<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 5, 1996
REGISTRATION NO. 333-13105
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
FIREARMS TRAINING SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
---------------
DELAWARE 3699 57-0777018
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NO.)
INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
7340 MCGINNIS FERRY ROAD
SUWANEE, GA 30174
(770) 813-0180
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
DAVID A. APSELOFF
FIREARMS TRAINING SYSTEMS, INC.
7340 MCGINNIS FERRY ROAD
SUWANEE, GA 30174
(770) 813-0180
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
JAMES G. ARCHER, ESQ. LAURENT ALPERT, ESQ.
SIDLEY & AUSTIN CLEARY, GOTTLIEB, STEEN & HAMILTON
875 THIRD AVENUE ONE LIBERTY PLAZA
NEW YORK, NY 10022 NEW YORK, NY 10006
(212) 906-2000 (212) 225-2000
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [_]
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box: [_]
CALCULATION OF REGISTRATION FEE
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- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE TO BE OFFERING PRICE OFFERING REGISTRATION
REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2) FEE(3)
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<S> <C> <C> <C> <C>
Class A Common Stock,
$0.000006 par value per
share................. 6,900,000 shares $16.00 $110,400,000 $38,068.97
</TABLE>
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(1) Includes 900,000 shares of Class A Common Stock which the Underwriters
have the option to purchase from the Selling Shareholder to cover over-
allotments, if any. See "Underwriting."
(2) Estimated solely for the purpose of calculating the amount of the
registration fee pursuant to Rule 457(a) under the Securities Act of 1933.
(3) $35,689.66 paid previously and $2,379.31 submitted with this Amendment No.
1.
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED NOVEMBER 5, 1996
6,000,000 SHARES
FIREARMS TRAINING SYSTEMS, INC.
[LOGO] Fats Training CLASS A COMMON STOCK
All the 6,000,000 shares of Class A Common Stock, $0.000006 par value (the
"Common Stock"), offered hereby are being sold by Firearms Training Systems,
Inc., a Delaware corporation ("FATS" or the "Company").
Prior to this offering (the "Offering"), there has been no public market for
the Common Stock. It is currently estimated that the initial public offering
price will be between $14.00 and $16.00 per share. See "Underwriting" for a
discussion of factors considered in determining the initial public offering
price. The Common Stock has been approved for quotation on the Nasdaq National
Market under the symbol "FATS," subject to official notice of issuance.
Upon consummation of the Offering, the Company's issued and outstanding
capital stock will consist of 20,402,404 shares of Common Stock, including the
6,000,000 shares of Common Stock being offered hereby. Upon consummation of the
Offering, the Centre Entities (as defined below) will own or have voting
control over approximately 54.7% of the outstanding shares of Common Stock and
THIN International N.V., a Netherlands Antilles corporation ("THIN
International" or the "Selling Shareholder") formerly called Firearms Training
Systems International N.V., will own approximately 14.5% of the outstanding
shares of Common Stock. See "Principal Shareholders."
Of the $82.1 million estimated net proceeds of the Offering anticipated to be
received by the Company: (i) $40.4 million will be used to repay the Bridge
Notes (as defined below), including accrued and unpaid interest, issued by the
Company to NationsBridge, L.L.C. ("NationsBridge") in connection with a set of
transactions (the "Recapitalization") consummated by the Company on July 31,
1996, and $1.3 million will be paid to NationsBridge as a fee in connection
with the repayment of the Bridge Notes; (ii) $17.1 million will be used to
repay a portion of the $69.8 million in outstanding Senior Bank Debt (as
defined below) incurred by the Company in connection with the Recapitalization;
(iii) $19.3 million will be paid to THIN International as an additional payment
for the shares of Common Stock repurchased by the Company from THIN
International in connection with the Recapitalization which additional payment
is payable by the Company upon consummation of the Offering; and (iv)
approximately $4.0 million will be paid to NationsBridge as consideration for
the redelivery to the Company of certain warrants to purchase shares of Common
Stock otherwise required to be delivered to NationsBridge upon consummation of
the Offering. See "Use of Proceeds."
SEE "RISK FACTORS" COMMENCING ON PAGE 8 OF THIS PROSPECTUS FOR A DISCUSSION
OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE
COMMON STOCK OFFERED HEREBY.
----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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<TABLE>
<CAPTION>
Price to Underwriting Proceeds to
Public Discount (1) Company (2)
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<S> <C> <C> <C>
Per Share.................................. $ $ $
Total (3).................................. $ $ $
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</TABLE>
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(1) See "Underwriting" for information concerning indemnification of the
Underwriters and other matters.
(2) Before deducting offering expenses payable by the Company, estimated at
$1,600,000.
(3) The Selling Shareholder has granted to the Underwriters a 30-day option to
purchase up to 900,000 additional shares of Common Stock solely to cover
over-allotments, if any. If the Underwriters exercise this option in full,
the total Price to Public, Underwriting Discount, Proceeds to Company and
Proceeds to Selling Shareholder will be $ , $ , $ and $ ,
respectively. See "Underwriting." The Company will not receive any proceeds
from the sale of any such additional shares.
The shares of Common Stock are offered by the several Underwriters named
herein subject to receipt and acceptance by them and subject to their right to
reject any orders in whole or in part. It is expected that delivery of the
certificates representing such shares will be made against payment therefor at
the office of Montgomery Securities on or about , 1996.
----------
Montgomery Securities
Lazard Freres & Co. LLC
The Robinson-Humphrey Company, Inc.
, 1996
<PAGE>
IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE OPEN MARKET
OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and financial data, including
the financial statements and notes thereto, included elsewhere in this
Prospectus. Except as otherwise noted, all information in this Prospectus: (i)
assumes that the initial public offering price will be $15.00 per share and no
exercise of the Underwriters' over-allotment option; (ii) gives effect to the
Recapitalization and the Drop Down Transaction described herein; and (iii)
gives effect for all periods to the 100,000-for-one stock split effected in
July 1996 and the 1.66-for-one stock split effected November 1, 1996 with
respect to all the outstanding shares of Common Stock.
THE COMPANY
Firearms Training Systems, Inc., a Delaware corporation ("FATS" or the
"Company"), is the leading worldwide producer of interactive simulation systems
designed to provide training in the handling and use of small and supporting
arms. The Company offers a broad array of cost-effective training systems
ranging from individual marksmanship trainers to instructional systems for
multiple users. Unlike traditional live firing ranges, the Company's simulation
systems enable users to train in highly realistic situations through the
integration of video and digitized projected imagery and modified, laser-
emitting firearms that retain the fit, function and feel of the original
weapon. Utilizing internally developed proprietary software and sensors
incorporated into the simulated weapons, the Company's systems offer real-time
feedback and evaluation with respect to a number of performance measures such
as accuracy, reaction time, situational judgment and important elements of
weapons handling. Over its 12-year history, the Company's team of experts has
developed over 180 types of simulated weapons and approximately 100 laser discs
containing more than 1,000 training scenarios. The Company's customers are
primarily U.S. and international military and law enforcement agencies
including the U.S. Marine Corps, the U.S. Army, the U.S. Air Force, the Los
Angeles Police Department, the Internal Revenue Service, the Singapore Army and
Police Coast Guard, the British Ministry of Defense and the Royal Netherlands
Army. More recently, the Company also has begun to sell simulation training
systems for hunter and sports training.
The Company has helped to revolutionize small and supporting arms training
through the introduction of cost-effective and realistic interactive
simulation. For decades, military and law enforcement organizations have
trained personnel on firing ranges with targets that are static or have limited
motion capabilities. This approach neither accurately replicates the hostile
situations armed personnel are likely to face nor helps to develop tactical
skills and individual judgment. Simulation systems not only provide solutions
to these issues but also offer significant improvements in safety and many
other benefits that cannot be attained in live weapons practice, including
reductions in ammunition consumption, weaponry wear, trainee transport, range
maintenance costs and environmental remediation expenses. Furthermore, many law
enforcement agencies have begun to adopt simulation systems based in part on
their concern over the increasing number of liability lawsuits relating to
alleged uses of excessive force. Of the approximately $260 billion U.S.
military budget for fiscal 1997, approximately $3 billion to $5 billion is
allocated to overall training and training-related expenditures. Management
estimates that the market for small and supporting arms simulation systems like
the Company's product line in the U.S. military market segment alone is
approximately $800 million, based on near-term stated acquisition objectives
set by various branches of the U.S. armed services. Moreover, management
believes that the trends favoring increased adoption of simulation in the U.S.
can also be identified abroad as military and law enforcement agencies in other
countries, generally more centralized than those in the U.S. and facing
increasingly restrictive budgets, are allocating greater portions of their
training budgets to small and supporting arms simulation training.
To date the Company has sold more than 2,000 FATS(TM) systems in the U.S. and
over 30 other countries. Although the Company is unaware of any independent
third party industry statistics, the Company believes,
3
<PAGE>
based on its monitoring of the market, that its systems sold to date represent
a substantial majority of the worldwide installed base of interactive small and
supporting arms simulation systems purchased by military and law enforcement
agencies. The Company's revenues and operating income have grown at compound
annual growth rates of 51.8% and 80.6%, respectively, over the last five fiscal
years to $65.4 million and $19.3 million, respectively, in fiscal 1996. As of
September 30, 1996, the Company had a backlog of approximately $56.2 million
from all customers and approximately an additional $46 million in unexercised
options to purchase the Company's products through September 30, 1999 under an
existing contract with the U.S. Marine Corps.
COMPETITIVE ADVANTAGES
Management believes that the Company's success is primarily attributable to
the following key competitive advantages:
. High Quality and Cost-Effective Products. The Company has participated in
studies of its products conducted by the U.S. Marine Corps, the U.S. Army
and the U.S. Air Force. The Company has been informed that such studies
have validated the cost-effectiveness and training benefits of FATS(TM)
systems for such entities and that trainees using the FATS(TM) systems
generally improve their marksmanship and judgment skills faster than
those using only live fire training. FATS(TM) systems have been used for
training U.S. and British forces in Bosnia and for pre-deployment
training of U.S. forces for Operation Desert Storm and operations in
Somalia.
. Premier FATS(TM) Brand Name. The Company believes that the FATS(TM) brand
name has become associated with high quality, technically superior
interactive small and supporting arms simulation systems. Management
believes that its reputation has been enhanced by the acceptance of the
Company's products by certain military and law enforcement agencies that
employ exacting standards in making purchasing decisions.
. Strong Long-Term Relationships with Customers. The Company works closely
with its customers often for a substantial period of time to help define
their training needs and develop customized training solutions.
Management believes that this approach is particularly important given
the relative infancy of the interactive simulation-based small and
supporting arms training market and the education required to convert
into customers those agencies and personnel accustomed to traditional
live fire training.
. Innovative Customized Training Solutions. The Company works closely with
many of its customers to develop training programs, simulated weapons and
training scenarios tailored to their specific needs. This ability to
adapt products to particular training needs is critical because the needs
of the Company's customers vary substantially.
. Extensive Inventory of Proven Weapons and Scenarios. The Company draws on
its extensive catalog of already fielded simulated weapons and scenarios
to address customers' requirements in an innovative manner and on a
timely basis.
. Integration of Advanced Technologies. The Company's strong technical
application capability enables it to integrate effectively: (i) advanced
laser, computer and video technology from third parties; (ii)
proprietary ballistics modeling, training and diagnostic software; and
(iii) specially machined, realistic, sensor-embedded weapons.
. Team of Recognized Subject Matter Experts. The Company maintains a team
of technical, training and other experts from a wide variety of military,
law enforcement and technology backgrounds to ensure an understanding of
each customer's particular training needs as well as the appropriation
and procurement process.
4
<PAGE>
GROWTH STRATEGY
The Company intends to seek further growth by implementing a strategy that
includes the following key elements:
. Increase Market Penetration. The interactive small and supporting arms
simulation industry is relatively new. As a result, the Company is
seeking to broaden acceptance of its products and increase sales to
military and law enforcement agencies in the U.S. and internationally.
. Continue New Product Development. The Company intends to continue to
develop new products based on the Company's research and development
("R&D") capabilities and its understanding of the needs of its customers.
For example, the Company's newest simulator, the Vessel Weapons
Engagement Training System ("VWETS"), is being developed at the request
of and in close collaboration with an international customer.
. Expand into New Markets. Management believes that significant
opportunities exist for sales beyond the Company's traditional military
and law enforcement customers. The Company has already begun to focus on
the hunter and sports training component of the market, which management
believes is a natural extension of its business to date. In addition,
although the Company has not yet taken steps to develop a product line or
otherwise enter the market for arcades, amusement parks and other
entertainment venues, the Company believes that this market may represent
significant opportunities for the Company in the future.
The Company was incorporated in Delaware in 1984. Its principal executive
offices are located at 7340 McGinnis Ferry Road, Suwanee, Georgia 30174. The
Company's telephone number is (770) 813-0180.
RECAPITALIZATION
Prior to July 31, 1996, the Company was wholly-owned by THIN International
N.V., a Netherlands Antilles corporation ("THIN International" or the "Selling
Shareholder") formerly known as Firearms Training Systems International N.V. On
July 31, 1996, the Company consummated a set of transactions (the
"Recapitalization"), pursuant to a Recapitalization and Stock Purchase
Agreement dated as of June 5, 1996 (the "Recapitalization Agreement") among the
Company, THIN International, Centre Partners Management LLC ("Centre
Management") and a group of entities (including Centre Capital Investors II,
L.P., Centre Partners Coinvestment, L.P., Centre Capital Offshore Investors II,
L.P. and Centre Capital Tax-exempt Investors II, L.P.) managed by Centre
Management and referred to herein (together with their controlling entity,
Centre Partners II LLC) as the "Centre Entities." As part of the
Recapitalization, the Company: (i) effected a 100,000-for-one stock split with
respect to its common stock and issued to the Centre Entities certain shares of
the Company's capital stock now consisting of Class A Common Stock, $0.000006
par value ("Common Stock"), for $36.0 million in cash; (ii) issued to
NationsBridge, L.L.C. ("NationsBridge") certain senior subordinated bridge
notes (the "Bridge Notes") for $40.0 million in cash and entered into escrow
arrangements providing for the delivery to NationsBridge in certain
circumstances of certain warrants currently held in escrow (the "NationsBridge
Warrants") to purchase shares of Common Stock, which NationsBridge Warrants are
being reacquired by the Company in connection with this offering (the
"Offering") as described below; (iii) entered into a new credit agreement (the
"NationsBank Credit Agreement") with NationsBank, N.A. (South) ("NationsBank")
and certain other lenders providing for certain credit facilities aggregating
$85.0 million (the "Senior Bank Debt"), borrowed $76.0 million under such
credit facilities and terminated its then existing credit facility with
NationsBank; and (iv) repurchased certain shares of Common Stock owned by THIN
International for approximately $151.9 million in cash ($15.0 million of which
was deposited in escrow) and agreed to make an
5
<PAGE>
additional contingent payment (the "Contingent Payment") in cash or shares of
Common Stock to THIN International in certain circumstances, such as upon the
consummation of the Offering. The obligation to make the Contingent Payment
will be satisfied in full by payment of $19.3 million in cash from the proceeds
of the Offering. Also in connection with the Recapitalization, the Company sold
certain shares of Common Stock and granted certain options to members of the
Company's management on September 18, 1996. The Company and NationsBridge have
agreed that the obligation to deliver from escrow the NationsBridge Warrants if
the Offering is completed as contemplated, which would otherwise have required
the delivery to NationsBridge of warrants to purchase 288,434 shares of Common
Stock at a nominal price upon consummation of the Offering, is to be satisfied
by the payment by the Company to NationsBridge (the "Warrant Payment") of
approximately $4.0 million (which amount represents the aggregate value of the
288,434 shares at an assumed initial offering price of $15.00 per share less
the assumed underwriting discount) from the proceeds of the shares of Common
Stock being offered by the Company hereby, and have agreed that the
NationsBridge Warrants will be redelivered to the Company for cancellation. See
"Management," "Certain Transactions," "Recapitalization" and Note 5 of Notes to
Consolidated Financial Statements.
Effective upon consummation of the Recapitalization and the related sales of
shares of Common Stock to management and prior to the Offering, the Centre
Entities owned or had voting control over and THIN International owned
approximately 77.5% and 20.6% of the outstanding shares of Common Stock,
respectively.
At the consummation of the Offering, the Centre Entities will own or have
voting control over approximately 54.7%, and THIN International will own
approximately 14.5%, of the outstanding shares of Common Stock. See "Principal
Shareholders."
The Company, currently an operating company, is in the process of
reorganizing into a holding company (the "Drop Down Transaction"), with the
Company owning 100% of the outstanding capital stock of a newly-formed
subsidiary, FATS, Inc., a Delaware corporation (the "Drop Down Subsidiary"),
which subsidiary will hold the operating assets of the Company. See
"Recapitalization."
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company................... 6,000,000 shares
Common Stock to be outstanding after the Offering..... 20,402,404 shares (1)
Use of proceeds....................................... To repay outstanding indebtedness and to
fund the Contingent Payment and the
Warrant Payment. See "Use of Proceeds."
Proposed Nasdaq National Market symbol................ FATS
</TABLE>
- --------
(1) Excludes 2,490,000 shares of Common Stock reserved for issuance pursuant to
the Company's Stock Option Plan, of which options to purchase 1,742,834
shares of Common Stock at an exercise price of approximately $3.25 have
been granted as of the date hereof. See "Management--Stock Option Plan" and
Note 5 of Notes to Consolidated Financial Statements.
6
<PAGE>
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FISCAL YEAR ENDED MARCH 31, SEPTEMBER 30,
--------------------------------------- -----------------
1992 1993 1994 1995 1996 1995 1996
------- ------- ------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues................ $12,324 $14,049 $20,534 $29,164 $65,439 $ 27,089 $ 39,138
Gross profit............ 7,285 8,276 10,883 14,934 34,537 12,885 21,158
Operating income........ 1,813 1,131 2,472 4,139 19,283 6,080 11,611
Income before income
taxes.................. 1,827 1,081 2,248 4,217 19,355 6,088 8,619
Net income.............. $ 1,274 $ 811 $ 1,518 $ 2,830 $12,790 $ 3,962 $ 5,338
======= ======= ======= ======= ======= ======== ========
Net income per share
(1).................... $0.08 $0.05 $0.09 $0.18 $0.80 $0.25 $0.33
======= ======= ======= ======= ======= ======== ========
Weighted average common
shares (1)............. 16,055 16,055 16,055 16,055 16,055 16,055 16,055
PRO FORMA STATEMENT OF OPERATIONS DATA (2):
Operating income........................................ $19,283 $ 11,611
Income before income taxes.............................. 13,793 7,811
Net income.............................................. $ 9,258 $ 5,190
======= ========
Net income per share.................................... $0.43 $0.24
======= ========
Shares used in computation (3).......................... 21,767 21,767
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
-----------------------
ACTUAL PRO FORMA (4)
-------- -------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital......................................... $ 10,859 $ 16,386
Total assets............................................ 34,628 33,289
Total debt, including current maturities................ 108,870 52,724
Stockholders' equity (deficit).......................... (87,444) (32,237)
</TABLE>
- --------
(1) Pursuant to the Securities and Exchange Commission Staff Accounting
Bulletin No. 83, common stock and common stock equivalents issued at prices
below the expected public offering price during the 12-month period prior
to the Company's expected initial public offering have been included in the
calculation of weighted average common shares as if they were outstanding
for all periods prior to the Offering, regardless of whether they are
dilutive. Accordingly, the weighted average common shares for all periods
presented reflects: (i) the issuance of shares to the Centre Entities and
the repurchase of shares from THIN International pursuant to the
Recapitalization; (ii) all shares issuable upon exercise of stock options
granted (using the treasury stock method); (iii) 288,434 shares issuable
upon exercise of the NationsBridge Warrants; (iv) all shares granted to
management within 12 months of the Offering; and (v) all shares purchased
by management within 12 months of the Offering.
(2) Pro forma statement of operations data give effect to the Recapitalization,
the consummation of the Offering and the application of the net proceeds
from the Offering after deducting the assumed underwriting discount and
estimated offering expenses as if they occurred at the beginning of the
respective period. Adjustments to the historical statement of operations
data represent the net effect of: (i) interest on borrowings under the
Senior Bank Debt at effective interest rates of 8.4% to 9.1% representing
interest rates in effect at the time of the Recapitalization and the Bridge
Notes at an average effective interest rate of 13.3% and amortization of
related deferred financing costs; (ii) elimination of interest and
amortization of deferred financing costs due to repayment of the Bridge
Notes and repayment of a portion of the Senior Bank Debt; and (iii) the
effect of the pro forma adjustments on the provision for income taxes. The
effect of the nonrecurring recapitalization expenses and the extraordinary
loss on the early extinguishment of debt as a result of the repayment of
the Bridge Notes and repayment of a portion of the Senior Bank Debt have
not been included in the pro forma statement of operations data as the
nonrecurring recapitalization expenses and the extraordinary loss are
assumed to occur immediately prior to the period presented. See "Use of
Proceeds," "Management's Discussion and Analysis of Financial Conditions
and Results of Operations--Overview--Extraordinary Loss,"
"Recapitalization" and Notes 4 and 10 of Notes to Consolidated Financial
Statements.
(3) Shares used in computation include the effect of 6,000,000 shares of Common
Stock issued and sold by the Company as part of the Offering and 1,365,220
shares of Common Stock issuable upon the exercise of outstanding options
(net of 377,614 shares assumed to be repurchased by the Company using the
treasury stock method). See "Use of Proceeds," "Management," "Certain
Transactions," "Recapitalization" and Note 5 of Notes to Consolidated
Financial Statements.
(4) Pro forma balance sheet data give effect to the consummation of the
Offering and the application of the proceeds from the Offering after
deducting the assumed underwriting discount and estimated offering expenses
as if they had occurred on the balance sheet date. See "Use of Proceeds,"
"Capitalization," "Recapitalization" and Notes 4 and 10 of Notes to
Consolidated Financial Statements.
7
<PAGE>
RISK FACTORS
An investment in the shares of Common Stock offered by this Prospectus
involves a high degree of risk. Prospective purchasers of the Common Stock
offered hereby should carefully review the following risk factors as well as
the other information set forth in this Prospectus.
Prospective investors should note that this Prospectus contains certain
"forward looking statements," including, without limitation, statements
containing the words "believes," "anticipates," "intends," "expects" and words
of similar import. Prospective investors are cautioned that any such forward
looking statements are not guarantees of future performance and involve risks
and uncertainties, and that the actual results may differ materially from
those in the forward looking statements as a result of various factors. The
accompanying information contained in this Prospectus identifies important
factors that could cause such differences. The Company disclaims any
obligation to update any such factors or to announce publicly the result of
any revisions to any of the forward looking statements contained herein to
reflect future events or developments.
SIGNIFICANT VARIABILITY IN QUARTERLY RESULTS
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. For example, the three months
ended December 31, 1995 accounted for 36.3% of revenues and 48.0% of net
income for fiscal 1996. As a result of the foregoing factors, the Company's
operating results for a future quarter may be below the expectations of public
market analysts and investors. In such event, the price of the Common Stock
will likely be adversely affected. See "--Customer Concentration; Reliance on
Certain Key Contracts," "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Results of Operations" and "--Quarterly
Results of Operations."
CUSTOMER CONCENTRATION; RELIANCE ON CERTAIN KEY CONTRACTS
In fiscal 1996, the Company's five largest customers accounted for
approximately 67.4% of the Company's revenues, with the U.S. Marine Corps, the
Royal Netherlands Army and the U.S. Army accounting for approximately 26.5%,
12.7% and 10.1%, respectively. In fiscal 1995, the Company's five largest
customers accounted for approximately 71.3% of the Company's revenues, with
the British Ministry of Defense, the Singapore Army, the U.S. Air Force
(including certain other components of the Department of Defense ("DOD") other
than the U.S. Army and the U.S. Marine Corps) and the Swiss Army accounting
for approximately 29.7%, 13.5%, 12.2% and 11.0%, respectively. No other
customer accounted for more than 10% of the Company's revenues in either such
year. (For purposes of the foregoing, the Reserve and National Guard
components of the U.S. Marine Corps, the U.S. Army and the U.S. Air Force are
combined with the respective active forces.) 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. The Company's
contracts are ordinarily terminable by the customer at any time without
penalty to the customer. Accordingly, there can be no assurance that existing
8
<PAGE>
customers will continue to purchase the Company's products or services at
historical levels, if at all. See "Business--Customers" and Note 7 of Notes to
Consolidated Financial Statements.
RELIANCE ON AND RISKS ASSOCIATED WITH GOVERNMENT CONTRACTS
Most of the Company's customers to date 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 44.3% of the
Company's revenues for fiscal 1996 were attributable to sales to military
authorities in the U.S., 11.5% were attributable to sales to law enforcement
authorities in the U.S. and 43.3% were attributable to sales to military and
law enforcement authorities internationally. Although the Company has
experienced an increased demand for its products in recent years despite
decreases in general levels of defense spending, 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. Sales to public sector customers are
subject to a multiplicity of detailed regulatory requirements and public
policies as well as to changes in training and purchasing priorities.
Contracts with public sector customers 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. See "Business--Government Contracts and Regulation" and "--
Customers."
RELIANCE ON AND RISKS ASSOCIATED WITH INTERNATIONAL SALES
A significant portion of the Company's sales are made to customers located
outside the U.S., primarily in Europe and Asia. In fiscal 1996, 1995 and 1994,
43.3%, 66.3% and 66.1% of the Company's revenues, respectively, were derived
from sales to customers located outside the U.S. The Company expects that its
international customers will continue to account for a substantial portion of
its revenues in the near future. 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. Any resulting changes in current tariff structures or
other trade and monetary policies could adversely affect the Company's sales
to international customers. Political and economic factors have been
identified by the Company with respect to certain of the markets in which it
competes. There can be no assurance that these factors will not result in
defaults by customers in making payments due to the Company, in reductions in
the purchases of the Company's products by international customers or in
foreign currency exchange losses. In certain cases, the Company has reduced
certain of the risks associated with international contracts by obtaining bank
letters of credit to support the payment obligations of its customers and/or
by providing in its contracts for payment in U.S. dollars. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Overview," "Business--Targeted Market," "--Customers" and Notes 7 and 9 of
Notes to Consolidated Financial Statements.
ABILITY TO MANAGE CONTINUED GROWTH
The Company's revenues have grown at a compound annual growth rate of 51.8%
over the last five years to $65.4 million in fiscal 1996. The Company's growth
has been a result of its ability to define, develop and expand the markets for
its products. Any future growth of the Company will depend on its ability to
conduct such activities with the same or greater degree of success as in the
past. Any such growth will continue to place significant demands on its
management and other resources. In particular, the Company will have to
continue to increase the number of its personnel, particularly skilled
technical, marketing and management personnel, and continue to develop and
improve its operational, financial and other internal systems, both in the
U.S. and internationally. Any inability of the Company to manage its growth
effectively could have a material adverse effect on the quality of the
Company's products and services, its ability to attract and retain key
personnel, its business prospects and its results of operations and financial
condition.
DEPENDENCE ON KEY PERSONNEL; NEW CEO
The Company believes that its success depends to a significant degree upon
the continuing contributions of its key management, sales, marketing and R&D
personnel. Failure to retain such key personnel or to attract and
9
<PAGE>
integrate other qualified personnel could have a material adverse effect on
the Company's results of operations and financial condition. The Company
recently has entered into an employment contract with Peter A. Marino, who
became the Company's new Chief Executive Officer in October 1996. In addition,
all the Company's senior officers have entered into non-competition agreements
with the Company. Mr. Marino had not previously worked with the Company. Jody
Scheckter, the founder and former President of the Company, recently
terminated his employment with the Company in connection with the
Recapitalization. See "Management."
ABILITY TO CONTINUE DEVELOPMENT OF MARKET
The market for interactive small and supporting arms training simulators is
developing, and the Company believes that its future success will depend upon,
among other factors, the extent to which domestic and foreign military
services and law enforcement departments continue to adopt simulation in their
training regimens. There can be no assurance that the use of simulation
training systems will become widespread or continue to grow or that the
Company's products will maintain their current share of the market. See
"Business--Industry Overview."
POTENTIAL FOR INCREASED COMPETITION
The relatively undeveloped nature of the market in which the Company
competes may attract new entrants as they perceive opportunities in this
market. While management believes that the Company is currently the most
effective competitor in its market, existing and new competitors may have
significantly greater financial, technical and marketing resources than the
Company, may foresee the course of market developments more accurately than
the Company, may develop products that are superior to or more cost-effective
than the Company's products or may adapt more quickly than the Company to new
technologies or evolving customer requirements. With respect to potential
competitors, the Company believes that as the firearms simulation market
continues to develop, a number of large domestic defense contractors have the
capacity to become significant competitors due to their expertise with complex
simulation systems and their relationships with the DOD and the U.S. Congress.
There can be no assurance that the Company will be able to maintain its
current market position, and failure to compete successfully with existing and
new competitors could have a material adverse effect on the Company's results
of operations and financial condition. See "Business--Competition."
ABILITY TO ADAPT TO TECHNOLOGICAL CHANGES
The Company's R&D personnel use certain established market-leading
technologies to develop simulation systems and related products. The continued
success of the Company will depend on its ability to incorporate in its
products changing technologies in such fields as electronics, mechanical
engineering, training development and audio-visual and to develop and
introduce new technology that meets the increasingly sophisticated training
needs of the Company's customers. Although the Company continuously pursues
product R&D efforts, there can be no assurance that the Company will be
successful in adapting to these developments in a timely fashion. The
Company's failure to so adapt could have a material adverse effect on the
Company's results of operations and financial condition. See "Business--
Research and Development."
EFFECTS OF COMPANY'S LEVERAGE
Prior to the consummation of the Recapitalization, the Company historically
used internally generated funds to finance its operations and growth and
generally had relatively insignificant amounts of long-term debt. Following
consummation of the Recapitalization, in which the Company incurred a
substantial amount of indebtedness, and after giving effect to the application
of the proceeds from the sale of the Common Stock offered hereby, the Company
will have approximately $52.7 million in outstanding Senior Bank Debt under
the NationsBank Credit Agreement, including $22.5 million under the Tranche A
Term Loan Facility (as defined below), $30.2 million under the Tranche B Term
Loan Facility (as defined below) and no indebtedness under the $15.0 million
NationsBank Revolving Credit Facility (as defined below). The Tranche A Term
Loan Facility and the NationsBank Revolving Credit Facility mature on July 31,
2002, and the Tranche B Term Loan Facility
10
<PAGE>
matures on July 31, 2003. Loans made under the Tranche A Term Loan Facility
and the NationsBank Revolving Credit Facility bear interest, at the Company's
option, at: (i) a floating rate based upon the Alternate Base Rate (defined as
the higher of the prime rate of the Senior Agent under the NationsBank Credit
Agreement and the federal funds rate as adjusted plus 0.50%) plus an
applicable margin of 1.25% to 1.75% per annum based on the Company's leverage
ratio; or (ii) the applicable Eurodollar Rate for one, two, three or six
months, plus an applicable margin of 2.25% to 2.75% per annum based on the
Company's leverage ratio, subject to adjustment in certain circumstances.
Loans made under the Tranche B Term Loan Facility bear interest, at the
Company's option, at: (i) a floating rate based upon the Alternate Base Rate
plus 2.50% per annum; or (ii) the applicable Eurodollar Rate plus 3.50% per
annum, subject to adjustment in certain circumstances. After giving effect to
the application of the estimated net proceeds of the Offering, quarterly
principal payments in respect of the Tranche A Term Loan Facility and the
Tranche B Term Loan Facility will commence on December 31, 1997; from December
31, 1997 through June 30, 1998, the aggregate amount of such scheduled
principal payments will be approximately $0.7 million per quarter and from
September 30, 1998 through March 31, 2001, the aggregate amount of such
scheduled principal payments will be approximately $1.3 million per quarter.
In addition, the Company will be required to make quarterly interest payments
on such indebtedness as described herein. Subject to the restrictions in the
NationsBank Credit Agreement, the Company may incur additional indebtedness
from time to time in the future in order to finance capital expenditures or
acquisitions or for other purposes. See "Use of Proceeds," "Capitalization,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources," "Recapitalization" and Notes 4
and 10 of Notes to Consolidated Financial Statements.
The Company's indebtedness and its financial and other covenants under the
NationsBank Credit Agreement will have several important effects on its future
operations, including, without limitation, the following: (i) a portion of the
Company's cash flow from operations must be dedicated to the payment of
interest on and principal of its indebtedness and will not be available for
other purposes; (ii) the Company's ability to obtain additional financing in
the future for working capital, capital expenditures, R&D, acquisitions,
general corporate purposes or other purposes may be limited; and (iii) the
Company's level of indebtedness could limit its flexibility in reacting to
business developments and changes in its industry and economic conditions
generally.
CONTROL BY CERTAIN EXISTING SHAREHOLDERS
Immediately after consummation of the Offering, the Centre Entities and THIN
International will beneficially own or have voting control over approximately
54.7% and 14.5% of the total outstanding shares of Common Stock, respectively.
Such concentration of ownership may have the effect of delaying or preventing
certain types of transactions involving an actual or potential change in
control of the Company, including transactions in which the holders of the
Common Stock might receive a premium on their shares over a prevailing market
price. In addition, by virtue of ownership of a majority of the outstanding
voting stock of the Company, the Centre Entities will be able to control all
elections of directors as well as all other matters submitted to a vote of
shareholders, including amendments to the certificate of incorporation,
mergers and sales of substantially all assets, going private transactions and
other extraordinary transactions. See "Principal Shareholders" and
"Description of Capital Stock."
EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE ON THE VALUE OF THE COMMON STOCK
Upon completion of the Offering, the Company will have 20,402,404 shares of
Common Stock outstanding. Of those shares, the 6,000,000 shares of Common
Stock sold in the Offering will be freely tradable without restriction or
further registration under the Securities Act of 1933, as amended (the
"Securities Act"), unless purchased by an "affiliate" of the Company, as that
term is defined in Rule 144 under the Securities Act, in which case such
shares will be subject to the resale limitations of Rule 144. The remaining
14,402,404 shares of Common Stock were issued by the Company in private
transactions prior to the Offering and are "restricted securities" as that
term is defined in Rule 144 and may not be sold unless they are registered or
unless an exemption from registration, such as the exemptions under Rule 144,
is available. The Company believes that
11
<PAGE>
THIN International may be eligible to sell its shares of Common Stock after
the termination of the 180-day holding period described below under
"Underwriting." The holders of shares of Common Stock at the time of the
Offering, including the Centre Entities and THIN International, have certain
registration rights relating thereto. In addition, options have been issued
under the Company's Stock Option Plan which will become exercisable at various
times and under various circumstances in the future for the purchase of up to
approximately 1,742,834 shares of Common Stock.
The Centre Entities, THIN International and the Company's officers and
directors who are shareholders of the Company and who, immediately following
the Offering collectively will beneficially own an aggregate of 14,402,404
shares of Common Stock, as well as the Company, have agreed not to offer, sell
or otherwise dispose of any of their shares of Common Stock for a period of
180 days from the date of this Prospectus. See "Underwriting."
Because there has been no public market for shares of Common Stock, the
Company is unable to predict the effect, if any, that future sales of shares,
or the availability of shares for future sale, will have on the market price
of the Common Stock prevailing from time to time. Sales of substantial amounts
of Common Stock, whether pursuant to a subsequent public offering or
otherwise, or the perception that such sales could occur, could have a
material adverse effect on the market price of the Common Stock and could
impair the Company's future ability to obtain capital through an offering of
equity securities. See "Management--Stock Option Plan," "Certain
Transactions," "Recapitalization," "Description of Capital Stock," "Shares
Eligible for Future Sale" and "Underwriting."
EFFECT OF CERTAIN CHARTER PROVISIONS ON THE VALUE OF THE COMMON STOCK
Effective upon the consummation of the Offering, the Board of Directors of
the Company will be classified into three classes, each of which will serve
for three years, with one class being elected each year. In addition, the
Board of Directors is empowered to issue, without shareholder action,
preferred stock having the terms designated by the Board of Directors. The
structure of the Board of Directors and the existence of this "blank check
preferred" could render more difficult an attempt to obtain control of the
Company by means of a tender offer, merger, proxy contest or otherwise. The
issuance of preferred stock also could decrease the amount of earnings and
assets available for distribution to the holders of Common Stock and could
adversely affect the rights and powers, including voting rights, of the
holders of Common Stock. See "Description of Capital Stock."
NO PRIOR MARKET FOR COMMON STOCK; POSSIBLE VOLATILITY OF COMMON STOCK PRICE
Prior to the Offering, there has been no public market for the Common Stock.
Although the Common Stock has been approved for quotation on the Nasdaq
National Market, there can be no assurance that an active or liquid trading
market for the Common Stock will develop or be sustained. Although the
Representatives of the Underwriters have advised the Company that they
currently intend to make a market in the Common Stock, they are not obligated
to do so and may discontinue such market at any time. The initial public
offering price of the Common Stock will be determined by negotiation among the
Company, the Selling Shareholder and the Representatives of the Underwriters
and may not be indicative of the market price for the Common Stock after the
Offering. Numerous factors, including announcements of fluctuations in the
Company's or its competitors' operating results, could have a significant
impact on the future price of the Common Stock. In addition, in recent years,
the equity market has experienced extreme price and volume fluctuations that
have affected the market price for many growth companies and that frequently
have been unrelated to the operating performance of those companies. Such
market fluctuations may materially and adversely affect the market price of
the Common Stock. See "Underwriting" and "Management--Stock Option Plan."
DILUTION TO PURCHASERS OF COMMON STOCK
Investors purchasing shares of Common Stock in the Offering will incur
immediate dilution of $16.58 in tangible net worth per share of Common Stock
from the initial public offering price. See "Dilution."
12
<PAGE>
CERTAIN BENEFITS TO EXISTING SECURITY HOLDERS
After giving effect to the Offering, the existing shareholders of the
Company will benefit from an immediate decrease of $4.49 in the deficit in
tangible net worth per share of Common Stock. The existing shareholders will
also benefit from the reduction in the Company's leverage as a result of the
application of certain of the estimated net proceeds from the Offering to the
repayment of a significant portion of the outstanding indebtedness of the
Company. In addition, approximately $23.3 million of the net proceeds of the
Offering will be used to satisfy certain obligations to existing security
holders, including $19.3 million to satisfy the obligation to make the
Contingent Payment to THIN International and approximately $4.0 million to
fund the Warrant Payment to NationsBridge. In addition, if the Underwriters
exercise their over-allotment option in full, THIN International would sell
900,000 shares of Common Stock. See "Dilution" and "Use of Proceeds."
NO PRESENT INTENTION TO PAY DIVIDENDS; RESTRICTION ON ABILITY TO PAY DIVIDENDS
The Company currently intends to retain all available funds to finance the
operation and expansion of its business and therefore does not anticipate
paying any dividends on the Common Stock in the foreseeable future. In
addition, the NationsBank Credit Agreement prohibits the payment of any
dividends in respect of the Common Stock. See "Dividend Policy."
13
<PAGE>
USE OF PROCEEDS
The proceeds to the Company from the sale of 6,000,000 shares of Common
Stock offered hereby by the Company at an assumed initial public offering
price of $15.00 per share, after deducting the assumed underwriting discount
and estimated offering expenses, are estimated to be $82.1 million. The
Company intends to use such estimated net proceeds in the following order of
priority: (i) $40.4 million will be used to repay the Bridge Notes, including
accrued and unpaid interest thereon, issued in connection with the
Recapitalization; (ii) $1.3 million will be used to pay NationsBridge a fee in
connection with the repayment of the Bridge Notes; (iii) $19.3 million will be
used to satisfy the obligation to make the Contingent Payment to THIN
International; (iv) approximately $4.0 million will be used to fund the
Warrant Payment to NationsBridge; and (v) $17.1 million will be used to repay
a portion of the $69.8 million of Senior Bank Debt outstanding under the
NationsBank Credit Agreement entered into in connection with the
Recapitalization, including $7.3 million of the $29.8 million in outstanding
indebtedness under the Tranche A Term Loan Facility and $9.8 million of the
$40.0 million in outstanding indebtedness under the Tranche B Term Loan
Facility.
Pursuant to the Recapitalization, the Bridge Notes were issued by the
Company in an aggregate principal amount of $40.0 million on July 31, 1996.
The Bridge Notes mature on July 31, 2004 and bear interest at an effective
rate of 13.3%, subject to adjustment in certain circumstances. If the Bridge
Notes are outstanding on December 30, 1996, $10.0 million in principal amount
of the Bridge Notes will automatically be exchanged for senior preferred stock
of the Company and $5.0 million in principal amount of the Bridge Notes will
automatically be exchanged for junior convertible preferred stock of the
Company. At that time, NationsBridge will have the option of selling the
junior convertible preferred stock to the Centre Entities.
In addition, pursuant to the Recapitalization, the Senior Bank Debt was
incurred by the Company in the aggregate principal amount of $76.0 million
under the NationsBank Credit Agreement on July 31, 1996. The Senior Bank Debt
included $30.0 million of the Tranche A term loan facility provided for
thereunder (the "Tranche A Term Loan Facility"), $40.0 million of the Tranche
B term loan facility provided for thereunder (the "Tranche B Term Loan
Facility") and $6.0 million of the $15.0 million revolving credit facility
provided for thereunder (the "NationsBank Revolving Credit Facility"). The
NationsBank Credit Agreement provides that the Tranche A Term Loan Facility
and the NationsBank Revolving Credit Facility mature on July 31, 2002, and the
Tranche B Term Loan Facility matures on July 31, 2003. Loans made under the
Tranche A Term Loan Facility and the NationsBank Revolving Credit Facility
bear interest, at the Company's option, at: (i) a floating rate based upon the
Alternate Base Rate (defined as the higher of the prime rate of the Senior
Agent under the NationsBank Credit Agreement and the federal funds rate as
adjusted plus 0.50%) plus an applicable margin of 1.25% to 1.75% per annum
based on the Company's leverage ratio; or (ii) the applicable Eurodollar Rate
for one, two, three or six months, plus an applicable margin of 2.25% to 2.75%
per annum based on the Company's leverage ratio, subject to adjustment in
certain circumstances. Loans made under the Tranche B Term Loan Facility bear
interest, at the Company's option, at: (i) a floating rate based upon the
Alternate Base Rate plus 2.50% per annum; or (ii) the applicable Eurodollar
Rate plus 3.50% per annum, subject to adjustment in certain circumstances. See
"Recapitalization" and Notes 4 and 10 of Notes to Consolidated Financial
Statements.
In connection with the repayment of the Bridge Notes and a portion of the
Senior Bank Debt, the Company will incur an extraordinary loss of
approximately $3.6 million, net of income taxes. Such extraordinary loss will
be recorded in the period in which the Offering is completed. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Overview--Extraordinary Loss."
If the Underwriter's over-allotment option is exercised in full, at an
assumed initial public offering price of $15.00 per share the proceeds to be
received by the Selling Shareholder from the sale of the 900,000 shares of
Common Stock offered by the Selling Shareholder, after deducting the assumed
underwriting discount, will be $12.6 million. The Company will not receive any
of the proceeds from the sale of the over-allotment shares of Common Stock
offered by the Selling Shareholder.
14
<PAGE>
DIVIDEND POLICY
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
NationsBank Credit Agreement prohibits the payment of any dividends in respect
of the Common Stock.
15
<PAGE>
CAPITALIZATION
The following unaudited table sets forth the current maturities of long-term
debt and the capitalization of the Company: (i) at September 30, 1996; and
(ii) pro forma for the application of the net proceeds from the sale of the
shares of Common Stock offered by the Company hereby. See "Use of Proceeds."
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
---------------------------
ACTUAL PRO FORMA (1)
-------- -------------
(IN THOUSANDS)
<S> <C> <C>
Current maturities of long-term debt............... $ 3,075 $ --
======== =========
Long-term debt, less current maturities............ $105,795 $ 52,724
-------- ---------
Stockholders' equity:
Preferred Stock, $.10 par value; 200,000 shares
authorized, no shares issued and outstanding.... -- --
Class A Common Stock, $0.000006 par value;
68,060,000 shares authorized, 14,402,404 shares
issued and outstanding actual (20,402,404 shares
issued and outstanding pro forma) (1)........... -- --
Class B Non-voting Common Stock, $0.000006 par
value: 2,200,000 shares authorized, no shares
issued and outstanding.......................... -- --
Additional paid-in capital (1)(2)................ 36,991 119,091
Warrants (3)..................................... 930 --
Accumulated earnings (deficit) (4)............... (125,353) (151,316)
Cumulative translation adjustment................ (12) (12)
-------- ---------
Total stockholders' equity (deficit)........... (87,444) (32,237)
-------- ---------
Total capitalization......................... $ 18,351 $ 20,487
======== =========
</TABLE>
- --------
(1) Pro forma Common Stock includes the 6,000,000 shares of Common Stock to be
sold by the Company in the Offering at an assumed initial public offering
price of $15.00 per share less the assumed underwriting discount and
estimated offering expenses.
(2) Pro forma additional paid-in capital includes the proceeds from the
Offering, net of the underwriting discount and estimated offering
expenses, as follows:
<TABLE>
<CAPTION>
ADDITIONAL
PAID-IN CAPITAL
---------------
<S> <C>
Balance at September 30, 1996, actual..................... $ 36,991
Proceeds from the Offering, net........................... 82,100
--------
Balance at September 30, 1996, pro forma.................. $119,091
========
</TABLE>
(3) Warrants represent the fair value of the NationsBridge Warrants for
288,434 shares of Common Stock. The NationsBridge Warrants will be
canceled upon payment of the Warrant Payment from the net proceeds of the
Offering. See "Recapitalization" and Notes 4 and 10 of Notes to
Consolidated Financial Statements.
(4) Pro forma accumulated earnings (deficit) includes the following:
<TABLE>
<CAPTION>
ACCUMULATED
DEFICIT
-----------
<S> <C>
Balance at September 30, 1996, actual........................ $(125,353)
Fee in connection with repayment of the Bridge Notes......... (1,300)
Elimination of a portion of capitalized debt financing
costs....................................................... (3,391)
Elimination of discount on Bridge Notes due to the
NationsBridge Warrants...................................... (930)
Income tax benefit on above items............................ 2,052
Payment to THIN International to satisfy the Contingent Pay-
ment, reflected as additional payment for the reacquisition
and subsequent cancellation of shares from THIN
International............................................... (19,300)
Payment to NationsBridge for settlement of NationsBridge
Warrants in excess of the recorded basis.................... (3,094)
---------
Balance at September 30, 1996, pro forma..................... $(151,316)
=========
</TABLE>
16
<PAGE>
DILUTION
As of September 30, 1996, the Company had a deficit in tangible net worth of
approximately $(87.4) million, or $(6.07) per share of Common Stock. Tangible
net worth per share represents the difference between total tangible assets
and total liabilities of the Company divided by the total number of shares of
Common Stock outstanding at September 30, 1996 (excluding shares issuable upon
the exercise of the NationsBridge Warrants to purchase 288,434 shares of
Common Stock). Tangible net worth and number of shares of Common Stock include
the 1.66-for-one stock split effected on November 1, 1996. After giving effect
to the Offering and the application of the estimated net proceeds therefrom,
the deficit in tangible net worth of the Company at September 30, 1996 would
have been approximately $(32.2) million or $(1.58) per share. This represents
an immediate decrease in the deficit in tangible net worth of $4.49 per share
to existing shareholders and an immediate dilution of $16.58 per share to
purchasers of Common Stock in the Offering. The following table illustrates
such dilution:
<TABLE>
<S> <C> <C> <C>
Assumed initial public offering price per share..... $15.00
Tangible net worth per share as of September 30,
1996............................................. $(6.07)
Change in tangible book value per share attributable
to:
6,000,000 shares being sold by the Company in the
Offering......................................... $5.63
$19.3 million contingent payment to THIN
International.................................... (.94)
$4.0 million payment to NationsBridge in
connection with the NationsBridge Warrants....... (.20)
-----
Net increase in tangible net worth per share
attributable to new investors...................... 4.49
------
Pro forma tangible net worth per share after giving
effect to the Offering............................. (1.58)
------
Dilution per share to new investors................. $16.58
======
</TABLE>
Exercise of the Underwriters' over-allotment option will not have an effect
on dilution to new investors since such shares will be sold by an existing
shareholder.
The foregoing computations assume no exercise of stock options prior to the
consummation of the Offering. The Company has reserved 2,490,000 shares for
issuance under its Stock Option Plan. It is anticipated that options to
purchase an aggregate of 1,742,834 shares of Common Stock at an exercise price
of approximately $3.25 per share will be outstanding as of the effective date
of the Offering. If all such stock issuances and such options had been
exercised (using the treasury stock method) at September 30, 1996, the deficit
pro forma net tangible book value per share after completion of the Offering
would have been $(1.22), representing an immediate decrease in the deficit in
pro forma tangible net worth of $4.85 per share attributable to the Offering
and an immediate dilution to new investors of $16.22 per share. See
"Management--Stock Option Plan," "Certain Transactions" and Note 5 of Notes to
Consolidated Financial Statements.
The following table sets forth, on a pro forma basis as of September 30,
1996, the difference between the total consideration and the average price
paid by the existing shareholders for their shares of the Company's Common
Stock and that paid by the purchasers of shares offered by the Company in the
Offering.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------ -------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders... 14,402,404 70.6% $ 36,991,000 29.1% $ 2.57
New investors........... 6,000,000 29.4 90,000,000 70.9 15.00
---------- ----- ------------ ----- ------
Total............... 20,402,404 100.0% $126,991,000 100.0% $ 6.22
========== ===== ============ ===== ======
</TABLE>
17
<PAGE>
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 fiscal years in the five-year period ended March
31, 1996, which financial statements have been audited by Arthur Andersen LLP
in the case of the fiscal years ended March 31, 1995 and 1996 and Price
Waterhouse LLP in the case of the fiscal years ended March 31, 1992, 1993 and
1994. The selected historical financial data as of and for the six months
ended September 30, 1995 and 1996 have been derived from the unaudited
financial statements of the Company, but include all adjustments (consisting
only of normal recurring adjustments) which the Company considers necessary
for a fair presentation of the results of operations for the periods
presented. The results of operations for the six-month period ended September
30, 1996 are not necessarily indicative of the operating results that may be
expected for the Company's fiscal 1997. 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 Prospectus and referred to in the "Index to Financial Statements"
(together with the notes and other reports relating to such financial
statements).
<TABLE>
<CAPTION>
SIX MONTHS
FISCAL YEAR ENDED MARCH 31, ENDED SEPTEMBER 30,
----------------------------------------- --------------------
1992 1993 1994 1995 1996 1995 1996
------- ------- ------- ------- ------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues................ $12,324 $14,049 $20,534 $29,164 $65,439 $27,089 $ 39,138
Cost of revenues........ 5,039 5,773 9,651 14,230 30,902 14,204 17,980
------- ------- ------- ------- ------- --------- ---------
Gross profit............ 7,285 8,276 10,883 14,934 34,537 12,885 21,158
------- ------- ------- ------- ------- --------- ---------
Operating expenses:
Selling, general and
administrative ex-
penses................ 3,640 4,606 6,066 8,169 12,087 5,367 7,513
Research and develop-
ment expenses......... 1,615 2,227 2,048 2,296 2,781 1,242 1,831
Depreciation and amor-
tization.............. 217 312 297 330 386 196 203
------- ------- ------- ------- ------- --------- ---------
Total operating ex-
penses............... 5,472 7,145 8,411 10,795 15,254 6,805 9,547
------- ------- ------- ------- ------- --------- ---------
Operating income........ 1,813 1,131 2,472 4,139 19,283 6,080 11,611
Interest income (ex-
pense), net............ 14 (50) (98) 12 165 35 (1,833)
Nonrecurring recapitali-
zation expenses........ -- -- -- -- -- -- (1,120)
Other income (expense),
net.................... -- -- (126) 66 (93) (27) (39)
------- ------- ------- ------- ------- --------- ---------
Income before income
taxes.................. 1,827 1,081 2,248 4,217 19,355 6,088 8,619
Provision for income
taxes (1).............. 553 270 730 1,387 6,565 2,126 3,281
------- ------- ------- ------- ------- --------- ---------
Net income.............. $ 1,274 $ 811 $ 1,518 $ 2,830 $12,790 $ 3,962 $ 5,338
======= ======= ======= ======= ======= ========= =========
Net income per share
(2).................... $0.08 $0.05 $0.09 $0.18 $0.80 $0.25 $0.33
======= ======= ======= ======= ======= ========= =========
Weighted average common
shares (2)............. 16,055 16,055 16,055 16,055 16,055 16,055 16,055
PRO FORMA STATEMENT OF OPERATIONS DATA: (3)
Operating income......................................... $19,283 $11,611
Income before income taxes............................... 13,793 7,811
Net income............................................... $ 9,258 $ 5,190
======= =========
Net income per share..................................... $0.43 $0.24
======= =========
Shares used in computation (4)........................... 21,767 21,767
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
----------------------------------- -------------------
PRO FORMA
1992 1993 1994 1995 1996 1996 1996 (5)
------ ------ ------ ------ ------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital......... $2,536 $3,207 $4,784 $7,657 $20,216 $ 10,859 $ 16,386
Total assets............ 5,280 8,036 12,108 16,817 33,820 34,628 33,289
Total debt, including
current maturities..... -- 1,189 876 -- -- 108,870 52,724
Stockholders' equity
(deficit).............. 3,195 4,006 5,524 8,484 21,262 (87,444) (32,237)
</TABLE>
Footnotes to Selected Financial Data appear on following page.
18
<PAGE>
Footnotes to Selected Financial Data.
- --------
(1) Provision for income taxes for fiscal 1992 and 1993 was calculated in
accordance with Accounting Principles Bulletin No. 11. Subsequent to
fiscal 1993 the Company adopted Statement of Financial Accounting
Standards No. 109.
(2) Pursuant to the Securities and Exchange Commission Staff Accounting
Bulletin No. 83, common stock and common stock equivalents issued at
prices below the expected public offering price during the 12-month period
prior to the Company's expected initial public offering have been included
in the calculation of weighted average common shares as if they were
outstanding for all periods prior to the Offering, regardless of whether
they are dilutive. Accordingly, the weighted average common shares for all
periods presented reflects: (i) the issuance of shares to the Centre
Entities and the repurchase of shares from THIN International pursuant to
the Recapitalization; (ii) all shares issuable upon exercise of stock
options granted (using the treasury stock method); (iii) 288,434 shares
issuable upon exercise of the NationsBridge Warrants; (iv) all shares
granted to management within 12 months of the Offering; and (v) all shares
purchased by management within 12 months of the Offering.
(3) Pro forma statement of operations data give effect to the
Recapitalization, the consummation of the Offering and the application of
the net proceeds from the Offering after deducting the assumed
underwriting discount and estimated offering expenses as if they occurred
at the beginning of the respective period. Adjustments to the historical
statement of operations data represent the net effect of: (i) interest on
borrowings under the Senior Bank Debt at effective interest rates of 8.4%
to 9.1% representing interest rates in effect at the time of the
Recapitalization and the Bridge Notes at an average effective interest
rate of 13.3% and amortization of related deferred financing costs; (ii)
elimination of interest and amortization of deferred financing costs due
to repayment of the Bridge Notes and repayment of a portion of the Senior
Bank Debt; and (iii) the effect of the pro forma adjustments on the
provision for income taxes. The effect of the nonrecurring
recapitalization expenses and the extraordinary loss on the early
extinguishment of debt as a result of the repayment of the Bridge Notes
and repayment of a portion of the Senior Bank Debt have not been included
in the pro forma statement of operations data as the nonrecurring
recapitalization expenses and the extraordinary loss are assumed to occur
immediately prior to the period presented. See "Use of Proceeds,"
"Management's Discussion and Analysis of Financial Condition and Results
of Operations--Overview--Extraordinary Loss," "Recapitalization" and Notes
4 and 10 of Notes to Consolidated Financial Statements.
(4) Shares used in computation include the effect of 6,000,000 shares of
Common Stock issued and sold by the Company as part of the Offering and
1,365,220 shares of Common Stock issuable upon the exercise of outstanding
options (net of 377,614 shares assumed to be repurchased by the Company
using the treasury stock method). See "Use of Proceeds," "Management,"
"Certain Transactions," "Recapitalization" and Note 5 of Notes to
Consolidated Financial Statements.
(5) Pro forma balance sheet data give effect to the consummation of the
Offering and the application of the proceeds from the Offering after
deducting the assumed underwriting discount and estimated offering
expenses as if they had occurred on the balance sheet date. See "Use of
Proceeds," "Capitalization," "Recapitalization" and Notes 5 and 10 of
Notes to Consolidated Financial Statements.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company is the leading worldwide producer of interactive simulation
systems designed to provide training in the handling and use of small and
supporting arms. The Company has focused its sales efforts primarily in the
U.S. and international military and law enforcement market and more recently
has begun to sell simulation training systems in the hunter and sports
training component of the market. Since fiscal 1992, the Company's revenues
and operating income have grown to $65.4 and $19.3 million, respectively,
representing five-year historical compound annual growth rates of 51.8% and
80.6%, respectively.
The Company derives most of its revenues from the sale of its products,
which include simulators, simulated firearms, scenarios, software and
auxiliary equipment, and certain additional revenues from service operations.
The Company receives purchase commitments for its products and services from
its customers largely through purchase orders and short- and long-term
contracts principally with governmental entities. Sales revenues are
recognized primarily upon shipment with advanced billings related to contracts
recorded as deferred revenue and recognized primarily as units are delivered.
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 in the U.S. and internationally, the top
five customers accounted for approximately 67.4%, 71.3% and 71.9% of the
Company's revenues in fiscal 1996, 1995 and 1994, respectively. A significant
increase or decrease in demand by a large customer could have a substantial
effect on the Company's revenues, and revenues from any one customer can vary
materially from period to period. In addition, although the Company has
experienced an increased demand for its products in recent years despite
decreases in general levels of defense spending, 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. A significant portion of the Company's
sales are also made to customers located outside the U.S., primarily in Europe
and Asia. During fiscal 1996, 1995 and 1994, approximately 43.3%, 66.3% and
66.1%, 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. 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 is not material. See "Risk Factors--Significant
Variability in Quarterly Results," "--Customer Concentration; Reliance on
Certain Key Contracts," "--Reliance on and Risks Associated with Government
Contracts," "--Reliance on and Risks Associated with International Sales,"
"Business--Customers" and Note 7 of Notes to Consolidated Financial
Statements.
Cost of revenues generally includes materials, direct labor, overhead and
other direct costs. Operating expenses include selling, general and
administrative expenses, R&D expenses and 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 12 years through internally generated funds.
U.S. Marine Corps Contract
In August 1994, through competitive bidding, the Company was awarded a
fixed-price contract ("Contract 2014") with the U.S. Marine Corps for the
supply of small and supporting arms simulators. This contract also contains
provisions which have enabled purchases under the contract of firearms
simulators by the U.S. Army. The total initial contract amount was $16.1
million, and options exercised and contract modifications made have
20
<PAGE>
increased that amount by a total of $51.8 million through September 30, 1996.
Deliveries under Contract 2014 commenced in the fourth quarter of fiscal 1995
and totalled $34.9 million through September 30, 1996. At such date,
unexercised options to purchase additional simulators through September 30,
1999 amounted to approximately $46 million. Future shipments under Contract
2014 could be adversely affected by a variety of factors, including changes in
training or purchasing priorities, a significant decrease in the general level
of defense spending and the unique aspects of the government procurement
process. Any termination of Contract 2014 or a failure to exercise existing
options in the future may have a material adverse effect on the Company's
future results of operations and financial condition. See "Risk Factors--
Customer Concentration; Reliance on Certain Key Contracts," "--Reliance on and
Risks Associated with Government Contracts," "Business-- Customers" and "--
Government Contracts and Regulation."
Backlog
Backlog represents customer orders that have been contracted for future
delivery. Accordingly, these orders have not yet been recognized as revenue,
but represent potential revenue. As of September 30, 1996, the Company had a
backlog of approximately $56.2 million, of which 67.9% and 31.0% are related
to contracted orders from U.S. military and international customers,
respectively. As of October 25, 1995, the Company had a backlog of
approximately $25.2 million. Contracts with U.S. and other governments may
generally be terminated by the customer in whole or in part for default or its
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 costs incurred through date of termination.
Recapitalization
In connection with the Recapitalization on July 31, 1996, the Company: (i)
issued shares of its Common Stock to the Centre Entities for $36.0 million in
cash; (ii) issued $40.0 million in Bridge Notes to NationsBridge and agreed to
issue to NationsBridge warrants for shares of Common Stock as described
herein; (iii) borrowed a total of $76.0 million under the NationsBank Credit
Agreement; (iv) repurchased certain shares of its Common Stock from THIN
International for $151.9 million in cash; and (v) agreed to make the
Contingent Payment in cash or shares of Common Stock to THIN International if
certain trigger events occur. In connection with the Recapitalization, the
Company also sold certain shares and granted certain options to members of
management on September 18, 1996. In addition, the Company's Common Stock was
split 100,000-for-one on July 30, 1996 and was split 1.66-for-one on November
1, 1996. All references to Common Stock data in this Prospectus have been
restated to reflect both stock splits. See "Management," "Certain
Transactions" and "Recapitalization."
The Company's indebtedness and the related covenants will have several
important effects on its future operations, including, but not limited to, the
following: (i) a portion of the Company's cash flow from operations must be
dedicated to the payment of interest on and principal of its indebtedness and
will not be available for other purposes; (ii) the Company's ability to obtain
additional financing in the future for working capital, capital expenditures,
R&D, acquisitions, general corporate purposes or other purposes may be
limited; and (iii) the Company's level of indebtedness could limit its
flexibility in reacting to business developments and changes in its industry
and economic conditions generally. See "Risk Factors--Effects of Company's
Leverage."
Extraordinary Loss
Of the $82.1 million of net proceeds expected from the Offering, after
deducting the underwriting discount and estimated offering expenses, $40.4
million will be used to repay the Bridge Notes, including accrued and unpaid
interest thereon. In addition, the Company will pay a $1.3 million fee to
NationsBridge in connection with the repayment. This fee along with the write-
off of unamortized deferred financing costs and debt discount
21
<PAGE>
will result in an extraordinary loss of approximately $3.6 million, net of
taxes. This extraordinary loss will be recognized at the time the Bridge Notes
are repaid in connection with the completion of the Offering, which is
expected to occur in the three months ending December 31, 1996. See "Use of
Proceeds."
RESULTS OF OPERATIONS
The following table sets forth certain operating data as a percentage of gross
revenues for the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
FISCAL YEAR ENDED SEPTEMBER
MARCH 31, 30,
------------------- ------------
1994 1995 1996 1995 1996
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Revenues.................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues............................ 47.0 48.8 47.2 52.4 45.9
----- ----- ----- ----- -----
Gross profit................................ 53.0 51.2 52.8 47.6 54.1
----- ----- ----- ----- -----
Operating expenses:
Selling, general and administrative
expenses.................................. 29.6 28.0 18.5 19.8 19.2
Research and development expenses.......... 10.0 7.9 4.2 4.6 4.7
Depreciation and amortization.............. 1.4 1.1 0.6 0.7 0.5
----- ----- ----- ----- -----
Total operating expenses................. 41.0 37.0 23.3 25.1 24.4
----- ----- ----- ----- -----
Operating income............................ 12.0 14.2 29.5 22.5 29.7
Interest income (expense), net.............. (0.5) 0.1 0.2 0.1 (4.7)
Nonrecurring recapitalization expenses...... -- -- -- -- (2.9)
Other income (expense), net................. (0.6) 0.2 (0.1) (0.1) (0.1)
----- ----- ----- ----- -----
Income before income taxes.................. 10.9 14.5 29.6 22.5 22.0
Provision for income taxes.................. 3.5 4.8 10.1 7.9 8.4
----- ----- ----- ----- -----
Net income.................................. 7.4% 9.7% 19.5% 14.6% 13.6%
===== ===== ===== ===== =====
</TABLE>
SIX MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO SIX MONTHS ENDED SEPTEMBER 30,
1995
Revenues. Revenues increased $12.0 million, or 44.5%, to $39.1 million for
the six months ended September 30, 1996 as compared to $27.1 million for the
six months ended September 30, 1995. This increase was due to strong growth in
sales throughout the Company's market. Sales to U.S. military customers
increased by $7.6 million, or 55.8%, primarily due to increased sales to the
U.S. Marine Corps under Contract 2014. In addition, sales to international
customers increased $2.9 million, or 26.4%, primarily due to increased sales
to Italian law enforcement agencies and increased deliveries under the
Netherlands Army contract. Sales to U.S. law enforcement agencies increased by
$1.1 million, or 45.8%, primarily due to increased sales to two existing
federal law enforcement customers. The six months ended September 30, 1996
also included approximately $667,000 in sales to hunter and sports training
customers as compared to $200,000 for the six months ended September 30, 1995.
Cost of Revenues. Cost of revenues increased $3.8 million, or 26.6%, to
$18.0 million for the six months ended September 30, 1996 compared to $14.2
million for the six months ended September 30, 1995. As a percentage of
revenues, cost of revenues decreased to 45.9% for the six months ended
September 30, 1996 as compared to 52.4% for the six months ended September 30,
1995. This decrease was a result of a decrease in materials as a percentage of
revenues due to product mix changes which were partially offset by lower gross
margins on sales to U.S. military customers. In addition, labor and overhead
costs as a percentage of revenues decreased as a result of spreading such
costs over a substantially higher revenue base.
Gross Profit. As a result of the foregoing, gross profit increased $8.3
million, or 64.2%, to $21.2 million, or 54.1% of revenues, for the six months
ended September 30, 1996 as compared to $12.9 million, or 47.6% of revenues,
for the six months ended September 30, 1995.
Total Operating Expenses. Total operating expenses increased $2.7 million,
or 40.3%, to $9.5 million for the six months ended September 30, 1996 compared
to $6.8 million for the six months ended September 30, 1995. Total operating
expenses as a percentage of revenues decreased to 24.4% for the six months
ended
22
<PAGE>
September 30, 1996 from 25.1% for the six months ended September 30, 1995
primarily due to operating leverage that enabled the Company to spread its
fixed costs over a larger revenue base. Accordingly, selling, general and
administrative expenses declined as a percentage of revenues to 19.2% for the
six months ended September 30, 1996 from 19.8% for the six months ended
September 30, 1995. R&D expenses increased 47.4% from September 30, 1995 to
September 30, 1996 due to continued efforts in developing new and improving
existing products. R&D expenses as a percentage of revenues increased to 4.7%
for the six months ended September 30, 1996 from 4.6% for the same period of
the prior year.
Operating Income. As a result of the foregoing, operating income increased
$5.5 million, or 91.0%, to $11.6 million, or 29.7% of revenues, for the six
months ended September 30, 1996 as compared to $6.1 million, or 22.5% of
revenues, for the six months ended September 30, 1995.
Other Income (Expense), Net. Net interest expense totaled $1.8 million, or
4.7% of revenues for the six months ended September 30, 1996 as compared to
net interest income of $35,000 for the six months ended September 30, 1995.
The increase in interest expense is a result of interest expense and
amortization of deferred financing costs related to debt incurred in
connection with the Recapitalization on July 31, 1996. Other income (expense),
net also includes a nonrecurring charge of $1.1 million for expenses incurred
in connection with the Recapitalization.
Provision for Income Taxes. The effective tax rate increased to 38.1% of
income before income taxes for the six months ended September 30, 1996
compared to 34.9% of income before taxes for the six months ended September
30, 1995. This increase was primarily attributable to the nonrecurring
expenses incurred in connection with the Recapitalization, which are not
deductible for income tax purposes.
Net Income. As a result of the foregoing, net income as reported increased
$1.3 million, or 34.7%, to $5.3 million ($0.33 per share), or 13.6% of
revenues for the six months ended September 30, 1996 as compared to $4.0
million ($0.25 per share), or 14.6% of revenues for the six months ended
September 30, 1995. If the nonrecurring charge related to the Recapitalization
was excluded, reported net income for the six months ended September 30, 1996
would have been $6.5 million ($0.40 per share), or 16.5% of revenues, an
increase of $2.5 million, or 63.0%, over the six months ended September 30,
1995.
FISCAL YEAR ENDED MARCH 31, 1996 COMPARED TO THE FISCAL YEAR ENDED MARCH 31,
1995
Revenues. Revenues increased $36.2 million, or 124.4%, to $65.4 million for
fiscal 1996 as compared to $29.2 million for fiscal 1995 as a result of
increases in revenues throughout the Company's market. Approximately 65.5% of
such increase was attributable to a $23.8 million increase in sales to the
U.S. military. This increase in sales to the U.S. military was due to two new
contracts awarded in August 1994. Deliveries under Contract 2014, which began
in January 1995, accounted for a majority of the increase. As a result, fiscal
1996 reflected a full year of deliveries under this contract while fiscal 1995
reflected approximately two months of deliveries. The second contract was with
the U.S. Marine Corps Reserves under which deliveries began in October 1995.
Fiscal 1996 reflected six months of deliveries under this contract while
fiscal 1995 reflected no deliveries. In addition, approximately 24.8% of the
overall increase in revenues was attributable to an increase in sales to
international customers of $9.0 million, or 46.5%, primarily due to deliveries
under contracts with the Royal Netherlands Army and two international law
enforcement agencies. The increase in international sales was partially offset
by reductions in deliveries to the British Ministry of Defense, the Singapore
Army and the Swiss Army. Sales to law enforcement agencies also increased by
$2.9 million, or 64.3%, primarily due to significant deliveries to two
existing federal law enforcement customers beginning in the second quarter of
fiscal 1996. Fiscal 1996 also included approximately $573,000 in sales to
hunter and sports training customers.
Cost of Revenues. Cost of revenues increased $16.7 million, or 117.2%, to
$30.9 million for fiscal 1996 as compared to $14.2 million for fiscal 1995. As
a percentage of revenues, cost of revenues decreased to 47.2% for fiscal 1996
as compared to 48.8% for fiscal 1995. The decrease was primarily the result of
spreading labor and overhead costs over a substantially higher revenue base.
This decline in labor and overhead costs as a
23
<PAGE>
percentage of revenues was partially offset by an increase in materials as a
percentage of revenues due to lower gross margins from the two new U.S.
military contracts.
Gross Profit. As a result of the foregoing, gross profit increased $19.6
million, or 131.3%, to $34.5 million, or 52.8% of revenues, for fiscal 1996 as
compared to $14.9 million, or 51.2% of revenues, for fiscal 1995.
Total Operating Expenses. Total operating expenses increased by $4.5
million, or 41.3%, to $15.3 million for fiscal 1996 as compared to $10.8
million for fiscal 1995. Total operating expenses as a percentage of revenues
decreased to 23.3% for fiscal 1996 from 37.0% for fiscal 1995 which resulted
from operating leverage that enabled the Company to spread its fixed costs
over a larger revenue base. Accordingly, selling, general and administrative
expenses declined as a percentage of revenues to 18.5% for fiscal 1996 from
28.0% for fiscal 1995. R&D expenses increased 21.1% from fiscal 1995 to fiscal
1996 due to continued efforts in developing new and improving existing
products. However, R&D expenses as a percentage of revenues decreased to 4.2%
in fiscal 1996 from 7.9% in fiscal 1995.
Operating Income. As a result of the foregoing, operating income increased
$15.2 million, or 365.9%, to $19.3 million, or 29.5% of revenues, for fiscal
1996 as compared to $4.1 million, or 14.2% of revenues, for fiscal 1995.
Other Income (Expense), Net. Other income decreased $6,000, or 7.7%, to
$72,000 for fiscal 1996 as compared to $78,000 for fiscal 1995.
Provision for Income Taxes. The effective tax rate increased to 33.9% of
income before income taxes for fiscal 1996 as compared to 32.9% of income
before income taxes for fiscal 1995. This increase was primarily attributable
to the increase in the federal tax rate at the Company's current taxable
income level to 35.0% for fiscal 1996 as compared to 34.0% for fiscal 1995.
The Company also benefited from the impact of R&D tax credits utilized, the
effect of which was greater in fiscal 1995 than in fiscal 1996 due to the fact
that the Company had lower taxable income in 1995. During fiscal 1996, the
Company also began utilizing a foreign sales corporation which provided a
permanent tax benefit related to international export sales.
Net Income. As a result of the foregoing, net income increased $10.0
million, or 351.9%, to $12.8 million, or 19.5% of revenues, for fiscal 1996 as
compared to $2.8 million, or 9.7% of revenues, for fiscal 1995.
FISCAL YEAR ENDED MARCH 31, 1995 COMPARED TO THE FISCAL YEAR ENDED MARCH 31,
1994
Revenues. Revenues increased $8.7 million, or 42.0%, to $29.2 million for
fiscal 1995 as compared to $20.5 million for fiscal 1994. Approximately 66.8%
of such increase was the result of a significant increase in sales to
international customers of $5.8 million, or 42.4%. A substantial portion of
the increase in fiscal 1995 international sales was due to increased
deliveries under the Company's British Ministry of Defense contract, which
began in September 1993, as well as deliveries to the Singapore Army, Swiss
Army and certain other international customers. In addition, approximately
21.6% of the overall increase in revenues was the result of an increase in
sales to the U.S. military of $1.9 million, or 55.0%. Such increase in U.S.
military sales was due to Contract 2014 awarded in August 1994 by the U.S.
Marine Corps, on which deliveries began in the fourth quarter of fiscal 1995.
Sales to law enforcement agencies in the U.S. also increased by $1.0 million,
or 28.2%.
Cost of Revenues. Cost of revenues increased $4.5 million, or 47.4%, to
$14.2 million for fiscal 1995 as compared to $9.7 million for fiscal 1994. As
a percentage of revenues, cost of revenues increased to 48.8% for fiscal 1995
as compared to 47.0% for fiscal 1994. Such increase was attributable to a
significant increase in materials costs as a percentage of revenues which
resulted from the lower gross margins from Contract 2014.
Gross Profit. As a result of the foregoing, gross profit increased $4.0
million, or 37.2%, to $14.9 million, or 51.2% of revenues, for fiscal 1995 as
compared to $10.9 million, or 53.0% of revenues, for fiscal 1994.
24
<PAGE>
Total Operating Expenses. Total operating expenses increased $2.4 million,
or 28.3%, to $10.8 million for fiscal 1995 as compared to $8.4 million for
fiscal 1994. Total operating expenses as a percentage of revenues decreased to
37.0% for fiscal 1995 as compared to 41.0% for fiscal 1994. This decrease
primarily resulted from a decline in selling, general and administrative
expenses as a percentage of revenues from 29.6% in fiscal 1994 to 28.0% in
fiscal 1995, and a decline in R&D expenses as a percentage of revenues from
10.0% in fiscal 1994 to 7.9% in fiscal 1995. These decreases in percentage of
revenues primarily resulted from operating leverage benefits.
Operating Income. As a result of the foregoing, operating income increased
$1.6 million, or 67.4%, to $4.1 million, or 14.2% of total revenues, for
fiscal 1995 as compared to $2.5 million, or 12.0% of total revenues, for
fiscal 1994.
Other Income (Expense), Net. Other income increased $302,000 to $78,000 for
fiscal 1995 as compared to an expense of $224,000 for fiscal 1994. This
increase primarily resulted from a decrease in interest expense in fiscal 1995
compared to fiscal 1994 and foreign currency translation gains achieved in
fiscal 1995.
Provision for Income Taxes. The effective tax rate increased to 32.9% of
income before income taxes for fiscal 1995 as compared to 32.5% of income
before income taxes for fiscal 1994. Such increase was primarily attributable
to the greater impact of the R&D tax credit utilized to reduce fiscal 1994
income tax expense.
Net Income. As a result of the foregoing, net income increased $1.3 million,
or 86.4%, to $2.8 million, or 9.7% of revenues, for fiscal 1995 as compared to
$1.5 million, or 7.4% of revenues, for fiscal 1994.
QUARTERLY RESULTS OF OPERATIONS
The following table presents certain unaudited quarterly statements of
operations data for each of the six quarters beginning April 1, 1995 and
ending September 30, 1996. 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 period.
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------
FISCAL 1996 FISCAL 1997
----------------------------------- -----------------
JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30
------- -------- ------- ------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenues................ $13,976 $13,113 $23,784 $14,566 $13,734 $25,404
Gross profit............ 7,030 5,855 13,524 8,128 7,173 13,985
Operating income........ 3,297 2,783 9,287 3,916 3,323 8,288
Income before income
taxes.................. 3,305 2,783 9,291 3,976 3,488 5,131
Net income.............. 2,182 1,780 6,111 2,717 2,215 3,123
<CAPTION>
QUARTER ENDED
------------------------------------------------------
FISCAL 1996 FISCAL 1997
----------------------------------- -----------------
JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30
------- -------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenues................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Gross profit............ 50.3 44.7 56.9 55.8 52.2 55.1
Operating income........ 23.6 21.2 39.0 26.9 24.2 32.6
Income before income
taxes.................. 23.6 21.2 39.1 27.3 25.4 20.2
Net income.............. 15.6 13.6 25.7 18.7 16.1 12.3
</TABLE>
The Company's operations and related revenues and operating results
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,
25
<PAGE>
concentration of shipments under large orders and the uneven timing of receipt
by the Company of necessary authorizations by governmental customers. See
"Risk Factors--Significant Variability in Quarterly Results."
LIQUIDITY AND CAPITAL RESOURCES
Prior to the Recapitalization, the Company's principal liquidity and capital
needs were to fund working capital and capital expenditures necessary to
support its growth. Net working capital was $10.9 million at September 30,
1996 and $20.2 million at March 31, 1996.
The Company's operating activities generated cash of $5.0 million in the six
months ended September 30, 1996 and $6.6 million, $2.0 million and $1.1
million in fiscal 1996, 1995 and 1994, respectively, due to higher levels of
net income in those periods. Cash generated from operations in fiscal 1996,
1995 and 1994 was partially offset by increases in inventories in all three
years and increases in accounts receivable in fiscal 1996 and 1994.
The Company's investing activities used cash of $432,000 for the six months
ended September 30, 1996 and $761,000, $191,000 and $405,000 in fiscal 1996,
1995 and 1994, respectively. The Company's use of cash for investing
activities in those periods was due to capital expenditures. In fiscal 1996,
the Company's capital expenditures were primarily for manufacturing equipment,
commercial vehicles and certain computer equipment used in R&D and general
administration.
The Company's financing activities used cash of $876,000 to reduce
outstanding borrowings under its line of credit in fiscal 1995. The Company
borrowed $762,000 under its line of credit and repaid $1.1 million of its
related-party notes payable in fiscal 1994. During the six months ended
September 30, 1996, the Company used cash of $11.7 million in financing
activities, primarily in connection with the Recapitalization, as described
herein. See "Recapitalization."
Prior to the Recapitalization described herein, the Company maintained a
$6.0 million revolving credit facility with NationsBank, N.A. which was
terminated in connection with the Recapitalization. In connection with the
Recapitalization, the Company entered into the $85.0 million NationsBank
Credit Agreement under which the Company borrowed an aggregate of $76.0
million in three components: (i) $6.0 million out of an available $15.0
million under the NationsBank Revolving Credit Facility, which matures July
31, 2002; (ii) $30.0 million of the Tranche A Term Loan Facility that requires
quarterly principal payments ranging from $200,000 to $1.8 million, commencing
September 30, 1996 and matures July 31, 2002; and (iii) $40.0 million of the
Tranche B Term Loan Facility that requires quarterly principal payments
ranging from $125,000 to $9.4 million, commencing December 31, 1996 and
matures July 31, 2003. The NationsBank Revolving Credit Facility, the Tranche
A Term Loan Facility and the Tranche B Term Loan Facility bear interest at
variable rates, which were approximately 10.0%, 8.4% and 9.1%, respectively,
at September 30, 1996. The borrowings under the NationsBank Credit Agreement
are secured by: (i) substantially all of the Company's assets; (ii) a pledge
of all of the then-issued Common Stock of the Company, which pledge will be
released upon consummation of the Drop Down Transaction in substitution for a
pledge of all the shares of the Drop Down Subsidiary; and (iii) a pledge of
65% of the capital stock of the Company's foreign subsidiaries. The Company
also received $40.0 million from the sale of Bridge Notes to NationsBridge,
which mature on July 31, 2004 and bear interest at an effective rate of 13.3%,
payable quarterly. See "Risk Factors--Effects of Company's Leverage,"
"Recapitalization" and Notes 4 and 10 of Notes to Consolidated Financial
Statements.
The Company anticipates completing the Drop Down Transaction whereby all the
operating assets of the Company will be contributed to the newly formed Drop
Down Subsidiary. The NationsBank Credit Agreement requires the Company to use
its best efforts to effect the Drop Down Transaction by December 31, 1996 and
provides that on and after January 1, 1997, the interest rates on the Senior
Bank Debt each will be increased by 0.25% until the Drop Down Transaction is
completed. The Company currently anticipates consummation of the Drop Down
Transaction by December 31, 1996. The purpose of the Drop Down Transaction is
to effect the release of the pledge of the outstanding shares of Common Stock
granted under the NationsBank Credit Agreement in connection with the
Recapitalization in substitution for a pledge of the shares of capital stock
of
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<PAGE>
the Drop Down Subsidiary as well as to permit the refinancing of a portion of
the indebtedness incurred in connection with the Recapitalization by an
issuance of Common Stock in the Offering free of any pledge or security
interest. The Drop Down Transaction will have no impact on the consolidated
financial statements of the Company since the Drop Down Subsidiary is wholly-
owned, and the financial covenants applicable to the Company and its
subsidiaries will remain essentially unchanged. See "Recapitalization--Drop
Down Transaction."
The Company's indebtedness and the related covenants will have several
important effects on its future operations, including, but not limited to, the
following: (i) a portion of the Company's cash flow from operations must be
dedicated to the payment of interest on and principal of its indebtedness and
will not be available for other purposes; (ii) the Company's ability to obtain
additional financing in the future for working capital, capital expenditures,
R&D, acquisitions, general corporate purposes or other purposes may be
limited; and (iii) the Company's level of indebtedness could limit its
flexibility in reacting to business developments and changes in its industry
and economic conditions generally.
The Company plans to proceed with the Offering with the anticipation of
raising approximately $82.1 million in net proceeds after deducting the
underwriting discount and estimated offering expenses. The Company anticipates
using the net proceeds to the Company to pay off the Bridge Notes, reduce the
Senior Bank Debt and to fund the Contingent Payment and the Warrant Payment.
There can be no assurance that the Offering can be completed at the
anticipated price, or at all.
After giving effect to the application of the estimated net proceeds of the
Offering, quarterly principal payments in respect of the Tranche A Term Loan
Facility and the Tranche B Term Loan Facility will commence on December 31,
1997; from December 31, 1997 through June 30, 1998, the aggregate amount of
such scheduled principal payments will be approximately $0.7 million per
quarter and from September 30, 1998 through March 31, 2001, the aggregate
amount of such scheduled principal payments will be approximately $1.3 million
per quarter. In addition, the Company will be required to make quarterly
interest payments on such indebtedness as described herein.
In addition to cash required for debt service, the Company anticipates that
its primary uses of cash in future periods will be for R&D expenses, working
capital and capital expenditures. From time to time, the Company enters into
long-term contracts with customers, in which R&D and delivery extend for more
than a one-year period. In such contracts, the Company attempts to obtain
advance payments to fund the R&D expenses and production costs required under
these contracts. The Company defers revenues associated with these contracts
until the products are delivered.
The Company believes that the proceeds from the Offering, together with cash
flow from operations and borrowings under the NationsBank Credit Agreement,
will be sufficient to meet the Company's presently anticipated working
capital, capital expenditure and debt service needs for at least the next 12
months. See "Use of Proceeds."
27
<PAGE>
BUSINESS
The Company is the leading worldwide producer of interactive simulation
systems designed to provide training in the handling and use of small and
supporting arms. The Company offers a broad array of cost-effective training
systems ranging from individual marksmanship trainers to instructional systems
for multiple users. Unlike traditional live firing ranges, the Company's
simulation systems enable users to train in highly realistic situations
through the integration of video and digitized projected imagery and modified,
laser-emitting firearms that retain the fit, function and feel of the original
weapon. Utilizing internally developed proprietary software and sensors
incorporated into the simulated weapons, the Company's systems offer real-time
feedback and evaluation with respect to a number of performance measures such
as accuracy, reaction time, situational judgment and other important elements
of weapons handling. In addition, the Company's simulation systems offer
significant improvements in safety as well as many other benefits to customers
that cannot be attained in live weapons practice, including reductions in
ammunition consumption, weaponry wear, trainee transport and range maintenance
costs and environmental remediation expenses. Over its 12-year history, the
Company's team of subject matter experts has developed over 180 types of
simulated weapons and approximately 100 laser discs containing more than 1,000
training scenarios.
The Company has focused its sales efforts primarily in the U.S. and
international military and law enforcement market segments through its
principal facilities near Atlanta, Georgia and its other facilities in the
U.K., the Netherlands and Singapore. More recently, the Company has also begun
to sell simulation training systems for hunter and sports training. By
offering products that enhance training effectiveness while reducing costs,
FATS has sold systems to numerous customers in the U.S. and abroad, including
the U.S. Marine Corps, the U.S. Army, the U.S. Air Force, the Los Angeles
Police Department, the Internal Revenue Service, the Singapore Army and Police
Coast Guard, the British Ministry of Defense and the Royal Netherlands Army.
To date the Company has sold more than 2,000 FATS(TM) systems in the U.S.
and over 30 other countries. Although the Company is unaware of any
independent third party industry statistics, the Company believes, based on
its monitoring of the market, that its systems sold to date represent a
substantial majority of the worldwide installed base of interactive small and
supporting arms simulation systems purchased by military and law enforcement
agencies. Management believes that the Company's success to date has been due
primarily to the proven quality and cost-effectiveness of the Company's
products, its premier FATS(TM) brand name, its strong long-term relationships
with its customers, its ability to provide innovative customized training
solutions on a timely basis, its extensive inventory of proven weapons and
scenarios, its ability to integrate advanced technologies and its team of
recognized subject matter experts. As a result of these competitive
advantages, the Company's revenues and operating income have grown at compound
annual growth rates of 51.8% and 80.6%, respectively, over the last five
fiscal years to $65.4 million and $19.3 million, respectively, in fiscal 1996.
As of September 30, 1996, the Company had a backlog of approximately $56.2
million from all customers and an additional $46 million in unexercised
customer options to purchase the Company's products through September 30, 1999
under an existing contract with the U.S. Marine Corps.
INDUSTRY OVERVIEW
The Company has helped to revolutionize small and supporting arms training
through the introduction of cost-effective and realistic interactive
simulation. For decades, military and law enforcement organizations have
trained personnel on firing ranges with targets that are static or have
limited motion capabilities. This approach neither accurately replicates the
hostile situations armed personnel are likely to face nor helps to develop
tactical skills and individual judgment. Despite efforts by law enforcement
agencies to add "aggressor" and "friendly" targets to evaluate the judgment of
their trainees, live fire training remains limited in its ability to replicate
real-life situations. Simulation systems not only provide solutions to these
issues but also offer significant improvements in safety and many other
benefits that cannot be attained in live weapons practice, including
reductions in ammunition consumption, weaponry wear, trainee transport and
range maintenance costs. In addition, firearms simulators help customers
reduce costs associated with environmental compliance requirements such as the
cost of removal from target ranges of lead deposits caused by the use of live
ammunition. Furthermore, many law
28
<PAGE>
enforcement agencies have begun to adopt simulation systems based in part on
their concern over the increasing number of liability lawsuits relating to
alleged uses of excessive force. As a result, military and law enforcement
organizations are allocating greater portions of their training budgets to
small and supporting arms simulation training.
In addition to the increased demand for more realistic training, management
believes the development of the small arms simulation industry has benefitted
from two trends: (i) increasing pressure on budgets; and (ii) rapidly
advancing computer and video technology. Faced with declining budgets, many
military and law enforcement agencies are adopting interactive small and
supporting arms simulation as a means of reducing costs while maintaining
training effectiveness. In addition, firearms simulators help customers reduce
costs associated with environmental compliance requirements such as the
removal from target ranges of lead deposits caused by the use of live
ammunition. At the same time, advances in computing power and speed coupled
with advances in high resolution graphics and video technology have made it
possible to create highly realistic and cost-effective simulators. The
improved fidelity and diagnostic capability of current simulators permit
military and law enforcement agencies to improve the quality of firearms
training at a substantially lower cost than live fire training.
The interactive small and supporting arms simulation industry is relatively
new and developing, and the Company believes that the global business
opportunities remain substantial due to the significant benefits of and demand
for simulation products. Of the approximately $260 billion U.S. military
budget for fiscal 1997, approximately $3 billion to $5 billion is allocated to
overall training and training-related expenditures. Management estimates that
the market for small and supporting arms simulation systems like the Company's
product line in the U.S. military market segment alone is approximately $800
million, based on near-term stated acquisition objectives for small and
supporting arms simulation systems set by various branches of the U.S. armed
services. Moreover, management believes the trends favoring increased reliance
upon simulation in the U.S. can also be identified abroad as military and law
enforcement agencies in other countries, generally centralized to a greater
extent than in the U.S. and facing increasingly restrictive budgets, are re-
allocating greater portions of their training budgets to simulation training.
COMPETITIVE ADVANTAGES
The Company believes that its success to date in the small arms training
simulation market is attributable to the following key competitive advantages:
High Quality and Cost-Effective Products. The Company has participated in
studies of its products conducted by the U.S. Marine Corps, the U.S. Army and
the U.S. Air Force. The Company has been informed that such studies have
validated the cost-effectiveness and training benefits of FATS(TM) systems for
such entities and that trainees using FATS(TM) systems generally improve their
marksmanship and judgment skills faster than those using only live fire
training. FATS(TM) systems have been used for training U.S. and British forces
in Bosnia and for pre-deployment training of U.S. forces for Operation Desert
Storm and operations in Somalia.
Premier FATS(TM) Brand Name. The Company believes that the FATS(TM) brand
name has become associated with high quality, technically superior interactive
small and supporting arms simulator systems. Management believes that its
reputation has been enhanced by the acceptance of the Company's products by
certain military and law enforcement agencies that employ exacting standards
in making purchasing decisions. As a result, management believes that the
FATS(TM) premier brand name is critical to its ability to compete in its
existing market. In addition, the Company intends to build on this reputation
as it focuses on other market segments that have sophisticated firearms
training requirements, as it has already begun to do in the hunter and sports
training component of the market.
Strong Long-Term Relationships with Customers. The Company believes that a
critical element of its success to date and its ability to continue to expand
the market for simulation-based training has been its commitment to long-term
relationships with its customers. The Company works closely with its customers
often
29
<PAGE>
for a substantial period of time to help determine their training needs,
define specifications and develop customized training solutions. This approach
is particularly important given the relative infancy of the simulation-based
small arms training market and the education required to convert into
customers those agencies and personnel accustomed to traditional live fire
training. In addition to providing extensive training manuals, once a system
has been installed for a customer, the Company continues to provide support
through long-term service and maintenance agreements and service centers
designed to address customer needs within 24 hours of notification. Through
these long-term relationships, the Company works to expand its customers'
defined requirements and develop follow-on sales of existing products, systems
upgrades and additional weapons and scenarios. The Company's commitment and
approach to customer service enable it to develop opportunities for the
introduction of product enhancements and other incremental sales
opportunities.
Innovative Customized Training Solutions. The Company works closely with
many of its customers to develop training programs, simulated weapons and
training scenarios tailored to their specific needs. This ability to adapt
products to particular training needs is critical because the needs of the
Company's customers vary substantially. In addition, the Company offers a
broad range of products at various prices and with numerous options in order
to reach as broad a market as possible. When the Company develops highly
customized solutions, it usually retains the rights to each product and
therefore is able to leverage its technology investment in the development of
similar products for sale to other customers.
Extensive Inventory of Proven Weapons and Scenarios. Over its 12-year
history, the Company has fielded more than 180 simulated weapons and
approximately 100 laser discs containing more than 1,000 scenarios. The
Company draws on this proven catalog of existing products to address quickly
specific customer requirements. Management believes that its ability to offer
simulated weapons already fielded and tested by other customers has been
instrumental in its success in competitive bidding situations.
Integration of Advanced Technologies. The Company's strong technical
application capability enables it to effectively integrate: (i) advanced
laser, computer and video technology from third parties; (ii) proprietary
ballistics modelling, training and diagnostic software; and (iii) specially
machined, realistic, sensor-embedded weapons. The Company's strategic
relationships with leading high technology companies provide it access to
advanced simulation technologies and the opportunity for collaborative product
development. This emphasis on continual systems enhancements and development
of new generations of products enables the Company to expand its product
offerings and augment its sales to existing customers. In order to maintain
its technical application capability, the Company dedicates significant
resources to R&D, with a total staff of 61 persons, the majority of whom have
advanced degrees.
Team of Recognized Subject Matter Experts. In order to produce highly
realistic simulated weapons and training scenarios for its small and
supporting arms simulation systems, the Company seeks to hire and retain
specialists with subject matter expertise. The Company's R&D department
consists of technical and training experts drawn from a wide range of military
and law enforcement backgrounds to ensure an understanding of each customer's
unique training needs. Technical weapons experts ensure that the Company's
simulated weapons provide the fit, function and feel of the original weapon,
including characteristics such as recoil, weight, balance and ballistics.
Training specialists translate a customer's live fire training requirements
into quantifiable simulation objectives and then work with R&D engineers to
produce simulation solutions that fulfill such customer's needs. Accordingly,
the Company continually recruits, hires and seeks to retain personnel with
military and law enforcement experience, and in particular individuals with
expertise in technical matters, training requirements and the appropriations
and procurement process.
GROWTH STRATEGY
The Company has experienced substantial growth in its sales during recent
years and intends to seek further growth through expanded sales of its
existing products in its target markets as well as the development of new
products and markets. The Company's growth strategy includes the following
core elements:
30
<PAGE>
Increase Market Penetration. The interactive small and supporting arms
simulation industry is relatively new. As a result, the Company is seeking to
broaden acceptance of its products and increase sales to military and law
enforcement agencies in the U.S. and internationally. While continuing to
acquire new customers by demonstrating the cost-effectiveness and training
benefits of its products, the Company also focuses on generating repeat orders
from existing customers. The Company has found that its customers often order
additional simulation systems after an initial purchase once they experience
the advantages of the FATS(TM) systems. In addition, in recent years, the
Company has begun to focus on generating follow-on orders through systems
upgrades, software and other auxiliary products.
Continue New Product Development. A key element of the Company's growth
strategy is new product development. The Company believes that it can continue
to develop new products as a result of its R&D efforts and its understanding
of the needs of its customers. For example, the Company's newest simulator,
the Vessel Weapons Engagement Training System ("VWETS"), is being developed at
the request of and in close collaboration with an international customer. The
Company is now developing smaller versions of the product for sale to other
customers and believes that this integration of a motion platform with its
core simulation technology can be applied to a variety of other mounted
weapons training situations. In addition, the Company is currently developing
simulation products for training law enforcement personnel in the use of less-
than-lethal force (e.g., tear gas, batons, sticky foam and bean bag shotguns).
The Company is also developing simulators for newly emerging weaponry and
products integrating FATS(TM) systems with larger weapons system simulators.
Expand into New Markets. Management believes that significant opportunities
exist for sales beyond the Company's traditional military and law enforcement
customers. The Company has already begun to focus on the hunter and sports
training component of the market, which management believes is a natural
extension of its activities to date. The Company believes that potential
customers for products related to hunter education include both state and
federal agencies which have shown interest in simulation as a means of
promoting hunter safety and conservation as well as firearms dealers
interested in the use of simulators for competitive shooting exercises, hunter
training and home security programs. In addition, although the Company has not
yet taken steps to develop a product line or otherwise enter the market for
arcades, amusement parks and other entertainment venues, the Company believes
that this market may represent significant opportunities for the Company in
the future. The Company believes that less expensive lower resolution,
portable versions of certain of its systems could be developed readily for
these markets.
Pursue Selected Strategic Acquisitions. As an alternative or a supplement to
the internal development of additional product lines, new products could be
developed or added to the FATS(TM) line by means of strategic acquisitions,
joint ventures or partnerships. In particular, an acquisition of a company
with a strong brand name in lower price point or different products could
permit the Company to expand its product line, while maintaining the premium
position of the FATS(TM) brand name. However, the Company has not made any
such acquisition or entered into any such arrangement in the past and
currently has no existing agreements, commitments or specific plans to do so.
PRODUCTS
The Company offers a variety of innovative products to meet the specific
firearms training needs of its customers. Customers typically purchase a
system comprised of a simulator with several weapons and scenarios. The
Company's systems sell for prices from $50,000 for low-end systems with a
basic complement of weapons and scenarios to over $300,000 for high-end
systems with an extensive set of weapons and scenarios and auxiliary
equipment. The Company also sells additional weapons and laser discs to
customers as add-ons to basic systems at prices ranging from $1,000 to
$25,000.
Simulators. The Company's training simulators combine a primary simulation
computer, a laser hit location detection system, a laser disc player and a
video projector. The user of the simulator practices with a modified firearm
and fires a laser beam at targets within a highly realistic training scenario
appearing on a 10- to 30-foot video screen. The simulator processes data
provided by the laser hit location detection system and sensors
31
<PAGE>
integrated into the simulated weapon to provide the instructor and trainee
real-time performance feedback. In addition, the instructor can replay various
parts of the training exercise with the trainee for detailed analysis of the
trainee's performance, including the trainee's accuracy, reaction time,
judgment and other aspects of weapons handling. Certain of the Company's
simulators can accurately measure weapons fire at simulated distances of up to
2,200 meters and be linked to other simulators so that as many as 15
individuals can train at the same time. In addition, the simulators can be
programmed to replicate a wide variety of real-life situations, including
situations in which outcomes depend upon the user's reactions as well as
situations in which the user faces unexpected events such as the malfunction
of the firearm.
Simulated Firearms. The Company works closely with its customers to offer a
diverse range of specially modified or custom fabricated simulated firearms
which accurately replicate the fit, function and feel of the original firearm
in all material respects. The Company believes it is critical that its
simulated weapons have the same physical functions and operational
characteristics as the actual firearm such as weight, timing of fire, recoil,
potential for weapon malfunction and loading and reloading procedures. A
typical simulated firearm will include an infra-red laser, gas piston
actuators, valves, several types of electronic sensors, a localized computer
controller, specialized recoil buffers, gas lines, ports and wiring. Based
upon customer requirements, the Company can modify actual weapons into
simulated firearms or can manufacture simulated firearms from raw materials.
The majority of simulated firearms sold to U.S. military and law enforcement
customers are modified from actual firearms or assembled from weapon kits
purchased from third party suppliers, while many international military
customers provide their own firearms for the Company to convert into training
devices. The Company's simulated firearms are designed for an extended life-
cycle with maximum reliability and realism. Currently available weapon types
include revolvers, semi-automatic pistols, shotguns, semi-automatic and
burst/automatic rifles, submachine guns, machine guns, anti-armor rocket
launchers, grenade launchers, cannons, mortars and archery bows.
Scenarios and Software. The Company offers more than 100 video laser discs
containing more than 1,000 scenarios designed for various targeted markets.
The Company's software programs combine video and graphics into a versatile
simulation package. The instructor can use the program to modify the training
exercises and monitor performance of the user in a broad range of scenarios.
These scenarios are based on realistic combat situations such as small unit
ambushes complete with tank or helicoptor aggressor units or law enforcement
situations ranging from ordinary patrol encounters to special SWAT operations.
Scenarios are typically filmed in an environment similar to that which the
user is likely to experience. The Company often works with its customers to
produce a video laser disc of a specific training scenario or location. In
addition, the video disc often contains variations of the same situation so
that the customer can train users in a variety of scenarios and with multiple
outcomes depending upon the actions of the trainee or instructions of the
trainer. The Company can also draw on its extensive library of scenarios in
order to reduce the time necessary to provide customized training solutions
for new customers.
Auxiliary Equipment. The Company manufactures a wide range of optional
auxiliary equipment which enhances the realism of the training scenarios.
Options include: (i) enemy shootback, which simulates return fire from the
target and has the ability to disable a trainee's training weapon; (ii) night
vision adapter, which can simulate night training using day video scenarios
and standard night vision goggles; (iii) less-than-lethal law enforcement
options such as baton simulation, pepper spray training devices and blank
firing weapons; and (iv) classroom trainers, in which a personal computer and
software are added to the system so that as many as 40 students, each with a
personal keypad, can participate in interactive training.
TARGETED MARKET
The Company currently targets four principal market components: (i) U.S.
military; (ii) U.S. law enforcement; (iii) international (including military
and law enforcement authorities); and (iv) hunter and sports training. Each
market component is in a different stage of development and is defined by a
different set of characteristics.
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<PAGE>
U.S. Military. The desire to provide realistic training while significantly
reducing costs has been the primary reason for the adoption of simulated arms
training by U.S. military authorities. The costs of live fire training, which
make it a relatively expensive form of training, include the usage 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. Moreover, according to budget
estimates of the DOD for the government's fiscal 1997, 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.
Although the U.S. military is centralized at the highest level, each major
branch of the U.S. military is at a different stage of implementing simulation
in its training regimen. The U.S. Marine Corps has adopted simulation as a
fundamental part of its training activities. In fiscal 1995, through
competitive bidding, the Company was awarded a contract (Contract 2014) with
the U.S. Marine Corps for the supply of small and supporting arms simulators.
The U.S. Army has purchased systems under the Company's contract with the U.S.
Marine Corps. 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 is the primary supplier of interactive small and
supporting arms simulation systems to the U.S. Marine Corps, the U.S. Army and
the U.S. Air Force. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Overview--U.S. Marine Corps Contract" and
"--Results of Operations."
A critical feature of the U.S. military component of the market is the
procurement, budgeting and appropriations process. There are two principal
methods by which military organizations in the U.S. acquire training
equipment. For purchasing programs that will be defined in the U.S.
government's budget, the military organizations generally follow the DOD's
multi-phase Planning, Programming, Budgeting and Execution System ("PPBES").
In the planning phase, the DOD makes a proposal based on its examination of
the specific requirements and requests of each service branch given available
existing products and products under development. The Company's simulation
products have been formally reviewed and tested in the planning phase by all
branches of the U.S. military. In the programming phase, a Program Objective
Memorandum is drafted to identify to the U.S. Congress, which is responsible
for the budgeting and appropriation of funds, the specific purchases requested
by the military and the desired time period for the purchases. In the
budgeting phase, each military branch and command within each branch compete
with the other branches or commands for funds. After funds are included in the
federal budget, they must be appropriated by Congress in order to be released
to the military to be spent. Typically, once funds are appropriated for
simulators and other similar types of equipment for which FATS seeks
contracts, the military organization has three years to enter into a
contractual obligation relating to such appropriation. When a contractual
obligation is incurred, funds ordinarily are expended within a five-year
period beginning on the date of appropriation. Appropriated funds must be
spent on the appropriated item unless the U.S. Congress otherwise agrees to a
change. U.S. military authorities can also make smaller purchases from
discretionary funds available to commanders for use in accordance with their
service priorities. These purchases can be made through various purchasing
procedures including the contracting procedures of the GSA. The Company has a
standing contract with the GSA that defines the prices the Company may charge
government entities for certain of its goods and services. The majority of
sales to the U.S. Air Force and federal law enforcement agencies as well as
sales to local law enforcement agencies financed with federal funds have been
made through the GSA procedures.
For fiscal 1996, 44.3% of the Company's total revenues and 78.2% of the
Company's U.S. revenues were attributable to sales to U.S. military
authorities. As of September 30, 1996, the Company had a backlog of $38.2
million for contracts or purchase orders awarded to the Company by 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 component of the market is
highly fragmented and can be divided into two principal groups: (i) U.S.
government entities (including the U.S. Postal Service, the U.S. Department of
Treasury (including its agencies and bureaus such as the Secret Service and
the Bureau of Alcohol, Tobacco and Firearms), the Federal Bureau of
Investigation, the Drug Enforcement Administration and
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<PAGE>
the Central Intelligence Agency); and (ii) state and local law enforcement
organizations such as the Los Angeles Police Department. The federal agencies,
whose procurement process generally follows the PPBES method, are typically
headquartered in or near Washington, D.C. By contrast, the state and local law
enforcement agencies are widely dispersed, with more than 12,500 different law
enforcement departments in the U.S. Given this fragmentation, the procurement
processes vary 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 2,500 law
enforcement agencies and departments with more than 25 officers. With only
approximately 650 systems sold to U.S. federal and local law enforcement
authorities to date (of which approximately 600 are FATS(TM) 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 may be opportunities for increased sales to U.S. law enforcement
authorities of cost-effective simulation products designed to enhance tactical
skills and judgment.
For fiscal 1996, 11.5% of the Company's total revenues and 20.3% 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."
International. The Company believes that many international military and law
enforcement agencies are beginning to recognize the benefits of cost-effective
and realistic small arms simulation training. The Company has sold FATS(TM)
systems to customers in more than 30 countries, including Great Britain, the
Netherlands, Italy and Singapore. Interest in the Company's products may be
greatest in countries in which limited land is available for live fire
training or in which budgetary constraints or interest in technological
upgrades may support a decision to purchase the Company's systems. 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 1996, 43.3% 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 7 of Notes to Consolidated Financial Statements.
Hunter and Sports Training. The Company has recently begun to focus on the
U.S. hunter and sports training component of the market. The customers for
firearms training in this emerging market component include state and federal
hunting agencies such as the U.S. Fish and Wildlife Service and the U.S.
Department of Natural Resources, as well as conservation associations such as
Ducks Unlimited, Inc. and the National Wild Turkey Federation, Inc. These
organizations have recognized the use of firearms simulation as a means of
promoting hunter safety and conservation. Moreover, the firearms dealer market
offers the potential to use simulators for competitive shooting exercises,
hunter training and home security programs. Simulators are currently being
used at some shooting competitions as a supplement to live fire matches. The
Company believes that as some states already require the successful completion
of a formal firearms training course as a prerequisite to owning a hunting
license or a gun, in the future, training on simulators may become an integral
part of such courses in many jurisdictions. 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 significant business
opportunities may exist in the hunter and sports training component of the
market.
For fiscal 1996, 0.9% 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."
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<PAGE>
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.
Domestic sales are generated entirely by the Company's 30-person domestic
marketing group, all of whom report either directly or indirectly to the
Company's Vice President, Domestic. By marketing its products directly without
relying on distributors or agents, the Company can better maintain control of
its sales efforts and promote consistency in marketing with respect to various
products and customers.
The vast scope of the international military and law enforcement components
of the market makes it inefficient for the Company to establish its own direct
sales force. Accordingly, the Company has established a network of agents and
subsidiaries (18 and four, respectively, as of September 30, 1996) operating
in six defined regional areas. The Company employs regional managers to
oversee the activities of these agents, each of whom reports to the Company's
Vice President, International.
CUSTOMERS
During the period from its inception in 1984 through fiscal 1996, the
Company sold more than 2,000 weapon simulation systems to military and law
enforcement authorities in the U.S. and over 30 other countries. The following
table lists certain of the Company's customers in fiscal 1996 in each of its
principal target market components:
<TABLE>
<CAPTION>
U.S. MILITARY U.S. LAW ENFORCEMENT INTERNATIONAL
- ----------------- -------------------------------------- ----------------------------------------
<S> <C> <C>
U.S. Air Force Immigration and Naturalization Service British Ministry of Defense
U.S. Army Internal Revenue Service Finanza (Italian National Customs Police)
U.S. Marine Corps Los Angeles Police Department Royal Netherlands Army
U.S. Postal Service Singapore Army
</TABLE>
In the first six months of fiscal 1997, the Company's five largest customers
accounted for approximately 82.1% of the Company's revenues, with the U.S.
Marine Corps and an Italian law enforcement agency accounting for
approximately 42.0% and 18.3%, respectively. In fiscal 1996, the Company's
five largest customers accounted for 67.4% of the Company's revenues, with the
U.S. Marine Corps, the Royal Netherlands Army and the U.S. Army accounting for
approximately 26.5%, 12.7% and 10.1%, 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. See "Risk Factors--
Customer Concentration; Reliance on Certain Key Contracts," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
Note 7 of Notes to Consolidated Financial Statements.
RESEARCH AND DEVELOPMENT
The Company engages in the R&D of new and enhanced simulation and training
technology using internally generated funds. A total of 61 Company employees,
or approximately 20.5% of the Company's employees, were engaged in R&D
projects as of September 30, 1996. Electronic and mechanical R&D expenditures
totaled $2.8
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<PAGE>
million, $2.3 million and $2.0 million in fiscal 1996, 1995 and 1994,
respectively. The Company's R&D efforts are divided into four separate
disciplines: electronic, mechanical, training and audio-visual.
Electronic R&D combines software and hardware engineering as well as other
electro-optical fields to produce programs and equipment responsive to
specific training needs. The Company's electronic R&D capabilities include
object-oriented software design, video and audio, interactive computer
generated graphics, Distributed Interactive Simulation, video special effects,
lasers, weapon ballistics, optics, image processing, target modeling and
motion platforms. This group is in the final stages of developing the first
fully interactive gunnery/tactics boat simulator and has developed technology
to transition from computer generated imaging to video and then back during
the same training scenario. As of September 30, 1996, a total of 37 Company
employees were engaged in electronic R&D.
Mechanical R&D combines mechanical engineering with the development of
highly specialized sensing mechanisms, incorporating sophisticated
programmable micro controllers for the execution of control firmware and
weapons technology. Mechanical R&D focuses on the refinement of cost-effective
products with enhanced realism and reliability. This process includes
conceptualization and prototype development, testing and documentation of the
finished trainer. The Company has the technology and resources to execute the
entire development process in-house by means of design teams that generally
include a project engineer, a model maker, a draftsman or designer, a weapons
software engineer, an electronics technician and a weapons training expert.
While each system varies according to the original weapon type, the Company
uses common components wherever possible to reduce costs and make service more
feasible. As of September 30, 1996, a total of 14 Company employees were
engaged in mechanical R&D.
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. As of September 30, 1996, a total of seven Company
employees were engaged in training R&D.
Audio-visual R&D focuses on the production of specialized audio-visual
programs and a range of media support activities, from full production 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 and pioneered the use of multi-screen
projection in small arms simulation. As of September 30, 1996, a total of
three Company employees were engaged in audio-visual R&D.
MANUFACTURING OPERATIONS
The Company's manufacturing operations are conducted at its headquarters
near Atlanta, Georgia and to a limited extent at the facility of its U.K.
subsidiary, Firearms Training Systems Ltd. Manufacturing operations are
divided into two departments, systems manufacturing and weapons manufacturing.
The systems manufacturing department assembles the simulator components of the
FATS(TM) systems from subassemblies designed by the Company and supplied by
third-party vendors. As the components are completed, they are tested for both
function and durability and are subjected to a comprehensive quality assurance
program. Systems manufacturing occurs only at the Company's headquarters where
electrical assemblers and technicians can assemble 70 primary simulation
computers and other unique simulator components per month on a single-shift
basis. The Company believes that this capacity can be easily expanded to 100
simulation computers per month by adding a second shift or to even greater
capacity by acquisition of the requisite workstations and floor space for
manufacturing and warehouse operations.
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<PAGE>
Weapons manufacturing involves the production of simulated firearms and non-
lethal simulators by either modifying actual firearms or 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 weapons manufacturing activities in the U.S.
and the U.K. have a capacity of 750 simulated firearms per month on a single-
shift basis. As with systems manufacturing, this capacity can readily be
expanded by using additional shifts and/or by acquiring additional facilities
and workstations.
CUSTOMER SERVICE
The Company has established a worldwide customer service network consisting
of personnel at its headquarters near Atlanta, area service representatives,
the Company's foreign subsidiaries, sub-contractors and agents. The Company
maintains an inventory of repair parts to support the service operations. The
Company maintains a 24-hour customer service hotline and seeks to remedy
customer service needs 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 parts and
assemblies to support the U.S. Marine Corps and the U.S. Army Reserve National
Guard with readily available serviceable parts and assemblies. The Company's
U.K. and Netherlands subsidiaries perform the same support functions for the
British and Netherlands armies, respectively, and a subcontractor in Singapore
provides similar services in support of the Company's customers in that
country.
RAW MATERIALS AND SUPPLIERS
The Company currently purchases from numerous suppliers on both a
competitive bid and long-term contract basis. 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 weapons 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.
COMPETITION
The Company competes with a number of domestic and international providers
of small and supporting arms simulation systems. The Company's principal
competitors in the U.S. military and international components of the market
consist generally of divisions or subsidiaries of larger companies, including
Short Brothers, a division of Bombardier, and Thomson Training and Simulation,
a U.K.-based subsidiary of Thomson CSF. In the U.S. law enforcement component
of the market, the Company's principal competitors include, among others, SBS
Technologies, Inc., I.E.S., Inc. and Caswell International. With respect to
potential competitors, the Company believes that as the interactive small and
supporting arms simulation market continues to develop, a number of large
domestic defense contractors have the capacity to become significant
competitors due to their expertise with complex simulation systems and their
relationships with the DOD and the U.S. Congress. Many of the Company's
current and potential competitors have significantly greater financial,
technical and marketing resources than the Company. The Company believes that
although it has a number of competitors and the potential exists for new
entrants in the market, the Company has been successful to date due to its
ability to integrate advanced technologies, competitive pricing, proven
quality, established brand name, strong customer service and other competitive
advantages.
FACILITIES
The Company's headquarters and primary facility, at which it performs
manufacturing, assembly, R&D, sales, marketing, service, financial and
administrative functions, is a leased property of approximately 92,800 square
feet located near Atlanta. The lease expires in 2008 with three five-year
options to extend the lease beyond
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<PAGE>
such date. The Company's U.K. subsidiary occupies a leased facility in
Lincolnshire, England, of approximately 12,000 square feet, at which the U.K.
subsidiary performs manufacturing, assembly, service, training and
administrative functions. The lease on the U.K. facility expires in 2003. The
Company's Netherlands subsidiary occupies a leased facility of approximately
4,800 square feet in Waardenburg, the Netherlands, at which the Netherlands
subsidiary performs service and administrative functions. The lease expires in
1998 with an option to extend to 2000.
EMPLOYEES
As of September 30, 1996, the Company and its subsidiaries employed 297
persons. As of such date, the Company employed a total of 274 persons
domestically, including 139 in manufacturing, assembly and customer service,
61 in R&D, 39 in sales and marketing, 24 in administration and finance and 11
in program management; the Company's U.K. subsidiary employed a total of 18
persons, including 14 in manufacturing, assembly and customer service and four
in administration and finance; the Company's Netherlands subsidiary employed a
total of four persons, including three in manufacturing, assembly and customer
service and one in administration and finance; the Company's Canadian
subsidiary employed one person in customer service; and the Company's
Singapore subsidiary contracted with one person in program management. The
majority of the Company's employees are located at its headquarters, with
salespersons in California, Texas, Missouri, Kentucky, New Jersey, Colorado,
Utah and Georgia. None of the employees is unionized.
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 socio-economic 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 default or 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.
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, including its largest
current contract (Contract 2014 with the U.S. Marine Corps), 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. The
contracts obtained by the Company in the future may also be cost-reimbursement
type contracts rather than fixed-price contracts and in any such case may not
take into account certain costs of the Company such as interest on
indebtedness. 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 the export licensing jurisdiction of the U.S.
Department of State (the "State Department") and the U.S. Department of
Commerce (the "Commerce Department") with respect to the temporary or
permanent export of certain of its products and the import of certain other
products based on, respectively, the Arms Export Control Act and the Export
Administration Act (which, though expired, is carried
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<PAGE>
out by Presidential Executive Order issued under the auspices of the
International Emergency Economic Powers Act). 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 addition, in
certain circumstances, export licenses and other authorizations may be
revoked, suspended or amended without notice. Such events have occurred with
respect to other companies subject to export licensing requirements relating
to defense articles and defense services in connection with the State
Department's implementation of the Arms Export Control Act. Such events have
also occurred with respect to the Commerce Department's implementation of the
Export Administration Act. Each of 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 criminal offenses in connection with exports.
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 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 LEGAL PROCEEDINGS
The Company is involved in legal proceedings from time to time in the
ordinary course of its business. As of the date of this Prospectus, there are
no legal proceedings pending against the Company which management believes are
material.
In July 1994, the Company disclosed to the Federal Election Commission (the
"FEC") that violations of the Federal Election Campaign Act ("FECA") may have
occurred with respect to a total of $8,500 in political contributions made on
behalf of candidates for Congressional election. As disclosed by the Company,
Mr. Jody Scheckter, who was then the President of the Company, was reimbursed
by the Company for personal contributions ranging from $500 to $2,000 over the
period from October 1989 through June 1993. Mr. Scheckter promptly reimbursed
the Company for these amounts and contends that he had previously been unaware
that the reimbursements had occurred. In October 1994, the FEC found reason to
believe that the Company, Mr. Scheckter and a secretarial employee who had
processed the reimbursements had knowingly and wilfully violated provisions of
the FECA. Counsel for the three respondents contested the FEC's finding.
Although the Company cannot predict how or when the matter will be resolved,
the statutory procedures provide for an attempt at conciliation, including
payment of civil penalties in the event that the FEC determines there is
probable cause to believe a violation has occurred. Failing such resolution,
the FEC may institute a civil action seeking civil penalties or refer the
matter to the U.S. Attorney General for possible criminal prosecution. The
Company does not believe that the ultimate resolution of the matter will have
a material adverse effect on its financial condition, results of operations,
or the conduct of its business.
The allegations of violations of FECA were apparently triggered by a
complaint by a former chief financial officer of the Company who also alleged
violations of other federal statutes. The Company believes that the ultimate
resolution of these matters will not have a material adverse effect on its
financial condition, results of operations or the conduct of its business.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information concerning the Company's
executive officers and directors:
<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------------- --- ------------------------------------------------
<S> <C> <C>
Peter A. Marino (1)....... 54 President, Chief Executive Officer and Director
Robert B. Terry, Jr. ..... 54 Vice President and Chief Operating Officer
David A. Apseloff......... 37 Treasurer, Chief Financial Officer and Assistant
Secretary
Robert F. Mecredy......... 50 Vice President, Domestic
Juan C. G. de Ledebur..... 41 Vice President, International
Gregory Echols............ 38 Vice President, Engineering
Lester Pollack (1) (2).... 63 Chairman of the Board and Director
William J. Bratton (3).... 49 Director
Craig I. Fields (2) (3)... 50 Director
Jonathan H. Kagan (1) 40 Secretary and Director
(3)......................
Scott Perekslis (1) (2)... 28 Vice President and Director
Bruce G. Pollack.......... 37 Director
Paul J. Zepf (1).......... 31 Director
</TABLE>
- --------
(1) Member of Executive Committee.
(2) Member of Compensation Committee.
(3) Member of Audit Committee.
Peter A. Marino has served as a Director of the Company since September 17,
1996 and became President and Chief Executive Officer on October 15, 1996.
Prior to joining the Company, Mr. Marino served as Senior Vice President of
Raytheon E-Systems, Inc. from 1991 to 1996. Mr. Marino previously served as
President and Chief Operating Officer of Fairchild Industries and prior to
such service was President and Chief Operating Officer of Lockheed Electronics
Co., Inc. Prior to such service, Mr. Marino held various positions at the
Central Intelligence Agency, including Director of the Office of Technical
Services. Mr. Marino serves as a director of Space Imaging, Inc. and E-Systems
Medical Electronics and is a member of the Defense Science Board.
Robert B. Terry, Jr. has served as Vice President and Chief Operating
Officer of the Company since July 31, 1996. Mr. Terry served as interim
President from July 31, 1996 until October 15, 1996. Mr. Terry previously
served as Director of Operations from 1995 to 1996, Director of Programs from
1992 to 1995 and as a Program Manager in 1992. Prior to joining the Company in
1992, Mr. Terry served as an officer in the U.S. Army for 27 years in a
variety of staff and management positions in aviation, transportation,
maintenance, supply, training and acquisition. Mr. Terry retired from the U.S.
Army in 1991 with the rank of colonel.
David A. Apseloff has served as Treasurer and Chief Financial Officer since
April 1995 and Assistant Secretary since July 31, 1996. Prior to joining the
Company in April 1995, Mr. Apseloff served as a Vice President of a real
estate development company and worked as a financial consultant from June 1994
to April 1995. From 1986 to 1994, Mr. Apseloff served as Chief Financial
Officer of Sensor Technology, Inc., a manufacturer's representative for
medical devices.
Robert F. Mecredy has served as Vice President, Domestic since September 17,
1996. Prior thereto, Mr. Mecredy served as a 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. Before joining the
Company, Mr. Mecredy served as Director of Army and Marine Corps Marketing--
Washington Operations at Raytheon Corporation from 1988 to 1990. Mr. Mecredy
served as an infantry and aviation officer in the U.S. Army for 20 years,
retiring in 1986 with the rank of lieutenant colonel.
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<PAGE>
Juan C. G. de Ledebur has served as Vice President, International since
September 17, 1996 and previously served as Director of International Sales &
Marketing from 1987 to 1996. Prior to joining the Company in 1987, Mr. de
Ledebur served as manager of European sales for Information Handling Services,
a provider of technical and regulatory information.
Gregory Echols has served as Vice President, Engineering since September 17,
1996 and previously served as Director of Research and Development from 1990
to 1996. Prior to joining the Company, Mr. Echols served as Engineering
Manager for Loral Corporation, a defense contractor, from 1979 to 1990.
Lester Pollack has served as a Director of the Company since July 31, 1996
and as Chairman of the Board since September 17, 1996. Mr. Pollack has served
as Managing Director of Centre Management since 1995. Mr. Pollack has been
Senior Managing Director of Corporate Advisors, L.P., the general partner of
Corporate Partners, L.P. and Corporate Offshore Partners, L.P., since 1988,
Managing Director of Lazard Freres & Co. LLC since 1995 (prior thereto a
General Partner) and Chief Executive Officer of Centre Partners, L.P. since
1986. Mr. Pollack also serves as a director of Continental Cablevision, Inc.,
LaSalle Re Holdings Limited, Parlex Corporation, Polaroid Corporation, Sphere
Drake Holdings Limited, SunAmerica Inc., and Tidewater, Inc. Mr. Pollack is
the father of Bruce Pollack, another Director of the Company.
William J. Bratton has served as a Director of the Company since September
17, 1996. Mr. Bratton has served as Vice Chairman of First Security Services
Corporation and President of its new subsidiary First Security Consulting,
Inc. since April 1996. From 1994 to 1996, Mr. Bratton served as Police
Commissioner of New York City. In 1992 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 1992, Mr. Bratton served as
Chief of the New York City Transit Police.
Craig I. Fields has served as a Director of the Company since September 17,
1996. From 1994 until the present, Dr. Fields has served on various boards of
directors, including the boards of ENSCO, Projectavision, Inc. and Alliance
Gaming Corporation. From 1990 to 1994, Dr. Fields served as Chairman and Chief
Executive Officer of the Microelectronics and Computer Technology Corporation,
a for-profit research and development consortium involved in information
technology. Dr. Fields is Chairman of the Defense Science Board.
Jonathan H. Kagan has served as Secretary and a Director of the Company
since July 31, 1996. Mr. Kagan has served as Managing Director of Centre
Management since 1995. Mr. Kagan has been a Managing Director of Corporate
Advisers, L.P. since 1990. Mr. Kagan has been associated with Lazard Freres &
Co. LLC since 1980 and has been a Managing Director since 1995 (prior thereto
a General Partner). Mr. Kagan also serves as a Director of Continental
Cablevision Inc., LaSalle Re Holdings Limited and Tyco Toys, Inc.
Scott Perekslis has served as a Vice President and a Director of the Company
since July 31, 1996. Since 1995, Mr. Perekslis has been a Principal of Centre
Management and a Principal of Corporate Advisors, L.P. From 1991 to 1995, Mr.
Perekslis was an Associate of Corporate Advisors, L.P.
Bruce G. Pollack has served as a Director of the Company since September 17,
1996. Mr. Pollack has been a Managing Director of Centre Management since
1995. He is also a Partner of Centre Partners L.P., which he joined in January
1991. Mr. Pollack is a Director of Johnny Rockets Group, Inc., Music Holdings
Corp. and Jeepers!, Inc. Mr. Pollack is the son of Lester Pollack, another
Director of the Company.
Paul J. Zepf has served as a Director of the Company since July 31, 1996.
Since 1995, Mr. Zepf has been a Principal of Centre Management and a Principal
of Corporate Advisors, L.P. Mr. Zepf also served as a Vice President of
Corporate Advisors, L.P. from 1993 to 1995 and an Associate from 1989 to 1993.
Mr. Zepf also serves as a Director of LaSalle Re Holdings Limited.
41
<PAGE>
COMMITTEES OF THE BOARD OF DIRECTORS
Executive Committee. The Board of Directors established the Executive
Committee in September 1996 to have all the power and authority of the Board
of Directors, consistent with limitations contained in the By-laws and
provisions of the Delaware General Corporation Law. Messrs. L. Pollack,
Marino, Kagan, Perekslis and Zepf are the members of the Executive Committee.
Audit Committee. The Board of Directors established the Audit Committee in
September 1996 to: (i) make recommendations concerning the engagement of
independent public accounts; (ii) review with the independent public
accountants the plans for and scope of the audit, the audit procedures to be
utilized and the results of the audit; (iii) approve the professional services
provided by the independent public accountants; (iv) review the independence
of the independent public accountants; and (v) review the adequacy and
effectiveness of the Company's internal accounting controls. Messrs. Kagan,
Bratton and Fields are the members of the Audit Committee.
Compensation Committee. The Board of Directors established the Compensation
Committee in September 1996 to determine compensation of the Company's
executive officers and to administer the Company's Stock Option Plan. Messrs.
L. Pollack, Perekslis and Fields are the members of the Compensation
Committee.
DIRECTOR 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. Messrs. Fields and Bratton have been granted options to
purchase an aggregate of 49,800 shares of Common Stock in connection with
their serving as directors of the Company. See "--Stock Option Plan--
Description of Outstanding Stock Options."
42
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth all compensation earned for services rendered
to the Company in all capacities for the fiscal year ended March 31, 1996 by
the Company's chief executive officer serving at March 31, 1996 and other
employees serving at March 31, 1996 whose salary and bonus exceeded $100,000.
SUMMARY COMPENSATION TABLE FOR THE FISCAL YEAR ENDED MARCH 31, 1996
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
------------------- OTHER ANNUAL ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION COMPENSATION
--------------------------- -------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
Jody Scheckter
President and Director
(1)........................ $300,000 $1,198,833 $21,490 (2) --
David A. Apseloff
Treasurer and Chief Finan-
cial Officer............... 92,308 10,000 -- $ 173 (3)
Clare Fawkes
Secretary and chief operat-
ing officer (4)............ 120,785 30,729 -- --
Juan C. G. de Ledebur
Vice President, Interna-
tional (5)................. 270,393 -- 4,800 (6) 1,751 (3)
Robert F. Mecredy
Vice President, Domestic
(5)........................ 149,328 15,000 -- 1,432 (3)
</TABLE>
- --------
(1) Mr. Scheckter resigned as President effective July 31, 1996 and resigned
as a Director effective September 17, 1996.
(2) Provision of automobile and reimbursement of a portion of dues for country
club membership by the Company.
(3) Matching contributions made by the Company to its 401(k) plan.
(4) Ms. Fawkes resigned as Secretary and chief operating officer effective
July 31, 1996 and served as a Director of the Company from July 31, 1996
to September 17, 1996.
(5) Messrs. de Ledebur and Mecredy were elected officers of the Company on
September 17, 1996.
(6) Provision of automobile allowance by the Company.
EMPLOYMENT AND NON-COMPETITION AGREEMENTS
Employment Agreement with Mr. Marino. The Company has entered into an
employment agreement with Mr. Marino with an initial term expiring March 31,
2002, with automatic one-year extensions thereafter unless terminated by
either party. Pursuant to the agreement, Mr. Marino serves as President and
Chief Executive Officer at an annual base salary of $350,000, subject to
review and annual increases as approved by the Board of Directors. Mr. Marino
also is eligible for annual bonuses based on the Company reaching targeted
EBITDA levels for each fiscal year, with a maximum of $225,000 in bonus
payable for each fiscal year (or such greater amount as determined by the
Board of Directors). In connection with the execution of the employment
agreement, Mr. Marino received a bonus of $155,000, was granted 36,852 shares
of Common Stock and was granted options to purchase 707,160 shares of Common
Stock, consisting of Series A Options for 353,580 shares and Series B Options
for 353,580 shares. See "--Stock Option Plan--Description of Outstanding Stock
Options." The Company also agreed to pay Mr. Marino's reasonable expenses in
relocating to the Atlanta area. Pursuant to the employment agreement, Mr.
Marino agreed to purchase 61,420 shares of Common Stock at approximately $3.25
per share. Mr. Marino also is subject to a covenant not to compete with the
Company during the period of his employment with the Company or any period
during which he receives payments from the Company pursuant to the employment
agreement and for a period of two years thereafter.
Management Shares Agreement. The Company has entered into a Management
Shares Agreement with Centre Management, the Centre Entities and those
executive officers who: (i) have been awarded options pursuant to the Stock
Option Plan; (ii) have been awarded shares of Common Stock; or (iii) have
purchased
43
<PAGE>
shares of Common Stock from the Company (the "Management Holders"). Pursuant
to the Management Shares Agreement, Centre Management, on behalf of the Centre
Entities, has "bring along rights" pursuant to which it has the right to
require the Management Holders to sell a pro rata portion of their shares in
connection with a sale to an unaffiliated third party of 5.0% or more of the
Common Stock held by the Centre Entities. The Management Holders have similar
"tag along" rights pursuant to which they can participate in a sale by the
Centre Entities of 5% or more of the outstanding shares of Common Stock to an
unaffiliated third party. Each Management Holder, other than the Chief
Executive Officer, has the right to require the Centre Entities to purchase
his shares of Common Stock at the lesser of fair market value or his
acquisition price if such Holder's employment is terminated within six months
of the date of the Agreement (September 18, 1996) other than for cause. The
Centre Entities also have agreed to assist the Management Holders in
registering proportionate amounts of the Common Stock held by such Management
Holders if the Centre Entities exercise any rights to register Common Stock
under the Centre Registration Rights Agreement (as defined below). See "Shares
Eligible for Future Sale--Registration Rights--Centre Registration Rights
Agreement." The Management Shares Agreement terminates: (i) with respect to
the Centre Entities, at such time as they hold less than 10% of the
outstanding shares of Common Stock; and (ii) ten years from the date of the
agreement, if not sooner terminated.
Non-Competition Agreements. The Company has entered into an Agreement to
Limit Future Competition with each member of senior management of the Company.
Pursuant to such agreements each such employee has agreed, for a period of two
years following the termination of employment with the Company, not to: (i) be
employed by specified businesses in an executive capacity; (ii) use or permit
to be used his executive skills, knowledge or expertise for the benefit of any
such business; and (iii) use or permit to be used competitively sensitive
information received while employed by the Company for the benefit of any such
business.
Transition Bonus Agreements. In March 1996, the Company entered into
agreements with 13 employees, including members of senior management, to pay a
transition bonus at the earlier of the six-month anniversary of the
Recapitalization and termination of the employee's employment other than for
cause. The maximum aggregate amount of bonuses payable pursuant to the
agreements is $400,000. The agreements are intended to facilitate the
transition process.
EXECUTIVE SEVERANCE BENEFIT PLAN
The Board of Directors has adopted an Executive Severance Benefit Plan (the
"Executive Severance Plan") that provides severance pay and benefits to five
designated executive officers of the Company in the event any such designated
executive's employment with the Company is terminated by the Company for any
reason other than Cause (as defined in the Executive Severance Plan) prior to
September 30, 1997. The severance benefit payable under the Executive
Severance Plan is equal to: (i) three times the monthly salary of the
terminated executive if such termination of employment occurs prior to July
31, 1997; (ii) two times such monthly salary if such termination of employment
occurs during August 1997; and (iii) an amount equal to such monthly salary if
such termination of employment occurs during September 1997.
STOCK OPTION PLAN
The Firearms Training Systems, Inc. Stock Option Plan (the "Stock Option
Plan"), which became effective September 17, 1996, permits awards of options
to purchase shares of Common Stock to the officers, other key employees,
consultants, independent contractors, agents and Outside Directors (as
defined) of the Company and its subsidiaries. The purposes of the Stock Option
Plan are: (i) to align the interest of the Company's shareholders and the
recipients of options under the Stock Option Plan by increasing the
proprietary interest of such recipients in the Company's growth and success;
(ii) to advance the interests of the Company by attracting and retaining
officers, other key employees, consultants, independent contractors, agents
and well-qualified persons who are not officers or employees of the Company
for service as directors of the Company ("Outside Directors"); and (iii) to
motivate such persons to act in the long-term best interests of the Company's
shareholders. The Company has reserved for issuance under the Stock Option
Plan 2,490,000 shares of Common Stock and has granted
44
<PAGE>
options to purchase 1,742,834 shares to two Outside Directors, six executive
officers and approximately 30 other key employees. Stock options granted under
the Stock Option Plan are nonqualified stock options.
The Stock Option Plan is administered by the Compensation Committee (the
"Committee"). The Committee, subject to the express provisions of the Stock
Option Plan, selects eligible participants to be awarded options and
determines the number of shares of Common Stock subject to each option granted
thereunder, the exercise price of such option, the time and conditions of
exercise of such option and all other terms and conditions of such option,
including, without limitation, the form of the option agreement. The Board
generally may amend the Stock Option Plan, subject to (i) shareholder approval
as may be required by applicable law, rule or regulation, provided, however,
that no amendment may be made without shareholder approval if such amendment
would increase the maximum number of shares of Common Stock available under
the Stock Option Plan and (ii) the consent of any holders of outstanding
options, if such amendment impairs the rights of such holder.
If an optionee's employment with the Company or directorship with the
Company terminates for any reason, each option granted under the Stock Option
Plan and held by such optionee generally will be exercisable only to the
extent that such option is exercisable on the effective date of such
optionee's termination of employment or directorship, as the case may be,
unless the agreement for such option provides otherwise at the discretion of
the Committee. See "--Description of Outstanding Stock Options" for a
description of the options that have been granted. Thereafter an option may be
exercised by such optionee (or such optionee's legal representative or similar
person) until and including the earliest to occur of: (i) the date which is
set forth in such agreement after the effective date of such optionee's
termination of employment or directorship, as the case may be; and (ii) the
expiration date of the term of such option; provided that, if an optionee's
employment is terminated for Cause (as defined in the Stock Option Plan), all
options granted under the Stock Option Plan and held by such optionee will
terminate automatically upon the termination of employment. The Stock Option
Plan contains anti-dilution and adjustment provisions applicable in the event
of any action by the Company such as a stock split, stock dividend,
recapitalization, reorganization, merger, consolidation, combination, exchange
of shares, liquidation, spin-off or other similar change in capitalization or
event and certain issuances of shares of Common Stock or securities
convertible into shares of Common Stock at a price below the market price of
the Common Stock. In addition, in the sole discretion of the Committee, the
terms of an agreement related to an option may provide that an optionee's
outstanding options will, immediately upon the occurrence of a Change in
Control (as defined in the Stock Option Plan), become exercisable in part or
in full. The agreement related to an option may specify: (i) in the event of a
merger, consolidation, reorganization, sale of all or substantially all of the
assets of the Company or complete liquidation or dissolution, the terms and
conditions pursuant to which the number and class of shares shall be
substituted for each share of Common Stock subject to option under such
agreement; and (ii) in the event of other Changes in Control (including the
acquisition of 50% or more of the voting securities of the Company or certain
actions resulting in a majority of the Board of Directors changing), the terms
and conditions pursuant to which the optionee can surrender the option to the
Company and any consideration to be paid to the optionee.
45
<PAGE>
Description of Outstanding Stock Options. Stock options granted under the
Stock Option Plan to date to officers and other employees of the Company have
either been designated as "Series A Options" or "Series B Options." Stock
options granted under the Plan to date to Outside Directors have been
designated as "Series C Options." The following table sets forth the stock
options that have been granted under the Stock Option Plan.
<TABLE>
<CAPTION>
OPTIONS GRANTED
------------------------------------
SERIES A SERIES B SERIES C TOTAL
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
Peter A. Marino............................ 353,580 353,580 -- 707,160
Juan C. G. de Ledebur...................... 106,074 106,074 -- 212,148
Robert F. Mecredy.......................... 91,300 91,300 -- 182,600
Robert B. Terry, Jr........................ 63,661 63,661 -- 127,322
Gregory Echols............................. 53,037 53,037 -- 106,074
David A. Apseloff.......................... 37,350 37,350 -- 74,700
Other employees............................ 141,515 141,515 -- 283,030
Outside Directors--
Craig I. Fields.......................... -- -- 33,200 33,200
William J. Bratton....................... -- -- 16,600 16,600
------- ------- ------ ---------
Total.................................. 846,517 846,517 49,800 1,742,834
======= ======= ====== =========
</TABLE>
Each Series A Option granted to date has an exercise price of approximately
$3.25 per share, will expire on the seventh anniversary of its grant date and,
subject to becoming exercisable sooner upon the termination of an optionee's
employment with the Company under certain circumstances set forth in the
related option agreement or upon a Change in Control of the Company, will
become exercisable with respect to 50% of the shares subject thereto on the
third anniversary of its grant date and an additional 25% of the shares
subject thereto on each of the fourth and fifth anniversaries of its grant
date.
Each Series B Option granted to date has an exercise price of approximately
$3.25 per share, will expire after the ninth anniversary of its grant date and
will become exercisable with respect to all of the shares subject thereto on
the ninth anniversary of its grant date unless it becomes exercisable sooner
upon a Change in Control of the Company or as set forth below. Each Series B
Option will become exercisable: (i) with respect to up to one-third of the
shares subject thereto on the 60th day following the close of the Company's
fiscal year ending on March 31, 1997 if certain Company earnings targets are
met or exceeded; (ii) with respect to up to two-thirds (on a cumulative basis)
of the shares subject thereto on the 60th day following the close of the
Company's fiscal year ending on March 31, 1998 if certain Company earnings
targets for the Company's fiscal years ending in 1997 and 1998, on a
cumulative basis, are met or exceeded; and (iii) with respect to up to all of
the shares subject thereto on the 60th day following the close of the
Company's fiscal year ending on March 31, 1999 if certain Company earnings
targets for the Company's fiscal years ending in 1997, 1998 and 1999, on a
cumulative basis, are met or exceeded.
Each Series C Option granted to date has an exercise price of approximately
$3.25 per share, will expire on the seventh anniversary of its grant date and
will become exercisable with respect to one-third of the shares subject
thereto on the first anniversary of its grant date and an additional one-third
of the shares subject thereto on each of the second and third anniversaries of
its grant date.
46
<PAGE>
CERTAIN TRANSACTIONS
Pursuant to certain assurances provided by the Centre Entities in connection
with the Recapitalization, on September 18, 1996, the Company sold to certain
of its executive officers shares of Common Stock at a price of approximately
$3.25 per share as set forth in the following table.
<TABLE>
<CAPTION>
AGGREGATE
PURCHASE
SHARES PRICE
------ ---------
<S> <C> <C>
Peter A. Marino................................................ 61,420 $199,800
Juan C. G. de Ledebur.......................................... 53,784 174,960
Gregory Echols................................................. 46,148 150,120
Robert F. Mecredy.............................................. 30,710 99,900
David A. Apseloff.............................................. 24,900 81,000
Robert B. Terry, Jr. .......................................... 15,371 50,004
</TABLE>
In accordance with the Recapitalization Agreement, the Company paid certain
fees and expenses associated with the Recapitalization including payment of a
transaction fee to the Centre Entities of $790,000 and reimbursement of THIN
International for expenses related to the Recapitalization of $210,000.
RECAPITALIZATION
The Company effected the Recapitalization on July 31, 1996. Prior to July
31, 1996, the Company was a wholly-owned subsidiary of THIN International. In
connection with the Recapitalization, the Company: (i) effected a 100,000-for-
one stock split with respect to the Common Stock and issued to the Centre
Entities 11,165,241 new shares of Common Stock for approximately $36.0 million
in cash; (ii) issued to NationsBridge the Bridge Notes in the aggregate amount
of $40.0 million and entered into certain other arrangements in connection
therewith, including escrow arrangements providing for the issuance to
NationsBridge in certain circumstances of the NationsBridge Warrants currently
held in escrow to purchase shares of Common Stock, which NationsBridge
Warrants are being repurchased by the Company in connection with the Offering
as described below, and (iii) borrowed a total of $76.0 million in Senior Bank
Debt under credit facilities provided for in the NationsBank Credit Agreement,
including the $30.0 million Tranche A Term Loan Facility, the $40.0 million
Tranche B Term Loan Facility and $6.0 million of the $15.0 million NationsBank
Revolving Credit Facility. The Company repurchased 46,832,022 shares of the
then 49,800,000 (as adjusted for the 1.66-for-one stock split) outstanding
shares of Common Stock owned by THIN International and paid THIN International
approximately $151.9 million in cash ($15.0 million of which was deposited in
escrow pursuant to the escrow arrangements described below) as the purchase
price for such shares. The Company also agreed to pay to THIN International,
as an increase in such purchase price, the Contingent Payment in cash or
additional shares of Common Stock in certain circumstances as described below.
The obligation to make the Contingent Payment will be satisfied in full by the
payment of $19.3 million in cash from the proceeds of the Offering, and will
be recorded as an increase in the accumulated deficit of the Company as
additional consideration for the repurchase and subsequent cancellation of
shares of Common Stock from THIN International in connection with the
Recapitalization. In addition, the Company terminated its then existing $6.0
million bank credit facility with NationsBank, N.A., and paid fees and
expenses associated with the Recapitalization including payment of a
transaction fee to the Centre Entities of $790,000 and reimbursement of THIN
International for expenses related to the Recapitalization of $210,000.
Immediately prior to these transactions, THIN International had contributed to
the Company the equity of the Company's U.K. subsidiary, THIN International's
only subsidiary associated with the Company's business then held outside the
direct corporate chain of ownership of the Company. The Company and
NationsBridge have agreed that the obligation to deliver from escrow the
NationsBridge Warrants if the Offering is completed as contemplated, which
would otherwise have required the delivery to NationsBridge of warrants to
purchase 288,434 shares of Common Stock at a nominal price upon consummation
of the Offering, is to be satisfied by the payment by the Company to
NationsBridge of the Warrant Payment in the amount of approximately $4.0
million (which amount represents the aggregate value of the 288,434 shares at
an assumed initial offering price of $15.00 per share less the assumed
underwriting discount) from the proceeds of the shares of Common Stock being
offered by the Company hereby, and have agreed that the NationsBridge Warrants
will be redelivered to the Company for cancellation.
47
<PAGE>
Effective upon consummation of the Recapitalization and the sales of shares
of Common Stock to management, and prior to the Offering, the Centre Entities
owned or had voting control over 11,165,241 shares of Common Stock, or
approximately 77.5% of the total outstanding shares of Common Stock, and THIN
International owned 2,967,978 shares of Common Stock, or approximately 20.6%
of the total outstanding shares of Common Stock.
The Recapitalization and Stock Transactions are being accounted for as a
recapitalization rather than a purchase; accordingly, the historical basis of
the Company's assets and liabilities has not changed as a result of the
transactions and the Company has not recognized goodwill in connection
therewith.
Contingent Payment. The Recapitalization Agreement provides for the
Contingent Payment to be made by the Company to THIN International upon the
occurrence of certain events, including a transaction implying an aggregate
value of the shares of Common Stock sold by the Company to the Centre Entities
in the Recapitalization and the shares of Common Stock retained by THIN
International in the Recapitalization of at least $190.0 million, the meeting
of certain cash flow tests or certain other events. At an estimated initial
offering price of the shares of Common Stock being offered hereby of $15.00,
the Offering implies such an aggregate value and the Company will be obligated
to make the Contingent Payment to THIN International. The Company and THIN
International have agreed that the obligation to make the Contingent Payment
will be satisfied in full by payment of cash from the net proceeds of the
Offering in an aggregate amount of $19.3 million. The Company will record such
payment as an increase in the accumulated deficit of the Company as additional
consideration for the repurchase and subsequent cancellation of shares of
Common Stock from THIN International in connection with the Recapitalization.
Escrow Amount. Pursuant to the Recapitalization Agreement, THIN
International has deposited in escrow $15.0 million out of the $151.9 million
in cash received as the purchase price for certain of its shares of Common
Stock. The escrowed amount is available to indemnify the Company, or in
certain cases the Centre Entities, for losses, liabilities or expenses arising
from breaches of certain representations and warranties and certain covenants
of THIN International set forth in the Recapitalization Agreement. This
indemnification obligation is subject to certain limitations, including a
limitation on the amount available in the aggregate to both the Company and
THIN International of the $15.0 million in escrow and limitations based on the
passage of time. The escrow agreement provides for release of funds that have
not been applied to payment of claims beginning on June 30, 1997.
Bridge Warrants. In connection with the issuance to NationsBridge of the
Bridge Notes, the Company entered into certain arrangements providing for the
release from escrow to NationsBridge of warrants to purchase shares of Common
Stock (consisting of 288,434 shares of Common Stock in the event the Offering
is completed as contemplated) at nominal cost exercisable for a period of ten
years and providing for registration rights in connection therewith. The
Company and NationsBridge have agreed that these warrants will be redelivered
to the Company in connection with the Offering in exchange for the payment to
NationsBridge of the Warrant Payment.
THIN Registration Rights Agreement. In connection with the Recapitalization,
the Company, THIN International and the Centre Entities entered into a
Registration Rights Agreement dated as of July 31, 1996 (the "THIN
Registration Rights Agreement"), pursuant to which THIN International was
granted certain demand registration rights and certain "piggyback"
registration rights with respect to their Common Stock. See "Shares Eligible
for Future Sale--Registration Rights."
Centre Registration Rights Agreement. In connection with the
Recapitalization, the Company and the Centre Entities entered into a
Registration Rights Agreement dated as of July 31, 1996 (the "Centre
Registration Rights Agreement"), pursuant to which the Centre Entities were
granted certain demand registration rights and certain "piggyback"
registration rights with respect to their Common Stock. See "Shares Eligible
for Future Sale--Registration Rights."
48
<PAGE>
NationsBank Credit Agreement. In connection with the Recapitalization, the
Company entered into the NationsBank Credit Agreement for up to $85.0 million,
pursuant to which the Senior Lenders extended the $30.0 million Tranche A Term
Loan Facility, the $40.0 million Tranche B Term Loan Facility and the $15.0
million NationsBank Revolving Credit Facility (which includes a $7.5 million
letter of credit subfacility and a $2.0 million swing line subfacility and
$6.0 million of which was borrowed in connection with the consummation of the
Recapitalization). The Tranche A Term Loan Facility and the NationsBank
Revolving Credit Facility mature on July 31, 2002 and the Tranche B Term Loan
Facility matures on July 31, 2003. Loans made under the Tranche A Term Loan
Facility and the NationsBank Revolving Credit Facility bear interest, at the
Company's option, at: (i) a floating rate based upon the Alternate Base Rate
(defined as the higher of (x) the prime rate of the Senior Agent under the
NationsBank Credit Agreement and (y) the federal funds rate as adjusted, plus
.50%) plus an applicable margin of 1.25% to 1.75% per annum based on the
Company's leverage ratio; or (ii) the applicable Eurodollar Rate for one, two,
three or six months, plus an applicable margin of 2.25% to 2.75% per annum
based on the Company's leverage ratio, subject to adjustment in certain
circumstances. In addition, loans made under the Tranche B Term Loan Facility
bear interest, at the Company's option, at: (i) a floating rate based upon the
Alternate Base Rate plus 2.50% per annum; or (ii) the applicable Eurodollar
Rate plus 3.50% per annum, subject to adjustment in certain circumstances. The
indebtedness of the Company under the NationsBank Credit Agreement is secured
by a perfected security interest in the Company's accounts receivable,
inventory, equipment and certain other personal property and a pledge of 65%
of the capital stock of its foreign subsidiaries. In addition, to the extent
that the Company's rights under contracts to sell equipment and services to
third parties can be assigned as collateral without violating the terms of the
contract or applicable law, the Company's rights have been assigned as
additional security for the loans made under the NationsBank Credit Agreement.
All the shares of Common Stock held by the Centre Entities and THIN
International were also pledged to secure the loans made under the NationsBank
Credit Agreement, which pledge will be released upon consummation of the Drop
Down Transaction in substitution for a pledge of all the shares of capital
stock of the Drop Down Subsidiary.
Following application of the net proceeds from the sale of the shares of
Common Stock being offered by the Company, the outstanding indebtedness under
the NationsBank Credit Agreement will be approximately $52.7 million. See "Use
of Proceeds."
The NationsBank Credit Agreement requires the Company to meet certain
financial tests, including minimum interest coverage, minimum fixed charge
coverage, maximum leverage ratio and minimum net worth. The NationsBank Credit
Agreement also contains covenants which, among other things, prohibit the
payment of dividends and limit the incurrence of liens and encumbrances, the
incurrence of indebtedness, transactions with affiliates, asset sales,
acquisitions, mergers and consolidations, prepayment of other indebtedness and
other matters customarily restricted in such agreements.
The NationsBank Credit Agreement contains events of default including
payment defaults, default for breaches of representations and warranties,
covenant defaults, including a change of control (as defined in the
NationsBank Credit Agreement), cross-defaults to certain other indebtedness,
certain events related to bankruptcy, judgments and adverse changes in the
Company's material agreements or relationships which could reasonably be
expected to have a material adverse effect on the Company's business.
Drop Down Transaction. The Company has been an operating company. The
Company is currently undertaking the Drop Down Transaction pursuant to which
the Company is reorganizing into a holding company with the Company owning
100% of the outstanding capital stock of the Drop Down Subsidiary, which will
hold the operating assets of the Company. In connection with the Drop Down
Transaction, substantially all assets and liabilities of the Company are being
contributed to the Drop Down Subsidiary, including the shares of all the
subsidiaries of the Company (including the Company's U.K., Singapore,
Canadian, Netherlands and Barbados subsidiaries) except that the Drop Down
Subsidiary will not assume: (i) any obligation of the Company to issue shares
of Common Stock to any person (whether pursuant to the Contingent Payment
provisions of the Recapitalization Agreement described above, warrants or
options issued by the Company or otherwise); (ii) any obligation of the
Company pursuant to the registration rights agreements described below; or
(iii) any nonassignable contract (provided that the economic benefits of such
contract will be accorded to the Drop Down
49
<PAGE>
Subsidiary under an agency agreement). The Drop Down Subsidiary will thus
assume all obligations of the Company under the NationsBank Credit Agreement
and certain related loan documents to which the Company has been a party as
well as the Bridge Notes (until repaid with the proceeds of the Offering). The
Company will guarantee the obligations of the Drop Down Subsidiary under the
NationsBank Credit Agreement and pledge all outstanding common stock of the
Drop Down Subsidiary as security for the repayment of the obligations under
the NationsBank Credit Agreement. (The pledge of the outstanding shares of
Common Stock currently pledged by the Centre Entities and THIN International
as security for the NationsBank Credit Agreement will be released.) If the
Drop Down Transaction is not completed, the shares of Common Stock owned by
the Centre Entities and THIN International will not be released from the
pledge. The NationsBank Credit Agreement requires the Company to use its best
efforts to effect the Drop Down Transaction by December 31, 1996 and provides
that on and after January 1, 1997, the interest rates on the Senior Bank Debt
each will be increased by 0.25% until the Drop Down Transaction is completed.
The Company currently anticipates consummation of the Drop Down Transaction by
December 31, 1996. The purpose of the Drop Down Transaction is to effect the
release of the pledge of the outstanding shares of Common Stock granted under
the NationsBank Credit Agreement in connection with the Recapitalization in
substitution for a pledge of the shares of capital stock of the Drop Down
Subsidiary as well as to permit the refinancing of a portion of the
indebtedness incurred in connection with the Recapitalization by an issuance
of Common Stock in the Offering free of any pledge or security interest.
Under federal acquisition regulations, transfer of all contracts with the
U.S. government from the Company to the Drop Down Subsidiary will require the
consent of the applicable contracting agency. The Company has applied for
consents to effect the Drop Down transfers and will enter into appropriate
novation agreements whereby its obligations under contracts with the U.S.
government will be transferred to the Drop Down Subsidiary. It is intended to
complete the transfer of substantially all the assets of the Company as soon
as the necessary approvals of the U.S. government are obtained. To the extent
transfer of any other contracts may not be effected without consent of the
other contracting party, the Company intends that the Drop Down Subsidiary
will perform such contracts on a agency basis for which it will receive all
the economic benefits of the contracts until such consents may be obtained.
After completion of the Drop Down Transaction, all commercial operations of
the Company will be conducted by the Drop Down Subsidiary and its
subsidiaries.
Company Subsidiaries. Prior to the Drop Down Transaction, the Company
conducted certain of its activities through five wholly owned subsidiaries,
which are being contributed to the Drop Down Subsidiary in connection with the
Drop Down Transaction. These subsidiaries will continue their operations as
subsidiaries of the Drop Down Subsidiary. Firearms Training Systems Limited,
the Company's U.K. subsidiary established in 1992, has been subcontracted by
the Company to perform manufacturing and maintenance work with respect to
certain of the Company's contracts. F.A.T.S. Singapore, LTD., the Company's
Singapore subsidiary established in 1994, conducts certain activities of the
Company in Asia. FATS Canada, Inc., the Company's Canadian subsidiary
established in 1996, was organized to support the performance of servicing
obligations to Canadian customers. Firearms Training Systems Netherlands,
B.V., the Company's Netherlands subsidiary established in 1995, was organized
to perform certain contractual obligations of the Company with respect to the
Company's contract with the Royal Netherlands Army and to provide services to
other customers in the region. F.A.T.S. Foreign Sales Corporation was
organized in April 1995 to act as agent with respect to export sales of
products and services outside the U.S.
50
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of Common Stock as of September 30, 1996 and as adjusted to reflect
the sale of shares of Common Stock by the Company being offered hereby by: (i)
each person (or group of affiliated persons) who is known by the Company to
own beneficially more than 5% of the outstanding shares of Common Stock; (ii)
each of the Company's directors; (iii) the Company's former chief executive
officer and each of the other employees included in the Summary Compensation
Table; and (iv) the Company's current directors and officers as a group.
Except as indicated in the footnotes to the table, the persons named in the
table have sole voting and investment power with respect to all shares of
Common Stock indicated as being beneficially owned by them.
<TABLE>
<CAPTION>
BENEFICIAL BENEFICIAL
OWNERSHIP OWNERSHIP
PRIOR TO AFTER THE
OFFERING (2) OFFERING (2) (3)
--------------- -----------------
NAMES OF BENEFICIAL OWNERS (1) NUMBER % NUMBER %
- ------------------------------------------- ---------- ---- ----------- -----
<S> <C> <C> <C> <C>
Centre Capital Investors II, L.P........... 7,266,811 50.5% 7,266,811 35.6%
Centre Partners Coinvestment, L.P.......... 1,074,961 7.5 1,074,961 5.3
Centre Partners Offshore Investors II,
L.P....................................... 1,439,918 10.0 1,439,918 7.1
Centre Capital Tax-exempt Investors II,
L.P....................................... 812,370 5.6 812,370 4.0
Centre Partners Management LLC (4)......... 9,519,099 66.1 9,519,099 46.7
Centre Partners II LLC (5)................. 11,165,241 77.5 11,165,241 54.7
THIN International N.V. (6)................ 2,967,978 20.6 2,967,978 14.5
Peter A. Marino............................ 98,272 * 98,272 *
David A. Apseloff.......................... 24,900 * 24,900 *
Juan C.G. de Ledebur....................... 53,784 * 53,784 *
Robert F. Mecredy.......................... 30,710 * 30,710 *
Lester Pollack (7)......................... -- -- -- --
William J. Bratton......................... -- -- -- --
Craig I. Fields............................ -- -- -- --
Jonathan H. Kagan (8)...................... -- -- -- --
Scott Perekslis (9)........................ 9,005 * 9,005 *
Bruce G. Pollack (10)...................... 7,504 * 7,504 *
Paul J. Zepf (11).......................... 10,506 * 10,506 *
Jody Scheckter............................. -- -- -- --
Clare Fawkes............................... -- -- -- --
All current directors and executive
officers as a group
(13 individuals) (12)..................... 296,200 2.1 296,200 1.5
</TABLE>
- --------
* Less than 1%.
(1) The address of the Centre Entities other than Centre Capital Offshore
Investors II, L.P. is 30 Rockefeller Plaza, New York, New York 10020; the
address of Centre Capital Offshore Investors II, L.P. is c/o Reid
Management, Cedar House, 41 Cedar Avenue, Box HM 1179, Hamilton, Bermuda;
and the address of THIN International N.V. is Landhuis Joonchi, Koya
Richard J. Beaujan z/n, P. O. Box 837, Curacao, Netherlands Antilles.
(2) Based on 14,402,404 shares of Common Stock outstanding prior to the
Offering and 20,402,404 shares of Common Stock outstanding after the
Offering. Calculation of percentage of beneficial ownership assumes the
exercise of all options and warrants exercisable within 60 days of the
date hereof only by the respective named shareholder.
(3) The Company expects that such persons will not make any purchases in the
Offering.
(4) Pursuant to a Management Agreement, Centre Capital Investors II, L.P.,
Centre Partners Offshore Investors II, L.P. and Centre Capital Tax-exempt
Investors II, L.P. have delegated voting and investment power with
respect to the Common Stock beneficially owned by them to Centre
Management; accordingly, the aggregate security ownership of those Centre
Entities is reflected for Centre Management as well.
(5) As general partner of Centre Partners Coinvestment, L.P. and general
partner of the general partner of Centre Capital Investors II, L.P.,
Centre Partners Offshore Investors II, L.P. and Centre Capital Tax-exempt
Investors II, L.P., Centre Partners II LLC ("Centre Partners") is
reflected as beneficially owning the Common Stock owned by those Centre
Entities. In addition, pursuant to certain co-investment arrangements,
Centre Partners has been delegated voting and investment power with
respect to an additional 571,181 shares of Common Stock.
(6) Mr. GH Thyssen-Bornemisza, a Swiss national resident in Monaco and
chairman of TBG Holdings N.V., may be deemed to have sole voting and
dispositive power over the Common Stock owned by THIN International. THIN
International has granted the Underwriters
51
<PAGE>
an option to purchase up to 900,000 shares of Common Stock to cover over-
allotments. The number of shares to be sold in the Offering and the
beneficial ownership after the Offering assumes that the Underwriters do not
exercise any portion of such option. If such option were exercised in full,
the number of outstanding shares of Common Stock owned by THIN International
would be 2,067,978, constituting 10.1% of the shares outstanding after the
Offering.
(7) Excludes 9,519,099 shares of Common Stock for which Centre Management has
been delegated voting and investment power and 11,165,241 shares of Common
Stock for which Centre Partners is reflected as having beneficial
ownership. Mr. L. Pollack is a Managing Director of each of Centre
Management and Centre Partners and, as such, may be deemed to have voting
and investment power over such shares of Common Stock. Mr. L. Pollack
disclaims any beneficial ownership of such shares of Common Stock.
(8) Excludes 9,519,099 shares of Common Stock for which Centre Management has
been delegated voting and investment power and 11,165,241 shares of Common
Stock for which Centre Partners is reflected as having beneficial
ownership. Mr. Kagan is a Managing Director of each of Centre Management
and Centre Partners and, as such, may be deemed to have voting and
investment power over such shares of Common Stock. Mr. Kagan disclaims any
beneficial ownership of such shares of Common Stock.
(9) Includes 9,005 shares of Common Stock held in a 401(k) plan for the
benefit of Mr. Perekslis, over which Mr. Perekslis has delegated voting
and investment authority to Centre Partners pursuant to certain co-
investment arrangements.
(10) Excludes 9,519,099 shares of Common Stock for which Centre Management has
been delegated voting and investment power and 11,165,241 shares of Common
Stock for which Centre Partners is reflected as having beneficial
ownership. Mr. B. Pollack is a Managing Director of each of Centre
Management and Centre Partners and, as such, may be deemed to have voting
and investment power over such shares of Common Stock. Mr. B. Pollack
disclaims any beneficial ownership of such shares of Common Stock.
Includes 7,504 shares of Common Stock held in a 401(k) plan for the
benefit of Mr. B. Pollack, over which Mr. B. Pollack has delegated voting
and investment authority to Centre Partners pursuant to certain co-
investment arrangements.
(11) Includes 10,506 shares of Common Stock held in a 401(k) plan for the
benefit of Mr. Zepf, over which Mr. Zepf has delegated voting and
investment authority to Centre Partners pursuant to certain co-investment
arrangements.
(12) Excludes 9,519,099 shares of Common Stock for which Centre Management has
been delegated voting and investment power and 11,165,241 shares of Common
Stock for which Centre Partners is reflected as having beneficial
ownership, for which Messrs. L. Pollack, Kagan and B. Pollack may be
deemed to have voting and investment power based on their serving as a
Managing Director of such entities. Messrs. L. Pollack, Kagan and B.
Pollack disclaim beneficial ownership of such shares of Common Stock.
Includes 27,015 shares of Common Stock held in 401(k) plans for the
benefit of Messrs. Perekslis, B. Pollack and Zepf, over which each such
individual has delegated voting and investment authority to Centre
Partners pursuant to certain co-investment arrangements.
52
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 68,060,000 shares of
Class A Common Stock, par value $0.000006 per share, 2,200,000 shares of Class
B Non-voting Common Stock, par value $0.000006 per share ("Class B Common
Stock"), and 200,000 shares of preferred stock, par value $0.10 per share (the
"Preferred Stock"). Upon completion of the Offering, 20,402,404 shares of
Common Stock will be issued and outstanding no shares of Class B Common Stock
will be issued and outstanding and no shares of Preferred Stock will be issued
and outstanding. The following summary of certain provisions of the Company's
capital stock describes the material provisions, but does not purport to be
complete and is subject to, and qualified in its entirety by, the Certificate
of Incorporation and the By-laws of the Company that are included as exhibits
to the Registration Statement of which this Prospectus forms a part and by the
provisions of applicable law.
Certain provisions described herein may have the effect of impeding
shareholder actions with respect to certain business combinations and the
election of new members to the Board. As such, the provisions could have the
effect of discouraging open market purchases of the Common Stock because they
may be considered disadvantageous by a shareholder who desires to participate
in a business combination or elect a new director.
COMMON STOCK AND CLASS B COMMON STOCK
Holders of shares of Common Stock are entitled to vote on all matters on
which shareholders generally are entitled to vote, with each share of Common
Stock entitled to one vote. Holders of Common Stock are not entitled to
cumulate votes in the election of Directors. Holders of shares of Class B
Common Stock are not entitled to vote on any matter submitted to a vote of
stockholders, except as may be explicitly required by statute in particular
situations. Each share of Class B Common Stock is convertible at any time for
no additional consideration, at the option of its holder and upon notice to
the Company of such election, into one share of Common Stock. Holders of
Common Stock or Class B Common Stock are not entitled to preemptive rights.
Holders of shares of Common Stock and Class B Common Stock are entitled to
receive ratably such dividends as may be declared by the Board out of funds
legally available for such purpose, subject to the rights of the holders of
any Preferred Stock that may be outstanding. No dividends may be declared or
paid in cash or property on any share of any class of common stock, unless
simultaneously the same dividend is declared or paid on each share of the
other class of common stock.
Upon liquidation, dissolution or winding-up of the Company, the holders of
Common Stock and Class B Common Stock are entitled to share ratably in all
assets available for distributions after payment in full of liabilities and
preferences applicable to the holders of any then outstanding Preferred Stock.
There are no redemption or sinking fund provisions applicable to the Common
Stock or Class B Common Stock. All outstanding shares of Common Stock are, and
all shares of Common Stock to be outstanding upon completion of the Offering
will be, fully paid and nonassessable. The rights, preferences and privileges
of holders of Common Stock and Class B Common Stock are subject to the terms
of any series of Preferred Stock that the Company may issue in the future.
TRANSFER AGENT AND REGISTRAR
The Company has appointed State Street Bank and Trust Company as its
transfer agent and registrar for the Common Stock.
PREFERRED STOCK
The Company has 200,000 authorized shares of Preferred Stock, 10,000 shares
of which have been designated Senior Preferred Stock and 5,000 shares of which
have been designated Junior Preferred Stock. As of November 1, 1996, no shares
of Senior Preferred Stock and no shares of Junior Preferred Stock had been
issued and no other shares of Preferred Stock were outstanding. Immediately
following the consummation of the
53
<PAGE>
Offering and the application of the net proceeds therefrom, the Company
intends, by resolution of the Board of Directors, to eliminate the designation
of the Senior Preferred Stock and Junior Preferred Stock.
The Board has the authority without any further action by the Company's
shareholders to issue any or all of the authorized shares of Preferred Stock
in one or more series and to establish the voting powers and the designations,
preferences and relative, participating, optional or other special rights, and
qualifications or restrictions thereof, including dividend rights, conversion
rights, terms of redemption, liquidation preferences, sinking fund terms and
the number of shares constituting any series, as are stated in the resolution
adopted by the Board providing for the establishment of such series and as are
permitted by the Delaware General Corporation Law. The issuance of Preferred
Stock pursuant to this authority could adversely affect the holders of Common
Stock and Class B Common Stock and could have the effect of delaying,
deferring or preventing a change in control of the Company. The Company has no
present plans to issue any shares of Preferred Stock. See "Risk Factors--
Effect of Certain Charter Provisions on the Value of the Common Stock."
MATERIAL PROVISIONS OF THE CERTIFICATE OF INCORPORATION AND BY-LAWS AND
STATUTORY PROVISIONS
The Certificate of Incorporation, as amended, and By-laws contain certain
provisions that could make more difficult the acquisition of the Company by
means of a tender offer, a proxy contest or otherwise.
Effective upon completion of the Offering, the Board will be classified into
three classes, each of which, after a transitional arrangement, will serve for
three years, with one class being elected each year. The number of directors
may be increased or decreased from time to time by the Board of Directors or
the shareholders of the Company in such manner as may be prescribed in the By-
laws.
The By-laws provide that any vacancy on the Board shall be filled only by
the remaining directors then in office, even if the remaining Directors
constitute less than a quorum, and that directors so appointed will serve for
the remainder of the term of the class in which the vacancy occurred rather
than until the next annual meeting of stockholders.
The By-laws provide that shareholders seeking to bring business before or to
nominate directors at any annual meeting of shareholders must provide timely
notice thereof in writing. To be timely, a shareholder's notice must be
delivered to, or mailed and received at, the principal executive offices of
the Company not less than 60 days nor more than 90 days prior to such meeting
or, if less than 70 days' notice was given for the meeting, within ten days
following the date on which such notice was given. The Bylaws also will
specify certain requirements for a shareholder's notice to be in proper
written form. These provisions will restrict the ability of shareholders to
bring matters before the shareholders or to make nominations for directors at
meetings of shareholders.
Limitations on Liability and Indemnification of Officers and Directors. The
Delaware Law provides that a corporation may limit the liability of each
director to the corporation or its shareholders for monetary damages except
for liability: (i) for any breach of the director's duty of loyalty to the
corporation or its shareholders; (ii) for acts or omissions not in good faith
or that involve intentional misconduct or a knowing violation of law; (iii) in
respect of certain unlawful dividend payments or stock redemptions or
repurchases; and (iv) for any transaction from which the director derives an
improper personal benefit. The Company's Certificate of Incorporation provides
that no director of the Company shall be personally liable to the Company or
its shareholders for monetary damages for breach of fiduciary duties as a
director except in the circumstances specified in the foregoing clauses (i),
(ii), (iii) and (iv). The effect of these provisions is to eliminate the
rights of the Company and its shareholders (through shareholders' derivative
suits on behalf of the Company) to recover monetary damages against a director
for certain breaches of fiduciary duty as a director (including breaches
resulting from grossly negligent conduct). This provision in the Certificate
of Incorporation does not exonerate the directors from liability under federal
securities laws nor does it limit the availability of non-monetary relief in
any action or proceeding against a director. In addition, the Certificate of
Incorporation provides that the Company shall, to the fullest extent permitted
by Delaware Law, indemnify its officers and directors against
54
<PAGE>
liabilities, costs and expenses as provided by Delaware Law. Insofar as
indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers or others pursuant to the foregoing
provisions, the Company has been informed that in the opinion of the
Commission, such indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable.
SHARES ELIGIBLE FOR FUTURE SALE
Upon the completion of the Offering there will be 20,402,404 shares of
Common Stock and no shares of Class B Common Stock outstanding. Of these
shares, the 6,000,000 shares of Common Stock sold in the Offering plus any
additional shares sold upon exercise of the Underwriters' over-allotment
option will be freely tradeable in the public market without restriction or
further registration under the Securities Act (unless held by an "affiliate"
of the Company as that term is defined in the Securities Act), in which case
such shares will be subject to the resale limitations of Rule 144. All the
remaining outstanding shares of Common Stock will be "restricted securities"
under the Securities Act and may not be sold unless they are registered or
unless an exemption from registration, such as the exemptions provided by Rule
144 is available. Certain of the affiliates of the Company are entitled to
certain registration rights as described below.
In general, under Rule 144 as currently in effect, an affiliate of the
Company, or a person (or persons whose shares are aggregated) who has
beneficially owned "restricted securities" for at least two years, is entitled
to sell within any three-month period a number of shares that does not exceed
the greater of: (i) one percent of the outstanding Common Stock or (ii) the
average weekly trading volume in the Common Stock reported through the Nasdaq
National Market (or exchange on which the Common Stock is traded) during the
four calendar weeks preceding the date on which notice of such sale is filed
with the Commission pursuant to Rule 144. Sales under Rule 144 are also
subject to certain provisions regarding the manner of sale, notice
requirements and the availability of current public information about the
Company. A person (or persons whose shares are aggregated) who is not an
affiliate of the Company for at least 90 days prior to a proposed transaction
and who has beneficially owned restricted securities for at least three years
is entitled to sell such shares under Rule 144(k) without regard to the
limitations described above. THIN International has held its shares of Common
Stock for more than three years and the Company believes that, following the
termination of the 180-day holdback period referred to below, THIN
International may be eligible to sell such shares pursuant to Rule 144(k).
The Centre Entities, THIN International and the Company's officers and
directors who are also shareholders of the Company and who, immediately
following the Offering collectively will beneficially own an aggregate of
14,402,404 shares of Common Stock, as well as the Company have agreed not to
offer, sell or otherwise dispose of any of their shares of Common Stock for a
period of 180 days without the prior written consent of Montgomery Securities.
See "Underwriting."
Prior to the Offering, there has been no public market for the Common Stock.
Although the Common Stock has been approved for quotation on the Nasdaq
National Market, there is no assurance that a viable public market for the
Common Stock will develop or be sustained after the Offering. Future sales of
substantial amounts of Common Stock in the public market could adversely
affect market prices of the Common Stock.
REGISTRATION RIGHTS
The Company has granted certain registration rights to the Centre Entities,
THIN International and their respective permitted assignees, with respect to
shares of Common Stock held by such entities.
THIN Registration Rights Agreement. As described above, in connection with
the Recapitalization, the Company, THIN International and the Centre Entities
entered into the THIN Registration Rights Agreement, pursuant to which THIN
International was granted certain demand registration rights exercisable on no
more than two occasions as well as certain "piggyback" registration rights
with respect to their Common Stock. The
55
<PAGE>
demand registration rights become exercisable on July 31, 2001. In the THIN
Registration Rights Agreement THIN International has agreed not to effect any
public sale or distribution of any of its shares of Common Stock during the
15-day period prior to, and during the 90-day period (or the 180-day period,
if so requested in good faith by the Underwriters) beginning on, the date any
registration statement filed by the Company is declared effective other than
pursuant to such registration statement. In connection with the Offering, the
Underwriters have requested, and THIN International has agreed, that THIN
International not effect any such distribution (except in connection with the
Offering) for 180 days from the date of this Prospectus. See "Underwriting."
Centre Registration Rights Agreement. In the Centre Registration Rights
Agreement, Centre Entities were granted certain demand registration rights
exercisable on no more than ten occasions as well as certain "piggyback"
registration rights.The Centre Entities have agreed not to effect any public
sale or distribution of any of their shares of Common Stock during the 15-day
period prior to, and during the 90-day period (or the 180-day period, if so
requested in good faith by the Company's underwriter) beginning on, the date
any registration statement filed by the Company is declared effective other
than pursuant to such registration statement. In connection with the Offering,
the Centre Entities have agreed not to effect any such distribution for 180
days from the date of this Prospectus. See "Underwriting."
56
<PAGE>
UNDERWRITING
The Underwriters named below (the "Underwriters"), represented by Montgomery
Securities, Lazard Freres & Co. LLC and The Robinson-Humphrey Company, Inc.
(the "Representatives"), have severally agreed, subject to the terms and
conditions in the underwriting agreement (the "Underwriting Agreement"), by
and among the Company, the Selling Shareholder and the Underwriters, to
purchase from the Company the number of shares of Common Stock indicated below
opposite their respective names, at the initial public offering price less the
underwriting discount set forth on the cover page of this Prospectus. The
Underwriting Agreement provides that the obligations of the Underwriters are
subject to certain conditions precedent and that the Underwriters are
committed to purchase all the shares of Common Stock, if they purchase any.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
------------ ---------
<S> <C>
Montgomery Securities..............................................
Lazard Freres & Co. LLC............................................
The Robinson-Humphrey Company, Inc.................................
---------
Total............................................................ 6,000,000
=========
</TABLE>
The Representatives have advised the Company and the Selling Shareholder
that the Underwriters propose initially to offer the Common Stock to the
public on the terms set forth on the cover page of this Prospectus. The
Underwriters may allow selected dealers a concession of not more than $ per
share; and the Underwriters may allow, and such dealers may reallow, a
concession of not more than $ per share to certain other dealers. After the
initial public offering, the public offering price and other selling terms may
be changed by the Representatives. The Common Stock is offered subject to
receipt and acceptance by the Underwriters, and to certain other conditions,
including the right to reject orders in whole or in part.
The Selling Shareholder has granted an option to the Underwriters,
exercisable during the 30-day period after the date of this Prospectus, to
purchase up to a maximum of 900,000 additional shares of Common Stock to cover
over-allotments, if any, at the same price per share as the initial shares to
be purchased by the Underwriters. To the extent that the Underwriters exercise
such over-allotment option, the Underwriters will be committed, subject to
certain conditions, to purchase such additional shares in approximately the
same proportion as set forth in the above table. The Underwriters may purchase
such shares only to cover over-allotments made in connection with the
Offering.
The Underwriting Agreement provides that the Company and the Selling
Shareholder will indemnify the Underwriters against certain liabilities,
including civil liabilities under the Securities Act, or will contribute to
payments the Underwriters may be required to make in respect thereof.
The Centre Entities, THIN International and the Company's officers and
directors who are also shareholders of the Company and who, immediately
following the Offering (assuming no exercise of the Underwriters' over-
allotment option), collectively will beneficially own an aggregate of
14,402,404 shares Common Stock, as well as the Company, have agreed that for a
period of 180 days from the date of this Prospectus they will not, without the
prior written consent of Montgomery Securities, directly or indirectly, issue,
offer for sale, sell, solicit an offer to sell, contract or grant an option to
sell, pledge, transfer, establish an open put equivalent position or otherwise
sell or dispose of any equity securities of the Company or any options or
warrants to acquire equity securities of the Company, subject to limited
exceptions. In evaluating any request for a waiver of the lock-up period,
Montgomery Securities would consider, in accordance with customary practice,
all relevant facts and circumstances at the time of the request, including,
without limitation, the recent trading market for the Common
57
<PAGE>
Stock, the size of the request and, with respect to a request by the Company
to issue additional equity securities, the purpose of such an issuance.
Lazard Freres & Co. LLC ("Lazard") rendered financial advisory services to
THIN International in connection with the Recapitalization. Lazard has
received a fee for such services which will be increased based on
consideration received by THIN International from sales of its holdings of
Common Stock, including sales in the Offering. Lester Pollack and Jonathan
Kagan, Directors of the Company, are Managing Directors of Lazard.
Under Rule 2720 of the Conduct Rules ("Rule 2720") of the National
Association of Securities Dealers, Inc. (the "NASD"), the Company may be
considered an "affiliate" of Lazard because "persons associated" with Lazard
(as such terms are defined in the Bylaws of the NASD) may be deemed to
beneficially own more than 10% of the voting securities of the Company. As a
result, the Offering is being conducted in accordance with Rule 2720, which
provides that, among other things, when an NASD member participates in the
underwriting of an affiliate's equity securities, the initial offering price
can be no higher than that recommended by a "qualified independent
underwriter" meeting certain standards ("QIU"). In accordance with this
requirement, Montgomery Securities has assumed the responsibilities of acting
as QIU and will recommend a maximum initial offering price in compliance with
the requirements of Rule 2720. In connection with the Offering, Montgomery
Securities is performing due diligence investigations and reviewing and
participating in the preparation of this Prospectus and the Registration
Statement of which this Prospectus forms a part.
The Representatives have informed the Company that the Underwriters do not
expect to make sales of Common Stock offered by this Prospectus to accounts
over which they exercise discretionary authority in excess of 5% of the number
of shares of Common Stock offered hereby.
Prior to the Offering, there has been no public trading market for the
Common Stock. Consequently, the initial public offering price of the Common
Stock has been determined by negotiations between the Company, and the
Representatives. Among the factors to be considered in such negotiations were
the history of, and the prospects for, the Company and the industry in which
the Company competes, an assessment of the Company's management, its financial
condition, its past and present earnings and the trend of such earnings, the
prospects for future earnings of the Company, the present state of the
Company's development, the general condition of the economy and the securities
markets at the time of the offering and the market prices of and demand for
publicly traded common stock of comparable companies in recent periods.
LEGAL MATTERS
Certain legal matters relating to the Common Stock being offered hereby and
to the Offering will be passed upon by Sidley & Austin, New York, New York and
Venable, Baetjer, Howard & Civiletti LLP, Washington, D.C., counsel for the
Company. Certain legal matters in connection with the Offering will be passed
upon for the Underwriters by Cleary, Gottlieb, Steen & Hamilton, New York, New
York.
INDEPENDENT ACCOUNTANTS
The consolidated financial statements and schedule of the Company for the
years ended March 31, 1995 and 1996 appearing in this Prospectus have been
audited by Arthur Andersen LLP, independent accountants, as of the dates and
for the periods indicated in its reports thereon, appearing elsewhere herein.
Such consolidated financial statements and schedule of the Company have been
included herein in reliance on the reports of Arthur Andersen LLP, independent
accountants, given on the authority of said firm as experts in accounting and
auditing.
The consolidated statements of income, changes in stockholders' equity and
cash flows for the year ended March 31, 1994 included in this Prospectus have
been so included in reliance on the report of Price Waterhouse LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
58
<PAGE>
CHANGE IN INDEPENDENT ACCOUNTANTS
PREVIOUS INDEPENDENT ACCOUNTANTS
On March 16, 1995, the Company dismissed Price Waterhouse LLP as its
independent accountants. The report of Price Waterhouse LLP on the Company's
financial statements for the fiscal year ended March 31, 1994 contained no
adverse opinion or disclaimer of opinion, and were not qualified or modified
as to uncertainty, audit scope or accounting principle. In connection with its
audit for the fiscal year ended March 31, 1994 and through March 16, 1995,
there have been no disagreements with Price Waterhouse LLP on any matter of
accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which disagreements if not resolved to the
satisfaction of Price Waterhouse LLP would have caused them to make reference
thereto in their report on the financial statements for the fiscal year ended
March 31, 1994. The decision to dismiss Price Waterhouse LLP was approved by
the Company's Board of Directors. A copy of a letter from Price Waterhouse LLP
indicating their agreement with the foregoing statement is filed as an exhibit
to this Registration Statement.
CURRENT INDEPENDENT ACCOUNTANTS
The Company engaged Arthur Andersen LLP as its new independent accountants
as of March 16, 1995.
During the fiscal year ended March 31, 1994 and through March 16, 1995, the
Company did not consult with Arthur Andersen LLP on items which (i) were or
should have been subject to Statement on Auditing Standards No. 50 or (ii)
concerned the subject matter of a disagreement or reportable event with Price
Waterhouse LLP.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act with respect to the Common Stock being offered
hereby. This Prospectus, which constitutes a part of the Registration
Statement, does not contain all the information set forth in the Registration
Statement and the exhibits and schedules thereto. Statements contained in this
Prospectus concerning the provisions of agreements or documents filed with the
Registration Statement as exhibits are not necessarily complete, and each such
statement is qualified in its entirety by reference to the copy of the
applicable agreement or document filed as an exhibit to the Registration
Statement. Upon the consummation of this offering, the Company will be subject
to the informational requirements of the Securities Exchange Act of 1934, as
amended (the "Exchange Act") and, in accordance therewith, will file reports
and other information with the Commission. The Registration Statement and the
exhibits and schedules thereto filed by the Company with the Commission, as
well as such reports and other information filed by the Company with the
Commission, may be inspected and copied at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549; at its Chicago Regional Office, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511; and at its New York Regional Office, Seven World
Trade Center, 13th Floor, New York, New York 10048. Copies of such material
can be obtained from the public reference section of the Commission, 450 Fifth
Street, N.W., Washington D.C. 20549, at prescribed rates. Such material may
also be accessed electronically by means of the Commission's home page on the
Internet at http://www.sec.gov. The Company intends to furnish to its
shareholders annual reports containing audited consolidated financial
statements and a report thereon by the Company's independent accountants and
will make available quarterly reports containing unaudited consolidated
financial information for the first three quarters of each fiscal year.
59
<PAGE>
FIREARMS TRAINING SYSTEMS, INC.
AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Arthur Andersen LLP............................................. F-2
Report of Price Waterhouse LLP............................................ F-3
Consolidated Balance Sheets of the Company as of March 31, 1995 and 1996
and
September 30, 1996....................................................... F-4
Consolidated Statements of Income for the Fiscal Years Ended March 31,
1994, 1995 and 1996 and for the Six Months Ended September 30, 1995 and
1996 .................................................................... F-5
Consolidated Statements of Changes in Stockholders' Equity for the Fiscal
Years Ended March 31, 1994, 1995 and 1996 and for the Six Months Ended
September 30, 1995 and 1996.............................................. F-6
Consolidated Statements of Cash Flows for the Fiscal Years Ended March 31,
1994, 1995 and 1996 and for the Six Months Ended September 30, 1995 and
1996..................................................................... F-7
Notes to Consolidated Financial Statements................................ F-8
Valuation and Qualifying Accounts......................................... F-25
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Firearms Training Systems, Inc.:
We have audited the accompanying consolidated balance sheets of FIREARMS
TRAINING SYSTEMS, INC. (a Delaware corporation) AND SUBSIDIARIES as of March
31, 1995 and 1996 and the related consolidated statements of income, changes
in stockholders' equity, and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Firearms Training Systems,
Inc. and subsidiaries as of March 31, 1995 and 1996 and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
May 17, 1996
(except with respect to the
matters discussed in Notes 1, 2,
3, 4, 5 and 10 as to which the
date is November 1, 1996)
F-2
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of Firearms Training Systems, Inc.
In our opinion, the accompanying consolidated statement of income, of
changes in stockholders' equity and of cash flows for the year ended March
31, 1994 present fairly, in all material respects, the results of
operations and cash flows of Firearms Training Systems, Inc. and its
subsidiary for the year ended March 31, 1994, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audit. We
conducted our audit of these statements in accordance with generally
accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable
basis for the opinion expressed above. We have not audited the consolidated
financial statements of Firearms Training Systems, Inc. for any period
subsequent to March 31, 1994.
As discussed in Note 10 to the financial statements, in 1996 the Company
retroactively restated its reporting entity to include the accounts of
Firearms Training Systems, Ltd.
PRICE WATERHOUSE LLP
Atlanta, Georgia
June 8, 1994, except as to the stock split
described in Note 10 and the third paragraph of
Note 10, which are as of November 1, 1996
F-3
<PAGE>
FIREARMS TRAINING SYSTEMS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
MARCH 31,
--------------- SEPTEMBER 30,
1995 1996 1996
------- ------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents..................... $ 2,328 $ 8,121 $ 951
Accounts receivable, net of allowance for
doubtful accounts of $51, $75, and $75 at
March 31, 1995 and 1996 and September 30,
1996, respectively........................... 3,785 10,092 10,772
Inventories................................... 7,819 12,836 12,612
Prepaid expenses and other current assets..... 928 655 1,360
Deferred income taxes......................... 918 866 1,243
------- ------- --------
Total current assets........................ 15,778 32,570 26,938
Property and equipment, net..................... 769 1,144 1,373
Escrow and other deposits....................... 270 106 53
Other assets.................................... -- -- 6,264
------- ------- --------
$16,817 $33,820 $ 34,628
======= ======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................. $ 1,416 $ 3,619 $ 2,841
Accrued liabilities........................... 2,864 5,207 6,523
Income taxes payable.......................... -- 1,305 1,326
Deferred revenue-advanced billings............ 3,494 1,455 1,258
Deferred warranty revenue and reserves........ 347 768 1,056
Current maturities of long-term debt.......... -- -- 3,075
------- ------- --------
Total current liabilities................... 8,121 12,354 16,079
------- ------- --------
Long-term debt, less current maturities......... -- -- 105,795
------- ------- --------
Other noncurrent liabilities.................... 212 204 198
------- ------- --------
Commitments and contingencies (Notes 4, 8 and
10)
Stockholders' equity:
Preferred stock, $0.10 par value; 200,000
shares authorized, no shares issued and out-
standing..................................... -- -- --
Class A common stock, $0.000006 par value;
68,060,000 shares authorized; 49,800,000
shares issued and outstanding at March 31,
1995 and 1996 and 14,402,404 issued and out-
standing, at September 30, 1996.............. -- -- --
Class B non-voting common stock, $0.000006 par
value; 2,200,000 shares authorized; no shares
issued and outstanding....................... -- -- --
Additional paid-in capital.................... 1,931 1,931 36,991
Warrants...................................... -- -- 930
Accumulated earnings (deficit)................ 6,553 19,343 (125,353)
Cumulative foreign currency translation ad-
justment..................................... -- (12) (12)
------- ------- --------
Total stockholders' equity (deficit)........ 8,484 21,262 (87,444)
------- ------- --------
$16,817 $33,820 $ 34,628
======= ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-4
<PAGE>
FIREARMS TRAINING SYSTEMS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL SIX MONTHS ENDED
YEAR ENDED MARCH 31, SEPTEMBER 30,
------------------------ ------------------
1994 1995 1996 1995 1996
------- ------- ------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues........................ $20,534 $29,164 $65,439 $ 27,089 $ 39,138
Cost of revenues................ 9,651 14,230 30,902 14,204 17,980
------- ------- ------- -------- --------
Gross profit.................... 10,883 14,934 34,537 12,885 21,158
------- ------- ------- -------- --------
Operating expenses:
Selling, general and
administrative expenses...... 6,066 8,169 12,087 5,367 7,513
Research and development ex-
penses....................... 2,048 2,296 2,781 1,242 1,831
Depreciation and amortiza-
tion......................... 297 330 386 196 203
------- ------- ------- -------- --------
Total operating expenses.... 8,411 10,795 15,254 6,805 9,547
------- ------- ------- -------- --------
Operating income................ 2,472 4,139 19,283 6,080 11,611
------- ------- ------- -------- --------
Other income (expense), net:
Interest income (expense),
net.......................... (98) 12 165 35 (1,833)
Nonrecurring recapitalization
expenses..................... -- -- -- -- (1,120)
Other income (expense), net... (126) 66 (93) (27) (39)
------- ------- ------- -------- --------
Total other income (ex-
pense), net................ (224) 78 72 8 (2,992)
------- ------- ------- -------- --------
Income before income taxes...... 2,248 4,217 19,355 6,088 8,619
Provision for income taxes...... 730 1,387 6,565 2,126 3,281
------- ------- ------- -------- --------
Net income...................... $ 1,518 $ 2,830 $12,790 $ 3,962 $ 5,338
======= ======= ======= ======== ========
Pro forma net income per common
share (Note 2)................. $ 0.09 $ 0.18 $ 0.80 $ 0.25 $ 0.33
======= ======= ======= ======== ========
Pro forma weighted average
common shares outstanding (Note
2)............................. 16,055 16,055 16,055 16,055 16,055
======= ======= ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE>
FIREARMS TRAINING SYSTEMS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
CLASS B CUMULATIVE
NON-VOTING FOREIGN
PREFERRED STOCK CLASS A COMMON STOCK COMMON STOCK ADDITIONAL ACCUMULATED CURRENCY
----------------- ------------------------------------- PAID-IN EARNINGS TRANSLATION
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL WARRANTS (DEFICIT) ADJUSTMENT TOTAL
------- -------- ------------- --------------- ------ ---------- -------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, March
31, 1993........ -- $ -- 49,800,000 $ -- -- $ -- $ 1,801 $-- $ 2,205 $ -- $ 4,006
Net income...... -- -- -- -- -- -- -- -- 1,518 -- 1,518
------- -------- ------------- ------- ---- ----- ------- ---- --------- ----- --------
Balance, March
31, 1994........ -- -- 49,800,000 -- -- -- 1,801 -- 3,723 -- 5,524
Net income...... -- -- -- -- -- -- -- -- 2,830 -- 2,830
Capital
contribution... -- -- -- -- -- -- 130 -- -- -- 130
------- -------- ------------- ------- ---- ----- ------- ---- --------- ----- --------
Balance, March
31, 1995........ -- -- 49,800,000 -- -- -- 1,931 -- 6,553 -- 8,484
Net income...... -- -- -- -- -- -- -- -- 12,790 -- 12,790
Foreign currency
translation
adjustment..... -- -- -- -- -- -- -- -- -- (12) (12)
------- -------- ------------- ------- ---- ----- ------- ---- --------- ----- --------
Balance, March
31, 1996........ -- -- 49,800,000 -- -- -- 1,931 -- 19,343 (12) 21,262
Net income
(unaudited).... -- -- -- -- -- -- -- -- 5,338 -- 5,338
Common Stock
issued in
connection with
the
Recapitalization
(Note 10)...... -- -- 11,165,241 -- -- -- 36,000 -- -- -- 36,000
Common Stock
retired in
connection with
the
Recapitalization
(Note 10)...... -- -- (46,832,022) -- -- -- (1,816) -- (150,034) -- (151,850)
Common Stock
issued to
Management in
connection with
the
Recapitalization
(Note 10)...... -- -- 269,185 -- -- -- 876 -- -- -- 876
Warrants issued
in connection
with the
Recapitalization
(Note 10)...... -- -- -- -- -- -- -- 930 -- -- 930
------- -------- ------------- ------- ---- ----- ------- ---- --------- ----- --------
Balance,
September 30,
1996
(unaudited)..... -- $ -- 14,402,404 $ -- -- $ -- $36,991 $930 $(125,353) $ (12) $(87,444)
======= ======== ============= ======= ==== ===== ======= ==== ========= ===== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE>
FIREARMS TRAINING SYSTEMS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FISCAL YEAR ENDED MARCH 31, SEPTEMBER 30,
------------------------------- -----------------
1994 1995 1996 1995 1996
--------- --------- --------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income................ $ 1,518 $ 2,830 $ 12,790 $ 3,962 $ 5,338
--------- --------- --------- ------- --------
Adjustments to reconcile
net income to net cash
provided by (used in) op-
erating activities:
Depreciation and
amortization............ 297 330 386 196 350
Stock grant.............. -- -- -- -- 120
Deferred income taxes.... -- (515) 52 -- (377)
Changes in assets and
liabilities:
Accounts receivable,
net.................... (1,828) 1,884 (6,307) (4,644) (680)
Related-party balances,
net.................... 324 -- -- -- --
Inventories............. (1,978) (4,125) (5,017) (1,670) 224
Prepaid expenses and
other current assets... (11) (876) 273 14 (705)
Escrow and other
deposits............... -- (270) 164 349 53
Accounts payable........ 69 (96) 1,777 (398) (778)
Accrued liabilities..... 1,978 886 2,769 (95) 1,316
Income taxes payable.... 260 (676) 1,305 691 21
Deferred revenue-
advanced billings...... (733) 2,397 (2,039) (780) (197)
Deferred warranty
revenue and reserves... 997 197 421 191 288
Noncurrent liabilities.. 167 45 (8) (4) (6)
--------- --------- --------- ------- --------
Total adjustments...... (458) (819) (6,224) (6,150) (371)
--------- --------- --------- ------- --------
Net cash provided by
(used in) operating
activities............ 1,060 2,011 6,566 (2,188) 4,967
--------- --------- --------- ------- --------
Cash flows from investing
activities:
Additions to property and
equipment, net........... (405) (191) (761) (421) (432)
--------- --------- --------- ------- --------
Cash flows from financing
activities:
Net borrowings
(repayments) of line of
credit................... 762 (876) -- 904 --
Borrowings of long-term
debt..................... -- -- -- -- 110,000
Repayments of long-term
debt..................... -- -- -- -- (200)
Repayments of related-
party notes payable...... (1,075) -- -- -- --
Proceeds from sale of
common stock............. -- -- -- -- 36,756
Repurchase of common
stock.................... -- -- -- -- (151,850)
Other assets.............. -- -- -- -- (6,411)
--------- --------- --------- ------- --------
Net cash (used in)
provided by financing
activities............ (313) (876) -- 904 (11,705)
--------- --------- --------- ------- --------
Effect of changes in for-
eign exchange rates....... -- -- (12) -- --
--------- --------- --------- ------- --------
Net increase (decrease) in
cash...................... 342 944 5,793 (1,705) (7,170)
Cash, beginning of period.. 1,042 1,384 2,328 2,328 8,121
--------- --------- --------- ------- --------
Cash, end of period........ $ 1,384 $ 2,328 $ 8,121 $ 623 $ 951
========= ========= ========= ======= ========
Supplemental disclosures of
cash paid for:
Interest................. $ 117 $ 48 $ 11 $ 1 $ 130
========= ========= ========= ======= ========
Income taxes............. $ 584 $ 2,100 $ 4,809 $ 1,012 $ 3,541
========= ========= ========= ======= ========
Supplemental disclosure of
noncash transactions:
Capital contribution
recorded for forgiveness
of
related-party payable... $ -- $ 130 $ -- $ -- $ --
========= ========= ========= ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-7
<PAGE>
FIREARMS TRAINING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED MARCH 31, 1994, 1995, 1996 (INFORMATION AS OF
SEPTEMBER 30, 1996 AND FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 IS
UNAUDITED)
1. ORGANIZATION AND NATURE OF BUSINESS
Firearms Training Systems, Inc. ("FATS" or the "Company"), a Delaware
corporation, was incorporated in 1984. The Company was a wholly owned
subsidiary of THIN International N.V. (previously Firearms Training Systems
International N.V.) ("THIN International"), a Netherlands Antilles
corporation, until July 31, 1996, at which time approximately 79.0% of the
outstanding stock of the Company was sold to a group of entities (the "Centre
Entities") managed by Centre Partners Management LLC, in connection with a
recapitalization and stock purchase and sale agreement (the
"Recapitalization") (Note 10).
FATS is engaged in the development, manufacture, sale, and servicing of
small and supporting arms training simulators and simulated firearms. The
Company's products include weapon simulators for military, law enforcement,
sport shooting, hunter education, and public training as well as for vessel
weapons training. The Company's customers include military and law enforcement
agencies primarily throughout the United States ("U.S."), Europe and Asia.
The Company has five wholly owned subsidiaries (the "Subsidiaries").
F.A.T.S. Foreign Sales Corporation was organized in April 1995 to act as agent
with respect to export sales of products and services outside the United
States. Firearms Training Systems, Ltd. ("FATS U.K."), previously a wholly
owned subsidiary of THIN International (Note 10), performs maintenance work on
certain British contracts and some weapons simulator manufacturing work. The
operations of FATS U.K. and the Company's remaining three subsidiaries are not
currently significant to the consolidated financial position or results of
operations of the Company.
THIN International is a holding company with no separate operations.
Accordingly, the consolidated statements of income reflect all of the costs of
doing business related to the Company.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and the Subsidiaries. All significant intercompany transactions and balances
have been eliminated.
Foreign Currency Translation
The assets and liabilities of the Company's foreign subsidiaries are
translated into U.S. dollars using current exchange rates in effect at the
balance sheet date, and revenues and expenses are translated at average
monthly exchange rates. The resulting translation adjustments are recorded in
a separate component of stockholders' equity, net of related income taxes.
Revenue Recognition
Substantially all revenue is derived from the sale of small and supporting
arms training simulators and accessories. Revenue is primarily recognized upon
shipment. A significant portion of the Company's revenues are derived from
shipments under contract with various governmental agencies. Such contracts
generally specify pricing terms by product and provide for shipment of the
Company's simulators and other products over an extended period of time, with
billings related to the shipment schedule. These contracts generally do not
include reimbursement of product development costs, and the Company does not
utilize percentage of completion accounting due to the nature of the
contractual arrangements. Advanced billings related to contracts are recorded
as deferred revenue and are recognized primarily as units are delivered.
Amounts billed for extended warranties are recorded as deferred revenue and
are recognized as income over the lives of the service agreements, which
generally range from one to three years.
F-8
<PAGE>
FIREARMS TRAINING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE FISCAL YEARS ENDED MARCH 31, 1994, 1995, 1996 (INFORMATION AS OF
SEPTEMBER 30, 1996 AND FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 IS
UNAUDITED)
Restricted Cash
In accordance with the terms of an escrow agreement with an agent of the
Company, an escrow account is used to ensure contract performance by the
Company under certain foreign contracts. The cash included in the escrow
account is restricted and is paid out over a scheduled term. The balance in
the escrow account has been classified in the accompanying financial
statements as follows (in thousands):
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
--------- 1996
1995 1996 (UNAUDITED)
---- ---- -------------
<S> <C> <C> <C>
Prepaid expenses and other current assets............ $146 $157 $124
Escrow and other deposits............................ 257 86 33
---- ---- ----
Total.............................................. $403 $243 $157
==== ==== ====
</TABLE>
Inventories
Inventories consist primarily of projectors, computer hardware, simulators,
and component parts. Inventories are valued at the lower of cost (on a first-
in, first-out basis) or market. Cost includes materials, labor, and
manufacturing overhead. Market is defined as net realizable value.
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
-------------- 1996
1995 1996 (UNAUDITED)
------ ------- -------------
<S> <C> <C> <C>
Raw materials................................... $3,286 $ 6,620 $ 5,470
Work in progress................................ 3,390 5,556 6,406
Finished goods.................................. 1,143 660 736
------ ------- -------
$7,819 $12,836 $12,612
====== ======= =======
</TABLE>
Property and Equipment
Property and equipment are stated at cost. Major property additions,
replacements, and betterments are capitalized, while maintenance and repairs
which do not extend the useful lives of these assets are expensed currently.
Depreciation is provided using the straight-line method for financial
reporting purposes and accelerated methods for income tax purposes.
The detail of property and equipment is as follows (in thousands):
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
---------------- 1996
1995 1996 (UNAUDITED) USEFUL LIVES
------- ------- ------------- --------------------
<S> <C> <C> <C> <C>
Machinery and equip-
ment................... $ 1,134 $ 1,704 $ 1,749 Five years
Demonstration equip-
ment................... 536 602 881 Three years
Furniture and fixtures.. 563 572 547 Five years
Vehicles................ 255 371 367 Three years
Leasehold improvements.. 2 2 34 Remaining lease term
------- ------- -------
2,490 3,251 3,578
Less accumulated
depreciation and
amortization........... (1,721) (2,107) (2,205)
------- ------- -------
$ 769 $ 1,144 $ 1,373
======= ======= =======
</TABLE>
F-9
<PAGE>
FIREARMS TRAINING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE FISCAL YEARS ENDED MARCH 31, 1994, 1995, 1996 (INFORMATION AS OF
SEPTEMBER 30, 1996 AND FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 IS
UNAUDITED)
Long-Lived Assets
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting
for the Impairment of Long-Lived Assets to be Disposed Of" requires that long-
lived assets and certain identifiable intangibles to be held and used by an
entity be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. When
events or changes in circumstances occur related to long-lived assets, the
Company estimates the future cash flows expected to result from the use of the
asset and its eventual disposition. Having found no instances whereby the sum
of expected future cash flows (undiscounted and without interest charges) was
less than the carrying amount of the asset thus requiring the recognition of
an impairment loss, management believes that the long-lived assets in the
accompanying balance sheets are appropriately valued.
Accrued Liabilities
Accrued liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
------------- 1996
1995 1996 (UNAUDITED)
------ ------ -------------
<S> <C> <C> <C>
Sales commissions, bonuses and agents commis-
sion......................................... $ 937 $2,347 $ 1,444
Professional fees............................. 888 484 99
Unvouchered accounts payable.................. 459 1,568 1,399
Accrued interest.............................. -- -- 1,809
Other......................................... 580 808 1,772
------ ------ -------
$2,864 $5,207 $ 6,523
====== ====== =======
</TABLE>
Unvouchered accounts payable represent accruals for products and services
received but for which the Company has not yet been billed.
Noncurrent Liabilities
Statement of Financial Accounting Standards ("SFAS") No. 13, "Accounting for
Leases," requires the straight-line recognition of escalating future minimum
lease payments. The Company has escalating rents in connection with the lease
of its manufacturing and office facility located near Atlanta, Georgia. In
addition, the Company received six months of free rent during the initial
period of the lease. The escalating rents and the free rents are recognized on
a straight-line basis over the term of the lease. Accrued rental expense
associated with the straight-line recognition of escalating rents of
approximately $211,000, $204,000, and $198,000 at March 31, 1995 and 1996 and
September 30, 1996, respectively, is included in noncurrent liabilities in the
accompanying balance sheets.
Stock-Based Compensation Plans
The Company accounts for its stock-based compensation plans under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB No. 25"). The Company has adopted the disclosure option of SFAS No. 123,
"Accounting for Stock-Based Compensation." SFAS No. 123 requires that
companies which do not choose to account for stock-based compensation as
prescribed by this statement shall disclose the pro forma effects on earnings
and earnings per share as if SFAS No. 123 had been adopted. Additionally,
certain other disclosures are required with respect to stock compensation and
the assumptions used to determine the pro forma effects of SFAS No. 123.
Research and Development Activities
The Company expenses research and development costs as incurred. Research
and development costs included in the accompanying statements of income
include salaries, wages, benefits, general and administrative, prototype
equipment, project supplies and other related costs directly associated with
research and development activities.
F-10
<PAGE>
FIREARMS TRAINING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE FISCAL YEARS ENDED MARCH 31, 1994, 1995, 1996 (INFORMATION AS OF
SEPTEMBER 30, 1996 AND FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 IS
UNAUDITED)
Financial Instruments
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments,"
requires disclosure of the following information about the fair value of
certain financial instruments for which it is practicable to estimate that
value. For purposes of this disclosure, the fair value of a financial
instrument is the amount at which the instrument could be exchanged in a
current transaction between willing parties other than in a forced sale or
liquidation. The financial instruments of the Company consist primarily of
cash and cash equivalents, accounts receivable, and accounts payable at March
31, 1995 and 1996 and September 30, 1996. The Company considers all highly
liquid investments with original maturities of three months or less to be cash
equivalents. In management's opinion, the carrying amounts of these financial
instruments approximate their fair values due to the immediate or short-term
maturity of these financial instruments at March 31, 1995 and 1996 and
September 30, 1996.
Pro Forma Net Income Per Common Share
Pro forma net income per common share is computed using the weighted average
number of shares of common stock and dilutive common stock equivalent shares
("CSEs") from warrants and from stock options (using the treasury stock
method). Pursuant to the Securities and Exchange Commission Staff Accounting
Bulletin No. 83, common stock and CSEs issued at prices below the expected
public offering price during the 12-month period prior to the Company's
expected initial public offering (the "Offering") (Note 3) have been included
in the calculation as if they were outstanding for all periods prior to the
Offering, regardless of whether they are dilutive. Accordingly, the shares
issued in the Recapitalization (Note 10), all shares issuable upon exercise of
stock options granted (Note 5), and all shares issuable upon exercise of
warrants (Note 4) are included in the earnings per share calculations for all
periods presented. As the Company also repurchased shares in connection with
the Recapitalization, the effect of the repurchased shares is also included in
the earnings per share calculations for all periods presented.
Stock Split
In connection with the Recapitalization (Note 10), the Company effected a
100,000-for-one stock split subsequent to fiscal year-end. In anticipation of
the Offering, the Company effected another stock split of 1.66-for-one
subsequent to fiscal year-end. All references in the accompanying financial
statements to number of shares and per share amounts of the Company's common
stock have been retroactively restated to reflect the increased number of
common shares outstanding from both the 100,000-for-one stock split and the
1.66-for-one stock split.
Preferred Stock
The Company has 200,000 authorized shares of Preferred Stock, 10,000 shares
of which have been designated Senior Preferred Stock with a par value of $0.10
per share and a stated liquidation value of $1,000 per share, and 5,000 shares
of which have been designated Junior Preferred Stock with a par value of $0.10
per share and a stated liquidation value of $1,000 per share. No shares of
preferred stock have been issued and no shares were outstanding at March 31,
1995 and 1996 and September 30, 1996.
Income Taxes
The Company is a C corporation for U.S. federal income tax reporting
purposes and accounts for income taxes under the provisions of SFAS No. 109,
"Accounting for Income Taxes," which requires the use of an asset and
liability method of accounting for deferred income taxes. Under SFAS No. 109,
deferred tax assets or liabilities at the end of each period are determined
using the tax rate expected to apply to taxable income in the period in which
the deferred tax asset or liability is expected to be settled or realized.
F-11
<PAGE>
FIREARMS TRAINING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE FISCAL YEARS ENDED MARCH 31, 1994, 1995, 1996 (INFORMATION AS OF
SEPTEMBER 30, 1996 AND FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 IS
UNAUDITED)
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Interim Unaudited Data for the Six Months Ended September 30, 1995 and 1996
In the opinion of management, the unaudited condensed consolidated financial
statements contain all the normal and recurring adjustments necessary to
present fairly the consolidated financial position of the Company and its
subsidiaries at September 30, 1996 and the consolidated results of the
Company's operations and their cash flows for the six months ended September
30, 1995 and 1996.
3. THE OFFERING
The Company plans to proceed with the Offering as described elsewhere in
this Prospectus with the anticipation of raising approximately $82.1 million
in capital net of underwriting discount and estimated expenses. The Company
anticipates using the net proceeds to the Company to pay off the senior
subordinated bridge notes (the "Bridge Notes") (Note 4), fund the contingent
payment to THIN International (Note 10), pay for the settlement of the
outstanding warrants (Note 4), and reduce a portion of the senior bank debt
(Note 4). There can be no assurance that the Offering can be completed at the
anticipated price, or at all. There are significant potential risks associated
with the purchase of shares in the Offering. See "Risk Factors" elsewhere in
this Prospectus related to the proposed offering for a discussion of these
risks.
4. BORROWINGS
Former Revolver Agreement
The Company had a revolving credit agreement with a bank (the "Former
Revolver Agreement") which allowed the Company to borrow a maximum of
$6,000,000 based on certain asset levels defined in the Former Revolver
Agreement. At March 31, 1995 and 1996 the Company had no outstanding
borrowings under the Former Revolver Agreement. The Former Revolver Agreement
was terminated subsequent to year-end in connection with the Company's
obtaining the financing discussed below.
The Company had outstanding irrevocable standby letters of credit in the
principal amount of approximately $1,663,000, $825,000 and $847,000 at March
31, 1995 and 1996 and September 30, 1996, respectively, in connection with the
performance of certain sales contracts.
NationsBank Credit Agreement
On July 31, 1996, the Company entered into a credit agreement with a
consortium of financial institutions (the "NationsBank Credit Agreement"). The
NationsBank Credit Agreement allows the Company to borrow up to an aggregate
of $85.0 million in three components:
(1) Revolving credit facility with an aggregate principal amount of up to
$15.0 million (which includes a $7.5 million letter-of-credit
subfacility and a $2.0 million swing line subfacility) (the
"NationsBank Revolving Credit Facility"). The NationsBank Revolving
Credit Facility matures and is payable July 31, 2002. At September 30,
1996, the Company had no outstanding borrowings under this facility.
(2) A term loan with an aggregate principal amount of up to $30.0 million,
with quarterly principal payments ranging from $200,000 to $1,750,000,
commencing September 30, 1996 and maturing July 31, 2002 (the "Tranche
A Loan"). At September 30, 1996, $29.8 million was outstanding under
the Tranche A Loan.
F-12
<PAGE>
FIREARMS TRAINING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE FISCAL YEARS ENDED MARCH 31, 1994, 1995, 1996 (INFORMATION AS OF
SEPTEMBER 30, 1996 AND FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 IS
UNAUDITED)
(3) A term loan with an aggregate principal amount of up to $40.0 million,
with quarterly principal payments ranging from $125,000 to $9,350,000,
commencing December 31, 1996 and maturing July 31, 2003 (the "Tranche B
Loan"). At September 30, 1996, $40.0 million was outstanding under the
Tranche B Loan.
The Tranche A Loan and the NationsBank Revolving Credit Facility bear
interest at the Company's option of either:
(a) The greater of (i) prime plus 1.25% to 1.75% (based on the Company's
leverage ratio and certain other factors defined in the NationsBank
Credit Agreement) or (ii) the federal funds rate plus 1.75% to 2.25%
(based on the Company's leverage ratio and certain other factors
defined in the NationsBank Credit Agreement) or
(b) A function of the Eurodollar rate plus 2.25% to 2.75% (based on the
Company's leverage ratio and certain other factors defined in the
NationsBank Credit Agreement).
The Tranche B Loan bears interest at the Company's option of either:
(a) The greater of (i) prime plus 2.5% (based on the Company's leverage
ratio and certain other factors defined in the NationsBank Credit
Agreement) or (ii) the federal funds rate plus 3.0% (based on the
Company's leverage ratio and certain other factors defined in the
NationsBank Credit Agreement) or
(b) A function of the Eurodollar rate plus 3.5% (based on the Company's
leverage ratio and certain other factors defined in the NationsBank
Credit Agreement).
The Company elected the Eurodollar rate for the Tranche A Loan and Tranche B
Loan, effective August 5, 1996 for a period of ninety days. At September 30,
1996, the interest rates were 8.39% for the Tranche A Loan and 9.14% for the
Tranche B Loan. The interest rate at September 30, 1996 for the NationsBank
Revolving Credit Facility was 10.0%.
The NationsBank Credit Agreement also calls for a commitment fee of 0.5% per
year, paid quarterly, on the unused portion of the NationsBank Revolving
Credit Facility and a yearly fee of $100,000. In addition, the Company paid
approximately $2,716,000 in bank transaction fees (including the initial
yearly fee) related to consummating the NationsBank Credit Agreement.
The borrowings under the NationsBank Credit Agreement are secured by
substantially all of the Company's assets, a pledge of all of the common
shares of the Company, and a pledge of 65% of the capital stock of the
Company's foreign subsidiaries. The NationsBank Credit Agreement also contains
restrictive covenants which, among other things, limit borrowings and capital
expenditures; require certain leverage, fixed charge, and interest coverage
ratios, as defined, to be maintained; and require a minimum net worth, as
defined. Initial borrowings under the NationsBank Credit Agreement were
approximately $76.0 million.
Bridge Notes
Also in July 1996, the Company received $40.0 million from the sale of
Bridge Notes to a financing institution. The Bridge Notes mature on July 31,
2004 and bear interest at a face rate of 12.5% to 13.0%, payable quarterly. At
September 30, 1996, $40.0 million was outstanding under the Bridge Notes.
F-13
<PAGE>
FIREARMS TRAINING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE FISCAL YEARS ENDED MARCH 31, 1994, 1995, 1996 (INFORMATION AS OF
SEPTEMBER 30, 1996 AND FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 IS
UNAUDITED)
The Bridge Notes required the Company to take action on or before September
30, 1996 to obtain other permanent financing. The proceeds of such refinancing
are to be used to repay the Bridge Notes. If such financing is not obtained
and the Bridge Notes have not been redeemed by December 30, 1996, the Company
is required to issue to the holders of the Bridge Notes junior preferred stock
with a stated liquidation value, as defined, of $5 million in exchange for $5
million of the outstanding principal balance of the Bridge Notes. The junior
preferred stock may be put to the Centre Entities, at a date no later than
January 30, 1998, for $5 million plus all accrued and unpaid dividends. In
addition, the junior preferred stock is convertible at the holder's option
into Class A common stock at a conversion price of approximately $3.22,
subject to adjustment for antidilution, through January 31, 1998. The junior
preferred stock earns cumulative dividends of 14.0% per annum, calculated
quarterly, subject to certain restrictions included in the certificate of
designation, including the presence of outstanding debt and senior preferred
stock. No junior preferred stock has been issued as of September 30, 1996.
If additional amounts remain outstanding under the Bridge Notes after the
issuance of the junior preferred stock, the Company is required to issue to
the holders senior preferred stock with a stated liquidation value, as
defined, of $10 million in exchange for $10 million of the outstanding
principal balance of the Bridge Notes. The senior preferred stock carries a
mandatory redemption clause which requires the Company to redeem the senior
preferred stock on a pro rata basis based on the amount of any prepayment of
the outstanding Bridge Notes until July 31, 2006, at which time all of the
outstanding senior preferred stock shall be redeemed. The redemption price of
the senior preferred stock is $10 million plus all accrued and unpaid
dividends. The senior preferred stock earns cumulative dividends at 14.0% per
annum, calculated quarterly. No senior preferred stock has been issued as of
September 30, 1996.
The agreement under which the Bridge Notes were issued contains restrictive
covenants which, among other things, limit borrowings and require certain
leverage and interest coverage ratios to be maintained. In the event the
Company prepays the Bridge Notes as contemplated in the Offering, a 3.25% fee
will be incurred on the balance prepaid.
Use of Proceeds
Proceeds from the NationsBank Credit Agreement and the Bridge Notes were
used by the Company to repurchase stock from THIN International in connection
with the Recapitalization (Note 10).
Warrants
In connection with the Bridge Notes, the Company entered into a warrant
escrow agreement which requires the Company to release from escrow warrants
for between 288,434 and 2,019,034 shares of common stock (in any combination
of voting or nonvoting as the holder may elect), contingent upon how and when
the Bridge Notes are repaid and the senior preferred stock is redeemed. If any
of the Bridge Notes or senior preferred stock remain outstanding after the
first anniversary of the date of issuance of the Bridge Notes, all warrants
will be issued to the holders of the Bridge Notes and Preferred Stock. The
warrants are exercisable at the earlier of July 31, 1997 or the effective date
of the Offering through July 31, 2006 at an exercise price of approximately
$0.0006 per share of common stock. In connection with the issuance of the
Bridge Notes, the Company deposited certain warrants to purchase shares of
Common Stock in escrow, including warrants to purchase 288,434 shares of
Common Stock at a nominal price that would be delivered to NationsBridge if
the Offering is consummated as anticipated. NationsBridge and the Company have
agreed that these warrants will be redelivered to the Company and cancelled in
exchange for a payment of approximately $4.0 million from the net proceeds
from the sale of Common Stock received by the Company in the Offering
(assuming the Offering is completed at $15.00 per share). If the Company
repays the Bridge Notes with proceeds from the Offering prior to December 30,
1996, no
F-14
<PAGE>
FIREARMS TRAINING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE FISCAL YEARS ENDED MARCH 31, 1994, 1995 1996 (INFORMATION AS OF
SEPTEMBER 30, 1996 AND FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 IS
UNAUDITED)
additional warrants will be issued. The fair value of these warrants at the
date of grant is estimated to be approximately $3.22 per share, which is the
price paid per share by the Centre Entities in connection with the
Recapitalization (Note 10). The effective interest rate of the Bridge Notes,
taking into consideration the issuance of such warrants, would be
approximately 12.8% to 13.3%.
Fees and Expenses
The Company capitalized approximately $6,205,000 of fees and expenses
incurred in connection with the NationsBank Credit Agreement and the Bridge
Notes. The fees were paid to the bank upon consummation of the transaction and
the expenses consisted primarily of legal, accounting and other miscellaneous
expenses. The fees and expenses are being amortized over the life of the
related debt. The capitalized fees and expenses have been included in other
assets, net of accumulated amortization, in the accompanying balance sheets.
5. STOCK-BASED COMPENSATION PLAN
Subsequent to year-end, the Company adopted the Firearms Training Systems,
Inc. Stock Option Plan (the "Plan"). The Company has reserved a total of
2,490,000 shares of Class A common stock for issuance under the Plan under
three different nonqualified option series. The Plan provides for antidilution
in the event of certain defined circumstances. The Plan will be administered
by a committee (the "Committee") designated by the board of directors of the
Company. The price of options granted will be determined at the date of grant.
Series A Options
Options under this series will be available for grant to officers and other
employees. The options are generally exercisable as follows: (i) 50% on the
third anniversary of the option issue date (the "option date"), (ii) 25% on
the fourth anniversary of the option date, and (iii) 25% on the fifth
anniversary of the option date. The options expire on the seventh anniversary
of the option date. In the event of termination of the optionee's employment
for any reason other than cause (as defined in the Plan) prior to the third
anniversary of the option date, 16.7% of the options shall be exercisable for
each anniversary of the option date prior to the optionee's termination date.
In the event of termination of the optionee's employment for cause, all of the
optionee's outstanding options are terminated.
Series B Options
Options under this series will be available for grant to officers and other
employees. The options are generally exercisable on the ninth anniversary but
are subject to acceleration based on defined earnings targets. The options
expire after the ninth anniversary of the option date. In the event of
termination of the optionee's employment for any reason other than cause (as
defined in the Plan), options shall be exercisable to the extent they are
exercisable on the effective date of the optionee's termination. In the event
of termination of the optionee's employment for cause, all of the optionee's
outstanding options are terminated.
Series C Options
Options under this series will be available for grant to nonemployee
directors. The options are generally exercisable one-third per year on a
cumulative basis beginning on the first anniversary of the option date. The
options expire on the seventh anniversary of the option date. In the event the
optionee ceases to be a director, options shall be exercisable to the extent
they are exercisable on the effective date of the optionee's ceasing to be a
director.
SFAS No. 123
During 1995, the Financial Accounting Standards Board issued SFAS No. 123
which defines a fair value based method of accounting for an employee stock
option or similar equity instrument and encourages all entities to adopt that
method of accounting for all of their employee stock compensation plans.
However, it also allows
F-15
<PAGE>
FIREARMS TRAINING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE FISCAL YEARS ENDED MARCH 31, 1994, 1995 1996 (INFORMATION AS OF
SEPTEMBER 30, 1996 AND FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 IS
UNAUDITED)
an entity to continue to measure compensation cost for those plans using the
method of accounting prescribed by APB No. 25. Entities electing to remain
with the accounting in APB No. 25 must make pro forma disclosures of net
income and, if presented, earnings per share, as if the fair value based
method of accounting defined in SFAS No. 123 had been applied.
On September 18, 1996, in connection with the Recapitalization (Note 10),
the Company granted options to purchase a total of 1,742,834 shares of common
stock (Series A options for 846,517 shares of common stock, Series B options
for 846,517 shares of common stock, and Series C options for 49,800 shares of
common stock), at an exercise price of approximately $3.25 per share, the fair
value of the Company's common stock on the date of grant. The fair value of
the common stock on the date of grant was determined by the Board of Directors
based upon an appraisal prepared by an independent appraisal firm.
The Company has elected to account for its stock-based compensation plans
under APB No. 25; however, the Company has computed for pro forma disclosure
purposes the value of all options granted for the six months ended September
30, 1996 using the Black-Scholes option-pricing model as prescribed by SFAS
No. 123 using the following weighted average assumptions used for grants for
the six months ended September 30, 1996:
<TABLE>
<CAPTION>
Series A Series B Series C
-------- -------- --------
<S> <C> <C> <C>
Risk free interest rate.............................. 6.63% 6.79% 6.46%
Expected dividend yield.............................. 0% 0% 0%
Expected lives (in years)............................ 4.75 7.00 3.00
Expected volatility.................................. 56.12% 56.12% 56.12%
</TABLE>
The total value of options granted for the six months ended September 30,
1996 was computed as approximately $3,204,000, which would be amortized on a
pro forma basis over the vesting period of the options. If the Company had
accounted for the Plan in accordance with SFAS No. 123, the Company's net
income and net income per share would be decreased by the following pro forma
amounts on an annual basis (net of tax):
<TABLE>
<CAPTION>
PRO
FORMA
CHARGE
--------
<S> <C>
Net income.......................... $362,000
Pro forma net income per share...... $0.02
</TABLE>
The following table sets forth the exercise price range, number of shares,
weighted average exercise price, and remaining contractual lives by groups of
similar price and grant date:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE NUMBER OF WEIGHTED CONTRACTUAL
PRICE RANGE SHARES AVERAGE PRICE LIFE
----------- --------- ------------- -----------
<S> <C> <C> <C> <C>
Series A..................... $3.25 846,517 $3.25 7
Series B..................... 3.25 846,517 3.25 9
Series C..................... 3.25 49,800 3.25 7
</TABLE>
No options were exercisable September 27, 1996.
F-16
<PAGE>
FIREARMS TRAINING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE FISCAL YEARS ENDED MARCH 31, 1994, 1995, 1996 (INFORMATION AS OF
SEPTEMBER 30, 1996 AND FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 IS
UNAUDITED)
6. INCOME TAXES
The significant components of income tax expense are as follows (in
thousands):
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31,
-----------------------------
1994 1995 1996
------------------ ---------
<S> <C> <C> <C>
Current:
Federal income tax expense.................. $ 651 $ 1,596 $ 5,686
Foreign income tax expense.................. 5 76 385
State income tax expense.................... 145 230 442
Deferred income tax (benefit) expense......... (71) (515) 52
------- --------- ---------
$ 730 $ 1,387 $ 6,565
======= ========= =========
</TABLE>
For the six months ended September 30, 1995 and 1996, the Company recorded
income tax expense of approximately $2,126,000 and $3,281,000, respectively.
A reconciliation of recorded income taxes with the amount computed at the
statutory rate is as follows (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31,
------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Tax at statutory federal rate.............. $ 764 $ 1,436 $ 6,774
State taxes, net of federal income tax
benefit................................... 89 82 404
Research and development tax credit........ (120) (100) (100)
Foreign sales corporation benefit.......... -- -- (639)
Other...................................... (3) (31) 126
-------- --------- ---------
Total.................................. $ 730 $ 1,387 $ 6,565
======== ========= =========
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax asset are as follows (in thousands):
<TABLE>
<CAPTION>
MARCH 31,
---------
1995 1996
---- ----
<S> <C> <C>
Inventory reserves................................................ $306 $380
Deferred revenue.................................................. 214 372
Accrued liabilities............................................... 318 156
Other............................................................. 80 (42)
---- ----
Net deferred taxes................................................ $918 $866
==== ====
</TABLE>
The Company's management has determined that it will be able to fully
utilize the deferred tax assets.
7. CONCENTRATION OF REVENUES
Most of the Company's customers to date 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 44.3% of the
Company's revenues for fiscal 1996 were attributable to sales to military
authorities in the U.S., 11.5% were
F-17
<PAGE>
FIREARMS TRAINING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE FISCAL YEARS ENDED MARCH 31, 1994, 1995, 1996 (INFORMATION AS OF
SEPTEMBER 30, 1996 AND FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 IS
UNAUDITED)
attributable to sales to law enforcement authorities in the U.S. and 43.3%
were attributable to sales to military and law enforcement authorities
internationally. 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.
For the year ended March 31, 1996, the Company's five largest customers
accounted for approximately 67.4% of the Company's total revenues. For any
period, a "Major Customer" is defined as a customer from which the Company
generated more than 10% of its revenues for that period. The following table
summarizes information about the Company's Major Customers for the years ended
March 31, 1994, 1995, and 1996:
<TABLE>
<CAPTION>
AGGREGATE PERCENT OF
REVENUES TOTAL
MAJOR CUSTOMERS (000'S) REVENUES
----------------------------------------------- --------- ---------
<C> <S> <C> <C>
1994 British Ministry of Defense.................... $6,225 30.3%
Finanza........................................ 3,336 16.3
U.S. Air Force (including certain other
components of the Department of Defense)...... 3,246 15.8
1995 British Ministry of Defense.................... 8,660 29.7
Singapore Army................................. 3,935 13.5
U.S. Air Force (including certain other
components of the Department of Defense)...... 3,546 12.2
Swiss Army..................................... 3,212 11.0
1996 U.S. Marine Corps ............................. 17,371 26.5
Royal Netherlands Army......................... 8,279 12.7
U.S. Army...................................... 6,610 10.1
</TABLE>
At March 31, 1995 and 1996, the Company had approximately $628,000 and
$3,999,000, respectively, in outstanding accounts receivable related to
revenues recognized from Major Customers for the related year.
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.
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, including its largest
current contract (Contract 2014 with the U.S. Marine Corps), 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. The
F-18
<PAGE>
FIREARMS TRAINING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE FISCAL YEARS ENDED MARCH 31, 1994, 1995, 1996 (INFORMATION AS OF
SEPTEMBER 30, 1996 AND FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 IS
UNAUDITED)
contracts obtained by the Company in the future may also be cost-reimbursement
type contracts rather than fixed-price contracts, which may not take into
account certain costs of the Company such as interest on indebtedness. 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.
A significant portion of the Company's sales are made to customers located
outside the U.S., primarily in Europe and Asia. In fiscal 1994, 1995 and 1996,
66.1%, 66.3% and 43.3% of the Company's revenues, respectively, were derived
from sales to customers located outside the U.S. The Company expects that its
international customers will continue to account for a substantial portion of
its revenues in the near future. 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. Any resulting changes in current tariff structures or
other trade and monetary policies could adversely affect the Company's sales
to international customers. Political and economic factors have been
identified by the Company with respect to certain of the markets in which it
competes. There can be no assurance that these factors will not result in
defaults by customers in making payments due to the Company, in reductions in
the purchases of the Company's products by international customers or in
foreign currency exchange losses. In certain cases, the Company has reduced
certain of the risks associated with international contracts by obtaining bank
letters of credit to support the payment obligations of its customers and/or
by providing in its contracts for payment in U.S. dollars.
8. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases its manufacturing and operating facilities and office
equipment under operating leases with terms in excess of one year. Rent
expense under noncancelable operating leases was approximately $424,000,
$522,000 and $552,000 for the years ended March 31, 1994, 1995, and 1996,
respectively, and approximately $243,000 and $272,000 for the six months ended
September 30, 1995 and 1996, respectively.
At March 31, 1996, future minimum payments under noncancelable operating
leases were as follows (in thousands):
<TABLE>
<CAPTION>
FISCAL
YEARS ENDED
MARCH 31,
-----------
<S> <C>
1997................................. $ 574
1998................................. 597
1999................................. 582
2000................................. 574
2001................................. 580
Thereafter............................. 4,100
------
$7,007
======
</TABLE>
F-19
<PAGE>
FIREARMS TRAINING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE FISCAL YEARS ENDED MARCH 31, 1994, 1995, 1996 (INFORMATION AS OF
SEPTEMBER 30, 1996 AND FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 IS
UNAUDITED)
Transition Bonus Agreements
In March 1996, the Company entered into agreements with 13 employees to pay
a transition bonus at the earlier of the six-month anniversary of the
Recapitalization (Note 10) or the employee's termination date. The total of
these agreements is $400,000, and is being recognized as expense over six
months commencing with the effective date of the Recapitalization.
Government Agency Review
The Company is subject to review and regulation by various government
agencies as a result of the nature of its business involving the import and
export of firearms. In the opinion of management, the Company has
substantially complied with all applicable rules and requirements related to
its business.
Legal
The Company is involved in various legal actions arising in the normal
course of business. In the opinion of management, the ultimate resolution of
these matters will not have a material adverse effect on the Company's
financial position or results of operations.
In July 1994, the Company disclosed to the Federal Election Commission (the
"FEC") that violations of the Federal Election Campaign Act ("FECA") may have
occurred with respect to a total of $8,500 in political contributions made on
behalf of candidates for Congressional election. As disclosed by the Company,
Mr. Jody Scheckter, who was then the President of the Company, was reimbursed
by the Company for personal contributions ranging from $500 to $2,000 over the
period from October 1989 through June 1993. Mr. Scheckter promptly reimbursed
the Company for these amounts and contends that he had previously been unaware
that the reimbursements had occurred. In October 1994, the FEC found reason to
believe that the Company, Mr. Scheckter and a secretarial employee who had
processed the reimbursements had knowingly and wilfully violated provisions of
the FECA. Counsel for the three respondents contested the FEC's finding.
Although the Company cannot predict how or when the matter will be resolved,
the statutory procedures provide for an attempt at conciliation, including
payment of civil penalties in the event that the FEC determines there is
probable cause to believe a violation has occurred. Failing such resolution,
the FEC may institute a civil action seeking civil penalties or refer the
matter to the U.S. Attorney General for possible criminal prosecution. The
Company does not believe that the ultimate resolution of the matter will have
a material adverse effect on its financial condition, results of operations or
the conduct of its business.
The allegations of violations of FECA were apparently triggered by a
complaint by a former chief financial officer of the Company who also alleged
violations of other federal statutes. The Company believes that the ultimate
resolution of these matters will not have a material adverse effect on its
financial condition, results of operations, or the conduct of its business.
F-20
<PAGE>
FIREARMS TRAINING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE FISCAL YEARS ENDED MARCH 31, 1994, 1995, 1996 (INFORMATION AS OF
SEPTEMBER 30, 1996 AND FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 IS
UNAUDITED)
9. INDUSTRY SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates in one industry segment--the manufacture, sale, and
service of small and supporting arms training simulators. The Company sells
its products throughout the world and operates primarily in the U.S. Export
sales are handled through the Company's international sales corporation and,
to a lesser extent, through certain foreign subsidiaries. Operations of the
subsidiaries outside of the U.S. are not material. Geographic financial
information on international sales is as follows (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS
FISCAL YEAR ENDED MARCH 31, ENDED SEPTEMBER 30,
----------------------------- -------------------
1994 1995 1996 1995 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
International sales:
Europe.................. $ 11,518 $ 12,599 $ 26,252 $ 9,861 $ 12,125
Asia.................... -- 3,935 1,165 507 408
Other................... 2,063 2,808 911 460 1,151
--------- --------- --------- --------- ---------
Total................. $ 13,581 $ 19,342 $ 28,328 $ 10,828 $ 13,684
========= ========= ========= ========= =========
</TABLE>
10. THE RECAPITALIZATION
In connection with the Recapitalization:
. The Company effected a 100,000-for-one stock split, resulting in
49,800,000 shares of Class A common stock outstanding and owned by THIN
International (including the 1.66-for-one stock split).
. The Company sold a total of 11,165,241 shares of Class A common stock and
Class B non-voting common stock to the Centre Entities for $36.0 million
(the "Stock Sale"). The shares of Class B non-voting common stock were
subsequently converted to Class A common stock.
. The Company obtained $116.0 million in borrowings (including certain
warrants) under the NationsBank Credit Agreement and the Bridge Notes
(collectively, the "Borrowings") (Note 4).
. Proceeds from the Borrowings and the Stock Sale were then used to
repurchase 46,832,022 shares of common stock from THIN International for
approximately $151.9 million, of which $15.0 million was placed in escrow
for up to two years pending the occurrence of certain events as defined
in the escrow agreement. The repurchased shares were canceled by the
Company. A contingent payment of $19.3 million in cash will be made to
THIN International upon consummation of the Offering as contemplated.
. The Company also sold 232,333 shares to management at fair market value,
granted 36,852 shares to the new President, and granted stock options for
1,742,834 shares at fair market value (Note 5).
As a result of the Recapitalization as described above, THIN International
retained approximately 20.6% of the outstanding shares of the Company and the
Centre Entities owned approximately 77.5% of the Company.
Prior to the Recapitalization, FATS U.K. was a wholly owned subsidiary of
THIN International for all periods presented. Prior to the Recapitalization,
THIN International contributed FATS U.K. to the Company and FATS U.K. became a
wholly owned subsidiary of the Company. The accompanying financial statements
have been retroactively restated at historical cost to reflect the
consolidation of FATS U.K. into the Company. A significant majority of FATS
U.K.'s operations involve intercompany sales to the Company, and such sales
have been eliminated in these consolidated statements. Remaining operations of
FATS U.K. are not material.
F-21
<PAGE>
FIREARMS TRAINING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE FISCAL YEARS ENDED MARCH 31, 1994, 1995, 1996 (INFORMATION AS OF
SEPTEMBER 30, 1996 AND FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 IS
UNAUDITED)
In addition, THIN International paid bonuses to certain employees of the
Company for services performed for THIN International in connection with the
repurchase of shares of common stock from THIN International. Such bonuses
have not been reflected in the accompanying financial statements, as they
relate solely to services performed for the benefit of THIN International and
provide no ongoing benefit to the Company.
Prior to the consummation of the Recapitalization, the Company historically
used internally generated funds to finance its operations and growth and
generally had relatively insignificant amounts of non-current liabilities. In
connection with the Recapitalization, the Company incurred a substantial
amount of indebtedness.
The Company's indebtedness and the related covenants will have several
important effects on its future operations, including, but not limited to, the
following:
. A portion of the Company's cash flow from operations must be dedicated to
the payment of interest on and principal of its indebtedness and will not
be available for other purposes.
. The Company's ability to obtain additional financing in the future for
working capital, capital expenditures, research and development,
acquisitions, general corporate purposes, or other purposes may be
limited.
. The Company's level of indebtedness could limit its flexibility in
reacting to business developments and changes in its industry and
economic conditions generally.
The Company anticipates completing the Drop Down Transaction whereby all the
operating assets of the Company will be contributed to a newly formed
subsidiary (the "Drop Down Subsidiary"). The purpose of the Drop Down
Transaction is to effect the release of the pledge of the outstanding shares
of Common Stock granted under the NationsBank Credit Agreement in connection
with the Recapitalization in substitution for a pledge of shares of capital
stock of the Drop Down Subsidiary. The Drop Down Transaction will have no
impact on the consolidated financial statements of the Company since the Drop
Down Subsidiary is wholly-owned, and the financial covenants applicable to the
Company and its subsidiaries will remain essentially unchanged.
The following pro forma information reflects the effects of (a) the
Recapitalization and (b) use of the proceeds of the Offering to repay debt:
<TABLE>
<CAPTION>
PRO FORMA FOR THE RECAPITALIZATION
-----------------------------------------
YEAR ENDED SIX MONTHS ENDED
MARCH 31, 1996 SEPTEMBER 30, 1996
----------------- -------------------
(UNAUDITED)
<S> <C> <C>
Net income................... $ 4,613 $ 3,594
================= =================
Earnings per share........... $ 0.29 $ 0.22
================= =================
<CAPTION>
PRO FORMA FOR THE RECAPITALIZATION
AND THE OFFERING
-----------------------------------------
YEAR ENDED SIX MONTHS ENDED
MARCH 31, 1996 SEPTEMBER 30, 1996
----------------- -------------------
(UNAUDITED)
<S> <C> <C>
Net income................... $ 9,258 $ 5,190
================= =================
Earnings per share........... $ 0.43 $ 0.24
================= =================
</TABLE>
F-22
<PAGE>
FIREARMS TRAINING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE FISCAL YEARS ENDED MARCH 31, 1994, 1995, 1996 (INFORMATION AS OF
SEPTEMBER 1996 AND FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 IS
UNAUDITED)
The pro forma information for the effects of the Recapitalization was
computed using interest rates on variable rate debt in effect at the time the
Recapitalization was completed, resulting in additional interest expense,
including amortization of deferred financing costs, of $12.9 million and $4.4
million for the year ended March 31, 1996 and the six months ended September
30, 1996, respectively, less the related income tax effect. The pro forma
information for the Recapitalization and the Offering includes the effects of
the Recapitalization, and the sale of 6,000,000 shares of Common Stock in the
Offering and application of $57.1 million of the proceeds of the Offering to
repay indebtedness incurred in the Recapitalization, resulting in a reduction
of interest expense, including amortization of deferred financing costs, of
$7.3 million and $2.5 million for the year ended March 31, 1996 and the six
months ended September 30, 1996, respectively, less the related income tax
effect. The pro forma net income and earnings per share data do not include
approximately $1.1 million of expenses related to the recapitalization
incurred in the period ended September 30, 1996, as well as an extraordinary
loss of approximately $3.6 million, net of tax, expected to be incurred upon
repayment of indebtedness if the Offering is completed as anticipated before
December 30, 1996, as such expenses will not have a continuing impact on
operations. The pro forma information may not be indicative of what results of
operations would have been had the Recapitalization and the Offering occurred
at the beginning of the respective periods.
In September, 1996, the Company has entered into a Management Shares
Agreement with Centre Partners Management LLC, the Centre Entities and those
executive officers who either: (i) have been awarded options pursuant to the
Stock Option Plan; (ii) have been awarded shares of common stock; or (iii)
have purchased shares of common stock from the Company (the "Management
Holders"). Pursuant to the Management Shares Agreement, Centre Partners
Management LLC, on behalf of the Centre Entities, has "bring along rights"
pursuant to which it has the right to require the Management Holders to sell a
pro rata portion of their shares in connection with a sale to an unaffiliated
third party of 5% or more of the common stock held by the Centre Entities. The
Management Holders have similar "tag along" rights pursuant to which they can
participate in a sale by the Centre Entities of 5% or more of the outstanding
shares of common stock to an unaffiliated third party. Each Management Holder,
other than the President, has the right to require the Centre Entities to
purchase his shares of common stock at the lesser of fair market value or his
acquisition price if his employment is terminated within six months of the
date of the Agreement (September 18, 1996) other than for cause. The Centre
Entities also have agreed to assist the Management Holders in registering
proportionate amounts of the common stock held by such Management Holders if
the Centre Entities exercise any rights to register common stock under the
Centre Registration Rights Agreement. The Management Shares Agreement
terminates: (i) with respect to the Centre Entities, at such time as they hold
less than 10.0% of the outstanding shares of common stock; and (ii) ten years
from the date of the agreement, if not sooner terminated.
Also in September, 1996, the Board of Directors adopted an Executive
Severance Benefit Plan (the "Executive Severance Plan") that provides
severance pay and benefits to five designated executive officers of the
Company in the event any such designated executive's employment with the
Company terminates for any reason other than Cause (as defined in the
Executive Severance Plan) prior to September 30, 1997. The severance benefit
payable under the Executive Severance Plan is equal to: (i) three times the
monthly salary of the terminated executive if such termination of employment
occurs prior to July 31, 1997; (ii) two times the monthly salary if such
termination of employment occurs during August 1997; and (iii) an amount equal
to the monthly salary if such termination of employment occurs during
September 1997.
Additionally, in September, 1996, the Company hired a new President and
Chief Executive Officer (the "President"). The Company has entered into an
employment agreement with the President with an initial term expiring March
31, 2002, with automatic one-year extensions thereafter unless terminated by
either party. Pursuant to the agreement, the President is employed at an
annual base salary of $350,000, subject to review and annual increases as
approved by the Board of Directors. The President is also eligible for annual
bonuses based
F-23
<PAGE>
FIREARMS TRAINING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE FISCAL YEARS ENDED MARCH 31, 1994, 1995, 1996 (INFORMATION AS OF
SEPTEMBER 1996 AND FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 IS
UNAUDITED)
on the Company reaching targeted EBITDA levels for each fiscal year, with a
maximum of $225,000 in bonus payable for each fiscal year (or such greater
amount as determined by the Board of Directors). In connection with the
signing of the employment agreement, the President received a bonus of
$155,000, was granted 36,852 shares of common stock, and was granted options
(Note 5). The Company also agreed to pay the President's reasonable expenses
for relocating to the Atlanta area. Pursuant to the employment agreement, the
President agreed to purchase 61,420 shares of common stock at approximately
$3.25 per share. The President is also subject to a covenant not to compete
with the Company during his employment with the Company or any period during
which he receives payments from the Company pursuant to the employment
agreement and for a period of two years thereafter. The Company recorded an
expense of approximately $120,000 during September related to the stock
granted to the President.
F-24
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
No dealer, sales representative or any other person has been authorized to
give any information or to make any representations in connection with the Of-
fering other than those contained in this Prospectus and, if given or made,
such information or representations must not be relied upon as having been au-
thorized by the Company or any of the Underwriters. This Prospectus does not
constitute an offer to sell or a solicitation of an offer to buy any securi-
ties other than the shares of Common Stock to which it relates or an offer to,
or a solicitation of, any person in any jurisdiction where such offer or so-
licitation would be unlawful. Neither the delivery of this Prospectus nor any
sale made hereunder shall, under any circumstances, create an implication that
there has been no change in the affairs of the Company, or that information
contained herein is correct as of any time, subsequent to the date hereof.
----------------
TABLE OF CONTENTS
----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 8
Use of Proceeds.......................................................... 14
Dividend Policy.......................................................... 15
Capitalization........................................................... 16
Dilution................................................................. 17
Selected Financial Data.................................................. 18
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 20
Business................................................................. 28
Management............................................................... 40
Certain Transactions..................................................... 47
Recapitalization......................................................... 47
Principal Shareholders................................................... 51
Description of Capital Stock............................................. 53
Shares Eligible for Future Sale.......................................... 55
Underwriting............................................................. 57
Legal Matters............................................................ 58
Independent Accountants.................................................. 58
Change in Independent Accountants........................................ 59
Additional Information................................................... 59
Index to Financial Statements............................................ F-1
</TABLE>
Until , 1996 (25 days after the date of this Prospectus), all dealers
effecting transactions in the registered securities, whether or not partici-
pating in this distribution, may be required to deliver a Prospectus. This de-
livery requirement is in addition to the obligation of dealers to deliver a
Prospectus when acting as underwriters and with respect to their unsold allot-
ments or subscriptions.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
6,000,000 SHARES
[LOGO] Fats Training
FIREARMS TRAINING SYSTEMS, INC.
CLASS A COMMON STOCK
-----------------
PROSPECTUS
-----------------
Montgomery Securities
Lazard Freres & Co. llc
The Robinson-Humphrey
Company, Inc.
, 1996
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
GRAPHIC APPENDIX PAGE
The top of the inside facing cover has the company's logo, a marksman in
crosshairs over the acronym "FATS " with the word "Training" along the righthand
side.
There is a full color photograph of two hostage rescue team members
participating in a hostage situation.
The graphic text below the photograph reads, "FATS (TM) SIMULATORS BRIDGE THE
GAP BETWEEN SKILLS TRAINING AND TACTICAL APPLICATIONS."
At the bottom of the inside front cover is the stabilization language which
has been electronically transmitted.
The front cover page folds out to reveal a gray bullseye which is overlaid
with graphic text and four color pictures.
The Company's logo appears at the top left hand corner of the foldout. There
is a headline banner across the top of the foldout stating, "TRAIN AS CLOSE TO
THE ACTUAL SITUATION AS POSSIBLE."
The center photograph is of six soldiers in combat fatigues aiming simulated
small and supporting arms at a combat training situation.
The center photograph is captioned at the bottom: "FATS (TM) systems are used
by military organizations around the world."
The left hand graphic text reads, "Firearms Training Systems, Inc. is the
leading worldwide producer of interactive simulation systems designed to provide
training in the handling and use of small and supporting arms."
The right hand graphic text reads, "Firearms Training Systems, Inc. is a
training company which uses advanced technologies in close collaboration with
its customers to meet their training needs."
The bottom portion of the front foldout contains three color photographs with
two graphic text sentences separating them.
The left hand photograph is of a law enforcement officer pointing a simulated
hand gun at a potential aggressor in a training session.
The center photograph is of a camouflaged hunter aiming a simulated shotgun at
ducks in a simulated hunting scene.
The right hand photograph depicts technicians testing a simulated firearm.
The text separating these photographs reads, "The Company has an inventory of
180 simulated firearms which accurately replicate the fit, function and feel of
the original firearms."
The rear inside cover page has a red box with text reading, "THE GLOBAL LEADER
IN INTERACTIVE SIMULATORS FOR SMALL AND SUPPORTING ARMS TRAINING."
The center portion of the rear inside cover is a color graphic map of the
globe. The Company's logo appears on the map with lines leading to each country,
appearing in red, in which Firearms Training Systems, Inc. has sold FATS (TM)
systems.
At the bottom of the inside rear cover is the Company's logo over the
Company's name.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Set forth below is an estimate (except for the Securities and Exchange
Commission Registration Fee, the NASD Filing Fee and the Nasdaq National
Market Fee) of the fees and expenses, all of which are payable by the
Registrant (including the fees and expenses, other than underwriting discounts
and commissions, of the Selling Shareholders), other than underwriting
discounts and commissions, in connection with the registration and sale of the
Common Stock being registered.
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee............ $ 35,690
NASD Filing Fee................................................ 10,850
Nasdaq National Market Fee..................................... 34,750
Blue Sky Fees and Expenses..................................... 5,000
Accounting Fees and Expenses................................... 550,000
Fees of Registrar and Transfer Agent........................... 5,000
Legal Fees and Expenses........................................ 500,000
Printing and Mailing Expenses.................................. 300,000
Miscellaneous.................................................. 168,470
----------
Total...................................................... $1,600,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the General Corporation Law of the State of Delaware permits
a Delaware corporation to indemnify certain persons, including officers and
directors and former officers and directors, and to purchase insurance with
respect to liability arising out of their capacity or status as officers and
directors. Such law provides further that the indemnification permitted
thereunder shall not be deemed exclusive of any other rights to which officers
and directors may be entitled under the Delaware corporation's bylaws, any
agreement or otherwise. Article Eleventh of the Company's Certificate of
Incorporation, as amended, included in Exhibits 3.01, 3.02 and 3.03 hereto,
and Article VI of the Company's By-laws, included in Exhibit 3.06 hereto,
provide, in general, that the Company shall indemnify its directors and
officers to the extent permitted by the General Corporation Law of the State
of Delaware. The Company has insurance providing for indemnification of
officers and directors of the Company and certain other persons against
liabilities and expenses incurred by any of them in certain stated proceedings
and under certain stated conditions.
In addition, Section 102(b)(7) of the General Corporation Law of the State
of Delaware permits a corporation to limit the liability of its directors
subject to certain exceptions. In accordance with Section 102(b)(7), Article
Eleventh of the Company's Certificate of Incorporation, as amended, provides
that no director of the Company shall be personally liable to the Company or
any of its shareholders except for (i) any breach of the directors' duty of
loyalty to the Company or its shareholders; (ii) acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law;
(iii) unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174 of the General Corporation Law of the
State of Delaware or (iv) any transaction from which the director derived an
improper personal benefit.
The Underwriting Agreement provides for indemnification by the Underwriters
of the Registrant, its directors and officers and the Selling Shareholders,
and by the Registrant and the Selling Shareholder of the Underwriters, for
certain liabilities, including liabilities arising under the Securities Act.
II-1
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The following, which gives effect to the 100,000-for-one stock split
effected by the Company on July 30, 1996 and the 1.66-for-one stock split
anticipated to be effected by the Company in October 1996, sets forth certain
information with respect to all securities of the Company sold by the Company
within the past three years:
1. On July 31, 1996, in connection with the Recapitalization, the Company
sold to the Centre Entities 11,165,241 shares, consisting of 3,898,430
shares of Class A Common Stock and 7,266,811 shares of Class B non-voting
Common Stock, for aggregate consideration of $36.0 million in cash.
Exemption for such transaction from registration under the Securities Act
is claimed in reliance on the exemption provided under Section 4(2) of the
Securities Act on the basis that the sales were transactions not involving
any public offering.
2. On July 31, 1996, in connection with the Recapitalization, the Company
sold to NationsBridge, L.L.C. senior subordinated bridge notes due July 31,
2004 in aggregate principal amount equal to $40.0 million and, in
connection with such sale, entered into arrangements for the issuance of
warrants (which warrants are being reacquired by the Company in connection
with the Offering) to purchase shares of Common Stock at a nominal price
(consisting of warrants to purchase 288,434 shares of Common Stock based on
the Offering being completed as contemplated in this Registration
Statement). NationsBridge, L.L.C. paid aggregate consideration of $40.0
million in cash (less certain fees) in the sale. Exemption for such
transaction from registration under the Securities Act is claimed in
reliance on the exemption provided under Section 4(2) of the Securities Act
on the basis that the sales were transactions not involving any public
offering.
3. On September 17, 1996, the Company issued 7,266,811 shares of its
Class A Common Stock to Centre Capital Investors II, L.P., in exchange for
7,266,811 shares of the Company's Class B non-voting Common Stock at the
election of the shareholder for no additional consideration. Exemption for
such transaction from registration under the Securities Act is claimed in
reliance on the exemption provided under Section 3(a)(9) of the Securities
Act.
4. On September 18, 1996, the Company issued to Peter A. Marino, its
President and Chief Executive Officer, the following securities pursuant to
an employment agreement dated September 18, 1996: (i) 36,852 shares as a
signing bonus; and (ii) options to purchase 707,160 shares of Common Stock
at an exercise price of approximately $3.25 per share.
Mr. Marino also purchased 61,420 shares of Common Stock for aggregate
consideration of $199,800 in cash. Exemption for such transactions from
registration under the Securities Act is claimed in reliance on the
exemption provided under Section 4(2) of the Securities Act.
5. On September 18, 1996, the Company sold an aggregate of 170,913 shares
of Common Stock to five officers of the Company other than Mr. Marino for
aggregate consideration of approximately $555,984 in cash. Exemption for
such transactions from registration under the Securities Act is claimed in
reliance on the exemption from registration under Section 4(2) of the
Securities Act.
6. On September 18, 1996, the Company awarded options (excluding the
options awarded to Mr. Marino discussed above) to purchase an aggregate of
1,035,674 shares of Common Stock at an exercise price of approximately
$3.25 per share to five executive officers, approximately 30 other key
employees and two outside directors. The options were issued in
consideration of the individuals' service as employees or directors of the
Company. Exemption for such transactions from registration under the
Securities Act is claimed in reliance on the exemption from registration
under Section 4(2) of the Securities Act.
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
The following documents are filed with this registration statement as
exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <C> <S>
1.01 -- Form of Underwriting Agreement.
*2.01 -- Recapitalization and Stock Purchase and Sale Agreement, dated
as of June 5, 1996, among THIN International N.V. (formerly
known as Firearms Training Systems International N.V.), the
Company, Centre Capital Investors II, L.P., Centre Partners
Coinvestment L.P., Centre Parallel Management Partners, L.P.,
Centre Capital Offshore Investors II, L.P., Centre Capital
Tax-exempt Investors II, L.P., State Board of Administration
of Florida and Centre Partners Management LLC.
*2.02 -- Letter Agreement, dated July 9, 1996, amending the
Recapitalization and Stock Purchase and Sale Agreement filed
as Exhibit 2.01.
*2.03 -- First Amendment, dated as of July 31, 1996, to the
Recapitalization and Stock Purchase and Sale Agreement filed
as Exhibit 2.01.
2.04 -- Letter Agreement, dated November 1, 1996, from the Company to
THIN International N.V. regarding payment of the Contingent
Payment pursuant to the Recapitalization and Stock Purchase
and Sale Agreement.
*3.01 -- Certificate of Incorporation of the Company, dated May 4,
1984.
*3.02 -- Certificate for Renewal and Revival of Certificate of
Incorporation of the Company, dated September 21, 1993.
*3.03 -- Certificate of Amendment of Certificate of Incorporation of
the Company, dated July 30, 1996.
*3.04 -- Certificate of Designations of Senior Preferred Stock of the
Company, dated July 31, 1996.
*3.05 -- Certificate of Designations of Junior Preferred Stock of the
Company, dated July 31, 1996.
3.06 -- By-laws of the Company.
3.07 -- Certificate of Amendment of Certificate of Incorporation of
the Company, dated October 31, 1996.
*4.01 -- Certificate of Designations of Senior Preferred Stock of the
Company, dated July 31, 1996 (filed as Exhibit 3.04).
*4.02 -- Certificate of Designations of Junior Preferred Stock of the
Company, dated July 31, 1996 (filed as Exhibit 3.05).
5.01 -- Opinion of Sidley & Austin.
*10.01 -- Credit Agreement, dated as of July 31, 1996, among the
Company, NationsBank, N.A. (South) and the other Lenders
named therein.
10.01-01 -- First Amendment, dated as of October 28, 1996, to Credit
Agreement, dated as of July 31, 1996, among the Company,
NationsBank N.A. (South) and the other Lenders named therein.
*10.02 -- Tranche A Term Note, dated July 31, 1996, issued by the
Company in favor of NationsBank, N.A. (South).
10.02-01 -- Schedule identifying Tranche A Term Notes substantially
identical in all material respects to Exhibit 10.02.
*10.03 -- Tranche B Term Note, dated July 31, 1996, issued by the
Company in favor of NationsBank, N.A. (South).
10.03-01 -- Schedule identifying Tranche B Term Notes substantially
identical in all material respects to Exhibit 10.03.
*10.04 -- Revolving Credit Note, dated July 31, 1996, issued by the
Company in favor of NationsBank, N.A. (South).
10.04-01 -- Schedule identifying Revolving Credit Notes substantially
identical in all material respects to Exhibit 10.04.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <C> <S>
*10.05 -- Swingline Note, dated July 31, 1996, issued by the Company in
favor of NationsBank,
N.A. (South).
*10.06 -- Pledge and Security Agreement, dated as of July 31, 1996,
between the Company, and
NationsBank, N.A. (South).
*10.07 -- Option to Lease, dated May 4, 1993, between the Company and
Technology Park/Atlanta,
Inc.
*10.08 -- Lease, dated May 4, 1993, between the Company and Technology
Park/Atlanta, Inc.
*10.09 -- First Amendment to Lease Agreement, dated December 21, 1993,
between the Company
and Technology Park/Atlanta, Inc., amending the Lease filed
as Exhibit 10.08.
*10.10 -- Second Amendment to Lease Agreement, dated December 21, 1995,
between the Company and Schneider Atlanta, L.P., amending the
Lease filed as Exhibit 10.08.
*10.11 -- United States Government Contract M67854-94-C-2014, awarded
August 4, 1994, between the Company and the U.S. Marine
Corps.
*10.12 -- Management Shares Agreement, dated as of September 18, 1996,
between the Company
and Peter A. Marino, Robert B. Terry, Robert F. Mecredy,
David A. Apseloff, Greg Echols and Juan de Ledebur.
*10.13 -- Firearms Training Systems, Inc. Stock Option Plan.
*10.14 -- Stock Option Agreement Series A, dated as of September 18,
1996 between the Company
and Peter A. Marino.
10.14-01 -- Schedule identifying Stock Option Agreements Series A
substantially identical in all
material respects to Exhibit 10.14
*10.15 -- Stock Option Agreement Series B, dated as of September 18,
1996 between the Company
and Peter A. Marino.
10.15-01 -- Schedule identifying Stock Option Agreements Series B
substantially identical in all
material respects to Exhibit 10.15
*10.16 -- Stock Option Agreement Series C, dated as of September 18,
1996 between the Company
and William J. Bratton.
10.16-01 -- Schedule identifying Stock Option Agreement Series C
substantially identical in all
material respects to Exhibit 10.16.
*10.17 -- Registration Rights Agreement, dated as of July 31, 1996,
between the Company and the
Institutional Holders set forth on Schedule I thereto.
*10.18 -- Registration Rights Agreement, dated as of July 31, 1996,
among the Company, THIN
International N.V. (formerly known as Firearms Training
Systems International N.V.) and
the Institutional Holders set forth on Schedule I thereto.
*10.19 -- Firearms Training Systems, Inc., Executive Severance Benefit
Plan.
*10.20 -- Employment Agreement, dated as of September 18, 1996, between
the Company and
Peter A. Marino.
*10.21 -- Form of Agreement to Limit Future Competition entered into
with each member of senior
management of the Company.
10.21-01 -- Schedule identifying Agreements to Limit Future Competition
substantially identical in all
material respects to Exhibit 10.21.
*10.22 -- Form of Transition Bonus Agreement entered into with 13
employees of the Company.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <C> <S>
10.22-01 -- Schedule identifying Transition Bonus Agreements
substantially identical in all material
respects to Exhibit 10.22.
11.01 -- Statement Regarding Computation of Pro Forma Net Income Per
Common Share.
16.01 -- Letter of Price Waterhouse LLP Regarding Change in
Accountants.
*21.01 -- Subsidiaries of the Company.
23.01 -- Consent of Price Waterhouse LLP, dated September 30, 1996.
23.02 -- Consent of Arthur Andersen, LLP, dated September 30, 1996.
*24.01 -- Powers of Attorney (set forth on page II-5 of the
Registration Statement).
27.01 -- Financial Data Schedule.
</TABLE>
- --------
* Previously filed with Initial Registration Statement on Form S-1 on
September 30, 1996.
** To be filed by Amendment.
(b) Financial Statement Schedules.
Schedule II--Valuation and Qualifying Accounts and Report of Independent
Public Accountants as to Schedules (set forth on pages II-6 and II-7 of the
Registration Statement).
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described under Item 14 above, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of
any action, suit or proceeding) is asserted by such directors, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of competent jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, (i) the information
omitted from the form of prospectus filed as part of this Registration
Statement in reliance upon Rule 430A under the Securities Act and contained in
a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective and (ii) each
post-effective amendment that contains a form of prospectus shall be deemed to
be a new Registration Statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
II-5
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS AS TO SCHEDULES
We have audited, in accordance with generally accepted auditing standards,
the financial statements of FIREARMS TRAINING SYSTEMS, INC. (a Delaware
corporation) AND SUBSIDIARIES included in this Registration Statement and have
issued our report thereon dated May 17, 1996 (except with respect to the
matters discussed in Notes 1, 2, 3, 4, 5, and 10 as to which the date is
November 1, 1996). Our audits were made for the purpose of forming an opinion
on the basic financial statements taken as a whole. The schedule listed in
Item 16(b) is the responsibility of the company's management and is presented
for purposes of complying with the Securities and Exchange Commission's rules
and is not part of the basic financial statements. This schedule has been
subjected to the auditing procedures applied in the audits of the basic
financial statements and, in our opinion, fairly states in all material
respects the financial data required to be set forth therein in relation to
the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
May 17, 1996
II-6
<PAGE>
SCHEDULE II
FIREARMS TRAINING SYSTEMS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE FISCAL YEARS ENDED MARCH 31, 1994, 1995, AND 1996
<TABLE>
<CAPTION>
ADDITIONS
CHARGED
BALANCE AT TO COSTS BALANCE AT
BEGINNING AND END OF
OF PERIOD EXPENSES DEDUCTIONS (1) PERIOD
---------- --------- -------------- ----------
<S> <C> <C> <C> <C>
Fiscal year ended March 31,
1994:
Allowance for doubtful
accounts..................... $58 $26 $(13) $71
Fiscal year ended March 31,
1995:
Allowance for doubtful
accounts..................... 71 1 (21) 51
Fiscal year ended March 31,
1996:
Allowance for doubtful
accounts..................... 51 24 -- 75
</TABLE>
- --------
(1) Adjustment of allowance based on analysis of receivable balances.
II-7
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS AMENDMENT TO THE REGISTRATION STATEMENT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNDER DULY AUTHORIZED, IN THE CITY OF
SUWANEE, STATE OF GEORGIA ON NOVEMBER 5, 1996.
Firearms Training Systems, Inc.
(Registrant)
/s/ Peter A. Marino
by: _________________________________
Peter A. Marino
President and Chief Executive
Officer (Principal Executive
Officer)
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
/s/ Peter A. Marino President and Chief November 5,
_______________________________ Executive Officer and 1996
Peter A. Marino Director
/s/ David A. Apseloff Treasurer, Chief Financial November 5,
_______________________________ Officer and Assistant 1996
David A. Apseloff Secretary (Principal
Financial and Accounting
Officer)
Director
* November 5,
_______________________________ 1996
William J. Bratton
II-8
<PAGE>
SIGNATURE TITLE DATE
Director
* November 5,
_______________________________ 1996
Craig I. Fields
Director
* November 5,
_______________________________ 1996
Jonathan H. Kagan
Director
/s/ Scott Perekslis November 5,
_______________________________ 1996
Scott Perekslis
Director
* November 5,
_______________________________ 1996
Bruce G. Pollack
Director and Chairman of the
* Board November 5,
_______________________________ 1996
Lester Pollack
Director
* November 5,
_______________________________ 1996
Paul J. Zepf
- --------
* Executed by attorney-in-fact pursuant to power of attorney granted September
30, 1996.
/s/ Scott Perekslis
- -------------------------------
By: Scott Perekslis
Attorney-in-Fact
II-9
<PAGE>
Exhibit 1.01
6,000,000 SHARES/*/
FIREARMS TRAINING SYSTEMS, INC.
CLASS A COMMON STOCK
UNDERWRITING AGREEMENT
November _, 1996
MONTGOMERY SECURITIES
LAZARD FRERES & CO. LLC
THE ROBINSON-HUMPHREY COMPANY, INC.
As Representatives of the several Underwriters
c/o MONTGOMERY SECURITIES
600 Montgomery Street
San Francisco, California 94111
Dear Sirs:
SECTION 1. Introductory. Firearms Training Systems, Inc., a Delaware
------------
corporation (the "Company"), proposes to issue and sell 6,000,000 shares of its
authorized but unissued Class A Common Stock (the "Common Stock") to the several
underwriters named in Schedule A annexed hereto (the "Underwriters"), for whom
you are acting as Representatives. Said aggregate of 6,000,000 shares are
herein called the "Firm Common Shares." In addition, THIN International N.V., a
Netherlands Antilles corporation ("THIN International" or the Selling
Stockholder"), proposes to grant to the Underwriters an option to purchase up to
900,000 additional issued and outstanding shares of Common Stock (the "Optional
Common Shares"), as provided in Section 5 hereof. The Firm Common Shares and,
to the extent such option is exercised, the Optional Common Shares are
hereinafter collectively referred to as the "Common Shares."
You have advised the Company and the Selling Stockholder that the
Underwriters propose to make a public offering of their respective portions of
the Common Shares on the effective date of the registration statement
hereinafter referred to, or as soon thereafter as in your judgment is advisable.
- ------------------------
/*/Plus an option to purchase an additional 900,000 Shares from THIN
International N.V. to cover over-allotments.
<PAGE>
The Company and the Selling Stockholder hereby confirm their
respective agreements with respect to the purchase of the Common Shares by the
Underwriters as follows:
SECTION 2. Representations and Warranties of the Company. The
---------------------------------------------
Company hereby represents and warrants to the several Underwriters that:
(a) A registration statement on Form S-1 (File No. 333-13105) with
respect to the Common Shares has been prepared by the Company in conformity
in all material respects with the requirements of the Securities Act of
1933, as amended (the "Act"), and the rules and regulations (the "Rules and
Regulations") of the Securities and Exchange Commission (the "Commission")
thereunder, and has been filed with the Commission. The Company has
prepared and has filed or proposes to file prior to the effective date of
such registration statement an amendment or amendments to such registration
statement, which amendment or amendments have been or will be similarly
prepared. There have been delivered to you two signed copies of such
registration statement and amendments, together with two copies of each
exhibit filed therewith. Conformed copies of such registration statement
and amendments (but without exhibits) and of the related preliminary
prospectus have been delivered to you in such reasonable quantities as you
have requested for each of the Underwriters. The Company will next file
with the Commission one of the following: (i) prior to effectiveness of
such registration statement, a further amendment thereto, including the
form of final prospectus, (ii) a final prospectus in accordance with Rules
430A and 424(b) of the Rules and Regulations or (iii) a term sheet (the
"Term Sheet") as described in and in accordance with Rules 434 and 424(b)
of the Rules and Regulations. As filed, the final prospectus, if one is
used, or the Term Sheet and Preliminary Prospectus, if a final prospectus
is not used, shall include all Rule 430A Information and, except to the
extent that you shall agree in writing to a modification, shall be in all
substantive respects in the form furnished to you prior to the date and
time that this Agreement was executed and delivered by the parties hereto,
or, to the extent not completed at such date and time, shall contain only
such specific additional information and other changes (beyond that
contained in the latest Preliminary Prospectus) as the Company shall have
previously advised you in writing would be included or made therein.
The term "Registration Statement" as used in this Agreement shall mean
such registration statement at the time such registration statement becomes
effective and, in the event any post-effective amendment thereto becomes
effective prior to the First Closing Date (as hereinafter defined), shall
also mean such registration statement as so amended; provided, however,
that such term shall also include (i) all Rule 430A Information deemed to
be included in such registration statement at the time such registration
statement becomes effective as provided by Rule 430A of the Rules and
Regulations and (ii) any registration statement filed pursuant to 462(b) of
the Rules and Regulations relating to the Common Shares. The term
"Preliminary Prospectus" shall mean any preliminary prospectus referred to
in the preceding paragraph and any preliminary prospectus included in the
Registration Statement at the time it becomes effective that omits Rule
430A Information. The term "Prospectus" as used in this Agreement shall
mean either (i) the prospectus relating to the Common Shares in the form in
which it is
2
<PAGE>
first filed with the Commission pursuant to Rule 424(b) of the Rules and
Regulations or, (ii) if a Term Sheet is not used and no filing pursuant to
Rule 424(b) of the Rules and Regulations is required, shall mean the form
of final prospectus included in the Registration Statement at the time such
registration statement becomes effective or (iii) if a Term Sheet is used,
the Term Sheet in the form in which it is first filed with the Commission
pursuant to Rule 424(b) of the Rules and Regulations, together with the
Preliminary Prospectus included in the Registration Statement at the time
it becomes effective. The term "Rule 430A Information" means information
with respect to the Common Shares and the offering thereof permitted to be
omitted from the Registration Statement when it becomes effective pursuant
to Rule 430A of the Rules and Regulations.
(b) The Commission has not issued any order preventing or suspending
the use of any Preliminary Prospectus, and each Preliminary Prospectus has
conformed in all material respects to the requirements of the Act and the
Rules and Regulations and, as of its date, has not included any untrue
statement of a material fact or omitted to state a material fact necessary
to make the statements therein, in the light of the circumstances under
which they were made, not misleading; and at the time the Registration
Statement becomes effective, and at all times subsequent thereto up to and
including each Closing Date hereinafter mentioned, the Registration
Statement and the Prospectus, and any amendments or supplements thereto,
will contain all material statements and information required to be
included therein by the Act and the Rules and Regulations and will in all
material respects conform to the requirements of the Act and the Rules and
Regulations, and neither the Registration Statement nor the Prospectus, nor
any amendment or supplement thereto, will include any untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading;
provided, however, no representation or warranty contained in this
subsection 2(b) shall be applicable to information contained in or omitted
from any Preliminary Prospectus, the Registration Statement, the Prospectus
or any such amendment or supplement in reliance upon and in conformity with
written information furnished to the Company by or on behalf of (i) any
Underwriter, directly or through the Representatives, or (ii) the Selling
Stockholder, specifically for use in the preparation thereof.
(c) The Company does not own or control, directly or indirectly, any
corporation, association or other entity other than the subsidiaries listed
in Exhibit 21.01 to the Registration Statement. The Company and each of
its subsidiaries have been duly incorporated and are validly existing as
corporations in good standing under the laws of their respective
jurisdictions of incorporation, with power and authority (corporate and
other) to own and lease their properties and conduct their respective
businesses as described in the Prospectus; except as disclosed in the
Prospectus, the Company owns all of the outstanding capital stock of its
subsidiaries free and clear of all claims, liens, charges and encumbrances;
the Company and each of its subsidiaries are in possession of and operating
in compliance with all authorizations, licenses, permits, consents,
certificates and orders material to the conduct of their respective
businesses, all of which are valid and in full force and effect; the
Company and each of its subsidiaries are duly qualified to do business and
in good standing as foreign corporations in each jurisdiction
3
<PAGE>
in which the ownership or leasing of properties or the conduct of their
respective businesses requires such qualification, except for jurisdictions
in which the failure to so qualify would not have a material adverse effect
upon the Company or the subsidiary; and no proceeding has been instituted
in any such jurisdiction, revoking, limiting or curtailing, or seeking to
revoke, limit or curtail, such power and authority or qualification, except
for proceedings, if any, which would not have a material adverse effect on
the Company and its subsidiaries. Firearms Training Systems Limited, a
United Kingdom corporation, Firearms Training Systems Netherlands, B.V., a
Netherlands corporation, and F.A.T.S. Singapore, LTD., a Singapore
corporation (collectively, the "Material Subsidiaries"), are the only
subsidiaries of the Company material to the condition (financial or
otherwise), business or results of operations of the Company and its
subsidiaries.
(d) The Company has an authorized and outstanding capital stock as
set forth under the heading "Capitalization" in the Prospectus; there are
no issued and outstanding shares of the Company's Class B Non-Voting Common
Stock; all issued and outstanding shares of Common Stock (including,
without limitation, the Common Shares to be sold hereunder by THIN
International) have been duly authorized and validly issued, are fully paid
and nonassessable, have been issued in compliance with all federal and
state securities laws, were not issued in violation of or subject to any
preemptive rights or other rights to subscribe for or purchase securities,
and conform to the description thereof contained in the Prospectus. All
issued and outstanding shares of capital stock of each subsidiary of the
Company have been duly authorized and validly issued and are fully paid and
nonassessable. Except as disclosed in or contemplated by the Prospectus
and the financial statements of the Company, and the related notes thereto,
included in the Prospectus, neither the Company nor any subsidiary has
outstanding any options to purchase, or any preemptive rights or other
rights to subscribe for or to purchase, any securities or obligations
convertible into, or any contracts or commitments to issue or sell, shares
of its capital stock or any such options, rights, convertible securities or
obligations. The description of the Company's stock option, stock bonus
and other stock plans or arrangements, and the options or other rights
granted and exercised thereunder, set forth in the Prospectus fairly
presents in all material respects the information required to be shown with
respect to such plans, arrangements, options and rights.
(e) The Common Shares to be sold by the Company have been duly
authorized and, when issued, delivered and paid for in the manner set forth
in this Agreement will be duly authorized, validly issued, fully paid and
nonassessable, and will conform to the description thereof contained in the
Prospectus. No preemptive rights or other rights to subscribe for or
purchase exist with respect to the issuance and sale of the Common Shares
by the Company pursuant to this Agreement. No stockholder of the Company
has any right which has not been waived, to require the Company to register
the sale of any shares owned by such stockholder under the Act in the
public offering contemplated by this Agreement. No further approval or
authority of the stockholders or the Board of Directors of the Company will
be required for the transfer and sale of the Common Shares to be sold by
the Selling Stockholder or the issuance and sale of the Common Shares to be
sold by the Company as contemplated herein.
4
<PAGE>
(f) The Company has full legal right, power and authority to enter
into this Agreement and perform the transactions contemplated hereby. This
Agreement has been duly authorized, executed and delivered by the Company
and constitutes a valid and binding obligation of the Company in accordance
with its terms, except as enforceability may be limited by general
equitable principles, bankruptcy, insolvency, reorganization, moratorium or
similar laws affecting creditors' rights generally. The making and
performance of this Agreement by the Company and the consummation of the
transactions herein contemplated will not violate any provisions of the
certificate of incorporation or bylaws, or other organizational documents,
of the Company or any of its subsidiaries, and will not conflict with,
result in the breach or violation of, or constitute, either by itself or
upon notice or the passage of time or both, a default under any agreement,
mortgage, deed of trust, lease, franchise, license, indenture, permit or
other instrument to which the Company or any of its subsidiaries is a party
or by which the Company or any of its subsidiaries or any of its respective
properties may be bound or affected, any statute or any authorization,
judgment, decree, order, rule or regulation of any court or any regulatory
body, administrative agency or other governmental body applicable to the
Company or any of its subsidiaries or any of its respective properties
except in each case for such violations, conflicts or defaults which would
not have a material adverse effect on the Company and its subsidiaries or
on the consummation of the transactions contemplated hereby. No consent,
approval, authorization or other order of any court, regulatory body,
administrative agency or other governmental body is required for the
execution and delivery of this Agreement or the consummation of the
transactions contemplated by this Agreement, except for compliance with the
Act, the Blue Sky laws applicable to the public offering of the Common
Shares by the several Underwriters and the clearance of such offering with
the National Association of Securities Dealers, Inc. (the "NASD") and
except for such consents as to which the failure to have would not have a
material adverse effect on the Company and its subsidiaries or on the
consummation of the transactions contemplated hereby.
(g) Arthur Andersen LLP and Price Waterhouse LLP, who have expressed
their opinion with respect to the financial statements and schedules filed
with the Commission as a part of the Registration Statement and included in
the Prospectus and in the Registration Statement, are independent
accountants as required by the Act and the Rules and Regulations.
(h) The financial statements and schedules of the Company, and the
related notes thereto, included in the Registration Statement and the
Prospectus present fairly the financial position of the Company as of the
respective dates of such financial statements and schedules, and the
results of operations and changes in financial position of the Company for
the respective periods covered thereby. Such statements, schedules and
related notes have been prepared in accordance with generally accepted
accounting principles applied on a consistent basis as certified by the
independent accountants named in subsection 2(g). No other financial
statements or schedules are required to be included in the Registration
Statement. The selected financial data set forth in the Prospectus under
the captions "Capitalization," "Summary Financial Data" and "Selected
Financial
5
<PAGE>
Data" fairly present the information set forth therein on the basis stated
in the Registration Statement.
(i) Except as disclosed in the Prospectus, and except as to defaults
which individually or in the aggregate would not be material to the
Company, neither the Company nor any of its subsidiaries is in violation or
default of any provision of its certificate of incorporation or bylaws, or
other organizational documents, or is in breach of or default with respect
to any provision of any agreement, judgment, decree, order, mortgage, deed
of trust, lease, franchise, license, indenture, permit or other instrument
to which it is a party or by which it or any of its properties are bound;
and there does not exist any state of facts which constitutes an event of
default on the part of the Company or any such subsidiary as defined in
such documents or which, with notice or lapse of time or both, would
constitute such an event of default.
(j) There are no contracts or other documents required to be
described in the Registration Statement or to be filed as exhibits to the
Registration Statement by the Act or by the Rules and Regulations which
have not been described or filed as required. The descriptions of such
contracts and other documents set forth in the Prospectus are accurate and
complete in all material respects to the extent such contracts or other
documents are described therein; all such contracts are in full force and
effect on the date hereof; and neither the Company nor any of its
subsidiaries, nor to the best of the Company's knowledge, any other party
is in breach of or default under any of such contracts.
(k) There are no legal or governmental actions, suits or proceedings
pending or, to the best of the Company's knowledge, threatened to which the
Company or any of its subsidiaries is or may be a party or of which
property owned or leased by the Company or any of its subsidiaries is or
may be the subject, or related to environmental or discrimination matters,
which actions, suits or proceedings could reasonably be expected to,
individually or in the aggregate, prevent or materially and adversely
affect the transactions contemplated by this Agreement or result in a
material adverse change in the condition (financial or otherwise),
properties, business, results of operations or prospects of the Company and
its subsidiaries; and no labor disturbance by the employees of the Company
or any of its subsidiaries exists or is imminent which might be expected to
materially and adversely affect such condition, properties, business,
results of operations or prospects. Neither the Company nor any of its
subsidiaries is a party or subject to the provisions of any material
injunction, judgment, decree or order of any court, regulatory body,
administrative agency or other governmental body.
(l) The Company or the applicable subsidiary has good and marketable
title to all the properties and assets reflected as owned in the financial
statements hereinabove described (or elsewhere in the Prospectus), subject
to no lien, mortgage, pledge, charge or encumbrance of any kind except (i)
those, if any, reflected in such financial statements (or elsewhere in the
Prospectus), or (ii) those which are not material in amount and do not
materially and adversely affect the use made and proposed to be made of
such property by the Company and its subsidiaries. The Company or the
applicable subsidiary holds its
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<PAGE>
leased properties under valid and binding leases, with such exceptions as
are not materially significant in relation to the business of the Company.
Except as disclosed in the Prospectus, the Company owns or leases all such
properties as are necessary to its operations as now conducted or as
proposed to be conducted, except where failure to so own or lease would not
have a material adverse effect on the Company and its subsidiaries or on
the consummation of the transactions contemplated hereby.
(m) Since the respective dates as of which information is given in
the Registration Statement and Prospectus, and except as disclosed in or
specifically contemplated by the Prospectus: (i) the Company and its
subsidiaries have not incurred any material liabilities or obligations,
indirect, direct or contingent, or entered into any material verbal or
written agreement or other transaction which is not in the ordinary course
of business or which could reasonably be expected to result in a material
reduction in the future earnings of the Company and its subsidiaries; (ii)
the Company and its subsidiaries have not sustained any material loss or
interference with their respective businesses or properties from fire,
flood, windstorm, accident or other calamity, whether or not covered by
insurance; (iii) the Company has not paid or declared any dividends or
other distributions with respect to its capital stock and the Company and
its subsidiaries are not in default in the payment of principal or interest
on any outstanding debt obligations; (iv) there has not been any change in
the capital stock (other than upon the sale of the Common Shares hereunder
and upon the exercise of options and warrants described in the Registration
Statement) or indebtedness material to the Company and its subsidiaries
(other than in the ordinary course of business); and (v) there has not been
any material adverse change in the condition (financial or otherwise),
business, properties, results of operations or prospects of the Company and
its subsidiaries.
(n) Except as disclosed in or specifically contemplated by the
Prospectus, the Company and its subsidiaries have sufficient trademarks,
trade names, patent rights, mask works, copyrights, licenses, approvals and
governmental authorizations to conduct their businesses as now conducted;
except as disclosed in or specifically contemplated by the Prospectus, the
expiration of any trademarks, trade names, patent rights, mask works,
copyrights, licenses, approvals or governmental authorizations would not
have a material adverse effect on the condition (financial or otherwise),
business, results of operations or prospects of the Company or its
subsidiaries; and the Company has no knowledge of any material infringement
by it or its subsidiaries of trademark, trade name rights, patent rights,
mask works, copyrights, licenses, trade secret or other similar rights of
others, and there is no claim being made against the Company or its
subsidiaries regarding trademark, trade name, patent, mask work, copyright,
license, trade secret or other infringement which could have a material
adverse effect on the condition (financial or otherwise), business, results
of operations or prospects of the Company and its subsidiaries.
(o) The Company has not been advised, and has no reason to believe,
that either it or any of its subsidiaries is not conducting business in
compliance with all applicable laws, rules and regulations of the
jurisdictions in which it is conducting business, including, without
limitation, all applicable local, state and federal environmental laws and
regulations, except where failure to be so in compliance would not
materially
7
<PAGE>
adversely affect the condition (financial or otherwise), business, results
of operations or prospects of the Company and its subsidiaries.
(p) The Company and its subsidiaries have filed all necessary
federal, state and foreign income and franchise tax returns and have paid
all taxes shown as due thereon, and the Company has no knowledge of any tax
deficiency which has been or might be asserted or threatened against the
Company or its subsidiaries, except for any failure to file, failure to pay
tax or deficiency which could not reasonably be expected to materially and
adversely affect the business, operations or properties of the Company and
its subsidiaries.
(q) The Company is not, and will not be following the transactions
contemplated herein, an "investment company" within the meaning of the
Investment Company Act of 1940, as amended.
(r) The Company has not distributed and will not distribute prior to
the First Closing Date any offering material in connection with the
offering and sale of the Common Shares other than the Prospectus, the
Registration Statement and the other materials permitted by the Act.
(s) Each of the Company and its subsidiaries maintain insurance of
the types and in the amounts customarily maintained by similarly situated
companies, including, but not limited to, insurance covering real and
personal property owned or leased by the Company and its subsidiaries
against theft, damage, destruction, acts of vandalism and all other risks
customarily insured against, all of which insurance is in full force and
effect.
(t) Except as disclosed in the Prospectus, neither the Company, any
of its subsidiaries or any of their respective officers or directors has at
any time during the last five years (i) made any unlawful contribution to
any candidate for foreign office, or failed to disclose fully any
contribution in violation of law or (ii) made any payment to any federal or
state governmental officer or official, or other person charged with
similar public or quasi-public duties, other than payments required or
permitted by the laws of the United States or any jurisdiction thereof.
(u) The Company has not taken and will not take, directly or
indirectly, any action designed to or that might be reasonably expected to
cause or result in stabilization or manipulation of the price of the Common
Stock to facilitate the sale or resale of the Common Shares.
SECTION 3. Representations, Warranties and Covenants of THIN
-------------------------------------------------
International. The Selling Stockholder represents and warrants to, and agrees
- -------------
with, the several Underwriters that:
(a) The Selling Stockholder has and on the Second Closing Date
hereinafter mentioned will have, good and marketable title to the
Common Shares proposed to be sold by the Selling Stockholder hereunder
and full right, power and authority to enter into
8
<PAGE>
this Agreement and to sell, assign, transfer and deliver such Common
Shares hereunder, free and clear of all voting trust arrangements,
liens, encumbrances, equities, security interests, restrictions and
claims whatsoever; and upon delivery of and payment for such Common
Shares hereunder, the Underwriters will acquire good and marketable
title thereto, free and clear of all liens, encumbrances, equities,
claims, restrictions, security interests, voting trusts or other
defects of title whatsoever.
(b) The Selling Stockholder has executed and delivered a Power of Attorney
(hereinafter referred to as the "Stockholders Agreement"), and this
Agreement and the Stockholders Agreement have been duly executed and
delivered by or on behalf of the Selling Stockholder and the form of such
Stockholders Agreement has been delivered to you.
(c) The performance of this Agreement and the Stockholders Agreement and
the consummation of the transactions contemplated hereby and by the
Stockholders Agreement will not result in a breach or violation by the
Selling Stockholder of any of the terms or provisions of, or constitute a
default by the Selling Stockholder under, the charter or by-laws of the
Selling Stockholder, any indenture, mortgage, deed of trust, trust
(constructive or other), loan agreement, lease, franchise, license or other
agreement or instrument to which the Selling Stockholder is a party or by
which the Selling Stockholder or any of its properties is bound, any
statute, or any judgment, decree, order, rule or regulation of any court or
governmental agency or body applicable to the Selling Stockholder or any of
its properties.
(d) The Selling Stockholder has not taken and will not take, directly or
indirectly, any action designed to or which has constituted or which might
reasonably be expected to cause or result, under the Securities Exchange
Act of 1934, as amended (the "Exchange Act") or otherwise, in stabilization
or manipulation of the price of any security of the Company to facilitate
the sale or resale of the Common Shares and has not effected any sales of
Common Stock which, if effected by the issuer, would be required to be
disclosed in response to Item 701 of Regulation S-K.
(e) Each Preliminary Prospectus and the Prospectus, insofar as it sets
forth information furnished by or upon the authority of the Selling
Stockholder expressly for use in each of the Preliminary Prospectus and the
Prospectus, has conformed in all material respects to the requirements of
the Act and the Rules and Regulations and has not included any untrue
statement of a material fact or omitted to state a material fact necessary
to make the statements therein not misleading in light of the circumstances
under which they were made; and neither the Registration Statement nor the
Prospectus, nor any amendment or supplement thereto, insofar as it sets
forth information furnished by or upon the authority of the Selling
Stockholder expressly for use in each of the Registration Statement and the
Prospectus, will include any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make
the statements therein not misleading. For the purposes of this clause
(e), the Underwriters and the Company agree with the Selling Stockholder
that the only information furnished by or upon the authority of the Selling
Stockholder is the
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<PAGE>
information in the Prospectus under the section "Principal Shareholders"
regarding the Selling Stockholder (including without limitation the
information contained in footnote (6) of the section "Principal
Shareholders"). The Selling Stockholder further represents and warrants
that the information contained in the section "Principal Shareholders"
(including without limitation the information contained in footnote (6) of
the section "Principal Shareholders") includes all information required to
be disclosed in the Registration Statement and the Prospectus with respect
to the Selling Stockholder pursuant to the Act and the Rules and
Regulations.
(f) The Selling Stockholder is not aware that any of the representations
or warranties set forth in Section 2 above is untrue or inaccurate in any
material respect.
(g) The Selling Stockholder agrees with the Company and the
Underwriters not to, directly or indirectly, offer to sell, sell, solicit
an offer to sell, or contract or grant an option to sell or otherwise
dispose of any equity securities of the Company or securities convertible
into or exchangeable for any such securities, for a period of 180 days
after the date of the Prospectus, without the prior written consent of
Montgomery Securities, which consent may be withheld at the sole discretion
of Montgomery Securities.
SECTION 4. Representations and Warranties of the Underwriters. The
--------------------------------------------------
Representatives, on behalf of the several Underwriters, represent and warrant to
the Company and to the Selling Stockholder that the information set forth (i) on
the cover page of the Prospectus with respect to price, underwriting discounts
and commissions and terms of offering and (ii) under "Underwriting" in the
Prospectus was furnished to the Company by and on behalf of the Underwriters for
use in connection with the preparation of the Registration Statement and the
Prospectus and is correct in all material respects. The Representatives
represent and warrant that they have been authorized by each of the other
Underwriters as the Representatives to enter into this Agreement on its behalf
and to act for it in the manner herein provided.
SECTION 5. Purchase, Sale and Delivery of Common Shares. On the
--------------------------------------------
basis of the representations, warranties and agreements herein contained, but
subject to the terms and conditions herein set forth, the Company agrees to
issue and sell to the Underwriters 6,000,000 Firm Common Shares. The
Underwriters agree, severally and not jointly, to purchase from the Company the
number of Firm Common Shares described in Schedule A below. The purchase price
per share to be paid by the several Underwriters to the Company shall be $___
per share.
Delivery of certificates for the Firm Common Shares to be purchased by
the Underwriters and payment therefor shall be made at the offices of Cleary,
Gottlieb, Steen & Hamilton, One Liberty Plaza, New York, New York (or such other
place as may be agreed upon by the Company and the Representatives) at such time
and date, not later than the third (or, if the Firm Common Shares are priced, as
contemplated by Rule 15c6-1(c) under the Exchange Act, after 4:30 P.M.
Washington D.C. time, the fourth) full business day following the first date
that any of the Common Shares are released by you for sale to the public, as you
shall designate by at least 48 hours prior notice to the Company (or at such
other time and date, not later than one week after such third or fourth, as the
case may be, full business day as may be agreed upon by the Company and the
Representatives) (the "First Closing Date"); provided, however, that if the
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<PAGE>
Prospectus is at any time prior to the First Closing Date recirculated to the
public, the First Closing Date shall occur upon the later of the third or
fourth, as the case may be, full business day following the first date that any
of the Common Shares are released by you for sale to the public or the date that
is 48 hours after the date that the Prospectus has been so recirculated.
Delivery of certificates for the Firm Common Shares shall be made by
or on behalf of the Company to you, for the respective accounts of the
Underwriters with respect to the Firm Common Shares to be sold by the Company
against payment by you, for the accounts of the several Underwriters, of the
purchase price therefor by a wire transfer of immediately available funds to an
account or accounts designated by the Company. The certificates for the Firm
Common Shares shall be registered in such names and denominations as you shall
have requested at least two full business days prior to the First Closing Date,
and shall be made available for checking and packaging on the business day
preceding the First Closing Date at a location in New York, New York, as may be
designated by you. Time shall be of the essence, and delivery at the time and
place specified in this Agreement is a further condition to the obligations of
the Underwriters.
In addition, on the basis of the representations, warranties and
agreements herein contained, but subject to the terms and conditions herein set
forth, THIN International hereby grants an option to the several Underwriters to
purchase, severally and not jointly, up to an aggregate of 900,000 Optional
Common Shares at the purchase price per share to be paid for the Firm Common
Shares, for use solely in covering any over-allotments made by you for the
account of the Underwriters in the sale and distribution of the Firm Common
Shares. The option granted hereunder may be exercised at any time (but not more
than once) within 30 days after the first date that any of the Common Shares are
released by you for sale to the public, upon notice by you to said Selling
Stockholder setting forth the aggregate number of Optional Common Shares as to
which the Underwriters are exercising the option, the names and denominations in
which the certificates for such shares are to be registered and the time and
place at which such certificates will be delivered. Such time of delivery
(which may not be earlier than the First Closing Date), being herein referred to
as the "Second Closing Date," shall be determined by you, but if at any time
other than the First Closing Date shall not be earlier than one nor later than
three full business days after delivery of such notice of exercise. The number
of Optional Common Shares to be purchased by each Underwriter shall be
determined by multiplying the number of Optional Common Shares to be sold by
said Selling Stockholder pursuant to such notice of exercise by a fraction, the
numerator of which is the number of Firm Common Shares to be purchased by such
Underwriter as set forth opposite its name in Schedule A and the denominator of
which is the total number of Firm Common Shares (subject to such adjustments to
eliminate any fractional share purchases as you in your discretion may make).
Certificates for the Optional Common Shares will be made available for checking
and packaging on the business day preceding the Second Closing Date at a
location in New York, New York, as may be designated by you. The manner of
payment for and delivery of the Optional Common Shares shall be the same as for
the Firm Common Shares as specified in the two preceding paragraphs (except that
the relevant account or accounts shall be designated by the Selling
Stockholder). At any time before lapse of the option, you may cancel such
option by giving written notice of such cancellation to said Selling
Stockholder. If the option is cancelled or expires unexercised in
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<PAGE>
whole or in part, the Company will deregister under the Act the number of Option
Shares as to which the option has not been exercised.
You have advised the Company and the Selling Stockholder that each
Underwriter has authorized you to accept delivery of its Common Shares, to make
payment and to receipt therefor. You, individually and not as the
Representatives of the Underwriters, may (but shall not be obligated to) make
payment for any Common Shares to be purchased by any Underwriter whose funds
shall not have been received by you by the First Closing Date or the Second
Closing Date, as the case may be, for the account of such Underwriter, but any
such payment shall not relieve such Underwriter from any of its obligations
under this Agreement.
Subject to the terms and conditions hereof, the Underwriters propose
to make a public offering of their respective portions of the Common Shares as
soon after the effective date of the Registration Statement as in the judgment
of the Representatives is advisable and at the public offering price set forth
on the cover page of and on the terms set forth in the final prospectus, if one
is used, or on the first page of the Term Sheet, if one is used.
SECTION 6. Covenants of the Company. The Company covenants and
------------------------
agrees that:
(a) The Company will use its best efforts to cause the Registration
Statement and any amendment thereof, if not effective at the time and date
that this Agreement is executed and delivered by the parties hereto, to
become effective. If the Registration Statement has become or becomes
effective pursuant to Rule 430A of the Rules and Regulations, or the filing
of the Prospectus is otherwise required under Rule 424(b) of the Rules and
Regulations, the Company will file the Prospectus, properly completed, with
the Commission pursuant to the applicable paragraph of Rule 424(b) of the
Rules and Regulations within the time period prescribed and will provide
evidence satisfactory to you of such timely filing. The Company will
promptly advise you in writing (i) of the receipt of any comments of the
Commission, (ii) of any request of the Commission for amendment of or
supplement to the Registration Statement (either before or after it becomes
effective), any Preliminary Prospectus or the Prospectus or for additional
information, (iii) when the Registration Statement, or any amendment
thereto, shall have become effective, and (iv) of the issuance by the
Commission of any stop order suspending the effectiveness of the
Registration Statement or of the institution of any proceedings for that
purpose. If the Commission shall enter any such stop order at any time,
the Company will use its best efforts to obtain the lifting of such order
at the earliest possible moment. The Company will not file any amendment
or supplement to the Registration Statement (either before or after it
becomes effective), any Preliminary Prospectus or the Prospectus of which
you have not been furnished with a copy a reasonable time prior to such
filing or to which you reasonably object or which is not in compliance with
the Act and the Rules and Regulations.
(b) The Company will prepare and file with the Commission, promptly
upon your request, any amendments or supplements to the Registration
Statement or the Prospectus which in your reasonable judgment may be
necessary or advisable to enable the several
12
<PAGE>
Underwriters to continue the distribution of the Common Shares and will use
its best efforts to cause the same to become effective as promptly as
possible. The Company will fully and completely comply with the provisions
of Rule 430A of the Rules and Regulations with respect to information
omitted from the Registration Statement in reliance upon such Rule.
(c) If at any time within the nine-month period referred to in
Section 10(a)(3) of the Act during which a prospectus relating to the
Common Shares is required to be delivered under the Act any event occurs,
as a result of which the Prospectus, including any amendments or
supplements, would include an untrue statement of a material fact, or omit
to state any material fact required to be stated therein or necessary to
make the statements therein not misleading, or if it is necessary at any
time to amend the Prospectus, including any amendments or supplements, to
comply with the Act or the Rules and Regulations, the Company will promptly
advise you thereof and will promptly prepare and file with the Commission,
at its own expense, an amendment or supplement which will correct such
statement or omission or an amendment or supplement which will effect such
compliance and will use its best efforts to cause the same to become
effective as soon as possible; and, in case any Underwriter is required to
deliver a prospectus after such nine-month period, the Company upon
request, but at the expense of such Underwriter, will promptly prepare such
amendment or amendments to the Registration Statement and such Prospectus
or Prospectuses as may be necessary to permit compliance with the
requirements of Section 10(a)(3) of the Act.
(d) As soon as practicable, but not later than 45 days after the end
of the first quarter ending after one year following the "effective date of
the Registration Statement" (as defined in Rule 158(c) of the Rules and
Regulations), the Company will make generally available to its security
holders and to you an earnings statement (which need not be audited)
covering a period of 12 consecutive months beginning after the effective
date of the Registration Statement which will satisfy the provisions of the
last paragraph of Section 11(a) of the Act.
(e) Not later than 4:00 p.m. on the business day following the date
the Common Shares are released by the Underwriters for sale to the public,
the Company shall deliver or cause to be delivered copies of the Prospectus
in such quantities and at such places as the Representatives shall request.
During such period as a prospectus is required by law to be delivered in
connection with sales by an Underwriter or dealer, the Company, at its
expense, but only for the nine-month period referred to in Section 10(a)(3)
of the Act, will furnish to you and the Selling Stockholder or mail to your
order copies of the Registration Statement, the Prospectus, the Preliminary
Prospectus and all exhibits, amendments and supplements to any such
documents in each case as soon as available and in such quantities as you
and the Selling Stockholder may request, for the purposes contemplated by
the Act. The Company will furnish or cause to be furnished to you copies of
all reports on Form SR required by Rule 463 of the Rules and Regulations.
(f) The Company shall cooperate with you and your counsel in order to
qualify or register the Common Shares for sale under (or obtain exemptions
from the application of)
13
<PAGE>
the Blue Sky laws of such jurisdictions as you designate, will comply with
such laws and will continue such qualifications, registrations and
exemptions in effect so long as reasonably required for the distribution of
the Common Shares. The Company shall not be required to qualify as a
foreign corporation or to file a general consent to service of process in
any such jurisdiction where it is not presently qualified or where it would
be subject to taxation as a foreign corporation. The Company will advise
you promptly of the suspension of the qualification or registration of (or
any such exemption relating to) the Common Shares for offering, sale or
trading in any jurisdiction or any initiation or threat of any proceeding
for any such purpose, and in the event of the issuance of any order
suspending such qualification, registration or exemption, the Company, with
your cooperation, will use its best efforts to obtain the withdrawal
thereof.
(g) During the period of five years hereafter, the Company will
furnish to the Representatives and, upon request of the Representatives, to
each of the other Underwriters: (i) as soon as practicable after the end
of each fiscal year, copies of the Annual Report of the Company containing
the balance sheet of the Company as of the close of such fiscal year and
statements of income, stockholders' equity and cash flows for the year then
ended and the opinion thereon of the Company's independent public
accountants; (ii) as soon as practicable after the filing thereof, copies
of each proxy statement, Annual Report on Form 10-K, Quarterly Report on
Form 10-Q, Report on Form 8-K or other report filed by the Company with the
Commission, the NASD or any securities exchange; and (iii) as soon as
available, copies of any report or communication of the Company mailed
generally to holders of its Common Stock.
(h) During the period of 180 days after the date of the Prospectus,
without the prior written consent of either Montgomery Securities or each
of the Representatives (which consent may be withheld at the sole
discretion of the Montgomery Securities or the Representatives, as the case
may be), the Company will not, directly or indirectly, other than pursuant
to outstanding stock options and warrants disclosed in the Prospectus,
issue, offer, sell, grant options to purchase or otherwise dispose of any
of the Company's equity securities or any other securities convertible into
or exchangeable with its equity securities; provided, the Company may grant
options to purchase any of the Company's equity securities to any officer
or employee of the Company who delivers to Montgomery Securities a letter
substantially similar to the letters described in Section 7(c)(x) hereof.
(i) The Company will apply the net proceeds of the sale of the Common
Shares sold by it substantially in accordance with its statements under the
caption "Use of Proceeds" in the Prospectus.
(j) The Company will use its best efforts to designate the Common
Stock for quotation on The NASDAQ National Market.
You, on behalf of the Underwriters, may, in your sole discretion,
waive in writing the performance by the Company of any one or more of the
foregoing covenants or extend the time for their performance.
14
<PAGE>
SECTION 7. Payment of Expenses. Whether or not the transactions
-------------------
contemplated hereunder are consummated or this Agreement becomes effective or is
terminated, the Company agrees to pay all costs, fees and expenses incurred in
connection with the performance of its obligations hereunder and in connection
with the transactions contemplated hereby, including without limiting the
generality of the foregoing, (i) all expenses incident to the issuance and
delivery of the Common Shares (including all printing and engraving costs), (ii)
all fees and expenses of the registrar and transfer agent of the Common Stock,
(iii) all necessary issue, transfer and other stamp taxes in connection with the
issuance and sale of the Common Shares to the Underwriters, (iv) all fees and
expenses of the Company's counsel and the Company's independent accountants, (v)
all costs and expenses incurred in connection with the preparation, printing,
filing, shipping and distribution of the Registration Statement, each
Preliminary Prospectus and the Prospectus (including all exhibits and financial
statements) and all amendments and supplements provided for herein, this
Agreement, the Agreement Among Underwriters, the Selected Dealers Agreement, the
Underwriters' Questionnaire, the Underwriters' Power of Attorney and the Blue
Sky memorandum, (vi) all filing fees, attorneys' fees and expenses reasonably
incurred by the Company or the Underwriters in connection with qualifying or
registering (or obtaining exemptions from the qualification or registration of)
all or any part of the Common Shares for offer and sale under the Blue Sky laws,
(vii) the filing fee of the National Association of Securities Dealers, Inc.,
and (viii) all other fees, costs and expenses referred to in Item 13 of the
Registration Statement. Except as provided in this Section 7, Section 9 and
Section 11 hereof, the Underwriters shall pay all of their own expenses,
including the fees and disbursements of their counsel (excluding those relating
to qualification, registration or exemption under the Blue Sky laws and the Blue
Sky memorandum referred to above).
The Selling Stockholder will pay (directly or by reimbursement) all
fees and expenses incident to the performance of its obligations under this
Agreement which are not otherwise specifically provided for herein, including
but not limited to (i) any fees and expenses of counsel for the Selling
Stockholder and (ii) all expenses and taxes incident to the sale and delivery of
the Optional Common Shares to be sold by the Selling Stockholder to the
Underwriters hereunder, including without limitation taxes payable under Article
12 of the New York State tax law.
This Section 7 shall not affect any agreements relating to the payment
of expenses between the Company and the Selling Stockholder.
SECTION 8. Conditions of the Obligations of the Underwriters. The
-------------------------------------------------
obligations of the several Underwriters to purchase and pay for the Firm Common
Shares on the First Closing Date and the Optional Common Shares on the Second
Closing Date shall be subject to the accuracy of the representations and
warranties on the part of the Company and the Selling Stockholder herein set
forth as of the date hereof and as of the First Closing Date or the Second
Closing Date, as the case may be, to the accuracy of the statements of Company
officers and the Selling Stockholder made pursuant to the provisions hereof, to
the performance by the Company and the Selling Stockholder of their respective
obligations hereunder, and to the following additional conditions:
15
<PAGE>
(a) The Registration Statement shall have become effective not later
than 5:00 P.M. (or, in the case of a registration statement filed pursuant
to Rule 462(b) of the Rules and Regulations relating to the Common Shares,
not later than 10 P.M.), Washington, D.C. Time, on the date of this
Agreement, or at such later time as shall have been consented to by you; if
the filing of the Prospectus, or any supplement thereto, is required
pursuant to Rule 424(b) of the Rules and Regulations, the Prospectus shall
have been filed in the manner and within the time period required by Rule
424(b) of the Rules and Regulations; and prior to such Closing Date, no
stop order suspending the effectiveness of the Registration Statement shall
have been issued and no proceedings for that purpose shall have been
instituted or shall be pending or, to the knowledge of the Company, the
Selling Stockholder or you, shall be contemplated by the Commission; and
any request of the Commission for inclusion of additional information in
the Registration Statement, or otherwise, shall have been complied with to
your satisfaction.
(b) You shall be satisfied that since the respective dates as of
which information is given in the Registration Statement and Prospectus,
(i) there shall not have been any change in the capital stock other than
pursuant to the exercise of outstanding options and warrants disclosed in
the Prospectus of the Company or any of its subsidiaries or any material
increase in the indebtedness (other than in the ordinary course of
business) of the Company or any of its subsidiaries, (ii) except as set
forth or contemplated by the Registration Statement or the Prospectus, no
material verbal or written agreement or other transaction shall have been
entered into by the Company or any of its subsidiaries, which is not in the
ordinary course of business or which could reasonably be expected to result
in a material reduction in the future earnings of the Company and its
subsidiaries, (iii) no loss or damage (whether or not insured) to the
property of the Company or any of its subsidiaries shall have been
sustained which materially and adversely affects the condition (financial
or otherwise), business, results of operations or prospects of the Company
and its subsidiaries, (iv) no legal or governmental action, suit or
proceeding affecting the Company or any of its subsidiaries which is
material to the Company and its subsidiaries or which affects or could
reasonably be expected to affect the transactions contemplated by this
Agreement shall have been instituted or threatened, and (v) there shall not
have been any material change in the condition (financial or otherwise),
business, management, results of operations or prospects of the Company and
its subsidiaries which makes it impractical or inadvisable in the judgment
of the Representatives to proceed with the public offering or purchase the
Common Shares as contemplated hereby.
(c) There shall have been furnished to you, as Representatives of the
Underwriters, on each Closing Date, in form and substance satisfactory to
you, except as otherwise expressly provided below:
(i) An opinion of Sidley & Austin, counsel for the Company,
addressed to the Underwriters and dated the First Closing Date, or the
Second Closing Date, as the case may be, to the effect that:
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<PAGE>
(1) Each of the Company and its subsidiaries incorporated
in the United States (each a "U.S. Sub") has been duly
incorporated and is validly existing as a corporation in good
standing under the laws of its jurisdiction of incorporation, is
duly qualified to do business as a foreign corporation and is in
good standing in all other jurisdictions where the ownership or
leasing of properties or the conduct of its business requires
such qualification, except for jurisdictions in which the failure
to so qualify would not have a material adverse effect on the
Company and its subsidiaries, and has the corporate power and
authority to own its properties and conduct its business as
described in the Registration Statement;
(2) The authorized capital stock of the Company conforms as
to legal matters in all material respects to the description
thereof in the Prospectus; all necessary corporate proceedings
have been taken in order to authorize validly such authorized
capital stock; all outstanding shares of Common Stock (including
the Firm Common Shares and any Optional Common Shares) have been
duly and validly issued, are fully paid and nonassessable, and
were not issued in violation of or subject to any preemptive
rights or other rights to subscribe for or purchase any
securities and conform to the description thereof contained in
the Prospectus; without limiting the foregoing, to the knowledge
of such counsel, there are no preemptive or other rights to
subscribe for or purchase any of the Common Shares to be sold by
the Company hereunder;
(3) All of each U.S. Sub's issued and outstanding shares
have been duly and validly authorized and issued, are fully paid
and nonassessable and, except as disclosed in the Prospectus, are
owned of record and otherwise to such counsel's knowledge by the
Company free and clear of all liens, encumbrances, equities,
claims, security interests, voting trusts or other defects of
title whatsoever;
(4) The certificates evidencing the Common Shares to be
delivered hereunder are in due and proper form under Delaware
law, and when duly countersigned by the Company's transfer agent
and registrar, and delivered to you or upon your order against
payment of the agreed consideration therefor in accordance with
the provisions of this Agreement, the Common Shares represented
thereby will be duly authorized and validly issued, fully paid
and nonassessable, will not have been issued in violation of or
subject to any preemptive rights or other rights to subscribe for
or purchase securities and will conform in all material respects
to the description thereof contained in the Prospectus;
(5) Except as disclosed in or specifically contemplated by
the Prospectus, to such counsel's knowledge, there are no
outstanding options, warrants or other rights calling for the
issuance of any shares of capital
17
<PAGE>
stock of the Company or any security convertible into or
exchangeable for capital stock of the Company;
(6)
(a) The Registration Statement has become effective
under the Act, and, to the best of such counsel's knowledge,
no stop order suspending the effectiveness of the
Registration Statement or preventing the use of the
Prospectus has been issued and no proceedings for that
purpose have been instituted or are pending or contemplated
by the Commission; any required filing of the Prospectus and
any supplement thereto pursuant to Rule 424(b) of the Rules
and Regulations has been made in the manner and within the
time period required by such Rule 424(b);
(b) The Registration Statement, the Prospectus and
each amendment or supplement thereto (except for the
financial statements and schedules and other financial data
included therein as to which such counsel need express no
opinion) comply as to form in all material respects with the
requirements of the Act and the Rules and Regulations; and
(c) To such counsel's knowledge, there are no
franchises, leases, contracts, agreements or documents of a
character required to be disclosed in the Registration
Statement or Prospectus or to be filed as exhibits to the
Registration Statement which are not disclosed or filed, as
required.
(d) To such counsel's knowledge, there are no legal or
governmental actions, suits or proceedings, pending or
threatened, against the Company or any of its U.S. Subs
which are required to be described in the Prospectus which
are not described as required.
(7) The Company has corporate power to enter into the
Underwriting Agreement and to perform its obligations thereunder;
this Agreement has been duly and validly authorized by all
necessary corporate action by the Company, has been duly and
validly executed and delivered by and on behalf of the Company,
and is a valid and binding agreement of the Company enforceable
in accordance with its terms, except as enforceability may be
limited by general equitable principles, bankruptcy, insolvency,
reorganization, moratorium or other laws affecting creditors'
rights generally and except as to those provisions relating to
indemnity or contribution as to which no opinion need be
expressed; and no approval, authorization, order, consent,
registration, filing, qualification, license or permit of or with
any court, regulatory, administrative or other governmental body
is required for the execution and delivery of this
18
<PAGE>
Agreement by the Company or the consummation of the transactions
contemplated by this Agreement, except such as have been obtained
and are in full force and effect under the Act and such as may be
required under applicable Blue Sky laws in connection with the
purchase and distribution of the Common Shares by the
Underwriters and the clearance of such offering with the NASD;
(8) The execution and performance of this Agreement and the
consummation of the transactions herein contemplated will not (i)
conflict with, result in the breach of, or constitute, either by
itself or upon notice or the passage of time or both, a default
under, any agreement, mortgage, deed of trust, lease, franchise,
license, indenture, permit or other instrument known to such
counsel to which the Company or any U.S. Sub is a party or by
which the Company or any U.S. Sub or any of their respective
properties may be bound or affected, or (ii) violate any of the
provisions of the certificate of incorporation or bylaws, or
other organizational documents, of the Company or any U.S. Sub,
or (iii) so far as is known to such counsel, violate any statute,
judgment, decree, order, rule or regulation of any court or
governmental body having jurisdiction over the Company or any
U.S. Sub or any of their respective properties, except in the
case of clauses (i) and (iii) for any such breach, default,
conflict or violation which could not reasonably be expected to
have a material adverse effect on the Company and its
subsidiaries;
(9) To such counsel's knowledge, neither the Company nor any
U.S. Sub is in violation of its certificate of incorporation or
bylaws, or other organizational documents;
(10) To such counsel's knowledge, no holders of securities
of the Company have rights which have not been waived, to the
registration of shares of Common Stock or other securities,
because of the filing of the Registration Statement by the
Company or the offering contemplated hereby or the use of
proceeds contemplated in the Prospectus; and
(11) No transfer taxes are required to be paid in connection
with the sale and delivery of the Common Shares to the
Underwriters hereunder, except as required under Article 12 of
New York State tax law in the case of the shares being sold by
the Selling Stockholder.
In rendering such opinion, such counsel may rely as to matters of local law, on
opinions of local counsel, and as to matters of fact, on certificates of
officers of the Company or the U.S. Subs and of governmental officials, in
which case their opinion is to state that they are so doing and that the
Underwriters are justified in relying on such opinions or certificates and
copies of said opinions or certificates are to be attached to the opinion. Such
counsel shall also include a statement to the effect that nothing has come to
such counsel's attention that would lead such counsel to believe that either at
the effective date of the Registration Statement or at the
19
<PAGE>
applicable Closing Date the Registration Statement or the Prospectus, or any
such amendment or supplement, except for financial statements and schedules and
other statistical or financial data as to which such counsel need express no
belief, contains any untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading.
(ii) An opinion of Venable, Baetjer, Howard & Civiletti, LLP,
counsel for the Company, addressed to the Underwriters and dated the
First Closing Date, or the Second Closing Date, as the case may be, to
the effect that the statements set forth under the headings "Business
- Certain Legal Proceedings" and "Business - Government Contracts and
Regulation" in the Prospectus, insofar as such statements constitute a
summary of the laws, regulations, legal matters, documents or
proceedings referred to therein, provide a fair and accurate summary
of such laws, regulations, legal matters, documents and proceedings.
(iii) With respect to each Material Subsidiary, an opinion
of local counsel acceptable to the Underwriters, addressed to the
Underwriters and dated the First Closing Date, or the Second
Closing Date, as the case may be, to the effect that:
(1) Such subsidiary has been duly incorporated and is
validly existing as a corporation in good standing under the laws
of its jurisdiction of incorporation, is duly qualified to do
business as a foreign corporation and is in good standing in all
other jurisdictions where the ownership or leasing of properties
or the conduct of its business requires such qualification,
except for jurisdictions in which the failure to so qualify would
not have a material adverse effect on the Company and its
subsidiaries, and has the corporate power and authority to own
its properties and conduct its business as described in the
Registration Statement;
(2) All of such subsidiary's issued and outstanding shares
have been duly and validly authorized and issued, are fully paid
and nonassessable and, except as disclosed in the Prospectus, are
owned of record and otherwise to such counsel's knowledge by the
Company free and clear of all liens, encumbrances, equities,
claims, security interests, voting trusts or other defects of
title whatsoever;
(3) The execution and performance of this Agreement and the
consummation of the transactions herein contemplated will not (i)
conflict with, result in the breach of, or constitute, either by
itself or upon notice or the passage of time or both, a default
under, any agreement, mortgage, deed of trust, lease, franchise,
license, indenture, permit or other instrument known to such
counsel to which such subsidiary is a party or by which such
subsidiary or any of its property may be bound or affected, or
(ii) violate any of the provisions of the certificate of
incorporation or bylaws, or other organizational documents, of
such subsidiary, or (iii) so
20
<PAGE>
far as is known to such counsel, violate any statute, judgment,
decree, order, rule or regulation of any court or governmental
body having jurisdiction over such subsidiary or any of its
property, except in the case of clauses (i) and (iii) for any
such breach, default, conflict or violation which could not
reasonably be expected to have a material adverse effect on the
Company and its subsidiaries; and
(4) Such subsidiary is not in violation of its certificate
of incorporation or bylaws, or other organizational documents, or
to the best of such counsel's knowledge, in breach of or default
with respect to any provision of any agreement, mortgage, deed of
trust, lease, franchise, license, indenture, permit or other
instrument known to such counsel to which such subsidiary is a
party or by which its properties may be bound or affected, except
where such default would not materially adversely affect the
Company and its subsidiaries.
In rendering such opinion, such counsel may rely as to matters of fact, on
certificates of officers of the Company or such subsidiary and of governmental
officials, in which case their opinion is to state that they are so doing and
that the Underwriters are justified in relying on such opinions or certificates
and copies of said opinions or certificates are to be attached to the opinion.
(iv) An opinion of Netherlands Intertrust (Antilles) N.V.,
counsel for THIN International, addressed to the Underwriters and
dated the First Closing Date, or the Second Closing Date, as the case
may be, to the effect that:
(1) This Agreement and the Stockholders Agreement have been
duly authorized, executed and delivered by or on behalf of the
Selling Stockholder; and to such counsel's knowledge the
performance of this Agreement and the Stockholders Agreement and
the consummation of the transactions herein contemplated by the
Selling Stockholder will not result in a breach of, or constitute
a default under, any indenture, mortgage, deed of trust, trust
(constructive or other), loan agreement, lease, franchise,
license or other agreement or instrument to which the Selling
Stockholder is a party or by which the Selling Stockholder or any
of its properties may be bound, or violate any statute, judgment,
decree, order, rule or regulation known to such counsel of any
court or governmental body having jurisdiction over the Selling
Stockholder or any of its properties; and no approval,
authorization, order or consent of any court, regulatory body,
administrative agency or other governmental body is required for
the execution and delivery of this Agreement or the Stockholders
Agreement or the consummation by the Selling Stockholder of the
transactions contemplated by this Agreement, except such as have
been obtained and are in full force and effect under the Act and
such as may be required under the rules of the NASD and
applicable Blue Sky laws; and
21
<PAGE>
(2) The Selling Stockholder has full right, power and
authority to sell, transfer and deliver the Common Shares to be
sold on such Closing Date by the Selling Stockholder hereunder
and good and marketable title to such Common Shares so sold, free
and clear of all liens, encumbrances, equities, claims,
restrictions, security interests, voting trusts, or other defects
of title whatsoever, has been transferred to the Underwriters
(whom counsel may assume to be bona fide purchasers) who have
purchased such Common Shares hereunder.
In rendering such opinion, such counsel may rely as to matters of fact, on
certificates of the Selling Stockholder and of officers of the Company and of
governmental officials, in which case their opinion is to state that they are so
doing and that the Underwriters are justified in relying on such opinions or
certificates and copies of said opinions or certificates are to be attached to
the opinion.
(v) An opinion of Cravath, Swaine & Moore, counsel for THIN
International, addressed to the Underwriters and dated the First
Closing Date, or the Second Closing Date, as the case may be, to the
effect that:
(1) Assuming due authorization and execution, the
Stockholders Agreement is a valid and binding agreement of the
Selling Stockholder in accordance with its terms except as
enforceability may be limited by general equitable principles,
bankruptcy, insolvency, reorganization, moratorium or other laws
affecting creditors' rights generally.
In rendering such opinion, such counsel may rely as to matters of
local law, on opinions of local counsel, and as to matters of fact, on
certificates of the Selling Stockholder and of officers of the Company
and of governmental officials, in which case their opinion is to state
that they are so doing and that the Underwriters are justified in
relying on such opinions or certificates and copies of said opinions
or certificates are to be attached to the opinion.
(vi) Such opinion or opinions of Cleary, Gottlieb, Steen &
Hamilton, counsel for the Underwriters, dated the First Closing Date
or the Second Closing Date, as the case may be, with respect to legal
matters relating to this Agreement, the validity of the Common Shares,
the Registration Statement and the Prospectus and other related
matters as you may reasonably require, and the Company and the Selling
Stockholder shall have furnished to such counsel such documents and
shall have exhibited to them such papers and records as they may
reasonably request for the purpose of enabling them to pass upon such
matters. In connection with such opinions, such counsel may rely on
representations or certificates of officers of the Company and
governmental officials.
(vii) A certificate of the Company (executed on behalf of the
Company by the president or chief operating officer and the chief
financial or chief accounting officer of the Company), dated the First
Closing Date or the Second Closing Date, as the case may be, to the
effect that:
22
<PAGE>
(1) The representations and warranties set forth in Section
2 of this Agreement are true and correct as of the date of this
Agreement and as of the First Closing Date or the Second Closing
Date, as the case may be, and the Company has complied with all
the agreements and satisfied all the conditions on its part to be
performed or satisfied on or prior to such Closing Date;
(2) The Commission has not issued any order preventing or
suspending the use of the Prospectus or any Preliminary
Prospectus filed as a part of the Registration Statement or any
amendment thereto; no stop order suspending the effectiveness of
the Registration Statement has been issued; and to the best of
the knowledge of the respective signers, no proceedings for that
purpose have been instituted or are pending or contemplated under
the Act;
(3) Neither the Registration Statement nor the Prospectus
nor any amendment or supplement thereto includes any untrue
statement of a material fact or omits to state any material fact
required to be stated therein or necessary to make the statements
therein not misleading;
(4) Since the initial date on which the Registration
Statement was filed, no agreement, written or oral, transaction
or event has occurred which should have been set forth in an
amendment to the Registration Statement or in a supplement to or
amendment of any prospectus which has not been disclosed in such
a supplement or amendment;
(5) Since the respective dates as of which information is
given in the Registration Statement and the Prospectus, and
except as disclosed in or contemplated by the Prospectus, there
has not been any material adverse change or a development
involving a material adverse change in the condition (financial
or otherwise), business, properties, results of operations,
management or prospects of the Company and its subsidiaries; and
no legal or governmental action, suit or proceeding is pending or
threatened against the Company or any of its subsidiaries which
is material to the Company and its subsidiaries, whether or not
arising from transactions in the ordinary course of business, or
which may adversely affect the transactions contemplated by this
Agreement; since such dates and except as so disclosed, neither
the Company nor any of its subsidiaries has entered into any
verbal or written agreement or other transaction which is not in
the ordinary course of business or which could reasonably be
expected to result in a material reduction in the future earnings
of the Company or incurred any material liability or obligation,
direct, contingent or indirect, made any change in its capital
stock, made any material change in its short-term debt or funded
debt or repurchased or otherwise acquired any of the Company's
capital stock; and the Company has not declared or paid any
dividend, or made any other distribution, upon its outstanding
23
<PAGE>
capital stock payable to stockholders of record on a date prior
to the First Closing Date or Second Closing Date; and
(6) Since the respective dates as of which information is
given in the Registration Statement and the Prospectus and except
as disclosed in or contemplated by the Prospectus, the Company
and its subsidiaries have not sustained a material loss or damage
by strike, fire, flood, windstorm, accident or other calamity
(whether or not insured).
(viii) On each Closing Date, a certificate, dated such Closing
Date and addressed to you, signed by or on behalf of THIN
International to the effect that the representations and warranties of
the Selling Stockholder in this Agreement are true and correct, as if
made at and as of such Closing Date, and the Selling Stockholder has
complied with all the agreements and satisfied all the conditions on
his part to be performed or satisfied prior to such Closing Date.
(ix) On the date that this Agreement is executed and also on the
First Closing Date and the Second Closing Date a letter addressed to
you, as Representatives of the Underwriters, from each of Arthur
Andersen LLP and Price Waterhouse, independent accountants, the first
such letter from each to be dated the date of this Agreement, the
second such letter from each to be dated the First Closing Date and
the third such letter from each (in the event of a second closing) to
be dated the Second Closing Date, in form and substance satisfactory
to you.
(x) On or before the First Closing Date, letters from each
continuing director and officer of the Company and each of the Centre
Entities (as such term is defined in the Prospectus), in form and
substance satisfactory to you, confirming that for a period of 180
days after the date of the Prospectus, each such person will not,
directly or indirectly, sell or offer to sell or otherwise dispose of
any equity securities of the Company or any right to acquire such
securities or any other securities convertible or exchangeable for
such securities without the prior written consent of either Montgomery
Securities or each of the Representatives, which consent may be
withheld at the sole discretion of Montgomery Securities or each of
the Representatives, as the case may be.
(d) The Common Stock shall have been designated for trading on The
NASDAQ National Market.
All opinions, certificates, letters and documents referred to above shall be in
compliance with the provisions hereof only if they are reasonably satisfactory
to you and to Cleary, Gottlieb, Steen & Hamilton, counsel for the Underwriters.
The Company shall furnish you with such manually signed or conformed copies of
such opinions, certificates, letters and documents as you reasonably request.
Any certificate signed by any officer of the Company and delivered to the
Representatives or to counsel for the Underwriters shall be deemed to be a
representation and warranty by the Company to the Underwriters as to the
statements made therein.
24
<PAGE>
If any condition to the Underwriters' obligations hereunder to be satisfied
prior to or at the First Closing Date is not so satisfied, this Agreement at
your election will terminate upon notification by you as Representatives to the
Company and the Selling Stockholder without liability on the part of any
Underwriter, the Company or the Selling Stockholder except for the expenses to
be paid or reimbursed by the Company and the Selling Stockholder pursuant to
Sections 7 and 9 hereof and except to the extent provided in Section 11 hereof.
SECTION 9. Reimbursement of Underwriters' Expenses. Notwithstanding
---------------------------------------
any other provisions hereof, if this Agreement shall be terminated by you
pursuant to Section 8, or if the sale to the Underwriters of the Common Shares
at the First Closing is not consummated because of any refusal, inability or
failure on the part of the Company or the Selling Stockholder to perform any
agreement herein or to comply with any provision hereof, the Company agrees to
reimburse you and the other Underwriters upon demand for all out-of-pocket
expenses that shall have been reasonably incurred by you and them in connection
with the proposed purchase and the sale of the Common Shares, including but not
limited to fees and disbursements of counsel, printing expenses, travel
expenses, postage, telegraph charges and telephone charges relating directly to
the offering contemplated by the Prospectus. Any such termination shall be
without liability of any party to any other party except that the provisions of
this Section, Section 7 and Section 11 shall at all times be effective and shall
apply.
SECTION 10. Effectiveness of Registration Statement. You and the
---------------------------------------
Company will use all your and its best efforts to cause the Registration
Statement to become effective, to prevent the issuance of any stop order
suspending the effectiveness of the Registration Statement and, if such stop
order be issued, to obtain as soon as possible the lifting thereof.
SECTION 11. Indemnification. (a) (i) The Company and the Selling
---------------
Stockholder, jointly and severally, agree to indemnify and hold harmless each
Underwriter, the directors, officers, employees and agents of each Underwriter
and each person, if any, who controls any Underwriter within the meaning of
either the Act or the Exchange Act against any losses, claims, damages,
liabilities or expenses, joint or several, to which such Underwriter, such
directors, officers, employees or agents or such controlling person may become
subject, under the Act, the Exchange Act, or other federal or state statutory
law or regulation, or at common law or otherwise (including in settlement of any
litigation, if such settlement is effected with the written consent of the
Company), insofar as such losses, claims, damages, liabilities or expenses (or
actions in respect thereof as contemplated below) arise out of or are based upon
any untrue statement or alleged untrue statement of any material fact contained
in the Registration Statement, any Preliminary Prospectus, the Prospectus, or
any amendment or supplement thereto, or arise out of or are based upon the
omission or alleged omission to state in any of them a material fact required to
be stated therein or necessary to make the statements in any of them not
misleading; and will reimburse each Underwriter, the directors, officers,
employees and agents of each Underwriter, and each such controlling person for
any legal and other expenses as such expenses are reasonably incurred by such
Underwriter, such directors, officers, employees or agents or such controlling
person in connection with investigating, defending, settling, compromising or
paying any such loss, claim, damage, liability, expense or action; provided,
--------
however, that neither the Company nor the Selling Stockholder shall be liable in
- -------
any such case to the extent that any such loss, claim, damage, liability or
expense arises out of or is based upon:
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<PAGE>
(i) an untrue statement or alleged untrue statement or omission or alleged
omission made in the Registration Statement, any Preliminary Prospectus, the
Prospectus or any amendment or supplement thereto in reliance upon and in
conformity with the information furnished to the Company pursuant to Section 4
hereof; or (ii) the failure of such Underwriter to deliver or cause to be sent
to the purchaser a copy of the Prospectus (or amendment or supplement thereto)
within the time required by the Act and the regulations thereunder, if the
untrue statement or alleged untrue statement or omission or alleged omission of
a material fact contained in any Preliminary Prospectus or Prospectus was
corrected in the Prospectus (or amendment or supplement thereto), provided that
the Company has delivered the Prospectus (or amendment or supplement thereto) to
the Underwriters in requisite quantity on a timely basis to permit such delivery
or sending. In addition to its other obligations under this Section 11(a), each
of the Company and the Selling Stockholder, jointly and severally, agree that,
as an interim measure during the pendency of any claim, action, investigation,
inquiry or other proceeding arising out of or based upon any statement or
omission, or any alleged statement or omission, or any inaccuracy in the
representations and warranties of the Company or the Selling Stockholder herein
or failure to perform obligations hereunder, all as described in this Section
11(a), it will reimburse each Underwriter on a quarterly basis for all
reasonable legal or other expenses incurred in connection with investigating or
defending any such claim, action, investigation, inquiry or other proceeding,
notwithstanding the absence of a judicial determination as to the propriety and
enforceability of the Company's or the Selling Stockholder's obligation to
reimburse each Underwriter for such expenses and the possibility that such
payments might later be held to have been improper by a court of competent
jurisdiction. To the extent that any such interim reimbursement payment is so
held to have been improper, each Underwriter shall promptly return it to the
Company or the Selling Stockholder, as the case may be, together with interest,
compounded daily, determined on the basis of the prime rate (or other commercial
lending rate for borrowers of the highest credit standing) announced from time
to time by Bank of America NT&SA, San Francisco, California (the "Prime Rate").
Any such interim reimbursement payments which are not made to an Underwriter
within 30 days of a request for reimbursement, shall bear interest at the Prime
Rate from the date of such request. This indemnity agreement will be in addition
to any liability which the Company or the Selling Stockholder may otherwise
have.
(ii) Notwithstanding the foregoing Section 11(a)(i), (A) no demand
for indemnification or reimbursement provided for in Section 11(a)(i) shall be
made upon the Selling Stockholder unless and until such demand has first been
made upon the Company, and the Company has failed to satisfy such demand within
a period of 30 days from the later of (x) the date of such demand and (y) the
date notice of such demand has been provided to the Selling Stockholder; and (B)
the Selling Stockholder's aggregate liability under Section 11(a)(i) shall be
limited to an amount equal to the proceeds (after deducting the underwriting
commissions, but before deducting expenses) received by the Selling Stockholder
from the sale of Optional Common Shares pursuant to this Agreement.
(b) Each Underwriter will severally indemnify and hold harmless the
Company, each of its directors, each of its officers who signed the Registration
Statement, the Selling Stockholder and each person, if any, who controls the
Company or the Selling Stockholder within the meaning of the Act, against any
losses, claims, damages, liabilities or expenses to which the Company, or any
such director, officer, Selling Stockholder or controlling person may
26
<PAGE>
become subject, under the Act, the Exchange Act, or other federal or state
statutory law or regulation, or at common law or otherwise (including in
settlement of any litigation, if such settlement is effected with the written
consent of such Underwriter), insofar as such losses, claims, damages,
liabilities or expenses (or actions in respect thereof as contemplated below)
arise out of or are based upon any untrue or alleged untrue statement of any
material fact contained in the Registration Statement, any Preliminary
Prospectus, the Prospectus, or any amendment or supplement thereto, or arise out
of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, in each case to the extent, but only to the extent, that
such untrue statement or alleged untrue statement or omission or alleged
omission was made in the Registration Statement, any Preliminary Prospectus, the
Prospectus, or any amendment or supplement thereto, in reliance upon and in
conformity with the information furnished to the Company pursuant to Section 4
hereof; and will reimburse the Company, or any such director, officer, Selling
Stockholder or controlling person for any legal and other expense reasonably
incurred by the Company, or any such director, officer, Selling Stockholder or
controlling person in connection with investigating, defending, settling,
compromising or paying any such loss, claim, damage, liability, expense or
action. In addition to its other obligations under this Section 11(b), each
Underwriter severally agrees that, as an interim measure during the pendency of
any claim, action, investigation, inquiry or other proceeding arising out of or
based upon any statement or omission, or any alleged statement or omission,
described in this Section 11(b) which relates to information furnished to the
Company pursuant to Section 4 hereof, it will reimburse the Company (and, to the
extent applicable, each officer, director, controlling person or Selling
Stockholder) on a quarterly basis for all reasonable legal or other expenses
incurred in connection with investigating or defending any such claim, action,
investigation, inquiry or other proceeding, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of the
Underwriters' obligation to reimburse the Company (and, to the extent
applicable, each officer, director, controlling person or Selling Stockholder)
for such expenses and the possibility that such payments might later be held to
have been improper by a court of competent jurisdiction. To the extent that any
such interim reimbursement payment is so held to have been improper, the Company
(and, to the extent applicable, each officer, director, controlling person or
Selling Stockholder) shall promptly return it to the Underwriters together with
interest, compounded daily, determined on the basis of the Prime Rate. Any such
interim reimbursement payments which are not made to the Company (and, to the
extent applicable, each officer, director, controlling person or Selling
Stockholder) within 30 days of a request for reimbursement, shall bear interest
at the Prime Rate from the date of such request. This indemnity agreement will
be in addition to any liability which such Underwriter may otherwise have.
(c) Promptly after receipt by an indemnified party under this Section
of notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against an indemnifying party under this
Section, notify the indemnifying party in writing of the commencement thereof;
but the omission so to notify the indemnifying party will not relieve it from
any liability which it may have to any indemnified party for contribution or
otherwise than under the indemnity agreement contained in this Section or to the
extent it is not prejudiced as a proximate result of such failure. In case any
such action is brought against any
27
<PAGE>
indemnified party and such indemnified party seeks or intends to seek indemnity
from an indemnifying party, the indemnifying party will be entitled to
participate in, and, to the extent that it may wish, jointly with all other
indemnifying parties similarly notified, to assume the defense thereof with
counsel reasonably satisfactory to such indemnified party; provided, however, if
the defendants in any such action include both the indemnified party and the
indemnifying party and the indemnified party shall have reasonably concluded
that there may be a conflict between the positions of the indemnifying party and
the indemnified party in conducting the defense of any such action or that there
may be legal defenses available to it and/or other indemnified parties which are
different from or additional to those available to the indemnifying party, the
indemnified party or parties shall have the right to select separate counsel to
assume such legal defenses and to otherwise participate in the defense of such
action on behalf of such indemnified party or parties. Upon receipt of notice
from the indemnifying party to such indemnified party of its election so to
assume the defense of such action and approval by the indemnified party of
counsel, the indemnifying party will not be liable to such indemnified party
under this Section for any legal or other expenses subsequently incurred by such
indemnified party in connection with the defense thereof unless (i) the
indemnified party shall have employed such counsel in connection with the
assumption of legal defenses in accordance with the proviso to the next
preceding sentence (it being understood, however, that the indemnifying party
shall not be liable for expenses of more than one separate counsel approved by
Montgomery Securities in the case of Section 11(a)(i) representing the
indemnified parties who are parties to such action) or (ii) the indemnifying
party shall not have employed counsel reasonably satisfactory to the indemnified
party to represent the indemnified party within a reasonable time after notice
of commencement of the action, in each of which cases the fees and expenses of
counsel shall be at the expense of the indemnifying party.
(d) If the indemnification provided for in this Section 11 is
required by its terms but is for any reason held to be unavailable to or
otherwise insufficient to hold harmless an indemnified party under paragraphs
(a), (b) or (c) in respect of any losses, claims, damages, liabilities or
expenses referred to herein, then each applicable indemnifying party shall
contribute to the amount paid or payable by such indemnified party as a result
of any losses, claims, damages, liabilities or expenses referred to herein (i)
in such proportion as is appropriate to reflect the relative benefits received
by the Company, the Selling Stockholder and the Underwriters from the offering
of the Common Shares or (ii) if the allocation provided by clause (i) above is
not permitted by applicable law, in such proportion as is appropriate to reflect
not only the relative benefits referred to in clause (i) above but also the
relative fault of the Company, the Selling Stockholder and the Underwriters in
connection with the statements or omissions or inaccuracies in the
representations and warranties herein which resulted in such losses, claims,
damages, liabilities or expenses, as well as any other relevant equitable
considerations; provided, however, that (A) the Selling Stockholder will not be
required to contribute any amounts referred to in clauses (i) and (ii) above
unless and until a demand for indemnification, reimbursement or contribution has
first been made upon the Company, and the Company has failed to satisfy such
demand within a period of 30 days from the later of (x) the date of such demand
and (y) the date of notice of such demand has been provided to the Selling
Stockholder and (B) the Selling Stockholder's relative benefit under this
Section 11(d) shall be limited to an amount equal to the proceeds (after
deducting the underwriting commissions, but
28
<PAGE>
before deducting expenses) received by the Selling Stockholder from the sale of
Optional Common Shares pursuant to this Agreement. The respective relative
benefits received by the Company, the Selling Stockholder and the Underwriters
shall be deemed to be in the same proportion, in the case of the Company and the
Selling Stockholder as the total price paid to the Company and to the Selling
Stockholder, respectively, for the Common Shares sold by them to the
Underwriters (net of underwriting commissions but before deducting expenses)
bears to the total price to the public set forth on the cover of the Prospectus,
and in the case of the Underwriters as the underwriting commissions received by
them bears to the total price to the public set forth on the cover of the
Prospectus. The relative fault of the Company, the Selling Stockholder and the
Underwriters shall be determined by reference to, among other things, whether
the untrue or alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact or the inaccurate or the alleged
inaccurate representation and/or warranty relates to information supplied by the
Company, the Selling Stockholder or the Underwriters and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such statement or omission. The amount paid or payable by a party as a result of
the losses, claims, damages, liabilities and expenses referred to above shall be
deemed to include, subject to the limitations set forth in subparagraph (c) of
this Section 11, any legal or other fees or expenses reasonably incurred by such
party in connection with investigating or defending any action or claim. The
provisions set forth in subparagraph (c) of this Section 11 with respect to
notice of commencement of any action shall apply if a claim for contribution is
to be made under this subparagraph (d); provided, however, that no additional
notice shall be required with respect to any action for which notice has been
given under subparagraph (c) for purposes of indemnification. The Company, the
Selling Stockholder and the Underwriters agree that it would not be just and
equitable if contribution pursuant to this Section 11 were determined solely by
pro rata allocation (even if the Underwriters were treated as one entity for
such purpose) or by any other method of allocation which does not take account
of the equitable considerations referred to in the immediately preceding
paragraph. Notwithstanding the provisions of this Section 11, (A) in the event
the Selling Stockholder is liable for any amount of contribution under this
Section 11(d), the Company agrees to indemnify and hold harmless the Selling
Stockholder against any losses, claims, damages, liabilities or expenses the
Selling Stockholder may become subject to under this Section 11(d) except to the
extent the proviso appearing in the first sentence of Section 11(e) shall be
operative, and (B) no Underwriter shall be required to contribute any amount in
excess of the amount of the total underwriting commissions received by such
Underwriter in connection with the Common Shares underwritten by it and
distributed to the public. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations to contribute pursuant to this
Section 11 are several in proportion to their respective underwriting
commitments and not joint.
(e) The Company agrees to indemnify and hold harmless the Selling
Stockholder, the directors, officers, partners, employees, representatives and
agents of the Selling Stockholder and each person, if any, who controls the
Selling Stockholder within the meaning of either the Act or the Exchange Act
against any losses, claims, damages, liabilities or expenses, joint or several,
to which such directors, officers, partners, employees, representatives or
agents or such
29
<PAGE>
controlling person may become subject, under the Act, the Exchange Act, or other
federal or state statutory law or regulation, or at common law or otherwise
(including in settlement of any litigation, if such settlement is effected with
the written consent of the Company), insofar as such losses, claims, damages,
liabilities or expenses (or actions in respect thereof as contemplated below)
arise out of or are based upon any untrue statement or alleged untrue statement
of any material fact contained in the Registration Statement, any Preliminary
Prospectus, the Prospectus, or any amendment or supplement thereto, or arise out
of or are based upon the omission or alleged omission to state in any of them a
material fact required to be stated therein or necessary to make the statements
in any of them not misleading; and will reimburse the Selling Stockholder, the
directors, officers, partners, employees, representatives and agents of the
Selling Stockholder, and each such controlling person for any legal and other
expenses as such expenses are reasonably incurred by the Selling Stockholder,
such directors, officers, partners, employees, representatives or agents or such
controlling person in connection with investigating, defending, settling,
compromising or paying any such loss, claim, damage, liability, expense or
action; provided, however, that the Company shall not be liable in any such case
-------- -------
to the Selling Stockholder or any person who controls the Selling Stockholder
within the meaning of either the Act or the Exchange Act to the extent that any
such loss, claim, damage, liability or expense arises out of or is based upon
any such untrue statement or alleged untrue statement or omission or alleged
omission made therein in reliance upon and in conformity with the information
furnished to the Company by or on behalf of the Selling Stockholder expressly
for inclusion in the Registration Statement and Prospectus; provided, further,
-------- -------
for purposes of this clause the Company agrees with the Selling Stockholder that
the only information provided by or upon the authority of the Selling
Stockholder is the name of the Selling Stockholder and number of Common Shares
owned prior to the Offering (as such term is defined in the Prospectus) and the
number of Common Shares owned upon completion of the Offering (as such term is
defined in the Prospectus), in each case appearing in the table in the
Prospectus under the heading "Principal Shareholders" and the information in
footnote (6) to such table; provided, further, that the indemnification required
-------- -------
by this Section 11(e) shall not apply to amounts paid in settlement of any such
loss, claim, damage, liability or expense if such settlement is effected without
the consent of the Company (which consent shall not be unreasonably withheld).
In addition to its other obligations under this Section 11(e), the Company
agrees that, as an interim measure during the pendency of any claim, action,
investigation, inquiry or other proceeding arising out of or based upon any
statement or omission, or any alleged statement or omission, or any inaccuracy
in the representations and warranties of the Company herein or failure to
perform obligations hereunder, all as described in this Section 11(e), it will
reimburse the Selling Stockholder on a quarterly basis for all reasonable legal
or other expenses incurred in connection with investigating or defending any
such claim, action, investigation, inquiry or other proceeding, notwithstanding
the absence of a judicial determination as to the propriety and enforceability
of the Company's obligation to reimburse the Selling Stockholder for such
expenses and the possibility that such payments might later be held to have been
improper by a court of competent jurisdiction. To the extent that any such
interim reimbursement payment is so held to have been improper, the Selling
Stockholder shall promptly return it to the Company, as the case may be,
together with interest, compounded daily, determined on the basis of the prime
rate (or other commercial lending rate for borrowers of the highest credit
standing) announced from time to time by Bank of America NT&SA, San Francisco,
California (the "Prime Rate"). Any such
30
<PAGE>
interim reimbursement payments which are not made to the Selling Stockholder
within 30 days of a request for reimbursement, shall bear interest at the Prime
Rate from the date of such request.
(f) It is agreed that any controversy arising out of the operation of
the interim reimbursement arrangements set forth in Sections 11(a) and 11(b)
hereof, including the amounts of any requested reimbursement payments and the
method of determining such amounts, shall be settled by arbitration conducted
under the provisions of the Constitution and Rules of the Board of Governors of
the New York Stock Exchange, Inc. or pursuant to the Code of Arbitration
Procedure of the NASD. Any such arbitration must be commenced by service of a
written demand for arbitration or written notice of intention to arbitrate,
therein electing the arbitration tribunal. In the event the party demanding
arbitration does not make such designation of an arbitration tribunal in such
demand or notice, then the party responding to said demand or notice is
authorized to do so. Such an arbitration would be limited to the operation of
the interim reimbursement provisions contained in Sections 11(a) and 11(b)
hereof and would not resolve the ultimate propriety or enforceability of the
obligation to reimburse expenses which is created by the provisions of such
Sections 11(a) and 11(b) hereof.
SECTION 12. Default of Underwriters. It shall be a condition to this
-----------------------
Agreement and the obligation of the Company and the Selling Stockholder to sell
and deliver the Common Shares hereunder, and of each Underwriter to purchase the
Common Shares in the manner as described herein, that, except as hereinafter in
this paragraph provided, each of the Underwriters shall purchase and pay for all
the Common Shares agreed to be purchased by such Underwriter hereunder upon
tender to the Representatives of all such shares in accordance with the terms
hereof. If any Underwriter or Underwriters default in their obligations to
purchase Common Shares hereunder on either the First or Second Closing Date and
the aggregate number of Common Shares which such defaulting Underwriter or
Underwriters agreed but failed to purchase on such Closing Date does not exceed
10% of the total number of Common Shares which the Underwriters are obligated to
purchase on such Closing Date, the non-defaulting Underwriters shall be
obligated severally, in proportion to their respective commitments hereunder, to
purchase the Common Shares which such defaulting Underwriters agreed but failed
to purchase on such Closing Date. If any Underwriter or Underwriters so default
and the aggregate number of Common Shares with respect to which such default
occurs is more than the above percentage and arrangements satisfactory to the
Representatives and the Company for the purchase of such Common Shares by other
persons are not made within 48 hours after such default, this Agreement will
terminate without liability on the part of any non-defaulting Underwriter or the
Company or the Selling Stockholder except for the expenses to be paid by the
Company and the Selling Stockholder pursuant to Section 7 hereof and except to
the extent provided in Section 11 hereof.
In the event that Common Shares to which a default relates are to be
purchased by the non-defaulting Underwriters or by another party or parties, the
Representatives or the Company shall have the right to postpone the First or
Second Closing Date, as the case may be, for not more than five business days in
order that the necessary changes in the Registration Statement, Prospectus and
any other documents, as well as any other arrangements, may be effected. As
used in this Agreement, the term "Underwriter" includes any person substituted
for
31
<PAGE>
an Underwriter under this Section. Nothing herein will relieve a defaulting
Underwriter from liability for its default.
SECTION 13. Effective Date. This Agreement shall become effective
--------------
immediately as to Sections 7, 9, 11, 14, 16 and 21 and, as to all other
provisions, (i) if at the time of execution of this Agreement the Registration
Statement has not become effective, at 2:00 P.M., California time, on the first
full business day following the effectiveness of the Registration Statement, or
(ii) if at the time of execution of this Agreement the Registration Statement
has been declared effective, at 2:00 P.M., California time, on the first full
business day following the date of execution of this Agreement; but this
Agreement shall nevertheless become effective at such earlier time after the
Registration Statement becomes effective as you may determine on and by notice
to the Company or by release of any of the Common Shares for sale to the public.
For the purposes of this Section 13, the Common Shares shall be deemed to have
been so released upon the release for publication of any newspaper advertisement
relating to the Common Shares or upon the release by you of communications (i)
advising Underwriters that the Common Shares are released for public offering,
or (ii) offering the Common Shares for sale to securities dealers, whichever may
occur first.
SECTION 14. Termination. Without limiting the right to terminate
-----------
this Agreement pursuant to any other provision hereof:
(a) This Agreement may be terminated by the Company by notice to you
and the Selling Stockholder or by you by notice to the Company and the
Selling Stockholder at any time prior to the time this Agreement shall
become effective as to all its provisions, and any such termination shall
be without liability on the part of the Company or the Selling Stockholder
to any Underwriter (except for the expenses to be paid or reimbursed by the
Company and the Selling Stockholder pursuant to Sections 7 and 9 hereof and
except to the extent provided in Section 11 hereof) or of any Underwriter
to the Company or the Selling Stockholder (except to the extent provided in
Section 11 hereof).
(b) This Agreement may also be terminated by you prior to the First
Closing Date by notice to the Company (i) if additional material
governmental restrictions, not in force and effect on the date hereof,
shall have been imposed upon trading in securities generally or minimum or
maximum prices shall have been generally established on the New York Stock
Exchange or on the American Stock Exchange or in the over the counter
market by the NASD, or trading in securities generally shall have been
suspended on either such Exchange or in the over the counter market by the
NASD, or a general banking moratorium shall have been established by
federal, New York or California authorities, (ii) if an outbreak of major
hostilities or other national or international calamity or any substantial
change in political, financial or economic conditions shall have occurred
or shall have accelerated or escalated to such an extent, as, in the
judgment of the Representatives, to affect adversely the marketability of
the Common Shares, (iii) if any adverse event shall have occurred or shall
exist which makes untrue or incorrect in any material respect any statement
or information contained in the Registration Statement or Prospectus or
which is not reflected in the Registration Statement or Prospectus but
should be reflected therein in order to make the statements or information
contained
32
<PAGE>
therein not misleading in any material respect, or (iv) if there shall be
any action, suit or proceeding pending or threatened, or there shall have
been any development or prospective development involving particularly the
business or properties or securities of the Company or any of its
subsidiaries or the transactions contemplated by this Agreement, which, in
the reasonable judgment of the Representatives, may materially and
adversely affect the Company's business or earnings and makes it
impracticable or inadvisable to offer or sell the Common Shares. Any
termination pursuant to this subsection (b) shall without liability on the
part of any Underwriter to the Company or the Selling Stockholder or on the
part of the Company or the Selling Stockholder to any Underwriter (except
for expenses to be paid or reimbursed by the Company and the Selling
Stockholder pursuant to Sections 7 and, if otherwise applicable, 9 hereof
and except to the extent provided in Section 11 hereof).
SECTION 15. Representations and Indemnities to Survive Delivery. The
---------------------------------------------------
respective indemnities, agreements, representations, warranties and other
statements of the Company, of its officers, of the Selling Stockholder and of
the several Underwriters set forth in or made pursuant to this Agreement will
remain in full force and effect, regardless of any investigation made by or on
behalf of any Underwriter or the Company or any of its or their partners,
officers or directors or any controlling person, or the Selling Stockholder, as
the case may be, and will survive delivery of and payment for the Common Shares
sold hereunder and any termination of this Agreement.
SECTION 16. Notices. All communications hereunder shall be in
-------
writing and, if sent to the Representatives shall be mailed, delivered or
telegraphed and confirmed to you at 600 Montgomery Street, San Francisco,
California 94111, Attention: David Baylor, Esq., with a copy to Laurent Alpert,
Esq., Cleary, Gottlieb, Steen & Hamilton, One Liberty Plaza, New York, New York
10006; if sent to the Company shall be mailed, delivered or telegraphed and
confirmed to the Company at 7340 McGinnis Ferry Road, Suwanee, Georgia 30174,
Attention: David Apseloff, with a copy to James G. Archer, Esq., Sidley &
Austin, 875 Third Avenue, New York, New York 10022; and if sent to THIN
International shall be mailed, delivered or telegraphed and confirmed to THIN
International N.V., c/o Netherlands Intertrust (Antilles) N.V., Landhuis
Joonchi, Kaya Richard J. Beaujon z/n, P.O. Box 837, Curacao, Netherlands
Antilles, Attention: Gregory Elias, with a copy to Cravath, Swaine & Moore, 33
King William Street, London EC4R 9DU, England, Attention: Sarah C. Murphy. The
Company, the Selling Stockholder or you may change the address for receipt of
communications hereunder by giving notice to the others.
SECTION 17. Successors. This Agreement will inure to the benefit of
----------
and be binding upon the parties hereto, including any substitute Underwriters
pursuant to Section 12 hereof, and to the benefit of the officers, directors,
employees, agents and controlling persons referred to in Section 11, and in each
case their respective successors, personal representatives and assigns, and no
other person will have any right or obligation hereunder. No such assignment
shall relieve any party of its obligations hereunder. The term "successors"
shall not include any purchaser of the Common Shares as such from any of the
Underwriters merely by reason of such purchase.
33
<PAGE>
SECTION 18. Representation of Underwriters. You will act as
------------------------------
Representatives for the several Underwriters in connection with all dealings
hereunder, and any action under or in respect of this Agreement taken by you
jointly or by Montgomery Securities, as Representatives, will be binding upon
all the Underwriters.
SECTION 19. Partial Unenforceability. The invalidity or
------------------------
unenforceability of any Section, paragraph or provision of this Agreement shall
not affect the validity or enforceability of any other Section, paragraph or
provision hereof. If any Section, paragraph or provision of this Agreement is
for any reason determined to be invalid or unenforceable, there shall be deemed
to be made such minor changes (and only such minor changes) as are necessary to
make it valid and enforceable.
SECTION 20. Applicable Law. THIS AGREEMENT SHALL BE GOVERNED BY AND
--------------
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
SECTION 21. Consent by Selling Stockholder to Jurisdiction and Service
----------------------------------------------------------
of Process. The Selling Stockholder irrevocably submits to the jurisdiction of
- ----------
any Federal court (and, if such court refuses to take jurisdiction, any New York
State Court) located in the Borough of Manhattan in the City of New York over
any suit, action or proceeding arising out of or relating to this Agreement or
the transactions contemplated hereby. The Selling Stockholder irrevocably
waives, to the fullest extent permitted by law, any objection which it may have
to the laying of the venue of any such suit, action or proceeding brought in
such a court and any claim that any suit, action or proceeding brought in such a
court has been brought in an inconvenient forum. The Selling Stockholder agrees
that final judgment in any such suit, action or proceeding brought in such a
court shall be conclusive and binding upon the Selling Stockholder and may be
enforced in any court to the jurisdiction of which the Selling Stockholder is
subject by a suit upon judgment, provided that service of process is effected
upon the Selling Stockholder in the manner specified in the following paragraph
or as otherwise permitted by law; provided, however, that the Selling
Stockholder does not waive, and the foregoing provisions of this sentence shall
not constitute or be deemed to constitute a waiver of, (i) any right to appeal
any such judgment, to seek any stay or otherwise to seek reconsideration or
review of any such judgment in each case before the trial court of a United
States Federal or State court having appellate jurisdiction over such trial
court or (ii) any stay of execution or levy pending an appeal form, or a suit,
action or proceeding for reconsideration or review of, any such judgment in such
trial court.
The Selling Stockholder will at all times have an authorized agent in
the Borough of Manhattan, the City of New York upon whom process may be served
in any suit, action or proceeding arising out of or relating to this Agreement.
Service of process upon such agent and written notice of such service mailed or
delivered to the Selling Stockholder shall to the extent permitted by law be
deemed in every respect effective service of process upon the Selling
Stockholder in any such suit, action or proceeding. The Selling Stockholder
hereby irrevocably appoints CT Corporation System, whose address is, as of the
date hereof, 1633 Broadway, New York, New York 10019, as its agent for such
purpose, and covenants and agrees that service of process in any such suit,
action or proceeding may be made upon it at the office of such agent at
34
<PAGE>
said address (or at such other address in the Borough of Manhattan, the City of
New York, as the Company may designate by written notice to the
Representatives). The Selling Stockholder hereby represents and warrants that
such agent has accepted such appointment and has agreed to act as said agent for
service of process, and the Selling Stockholder agrees to take any and all
action, including the filing of any and all documents that may be necessary to
continue such appointment in full force and effect as aforesaid.
The Selling Stockholder hereby consents to process being served in any
suit, action or proceeding of the nature referred to in the preceding paragraphs
by service upon such agent together with the mailing of a copy thereof by
registered or certified mail, postage prepaid, return receipt requested, to the
address of the Selling Stockholder set forth herein or to any other address of
which the Selling Stockholder shall have given written notice to the
Representatives. The Selling Stockholder irrevocably waives, to the fullest
extent permitted by law, all claim of error by reason of any such service (but
does not waive any right to assert lack of subject matter jurisdiction) and
agrees that such service and mailing (i) shall be deemed in every respect
effective service or process upon the Selling Stockholder in any such suit,
action or proceeding and (ii) shall, to the fullest extent permitted by law, be
taken and held to be valid personal service.
Nothing in this Section shall affect the right of the Underwriters to
serve process in any manner permitted by law or limit the right of the
Underwriters to bring proceedings against the Selling Stockholder in the courts
of any jurisdiction or jurisdictions.
SECTION 22. General. This Agreement constitutes the entire agreement
-------
of the parties to this Agreement and supersedes all prior written or oral and
all contemporaneous oral agreements, understandings and negotiations with
respect to the subject matter hereof. This Agreement may be executed in several
counterparts, each one of which shall be an original, and all of which shall
constitute one and the same document.
In this Agreement, the masculine, feminine and neuter genders and the
singular and the plural include one another. The section headings in this
Agreement are for the convenience of the parties only and will not affect the
construction or interpretation of this Agreement. This Agreement may be amended
or modified, and the observance of any term of this Agreement may be waived,
only by a writing signed by the Company, the Selling Stockholder and you.
Any person executing and delivering this Agreement as Attorney-in-fact
for the Selling Stockholder represents and warrants by so doing that he has been
duly appointed as Attorney-in-fact by the Selling Stockholder pursuant to a
validly existing and binding Power of Attorney which authorizes such Attorney-
in-fact to take such action. Any action taken under this Agreement by any
Attorney-in-fact will be binding on the Selling Stockholder.
If the foregoing is in accordance with your understanding of our
agreement, kindly sign and return to us the enclosed copies hereof, whereupon it
will become a binding agreement among the Company, the Selling Stockholder and
the several Underwriters including you, all in accordance with its terms.
35
<PAGE>
Very truly yours,
FIREARMS TRAINING SYSTEMS, INC.
By:__________________________
Name:
Title:
THIN INTERNATIONAL N.V.
By:___________________________
Name:
Title:
36
<PAGE>
The foregoing Underwriting Agreement
is hereby confirmed and accepted by
us in New York, New York as of
the date first above written.
MONTGOMERY SECURITIES
LAZARD FRERES & CO. LLC
THE ROBINSON-HUMPHREY COMPANY, INC.
Acting as Representatives of the
several Underwriters named in
the attached Schedule A.
By: MONTGOMERY SECURITIES
By:______________________________
Name:
Title:
37
<PAGE>
SCHEDULE A
Number of Firm
Common Shares
Name of Underwriter to be Purchased
- ------------------- ---------------
Montgomery Securities..................
Lazard Freres & Co. LLC................
The Robinson-Humphrey Company, Inc.....
---------------
TOTAL................................ 6,000,000
===============
38
<PAGE>
EXHIBIT 2.04
Firearms Training Systems, Inc.
7340 McGinnis Ferry Road
Suwanee, Georgia 30174
November 1, 1996
THIN International N.V.
c/o Holland Intertrust (Antilles) N.V.
Landhuis Joonchi
Kaya Richard J. Beaujon z/n
P.O. Box 837
Curacao, Netherlands Antilles
Attn: Gregory Elias, Director
Gentlemen and Ladies:
We are writing in connection with the Recapitalization and Stock Purchase
Agreement and Sale Agreement (the "Recapitalization Agreement") among THIN
International N.V. (formerly Firearms Training Systems International N.V.)
("THIN"), Firearms Training Systems, Inc. (the "Company") and various entities
managed by Centre Partners Management LLC dated as of June 5, 1996 as amended.
The Company has filed Registration Statement No. 333-13105 on Form S-1 (the
"Registration Statement") seeking to register for sale in an initial public
offering (the "IPO") pursuant to an underwriting agreement 6,900,000 shares of
its Class A Common Stock (the "Common Stock"), consisting of (1) 4,000,000
shares to be sold by the Company; (2) 2,000,000 shares to be sold by certain
selling shareholders and (3) up to 900,000 additional shares for sale by a
selling shareholder if the underwriters' over-allotment option is exercised.
The Company intends to file as promptly as feasible an amendment to the
Registration Statement increasing the number of shares to be offered for sale by
the Company to 6,000,000 shares, and reducing the shares to be offered by
selling shareholders to the 900,000 shares which are subject to exercise of the
underwriters' over-allotment option. (Numbers of such shares of Common Stock
and per share prices hereinafter described have been adjusted to reflect a 1.66
for one stock split to be effected prior to the IPO). The Company intends to
apply the net proceeds of the offering in order of priority to (i) prepay in
full $40 million principal amount of senior subordinated notes (the "Bridge
Notes"), together with accrued interest thereon, plus the fee due NationsBridge,
L.L.C. ("NationsBridge") in connection therewith of $1.3 million; (ii) make a
cash payment of $19.3 million to THIN as described below in full satisfaction of
its Contingent Payment obligation; (iii) eliminate the obligation to issue
NationsBridge 288,434 shares of Common Stock to be issued upon exercise in full
by NationsBridge of certain warrants (the "Warrants") deposited in escrow in
connection with the Bridge Notes; and (iv) retire senior bank
1
<PAGE>
debt provided by NationsBank, N.A. (South) and certain other lenders (the
"Senior Lenders") pursuant to the NationsBank Credit Agreement described in the
Registration Statement. The Company will have discretion to reduce the size of
(or determine not to complete) the offering. If the size of the offering is
reduced, the Company will apply the net proceeds in the order described above.
In the event the Registration Statement becomes effective and the Common
Stock is sold by the underwriters at an initial price to the public of at least
approximately $13.443 (the "Trigger Price"), THIN would be entitled to receive
pursuant to Section 1(c)(D) of the Recapitalization Agreement the Contingent
Payment of $20 million. Under the Recapitalization Agreement, since a
Prohibition as defined therein is currently in effect, such Contingent Payment
would be required to be paid in shares of Common Stock within 45 days of the
consummation of the IPO at an initial price to the public of not less than the
Trigger Price (a "Trigger Event"), with such number of shares to be issued
calculated at a value to be determined as provided in the Recapitalization
Agreement. In addition, THIN has indicated a desire to participate in the
underwritten offering as a selling shareholder pursuant to Section 3 of the
Registration Rights Agreement dated as of July 31, 1996 (the "Registration
Rights Agreement") among THIN, the Company and certain Institutional Holders
described therein.
This letter sets forth our understanding with respect to a revised
mechanism for payment of the Contingent Payment if earned in connection with the
IPO at the Trigger Price and the exercise of THIN's registration rights pursuant
to Section 3 of the Registration Rights Agreement.
We hereby agree with you as follows:
(1) In the event the IPO is consummated at an initial price to the public
of not less than the Trigger Price, in lieu of payment of the Contingent
Payment in the manner contemplated by the Recapitalization Agreement, THIN will
be entitled to receive upon the closing of the IPO and receipt by the Company of
the sale proceeds, a payment in cash of $19.3 million in full satisfaction of
the Contingent Payment. The Company and the Senior Lenders have executed an
amendment to the Senior Credit Agreement which permits the Company to satisfy
the Contingent Payment for $19.3 million in cash and requires the Company to
apply the net proceeds of the offering as described in the first paragraph of
this letter.
(2) As noted above, after application of proceeds to retire the Bridge
Notes in full and satisfaction of the Contingent Payment, the Company intends to
use additional proceeds from the offering to repurchase the Warrants at a per
share price equal to the price paid by the public in the IPO net of the per
share underwriting discount.
(3) THIN will have the exclusive right to participate in the sale pursuant
to the Registration Statement and Underwriting Agreement of up to 900,000 shares
of Common Stock if purchased by the underwriters pursuant to the over-allotment
option. In addition, if the
2
<PAGE>
underwriters are prepared to purchase an additional amount of shares in the IPO
without an adverse impact on the price at which such shares are sold (after sale
by the Company of 6 million primary shares), the Company will discuss with THIN
(but is under no contractual obligation to permit) the participation by THIN in
the sale of such additional shares; provided, however, if the amount of shares
-----------------
in the over-allotment option increases beyond 900,000 shares due to the
Underwriters' purchase of additional amounts of shares in the IPO, THIN will
have the exclusive right to participate in the sale of any such increases in the
over-allotment option. All sales by THIN shall be pursuant to an Underwriting
Agreement among the Company, the underwriters and THIN in substantially the form
attached hereto as Exhibit A (the "Underwriting Agreement"). In addition, the
Power of Attorney to be executed by THIN in connection with the Underwriting
Agreement will contain a "minimum price" clause, which will allow THIN to
withdraw from the offering if the per share price is below the minimum
threshold, which will be at or below the price at which the Contingent Payment
is not reached.
(4) As contemplated by Section 6.2 of the Registration Rights Agreement,
the Company will bear all Registration Expenses as defined therein that are
incurred in connection with this Piggyback Registration. Furthermore, whether
or not THIN participates in the sale under the Registration Statement, THIN will
observe as required by the Registration Rights Agreement a 180 day holdback from
direct or indirect sale or other disposition of any equity securities of the
Company as reflected in the Underwriting Agreement unless THIN shall have
received an appropriate consent of the underwriters as permitted therein.
If the foregoing reflects our mutual agreement, please execute and return a
copy to the Company, to the attention of Mr. Peter A. Marino, President and
Chief Executive Officer, 7340 McGinnis Ferry Road, Suwanee GA 30174 (fax number
770-813-1914), with a copy to James G. Archer, Sidley & Austin, 875 Third Ave.,
New York, N.Y., fax number 212-906-2021.
Very truly yours,
Firearms Training Systems, Inc.
By: /s/ Peter A. Marino
---------------------------
Peter A. Marino
President and Chief Executive Officer
cc: Clare Fawkes
Anthony Markham
Robert Rosenman
Accepted:
Date: 2 November 1996 THIN International N.V.
------------------- By: /s/ Anthony H. Markham
-------------------------
Name: Anthony H. Markham
Title: Director
3
<PAGE>
EXHIBIT 3.06
================================================================================
BY-LAWS
OF
FIREARMS TRAINING SYSTEMS, INC.
================================================================================
<PAGE>
BY-LAWS
OF
FIREARMS TRAINING SYSTEMS, INC.
ARTICLE I
---------
Stockholders Meetings
---------------------
Section 1.1. Annual Meetings. (a) An annual meeting of stockholders
---------------
shall be held for the election of directors at such date, time and place as may
be fixed by resolution of the Board of Directors from time to time. Subject to
paragraph (b) of this Section 1.1, any other proper business may be transacted
at an annual meeting.
(b) Only such business shall be conducted at an annual meeting of
stockholders as shall have been properly brought before the meeting. For
business to be properly brought before the meeting, it must be: (i) authorized
by the Board of Directors and specified in the notice, or a supplemental notice,
of the meeting, (ii) otherwise brought before the meeting by or at the direction
of the Board of Directors or the chairman of the meeting, or (iii) otherwise
properly brought before the meeting by a stockholder. For business to be
properly brought before an annual meeting by a stockholder, the stockholder must
have given written notice thereof to the Secretary, delivered or mailed to and
received at the principal executive offices of the Corporation (x) not less than
60 days nor more than 90 days prior to the meeting, or (y) if less than 70 days'
notice of the meeting or prior public disclosure of the date of the meeting is
given or made to stockholders, not later than the close of business on the tenth
day following the day on which the notice of the meeting was mailed or, if
earlier, the day on which such public disclosure was made. A stockholder's
notice to the Secretary shall set forth as to each item of business the
stockholder proposes to bring before the meeting (1) a brief description of such
item and the reasons for conducting such business at the meeting, (2) the name
and address, as they appear on the Corporation's records, of the stockholder
proposing such business, (3) the class and number of shares of stock of the
Corporation which are beneficially owned by the stockholder (for purposes of the
regulations under Sections 13 and 14 of the Securities Exchange Act of 1934, as
amended), and (4) any material interest of the stockholder in such business. No
business shall be conducted at any annual meeting except in accordance with the
procedures set forth in this paragraph (b).
<PAGE>
The chairman of the meeting at which any business is proposed by a stockholder
shall, if the facts warrant, determine and declare to the meeting that such
business was not properly brought before the meeting in accordance with the
provisions of this paragraph (b), and, in such event, the business not properly
before the meeting shall not be transacted.
Section 1.2. Special Meetings. Special meetings of stockholders for any
----------------
purpose or purposes may be called at any time only by the Chairman of the Board,
if any, the President, the Board of Directors or by a committee of the Board of
Directors authorized to call such meetings, and by no other person. The
business transacted at a special meeting of stockholders shall be limited to the
purpose or purposes for which such meeting is called, except as otherwise
determined by the Board of Directors or the chairman of the meeting.
Section 1.3. Notice of Meetings. A written notice of each annual or
------------------
special meeting of stockholders shall be given stating the place, date and time
of the meeting, and, in the case of a special meeting, the purpose or purposes
for which the meeting is called. Unless otherwise provided by law, the
Certificate of Incorporation or these By-laws, such notice of meeting shall be
given not less than ten nor more than 60 days before the date of the meeting to
each stockholder of record entitled to vote at such meeting. If mailed, such
notice shall be deemed to be given when deposited in the mail, postage prepaid,
directed to the stockholder at such stockholder's address as it appears on the
records of the Corporation.
Section 1.4. Adjournments. Any annual or special meeting of stockholders
------------
may be adjourned from time to time to reconvene at the same or some other place,
and notice need not be given of any such adjourned meeting if the date, time and
place thereof are announced at the meeting at which the adjournment is taken.
At the adjourned meeting any business may be transacted which might have been
transacted at the original meeting. If the adjournment is for more than 30
days, or if after the adjournment a new record date is fixed for the adjourned
meeting, a notice of the adjourned meeting shall be given to each stockholder of
record entitled to vote at the adjourned meeting in accordance with Section 1.3.
Section 1.5. Quorum. Except as otherwise provided by law, the Certificate
------
of Incorporation or these By-laws, the presence in person or by proxy of the
holders of stock having a majority of the votes which could be cast by the
holders of all outstanding stock entitled to vote at the meeting shall
constitute a quorum at each meeting of stockholders. In the absence of a
quorum, the stockholders so present may, by the affirmative vote of the holders
of stock having a majority of the votes which could be cast by all such holders,
adjourn the meeting from time to time in the manner provided in Section 1.4
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<PAGE>
of these By-laws until a quorum is present. If a quorum is present when a
meeting is convened, the subsequent withdrawal of stockholders, even though less
than a quorum remains, shall not affect the ability of the remaining
stockholders lawfully to transact business.
Section 1.6. Organization. Meetings of stockholders shall be presided
------------
over by the Chairman of the Board, if any, or if there is none or in his or her
absence, by the President, or in his or her absence, by a chairman designated by
the Board of Directors, or in the absence of such designation by a chairman
chosen at the meeting. The Secretary shall act as secretary of the meeting, but
in his or her absence the chairman of the meeting may appoint any person to act
as secretary of the meeting.
Section 1.7. Voting. (a) Except as otherwise provided by the Certificate
------
of Incorporation, each stockholder entitled to vote at any meeting of
stockholders shall be entitled to one vote for each share of stock held by such
stockholder which has voting power on the matter in question.
(b) Voting at meetings of stockholders need not be by written ballot and
need not be conducted by inspectors of election unless so required by Section
1.9 of these By-laws or so determined by the holders of stock having a majority
of the votes which could be cast by the holders of all outstanding stock
entitled to vote which are present in person or by proxy at such meeting.
Unless otherwise provided in the Certificate of Incorporation, directors shall
be elected by a plurality of the votes cast in the election of directors. Each
other question shall, unless otherwise provided by law, the Certificate of
Incorporation or these By-laws, be decided by the vote of the holders of stock
having a majority of the votes which could be cast by the holders of all stock
entitled to vote on such question which are present in person or by proxy at the
meeting.
(c) Stock of the Corporation standing in the name of another corporation
and entitled to vote may be voted by such officer, agent or proxy as the by-laws
or other internal regulations of such other corporation may prescribe or, in the
absence of such provision, as the board of directors or comparable body of such
other corporation may determine.
(d) Stock of the Corporation standing in the name of a deceased person, a
minor, an incompetent or a debtor in a case under Title 11, United States Code,
and entitled to vote may be voted by an administrator, executor, guardian,
conservator, debtor-in-possession or trustee, as the case may be, either in
person or by proxy, without transfer of such shares into the name of the
official or other person so voting.
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<PAGE>
(e) A stockholder whose voting stock of the Corporation is pledged shall be
entitled to vote such stock unless on the transfer records of the Corporation
the pledgor has expressly empowered the pledgee to vote such shares, in which
case only the pledgee, or such pledgee's proxy, may represent such shares and
vote thereon.
(f) If voting stock is held of record in the names of two or more persons,
whether fiduciaries, members of a partnership, joint tenants, tenants in common,
tenants by the entirety or otherwise, or if two or more persons have the same
fiduciary relationship respecting the same shares, unless the Secretary is
given written notice to the contrary and is furnished with a copy of the
instrument or order appointing them or creating the relationship wherein it is
so provided, their acts with respect to voting shall have the following effect:
(i) if only one votes, such act binds all; (ii) if more than one vote, the act
of the majority so voting binds all; and (iii) if more than one votes, but the
vote is evenly split on any particular matter, each faction may vote such stock
proportionally, or any person voting the shares, or a beneficiary, if any, may
apply to the Court of Chancery of the State of Delaware or such other court as
may have jurisdiction to appoint an additional person to act with the persons so
voting the stock, which shall then be voted as determined by a majority of such
persons and the person appointed by the Court. If the instrument so filed shows
that any such tenancy is held in unequal interests, a majority or even split for
the purpose of this subsection shall be a majority or even split in interest.
(g) Stock of the Corporation belonging to the Corporation, or to another
corporation a majority of the shares entitled to vote in the election of
directors of which are held by the Corporation, shall not be voted at any
meeting of stockholders and shall not be counted in the total number of
outstanding shares for the purpose of determining whether a quorum is present.
Nothing in this Section 1.7 shall limit the right of the Corporation to vote
shares of stock of the Corporation held by it in a fiduciary capacity.
Section 1.8. Proxies. (a) Each stockholder entitled to vote at a meeting
-------
of stockholders may authorize another person or persons to act for such
stockholder by proxy filed with the Secretary before or at the time of the
meeting. No such proxy shall be voted or acted upon after three years from its
date, unless the proxy provides for a longer period. A duly executed proxy
shall be irrevocable if it states that it is irrevocable and if, and only as
long as, it is coupled with an interest sufficient in law to support an
irrevocable power. A stockholder may revoke any proxy which is not irrevocable
by attending the meeting and voting in person or by filing with the Secretary an
instrument in writing revoking the proxy or another duly executed proxy bearing
a later date.
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<PAGE>
(b) A stockholder may authorize another person or persons to act for such
stockholder as proxy (i) by executing a writing authorizing such person or
persons to act as such, which execution may be accomplished by such stockholder
or such stockholder's authorized officer, director, partner, employee or agent
(or, if the stock is held in a trust or estate, by a trustee, executor or
administrator thereof) signing such writing or causing his or her signature to
be affixed to such writing by any reasonable means, including, but not limited
to, facsimile signature, or (ii) by transmitting or authorizing the transmission
of a telegram, cablegram or other means of electronic transmission (a
"Transmission") to the person who will be the holder of the proxy or to a proxy
solicitation firm, proxy support service organization or like agent duly
authorized by the person who will be the holder of the proxy to receive such
Transmission; provided that any such Transmission must either set forth or be
submitted with information from which it can be determined that such
Transmission was authorized by such stockholder.
(c) Any inspector or inspectors appointed pursuant to Section 1.9 of these
By-Laws shall examine Transmissions to determine if they are valid. If no
inspector or inspectors are so appointed, the Secretary, an Assistant Secretary
or such other person or persons as shall be appointed from time to time by the
Board of Directors shall examine Transmissions to determine if they are valid.
If it is determined a Transmission is valid, the person or persons making that
determination shall specify the information upon which such person or persons
relied. Any copy, facsimile telecommunication or other reliable reproduction of
such a writing or Transmission may be substituted or used in lieu of the
original writing or Transmission for any and all purposes for which the original
writing or Transmission could be used; provided that such copy, facsimile
telecommunication or other reproduction shall be a complete reproduction of the
entire original writing or Transmission.
Section 1.9. Voting Procedures and Inspectors of Elections. (a) If the
---------------------------------------------
Corporation has a class of voting stock that is (i) listed on a national
securities exchange, (ii) authorized for quotation on an interdealer quotation
system of a registered national securities association or (iii) held of record
by more than 2,000 stockholders, the Board of Directors shall, in advance of any
meeting of stockholders, appoint one or more inspectors (individually an
"Inspector," and collectively the "Inspectors") to act at such meeting and make
a written report thereof. The Board of Directors may designate one or more
persons as alternate Inspectors to replace any Inspector who shall fail to act.
If no Inspector or alternate is able to act at such meeting, the chairman of the
meeting shall appoint one or more other persons to act as Inspectors. Each
Inspector, before entering upon the discharge of his or her duties, shall take
and sign an oath faithfully to execute the duties of Inspector with
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<PAGE>
strict impartiality and according to the best of his or her ability.
(b) The Inspectors shall (i) ascertain the number of shares of stock of the
Corporation outstanding and the voting power of each, (ii) determine the number
of shares of stock of the Corporation present in person or by proxy at such
meeting and the validity of proxies and ballots, (iii) count all votes and
ballots, (iv) determine and retain for a reasonable period a record of the
disposition of any challenges made to any determination by the Inspectors and
(v) certify their determination of the number of such shares present in person
or by proxy at such meeting and their count of all votes and ballots. The
Inspectors may appoint or retain other persons or entities to assist them in the
performance of their duties.
(c) The date and time of the opening and the closing of the polls for each
matter upon which the stockholders will vote at a meeting shall be announced at
such meeting. No ballots, proxies or votes, nor any revocations thereof or
changes thereto, shall be accepted by the Inspectors after the closing of the
polls unless the Court of Chancery of the State of Delaware upon application by
any stockholder shall determine otherwise.
(d) In determining the validity and counting of proxies and ballots, the
Inspectors shall be limited to an examination of the proxies, any envelopes
submitted with such proxies, any information referred to in paragraphs (b) and
(c) of Section 1.8 of these By-laws, ballots and the regular books and records
of the Corporation, except that the Inspectors may consider other reliable
information for the limited purpose of reconciling proxies and ballots submitted
by or on behalf of banks, brokers, their nominees or similar persons which
represent more votes than the holder of a proxy is authorized by a stockholder
of record to cast or more votes than such stockholder holds of record. If the
Inspectors consider other reliable information for the limited purpose permitted
herein, the Inspectors, at the time they make their certification pursuant to
paragraph (b) of this Section 1.9, shall specify the precise information
considered by them, including the person or persons from whom such information
was obtained, when and the means by which such information was obtained and the
basis for the Inspectors' belief that such information is accurate and reliable.
Section 1.10. Fixing Date of Determination of Stockholders of Record.
------------------------------------------------------
(a) In order that the Corporation may determine the stockholders entitled (i)
to notice of or to vote at any meeting of stockholders or any adjournment
thereof, (ii) to express consent to corporate action in writing without a
meeting, (iii) to receive payment of any dividend or other distribution or
allotment of any rights, (iv) to exercise any rights in respect of any change,
conversion or exchange of stock
-6-
<PAGE>
or (v) to take, receive or participate in any other action, the Board of
Directors may fix a record date, which shall not be earlier than the date upon
which the resolution fixing the record date is adopted by the Board of Directors
and which (1) in the case of a determination of stockholders entitled to notice
of or to vote at any meeting of stockholders or adjournment thereof, shall,
unless otherwise required by law, be not more than 60 nor less than ten days
before the date of such meeting; (2) in the case of a determination of
stockholders entitled to express consent to corporate action in writing without
a meeting, shall be not more than ten days after the date upon which the
resolution fixing the record date is adopted by the Board of Directors; and (3)
in the case of any other action, shall be not more than 60 days before such
action.
(b) If no record date is fixed, (i) the record date for determining
stockholders entitled to notice of or to vote at a meeting of stockholders shall
be at the close of business on the day next preceding the day on which notice is
given, or, if notice is waived, at the close of business on the day next
preceding the day on which the meeting is held; (ii) the record date for
determining stockholders entitled to express consent to corporate action in
writing without a meeting when no prior action of the Board of Directors is
required by law, shall be the first date on which a signed written consent
setting forth the action taken or proposed to be taken is delivered to the
corporation in accordance with applicable law, or, if prior action by the Board
of Directors is required by law, shall be at the close of business on the day on
which the Board of Directors adopts the resolution taking such prior action; and
(iii) the record date for determining stockholders for any other purpose shall
be at the close of business on the day on which the Board of Directors adopts
the resolution relating thereto.
(c) A determination of stockholders of record entitled to notice of or to
vote at a meeting of stockholders shall apply to any adjournment of the meeting,
but the Board of Directors may fix a new record date for the adjourned meeting.
Section 1.11. List of Stockholders Entitled to Vote. The Secretary or an
-------------------------------------
Assistant Secretary shall prepare, at least ten days before every meeting of
stockholders, a complete list of the stockholders entitled to vote at the
meeting, arranged in alphabetical order, and showing the address and the number
of shares registered in the name of each stockholder. Such list shall be open
to the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten days prior to the
meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof and may be inspected by any
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<PAGE>
stockholder who is present. The stock ledger shall be the only evidence as to
who are the stockholders entitled to examine the stock ledger, the list of
stockholders or the books of the corporation, or to vote in person or by proxy
at any meeting of stockholders.
Section 1.12. Action By Consent of Stockholders. (a) Unless the power of
---------------------------------
stockholders to act by consent without a meeting is restricted or eliminated by
the Certificate of Incorporation, any action required or permitted to be taken
at any annual or special meeting of stockholders may be taken without a meeting,
without prior notice and without a vote, if a consent in writing, setting forth
the action so taken, is signed by the holders of outstanding stock having not
less than the minimum number of votes that would be necessary to authorize or
take such action at a meeting at which all shares entitled to vote on such
action were present and voted.
(b) Every written consent shall bear the date of signature of each
stockholder (or his, her or its proxy) signing such consent. Prompt notice of
the taking of corporate action without a meeting of stockholders by less than
unanimous written consent shall be given to those stockholders who have not
consented in writing. All such written consents shall be delivered to the
Corporation at its registered office in the State of Delaware, at its principal
place of business or to the Secretary. Delivery made to the Corporation's
registered office shall be by hand or by certified or registered mail, return
receipt requested. No written consent shall be effective to authorize or take
the corporate action referred to therein unless, within 60 days of the earliest
dated written consent delivered to the Corporation in the manner required by
this Section 1.12, written consents signed by a sufficient number of persons to
authorize or take such action are delivered to the Corporation at its registered
office in the State of Delaware, at its principal place of business or to the
Secretary. All such written consents shall be filed with the minutes of
proceedings of the stockholders, and actions authorized or taken under such
written consents shall have the same force and effect as those authorized or
taken pursuant to a vote of the stockholders at an annual or special meeting.
ARTICLE II
----------
Board of Directors
------------------
Section 2.1. Number. The Board of Directors shall consist of one or more
------
directors, the number thereof to be determined from time to time by resolution
of the Board of Directors.
-8-
<PAGE>
Section 2.2. Election; Resignation; Vacancies. (a) Unless the
--------------------------------
Certificate of Incorporation or an amendment to these By-laws adopted by the
stockholders provides for a Board of Directors divided into two or three
classes, at each annual meeting of stockholders the stockholders shall elect
directors each of whom shall hold office until the next annual meeting of
stockholders and the election and qualification of his or her successor, or
until his or her earlier death, resignation or removal. If the Board of
Directors is divided into classes, at each annual meeting at which the term of
office of a class of directors expires, the stockholders shall elect directors
of such class each to hold office until the annual meeting at which the terms of
office of such class of directors expire and the election and qualification of
his or her successor, or until his or her earlier death, resignation or removal.
(b) Only persons who are nominated in accordance with the procedures set
forth in this paragraph (b) shall be eligible for election as directors of the
Corporation. Nominations of persons for election to the Board of Directors may
be made at a meeting of stockholders by the Board of Directors or by any
stockholder of the Corporation entitled to vote in the election of directors at
the meeting who complies with the notice procedures set forth in this paragraph
(b). Any nomination by a stockholder must be made by written notice to the
Secretary delivered or mailed to and received at the principal executive offices
of the Corporation (i) not less than 60 days nor more than 90 days prior to the
meeting, or (ii) if less than 70 days' notice of the meeting or prior public
disclosure of the date of the meeting is given or made to stockholders, not
later than the close of business on the tenth day following the day on which the
notice of the meeting was mailed or, if earlier, the day on which such public
disclosure was made. A stockholder's notice to the Secretary shall set forth
(x) as to each person whom the stockholder proposes to nominate for election or
re-election as a director: (1) the name, age, business address and residence
address of such person, (2) the principal occupation or employment of such
person, (3) the class and number of shares of stock of the Corporation which are
beneficially owned by such person (as would be determined pursuant to the
regulations under Sections 13 and 14 of the Securities Exchange Act of 1934, as
amended), and (4) any other information relating to such person that would be
required to be disclosed in solicitations of proxies for the election of such
person as a director of the Corporation pursuant to Regulation 14A under the
Securities Exchange Act of 1934, as amended, and such person's written consent
to being named in any proxy statement as a nominee and to serving as a director
if elected; and (y) as to the stockholder giving notice (1) the name and
address, as they appear on the Corporation's records, of such stockholder and
(2) the class and number of shares of stock of the Corporation which are
beneficially owned by such stockholder (determined as provided in clause (x)(3)
above). At the request of the Board of Directors,
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<PAGE>
any person nominated by the Board of Directors for election as a director shall
furnish to the Secretary that information required to be set forth in a
stockholder's notice of nomination which pertains to the nominee. The chairman
of the meeting at which a stockholder nomination is presented shall, if the
facts warrant, determine and declare to the meeting that such nomination was not
made in accordance with the procedures prescribed by this paragraph (b), and, in
such event, the defective nomination shall be disregarded.
(c) Any director may resign at any time by giving written notice to the
Chairman of the Board, if any, the President or the Secretary. Unless otherwise
stated in a notice of resignation, it shall take effect when received by the
officer to whom it is directed, without any need for its acceptance.
(d) Any newly created directorship or any vacancy occurring in the Board of
Directors for any reason may be filled by a majority of the remaining directors,
although less than a quorum, or by a plurality of the votes cast in the election
of directors at a meeting of stockholders. Each director elected to replace a
former director shall hold office until the expiration of the term of office of
the director whom he or she has replaced and the election and qualification of
his or her successor, or until his or her earlier death, resignation or removal.
A director elected to fill a newly created directorship shall serve until the
next annual meeting of stockholders (or, if the Board of Directors is divided
into classes, the annual meeting at which the terms of office of the class of
directors to which he or she is assigned expire) and the election and
qualification of his or her successor, or until his or her earlier death,
resignation or removal.
Section 2.3. Regular Meetings. A regular annual meeting of the Board of
----------------
Directors shall be held, without call or notice, immediately after and at the
same place as the annual meeting of stockholders, for the purpose of organizing
the Board of Directors, electing officers and transacting any other business
that may properly come before such meeting. If the stockholders shall elect the
directors by written consent of stockholders as permitted by Section 1.12 of
these By-laws, a special meeting of the Board of Directors shall be called as
soon as practicable after such election for the purposes described in the
preceding sentence. Additional regular meetings of the Board of Directors may
be held without call or notice at such times as shall be fixed by resolution of
the Board of Directors.
Section 2.4. Special Meetings. Special meetings of the Board of Directors
----------------
may be called by the Chairman of the Board, if any, the President, the
Secretary, or by any member of the Board of Directors. Notice of a special
meeting of the Board of Directors shall be given by the person or persons
calling the meeting at least twenty-four hours before the special meeting.
-10-
<PAGE>
The purpose or purposes of a special meeting need not be stated in the call or
notice.
Section 2.5. Organization. Meetings of the Board of Directors shall be
------------
presided over by the Chairman of the Board, if any, or if there is none or in
his or her absence, by the President, or in his or her absence by a chairman
chosen at the meeting. The Secretary shall act as secretary of the meeting, but
in his or her absence the chairman of the meeting may appoint any person to act
as secretary of the meeting. A majority of the directors present at a meeting,
whether or not they constitute a quorum, may adjourn such meeting to any other
date, time or place without notice other than announcement at the meeting.
Section 2.6. Quorum; Vote Required for Action. At all meetings of the
--------------------------------
Board of Directors a majority of the whole Board of Directors shall constitute a
quorum for the transaction of business. Unless the Certificate of Incorporation
or these By-laws otherwise provide, the vote of a majority of the directors
present at a meeting at which a quorum is present shall be the act of the Board
of Directors.
Section 2.7. Committees. The Board of Directors may, by resolution passed
----------
by a majority of the whole Board of Directors, designate one or more committees,
each committee to consist of one or more directors of the Corporation. The
Board of Directors may designate one or more directors as alternate members of
any committee, who may replace any absent or disqualified member at any meeting
of the committee. In the absence or disqualification of a member of the
committee, the member or members present at any meeting and not disqualified
from voting, whether or not a quorum, may unanimously appoint another member of
the Board of Directors to act at the meeting in place of any such absent or
disqualified member. Any such committee, to the extent permitted by law and
provided in the resolution of the Board of Directors designating such committee,
or an amendment to such resolution, shall have and may exercise all the powers
and authority of the Board of Directors in the management of the business and
affairs of the Corporation, and may authorize the seal of the Corporation to be
affixed to all papers which may require it.
Section 2.8. Telephonic Meetings. Directors, or any committee of
-------------------
directors designated by the Board of Directors, may participate in a meeting of
the Board of Directors or such committee by means of conference telephone or
similar communications equipment by means of which all persons participating in
the meeting can hear each other, and participation in a meeting pursuant to this
Section 2.8 shall constitute presence in person at such meeting.
Section 2.9. Informal Action by Directors. Unless otherwise restricted by
----------------------------
the Certificate of Incorporation or these
-11-
<PAGE>
By-laws, any action required or permitted to be taken at any meeting of the
Board of Directors, or of any committee thereof, may be taken without a meeting
if all members of the Board of Directors or such committee, as the case may be,
consent thereto in writing (which may be in counterparts), and the written
consent or consents are filed with the minutes of proceedings of the Board of
Directors or such committee.
Section 2.10. Committee Rules. Unless the Board of Directors otherwise
---------------
provides, each committee designated by the Board of Directors may make, alter
and repeal rules for the conduct of its business. In the absence of such rules
each committee shall conduct its business in the same manner as the Board of
Directors conducts its business pursuant to this Article II of these By-laws.
Section 2.11. Reliance upon Records. Every director, and every member of
---------------------
any committee of the Board of Directors, shall, in the performance of his or her
duties, be fully protected in relying in good faith upon the records of the
Corporation and upon such information, opinions, reports or statements presented
to the Corporation by any of its officers or employees, or committees of the
Board of Directors, or by any other person as to matters the director or member
reasonably believes are within such other person's professional or expert
competence and who has been selected with reasonable care by or on behalf of the
Corporation, including, but not limited to, such records, information, opinions,
reports or statements as to the value and amount of the assets, liabilities
and/or net profits of the Corporation, or any other facts pertinent to the
existence and amount of surplus or other funds from which dividends might
properly be declared and paid, or with which the Corporation's capital stock
might properly be purchased or redeemed.
Section 2.12. Interested Directors. A director who is directly or
--------------------
indirectly a party to a contract or transaction with the Corporation, or is a
director or officer of or has a financial interest in any other corporation,
partnership, association or other organization which is a party to a contract or
transaction with the Corporation, may be counted in determining whether a quorum
is present at any meeting of the Board of Directors or a committee thereof at
which such contract or transaction is considered or authorized, and such
director may participate in such meeting and vote on such authorization to the
extent permitted by applicable law, including Section 144 of the General
Corporation Law of the State of Delaware.
Section 2.13. Compensation. Unless otherwise restricted by the
------------
Certificate of Incorporation, the Board of Directors shall have the authority to
fix the compensation of directors. The directors shall be paid their reasonable
expenses, if any, of attendance at each meeting of the Board of Directors or a
committee thereof and may be paid a fixed sum for
-12-
<PAGE>
attendance at each such meeting and an annual retainer or salary for services as
a director or committee member. No such payment shall preclude any director
from serving the Corporation in any other capacity and receiving compensation
therefor.
Section 2.14. Presumption of Assent. Unless otherwise provided by the
---------------------
laws of the State of Delaware, a director who is present at a meeting of the
Board of Directors or a committee thereof at which action is taken on any matter
shall be presumed to have assented to the action taken unless his or her dissent
shall be entered in the minutes of such meeting or unless he or she shall file
his or her written dissent to such action with the person acting as secretary of
such meeting before the adjournment thereof or shall forward such dissent by
registered mail to the Secretary immediately after the adjournment of such
meeting. Such right to dissent shall not apply to a director who voted in favor
of such action.
ARTICLE III
-----------
Officers
--------
Section 3.1. Executive Officers; Election; Qualification; Term of Office.
-----------------------------------------------------------
The Board of Directors shall elect a President and may, if it so determines,
designate a Chairman of the Board from among its members. The Board of
Directors shall also elect a Secretary and may elect one or more Vice
Presidents, one or more Assistant Secretaries, a Treasurer and one or more
Assistant Treasurers. Any number of offices may be held by the same person.
Each officer shall hold office until the first meeting of the Board of Directors
after the annual meeting of stockholders next succeeding his or her election,
and until his or her successor is elected and qualified or until his or her
earlier death, resignation or removal.
Section 3.2. Resignation; Removal; Vacancies. Any officer may resign at
-------------------------------
any time by giving written notice to the Chairman of the Board, if any, the
President or the Secretary. Unless otherwise stated in a notice of resignation,
it shall take effect when received by the officer to whom it is directed,
without any need for its acceptance. The Board of Directors may remove any
officer with or without cause at any time, but such removal shall be without
prejudice to the contractual rights of such officer, if any, with the
Corporation. A vacancy occurring in any office of the Corporation may be filled
for the unexpired portion of the term thereof by the Board of Directors at any
regular or special meeting.
Section 3.3. Powers and Duties of Executive Officers. The officers of the
---------------------------------------
Corporation shall have such powers and duties in the management of the
Corporation as may be prescribed by the
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<PAGE>
Board of Directors and, to the extent not so provided, as generally pertain to
their respective offices, subject to the control of the Board of Directors. The
Board of Directors may require any officer, agent or employee to give security
for the faithful performance of his or her duties.
Section 3.4. Chief Executive Officer. Unless the Board of Directors
-----------------------
elects a Chairman of the Board who is designated as such, the President shall be
the Chief Executive Officer of the Corporation and shall in general supervise
and control all of the business affairs of the Corporation, subject to the
direction of the Board of Directors. The President may execute, in the name and
on behalf of the Corporation, any deeds, mortgages, bonds, contracts or other
instruments which the Board of Directors or a committee thereof has authorized
to be executed, except in cases where the execution shall have been expressly
delegated by the Board of Directors or a committee thereof to some other officer
or agent of the corporation.
Section 3.5. Secretary. In addition to such other duties, if any, as may
---------
be assigned to the Secretary by the Board of Directors, the Chairman of the
Board, if any, the President, the Secretary or an Assistant Secretary shall (i)
keep the minutes of proceedings of the stockholders, the Board of Directors and
any committee of the Board of Directors in one or more books provided for that
purpose; (ii) see that all notices are duly given in accordance with the
provisions of these By-laws or as required by law; (iii) be the custodian of the
records and seal of the Corporation; (iv) affix or cause to be affixed the seal
of the Corporation or a facsimile thereof, and attest the seal by his or her
signature, to all certificates for shares of stock of the Corporation and to all
other documents the execution of which under seal is authorized by the Board of
Directors; and (v) unless such duties have been delegated by the Board of
Directors to a transfer agent of the Corporation, keep or cause to be kept a
register of the name and address of each stockholder, as the same shall be
furnished to the Secretary by such stockholder, and have general charge of the
stock transfer records of the Corporation.
ARTICLE IV
----------
Stock Certificates and Transfers
--------------------------------
Section 4.1. Certificate. Every holder of stock shall be entitled to have
-----------
a certificate signed by or in the name of the Corporation by the Chairman of the
Board, if any, or the President or a Vice President, and by the Secretary or an
Assistant Secretary, of the Corporation, certifying the number of shares owned
by such stockholder in the Corporation. Any of or all the signatures on the
certificate may be facsimile. In case
-14-
<PAGE>
any officer, transfer agent, or registrar who has signed or whose facsimile
signature has been placed upon a certificate shall have ceased to be such
officer, transfer agent or registrar before such certificate is issued, it may
be issued by the Corporation with the same effect as if such officer, transfer
agent, or registrar continued to be such at the date of issue.
Section 4.2. Lost, Stolen or Destroyed Certificates; Issuance of New
-------------------------------------------------------
Certificates. The Corporation may issue a new certificate for stock in the
- ------------
place of any certificate theretofore issued by it, alleged to have been lost,
stolen or destroyed, and the Corporation may require the owner of the lost,
stolen or destroyed certificate, or such stockholder's legal representative, to
give the Corporation a bond sufficient to indemnify it against any claim that
may be made against it on account of the alleged loss, theft or destruction of
any such certificate or the issuance of such new certificate.
Section 4.3. Transfers of Stock. Upon surrender to the Corporation or the
------------------
transfer agent of the Corporation of a certificate for stock of the Corporation
duly endorsed or accompanied by proper evidence of succession, assignment or
authority to transfer or, if the relevant stock certificate is claimed to have
been lost, stolen or destroyed, upon compliance with the provisions of Section
4.2 of these By-laws, and upon payment of applicable taxes with respect to such
transfer, and in compliance with any restrictions on transfer applicable to such
stock certificate or the shares represented thereby of which the Corporation
shall have notice and subject to such rules and regulations as the Board of
Directors may from time to time deem advisable concerning the transfer and
registration of stock certificates, the Corporation shall issue a new
certificate or certificates for such stock to the person entitled thereto,
cancel the old certificate and record the transaction upon its books. Transfers
of stock shall be made only on the books of the Corporation by the registered
holder thereof or by such holder's attorney or successor duly authorized as
evidenced by documents filed with the Secretary or transfer agent of the
Corporation. Whenever any transfer of stock shall be made for collateral
security, and not absolutely, it shall be so expressed in the entry of transfer
if, when the certificate or certificates representing such stock are presented
to the Corporation for transfer, both the transferor and transferee request the
Corporation to do so.
Section 4.4. Stockholders of Record. The Corporation shall be entitled to
----------------------
treat the holder of record of any stock of the Corporation as the holder thereof
and shall not be bound to recognize any equitable or other claim to or interest
in such stock on the part of any other person, whether or not it shall have
express or other notice thereof, except as otherwise required by the laws of the
State of Delaware.
-15-
<PAGE>
ARTICLE V
---------
Notices
-------
Section 5.1. Manner of Notice. Except as otherwise provided by law, the
----------------
Certificate of Incorporation or these By-laws, whenever notice is required to be
given to any stockholder, director or member of any committee of the Board of
Directors, such notice may be given by personal delivery or by depositing it, in
a sealed envelope, in the United States mails, first class, postage prepaid,
addressed, or by delivering it to a telegraph company, charges prepaid, for
transmission, or by transmitting it via telecopier, to such stockholder,
director or member, either at the address of such stockholder, director or
member as it appears on the records of the Corporation or, in the case of such a
director or member, at his or her business address; and such notice shall be
deemed to be given at the time when it is thus personally delivered, deposited,
delivered or transmitted, as the case may be. Such requirement for notice shall
also be deemed satisfied, except in the case of stockholder meetings, if actual
notice is received orally or by other writing by the person entitled thereto as
far in advance of the event with respect to which notice is being given as the
minimum notice period required by law or these By-laws.
Section 5.2. Dispensation with Notice. (a) Whenever notice is required
------------------------
to be given by law, the Certificate of Incorporation or these By-laws to any
stockholder to whom (i) notice of two consecutive annual meetings of
stockholders, and all notices of meetings of stockholders or of the taking of
action by stockholders by written consent without a meeting to such stockholder
during the period between such two consecutive annual meetings, or (ii) all, and
at least two, payments (if sent by first class mail) of dividends or interest on
securities of the Corporation during a 12-month period, have been mailed
addressed to such stockholder at the address of such stockholder as shown on the
records of the Corporation and have been returned undeliverable, the giving of
such notice to such stockholder shall not be required. Any action or meeting
which shall be taken or held without notice to such stockholder shall have the
same force and effect as if such notice had been duly given. If any such
stockholder shall deliver to the Corporation a written notice setting forth the
then current address of such stockholder, the requirement that notice be given
to such stockholder shall be reinstated.
(b) Whenever notice is required to be given by law, the Certificate of
Incorporation or these By-laws to any person with whom communication is
unlawful, the giving of such notice to such person shall not be required, and
there shall be no duty to apply to any governmental authority or agency for a
license or permit to give such notice to such person. Any action or meeting
-16-
<PAGE>
which shall be taken or held without notice to any such person with whom
communication is unlawful shall have the same force and effect as if such notice
had been duly given.
Section 5.3. Waivers of Notice. Any written waiver of notice, signed by
-----------------
the person entitled to notice, whether before or after the time stated therein,
shall be deemed equivalent to notice. Attendance of a person at a meeting shall
constitute a waiver of notice of such meeting, except when the person attends a
meeting for the express purpose of objecting, at the beginning of the meeting,
to the transaction of any business because the meeting is not lawfully called or
convened. Neither the business to be transacted at, nor the purpose of any
regular special meeting of the stockholders, directors, or members of a
committee or directors need be specified in any written waiver of notice.
ARTICLE VI
----------
Indemnification
---------------
Section 6.1. Right to Indemnification. (a) The Corporation shall
------------------------
indemnify and hold harmless, to the fullest extent permitted by law as in effect
on the date of adoption of these By-laws or as it may thereafter be amended, any
person who was or is made or is threatened to be made a party or is otherwise
involved in any action, suit or proceeding, whether civil, criminal,
administrative or investigative (a "proceeding") by reason of the fact that he
or she, or a person for whom he or she is the legal representative, is or was a
director, officer, employee or agent of the Corporation or is or was serving at
the request of the Corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture or other enterprise, against any
and all liability and loss (including judgments, fines, penalties and amounts
paid in settlement) suffered or incurred and expenses reasonably incurred by
such person; provided that any standard of conduct applicable to whether a
director or officer may be indemnified shall be equally applicable to an
employee or agent under this Article VI. The Corporation shall not be required
to indemnify a person in connection with a proceeding initiated by such person,
including a counterclaim or crossclaim, unless the proceeding was authorized by
the Board of Directors.
(b) For purposes of this Article VI: (i) any reference to "other
enterprise" shall include all plans, programs, policies, agreements, contracts
and payroll practices and related trusts for the benefit of or relating to
employees of the Corporation and its related entities ("employee benefit
plans"); (ii) any reference to "fines", "penalties", "liability" and "expenses"
shall include any excise taxes, penalties, claims, liabilities and reasonable
expenses (including reasonable legal
-17-
<PAGE>
fees and related expenses) assessed against or incurred by a person with respect
to any employee benefit plan; (iii) any reference to "serving at the request of
the Corporation" shall include any service as a director, officer, employee or
agent of the Corporation or trustee or administrator of any employee benefit
plan which imposes duties on, or involves services by, such director, officer,
employee or agent with respect to an employee benefit plan, its participants,
beneficiaries, fiduciaries, administrators and service providers; (iv) any
reference to serving at the request of the Corporation as a director, officer,
employee or agent of a partnership or trust shall include service as a partner
or trustee; and (v) a person who acted in good faith and in a manner he or she
reasonably believed to be in the interest of the participants and beneficiaries
of an employee benefit plan shall be deemed to have acted in a manner "not
opposed to the best interests of the Corporation" for purposes of this Article
VI.
Section 6.2. Prepayment of Expenses. The Corporation may pay or reimburse
----------------------
the reasonable expenses incurred in defending any proceeding in advance of its
final disposition if the Corporation has received in advance an undertaking by
the person receiving such payment or reimbursement to repay all amounts advanced
if it should be ultimately determined that he or she is not entitled to be
indemnified under this Article VI or otherwise. The Corporation may require
security for any such undertaking.
Section 6.3. Claims. If a claim for indemnification or payment of
------
expenses under this Article VI is not paid in full within 60 days after a
written claim therefor has been received by the Corporation, the claimant may
file suit to recover the unpaid amount of such claim and, if successful in whole
or in part, shall be entitled to be paid the expense of prosecuting such claim.
In any such action the Corporation shall have the burden of proving that the
claimant was not entitled to the requested indemnification or payment of
expenses under applicable law.
Section 6.4. Non-Exclusivity of Rights. The rights conferred on any
-------------------------
person by this Article VI shall not be exclusive of any other rights which such
person may have or hereafter acquire under any statute, provision of the
Certificate of Incorporation, these By-laws, agreement, vote of stockholders or
disinterested directors or otherwise.
Section 6.5. Other Indemnification. The Corporation's obligation, if any,
---------------------
to indemnify any person who was or is serving at its request as a director,
officer, employee, partner or agent of another corporation, partnership, joint
venture or other enterprise shall be reduced by any amount such person may
collect as indemnification from such other corporation, partnership, joint
venture or other enterprise.
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<PAGE>
Section 6.6. Amendment or Repeal. Any repeal or modification of the
-------------------
foregoing provisions of this Article VI shall not adversely affect any right or
protection hereunder of any person in respect of any act or omission occurring
prior to the time of such repeal or modification.
ARTICLE VII
-----------
General
-------
Section 7.1. Fiscal year. The fiscal year of the Corporation shall be
-----------
determined by resolution of the Board of Directors.
Section 7.2. Seal. The corporate seal shall have the name of the
----
Corporation inscribed thereon and shall be in such form as may be approved from
time to time by the Board of Directors.
Section 7.3. Form of Records. Any records maintained by the Corporation
---------------
in the regular course of its business, including its stock ledger, books of
account, and minute books, may be kept on, or be in the form of, punch cards,
magnetic tape, photographs, microphotographs, or any other information storage
device, provided that the records so kept can be converted into clearly legible
form within a reasonable time. The Corporation shall so convert any records so
kept upon the request of any person entitled to inspect the same.
Section 7.4. Amendment of By-Laws. These By-laws may be altered or
--------------------
repealed, and new By-laws made, by the Board of Directors, but the stockholders
may make additional By-laws and may alter and repeal any By-laws whether adopted
by them or otherwise.
-19-
<PAGE>
EXHIBIT 3.07
CERTIFICATE OF AMENDMENT
------------------------
OF
--
CERTIFICATE OF INCORPORATION
----------------------------
OF
--
FIREARMS TRAINING SYSTEMS, INC.
-------------------------------
Pursuant to Section 242 of the General
--------------------------------------
Corporation Law of the State of Delaware
----------------------------------------
FIREARMS TRAINING SYSTEMS, INC. (the "Corporation"), a corporation
organized and existing under and by virtue of the General Corporation Law of the
State of Delaware, DOES HEREBY CERTIFY:
FIRST: That, in lieu of a meeting of the Board of Directors of the
Corporation, resolutions were duly adopted by written unanimous consent of
all the directors setting forth a proposed amendment to the Certificate of
Incorporation of the Corporation, declaring said amendment to be advisable
and directing the submission of said amendment to the holders of all the
outstanding shares of Class A Common Stock of the Corporation (the only
shares entitled to vote thereon) for consideration thereof. The resolution
of the Board of Directors of the Corporation setting forth the proposed
amendment is as follows:
RESOLVED, that the Board of Directors of the Corporation hereby
declares it advisable that the Certificate of Incorporation of the
Corporation be amended as follows:
(a) Article Fourth thereof shall be amended so that, as amended, Article
Fourth shall be and read in its entirety as follows:
<PAGE>
"FOURTH: The corporation is authorized to issue three classes
-------
of shares to be designated respectively as Preferred Stock, Class A Common
Stock and Class B Non-voting Common Stock. The total number of shares of
Preferred Stock the corporation shall have authority to issue shall be
200,000, $.10 par value, and the total number of shares of Class A Common
Stock the corporation shall have the authority to issue shall be
68,060,000, $.000006 par value, and the total number of shares of Class B
Non-voting Common Stock the corporation shall have the authority to issue
shall be 2,200,000, $.000006 par value."
(b) a new Article Twelfth shall be added which shall read and be in its
entirety as follows:
"TWELFTH: In accordance with Section 203(b)(3) of the General
-------
Corporation Law of Delaware, the restrictions of Section 203 of the General
Corporation Law of Delaware, which pertain to business combinations with
interested stockholders and related matters, shall not apply to the
corporation or to its interested stockholders (as defined in the General
Corporation Law of Delaware)."
SECOND: That thereafter, in lieu of a meeting and vote of
stockholders, the holders of a majority of all the outstanding shares of
Class A Common Stock of the Corporation have given written consent to said
amendment in accordance with Section 228 of the General Corporate Law of
the State of Delaware.
THIRD: That said amendment was duly adopted in accordance with the
provisions of Sections 242 and 228 of the General Corporate Law of the
State of Delaware.
-2-
<PAGE>
IN WITNESS WHEREOF, Firearms Training Systems, Inc. has caused this
Certificate to be signed by Peter A. Marino, its President and Chief Executive
Officer and attested to by David A. Apseloff, its Assistant Secretary, this 31st
day of October, 1996.
Firearms Training Systems, Inc.
By: /s/ Peter A. Marino
--------------------------
Name: Peter A. Marino
Title: President and Chief
Executive Officer
ATTEST:
By: /s/ David A. Apseloff
-----------------------
Name: David A. Apseloff
Title: Assistant Secretary
-3-
<PAGE>
EXHIBIT 5.01
[Sidley & Austin Letterhead]
November 1, 1996
Firearms Training Systems, Inc.
7340 McGinnis Ferry Road
Suwanee, GA 30174
Re: 6,900,000 Shares of Class A Common Stock, $0.000006 Par Value
-------------------------------------------------------------
Per Share
---------
Gentlemen:
We refer to the Registration Statement No. 333-13105 on Form S-1 (the
"Registration Statement") filed by Firearms Training Systems, Inc. ("the
Company") with the Securities and Exchange Commission under the Securities Act
of 1933, as amended (the "Securities Act"), relating to the registration of
6,900,000 shares of Class A Common Stock, $0.000006 par value (the "New
Shares"), of the Company.
We are familiar with the proceedings to date with respect to the
proposed issuance and sale of the New Shares and have examined such records,
documents and questions of law, and satisfied ourselves as to such matters of
fact, as we have considered relevant and necessary as a basis for this opinion.
Based on the foregoing, we are of the opinion that:
1. The Company is duly incorporated and validly existing under the
laws of the State of Delaware.
2. The New Shares will be legally issued, fully paid and non-
assessable when (i) the Registration Statement, as finally amended, shall have
become effective under the Securities Act; (ii) the Company's Board of Directors
or a duly authorized committee thereof shall have duly adopted final resolutions
authorizing the issuance and sale of the New Shares as contemplated by the
Registration Statement; and (iii) certificates representing the New Shares shall
have been duly executed, countersigned and registered and duly delivered to the
purchasers thereof against payment of the agreed consideration therefor.
<PAGE>
November 1, 1996
Page 2
We do not find it necessary for the purposes of this opinion to cover,
and accordingly we express no opinion as to, the application of the securities
or blue sky laws of the various states to the sale of the New Shares.
We hereby consent to the filing of this opinion as an Exhibit to the
Registration Statement and to all references to our firm included in or made a
part of the Registration Statement.
Very truly yours,
SIDLEY & AUSTIN
<PAGE>
EXHIBIT 10.01-01
FIRST AMENDMENT dated as of October 28, 1996 (this
"First Amendment"), to the Credit Agreement dated as of July
----------------
31, 1996 (the "Credit Agreement"), among Firearms Training
----------------
Systems, Inc. (the "Borrower"), the lenders listed on the
--------
signature pages thereto (the "Lenders") and NationsBank,
-------
N.A. (South), as agent for the Lenders (in such capacity,
the "Agent") and as issuing bank (in such capacity, the
-----
"Issuing Bank").
-------------
The parties hereto have agreed, subject to the terms and conditions hereof,
to amend the Credit Agreement as provided herein.
Capitalized terms used and not otherwise defined herein shall have the
meanings assigned to such terms in the Credit Agreement (the Credit Agreement,
as amended by, and together with, this First Amendment, and as hereinafter
amended, modified, extended or restated from time to time, being called the
"Amended Agreement").
- ------------------
Accordingly, the parties hereto hereby agree as follows:
SECTION 1.01. Amendment to Section 1.01. (a) The following definition is
-------------------------
hereby added to Section 1.01 immediately following the definition of "Permitted
Investors" therein:
""Permitted IPO" shall mean an IPO that (a) is consummated on or
-------------
before December 31, 1996 and (b) results in Net Cash Proceeds to FATS of at
least $41,300,000, plus the amount of any accrued and unpaid interest on
the Permitted Senior Subordinated Notes."
SECTION 1.02. Amendment to Section 2.11(g). The last sentence of Section
----------------------------
2.11(g) is hereby deleted and the following sentence shall be substituted in
lieu thereof:
"Notwithstanding the foregoing, in the case of a Refinancing Mandatory
Prepayment Event consisting of a Permitted IPO, the Borrower shall be
required to use the Net Cash Proceeds thereof as follows: (A) first, to
-----
prepay in full the Permitted Senior Subordinated Notes for $40,000,000
(plus (I) the amount of any accrued and unpaid interest up to the date of
the prepayment of the Permitted Senior Subordinated Notes and (II) the
$1,300,000 fee due to the Bridge Lenders upon such prepayment), (B) second,
------
to satisfy its obligations under the Contingent Purchase Price Rights for
$19,300,000, provided that such rights are fully extinguished as a result
of such payment, (C) third, to repurchase Warrants covering 288,434 shares
-----
of Common Stock from the Bridge Lenders at a per share purchase price equal
to the price paid by the public in the Permitted IPO, net of the per share
underwriting discount paid by FATS in the Permitted IPO, and (D) fourth, to
------
prepay Tranche A Term Loans and Tranche B Term Loans on a pro rata basis.
Any Net Cash Proceeds applied to either the Tranche A Term Loans or Tranche
B Term Loans pursuant to the immediately preceding sentence
<PAGE>
shall be applied to reduce the remaining scheduled installments of
principal due in respect of such Class of Loans under Section 2.11(a) or
(b), as applicable, on a pro rata basis according to the amount of each
such scheduled payment (except that a portion of such Net Cash Proceeds
may, at the request of the Borrower, be applied in direct order of maturity
so long as after giving effect thereto, no more than the next four
regularly scheduled payments of principal of either the Tranche A Term
Loans or Tranche B Term Loans due under Section 2.11(a) or (b), as
applicable, have been prepaid)."
SECTION 1.03. Amendment to Section 5.09. The number "120" in the first
-------------------------
line of Section 5.09 is hereby deleted and the number "180" is hereby
substituted in lieu thereof.
SECTION 1.04. Amendment to Section 6.06. (a) Clause (x) of the proviso
-------------------------
in Section 6.06 is hereby deleted and the following clause is hereby substituted
in lieu thereof:
"(x) FATS may satisfy its obligations under the Contingent Purchase
Price Rights as in effect of the Closing Date by either (A) issuing shares
of Common Stock, so long as all such shares of Common Stock are (unless the
Termination and Release Conditions have been satisfied) pledged to the
Agent on behalf of the Lenders pursuant to the Seller Pledge Agreement (in
the case of any such shares issued to the Seller and its Affiliates) or an
Additional Pledge Agreement (in the case of any such shares issued to any
other person) or (B) making a payment in cash to the Seller of $19,300,000
solely with a portion of the Net Cash Proceeds to FATS of a Permitted IPO,
provided that such rights are fully extinguished as a result of such
--------
payment in cash; and"
(b) The following paragraph is hereby added immediately following clause
(x) thereof:
"(xi) FATS may repurchase the Warrants from the Bridge Lenders by
making a payment in cash to the Bridge Lenders solely with a portion of the
Net Cash Proceeds to FATS of a Permitted IPO, provided that the per share
--------
purchase price equals the price paid by the public in the Permitted IPO,
net of the per share underwriting discount paid by FATS in the Permitted
IPO."
SECTION 1.05. Amendment to Section 6.13(a). The following parenthetical
----------------------------
phrase is hereby added immediately before the comma at the end of clause (a) of
Section 6.13:
"(provided that the reclassification of the Board of Directors of FATS into
--------
a board with three classes each elected for three year terms and the
amendment of the By-laws of FATS to include the other provisions described
in the preliminary prospectus for the IPO filed with the SEC on September
30, 1996 under "Description of Capital Stock--Certain Provisions of the
Certificate of Incorporation and By-laws and Statutory Provisions" shall
not be deemed adverse in any respect to the Lenders)"
-2-
<PAGE>
SECTION 1.06. Amendment to Section 6.14(a). The following sentence is
----------------------------
hereby added to the end of paragraph (a) of Section 6.14:
"Notwithstanding the foregoing, FATS may issue shares of Common Stock in a
Permitted IPO."
SECTION 1.07. Amendment to Section 2.05 of the Seller Pledge Agreement.
--------------------------------------------------------
The following sentence is hereby added to the end of Section 2.05 of the Seller
Pledge Agreement:
"Notwithstanding the foregoing, upon consummation of a Permitted IPO, the
Agent shall release (I) up to 150,000 shares of Common Stock and (II) up to
900,000 shares of Common Stock if the underwriter's over-allotment option
is exercised (in both cases, after giving effect to the proposed 1.66 to 1
stock split) pledged hereunder in accordance with the same procedures
applicable to a release of shares under the provisions of the immediately
preceding sentence."
SECTION 1.08. Representations and Warranties. The Borrower hereby
------------------------------
represents and warrants to the Agent and the Lenders, as follows:
(a) The representations and warranties set forth in Article III of the
Amended Agreement, and in each other Loan Document, are true and correct in
all material respects on and as of the date hereof and on and as of the
First Amendment Effective Date with the same effect as if made on and as of
the date hereof or the First Amendment Effective Date, as the case may be,
except to the extent such representations and warranties expressly relate
solely to an earlier date.
(b) Each of the Borrower and the other Loan Parties is in compliance
with all the terms and conditions of the Amended Agreement and the other
Loan Documents on its part to be observed or performed and no Default or
Event of Default has occurred or is continuing under the Amended Agreement.
(c) The execution, delivery and performance by the Borrower of this
First Amendment have been duly authorized by the Borrower.
(d) This First Amendment constitutes the legal, valid and binding
obligation of the Borrower, enforceable against it in accordance with its
terms.
(e) The execution, delivery and performance by the Borrower of this
First Amendment (i) do not conflict with or violate (A) any provision of
law, statute, rule or regulation, or of the certificate of incorporation or
by-laws of the Borrower, (B) any order of any Governmental Authority or (C)
any provision of any indenture, agreement or other instrument to which the
Borrower is a party or by which it or any of its property may be bound and
(ii) do not require any consents under, result in a breach of or constitute
(with notice or lapse of time or both) a default under any such indenture,
agreement or instrument.
-3-
<PAGE>
SECTION 1.09. Effectiveness. This First Amendment shall become effective
-------------
only upon satisfaction of the following conditions precedent (the first date
upon which each such condition has been satisfied being herein called the "First
-----
Amendment Effective Date"):
- ------------------------
(a) The Agent shall have received duly executed counterparts of this
First Amendment which, when taken together, bear the authorized signatures
of the Borrower and the Required Lenders.
(b) The Required Lenders shall be satisfied that the representations
and warranties set forth in Section 1.08 are true and correct on and as of
the First Amendment Effective Date and that no Default or Event of Default
has occurred or is continuing.
(c) There shall not be any action pending or any judgment, order or
decree in effect which, in the judgment of the Required Lenders or their
counsel, is likely to restrain, prevent or impose materially adverse
conditions upon performance by the Borrower or any other Loan Party of its
obligations under the Loan Documents.
(d) The Borrower shall have consummated a Permitted IPO.
(e) The Required Lenders shall have received such other documents,
legal opinions, instruments and certificates as they shall reasonably
request and such other documents, legal opinions, instruments and
certificates shall be satisfactory in form and substance to the Required
Lenders and their counsel. All corporate and other proceedings taken or to
be taken in connection with this First Amendment and all documents
incidental thereto, whether or not referred to herein, shall be
satisfactory in form and substance to the Required Lenders and their
counsel.
SECTION 1.10. APPLICABLE LAW. THIS FIRST AMENDMENT SHALL BE GOVERNED BY,
--------------
AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, EXCEPT TO
THE EXTENT THAT THE FEDERAL LAWS OF THE UNITED STATES OF AMERICA MAY APPLY.
SECTION 1.11. Expenses. The Borrower shall pay all reasonable out-of-
--------
pocket expenses incurred by the Agent and the Required Lenders in connection
with the preparation, negotiation, execution, delivery and enforcement of this
First Amendment, including, but not limited to, the reasonable fees and
disbursements of counsel. The agreement set forth in this Section 1.11 shall
survive the termination of this First Amendment and the Amended Agreement.
SECTION 1.12. Counterparts. This First Amendment may be executed in any
------------
number of counterparts, each of which shall constitute an original but all of
which when taken together shall constitute but one agreement.
SECTION 1.13. Credit Agreement. Except as expressly set forth herein, the
----------------
amendments provided herein shall not by implication or otherwise limit,
constitute a waiver of, or otherwise affect the rights and remedies of the
Lenders, the Agent or the other Secured Parties under the Amended Agreement or
any other Loan Document, nor shall they constitute
-4-
<PAGE>
a waiver of any Default or Event of Default, nor shall they alter, modify, amend
or in any way affect any of the terms, conditions, obligations, covenants or
agreements contained in the Amended Agreement or any other Loan Document. Each
of the amendments provided herein shall apply and be effective only with respect
to the provisions of the Amended Agreement specifically referred to by such
amendment. Except as expressly amended herein, the Amended Agreement shall
continue in full force and effect in accordance with the provisions thereof. As
used in the Amended Agreement, the terms "Agreement", "herein", "hereinafter",
"hereunder", "hereto" and words of similar import shall mean, from and after the
date hereof, the Amended Agreement.
-5-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to
be duly executed by their duly authorized officers, all as of the date first
above written.
FIREARMS TRAINING SYSTEMS, INC.,
as Borrower
By: /s/ Robert Terry
--------------------------------------
Name: Robert Terry
Title: Chief Operating Officer
NATIONSBANK, N.A. (SOUTH), as Issuing
Bank, Swingline Lender and individually
as a Lender
By: /s/ Shawn B. Welch
--------------------------------------
Name: Shawn B. Welch
Title: Vice President
FIRST BANK NATIONAL ASSOCIATION, as a
Lender
By: /s/ Mark R. Olman
--------------------------------------
Name: Mark R. Olman
Title: Vice President
FIRST SOURCE FINANCIAL LLP, as a Lender,
by First Source Financial, Inc., as Agent/Manager
By: /s/ James W. Wilson
--------------------------------------
Name: James W. Wilson
Title: Senior Vice President
BHF-BANK AKTIENGESELLSCHAFT, as a
Lender
By: /s/ Evan Contos
--------------------------------------
Name: Evan Contos
Title: Vice President
By: /s/ Thomas T. Leisel
--------------------------------------
Name: Thomas T. Leisel
Title: Vice President
-6-
<PAGE>
CREDITANSTALT CORPORATE FINANCE,
INC., as a Lender
By: /s/ Carl G. Drake
--------------------------------------
Name: Carl G. Drake
Title: Senior Associate
By: /s/ Robert M. Biringer
--------------------------------------
Name: Robert M. Birginger
Title: Executive Vice President
-7-
<PAGE>
EXHIBIT 10.02-01
Tranche A Term Notes
The following four Tranche A Term Notes executed by the Company are
identical in all material respects to Exhibit 10.02 except that the amounts and
payees are as indicated below:
1. Tranche A Term Note dated July 31, 1996 in the amount of $5,294,118,
payable to BHF-Bank Aktiengesellschaft;
2. Tranche A Term Note dated July 31, 1996 in the amount of $5,294,118,
payable to Creditanstalt Corporate Finance, Inc.;
3. Tranche A Term Note dated July 31, 1996 in the amount of $6,666,667,
payable to First Bank National Association; and
4. Tranche A Term Note dated July 31, 1996 in the amount of $7,058,823,
payable to First Source Financial LLP.
<PAGE>
EXHIBIT 10.03-01
Tranche B Term Notes
The following three Tranche B Term Notes executed by the Company are
identical in all material respects to Exhibit 10.03 except that the amounts and
payees are as indicated below:
1. Tranche B Term Note dated July 31, 1996 in the amount of $7,058,823,
payable to BHF-Bank Aktiengesellschaft;
2. Tranche B Term Note dated July 31, 1996 in the amount of $7,058,823,
payable to Creditanstalt Corporate Finance, Inc.; and
3. Tranche B Term Note dated July 31, 1996 in the amount of $9,411,765,
payable to First Source Financial LLP.
-2-
<PAGE>
EXHIBIT 10.04-1
Revolving Credit Notes
The following four Revolving Credit Notes executed by the Company are
identical in all material respects to Exhibit 10.04 except that the amounts and
payees are as indicated below:
1. Revolving Credit Note dated July 31, 1996 in the amount of $2,647,059,
payable to BHF-Bank Aktiengesellschaft;
2. Revolving Credit Note dated July 31, 1996 in the amount of $2,647,059,
payable to Creditanstalt Corporate Finance, Inc.;
3. Revolving Credit Note dated July 31, 1996 in the amount of $3,333,333,
payable to First Bank National Association; and
4. Revolving Credit Note dated July 31, 1996 in the amount of $3,529,412,
payable to First Source Financial LLP.
-3-
<PAGE>
EXHIBIT 10.14-01
Stock Option Agreements Series A
The Stock Option Agreements Series A, each dated as of September 18, 1996
between the Company and the following employees are identical in all material
respects to Exhibit 10.14 except with respect to the number of shares which are
subject to the option:
1. Robert B. Terry, Jr.;
2. Robert F. Mecredy;
3. Juan de Ledebur; and
4. Gregory F. Echols.
The Stock Option Agreement Series A, dated as of September 18, 1996 between
the Company and David A. Apseloff, is identical in all material respects to
Exhibit 10.14 except with respect to (i) the number of shares subject to the
option and (ii) an additional proviso in Section 2.2(e) which provides that if
Mr. Apseloff's employment is terminated by the Company prior to the first
anniversary of the agreement, but after the consummation of the IPO, his option
shall be exercisable with respect to 16 2/3% of the shares of Common Stock
subject to the option.
The Stock Option Agreements Series A, each dated as of September 18, 1996
between the Company and the following employees are identical in all material
respects to Exhibit 10.14 except (i) with respect to the number of shares which
are subject to the option and (ii) that the Agreements do not provide for
monthly vesting of the option:
1. Jeffrey Marlin;
2. Geoff E. Lonsdale;
3. Christopher Bailey;
4. Wenlong Tsang;
5. Bradley D. Nichols;
6. William E. Tait;
7. Charles L. Belitz;
8. Frank Socolow, Jr.
9. Gregg A. Rowland;
10. John D'Araujo, Jr.;
11. James W. Hall;
12. Lifan Hua;
13. Michael J. McKean;
14. Michael A. Wenson;
15. Rameshchandra Patel;
16. John A. Morelli;
17. Robert J. Combs;
18. Robert A. Dare, Jr.;
19. William E. Jordan, Jr.;
20. Robert Rivers;
-4-
<PAGE>
21. Christopher S. Bryan;
22. Theresa A. Reed;
23. Darcey Tatum;
24. Ed Schumacher;
25. Wen Li;
26. Charles Kenyon, Jr.;
27. David F. Pritchett;
28. Michael Leonhardi;
29. Donald W. Harvey; and
30. Larry David Walker.
-5-
<PAGE>
EXHIBIT 10.15-01
Stock Option Agreements Series B
The Stock Option Agreements Series B, each dated as of September 18, 1996
between the Company and the following
employees are identical in all material respects to
Exhibit 10.15 except with respect to the number of shares
which are subject to the option:
1. Robert B. Terry, Jr.;
2. Robert F. Mecredy;
3. Juan de Ledebur;
4. David A. Apseloff; and
5. Gregory F. Echols.
The Stock Option Agreements Series B, each dated as of September 18, 1996
between the Company and the following employees are identical in all material
respects to Exhibit 10.15 except (i) with respect to the number of shares which
are subject to the option and (ii) that the Agreements do not provide for
monthly vesting of the option:
1. Jeffrey Marlin;
2. Geoff E. Lonsdale;
3. Christopher Bailey;
4. Wenlong Tsang;
5. Bradley D. Nichols;
6. William E. Tait;
7. Charles L. Belitz;
8. Frank Socolow, Jr.
9. Gregg A. Rowland;
10. John D'Araujo, Jr.;
11. James W. Hall;
12. Lifan Hua;
13. Michael J. McKean;
14. Michael A. Wenson;
15. Rameshchandra Patel;
16. John A. Morelli;
17. Robert J. Combs;
18. Robert A. Dare, Jr.;
19. William E. Jordan, Jr.;
20. Robert Rivers;
21. Christopher S. Bryan;
22. Theresa A. Reed;
23. Darcey Tatum;
24. Ed Schumacher;
25. Wen Li;
26. Charles Kenyon, Jr.;
27. David F. Pritchett;
28. Michael Leonhardi;
29. Donald W. Harvey; and
-6-
<PAGE>
30. Larry David Walker.
-7-
<PAGE>
EXHIBIT 10.16-01
Stock Option Agreements Series C
The Stock Option Agreement Series C, dated as of September 18, 1996 between
the Company and Craig I. Fields is identical in all material respects to Exhibit
10.16 except with respect to the number of shares which are subject to the
option.
-8-
<PAGE>
EXHIBIT 10.21-01
Agreements to Limit Future Competition
The Agreements to Limit Future Competition entered into by the Company with
each member of senior management of the Company are identical in all material
respects to Exhibit 10.21.
-9-
<PAGE>
EXHIBIT 10.22-01
Transition Bonus Agreements
The Transition Bonus Agreements entered into by the Company with 13
employees of the Company are identical in all material respects to Exhibit
10.22.
-10-
<PAGE>
EXHIBIT 11.01
FIREARMS TRAINING SYSTEMS, INC. AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF PRO FORMA NET INCOME PER COMMON SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED MARCH 31, SEPTEMBER 30,
---------------------------- --------------------
1994 1995 1996 1995 1996
-------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net Income Per Share: (1)
Weighted average number of
common shares
outstanding.............. 49,800 49,800 49,800 49,800 49,800
Shares repurchased in
conjunction with the
Recapitalization (2)..... (46,832) (46,832) (46,832) (46,832) (46,832)
Shares issued in
conjunction with the
Recapitalization (3)..... 11,165 11,165 11,165 11,165 11,165
Shares granted to
management............... 37 37 37 37 37
Shares purchased by
management (4)........... 232 232 232 232 232
Shares issued upon assumed
exercise of outstanding
warrants (5)............. 288 288 288 288 288
Shares issued upon assumed
exercise of outstanding
options (6).............. 1,365 1,365 1,365 1,365 1,365
-------- -------- -------- --------- ---------
Weighted average number of
common and common
equivalent shares
outstanding.............. 16,055 16,055 16,055 16,055 16,055
======== ======== ======== ========= =========
Net income................. $1,518 $2,830 $12,790 $2,182 $2,215
======== ======== ======== ========= =========
Net income per common
share..................... $0.09 $0.18 $0.80 $0.14 $0.14
======== ======== ======== ========= =========
</TABLE>
- --------
(1) Shares reflect a 100,000-for-one stock split effected in connection with
the Recapitalization and a split of 1.66-for-one effected in November 1996.
Shares have been restated for all periods presented.
(2) Shares were repurchased from THIN International for $151.9 million in
connection with the Recapitalization and are assumed to be outstanding for
all periods presented.
(3) Shares were issued to the Centre Entities for $36.0 million in connection
with the Recapitalization and are assumed to be outstanding for all
periods presented.
(4) Shares purchased by management for approximately $3.25 per share which are
assumed to be outstanding for all periods presented.
(5) Represents warrants attached to the Bridge Notes, at approximately $0.0006
per warrant, which are assumed to be outstanding for all periods
presented, using the treasury stock method at the assumed initial offering
price of $15.00 per share, regardless of whether they are anti-dilutive.
(6) Represents 1,742,834 stock options with an exercise price of approximately
$3.25 per option, which are assumed to be outstanding for all periods
presented, using the treasury stock method at the assumed initial offering
price of $15.00 per share, regardless of whether they are anti-dilutive.
<PAGE>
EXHIBIT 16.01
[LETTERHEAD OF PRICE WATERHOUSE LLP] [LOGO]
October 1, 1996
Securities and Exchange Commission
450 Fifth Street, Northwest
Washington, D.C. 20549
Ladies and Gentlemen:
Re: Form S-1 of Firearms Training Systems, Inc.
- ------------------------------------------------
We have read the first paragraph of the "Change in Independent Accountants"
section of the aforementioned Form S-1 and are in agreement with the statements
contained therein.
Yours very truly,
/s/ Price Waterhouse LLP
<PAGE>
EXHIBIT 23.01
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated June 8, 1994, except as
to the stock split described in Note 10 and the third paragraph of Note 10,
which are as of September 27, 1996, relating to the financial statements of
Firearms Training Systems, Inc. and its subsidiary, which appears in such
Prospectus. We also consent to the application of such report to the Financial
Statement Schedule for the year ended March 31, 1994 listed under Item 16(b)
of this Registration Statement when such Schedule is read in conjunction with
the financial statements referred to in our report. The audit referred to in
such report also included this schedule. We also consent to the references to
us under the headings "Experts" and "Selected Financial Data" in such
Prospectus. However, it should be noted that Price Warehouse LLP has not
prepared or certified such "Selected Financial Data."
Price Waterhouse LLP
Atlanta, Georgia
September 30, 1996
<PAGE>
EXHIBIT 23.02
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports and to all references to our firm included in or made a part of this
Registration Statement.
Arthur Andersen LLP
Atlanta, Georgia
November 1, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF FIREARMS TRAINING SYSTEMS, INC. AND
SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR 3-MOS
<FISCAL-YEAR-END> MAR-31-1996 MAR-31-1997
<PERIOD-START> APR-01-1995 APR-01-1996
<PERIOD-END> MAR-31-1996 SEP-30-1996
<CASH> 8,121 951
<SECURITIES> 0 0
<RECEIVABLES> 10,167 10,847
<ALLOWANCES> 75 75
<INVENTORY> 12,836 12,612
<CURRENT-ASSETS> 32,570 26,938
<PP&E> 3,251 3,578
<DEPRECIATION> 2,107 2,205
<TOTAL-ASSETS> 33,820 34,628
<CURRENT-LIABILITIES> 12,354 16,079
<BONDS> 0 0
0 0
0 0
<COMMON> 1,931 36,991
<OTHER-SE> 19,331 (124,435)
<TOTAL-LIABILITY-AND-EQUITY> 33,820 34,628
<SALES> 65,439 39,138
<TOTAL-REVENUES> 65,439 39,138
<CGS> 30,902 17,980
<TOTAL-COSTS> 30,902 17,980
<OTHER-EXPENSES> 15,171 10,706
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 11 1,833
<INCOME-PRETAX> 19,355 8,619
<INCOME-TAX> 6,565 3,281
<INCOME-CONTINUING> 12,790 5,338
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 12,790 5,338
<EPS-PRIMARY> 0.80 0.33
<EPS-DILUTED> 0.80 0.33
</TABLE>
