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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 1998
COMMISSION FILE NUMBER 0-21773
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
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FIREARMS TRAINING SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
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DELAWARE 57-0777018
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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7340 MCGINNIS FERRY ROAD, SUWANEE, GEORGIA 30024
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (770) 813-0180
Name of exchange on which registered: NONE
Securities pursuant to Section 12(g) of the Act: CLASS A COMMON STOCK, $0.000006
PAR VALUE PER SHARE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K ____________.
Aggregate market value of the voting stock held by non-affiliates of the
registrant as of June 22, 1998: $27,442,496 (based on 9,243,788 shares of
non-affiliates Class A Common Stock outstanding at $2.96875 per share; the last
sale price on The Nasdaq National Market on June 22, 1998).
At June 22, 1998, there were issued and outstanding 18,970,970 shares of
Class A Common Stock, par value $0.000006 per share, and there were issued and
outstanding 1,694,569 shares of Class B nonvoting Common Stock, par value
$0.000006 per share.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for the 1998 Annual
Meeting of Stockholders, to be filed with the Commission, are incorporated by
reference into Part III hereof.
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PART I
Statements in this document, other than statements of historical
information, are forward-looking statements that are made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995 (the
"1995 Act"). Such forward-looking statements made by or on behalf of Firearms
Training Systems, Inc. (the "Company") from time to time, including statements
contained in the Company's filings with the Commission and its reports to
stockholders, involve known and unknown risks and other factors which may cause
the Company's actual results in future periods to differ materially from those
expressed in any forward-looking statements. Any such statement is qualified by
reference to the risks and factors discussed below under the headings
"Business -- Customers," "-- Research and Development," "-- Proprietary
Operating System; Raw Materials and Suppliers," "-- Government Contracts and
Regulations" and "Management's Discussion and Analysis of Financial Condition
and Results of Operation -- General," and "-- Liquidity and Capital Resources"
and in the Company's filings with the Commission, which are available from the
Commission or which may be obtained upon request from the Company. The Company
cautions that the factors and risks discussed herein and therein are not
exclusive. The Company does not undertake to update any forward-looking
statement that may be made from time to time by or on behalf of the Company.
ITEM 1. BUSINESS
GENERAL
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.
The Company has focused its sales efforts primarily in the U.S. and
international military and law enforcement market through its principal
facilities near Atlanta, Georgia and its other facilities in the U.K. and the
Netherlands. 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 and New York Police Departments, the Federal Bureau of
Investigation, the Internal Revenue Service, the Singapore Army and Police Coast
Guard, the British Ministry of Defence and the Royal Netherlands Army. In April
1998, the Company acquired all of the outstanding stock of Dart International,
Inc. ("Dart"), a Colorado-based hunter/sports simulation company. The Company's
hunter and sports business will be consolidated with and managed by Dart. In
March 1998, the Company purchased all of the outstanding stock of Simtran
Technologies, Inc. ("Simtran"), a Canadian-based simulation company. Simtran has
contracts with the Canadian Department of National Defence to develop and
deliver three unique products: an air defense missile trainer; an appended
armored vehicle crew trainer; and a stand-alone armored vehicle crew trainer.
To date the Company combined with Dart has sold more than 3,000 simulation
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(R) brand name, its strong long-term relationships
with its customers, its ability to provide
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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 of March 31,
1998, the Company had a backlog of approximately $49.4 million from all
customers.
HISTORY
The Company was incorporated in 1984 and was a wholly owned subsidiary of
THIN International N.V. ("THIN International"), a Netherlands Antilles
corporation, until July 31, 1996. At that time, the Company consummated a set of
transactions (the "Recapitalization") pursuant to a Recapitalization and Stock
Purchase and Sale Agreement among the Company, THIN International, Centre
Partners Management LLC ("Centre Management"), and a group of entities managed
by Centre Management (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, (ii) issued common stock to the Centre Entities for cash, (iii)
issued certain senior subordinated bridge notes (the "Bridge Notes") and agreed
to deliver under certain circumstances warrants to purchase common stock of the
Company (the "Warrants"), (iv) 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 (the "Senior
Bank Debt"), pursuant to which it borrowed $76 million, and (v) repurchased
certain shares of common stock owned by THIN International and agreed to make an
additional contingent payment (the "Contingent Payment") upon the occurrence of
certain events. 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. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- General -- Recapitalization."
In November 1996, the Company completed an initial public offering,
pursuant to which it offered and sold 6,000,000 shares of its common stock (the
"Offering"). The Company used approximately $75.3 million in net proceeds from
the Offering (i) to repay the Bridge Notes, (ii) to make the Contingent Payment,
(iii) to reacquire the Warrants, and (iv) to reduce the amount then outstanding
under the Senior Bank Debt. Following consummation of the Offering, the Centre
Entities owned or had control over approximately 54.7% and THIN International
owned approximately 14.5% of the outstanding shares of Class A Common Stock (the
"Common Stock").
In fiscal 1997, the Company completed a reorganization into a holding
company structure (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" or "FATS") which is now the
primary operating company. The Company has pledged all of the shares of capital
stock of the Drop Down Subsidiary as security for the repayment of the
obligations under the NationsBank Credit Agreement. The financial statements of
the Company are prepared and presented on a consolidated basis and the
discussions in this report reflect the operations of the Company and its
subsidiaries.
On April 24, 1998, 1,694,569 shares of the Company's voting Class A Common
Stock were exchanged by the Centre Entities for an equal amount of non-voting
Class B Common Stock. In connection with the exchange, the Centre Entities
agreed not to convert the shares of Class B Common Stock to shares of Class A
Common Stock if, as a result of such conversion, the Centre Entities would hold,
of record or beneficially with power to vote, more than 50% of the shares of
Class A Common Stock outstanding immediately following such conversion, unless
concurrently with such conversion the shares of Class A Common Stock are
transferred to an unaffiliated person.
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 fully develops 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
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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. 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. 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 benefited
from two trends: (i) increasing pressure on budgets, and (ii) rapidly advancing
computer and imaging 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 due to the benefits of and demand for simulation products.
Moreover, management believes the trends favoring increased reliance upon
simulation in the U.S. can also be identified abroad in military and law
enforcement agencies in other countries, generally centralized to a greater
extent than in the U.S., and facing increasingly restrictive budgets.
Sales to U.S. and international governmental agencies are subject to
numerous and changing regulations and budgetary processes that could have a
material adverse effect on the Company's future results of operations and
financial condition. See "-- Customers" and "-- Government Contracts and
Regulation."
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, simulated firearms, scenarios and software. The
Company's systems sell for prices from approximately $30,000 for low-end systems
with a basic complement of simulated firearms and scenarios to over $500,000 for
high-end systems with an extensive set of simulated firearms and scenarios and
auxiliary equipment. The Company also sells additional simulated firearms and
laser discs to customers as add-ons to basic systems at prices ranging from
approximately $1,000 to $60,000.
Simulators. The Company's training simulators combine a primary simulation
computer, a laser hit location detection system, a video projector, and a
variety of visual image storage and delivery media. 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 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
2,800 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
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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 on 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 a library of more than 1,000
scenarios and marksmanship courses, as well as an extensive library of digital
scenes and targets designed for various markets. The Company's software programs
combine video, graphics and computer generated imagery into a versatile
simulation package. The instructor can use the program to employ existing, new
or modified training materials to monitor performance of the user in a broad
range of training situations. The existing library of materials provides a wide
array of situations to be presented for training or mission rehearsal. The
Company has collected and offers training materials which can exercise the total
spectrum of infantry and indirect fire weapons. Additionally, training materials
are available to support the entire range of the law enforcement force continuum
including physical presence, verbal commands, chemical suppressants, impact
weapons and deadly force. The Company often works with customers to develop
custom materials that meet unique requirements and to provide them with the
ability to develop their own materials. The software program and built in tools
provide the customer with the ability to capture real world environments in
video or computer generated imagery, convert that material into a training or
testing medium, present the material with the simulator, and evaluate the
performance of trainees during the conduct of selected exercises.
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.
Simtran. Simtran is working closely with its customers to develop three
unique products: an air defense missile trainer; an appended armored vehicle
crew trainer; and a stand-alone armored vehicle crew trainer. Also, Simtran
manufactures gunnery trainers for both hand held and tripod mounted anti-armor
missile systems. The company manufactures cost effective, high quality training
simulation systems for the defense industry in military weapons systems.
Simtran's systems provide for the "look and feel" of the actual system along
with training for the individual operator or for the crew as a tactical unit.
The simulators are portable or transportable and provide for fixed or on-site
training wherever they are required.
Simtran's training systems combine operating units such as actual or
replicated driver stations or missile launchers with electronic simulation
devices. Various scenarios can be custom arranged by the user to meet specific
training requirements using interactive video, computer generated imagery and
dynamic computer generated imagery as needed. Research and development into new
technologies and simulation applications are performed by Simtran's Advanced
Technologies group. Simtran's Repair and Overhaul Division provide warranty
support, bench service and on-site support.
Dart. The Company believes that Dart is the pioneer and market leader of
video simulation technology in the shooting sports industry. Dart has an
installed base of more than 250 systems nationwide. Current products include
both portable and fixed location systems for archery and firearms applications.
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Dart products provide the commercial or retail firearms and archery dealer
with revenue generating opportunity by incorporating interactive features such
as: over 1,000 video scenarios complete with appropriate audio cues; instant
feedback to the shooter after every shot; an automated scoring system; computer
generated targets; league and competition format; a complete database function;
marketing support for advertising and promotion and a communications network
capable of linking all systems to a central computer at the company's
headquarters for service support or data management.
Current Dart customers include archery pro-shops, shooting sports
retailers, full-line sporting goods retailers and federal and state wildlife
agencies.
TARGETED MARKET
The Company currently targets four principal market components: (i)
international (including military and law enforcement authorities); (ii) U.S.
military; (iii) U.S. law enforcement; and (iv) hunter and sports training.
International. The Company believes that many international military and
law enforcement agencies have begun to recognize the benefits of cost-effective
and realistic small arms simulation training. The Company has sold FATS(R)
systems to customers in more than 30 countries, including Canada, 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 1998, 46.0% of the Company's total revenues were attributable to
sales to military and law enforcement authorities outside the U.S. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Note 8 of Notes to Consolidated Financial Statements.
U.S. Military. The desire to provide realistic training while
significantly reducing costs has been the primary reason for the adoption of
simulated arms training by U.S. military authorities. The relatively high costs
of live fire training considering the use of ammunition, wear and tear on
weapons, the need to transport soldiers and equipment to the firing range and
legal requirements for remediation of environmental damage to the firing range
encourages military forces to use simulation to ensure proper readiness.
Moreover, according to budget estimates of the U.S. Department of Defense
("DOD") for the government's fiscal 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.
While all the U.S. military forces have embraced use of simulation, each
major branch of the U.S. military is at a different stage of implementing
simulation in training regimens. 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 also purchased systems under the Company's contract with the U.S.
Marine Corps while the U.S. Air Force has purchased systems from the Company
through the procedures of the U.S. General Services Administration ("GSA"). The
Company believes that it has been the primary supplier of interactive small and
supporting arms simulation systems to the U.S. Marine Corps, the U.S. Air Force
and the U.S. Army. See, however, the recent developments with regard to the U.S.
Army Engagement Skills Trainer ("EST") procurement as discussed under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- General -- U.S. Army EST Procurement Process" 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
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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. See "-- Government Contracts and
Regulations."
For fiscal 1998, 40.8% of the Company's total revenues and 75.5% of the
Company's U.S. revenues were attributable to sales to U.S. military authorities.
As of March 31, 1998, the Company had a backlog of $2.2 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 three principal groups: (i) U.S.
government entities (including the U.S. Department of Justice, the U.S.
Department of Treasury (including its agencies and bureaus such as the Federal
Law Enforcement Training Center, Secret Service, Bureau of Alcohol, Tobacco and
Firearms and the Internal Revenue Service), the U.S. Postal Service, the Federal
Bureau of Investigation, the Drug Enforcement Administration and the Central
Intelligence Agency); and (ii) state and local law enforcement departments such
as the Los Angeles and New York City Police Departments, and smaller rural
counterparts, and (iii) colleges and universities teaching criminal justice. 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 17,000
different law enforcement departments in the U.S. Given this diversity, 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 3,600 law
enforcement agencies and departments with more than 25 officers. With only
approximately 875 systems sold to U.S. federal and local law enforcement
authorities to date (of which approximately 775 are FATS(R) 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 and lower liability costs.
For fiscal 1998, 11.7% of the Company's total revenues and 21.7% 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."
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Hunter and Sports Training. The Company has through its Dart subsidiary
continued to penetrate 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, the U.S. Department of Natural Resources, various state agencies, 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 business opportunities may exist in the hunter and sports training
component of the market.
For fiscal 1998, 1.5% of the Company's total revenues were attributable to
sales in the hunter and sports training component of the market. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
SALES AND MARKETING
The Company's marketing and sales efforts are organized to service its
principal customers, with separate sales operations for FATS, Simtran and Dart.
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 personnel and decision makers 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.
The acquisition of Simtran and Dart will allow the Company to focus
marketing and sales staff, engineering, and operations on particular markets to
support various customer needs. FATS is responsible for small arms trainers and
gunnery related simulators to support military and law enforcement simulation
needs. Simtran compliments these efforts by offering training products used by
military elements worldwide which meet the supporting combat mission of air
defense or anti-armor areas. Dart focuses on the retail or commercial market.
Marketing staffs for each company, FATS, Simtran and DART, develop business
opportunities, capture plans and provide appropriate collateral material. FATS
international sales staff will be responsible for both FATS' products as well as
Simtran as both companies serve the same customer base. FATS will continue to
support the international sales effort with a network of agents and business
representatives. DART supports its sales effort within the United States using
established dealer representatives and in-house sales staff.
The Company believes that an integrated marketing and sales approach
combining both FATS and Simtran products ties closely to procurement plans of
overseas military forces. Acquisition strategies for gunnery related simulators
for countries include use of small arms, indirect fire, anti-armor, air defense,
and armored vehicle training needs. The Company's ability to offer a coordinated
approach to develop and manufacture products using a single architecture should
meet both training standardization needs as well as provide support efficiencies
over the life cycle of the fielding.
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CUSTOMERS
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 40.8% of the Company's
revenues for fiscal 1998 were attributable to sales to military authorities in
the U.S., 11.7% were attributable to sales to law enforcement authorities in the
U.S. and 46.0% 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. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- General -- U.S. Army EST
Procurement Process".
The following table lists certain of the Company's customers in fiscal 1998
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 Bureau of Alcohol, Tobacco & Firearms Italian Air Force
U.S. Army Federal Bureau of Investigation Italian Army
U.S. Marine Corps Los Angeles Police Department Singapore Army
</TABLE>
In fiscal 1998, the Company's five largest customers accounted for
approximately 60.7% of the Company's revenues, with the U.S. Marine Corps and
the Italian Air Force accounting for approximately 28.5% and 12.1%,
respectively. In fiscal 1997, the Company's five largest customers accounted for
approximately 76.3% of the Company's revenues, with the U.S. Marine Corps
accounting for approximately 49.3%. No other customer accounted for more than
10% of revenues in either period. Given the nature of the Company's contracts,
revenues attributable to specific customers are likely to vary from year to
year, and a significant customer in one year may not be a significant customer
in a subsequent year. In order to reach its growth objectives, the Company will
be required to seek contracts from new domestic and international customers as
well as orders from existing customers for additional types of simulated
firearms or increased quantities of previously ordered systems and simulated
weapons. A significant decrease in demand by or the loss of one or more
significant customers could have a material adverse effect on the Company's
results of operations or financial condition. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and Note 8 of Notes
to Consolidated Financial Statements.
RESEARCH AND DEVELOPMENT
The Company engages in the research and development ("R&D") of new and
enhanced simulation and training technology using internally generated funds.
The Company's R&D efforts are divided into four separate disciplines:
electronic, mechanical, training and audio-visual. The continued success of the
Company will depend on its ability to incorporate in its products changing
technologies in such areas and to develop and introduce new technology that
meets the increasingly sophisticated training needs of the Company's customers.
Although the Company continuously pursues research and development, there can be
no assurance that it will be successful in adapting technology in a timely
fashion.
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.
Mechanical R&D combines mechanical engineering with the development of
highly specialized sensing mechanisms, incorporating sophisticated programmable
micro controllers for the execution of control
9
<PAGE> 10
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.
Training R&D focuses on the interpretation and translation of customer
training requirements into quantifiable objectives and the development of
simulation programs to meet those objectives. The Company's training R&D
department is staffed with world-class competitive shooters, each of whom has
extensive military or law enforcement experience. Specialized experience on the
part of the Company's employees in such areas as the U.S. military, law
enforcement, hunting and competitive shooting helps ensure an understanding of
customer requirements.
Audio-visual R&D focuses on the production of specialized audio-visual
programs and a range of media support activities, from full production of
training programs to customer assistance in user-produced programs. The
Company's audio-visual technology is very important for creating a life-like
training environment. The Company has assembled a team of experienced
audio-visual engineers, cinematographers and specialists and pioneered the use
of multi-screen projection in small arms simulation.
MANUFACTURING OPERATIONS
The Company's manufacturing operations are conducted primarily at its
headquarters near Atlanta, Georgia, and to a limited extent at the facility of
its U.K. subsidiary, Firearms Training Systems Ltd. Simtran's products will be
manufactured at its facility in Montreal, and Dart's products are manufactured
at its facility in Denver, Colorado. Atlanta manufacturing operations are
divided into two departments, systems manufacturing and weapons manufacturing.
The systems manufacturing department assembles the simulator components of the
FATS(R) systems. 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 at the Company's headquarters where
electrical assemblers and technicians can assemble approximately 40 primary
simulation computers and other unique simulator components per month on a
single-shift basis. The Company believes that this capacity can be expanded to
100 simulation computers per month by adding additional personnel, using a
second shift or to even greater capacity by acquisition of the requisite
workstations and floor space for manufacturing and warehouse operations.
Weapons manufacturing involves the production of simulated firearms and
non-lethal simulators by either modifying actual firearms and other devices into
simulators or assembling simulators from kits manufactured to the Company's
specifications by a variety of outside sources. The assembly process encompasses
the fitting of modified weapons or kits with the Company's pneumatic and
electrical components, followed by the functional testing of the completed
assembly. The combined weapons manufacturing activities in the U.S. and the U.K.
have a capacity of 450 simulated firearms per month on a single-shift basis. As
with systems manufacturing, this capacity can readily be expanded to 750 by
adding additional personnel, 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, an area service representative,
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 with readily
available serviceable parts and assemblies. The Company's
10
<PAGE> 11
U.K., Netherlands and Singapore subsidiaries as well as Simtran and Dart perform
the same support functions for respective customers.
PROPRIETARY OPERATING SYSTEM; RAW MATERIALS AND SUPPLIERS
The Company currently purchases from numerous suppliers on both a
competitive bid and long-term contract basis. The Company's newest generation
products use a Windows(R)-based operating system; however, some of the Company's
current products, as well as earlier model simulators, use a software operating
system known as OS-9 which is a proprietary system owned by Microware
Corporation. The Company has licensed the OS-9 system from Microware on a
non-exclusive, royalty-paying basis for a term currently expiring October 31,
2001 (unless sooner terminated for breach by the Company of the license terms).
Although loss of its OS-9 license could have a material adverse effect on the
future conduct of its business operations and financial condition, the Company
is in compliance with the terms of such license and believes its relationship
with Microware Corporation to be satisfactory. The Company believes that there
are viable alternative sources for all of its raw materials. In addition, the
Company has a sophisticated machine shop in which it can convert actual weapons
into simulated weapons and produce certain weapon and simulator parts. This
ability provides the Company with the flexibility to produce a large portion of
its principal components if they become unavailable or it becomes economically
advantageous to do so.
COMPETITION
The recent increase in sales and acceptance of small arms simulation
products and the addition of a broader range of products through Simtran has
brought about an increase in competition from both domestic and international
companies. The Company competes with divisions or subsidiaries of larger
companies solely dedicated to simulation for sales of the Company's small and
supporting arms simulation products, which now include indirect fire, air
defense and armored vehicles. Principal among the competitors for military
business are CAE Invetron Ltd., a U.K. division of CAE Electronics, Short
Brothers, a division of Bombardier (which has recently teamed with a U.S.
Company, ECC International Corp.), Simtech, a subsidiary of TADIRAN and
Solatron, a subsidiary of Lockheed Martin. In the U.S. law enforcement component
of the market, the Company's principal competitors include, among others,
Advanced Interactive Systems, Inc. and I.E.S., Inc. The international law
enforcement component of the market has also seen an increase in competition
from small European companies. The growing awareness of simulation budgets,
combined with the competitive nature of the marketplace, has contributed to the
formation of teaming arrangements by competitors that present potential
competitive challenges, for example, with respect to the yet to be awarded U.S.
Army EST program. Many of the Company's current and potential competitors have
significantly greater financial, technical and marketing resources than the
Company.
EMPLOYEES
As of March 31, 1998, the Company and its subsidiaries, including Simtran,
employed 464 persons. As a result of the restructuring measures discussed in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- General -- U.S. Army EST Procurement Process", as of June 22,
1998, the Company employed 362 persons, including 14 persons at Dart. As of such
date, the Company employed a total of 234 persons domestically, including 101 in
manufacturing, assembly and customer service, 74 in R&D, 31 in sales and
marketing, 24 in administration and finance and 4 in program management; the
Company's U.K. subsidiary employed a total of 19 persons, including 14 in
manufacturing, assembly and customer service, one in R&D, three in sales and
marketing and one in administration and finance; the Company's Netherlands
subsidiary employed a total of six persons, including four in manufacturing,
assembly and customer service and two in administration and finance; the
Company's Dart subsidiary employed a total of 14 persons, including 5 in
manufacturing, assembly and customer service, 1 in R&D, 5 in sales and marketing
and 3 in administration and finance; the Company's Canadian subsidiaries
employed a total of 88 persons, including 41 in manufacturing, assembly and
customer service, 33 in R&D, 3 in sales and marketing and 11 in administration
and finance; 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
11
<PAGE> 12
salespersons in California, Florida, Georgia, Illinois, Kansas, New Jersey, New
Mexico, Texas, Virginia and Wyoming. 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 its convenience if such termination
would be in the best interest of the U.S. government. Furthermore, any
contractor who is suspected of, or found to have engaged in, commission of fraud
or a criminal offense in connection with a government contract or subcontract, a
serious violation of the terms of a government contract or subcontract, unfair
trade practices, or any other offense indicating moral turpitude or a lack of
business integrity or business honesty faces the possibility of being suspended
or debarred from all further government contracting. The decision to suspend or
debar a contractor is generally at the discretion of the government. Any such
suspension or debarment could have a material adverse effect on the Company's
future results of operations and financial condition.
The type of government contracts awarded to the Company in the future may
affect its financial performance. A number of the Company's contracts have been
obtained on a sole source basis while others, 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 out by Presidential Executive Order issued
under the auspices of the International Emergency Economic Powers Act). In
addition to application to transfer of information and products to customers,
such regulations also may from time to time require a license for the transfer
of technical information from the Company to its foreign subsidiaries, such as
information necessary to enable a subsidiary to modify simulated weapons for use
in systems being supplied by the subsidiary to customers. The respective
jurisdictional statutes provide the State Department and the Commerce Department
with the discretion to change their policies with respect to whether particular
products can be licensed for export to particular countries. In addition, in
certain circumstances, export licenses and other authorizations may be revoked,
suspended or amended without notice. 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 civil violations and criminal offenses in connection with
exports. Any loss, suspension or revocation of the Company's export licenses
could have a material adverse effect on the Company's future results of
operations and financial condition.
12
<PAGE> 13
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 of the Company's subsidiaries also have similar
licenses in their jurisdictions of incorporation. Any revocation of or refusal
to renew the Company's ATF license or any such foreign license could have a
material adverse effect on the conduct of the Company's operations and financial
condition since it must possess such licenses and comply with ATF regulations in
order to import, possess and modify the authentic firearms used in its FATS(R)
systems.
Certain FATS(R) simulation systems use laser-emitting devices to locate the
user's aiming point in relation to the target. Such products must be
manufactured and operated in accordance with safety standards adopted to protect
human eyesight. In the United States, such standards are included as part of
Food and Drug Administration regulations currently administered by the Center
for Devices and Radiological Health. Systems sold to many international
customers, including those in Europe and Canada, however, must comply with
international standard IEC 825-1, as recently revised, which contains more
rigorous criteria than the present U.S. standards. Depending on the amount of
laser energy emitted, room safety precautions, warning signs and labels, special
shut-off devices, special training for personnel and related safety measures may
be required, which increase costs and can create administrative concerns for the
Company's customers.
EXECUTIVE OFFICERS
Executive officers of the Company are elected by the Board of Directors
annually and hold office until the next annual meeting of stockholders or until
they sooner resign or are removed from office by the Board of Directors.
The executive officers of the Company and their ages and positions with the
Company as of June 26, 1998 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Peter A. Marino..... 56 President, Chief Executive Officer and Director
Robert F. Mecredy... 51 Executive Vice President
Emory O. Berry...... 32 Chief Financial Officer and Treasurer
Juan C.G. de
Ledebur........... 43 Vice President, Sales and Marketing
Charles N. Bowen.... 35 Secretary
</TABLE>
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 is a member of the Defense
Science Board.
Robert F. Mecredy has served as Executive Vice President since July 18,
1997. Prior thereto, Mr. Mecredy served as Vice President, Domestic from 1996 to
1997, Director of the Company from 1993 to 1996, as Director of Domestic Sales
and Marketing from 1994 to 1996 and as Director of U.S. Military Marketing from
1990 to 1994. 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 non-commissioned
and commissioned officer in the U.S. Army for 20 years, retiring in 1986 with
the rank of lieutenant colonel.
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<PAGE> 14
Emory O. Berry has served as Chief Financial Officer and Treasurer since
June 25, 1998. Mr. Berry served as Director of Corporate Accounting since March
1997. Prior to joining the Company, Mr. Berry served as a financial consultant
from December 1996 to February 1997 with Physicians Resource Group, a physician
practices management company. From May 1996 to December 1996, Mr. Berry served
as Corporate Controller of Housecall Medical Resources, Inc., a home health care
company. From 1993 to 1996, Mr. Berry served as Corporate Controller of EquiMed,
Inc., a physician practices management company. From 1990 to 1993, Mr. Berry
served as Financial Reporting Manager of American Security Group, a group of
insurance companies
Juan C. G. de Ledebur has served as Vice President, Sales and Marketing
since July 18, 1997. Mr. De Ledebur previously served as Vice President,
International from 1996 to 1997 and 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.
Charles N. Bowen has served as Secretary since July 18, 1997. Mr. Bowen has
served as General Counsel to the Company since December 23, 1996. Prior to
joining the Company, Mr. Bowen was an attorney with the Atlanta law firm of
Gambrell & Stolz from 1992 to 1996. Mr. Bowen served as a commissioned officer
with the U.S. Army's 101st Airborne Division (Air Assault) from 1988 to 1992.
David A. Apseloff resigned as Vice President, Chief Financial Officer,
Treasurer and Assistant Secretary as of June 25, 1998. Mr. Apseloff served as
Treasurer and Chief Financial Officer since April 1995, Assistant Secretary
since July 31, 1996 and Vice President since April 1997. 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 B. Terry, Jr. resigned as Vice President, Operations as of June 19,
1998. Mr. Terry served as Vice President, Operations from July 18, 1997, as
Chief Operating Officer and Vice President from 1996 to 1997 and 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.
Gregory Echols resigned as Vice President, Engineering as of June 19, 1998.
Mr. Echols served as Vice President, Engineering from September 17, 1996 and
previously served as Director of Research and Development from 1990 to 1996.
ITEM 2. PROPERTIES
The Company's headquarters and primary facility, at which it performs
manufacturing, assembly, R&D, sales, marketing, financial and administrative
functions, is a leased property of approximately 98,100 square feet located near
Atlanta. The lease expires in 2008 with three five-year options to extend the
lease beyond such date. The Company also leases a 12,900 square foot facility
located close to its primary facility, at which it bases its U.S. customer
service operations. The lease expires in 2002, however, the Company intends to
negotiate a termination of this lease as of August 1, 1998. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- General -- U.S. Army EST Procurement Process." A Company
subsidiary occupies a leased facility in Melbourne, Florida of approximately
3,750 square feet. The lease expires in 1999. 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. Simtran, one of the Company's
Canadian subsidiaries, performs its operations in Quebec in leased facilities
containing approximately 38,800 square feet. The lease expires in 2001.
14
<PAGE> 15
ITEM 3. LEGAL PROCEEDINGS
The Company has been actively participating in a competitive bidding
process for the proposed U.S. Army Engagement Skills Trainer ("EST") program, a
U.S. military procurement award anticipated to be at least as large as the
Company's current U.S. Marine Corps Contract 2014. On May 14, 1998, the Company
received notification on behalf of the U.S. Army that its proposal in response
to the ongoing competition had been excluded from further consideration. On June
2, 1998, the Company filed an action in the United States Court of Federal
Claims to protest this decision, and to obtain an injunction against any award
of the EST contract until the Court can rule on the Company's protest. As part
of this action, the Company has requested that the Court order the procurement
authority to continue its consideration of the Company's proposal and to engage
in meaningful discussions with the Company. Although the Company intends to
pursue this matter vigorously, there can be no assurance that the Court will
grant the relief requested. Furthermore, even if the Company is successful in
securing the right to continue in the competitive bidding process, there can be
no assurance that the Company would ultimately be successful in securing the EST
contract award. In view of the Company's substantial completion of Marine Corps
Contract 2014 and the more limited scope of other U.S. military opportunities,
the failure to secure an award of the U.S. Army EST contract could have a
material adverse effect on the Company's future revenues from the U.S. military,
particularly as compared with the U.S. military revenues during fiscal 1997, and
on the Company's financial condition, liquidity or results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- General -- U.S. Army EST Procurement Process."
On October 3, 1997, Dart, a Company subsidiary, was sued by Advance
Interactive Systems, Inc. ("AIS") for alleged infringement of a patent owned by
AIS, U.S. Patent No. 5,649,706 (the "706 Patent"). Dart filed its answer on
December 2, 1997, denying all material allegations, asserting numerous
affirmative defenses, and counterclaiming for a judicial declaration of
noninfringement, patent invalidity, patent unenforceability, and for damages for
unjust enrichment. Discovery is ongoing at this time, and no dispositive motions
have been filed or heard. In the opinion of the Company's management, this
proceeding will not have a material adverse effect on the Company's financial
position, liquidity, or results of operations.
The Company is involved in additional legal proceedings from time to time
in the ordinary course of its business which, in the opinion of management, will
not have a materially adverse effect on the Company's financial position,
liquidity, or results of operation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the security holders of the Company
during the fourth quarter of the fiscal year.
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock has been traded on The Nasdaq National Market
since November 27, 1996. Prior to such date, there was no public trading market
for the Common Stock. As of June 22, 1998, there were 124 holders of record of
the Company's Common Stock. The high and low sales prices of the Common Stock
during the period from November 27, 1996 through the year ended March 31, 1998
were as follows:
QUARTERLY STOCK PRICE RANGE
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
Third Quarter 1997 (from November 27, 1996)................. $14.13 $10.50
Fourth Quarter 1997......................................... 16.25 11.38
First Quarter 1998.......................................... 15.50 9.13
Second Quarter 1998......................................... 14.25 5.75
Third Quarter 1998.......................................... 7.50 5.00
Fourth Quarter 1998......................................... 10.44 5.34
</TABLE>
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<PAGE> 16
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.
RECENT SALES OF UNREGISTERED SECURITIES
The following, which gave 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
effected by the Company on November 1, 1996, sets forth certain information with
respect to all securities of the Company sold by the Company within the past
three years:
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 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.
On July 31, 1996, in connection with the Recapitalization, the Company
sold to NationsBridge, L.L.C. the Bridge Notes due July 31, 2004 in an
aggregate principal amount equal to $40.0 million and, in connection with
such sale, entered into arrangements for the issuance of warrants to
purchase shares of Common Stock at a nominal price. NationsBridge paid
aggregate consideration of $40 million in cash (less certain fees) for 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 September 17, 1996, the Company issued 7,266,811 shares of its
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 stockholder 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.
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 of
Common Stock 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.
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.
On April 24, 1998, 1,694,569 shares of the Company's voting Class A
Common Stock were exchanged by the Centre Entities for an equal amount of
non-voting Class B Common Stock. In connection with the exchange, the
Centre Entities agreed not to convert the shares of Class B Common Stock to
shares of Class A Common Stock if, as a result of such conversion, the
Centre Entities would hold, of record or beneficially with power to vote,
more than 50% of the shares of Class A Common Stock outstanding immediately
following such conversion, unless concurrently with such conversion the
shares of Class A Common Stock are transferred to an unaffiliated person.
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<PAGE> 17
ITEM 6. SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The selected financial data of the Company for each of the last five years
set forth below have been derived from the Company's consolidated financial
statements for each of the five fiscal years ended March 31, 1998, which
financial statements have been audited by Arthur Andersen LLP in the case of the
fiscal years ended March 31, 1998, 1997, 1996 and 1995. The selected
consolidated financial data set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" set forth below and the financial statements of the Company included
elsewhere in this Report and referred to in the "Index to Financial Statements"
(together with the notes and other reports relating to such financial
statements).
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31,
---------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues......................................... $73,547 $90,806 $65,439 $29,164 $20,534
Cost of revenues................................. 33,867 44,214 30,902 14,230 9,651
------- ------- ------- ------- -------
Gross profit..................................... 39,680 46,592 34,537 14,934 10,883
------- ------- ------- ------- -------
Operating expenses:
Selling, general and administrative
expenses.................................. 15,036 15,016 12,087 8,169 6,066
Research and development expenses........... 6,475 4,224 2,781 2,296 2,048
Depreciation and amortization............... 1,042 473 386 330 297
Acquired in-process research and development
charge.................................... 4,000 -- -- -- --
------- ------- ------- ------- -------
Total operating expenses............... 26,553 19,713 15,254 10,795 8,411
------- ------- ------- ------- -------
Operating income................................. 13,127 26,879 19,283 4,139 2,472
Interest income (expense), net................... (5,905) (6,069) 165 12 (98)
Nonrecurring recapitalization expenses........... -- (1,181) -- -- --
Other income (expense), net...................... (97) 71 (93) 66 (126)
------- ------- ------- ------- -------
Income before income taxes and extraordinary
item........................................... 7,125 19,700 19,355 4,217 2,248
Provision for income taxes(1).................... 3,892 7,359 6,565 1,387 730
------- ------- ------- ------- -------
Income before extraordinary item................. 3,233 12,341 12,790 2,830 1,518
Extraordinary item, net of income tax............ -- (3,327) -- -- --
------- ------- ------- ------- -------
Net income....................................... $ 3,233 $ 9,014 $12,790 $ 2,830 $ 1,518
======= ======= ======= ======= =======
Basic earnings per share(2)...................... $ 0.16 $ 0.55 $ 0.89 $ 0.20 $ 0.11
Diluted earnings per share(2).................... $ 0.15 $ 0.50 $ 0.80 $ 0.18 $ 0.09
======= ======= ======= ======= =======
Weighted average common shares -- basic(2)....... 20,408 16,489 14,402 14,402 14,402
======= ======= ======= ======= =======
Weighted average common shares -- diluted(2)..... 21,456 18,009 16,029 16,029 16,029
======= ======= ======= ======= =======
</TABLE>
17
<PAGE> 18
<TABLE>
<CAPTION>
FISCAL YEAR
ENDED
MARCH 31,
-----------
1998 1997 1996
------- ----------- -------
<S> <C> <C> <C>
PRO FORMA STATEMENT OF OPERATIONS DATA(3):
Operating income.......................................... $13,127 $26,879 $19,283
Income before income taxes................................ 7,125 21,408 13,664
Net income................................................ $ 3,233 $13,560 $ 9,026
======= ======= =======
Basic earnings per share.................................. $ 0.16 $ 0.66 $ 0.44
======= ======= =======
Diluted earnings per share................................ $ 0.15 $ 0.62 $ 0.42
======= ======= =======
Shares used in computation -- basic(4).................... 20,408 20,402 20,402
Shares used in computation -- diluted(4).................. 21,456 21,741 21,741
</TABLE>
<TABLE>
<CAPTION>
MARCH 31,
----------------------------
1998 1997 1996 1995 1994
------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............................... $18,907 $ 20,350 $20,216 $ 7,657 $ 4,784
Total assets.................................. 56,380 42,121 33,820 16,817 12,108
Total debt, including current maturities...... 63,000 58,600 -- -- 876
Stockholders' equity (deficit)................ (28,231) (31,378) 21,262 8,484 5,524
</TABLE>
- ---------------
(1) Provision for income taxes for fiscal 1993 was calculated in accordance with
Accounting Principles Board Opinion 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
public offering price during the 12-month period prior to the Company's
initial public offering, (the "Offering") that was consummated on November
26, 1996 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 underwriting discount and 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 "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- General --
Extraordinary Loss," "-- Recapitalization" and Notes 4 and 10 of Notes to
Consolidated Financial Statements.
18
<PAGE> 19
(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 1,338,248
shares of Common Stock issuable upon the exercise of outstanding options
(net of 404,586 shares assumed to be repurchased by the Company using the
treasury stock method). See "Business--History", "Management's Discussion
and Analysis of Financial Condition and Results of
Operations--Recapitalization" and Note 5 of Notes to Consolidated Financial
Statements.
RECENT DEVELOPMENTS
To support the Company's objectives of increasing revenues, the Company had
developed its infrastructure during the last several years in expectation that
the resulting increase in expense would be offset by additional revenues. In
response to developments concerning the Army EST procurement process including
its possible related impact on other new business opportunities, the Company
announced on June 24, 1998 that it would take a restructuring charge of
approximately $900,000 for costs incurred in the first quarter fiscal 1999
related to a workforce reduction and other measures. In addition, the Company
has agreed to a revision of certain financial covenants under its senior credit
facility which will result in incurrence of certain additional interest costs.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- General -- U.S. Army EST Procurement Process and -- Liquidity and
Capital Resources.
19
<PAGE> 20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
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. As a result of the Simtran acquisition, the Company also has a
contract to develop air defense and armored vehicle products. 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.
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 or on a percentage of
completion method for a contract in which completion and delivery exceeds one
year. Service revenues are comprised of revenues from individual purchase
orders, which are recognized as services are provided, and revenues from
extended service contracts, which are recognized over the life of the service
contracts.
Although the Company sells its products and services to a large number of
military and law enforcement agencies in the U.S. and internationally, the top
five customers accounted for approximately 60.7%, 76.3% and 67.4% of the
Company's revenues in fiscal 1998, 1997 and 1996, respectively. A significant
increase or decrease in demand by a large customer can 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 1998, 1997 and 1996, approximately 46.0%, 31.3% and 43.3%,
respectively, of the Company's revenues were derived from sales to international
customers. The Company expects that sales to international customers will
continue to account for a significant percentage of future revenues, as the
worldwide acceptance for simulation-based training systems continues to grow and
U.S. military opportunities are reduced. 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 or imposition of economic sanctions such as those
recently applied to India and Pakistan. 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. Certain of the Company's
international sales are denominated in foreign currencies. The Company does not
currently hedge these foreign currency transactions, since it believes its
exposure to foreign exchange rate fluctuations has not been material.
Cost of revenues generally includes materials, direct labor, overhead and
other direct costs. Operating expenses include selling, general and
administrative expenses, R&D 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 14 years
primarily 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
20
<PAGE> 21
the U.S. Army. The total initial contract amount was $16.1 million, and options
exercised and contract modifications made have increased that amount by a total
of $79.1 million through March 31, 1998. Deliveries under Contract 2014
commenced in the fourth quarter of fiscal 1995 and totaled $94.6 million through
March 31, 1998.
U.S. Army EST Procurement Process
The Company has been actively participating in a competitive bidding
process for the proposed U.S. Army Engagement Skills Trainer ("EST") program, a
U.S. military procurement award anticipated to be at least as large as the
Company's current U.S. Marine Corps Contract 2014. On May 14, 1998, the Company
received notification on behalf of the U.S. Army that its proposal in response
to the ongoing competition had been excluded from further consideration. On June
2, 1998, the Company filed an action in the United States Court of Federal
Claims to protest this decision, and to obtain an injunction against any award
of the EST contract until the Court can rule on the Company's protest. As part
of this action, the Company has requested that the Court order the procurement
authority to continue its consideration of the Company's proposal and to engage
in meaningful discussions with the Company. Although the Company intends to
pursue this matter vigorously, there can be no assurance that the Court will
grant the relief requested. Furthermore, even if the Company is successful in
securing the right to continue in the competitive bidding process, there can be
no assurance that the Company would ultimately be successful in securing the EST
contract award. In view of the Company's substantial completion of Marine Corps
Contract 2014 and the more limited scope of other U.S. military opportunities,
the failure to secure an award of the U.S. Army EST contract could have a
material adverse effect on the Company's future revenues from the U.S. military,
particularly as compared with the U.S. military revenues in fiscal 1997, and the
Company's financial position, liquidity and results of operations. To support
the Company's objectives of increasing revenues, the Company had developed its
infrastructure during the last several years in expectation that the resulting
increase in expense would be offset by additional revenues. In response to
developments concerning the Army EST procurement process and possible related
impact on related business opportunities, the Company announced on June 24, 1998
that it would take a restructuring charge of approximately $900,000 for costs
incurred in the first quarter fiscal 1999 related to a workforce reduction and
other measures. In addition, the Company has agreed to a revision of certain
financial covenants under its senior credit facility which will result in
incurrence of certain additional interest costs. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources.
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 March 31, 1998, the Company had a backlog of
approximately $49.4 million, comprised of $27.4 million from FATS international
customers, $18.9 from Simtran's Canadian customers and $2.2 million from FATS
U.S. military customers. Recognition of Simtran's backlog will be dependent upon
delivery and acceptance of its products currently under development.
Approximately $35.6 million of the contracted orders are scheduled for delivery
during fiscal year 1999. 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 the 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 million in
cash; (ii) issued $40 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 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
21
<PAGE> 22
Payment in cash or shares of Common Stock to THIN International if certain
trigger events occurred. 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 report have been restated to reflect
both stock splits.
Extraordinary Loss
A portion of the proceeds from the Offering was used to repay the $40
million Bridge Notes and reduce the Senior Bank Debt by $11.2 million. As a
result, an extraordinary loss occurred on the early extinguishment of debt. This
extraordinary item includes legal fees, unamortized deferred financing costs,
unamortized basis of the NationsBridge Warrants and a fee paid in connection
with the repayment of the Bridge Notes.
Acquired In-Process Research and Development Charge
The Company recognized a non-recurring acquired in-process research and
development charge in connection with the acquisition of Simtran completed on
March 5, 1998. Based on an assessment by the Company, in conjunction with an
independent valuation firm, it was determined that $4.0 million (or $0.19 per
diluted share) of Simtran's purchase price represented technology that does not
meet the accounting definition of completed technology, and thus should be
charged to earnings under generally accepted accounting principles.
Growth Strategy
The Company has experienced significant growth in its sales during recent
years, primarily, due to sales to the U.S. Marine Corps, 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 and through
strategic acquisitions. See "U.S. Army EST Procurement Process" above. The
Company's growth strategy includes the following core elements:
Increase Market Penetration. The Company is seeking to broaden
acceptance of its products and increase sales to military and law
enforcement agencies internationally and in the U.S. 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(R) 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. Addition of an indirect fire
simulator for artillery and naval gunfire has resulted in the award of an
additional contract with the Canadian Armed Forces beyond small arms
simulators and may assist the Company in gaining additional new contracts.
The Company is also developing simulators for newly emerging weaponry and
products integrating FATS(R) systems with larger weapons system simulators,
such as those currently being developed by Simtran. 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).
Expand into New Markets. Management believes that opportunities exist
for sales beyond the Company's traditional military and law enforcement
customers. The Company had already begun to focus on the hunter and sports
training component of the market, and with the acquisition of Dart seeks to
increase the penetration in this business. 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.
22
<PAGE> 23
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(R) 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(R) brand name such as
the recent acquisitions of ICAT, Simtran and Dart completed within the last
twelve months.
RESULTS OF OPERATIONS
The following table sets forth certain operating data as a percentage of
gross revenues for the periods indicated:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31,
-----------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Revenues.................................................... 100.0% 100.0% 100.0%
Cost of revenues............................................ 46.1 48.7 47.2
----- ----- -----
Gross profit................................................ 53.9 51.3 52.8
----- ----- -----
Operating expenses:
Selling, general and administrative expenses.............. 20.5 16.5 18.5
Research and development expenses......................... 8.8 4.7 4.2
Depreciation and amortization............................. 1.4 0.5 0.6
Acquired in-process research and development charge....... 5.4 -- --
----- ----- -----
Total operating expenses.......................... 36.1 21.7 23.3
----- ----- -----
Operating income............................................ 17.8 29.6 29.5
Interest income (expense), net.............................. (8.0) (6.7) 0.2
Nonrecurring recapitalization expenses...................... -- (1.3) --
Other income (expense), net................................. (0.1) 0.1 (0.1)
----- ----- -----
Income before income taxes and extraordinary item........... 9.7 21.7 29.6
Provision for income taxes.................................. 5.3 8.1 10.1
----- ----- -----
Income before extraordinary item............................ 4.4 13.6 19.5
Extraordinary item, net of income tax....................... -- (3.7) --
----- ----- -----
Net income.................................................. 4.4% 9.9% 19.5%
===== ===== =====
</TABLE>
Fiscal Year Ended March 31, 1998 Compared to the Fiscal Year Ended March 31,
1997
Revenues. Revenues decreased $17.3 million, or 19.0%, to $73.5 million for
fiscal 1998 as compared to $90.8 million for fiscal 1997. This decrease was
attributable to a $23.8 million decrease, or 44.2%, to $30.0 million in sales to
the U.S. military due primarily to a decrease in sales to the U.S. Marine Corps
as significant portions of Contract 2014 were completed. This decrease was
partially offset by an increase of $5.4 million, or 18.9%, to $33.8 million, in
international sales. Sales to U.S. law enforcement customers for fiscal 1998
increased by $1.5 million, or 21.8%, to $8.6 million. Sales to U.S.
Hunter/Sports customers decreased by $0.4 million, or 25.9%, to $1.1 million.
Cost of Revenues. Cost of revenues decreased $10.3 million, or 23.4%, to
$33.9 million for fiscal year 1998 as compared to $44.2 million for fiscal 1997.
As a percentage of revenues, cost of revenues decreased to 46.1% for fiscal 1998
as compared to 48.7% for fiscal 1997. This decrease was due to customer and
product mix changes primarily due to a decrease in sales to U.S. military
customers which traditionally have higher cost of revenues.
Gross Profit. As a result of the foregoing, gross profit decreased $6.9
million, or 14.8% to $39.7 million, or 53.9% of revenues, for fiscal 1998 as
compared to $46.6 million, or 51.3% of revenues, for fiscal 1997.
Total Operating Expenses. Total operating expenses increased $6.8 million,
or 34.7% to $26.6 million for fiscal 1998 as compared to $19.7 million for
fiscal 1997. Total operating expenses as a percentage of
23
<PAGE> 24
revenues increased to 36.1% for fiscal 1998 from 21.7% for fiscal 1997. This
increase was primarily a result of the $4.0 million acquired in-process research
and development charge related to the Simtran acquisition. Selling, general and
administrative expenses increased as a percentage of revenue to 20.5% for fiscal
1998 from 16.5% for fiscal 1997 as a result of the decrease in revenues.
Research and development costs increased $2.3 million, or 53.3%, from fiscal
1997 to fiscal 1998 due to continued efforts in developing new and improving
existing products.
Operating Income. As a result of the foregoing, operating income decreased
$13.8 million, or 51.2%, to $13.1 million, or 17.8% of revenues, for fiscal 1998
as compared to $26.9 million, or 29.6% of revenues, for fiscal 1997.
Other Income (Expense), net. Net interest expense totaled $5.9 million, or
8.0% of revenues for fiscal 1998 as compared to net interest expense of $6.1
million, or 6.7% for fiscal 1997. Other income (expense), net for fiscal 1997
includes a nonrecurring charge of $1.2 million for expenses incurred in
connection with the Recapitalization.
Provision for Income Taxes. The effective tax rate increased to 54.6% of
income before income taxes for fiscal 1998 compared to 37.4% of income before
taxes for fiscal 1997. This increase was primarily attributable to the acquired
in-process research and development charge related to the Simtran acquisition,
which is not deductible for income tax purposes.
Income Before Extraordinary Item. As a result of the foregoing, income
before extraordinary item decreased $9.1 million, or 73.8%, to $3.2 million, or
4.4% of revenues for fiscal 1998 as compared to $12.3 million, or 13.6% of
revenues for fiscal 1997.
Extraordinary Item. A portion of the proceeds from the Offering was used
to repay the $40 million Bridge Notes and reduce the Senior Bank Debt by $11.2
million. As a result, an extraordinary loss occurred on the early extinguishment
of debt in fiscal 1997. This extraordinary item includes legal fees, unamortized
deferred financing costs, unamortized basis of the NationsBridge Warrants and a
fee paid in connection with the repayment of the Bridge Notes.
Net Income. As a result of the foregoing, net income as reported decreased
$5.8 million, or 64.1%, to $3.2 million ($0.15 per diluted share), or 4.4% of
revenues for fiscal 1998 as compared to $9.0 million ($0.50 per diluted share),
or 9.9% of revenues for fiscal 1997.
Pro Forma Results. The pro forma results give effect to the
Recapitalization and the Offering as if it occurred at the beginning of the
period. The pro forma results exclude the nonrecurring expenses incurred in
connection with the Recapitalization and the extraordinary loss related to the
early extinguishment of debt and also reflect interest expense for all periods
presented, based on the Senior Bank Debt of $58.6 million outstanding after the
Offering. The net income for fiscal 1998 was $3.2 million ($0.15 per diluted
share), or 4.4% of revenues, a decrease of $10.3 million, or 76.2%, over the
$13.6 million ($0.62 per diluted share) pro forma net income for fiscal 1997.
Fiscal Year Ended March 31, 1997 Compared to the Fiscal Year Ended March 31,
1996
Revenues. Revenues increased $25.4 million, or 38.8%, to $90.8 million for
fiscal 1997 as compared to $65.4 million for fiscal 1996. Approximately 97.7% of
such increase was attributable to a $24.8 million increase in sales to the U.S.
military. Deliveries to the U. S. Marine Corps accounted for the majority of the
increase in sales to the U.S. military. Fiscal 1997 also included approximately
$1.5 million in sales to hunter and sports customers as compared to $573,000 for
fiscal 1996.
Cost of Revenues. Cost of revenues increased $13.3 million, or 43.1%, to
$44.2 million for fiscal year 1997 as compared to $30.9 million for fiscal 1996.
As a percentage of revenues, cost of revenues increased to 48.7% for fiscal 1997
as compared to 47.2% for fiscal 1996. This increase was due to an increase in
materials as a percentage of revenues due to customer and product mix changes
and due to lower gross margins from the U.S. military contracts. This increase
was partially offset by a decrease in labor and overhead costs as a
24
<PAGE> 25
percent of revenue. This decrease was primarily the result of spreading labor
and overhead costs over a substantially higher revenue base.
Gross Profit. As a result of the foregoing, gross profit increased $12.1
million, or 34.9% to $46.6 million, or 51.3% of revenues, for fiscal 1997 as
compared to $34.5 million, or 52.8% of revenues, for fiscal 1996.
Total Operating Expenses. Total operating expenses increased $4.5 million,
or 29.2% to $19.7 million for fiscal 1997 as compared to $15.3 million for
fiscal 1996. Total operating expenses as a percentage of revenues decreased to
21.7% for fiscal 1997 from 23.3% for fiscal 1996 which resulted from operating
leverage that enabled the Company to spread its fixed cost over a larger revenue
base. Accordingly, selling, general and administrative expenses declined as a
percentage of revenue to 16.5% for fiscal 1997 from 18.5% for fiscal 1996. R&D
costs, however, increased $1.4 million, or 51.9%, from fiscal 1996 to fiscal
1997 due to continued efforts in developing new and improving existing products.
Operating Income. As a result of the foregoing, operating income increased
$7.6 million, or 39.4%, to $26.9 million, or 29.6% of revenues, for fiscal 1997
as compared to $19.3 million, or 29.5% of revenues, for fiscal 1996.
Other Income (Expense), net. Net interest expense totaled $6.1 million, or
6.7% of revenues for fiscal 1997 as compared to net interest income of $165,000
for fiscal 1996. The increase in net interest expense is a result of interest
expense and amortization of deferred financing costs related to debt incurred in
connection with the Recapitalization. Other income (expense), net also includes
a nonrecurring charge of $1.2 million for expenses incurred in connection with
the Recapitalization.
Provision for Income Taxes. The effective tax rate increased to 37.4% of
income before income taxes for fiscal 1997 compared to 33.9% of income before
taxes for fiscal 1996. This increase was primarily attributable to certain of
the nonrecurring expenses incurred in connection with the Recapitalization which
are not deductible for income tax purposes.
Income Before Extraordinary Item. As a result of the foregoing, income
before extraordinary item decreased $.5 million, or 3.5%, to $12.3 million, or
13.6% of revenues for fiscal 1997 as compared to $12.8 million, or 19.5% of
revenues for fiscal 1996.
Extraordinary Item. A portion of the proceeds from the Offering was used
to repay the $40 million Bridge Notes and reduce the Senior Bank Debt by $11.2
million. As a result, an extraordinary loss occurred on the early extinguishment
of debt in fiscal 1997. This extraordinary item includes legal fees, unamortized
deferred financing costs, unamortized basis of the NationsBridge Warrants and a
fee paid in connection with the repayment of the Bridge Notes.
Net Income. As a result of the foregoing, net income as reported decreased
$3.8 million, or 29.5%, to $9.0 million ($0.50 per diluted share), or 9.9% of
revenues for fiscal 1997 as compared to $12.8 million ($0.80 per diluted share),
or 19.5% of revenues for fiscal 1996.
Pro Forma Results. The pro forma results give effect to the
Recapitalization and the Offering as if each occurred at the beginning of the
respective periods. The pro forma results exclude the nonrecurring expenses
incurred in connection with the Recapitalization and the extraordinary loss
related to the early extinguishment of debt and also reflect interest expense
for all periods presented, based on the Senior Bank Debt of $58.6 million
outstanding after the Offering. The pro forma net income for fiscal 1997 was
$13.6 million ($0.62 per diluted share), or 14.9% of revenues, an increase of
$4.5 million, or 50.4%, over the $9.0 million ($0.42 per diluted share) pro
forma net income for fiscal 1996.
25
<PAGE> 26
QUARTERLY RESULTS OF OPERATIONS
The following table presents certain unaudited quarterly statements of
operations data for each of the eight quarters beginning April 1, 1996 and
ending March 31, 1998. Such information, in the opinion of management, includes
all adjustments consisting only of normal recurring adjustments necessary for a
fair presentation of that information. The results of operations for any quarter
are not necessarily indicative of the results to be expected for any future
quarter.
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------------------------------------
FISCAL YEAR 1998 FISCAL YEAR 1997
------------------------------------------- -------------------------------------------
MARCH 31 DEC. 31 SEPT. 30 JUNE 30 MARCH 31 DEC. 31 SEPT. 30 JUNE 30
--------- -------- --------- -------- --------- -------- --------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues.............................. $17,421 $ 18,102 $19,415 $ 18,609 $26,001 $ 25,667 $25,404 $ 13,734
Gross profit.......................... 9,979 9,023 10,310 10,368 12,324 13,110 13,985 7,173
Operating income (loss)............... (514) 4,034 4,710 4,897 7,068 8,200 8,288 3,323
Income (loss) before income taxes and
extraordinary item.................. (2,020) 2,465 3,264 3,416 5,545 5,536 5,131 3,488
Net income (loss) before extraordinary
item................................ (2,693) 1,651 2,089 2,186 3,490 3,513 3,123 2,215
Net income............................ (2,693) 1,651 2,089 2,186 3,490 186 3,123 2,215
Basic earnings (loss) per share before
extraordinary item.................. $ (0.13) $ 0.08 $ 0.10 $ 0.11 $ 0.17 $ 0.21 $ 0.22 $ 0.15
Diluted earnings (loss) per share
before extraordinary item........... (0.13) 0.08 0.10 0.10 0.16 0.19 0.19 0.14
Basic earnings (loss) per share....... (0.13) 0.08 0.10 0.11 0.17 0.01 0.22 0.15
Diluted earnings (loss) per share..... (0.13) 0.08 0.10 0.10 0.16 0.01 0.19 0.14
</TABLE>
The Company's revenues and results of operations historically have varied
substantially from quarter to quarter, and the Company expects these variations
to continue. Among the factors causing these variations have been the number,
timing and scope of the Company's contracts and purchase orders, concentration
of shipments under large orders and the uneven timing of the receipt by the
Company of necessary authorizations from government customers. The Company
recognizes revenues primarily upon shipment of its products to its customers,
while a high percentage of the Company's operating expenses, including
personnel, rent and debt service, are relatively fixed in advance of any
particular quarter. As a result the concentration of several order deliveries in
a particular quarter, unanticipated variations in the number and timing of
shipments or customer delays in proceeding to succeeding stages of a contract
could have a material adverse effect on the Company's quarterly results of
operations and financial condition.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal liquidity and capital resources needs currently and
for the near future are to fund working capital, debt service and capital
expenditures necessary to support its business. Prior to the Recapitalization,
the Company's principal liquidity and capital resource needs were to fund
working capital and capital expenditures related to growth. The Company's
primary sources of liquidity and capital resources are cash generated from
operating activities and the Senior Bank Debt.
As of June 26, 1998 the Company amended the NationsBank Credit Agreement to
provide for an increase in interest rates and for a temporary relaxation of
certain restrictive financial covenants. These covenant changes were based on
the Company's current business outlook which assumes receipt and delivery of
orders from new and existing customers and delivery of the $35.6 million of the
$49.4 million in backlog as of March 31, 1998. However, there can be no
assurance that the Company will meet these covenants and that further Senior
Bank Debt borrowings will be available should it fail to do so. The Company
currently has borrowings of $12 million and has outstanding letters of credit of
approximately $1.7 million under the $25 million revolving credit facility. The
Company believes that the cash flow from operations combined with borrowings
under the Senior Bank Debt, 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.
The Company entered into the Senior Bank Debt and borrowed an aggregate of
$76 million in connection with the Recapitalization. See "Business - History."
The Senior Bank Debt provided for credit facilities in an
26
<PAGE> 27
aggregate amount of $85 million, consisting of (i) a $15 million revolving
credit line, (ii) a Tranche A Term Loan Facility with an initial amount of $30
million, and (iii) a Tranche B Term Loan Facility with an initial amount of $40
million. The Company used approximately $11.2 million of the net proceeds from
the Offering to reduce the borrowings under the Senior Bank Debt and as of
October 15, 1997 amended the credit facility to provide an additional $10
million under the revolving credit line. See Notes 5 and 11 of Notes to
Consolidated Financial Statements. As a result of and after giving effect to the
application of the net proceeds of the Offering to reduce the borrowed amount,
the quarterly principal payments in respect to Tranche A Term Loan Facility and
the Tranche B Term Loan Facility commenced on December 31, 1997; from December
31, 1997 through June 30, 1998, the aggregate amount of such scheduled principal
payments is approximately $0.8 million per quarter and from September 30, 1998
through March 31, 2001, the aggregate amount of such scheduled principal
payments will be approximately $1.5 million per quarter. In addition, the
Company will be required to make quarterly interest payments on such
indebtedness. The revolving credit line, the Tranche A Term Loan Facility and
the Tranche B Term Loan Facility bear interest at variable rates, which were
approximately 7.94%, 7.94% and 8.69%, respectively, at March 31, 1998. The
amendment entered into as of June 26, 1998 provides for an additional increase
to the interest rates to the revolving credit line, the Tranche A Term Loan
Facility and the Tranche B Term Loan Facility of 1.0%, 1.0% and 0.5%,
respectively. The Senior Bank Debt is guaranteed by the Company and is secured
by a pledge of all of the stock of the Drop Down Subsidiary and a security
interest in the assets of the Drop Down Subsidiary.
The Company's indebtedness and the related covenants will have several
important effects on the 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's operating activities generated cash of approximately $6.4
million, $6.1 million and $6.6 million in fiscal 1998, 1997 and 1996,
respectively, due to net income in those periods. The cash generated from
operations was partially offset by increases in accounts receivable and
inventories in fiscal 1998 and 1997. The Company's investing activities used
cash of approximately $8.2 million, $2.0 million and $0.8 million in fiscal
1998, 1997 and 1996, respectively. The Company's use of cash for investing
activities in 1998 was due to payments for acquisitions and capital
expenditures. The Company's use of cash for investing activities in 1997 and
1996 was due to capital expenditures. In fiscal 1998, the Company generated cash
of $3.8 million in financing activities, primarily in connection with the
borrowings of long-term debt to finance its acquisitions.
RECENT ACCOUNTING PRONOUNCEMENTS/YEAR 2000
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income," ("SFAS 130"). SFAS 130 establishes
standards for reporting and display of comprehensive income and its components
in a full set of general purpose financial statements. SFAS 130 is effective for
the Company's fiscal year ending March 31, 1999. Management does not expect SFAS
130 to have a significant impact on the Company's consolidated financial
statements.
Also in June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, "Disclosures About Segments of an Enterprise and Related
Information" ("SFAS 131"). SFAS 131 requires companies to determine reporting
segments based on the manner in which management makes decisions about
allocating resources to segments and measuring their performance. Disclosures
for each segment are similar to those required under current standards, with the
addition of certain quarterly disclosure requirements. SFAS 131 also requires
entity-wide disclosure about the products and services an entity provides, the
countries in which it holds material assets and reports material revenues, and
its significant customers. SFAS is effective for financial statements for the
Company's fiscal year ending March 31, 1999. The Company does not expect that
SFAS 131 will require significant revision of prior disclosures.
27
<PAGE> 28
The Company expects to incur certain costs during the next two years to
address the impact of the Year 2000 problem on its information systems. The Year
2000 problem, which is common to most businesses, concerns the inability of
information systems, primarily computer software programs, to properly recognize
and process date-sensitive information on and beyond January 1, 2000. The
Company currently believes that it will be able to modify or replace its
affected systems in time to minimize any detrimental effects on operations. The
Company's products currently delivered to customers are designed to be Year 2000
compliant. Previously delivered customer products have minor issues relating to
computer printouts. These issues are corrected in all new releases of software
that are purchased by customers. The incremental costs of the Year 2000 project
are estimated between $50,000 and $100,000. These costs will be expensed as
incurred, unless new software is purchased that will be capitalized in
accordance with the Company's policy. The Company does not expect that the Year
2000 problem will have a material impact on the results of operations, liquidity
or consolidated financial position of the Company.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Report of Independent Public Accountants, the Consolidated Financial
Statements, Financial Statement Schedule and Notes to Consolidated Financial
Statements that appear on pages F-4 through F-25 and S-1 of this Annual Report
on Form 10-K are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The information contained under the heading "Nominees for Election to the
Board of Directors" in the definitive Proxy Statement to be used in connection
with the solicitation of proxies for the Company's 1998 Annual Meeting of
Stockholders, to be filed with the Commission, including any information with
respect to compliance by directors, officers and beneficial owners of more than
10% of the Class A Common Stock with respect to Section 16(a) of the Securities
Exchange Act of 1934, is incorporated herein by reference. Pursuant to
instruction 3 to paragraph (b) of Item 401 of Regulation S-K, information
relating to the executive officers of the Company is included in Item 1 of this
report.
ITEM 11. EXECUTIVE COMPENSATION
The information contained under the headings "Summary Compensation Table"
"Option Grants in the Last Fiscal Year", "Fiscal Year-End Option Values", and
"Directors' Compensation" in the definitive Proxy Statement to be used in
connection with solicitation of proxies for the Company's 1998 Annual Meeting of
Shareholders, to be filed with the Commission, is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained under the headings "Ownership of Stock by
Directors, Executive Officers and Principal Stockholders" in the definitive
Proxy Statement to be used in connection with the solicitation of proxies for
the Company's 1998 Annual Meeting of Stockholders, to be filed with the
Commission, including any information with respect to compliance by directors,
officers and beneficial owners of more than 10% of the Class A Common Stock with
respect to Section 16(a) of the Securities Exchange Act of 1934, is incorporated
herein by reference. For purposes of determining the aggregate market value of
the Company's voting stock held by nonaffiliates, shares held by all directors
and executive officers of the Company have been excluded. The exclusion of such
shares is not intended to, and shall not, constitute a determination as to which
persons or entities may be "affiliates" of the Company as defined by the
Commission.
28
<PAGE> 29
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained under the heading "Certain Transactions" in the
definitive Proxy Statement to be used in connection with the solicitation of
proxies for the Company's 1998 Annual Meeting of Stockholders, to be filed with
the Commission, is incorporated herein by reference.
29
<PAGE> 30
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The following financial statements and notes thereto of the Company are
incorporated by reference in Item 8 of this report:
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Public Accountants.................... F-4
Consolidated Balance Sheets as of March 31, 1998 and 1997... F-5
Consolidated Statements of Income for the Years Ended March
31, 1998, 1997 and 1996................................... F-6
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended March 31, 1998, 1997 and 1996......... F-7
Consolidated Statements of Cash Flows for the Years Ended
March 31, 1998, 1997 and 1996............................. F-8
Notes to Consolidated Financial Statements.................. F-9
</TABLE>
2. Financial Statement Schedule
The following financial statement schedule is included on page S-1 of this
annual report on Form 10-K:
Schedule II -- Valuation and Qualifying Accounts
3. Exhibits
The following exhibits are required to be filed with this Annual Report on
Form 10-K by Item 601 of Regulation S-K:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
<C> <S> <C>
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. (filed as Exhibit 2.01 to the
Company's Registration Statement No. 333-13105)
2.01-01 -- Letter Agreement, dated July 9, 1996, amending the
Recapitalization and Stock Purchase and Sale Agreement.
(filed as Exhibit 2.02 to the Company's Registration
Statement No. 333-13105)
2.01-02 -- First Amendment, dated as of July 31, 1996, to the
Recapitalization and Stock Purchase and Sale Agreement.
(filed as Exhibit 2.03 to the Company's Registration
Statement No. 333-13105).
2.02 -- 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. (filed as Exhibit 2.04 to
the Company's Registration Statement No. 333-13105)
3.01 -- By-laws of the Company. (filed as Exhibit 3.06 to the
Company's Registration Statement No. 333-13105)
3.02 -- Restated Certificate of Incorporation of the Company, dated
December 23, 1996. (filed as Exhibit 3.03 to the Company's
Quarterly Report on Form 10-Q for the Fiscal Quarter ended
December 31, 1996)
</TABLE>
F-1
<PAGE> 31
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
<C> <S> <C>
10.01-01 -- Amended and Restated Credit Agreement, dated as of October
15, 1997, among the Company, FATS, Inc., NationsBank, N.A.
(South) and the other Lenders named therein. (filed as
Exhibit 10.01 to the Company's Quarterly Report on Form 10-Q
for the Fiscal Quarter ended September 30, 1997)
10.01-02 -- First Amendment to the Amended and Restated Credit
Agreement, dated as of June 26, 1998, among the Company,
FATS, Inc., NationsBank, N.A. (South) and the other Lenders
named therein.
10.02 -- Pledge and Security Agreement, dated as of July 31, 1996,
between the Company and NationsBank, N.A. (South). (filed as
Exhibit 10.06 to the Company's Registration Statement No.
333-13105)
10.03 -- Assignment and Assumption Agreement dated as of January 1,
1997 among the Company, FATS, Inc. and NationsBank N.A.
(South).
10.04 -- Borrower's Consent and Agreement dated as of October 15,
1997 between FATS, Inc. and NationsBank N.A. (South).
10.05 -- Pledge Agreement dated as of January 1, 1997 between the
Company and NationsBank N.A. (South).
10.06 -- Parent's Consent dated as of October 15, 1997 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. (filed as Exhibit 10.07 to the
Company's Registration Statement No. 333-13105)
10.08 -- Lease, dated May 4, 1993, between the Company and Technology
Park/Atlanta, Inc. (filed as Exhibit 10.08 to the Company's
Registration Statement No. 333-13105)
10.08-01 -- First Amendment to Lease Agreement, dated December 21,1993,
between the Company and Technology Park/Atlanta, Inc. (filed
as Exhibit 10.09 to the Company's Registration Statement No.
333-13105)
10.08-02 -- Second Amendment to Lease Agreement, dated December 21,1995,
between the Company and Schneider Atlanta, L.P. (filed as
Exhibit 10.10 to the Company's Registration Statement No.
333-13105).
10.09 -- United States Government Contract M67854-94-C-2014, awarded
August 4, 1994, between the Company and the U.S. Marine
Corps. (filed as Exhibit 10.11 to the Company's Registration
Statement No. 333-13105)
10.10 -- 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. (filed as Exhibit 10.12 to the Company's
Registration Statement No. 333-13105)
10.11 -- Firearms Training Systems, Inc. Stock Option Plan. (filed as
Exhibit 10.13 to the Company's Registration Statement No.
333-13105)
10.12 -- Stock Option Agreement Series A, dated as of September 18,
1996 between the Company and Peter A. Marino. (filed as
Exhibit 10.14 to the Company's Registration Statement No.
333-13105)
10.12-01 -- Schedule identifying Stock Option Agreements Series A
substantially identical in all material respects to Exhibit
10.12.
10.13 -- Stock Option Agreement Series B, dated as of September 18,
1996 between the Company and Peter A. Marino. (filed as
Exhibit 10.15 to the Company's Registration Statement No.
333-13105)
</TABLE>
F-2
<PAGE> 32
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
<C> <S> <C>
10.13-01 -- Schedule identifying Stock Option Agreements Series B
substantially identical in all material respects to Exhibit
10.13.
10.14 -- Stock Option Agreement Series C, dated as of September 18,
1996 between the Company and William J. Bratton. (filed as
Exhibit 10.16 to the Company's Registration Statement No.
333-13105)
10.14-01 -- Schedule identifying Stock Option Agreements Series C
substantially identical in all material respects to Exhibit
10.14. (filed as Exhibit 10.16.01 to the Company's
Registration Statement No. 333 -13105)
10.15 -- Registration Rights Agreement, dated as of July 31, 1996,
between the Company and the Institutional Holders set forth
on Schedule I thereto. (filed as Exhibit 10.17 to the
Company's Registration Statement No. 333-13105)
10.16 -- 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.
(filed as Exhibit 10.18 to the Company's Registration
Statement No. 333-13105)
10.17 -- Firearms Training Systems, Inc. Executive Severance Benefit
Plan. (filed as Exhibit 10.19 to the Company's Registration
Statement No. 333-13105)
10.18 -- Employment Agreement, dated as of September 18, 1996,
between the Company and Peter A. Marino. (filed as Exhibit
10.20 to the Company's Registration Statement No. 333-13105)
10.19 -- Form of Agreement to Limit Future Competition entered into
with each member of senior management of the Company. (filed
as Exhibit 10.21 to the Company's Registration Statement No.
333-13105)
10.19-01 -- Schedule identifying Agreements to Limit Future Competition
substantially identical in all material respects to Exhibit
10.19. (filed as Exhibit 10.21-01 to the Company's
Registration Statement No. 333-13105)
10.20 -- License Agreement, dated October 31, 1991 by and between
Microware Systems Corporation and the Company. (filed as
Exhibit 10.23 to the Company's Registration Statement No.
333-13105)
11.01 -- Statement Regarding Computation of Pro Forma Net Income Per
Common Share.
21.01 -- Subsidiaries of the Company.
23.01 -- Consent of Arthur Andersen LLP, dated June 26, 1998.
24.01 -- Power of Attorney (set forth on page V-1).
27.01 -- Financial Data Schedule.
</TABLE>
(b) Reports on Form 8-K:
Form 8-K filed March 17, 1998
(c) Exhibits
See (a)(3) above.
(d) Financial Statement Schedule.
See (a)(2) above.
F-3
<PAGE> 33
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,
1998 and 1997 and the related consolidated statements of income, changes in
stockholders' equity, and cash flows for each of the three years in the period
ended March 31, 1998. These financial statements and the schedule referred to
below are the responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements and schedule 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, 1998 and 1997 and the results of their
operations and their cash flows for each of the three years in the period ended
March 31, 1998 in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index of
financial statements is presented for the purpose 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 8, 1998 (Except with respect to the matters discussed in the third and
fourth paragraphs of Note 12 to which the date is June 26, 1998)
F-4
<PAGE> 34
FIREARMS TRAINING SYSTEMS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1998 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 3,395 $ 1,663
Accounts receivable, net of allowance for doubtful
accounts of $100 at March 31, 1998 and 1997............ 22,710 20,690
Inventories............................................... 17,725 11,965
Prepaid expenses and other current assets................. 594 477
Deferred income taxes..................................... 1,050 1,491
--------- ---------
Total current assets.............................. 45,474 36,286
PROPERTY AND EQUIPMENT, net................................. 3,971 2,660
DEFERRED FINANCING COSTS, net............................... 3,007 3,004
GOODWILL, net of accumulated amortization of $145 at March
31, 1998.................................................. 2,751 --
DEFERRED INCOME TAXES....................................... 1,065 --
OTHER ASSETS................................................ 112 171
--------- ---------
$ 56,380 $ 42,121
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 3,389 $ 4,538
Accrued liabilities....................................... 11,060 8,300
Income taxes payable...................................... 390 653
Deferred revenue.......................................... 6,428 857
Current maturities of long-term debt...................... 5,300 1,588
--------- ---------
Total current liabilities......................... 26,567 15,936
--------- ---------
LONG-TERM DEBT, less current maturities..................... 57,700 57,012
--------- ---------
OTHER NONCURRENT LIABILITIES................................ 344 551
--------- ---------
COMMITMENTS AND CONTINGENCIES (Notes 5, 9 and 11)
STOCKHOLDERS' EQUITY (Notes 3, 6 and 12):
Preferred stock, $0.10 par value; 200 shares authorized,
no shares issued at March 31, 1998 and 1997............ -- --
Class A common stock, $0.000006 par value; 68,060 shares
authorized; 20,415 and 20,402 shares issued and
outstanding at March 31, 1998 and 1997, respectively... -- --
Class B nonvoting common stock, $0.000006 par value; 2,200
shares authorized, no shares issued at March 31, 1998
and 1997............................................... -- --
Additional paid-in capital................................ 112,390 112,331
Accumulated (deficit) earnings............................ (140,569) (143,802)
Cumulative foreign currency translation adjustment........ (52) 93
--------- ---------
Total stockholders' (deficit) equity.............. (28,231) (31,378)
--------- ---------
$ 56,380 $ 42,121
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-5
<PAGE> 35
FIREARMS TRAINING SYSTEMS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED MARCH 31, 1998, 1997, AND 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
REVENUES.................................................... $73,547 $90,806 $65,439
COST OF REVENUES............................................ 33,867 44,214 30,902
------- ------- -------
GROSS PROFIT................................................ 39,680 46,592 34,537
------- ------- -------
OPERATING EXPENSES:
Selling, general, and administrative expenses............. 15,036 15,016 12,087
Research and development expenses......................... 6,475 4,224 2,781
Depreciation and amortization............................. 1,042 473 386
Acquired in-process research and development charge....... 4,000 -- --
------- ------- -------
Total operating expenses.......................... 26,553 19,713 15,254
------- ------- -------
OPERATING INCOME............................................ 13,127 26,879 19,283
------- ------- -------
OTHER (EXPENSE) INCOME, net:
Interest (expense) income, net............................ (5,905) (6,069) 165
Nonrecurring recapitalization expenses (Note 11).......... -- (1,181) --
Other income (expense), net............................... (97) 71 (93)
------- ------- -------
Total other (expense) income, net................. (6,002) (7,179) 72
------- ------- -------
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEM........... 7,125 19,700 19,355
PROVISION FOR INCOME TAXES.................................. 3,892 7,359 6,565
------- ------- -------
INCOME BEFORE EXTRAORDINARY ITEM............................ 3,233 12,341 12,790
EXTRAORDINARY ITEM, net of income tax benefit of $1,913
(NOTE 5).................................................. -- (3,327) --
------- ------- -------
NET INCOME.................................................. $ 3,233 $ 9,014 $12,790
======= ======= =======
BASIC EARNINGS PER SHARE BEFORE THE EXTRAORDINARY ITEM...... $ 0.16 $ 0.75 $ 0.89
======= ======= =======
DILUTED EARNINGS PER SHARE BEFORE THE EXTRAORDINARY ITEM.... $ 0.15 $ 0.69 $ 0.80
======= ======= =======
BASIC EARNINGS PER SHARE.................................... $ 0.16 $ 0.55 $ 0.89
======= ======= =======
DILUTED EARNINGS PER SHARE.................................. $ 0.15 $ 0.50 $ 0.80
======= ======= =======
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING -- BASIC (NOTE
3)........................................................ 20,408 16,489 14,402
======= ======= =======
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES
OUTSTANDING -- DILUTED (NOTE 3)........................... 21,456 18,009 16,029
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE> 36
FIREARMS TRAINING SYSTEMS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 1998, 1997, AND 1996
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
CLASS B
CLASS A NONVOTING
PREFERRED STOCK COMMON STOCK COMMON STOCK ADDITIONAL ACCUMULATED
----------------- --------------------- --------------- PAID-IN EARNINGS
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL WARRANTS (DEFICIT)
-------- ------ ------------ ------ ------ ------ ---------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, March 31,
1995................ -- $ -- 49,800,000 $ -- -- $ -- $ 1,931 -- $ 6,553
Net income............ -- -- -- -- -- -- -- -- 12,790
Foreign currency
translation
adjustment.......... -- -- -- -- -- -- -- -- --
---- ---- ------------ ---- ---- ---- -------- ----- ---------
Balance, March 31,
1996................ -- -- 49,800,000 -- -- -- 1,931 -- 19,343
Net income............ -- -- -- -- -- -- -- -- 9,014
Common stock issued in
connection with the
Recapitalization
(Note 11)........... -- -- 11,165,241 -- -- -- 36,000 -- --
Common stock retired
in connection with
the Recapitalization
(Note 11)........... -- -- (46,832,022) -- -- -- (1,816) -- (150,034)
Common stock issued to
management in
connection with the
Recapitalization
(Note 11)........... -- -- 269,185 -- -- -- 876 -- --
Warrants issued in
connection with the
Recapitalization
(Note 11)........... -- -- -- -- -- -- -- 930 --
Common stock issued in
connection with the
initial public
offering, net of
issuance costs...... -- -- 6,000,000 -- -- -- 75,340 -- --
Contingent payment to
THIN International
(Note 11)........... -- -- -- -- -- -- -- -- (19,300)
Warrants repurchased
in connection with
the retirement of
the Bridge Notes
(Note 5)............ -- -- -- -- -- -- -- (930) (2,825)
Foreign currency
translation
adjustment.......... -- -- -- -- -- -- -- -- --
---- ---- ------------ ---- ---- ---- -------- ----- ---------
Balance, March 31,
1997................ -- -- 20,402,404 -- -- -- 112,331 -- (143,802)
Net income............ -- -- -- -- -- -- -- -- 3,233
Common Stock issued to
employees exercising
stock options,
including tax
benefit............. -- -- 2,679 -- -- -- 17 -- --
Common Stock issued to
the Company's
Employee Stock
Compensation Plan... -- -- 10,239 -- -- -- 42 -- --
Foreign currency
translation
adjustment.......... -- -- -- -- -- -- -- -- --
---- ---- ------------ ---- ---- ---- -------- ----- ---------
Balance, March 31,
1998................ -- $ -- 20,415,322 $ -- -- $ -- $112,390 $ -- $(140,569)
==== ==== ============ ==== ==== ==== ======== ===== =========
<CAPTION>
CUMULATIVE
FOREIGN
CURRENCY
TRANSLATION
ADJUSTMENT TOTAL
------------ --------
<S> <C> <C>
Balance, March 31,
1995................ $ -- $ 8,484
Net income............ -- 12,790
Foreign currency
translation
adjustment.......... (12) (12)
----- --------
Balance, March 31,
1996................ (12) 21,262
Net income............ -- 9,014
Common stock issued in
connection with the
Recapitalization
(Note 11)........... -- 36,000
Common stock retired
in connection with
the Recapitalization
(Note 11)........... -- (151,850)
Common stock issued to
management in
connection with the
Recapitalization
(Note 11)........... -- 876
Warrants issued in
connection with the
Recapitalization
(Note 11)........... -- 930
Common stock issued in
connection with the
initial public
offering, net of
issuance costs...... -- 75,340
Contingent payment to
THIN International
(Note 11)........... -- (19,300)
Warrants repurchased
in connection with
the retirement of
the Bridge Notes
(Note 5)............ -- (3,755)
Foreign currency
translation
adjustment.......... 105 105
----- --------
Balance, March 31,
1997................ 93 (31,378)
Net income............ -- 3,233
Common Stock issued to
employees exercising
stock options,
including tax
benefit............. -- 17
Common Stock issued to
the Company's
Employee Stock
Compensation Plan... -- 42
Foreign currency
translation
adjustment.......... (145) (145)
----- --------
Balance, March 31,
1998................ $ (52) $(28,231)
===== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-7
<PAGE> 37
FIREARMS TRAINING SYSTEMS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1998, 1997, AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997 1996
------- -------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 3,233 $ 9,014 $12,790
------- -------- -------
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 1,679 987 386
Noncash portion of extraordinary item.................. -- 3,871 --
Stock grant............................................ -- 120 --
Deferred income taxes.................................. 440 (625) 52
Employee stock compensation plan....................... 42 -- --
Acquired in-process research and development charge.... 4,000 -- --
Changes in assets and liabilities (excluding effects of
businesses acquired):
Accounts receivable, net............................. (1,298) (10,598) (6,307)
Inventories.......................................... (2,203) 871 (5,017)
Prepaid expenses and other current assets............ 4 178 273
Escrow and other deposits............................ 59 (65) 164
Accounts payable..................................... (1,476) 919 1,777
Accrued liabilities.................................. 1,273 2,593 3,029
Income taxes payable................................. (255) (652) 1,305
Deferred revenue..................................... 1,060 (866) (1,878)
Noncurrent liabilities............................... (207) 347 (8)
------- -------- -------
Total adjustments................................. 3,118 (2,920) (6,224)
------- -------- -------
Net cash provided by operating activities......... 6,351 6,094 6,566
------- -------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for business acquisitions........................ (6,801) -- --
Additions to property and equipment, net.................. (1,445) (1,989) (761)
------- -------- -------
Net cash used in investing activities............. (8,246) (1,989) (761)
------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings of long-term debt................ 6,000 110,000 --
Repayments of long-term debt.............................. (1,600) (51,400) --
Proceeds from sale of common stock........................ 9 112,096 --
Deferred financing costs.................................. (640) (6,459) --
Repurchase of warrants.................................... -- (3,755) --
Repurchase of common stock................................ -- (171,150) --
------- -------- -------
Net cash provided by (used in) financing
activities...................................... 3,769 (10,668) --
------- -------- -------
EFFECT OF CHANGES IN FOREIGN EXCHANGE RATES................. (142) 105 (12)
------- -------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 1,732 (6,458) 5,793
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR................ 1,663 8,121 2,328
------- -------- -------
CASH AND CASH EQUIVALENTS, END OF YEAR...................... $ 3,395 $ 1,663 $ 8,121
======= ======== =======
SUPPLEMENTAL DISCLOSURES OF CASH PAID FOR:
Interest.................................................. $ 5,244 $ 5,278 $ 11
======= ======== =======
Income taxes.............................................. $ 3,856 $ 6,723 $ 4,809
======= ======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-8
<PAGE> 38
FIREARMS TRAINING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998, 1997, AND 1996
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% 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 11).
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 simulators for the military, law enforcement, sport
shooting and hunter education. The Company's customers include military and law
enforcement agencies primarily throughout the United States ("U.S."), Europe and
Asia.
The Company, Firearms Training Systems, Inc., has one wholly-owned
subsidiary, FATS, Inc., which is the operating subsidiary (the "Operating
Subsidiary"). As of March 31, 1998, FATS, Inc. had eight wholly owned
subsidiaries (collectively, the "Subsidiaries"). Firearms Training Systems
Limited, the Operating Subsidiary's U.K. subsidiary established in 1992 ("FATS
U.K."), has been subcontracted by the Operating Subsidiary to perform
manufacturing and maintenance work with respect to certain of the Operating
Subsidiary's contracts. F.A.T.S. Singapore Pte, Ltd., the Operating Subsidiary's
Singapore subsidiary established in 1994, conducts certain activities of the
Company in Asia. Firearms Training Systems Netherlands, B.V., the Operating
Subsidiary'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 an agent with respect to export sales of products and
services outside the U.S. On October 1, 1997, the Operating Subsidiary
incorporated FSS, Inc. ("FSS"), which acquired all the assets of a Florida-based
weapons simulation company. FATS Canada, Inc., the Operating Subsidiary's
Canadian subsidiary established in 1996, was organized to support the
performance of servicing obligations to Canadian customers. On March 1, 1998,
FATS Canada, Inc. acquired all of the outstanding stock of Simtran, a
Canadian-based simulation company. Effective April 1, 1998, FATS Canada, Inc.
and Simtran were amalgamated. The amalgamated company became Simtran. In
conjunction with the acquisition of Simtran, FATS Canada Holdings, a Canadian
corporation was formed. FATS Canada Holdings primary activity is the holding of
investments.
In fiscal 1997, THIN International contributed FATS U.K. to the Company and
FATS U.K., subsequently, became a wholly owned subsidiary of the Operating
Subsidiary. 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 Operating Subsidiary, and such sales have been eliminated in these
consolidated statements. Remaining operations of FATS U.K. are not material.
2. ACQUISITIONS
On June 26, 1997, FATS, Inc. acquired certain operating assets of the ICAT
Judgmental Use of Force Business from SBS Technologies, Inc. ("ICAT") for
approximately $2.2 million in cash and acquisition costs.
The Company recorded the acquisition using the purchase method of
accounting with approximately $1.9 million of the purchase price allocated to
goodwill. The results of operations of ICAT have been included in the Company's
consolidated statements of operations since the effective date of the
acquisition.
F-9
<PAGE> 39
FIREARMS TRAINING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On October 1, 1997, FSS, Inc. ("FSS") acquired all of the operating assets
of a Florida-based simulation company for approximately $250,000 in cash and
acquisition costs. In connection with the purchase of the Florida-based
simulation company, the Company could potentially issue up to an additional
150,000 contingent shares of common stock upon FSS meeting certain earnings
targets. The Company recorded the acquisition using the purchase method of
accounting with approximately $100,000 of the purchase price allocated to
goodwill. The results of operations of FSS have been included in the Company's
consolidated statements of operations since the effective date of the
acquisition.
On March 1, 1998, a Company subsidiary acquired all of the outstanding
common stock of Simtran for approximately $4.4 million in cash and acquisition
costs and assumed liabilities in excess of assets of $500,000. In addition, the
Company could potentially pay up to an additional $4 million in cash
consideration if certain future Simtran revenue performance criteria are met.
Based on an assessment by the Company, in conjunction with an independent
valuation firm, it was determined that $4 million of Simtran's purchase price
represented technology that does not meet the accounting definition of completed
technology, and thus should be charged to earnings under generally accepted
accounting principles. The Company recorded the acquisition using the purchase
method of accounting with $4 million of the purchase price allocated to acquired
in-process research and development and charged to the consolidated statements
of operations in March 1998 and approximately $900,000 of the purchase price
allocated to goodwill. The results of operations of Simtran have been included
in the Company's consolidated statements of operations since the effective date
of the acquisition.
The unaudited pro forma consolidated results of operations of the Company
for the years ended March 31, 1998 and 1997 are summarized below as if the
acquisitions described above had occurred on April 1, 1997 and 1996,
respectively (in thousands, except per share data):
<TABLE>
<CAPTION>
MARCH 31,
-----------------
1998 1997
------- -------
<S> <C> <C>
Revenues.................................................... $75,651 $93,478
Net income before extraordinary item........................ 4,895 11,193
Net income.................................................. 4,895 7,866
Basic earnings per share.................................... 0.24 0.48
Diluted earnings per share.................................. 0.23 0.44
</TABLE>
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company,
the Operating Subsidiary and the Subsidiaries. All significant intercompany
transactions and balances have been eliminated.
FOREIGN CURRENCY TRANSLATION
The assets and liabilities of the Operating Subsidiary'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 as a separate component of stockholders' equity. Gains and losses which
result from foreign currency transactions are included in the accompanying
consolidated statements of income.
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 is derived from
shipments under contract with various governmental agencies. Such contracts
generally specify
F-10
<PAGE> 40
FIREARMS TRAINING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. Advanced billings related to contracts are recorded
as deferred revenue and are recognized primarily as units are delivered or on a
percentage of completion method for contracts in which completion typically
exceeds one year. 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.
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,
-----------
1998 1997
---- ----
<S> <C> <C>
Prepaid expenses and other current assets................... $7 $86
Escrow and other deposits................................... -- 6
-- ---
Total............................................. $7 $92
== ===
</TABLE>
INVENTORIES
Inventories consist primarily of simulators, computer hardware, projectors
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,
-----------------
1998 1997
------- -------
<S> <C> <C>
Raw materials............................................... $11,635 $ 8,233
Work in progress............................................ 3,341 2,816
Finished goods.............................................. 2,749 916
------- -------
$17,725 $11,965
======= =======
</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. Estimated service
lives of the principal items of property and equipment range from three to five
years. Total depreciation expense for the years ended March 31, 1998, 1997 and
1996 was $897,000, $473,000 and $386,000, respectively.
F-11
<PAGE> 41
FIREARMS TRAINING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The detail of property and equipment is as follows (in thousands):
<TABLE>
<CAPTION>
MARCH 31,
-----------------
1998 1997
------- -------
<S> <C> <C>
Machinery and equipment..................................... $ 4,451 $ 2,711
Demonstration equipment..................................... 1,427 1,421
Furniture and fixtures...................................... 691 502
Vehicles.................................................... 400 280
Leasehold improvements...................................... 224 73
------- -------
7,193 4,987
Less accumulated depreciation and amortization.............. (3,222) (2,327)
------- -------
$ 3,971 $ 2,660
======= =======
</TABLE>
LONG-LIVED ASSETS
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting
for the Impairment of Long-Lived Assets and for 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,
----------------
1998 1997
------- ------
<S> <C> <C>
Sales commissions, bonuses and agents' commissions.......... $ 4,175 $2,414
Accrued salaries and related expenses....................... 2,069 1,124
Professional fees........................................... 380 685
Accrued interest............................................ 369 369
Accrued warranty costs...................................... 1,282 900
Other....................................................... 2,785 2,808
------- ------
$11,060 $8,300
======= ======
</TABLE>
STOCK-BASED COMPENSATION PLANS
The Company accounts for its stock-based compensation plans under
Accounting Principles Board Opinion No. 25 ("APB No. 25"), "Accounting for Stock
Issued to Employees". 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.
F-12
<PAGE> 42
FIREARMS TRAINING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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, accounts payable and long-term debt at March
31, 1998 and 1997. 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, with
the exception of long-term debt, approximate their fair values due to the
immediate or short-term maturity of these financial instruments at March 31,
1998 and 1997. As the variable interest rate on the Company's long-term debt is
set for a maximum of 180 days, the carrying value of long-term debt approximates
fair value at March 31, 1998.
NET INCOME PER COMMON SHARE
The Company has adopted Statement of Financial Accounting Standards No.
128, "Earnings per share" for its calculation of net income per common share.
Basic net income per common share is computed using the weighted average number
of shares of common stock outstanding. Diluted net income per share is computed
using the weighted average number of shares of common stock outstanding and
common equivalent shares ("CESs") from warrants and from stock options (using
the treasury stock method). No adjustments are necessary to historical net
income for net income per share presentation. Total CESs included in the
computation of diluted net income per share for the years ended March 31, 1998,
1997 and 1996 were 1,048,000, 1,520,000 and 1,627,000, respectively. The net
income per share effect of the extraordinary item incurred for the year ended
March 31, 1997 was $0.20 and $0.18 per share for basic and diluted net income
per share, respectively. The shares issued in the Recapitalization (Note 11),
all shares issuable upon exercise of stock options granted (Note 6), and all
shares issuable upon exercise of warrants (Note 5) 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 prior to the offering (the "Offering").
In connection with the purchase of FSS, Inc. in October of 1997, the
Company entered into a purchase agreement requiring the possible issuance of up
to 150,000 shares of common stock upon the subsidiary meeting certain earnings
targets. These contingently issuable shares could potentially dilute basic and
diluted net income per share in future periods.
STOCK SPLIT
In connection with the Recapitalization (Note 11), the Company effected a
100,000-for-one stock split during fiscal year 1997. In anticipation of the
Offering, the Company effected another stock split of 1.66-for-one during fiscal
year 1997. All references in the accompanying financial statements to number of
shares and per share amounts of the Company's common stock prior to the
Recapitalization and the Offering 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.
F-13
<PAGE> 43
FIREARMS TRAINING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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 and
contingent 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.
RECLASSIFICATIONS
Certain balances in prior fiscal years have been reclassified to conform
with the presentation in the current fiscal year.
4. THE OFFERING
In November 1996, the Company completed an initial public offering of
6,000,000 shares of its Class A Common Stock. Net proceeds to the Company were
approximately $75.3 million and were used to repay the $40 million senior
subordinated bridge notes (the "Bridge Notes") (Note 5) issued in connection
with the Recapitalization to reduce by $11.2 million the NationsBank Credit
Agreement (Note 5), to make a $19.3 million contingent payment to THIN
International (Note 11) and to fund certain nonrecurring obligations of the
Company.
5. LONG-TERM DEBT
NATIONSBANK CREDIT AGREEMENT
On July 31, 1996, the Company replaced its existing credit agreement and
entered into a credit agreement with a group of financial institutions (the
"NationsBank Credit Agreement"). The NationsBank Credit Agreement was amended
and restated on October 15, 1997. The three components of the NationsBank Credit
Agreement are as follows:
- Revolving credit facility with an aggregate principal amount of up to $25
million (which includes a $10 million letter-of-credit subfacility and a
$2 million swing line subfacility) (the "Revolving Credit Facility"). The
Revolving Credit Facility matures and is payable July 31, 2002. At March
31, 1998, the Company had $6 million of outstanding borrowings under this
facility.
- A term loan with an initial principal amount of $30 million maturing July
31, 2002 (the "Tranche A Loan"). At March 31, 1998, $23.6 million was
outstanding under the Tranche A Loan, with quarterly principal payments
ranging from $700,000 to $1,600,000.
- A term loan with an initial principal amount of $40 million maturing July
31, 2003 (the "Tranche B Loan"). At March 31, 1998, $33.4 million was
outstanding under the Tranche B Loan, with quarterly principal payments
ranging from $100,000 to $8,000,000.
F-14
<PAGE> 44
FIREARMS TRAINING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At March 31, 1998 and 1997, long-term debt consisted of the following (in
thousands):
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Tranche A Loan.............................................. $23,600 $25,000
Tranche B Loan.............................................. 33,400 33,600
Revolving Credit Facility................................... 6,000 --
------- -------
63,000 58,600
Current portion............................................. (5,300) (1,588)
------- -------
$57,700 $57,012
======= =======
</TABLE>
The Company had outstanding irrevocable standby letters of credit in the
principal amount of approximately $2,147,000 and $2,161,000 at March 31, 1998
and 1997, respectively, in connection with the performance of certain sales
contracts.
The Tranche A Loan and the NationsBank Revolving Credit Facility bear
interest at the Company's option of either:
- 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 .50% plus 1.75% to
2.25% (based on the Company's leverage ratio and certain other factors
defined in the NationsBank Credit Agreement) or
- 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:
- 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
- A function of the Eurodollar rate plus 3.0% (based on the Company's
leverage ratio and certain other factors defined in the NationsBank
Credit Agreement).
At March 31, 1998, the interest rates in effect were 7.94% for the
Revolving Credit Facility and the Tranche A Loan and 8.69% for the Tranche B
Loan.
On March 5, 1997, the Company entered into an interest rate protection
agreement which expires on March 5, 1999 (the "protection period"). The
agreement protects outstanding floating rate debt of $20,000,000 over the
protection period. Under the agreement, the Company is reimbursed when actual
interest rates exceed a limit, as defined. The limit, based on the 90-day LIBOR,
is 6.5% over the protection period.
On December 5, 1997, the Company entered into an interest rate swap
agreement that expires on December 5, 2002 (the "swap period"), unless
NationsBank elects to terminate the swap agreement on December 5, 2000. Nothing
in the agreement shall obligate NationsBank to elect the termination date. The
agreement protects outstanding floating rate debt of $10,000,000 over the swap
period. Under the agreement, the company will pay a fixed rate of interest per
quarter as measured by changes in 90-day LIBOR over the length of the swap.
The NationsBank Credit Agreement also provides for a commitment fee of 0.5%
per year, paid quarterly, on the unused portion of the NationsBank Revolving
Credit Facility and a yearly agency fee of $75,000.
F-15
<PAGE> 45
FIREARMS TRAINING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 Operating Subsidiary, 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 and require certain leverage, fixed charge, and interest coverage
ratios, as defined, to be maintained and require a minimum net worth, as
defined. Borrowings at March 31, 1998 were $63 million. See Note 12 regarding
amendments to the NationsBank Credit Agreement subsequent to year end.
The aggregate annual maturities of long-term debt at March 31, 1998 are as
follows (in thousands):
<TABLE>
<S> <C>
1999........................................................ $ 5,300
2000........................................................ 6,000
2001........................................................ 6,000
2002........................................................ 6,300
2003........................................................ 31,400
Thereafter.................................................. 8,000
-------
$63,000
=======
</TABLE>
BRIDGE NOTES
Also in July 1996, the Company received $40 million from the sale of Bridge
Notes to a financing institution. The Bridge Notes were repaid from the proceeds
of the Offering (Note 4).
WARRANTS
In connection with the issuance of the Bridge Notes, the Company entered
into a warrant escrow agreement (the "warrants") which required 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 were repaid and, if issued, the
senior preferred stock redeemed. In connection with the Offering, the holder of
the warrants agreed to cancel the warrants in exchange for a payment of
approximately $3.8 million from the net proceeds of the Offering. The fair value
of these warrants at the date of grant was 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 11). The effective interest rate of
the Bridge Notes, taking into consideration the issuance of such warrants, was
approximately 12.8% to 13.3%.
FEES AND EXPENSES
The Company capitalized approximately $640,000 and $6.2 million in 1998 and
1997, respectively, of fees and expenses incurred in connection with the
NationsBank Credit Agreement and the amendment thereto and the Bridge Notes. The
fees were paid to the bank upon consummation of the transactions, and the
expenses consisted primarily of legal, accounting and other miscellaneous
expenses. Fees of approximately $3 million have been expensed as a result of the
repayment of the Bridge Notes and the repayment of a portion of the Tranche A
Loan and the Tranche B Loan and are included in the extraordinary loss in the
accompanying statements of income. The remaining capitalized fees and expenses
have been included in deferred financing costs, net of accumulated amortization,
and are being amortized over the life of the related debt. The accumulated
amortization included in deferred financing costs is $1,151,000 and $514,000 in
1998 and 1997, respectively.
F-16
<PAGE> 46
FIREARMS TRAINING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
EXTRAORDINARY ITEM
A portion of the proceeds from the Offering was used to repay the $40
million Bridge Notes and to reduce the outstanding borrowings of the NationsBank
Credit Agreement by $11.2 million. As a result, an extraordinary loss occurred
on the early extinguishment of debt in the fiscal year ended March 31, 1997.
This extraordinary item includes legal fees, unamortized deferred financing
costs, unamortized basis of the Warrants and a fee paid in connection with the
repayment of the Bridge Notes.
6. STOCK-BASED COMPENSATION PLAN
The Company adopted the Firearms Training Systems, Inc. Stock Option Plan
(the "Plan") in fiscal year 1997. The Company has reserved a total of 2,490,000
shares of Class A common stock for issuance under the Plan under four different
nonqualified option series. The Plan provides for antidilution in the event of
certain defined circumstances. The Plan is administered by a committee
designated by the board of directors of the Company. The price of options
granted is determined at the date of grant.
SERIES A OPTIONS
Options under this series are 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 shall be forfeited.
SERIES B OPTIONS
Options under this series are 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 shall be forfeited.
SERIES C OPTIONS
Options under this series are 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.
SERIES D OPTIONS
Options under this series are available for grant to officers and other
employees. 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 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
F-17
<PAGE> 47
FIREARMS TRAINING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 shall be forfeited.
A summary of changes in outstanding options during the years ended March
31, 1997 and 1998 is as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE EXERCISE
OPTIONS PRICE PRICE
--------- ------------- --------
<S> <C> <C> <C> <C>
March 31, 1996...................................... -- -- --
Granted........................................... 1,772,820 $3.25-$14.00 $3.43
Canceled.......................................... (14,524) 3.25 3.25
Exercised......................................... -- -- --
---------
March 31, 1997...................................... 1,758,296 3.25- 14.00 3.44
Granted........................................... 400,100 5.19- 14.25 9.28
Canceled.......................................... (64,068) 3.25- 14.00 5.97
Exercised......................................... (2,679) 3.25 3.25
---------
March 31, 1998...................................... 2,091,649 3.25- 14.25 4.48
=========
Shares exercisable as of March 31, 1998............. 114,123 3.25- 14.00 3.57
=========
Shares available for future grants.................. 395,672
=========
</TABLE>
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 at March 31, 1998 using the
Black-Scholes option pricing model as prescribed by SFAS No. 123 using the
following ranges of weighted average assumptions used for grants:
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Risk-free interest rate..................................... 5.7-5.9% 6.5-7.0%
Expected dividend yield..................................... 0 0
Expected lives (in years)................................... 4-9 2.5-7.8
Expected volatility......................................... 78.84 50.53
</TABLE>
The total value of options at March 31, 1998 and 1997 was computed as
approximately $5,141,000 and $17,989,000, respectively, 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 basic and diluted net income per share would be decreased by the following
pro forma amounts on an annual basis (net of tax):
<TABLE>
<CAPTION>
1998 1997
-------- ----------
<S> <C> <C>
Net income, as reported..................................... $672,000 $2,142,000
Basic net income per share.................................. 0.03 0.13
Diluted net income per share................................ 0.03 0.12
</TABLE>
F-18
<PAGE> 48
FIREARMS TRAINING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table sets forth the Company's outstanding options and
options exercisable, including the exercise price range, number of shares,
weighted average exercise price, and remaining contractual lives by groups of
similar price and grant date as of March 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------- ----------------------
WEIGHTED
AVERAGE WEIGHTED EXERCISABLE WEIGHTED
REMAINING AVERAGE AS OF AVERAGE
NUMBER OF CONTRACTUAL EXERCISE MARCH 31, EXERCISE
RANGE OF EXERCISE PRICES SHARES LIFE PRICE 1998 PRICE
- ------------------------ --------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 3.25-$ 4.28........................ 1,680,799 6.4 $ 3.25 110,728 $ 3.25
4.28- 5.70........................ 16,700 6.8 5.19 -- --
5.70- 7.13........................ 180,000 6.8 6.27 -- --
7.13- 8.55........................ 200 6.3 8.06 -- --
8.55- 9.98........................ 300 7.0 9.17 -- --
11.40- 12.83........................ 138,650 6.0 11.75 -- --
12.83- 14.25........................ 75,000 7.0 14.00 3,395 14.00
--------- --- ------ ------- ------
2,091,649 6.5 $ 4.48 114,123 $ 3.57
========= === ====== ======= ======
</TABLE>
In September 1996, the Company entered into a management shares agreement
"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 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. 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 a registration
rights agreement, which granted Centre Entities certain demand registration
rights exercisable on no more than ten occasions as well as certain "piggyback'
registration rights. 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.
7. INCOME TAXES
The significant components of income tax expense are as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Current:
Federal income tax expense.................................. $3,046 $6,844 $5,686
Foreign income tax expense.................................. 172 529 385
State income tax expense.................................... 234 611 442
Deferred income tax (benefit) expense....................... 440 (625) 52
------ ------ ------
$3,892 $7,359 $6,565
====== ====== ======
</TABLE>
F-19
<PAGE> 49
FIREARMS TRAINING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of recorded income taxes with the amount computed at the
statutory rate is as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Tax at statutory federal rate............................... $2,422 $6,895 $6,774
State taxes, net of federal income tax benefit.............. 128 389 404
Research and development tax credit......................... -- -- (100)
Foreign sales corporation benefit........................... (294) (516) (639)
Nondeductible recapitalization expenses..................... -- 350 --
Acquired in-process research and development charge......... 1,360 -- --
Other....................................................... 276 241 126
------ ------ ------
Total............................................. $3,892 $7,359 $6,565
====== ====== ======
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax asset and liabilities are as follows (in
thousands):
<TABLE>
<CAPTION>
MARCH 31,
---------------
1998 1997
------ ------
<S> <C> <C>
Inventory reserves.......................................... $ 380 $ 532
Accrued liabilities......................................... 569 379
Warranty reserve............................................ 245 315
Deferred revenue............................................ 156 106
Other....................................................... (300) 159
------ ------
Net deferred tax asset -- current................. $1,050 $1,491
====== ======
Foreign net operating loss carryforward..................... $1,065 $ --
------ ------
Deferred tax asset -- long-term................... $1,065 $ --
====== ======
</TABLE>
The Company recorded a deferred tax asset of $1,065,000, in connection with
the acquisition of Simtran, related to the net operating loss carryforwards of
Simtran of approximately $3.4 million. These net operating loss carryforwards
expire in 2002. The Company's management has determined that it is more likely
than not that the Company will be able to fully utilize the deferred tax assets.
8. CONCENTRATION OF REVENUES
Most of the Company's customers to date have been in the public sector of
the United States ("U.S."), including the federal, state and local governments,
and in the public sectors of a number of other countries. Approximately 40.8% of
the Company's revenues for fiscal 1998 was attributable to sales to military
authorities in the U.S., 11.7% were attributable to sales to law enforcement
authorities in the U.S. and 46.0% was 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.
F-20
<PAGE> 50
FIREARMS TRAINING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
For the year ended March 31, 1998, the Company's five largest customers
accounted for approximately 60.7% 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, 1998, 1997, and 1996:
<TABLE>
<CAPTION>
AGGREGATE PERCENT
REVENUES OF TOTAL
MAJOR CUSTOMERS (000'S) REVENUES
--------------- --------- --------
<S> <C> <C> <C>
1998 U.S. Marine Corps........................................... $20,994 28.5%
Italian Air Force........................................... 8,926 12.1
1997 U.S. Marine Corps........................................... 44,802 49.3
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, 1998 and 1997, the Company had approximately $9,260,000 and
$7,581,000, respectively, in outstanding accounts receivable related to revenues
recognized from major customers for the related year. In addition,
approximately, $12.7 million of the March 31, 1998 accounts receivable was due
from three international customers, of which approximately $7.7 million was
secured by letters of credit.
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 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 1998, 1997 and 1996,
46.0%, 31.3% 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 or imposition of economic sanctions. 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
F-21
<PAGE> 51
FIREARMS TRAINING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
9. 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. Rental
expense under noncancelable operating leases was approximately $755,000,
$743,000 and $552,000 for the years ended March 31, 1998, 1997, and 1996,
respectively.
At March 31, 1998, future minimum payments under noncancelable operating
leases were as follows (in thousands):
<TABLE>
<S> <C>
1999........................................................ $ 995
2000........................................................ 972
2001........................................................ 978
2002........................................................ 863
2003........................................................ 626
Thereafter.................................................. 2,938
------
$7,372
======
</TABLE>
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.
EMPLOYMENT AGREEMENT
In September 1996, the Company entered into an employment agreement with
its president and chief executive officer. The amount of this contract is not
material to the Company's financial position.
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.
F-22
<PAGE> 52
FIREARMS TRAINING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. 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 F.A.T.S. Foreign Sales Corporation and, to a lesser extent,
through certain other subsidiaries. Geographic financial information on
international sales is as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
International sales:
Europe.................................................. $25,404 $22,302 $26,252
Asia.................................................... 5,719 5,008 1,165
Canada.................................................. 1,574 745 224
Other................................................... 1,135 398 687
------- ------- -------
Total........................................... $33,832 $28,453 $28,328
======= ======= =======
</TABLE>
11. THE RECAPITALIZATION
In connection with the Recapitalization and prior to the Offering:
- 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.
- The Company sold a total of 11,165,241 shares of Class A common stock and
Class B nonvoting common stock to the Centre Entities for $36 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 million in borrowings (including certain
warrants) under the NationsBank Credit Agreement and the Bridge Notes
(collectively, the "Borrowings") (Note 5). 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 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 was made to THIN International upon consummation of
the Offering.
- 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 6).
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 Offering.
As a result of the Offering and as of March 31, 1997, THIN International
retained approximately 14.5% of the outstanding shares of the Company and the
Centre Entities owned approximately 54.7% of the Company.
F-23
<PAGE> 53
FIREARMS TRAINING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following unaudited pro forma information reflects the effects of the
Recapitalization and the use of the proceeds of the Offering to repay debt for
the years ended March 31, 1997 and 1996 as if these transactions had occurred on
April 1, 1995:
<TABLE>
<CAPTION>
PRO FORMA FOR THE
RECAPITALIZATION
AND THE OFFERING
------------------
1997 1996
-------- -------
(UNAUDITED)
<S> <C> <C>
Net income.................................................. $13,560 $9,026
Diluted net income per share................................ 0.62 0.42
</TABLE>
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 $51.2 million of the proceeds
of the Offering to repay indebtedness incurred in the Recapitalization,
resulting in a net interest expense, including amortization of deferred
financing costs, of $5.7 million for the years ended March 31, 1997 and 1996,
less the related income tax effect. The pro forma net income and earnings per
share data do not include approximately $1.2 million of expenses related to the
Recapitalization incurred in fiscal 1997, as well as an extraordinary loss of
approximately $3.3 million, net of tax, incurred upon repayment of indebtedness
with the proceeds from the Offering, as such expenses will not have a continuing
impact on operations. The extraordinary loss was comprised of (1) approximately
$566,000, net of tax, recorded as a discount against the Bridge Notes for the
fair value of the warrants attached to the Bridge Notes (Note 5); (2)
approximately $825,000, net of tax, which relates to a fee in connection with
the Bridge Notes; and (3) approximately $2 million, net of tax, related to the
write-off of capitalized transaction fees on the Bridge Notes and a pro rata
portion of capitalized transaction fees on the Tranche A Loan and Tranche B
Loan. The pro forma information may not be indicative of what results of
operations would have been had the Recapitalization and the Offering actually
occurred at the beginning of the respective periods.
12. SUBSEQUENT EVENTS
On April 1, 1998, the Operating Subsidiary acquired the outstanding stock
of Dart International, Inc. ("Dart"), a Colorado-based hunter and sports
simulation company, in exchange for 257,577 Class A common shares of the
Company. Dart has an installed base of over 250 systems. Its current products
include an interactive shooting system for entertainment and amusement, an
archery system and a combination archery firearm system.
On April 24, 1998, 1,694,569 shares of the Company's common stock were
exchanged from Class A shares (voting) to Class B shares (nonvoting) by the
Centre Entities.
The Company has been actively participating in a competitive bidding
process for the proposed U.S. Army Engagement Skills Trainer ("EST") program, a
U.S. military procurement award anticipated to be at least as large as the
Company's current U.S. Marine Corps Contract 2014. On May 14, 1998, the Company
received notification on behalf of the U.S. Army that its proposal in response
to the ongoing competition had been excluded from further consideration. On June
2, 1998, the Company filed an action in the United States Court of Federal
Claims to protest this decision, and to obtain an injunction against any award
of the EST contract until the Court can rule on the Company's protest. As part
of this action, the Company has requested that the Court order the procurement
authority to continue its consideration of the Company's proposal and to engage
in meaningful discussions with the Company. Although the Company intends to
pursue this matter vigorously, there can be no assurance that the Court will
grant the relief requested. Furthermore, even if the Company is successful in
securing the right to continue in the competitive bidding process, there can be
no assurance that the Company would ultimately be successful in securing the EST
contract award. In view of
F-24
<PAGE> 54
FIREARMS TRAINING SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the Company's substantial completion of Marine Corps Contract 2014 and the more
limited scope of other U.S. military opportunities, the failure to secure an
award of the U.S. Army EST contract could have a material adverse effect on the
Company's future revenues from the U.S. military, particularly as compared with
the U.S. military revenues in fiscal 1997, and the Company's financial position,
liquidity and results of operations. To support the Company's objectives of
increasing revenues, the Company had developed its infrastructure during the
last several years in expectation that the resulting increase in expense would
be offset by additional revenues. In response to developments concerning the
Army EST procurement process and possible related impact on related business
opportunities, the Company announced on June 24, 1998 that it would take a
restructuring charge of approximately $900,000 for costs incurred in the first
quarter fiscal 1999 related to a workforce reduction and other measures. In
addition, the Company has agreed to a revision of certain financial covenants
under its senior credit facility which will result in incurrence of certain
additional interest costs.
On June 26, 1998, the Company amended the NationsBank Credit Agreement to
provide for an increase in interest rates and for a temporary relaxation of
certain restrictive financial covenants. These covenant changes were based on
the Company's current business outlook. The Company currently has borrowings of
$12 million and has outstanding letters of credit of approximately $1.7 million
under the $25 million revolving credit facility.
F-25
<PAGE> 55
FIREARMS TRAINING SYSTEMS, INC.
AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
MARCH 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END OF
OF PERIOD EXPENSES DEDUCTIONS PERIOD
---------- ---------- ------------- ----------
<S> <C> <C> <C> <C>
Fiscal year ended March 31, 1998:
Allowance for doubtful accounts.................. $100 $-- $-- $100
Fiscal year ended March 31, 1997:
Allowance for doubtful accounts.................. 75 25 -- 100
Fiscal year ended March 31, 1996:
Allowance for doubtful accounts.................. 51 24 -- 75
</TABLE>
S-1
<PAGE> 56
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunder duly authorized, in the City of
Suwanee, State of Georgia on June 29, 1998.
FIREARMS TRAINING SYSTEMS, INC.
By: /s/ PETER A. MARINO
------------------------------------
Peter A. Marino
President, Chief Executive Officer
and Director
(Principal Executive Officer)
POWER OF ATTORNEY AND SIGNATURES
Each person whose signature appears below constitutes and appoints Peter A.
Marino and Emory O. Berry, each of them singly, his true and lawful
attorneys-in-fact and agents, with full power of substitution and resubstitution
in each of them, for him and his name, place and stead, and in any and all
capacities, to sign any and all amendments to this Annual Report on Form 10-K of
Firearms Training Systems, Inc., and to file the same, with all exhibits thereto
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
necessary or desirable to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that attorneys-in-fact and agents or any of them or any of their
substitutes may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ PETER A. MARINO President, Chief Executive June 29, 1998
- ----------------------------------------------------- Officer and Director (Principal
Peter A. Marino Executive Officer)
/s/ EMORY O. BERRY Chief Financial Officer and June 29, 1998
- ----------------------------------------------------- Treasurer (Principal Financial
Emory O. Berry and Accounting Officer)
/s/ CHARLES N. BOWEN Secretary June 29, 1998
- -----------------------------------------------------
Charles N. Bowen
/s/ ROBERT F. MECREDY Executive Vice President June 29, 1998
- -----------------------------------------------------
Robert F. Mecredy
/s/ LESTER POLLACK Chairman of the Board and June 29, 1998
- ----------------------------------------------------- Director
Lester Pollack
/s/ WILLIAM J. BRATTON Director June 29, 1998
- -----------------------------------------------------
William J. Bratton
/s/ GILBERT F. DECKER Director June 29, 1998
- -----------------------------------------------------
Gilbert F. Decker
</TABLE>
V-1
<PAGE> 57
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ CRAIG I. FIELDS Director June 29, 1998
- -----------------------------------------------------
Craig I. Fields
/s/ FRANK S. JONES Director June 29, 1998
- -----------------------------------------------------
Frank S. Jones
/s/ JONATHAN H. KAGAN Director June 29, 1998
- -----------------------------------------------------
Jonathan H. Kagan
/s/ SCOTT PEREKSLIS Director June 29, 1998
- -----------------------------------------------------
Scott Perekslis
/s/ PAUL J. ZEPF Director June 29, 1998
- -----------------------------------------------------
Paul J. Zepf
</TABLE>
V-2
<PAGE> 1
EXHIBIT 10.01-02
FIRST AMENDMENT dated as of June 26, 1998 (this "First Amendment"), to the
Amended and Restated Credit Agreement dated as of October 15, 1997, (said
Amended and Restated Credit Agreement as so amended being the "Credit
Agreement"), among Firearms Training Systems, Inc., as Parent, FATS, Inc., as
Borrower (the "Borrower"), the lenders listed on the signature pages thereto
(the "Lenders"), NationsBank, N.A., as Agent, (in such capacity, the "Agent"),
Swingline Lender and Issuing Bank.
The parties hereto have agreed, subject to the terms and conditions hereof,
to further 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. Amendments to Section 1.01. (a) The definition of
"Applicable ABR Margin" is hereby deleted in its entirety and the following
definition is substituted in lieu thereof:
""Applicable ABR Margin" shall mean (a) with respect to any Tranche A
Term Loan, Revolving Loan or Swingline Loan outstanding on any day:
(i) 1.25%, if such day falls within a Level I Pricing Period;
(ii) 1.50%, if such day falls within a Level II Pricing Period;
(iii) 1.75%, if such day falls within a Level III Pricing Period;
(iv) 2.00%, if such day falls within a Level IV Pricing Period; and
(v) 2.25%, if such day falls within a Level V Pricing Period; and
(b) with respect to any Tranche B Term Loan outstanding on any day,
2.50%."
(b) The definition of "Applicable Eurodollar Margin" is hereby deleted in
its entirety and the following definition is substituted in lieu thereof:
""Applicable Eurodollar Margin" shall mean (a) with respect to any
Tranche A Term Loan, Revolving Loan or Swingline Loan outstanding on any
day:
(i) 2.25%, if such day falls within a Level I Pricing Period;
(ii) 2.50%, if such day falls within a Level II Pricing Period;
(iii) 2.75%, if such day falls within a Level III Pricing Period;
(iv) 3.00%, if such day falls within a Level IV Pricing Period; and
(v) 3.25%, if such day falls within a Level V Pricing Period; and
(b) with respect to any Tranche B Term Loan outstanding (i) on any day
during the period commencing July 1, 1998 and ending June 30, 1999, 3.50% and
(ii) on any other day, 3.00%"
(c) The definition of "EBITDA" is hereby amended by inserting between the
word "GAAP" and the period at the end of such definition the following:
"; provided, that a one time charge taken in the first fiscal quarter
of 1999 in an amount not greater than $900,000.00, which amount shall
include (a) an amount not to exceed $500,000.00 in connection with certain
lease severance expenses and (b) an amount not to exceed $400,000.00
related to corporate restructuring expenses of the Borrower, shall not be
considered in the calculation of EBITDA."
1
<PAGE> 2
(d) The definition of "Level II Pricing Period" is hereby amended by adding
"(a)" between the word "which" and the phrase "the Leverage Ratio" and by adding
the phrase "or equal to" between the phrase "less than" and "4.00:1.00".
(e) The definition of "Level III Pricing Period" is hereby deleted in its
entirety and the following definition is substituted in lieu thereof:
""Level III Pricing Period" shall mean, subject to Section 2.07(c),
any period during which (a) the Leverage Ratio is greater than 4.00:1.00
but less than or equal to 4.50:1.00 and (b) no Default or Event of Default
has occurred and is continuing."
(f) The definition of "pro forma basis" is hereby amended by adding at the
end thereof the following:
"Notwithstanding the foregoing, for purposes of calculating compliance
with the covenants set forth in Article VI, the Simtran Acquisition and the
Dart Acquisition only, and not any future Permitted Acquisition, shall be
deemed to have occurred on the actual effective date of the Simtran
Acquisition or the Dart Acquisition, as the case may be."
(g) The following definitions are hereby added in alphabetical order:
""Canadian Line of Credit" shall mean that certain line of credit
dated as of April 21, 1998 and available until April 21, 1999 from the Bank
of Nova Scotia to Simtran Technologies, Inc. in an amount not to exceed
4,750,000.00 Canadian dollars to be used for the operating expenses of
Simtran Technologies, Inc."
""Dart Acquisition" shall mean the acquisition by FATS, Inc. of 100%
of the capital stock of Dart International, Inc."
""Level IV Pricing Period" shall mean, subject to Section 2.07(c), any
period during which (a) the Leverage Ratio is greater than 4.50:1.00 but
less than or equal to 5.00:1.00 and (b) no Default or Event of Default has
occurred and is continuing."
""Level V Pricing Period" shall mean (a) with respect to any day from
and including the First Amendment Effective Date through the date on which
financial statements and certifications are required to be delivered
pursuant to Section 5.04(g) and (b) thereafter, any period which is not a
Level I Pricing Period, a Level II Pricing Period, a Level III Pricing
Period or a Level IV Pricing Period."
""Simtran Acquisition" shall mean the acquisition by FATS, Inc.,
through a Wholly Owned Subsidiary, of 100% of the capital stock of Simtran
Technologies, Inc., which acquisition is a Permitted Acquisition."
SECTION 1.02. Amendment to Section 6.01. Section 6.01 of the Credit
Agreement is hereby amended by deleting Section 6.01(f) in its entirety and
substituting the following in lieu thereof:
"(f) other unsecured Indebtedness (excluding Capital Lease Obligations
permitted pursuant to Section 6.01(d) above) in an aggregate principal
Dollar Amount of up to $5,000,000 (including Indebtedness with respect to
the Canadian Line of Credit outstanding at any time); and"
SECTION 1.03. Amendment to Section 6.15. (a) Section 6.15(a) of the
Credit Agreement is hereby amended by deleting the chart therefrom in its
entirety and substituting in lieu thereof the following:
<TABLE>
<CAPTION>
"FROM AND INCLUDING TO AND INCLUDING RATIO
- ------------------- ---------------- -----
<S> <C> <C>
The Effective Date December 31, 1997 1.75 to 1.00
January 1, 1998 June 30, 1998 2.10 to 1.00
July 1, 1998 March 31, 1999 2.00 to 1.00
April 1, 1999 December 31, 1999 2.30 to 1.00
January 1, 2000 December 31, 2000 2.60 to 1.00
January 1, 2001 December 31, 2001 2.95 to 1.00
January 1, 2002 December 31, 2002 3.40 to 1.00
January 1, 2003 June 30, 2003 4.00 to 1.00"
</TABLE>
2
<PAGE> 3
(b) Section 6.15(b) of the Credit Agreement is hereby amended by deleting
therefrom the chart in its entirety and substituting in lieu thereof the
following:
<TABLE>
<CAPTION>
"FROM AND INCLUDING TO AND INCLUDING RATIO
- ------------------- ---------------- -----
<S> <C> <C>
The Effective Date December 31, 1997 1.30 to 1.00
January 1, 1998 June 30, 1998 1.35 to 1.00
July 1, 1998 December 31, 1998 1.00 to 1.00
January 1, 1999 December 31, 1999 1.35 to 1.00
January 1, 2000 December 31, 2000 1.40 to 1.00
January 1, 2001 June 30, 2003 1.50 to 1.00"
</TABLE>
(c) Section 6.15(c) of the Credit Agreement is hereby amended by deleting
the chart therefrom in its entirety and substituting in lieu thereof the
following:
<TABLE>
<CAPTION>
"FROM AND INCLUDING TO AND INCLUDING RATIO
- ------------------- ---------------- -----
<S> <C> <C>
The Effective Date December 31, 1997 4.80 to 1.00
January 1, 1998 March 31, 1998 4.00 to 1.00
April 1, 1998 June 30, 1998 5.50 to 1.00
July 1, 1998 September 30, 1998 5.75 to 1.00
October 1, 1998 December 31, 1998 5.50 to 1.00
January 1, 1999 March 31, 1999 4.75 to 1.00
April 1, 1999 June 30, 1999 4.50 to 1.00
July 1, 1999 December 31, 1999 3.60 to 1.00
January 1, 2000 December 31, 2000 3.10 to 1.00
January 1, 2001 December 31, 2001 2.75 to 1.00
January 1, 2002 June 30, 2003 2.25 to 1.00"
</TABLE>
SECTION 1.04. Amendment to Schedule 3.09. Schedule 3.09(a) of the Credit
Agreement is hereby amended by inserting the following after Paragraph 1:
"2. In October 1997, Advanced Interactive Systems, Inc. ("AIS") filed
a lawsuit against Dart International, Inc. ("Dart"), a Wholly Owned
Subsidiary of the Borrower (Advanced Interactive Systems, Inc. vs. Dart
International, Inc., United States District Court for the Western District
of Washington, Civil Action Number 97-1596-WD) alleging patent
infringement. Dart's patent counsel is defending the case and counter-suing
on several grounds, including (i) priority of invention by Dart and
invalidity of plaintiff's patent; (ii) unenforceability of plaintiff's
patent and (iii) damages. AIS has offered to settle the suit for $100,000
plus a royalty-free cross license of the patented item; Borrower's and
Dart's counsel expect that the lawsuit could be settled for considerably
less than such amount."
SECTION 1.05. Representations and Warranties. The Borrower hereby
represents and warrants to the Agents 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, including any Schedules
thereto, 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 (as defined
below) 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.
3
<PAGE> 4
(d) This First Amendment constitutes the legal, valid and binding
obligation of the Borrower, enforceable against the Borrower in accordance
with its terms.
(e) The execution, delivery and performance by the Borrower of this
First Amendment (i) does not conflict with or violate (A) any provision of
law, statute, rule or regulation, or of the articles 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) does not require any consents under, result in a breach of or
constitute (alone or with notice or lapse of time or both) a default or
give rise to increased, additional, accelerated or guaranteed rights of any
person under any such indenture, agreement or instrument.
SECTION 1.06. 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 Parent, the Borrower and the Lenders.
(b) The Agent shall have received duly executed counterparts of the
Limited Waiver and Consent dated June 26, 1998 which, when taken together,
bear the authorized signatures of the Parent, the Borrower and the Required
Lenders.
(c) The Lenders shall be satisfied that the representations and
warranties set forth in Section 1.02 hereof 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.
(d) 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.
(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.
(f) The Agent shall have received payment of and all fees and expenses
set forth in Section 1.08.
(g) The Agent shall be satisfied with the terms of and conditions of
the Canadian Line of Credit.
SECTION 1.07. 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 1.08. Fees and Expenses. The Borrower shall pay an amendment fee
equal to .25% of the outstanding Commitment and all reasonable out-of-pocket
expenses incurred by the Agent and the 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.
SECTION 1.09. 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 1.10. 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
4
<PAGE> 5
Loan Document, nor shall they constitute 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.
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 Parent
By: /s/ EMORY O. BERRY
-------------------------------------
Name: Emory O. Berry
Title: Chief Financial Officer and
Treasurer
FATS, INC.
as Borrower
By: /s/ EMORY O. BERRY
-------------------------------------
Name: Emory O. Berry
Title: Chief Financial Officer and
Treasurer
NATIONSBANK, N.A., as Agent, Swingline
Lender and Issuing Bank and
individually as a Lender
By: /s/ GREG MCCRERY
-------------------------------------
Name: Greg McCrery
Title: Vice President
U.S. BANK NATIONAL ASSOCIATION
By: /s/ MARK R. OLMAN
-------------------------------------
Name: Mark R. Olman
Title: Vice President
FIRST SOURCE FINANCIAL LLP, by First
Source Financial, Inc., as Agent/Manager
By: /s/ GARY L. FRANCIS
-------------------------------------
Name: Gary L. Francis
Title: Senior Vice President
BHF-BANK ATKIENGESELLSCHAFT
By: /s/ THOMAS J. LEISSI
-------------------------------------
Name: Thomas J. Leissi
Title: Vice President
5
<PAGE> 6
CREDITANSTALT CORPORATE FINANCE, INC.
By: /s/ CARL G. DRAKE
------------------------------------
Name: Carl G. Drake
Title: Vice President
By: /s/ STEPHEN W. HIPP
-------------------------------------
Name: Stephen W. Hipp
Title: Associate
6
<PAGE> 1
EXHIBIT 10.03
ASSIGNMENT AND ASSUMPTION AGREEMENT
ASSIGNMENT AND ASSUMPTION AGREEMENT (this "Agreement") dated as of January
1, 1997, among FIREARMS TRAINING SYSTEMS, INC., a Delaware corporation (the
"Assignor"), FATS, INC., a Delaware corporation (the "Assignee"), and
NATIONSBANK, N.A. (SOUTH), as Agent (in such capacity, the "Agent") for the
Lenders (as defined herein).
Reference is made to the Credit Agreement dated as of July 31, 1996, among
the Assignor, as Borrower, the financial institutions party thereto (the
"Lenders"), and NationsBank, N.A. (South), as Agent, Issuing Bank and Swingline
Lender (as amended, supplemented, restated, replaced or otherwise modified, the
"Credit Agreement"). Loans made to the Assignor by the Lenders under the Credit
Agreement in the aggregate principal amount of $61,608,775.40 are outstanding as
of the date hereof.
The Assignor and the Assignee are proposing to effect the Permitted Drop
Down Transaction (as defined in the Credit Agreement), and in connection
therewith, the Assignee will assume the due and punctual payment of all amounts
payable by the Assignor under, and the due and punctual performance and
observance of, all the terms, covenants, agreements and conditions of the Credit
Agreement and the other Loan Documents (as defined in the Credit Agreement) to
the same extent as if the Assignee had been the original party to the Credit
Agreement and the other Loan Documents. As a condition to the Permitted Drop
Down Transaction under the Credit Agreement, the Lenders have required that such
assumption be separately evidenced by this Agreement.
Accordingly, the Assignor and the Assignee, intending to be legally bound,
hereby agree with the Agent, as follows:
SECTION 1. Definitions. All capitalized terms not otherwise defined herein
shall have the respective meanings set forth in the Credit Agreement.
SECTION 2. Assignment. The Assignee hereby accepts and acknowledges its
assumption of, and hereby assumes, all of the obligations of the Assignor under
the Credit Agreement, the Notes and the other Loan Documents, including, the due
and punctual payment of the principal of and interest on the Loans and the other
Obligations, when and as due, and the due and punctual performance and
observance of all the terms, covenants, agreements and conditions of the Credit
Agreement, the Notes and the other Loan Documents to be performed or observed by
the Borrower, to the same extent as if the Assignee had been the original party
to the Credit Agreement and the other Loan Documents (collectively, the
"Assigned Obligations"). Upon the execution and delivery hereof by the Assignor,
the Assignee and the Agent, the Assignee shall, as of the date hereof, be
obligated to pay and perform the Assigned Obligations in accordance with their
terms. Furthermore, the Assignee hereby acknowledges that it is an express
condition of the Permitted Drop Down Transaction that the Assignee shall acquire
substantially all of the assets of the Assignor and that such assets shall be
subject to the existing and continuing security interests in the Collateral and
that the continuation of such existing security interests and the granting of
security interests in hereafter acquired Collateral, in each case pursuant to
the terms of the Security Agreement, shall constitute a part of the Assigned
Obligations. For the avoidance of doubt, all calculations of an accounting or
financial nature contained in the Credit Agreement shall be made for any period
prior to the date on which the Assignee acquires substantially all of the assets
of the Assignor based on the financial condition and results of the Assignor and
its Consolidated Subsidiaries and for any period on or after such date based on
the financial condition and results of the Assignee and its Consolidated
Subsidiaries. Nothing herein is intended to, and this Agreement shall not,
release the Assignor from any of its obligations under the Credit Agreement and
the other Loan Documents.
SECTION 3. Representations and Warranties. Each of the Assignor and the
Assignee represent and warrant to the Agent and each of the Secured Parties that
(i) except as expressly set forth on the Schedules hereto, all representations
and warranties made by it in the Credit Agreement and the other Loan Documents
to which it is a party are true and correct in all material respects on and as
of the date hereof with the same effect as though made on and as of the date
hereof, except to the extent such representations and warranties
<PAGE> 2
expressly relate to an earlier date, in which case such representations and
warranties are true and correct as of such earlier date and (ii) except as
expressly set forth on the Schedules hereto, all representations and warranties
made by the Assignor, as Borrower, under the Credit Agreement and the other Loan
Documents to which it is a party are, after giving effect to the assumption of
obligations by the Assignee contemplated hereby, true and correct in all
material respects on and as of the date hereof with the same effect as though
made by the Assignee, as Borrower, on and as of the date hereof, except to the
extent such representations and warranties expressly relate to an earlier date.
SECTION 4. Indemnification by Assignor. Each of the Assignor and the
Assignee agrees to indemnify the Agent and each Lender, their respective
affiliates and the respective directors, officers, agents and employees of the
foregoing (each an "Indemnitee") and hold each Indemnitee harmless from and
against any and all liabilities, losses, damages, costs and expenses of any
kind, including, without limitation, the reasonable fees and disbursements of
counsel, which may be incurred by such Indemnitee by reason of any breach of or
inaccuracy in the representations, warranties and covenants made by the Assignor
in this Agreement on and as of the date hereof.
SECTION 5. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York.
SECTION 6. Counterparts; Effectiveness. This Agreement shall be effective
when the Agent has received counterparts hereof signed by each of the parties
hereto. This Agreement may be signed in any number of counterparts, each of
which shall be an original, with the same effect as if the signatures thereto
and hereto were upon the same instrument.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
and delivered by their duly authorized officers as of the date first above
written.
FIREARMS TRAINING SYSTEMS, INC.,
as Assignor
By: /s/ DAVID A. APSELOFF
------------------------------------
Name: David A. Apseloff
Title: Chief Financial Officer
FATS, INC., as Assignee
By: /s/ DAVID A. APSELOFF
------------------------------------
Name: David A. Apseloff
Title: Chief Financial Officer
NATIONSBANK, N.A. (SOUTH), as Agent
By: /s/ GREG MCCRERY
------------------------------------
Name: Greg McCrery
Title: Vice President
<PAGE> 1
EXHIBIT 10.04
[FORM OF]
BORROWER'S CONSENT AND AGREEMENT
BORROWER'S CONSENT AND AGREEMENT dated as of October 15, 1997 among FATS,
Inc. (the "Borrower") the Lenders (as defined herein) and NationsBank, N.A.
(formerly known as NationsBank, N.A. (South)), as Agent (in such capacity, the
"Agent") for the Lenders (as defined herein).
Reference is made to (a) the Credit Agreement dated as of July 31, 1996
(the "Original Credit Agreement"), among Firearms Training Systems, Inc. (the
"Parent"), the financial institutions party thereto as lenders (the "Lenders")
and the Agent, (b) the Pledge and Security Agreement dated as of July 31, 1996
(the "Security Agreement") among the Parent, the Subsidiaries named therein as
Grantors and the Agent and (c) the Assignment and Assumption Agreement dated as
of January 1, 1997 (the "Assignment and Assumption") among the Parent, the
Borrower and the Agent pursuant to which, in connection with the Permitted Drop
Down Transaction (as defined in the Original Credit Agreement), the Parent
assigned to the Borrower and the Borrower assumed from the Parent all of the
obligations of the Parent under the Original Credit Agreement, the Security
Agreement and the other Loan Documents. To induce the Lenders to enter into the
Original Credit Agreement, the Borrower granted to the Agent, for the benefit of
the Secured Parties, a security interest in certain Collateral (as defined in
the Security Agreement).
The Parent, the Borrower and the Agent desire to amend and restate the
Original Credit Agreement in order to (i) increase the aggregate Revolving
Credit Commitment thereunder from $15,000,000 to $25,000,000, and (ii) permit
(A) Foreign Currency Letters of Credit, (B) Permitted Acquisitions and (C) the
repurchase by the Borrower of certain Capital Stock, all in the form and
pursuant to the terms and conditions set forth in the Amended and Restated
Credit Agreement dated as of October 10, 1997 (as such agreement may be amended
or modified from time to time, the "Amended Agreement"). Terms used herein and
not otherwise defined herein shall have the meanings assigned to them in the
Amended Agreement. To induce the Agent and the Lenders to enter into the Amended
Agreement, the Borrower hereby agrees as follows:
SECTION 1. Consent of Borrower. (a) The Borrower agrees that its
obligations under the Security Agreement shall continue in full force and
effect, taking into account the amendments contemplated by the Amended Agreement
and this Consent and Agreement. In particular, the Borrower hereby acknowledges
the increase in the Revolving Credit Commitments, agrees that all Obligations
(as defined in the Amended Agreement) shall constitute obligations secured by
the Borrower pursuant to the Security Agreement. Accordingly, the Borrower
acknowledges and agrees that (i) the definition of "Secured Obligations" in the
Security Agreement is hereby amended to include and consist of all obligations
of the Borrower under the Amended Agreement and (ii) any reference to the terms
"Loans", "Letters of Credit", "Notes", "Letter of Credit Disbursements" and
"Obligations" in the Security Agreement (as amended by the foregoing clause
(i)), shall have the meaning ascribed to such terms in the Amended Agreement.
(b) The Borrower, the Agent and the Lenders agree to amend the Security
Agreement as follows:
(i) subsection (i) of Section 2.01 is hereby deleted in its entirety
and the following is substituted therefor:
"(i) all Receivables (other than rights to receive payments in
connection with (A) Government Contracts existing as of the Closing Date
to the extent that a grant of a security interest in such rights is
prohibited by the terms of such Government Contract and any renewals,
extensions or replacements thereof or additional contracts with the same
customers as are parties to such existing Government Contract, provided
that the applicable Grantor shall have used its reasonable, good faith
efforts to cause any such renewal, extensions, replacements or
additional contracts to be included in the Collateral), (B) Government
Contracts entered into after the Closing Date that (I) collectively have
an aggregate value of less than $100,000 to the extent that a grant of a
security interest in such rights is prohibited by the terms of such
Government Contract or (II) are entered into with foreign governmental
entities, the right to receive payments under which are not governed by
the UCC and whose terms prohibit assignment of rights under such
Contract or requires
<PAGE> 2
a consent the Borrower was unable to obtain, or (C) Government Contracts
to the extent that a grant of a security interest in such rights is
prohibited by applicable law);"
(ii) Section 4.02(a)(x) is hereby amended by (A) inserting the phrase
"with respect to any Government Contract with a value greater than
$1,000,000," between the "(A)" and the word "notify" and (B) deleting the
number "$500,000" from subsection (III) thereof and substituting the number
"$2,000,000" therefor.
SECTION 2. Effectiveness. This Consent and Agreement shall become
effective on the Effective Date. On and after the Effective Date, the rights and
obligations of the parties hereto shall be governed by the Security Agreement,
in each case as amended and modified by this Consent and Agreement, and the
other Loan Documents.
SECTION 3. Integration; Confirmation. On and after the Effective Date,
each reference in the Security Agreement to "this Agreement", "herein",
"hereunder" or words of similar import, each reference in any other document
delivered in connection with any of the Loan Documents to the "Security
Agreement" or words of similar import, shall be deemed to be a reference to the
Security Agreement as amended and modified by this Consent and Agreement. All
other terms and provisions of the Security Agreement shall continue in full
force and effect and unchanged and are hereby confirmed in all respects. On and
after the Effective Date, all references in the Security Agreement or any other
document delivered in connection therewith, to the "Credit Agreement" shall be
deemed to be a reference to the Original Credit Agreement, as amended and
restated by the Amended Agreement.
SECTION 4. Representations and Warranties. All representations and
warranties contained in the Amended Agreement that relate to the Borrower are
true and correct.
SECTION 5. Counterparts. This Consent and Agreement may be executed by the
parties hereto in several counterparts and each such counterpart shall be deemed
to be an original, admissible into evidence, but all such counterparts shall
together constitute but one and the same Consent and Agreement. Delivery of an
executed counterpart of this Consent and Agreement by telefacsimile shall be
equally as effective as delivery of a manually executed counterpart of this
Consent and Agreement. Any party delivering an executed counterpart of this
Consent and Agreement by telefacsimile shall also deliver a manually executed
counterpart of this Consent and Agreement, but the failure to deliver a manually
executed counterpart shall not affect the validity, enforceability and binding
effect of this Consent and Agreement.
SECTION 6. Governing Law. THIS CONSENT AND AGREEMENT SHALL BE CONSTRUED IN
ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK.
IN WITNESS WHEREOF, each party hereto has caused this Consent and Agreement
to be duly executed and delivered by its officers thereunto duly authorized as
of the date first above written.
FATS, INC., as Borrower
By: /s/ DAVID A. APSELOFF
------------------------------------
Name: David A. Apseloff
Title: Vice President
NATIONSBANK, N.A., as Agent
By: /s/ DERRICK C. BELL
------------------------------------
Name: Derrick C. Bell
Title: Vice President
<PAGE> 3
FIRST BANK NATIONAL ASSOCIATION
By: /s/ MARK R. OLMAN
------------------------------------
Name: Mark R. Olman
Title: Vice President
FIRST SOURCE FINANCIAL LLP, by
First Source Financial, Inc., as
Agent/Manager
By: /s/ GARY L. FRANCIS
------------------------------------
Name: Gary L. Francis
Title: Senior Vice President
BHF-BANK AKTIENGESELLSCHAFT
By: /s/ THOMAS J. LEISSL
------------------------------------
Name: Thomas J. Leissl
Title: Vice President
By: /s/ CHRISTOPHER LALLY
------------------------------------
Name: Christopher Lally
Title: Assistant Treasurer
CREDITANSTALT CORPORATE FINANCE, INC.
By: /s/ CARL G. DRAKE
------------------------------------
Name: Carl G. Drake
Title: Senior Associate
By: /s/ ROBERT M. BIRINGER
------------------------------------
Name: Robert M. Biringer
Title: Executive Vice President
<PAGE> 1
EXHIBIT 10.05
PARENT PLEDGE AGREEMENT
DATED AS OF JANUARY 1, 1997
BETWEEN
FIREARMS TRAINING SYSTEMS, INC.
AND
NATIONSBANK, N.A. (SOUTH),
AS AGENT
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ARTICLE SECTION PAGE
- ------- ------- ----
<S> <C> <C> <C>
ARTICLE I DEFINITIONS............................................................... 1
SECTION 1.01. Terms Defined in Credit Agreement........................... 1
SECTION 1.02. Definition of Certain Terms Used Herein..................... 1
SECTION 1.03. UCC Definitions............................................. 2
SECTION 1.04. Terms Generally............................................. 2
ARTICLE II SECURITY INTERESTS....................................................... 2
SECTION 2.01. The Security Interests...................................... 2
SECTION 2.02. Continuing Liability of the Pledgor......................... 2
SECTION 2.03. Delivery of Pledged Securities.............................. 2
SECTION 2.04. Security Interests Absolute................................. 3
SECTION 2.05. Release of Collateral....................................... 3
ARTICLE III REPRESENTATIONS AND WARRANTIES.......................................... 4
SECTION 3.01. Credit Agreement............................................ 4
SECTION 3.02. Pledged Securities.......................................... 4
SECTION 3.03. Validity, Perfection and Priority of Security Interests..... 4
SECTION 3.04. Place of Business; Location of Collateral................... 4
SECTION 3.05. Effectiveness............................................... 4
ARTICLE IV COVENANTS................................................................ 5
SECTION 4.01. Perfection of Security Interests............................ 5
SECTION 4.02. Further Actions............................................. 5
SECTION 4.03. Change of Name, Identity or Structure....................... 5
SECTION 4.04. Place of Business and Collateral............................ 6
SECTION 4.05. Maintenance of Records...................................... 6
SECTION 4.06. Compliance with Laws, etc. ................................. 6
SECTION 4.07. Payment of Taxes, etc. ..................................... 6
SECTION 4.08. Limitation on Liens on Collateral........................... 6
SECTION 4.09. Limitations on Dispositions of Collateral................... 6
SECTION 4.10. Notices..................................................... 6
SECTION 4.11. Change of Law............................................... 6
SECTION 4.12. Reimbursement Obligation.................................... 6
ARTICLE V DISTRIBUTIONS ON PLEDGED SECURITIES; VOTING............................... 7
SECTION 5.01. Right to Receive Distributions on Pledged Collateral; 7
Voting......................................................
ARTICLE VI REMEDIES; RIGHTS UPON DEFAULT............................................ 8
SECTION 6.01. UCC Rights.................................................. 8
SECTION 6.02. Sale of Collateral.......................................... 8
SECTION 6.03. Rights of Purchasers........................................ 9
SECTION 6.04. Additional Rights of the Agent.............................. 9
SECTION 6.05. Securities Act, etc. ....................................... 9
SECTION 6.06. Remedies Not Exclusive...................................... 10
SECTION 6.07. Waiver and Estoppel......................................... 11
SECTION 6.08. Power of Attorney........................................... 11
SECTION 6.09. Application of Proceeds..................................... 12
ARTICLE VII MISCELLANEOUS........................................................... 13
SECTION 7.01. Notices..................................................... 13
SECTION 7.02. Survival of Agreement....................................... 13
SECTION 7.03. Counterparts; Effectiveness................................. 13
SECTION 7.04. Amendments, Etc. ........................................... 13
SECTION 7.05. Assignments................................................. 13
</TABLE>
i
<PAGE> 3
<TABLE>
<CAPTION>
ARTICLE SECTION PAGE
- ------- ------- ----
<S> <C> <C> <C>
SECTION 7.06. Savings Clause.............................................. 13
SECTION 7.07. Governing Law............................................... 14
SECTION 7.08. Entire Agreement............................................ 14
SECTION 7.09. No Waiver; Remedies......................................... 14
SECTION 7.10. Headings.................................................... 14
SECTION 7.11. Submission to Jurisdiction.................................. 14
SECTION 7.12. No Oral Agreements.......................................... 14
</TABLE>
<TABLE>
<CAPTION>
SCHEDULES
- ---------
<S> <C>
Schedule 1 Chief Executive Office and Principal Place of Business;
Locations of Records of Receivables and General Intangibles
Schedule 2 Pledged Securities
Schedule 3 Trade Names, Division Names, etc.
Schedule 4 Required Filings and Recordings
</TABLE>
ii
<PAGE> 4
PLEDGE AGREEMENT dated as of January 1, 1997 between FIREARMS TRAINING
SYSTEMS, INC., a Delaware corporation (the "Pledgor"), and NATIONSBANK, N.A.
(SOUTH), as Agent (in such capacity, the "Agent") for the Lenders (as defined
herein).
Reference is made to (a) the Credit Agreement dated as of July 31, 1996 (as
amended, supplemented or otherwise modified from time to time, the "Credit
Agreement"), among FATS, Inc. (the "Borrower", which simultaneously with the
execution and delivery of this Agreement has assumed all of the Obligations (as
such term is defined in the Credit Agreement) of Firearms Training Systems, Inc.
pursuant to Section 6.05(a)(iv) E) of the Credit Agreement), the financial
institutions party thereto as lenders (the "Lenders") and NationsBank, N.A.
(South), as Agent, as Swingline Lender and as Issuing Bank.
The Lenders and the Swingline Lenders have respectively agreed to extend
credit to the Borrower, and the Issuing Bank has agreed to issue Letters of
Credit for the account of the Borrower, pursuant to, and upon the terms and
subject to the conditions set forth in, the Credit Agreement. The obligations of
the Lenders and the Swingline Lenders to extend credit and of the Issuing Bank
to issue Letters of Credit under the Credit Agreement are conditioned on, among
other things, the execution and delivery by the Pledgor of a Pledge Agreement in
the form hereof in connection with the consummation of the Permitted Drop Down
Transaction. As consideration therefor and in order to induce the Lenders to
make Loans, the Pledgor is willing to execute and deliver this Agreement.
Accordingly, the Pledgor, intending to be legally bound, hereby agrees with
the Agent, for the ratable benefit of the Secured Parties, as follows:
ARTICLE I
DEFINITIONS
SECTION 1.01. Terms Defined in Credit Agreement. Terms used herein and not
otherwise defined herein shall have the meanings set forth in the Credit
Agreement; provided that as used herein, the term "Loan Party" when used in
connection with the obligations of the Pledgor, shall mean the Borrower, the
Subsidiaries, the Buyers and the Seller.
SECTION 1.02. Definition of Certain Terms Used Herein. As used herein, the
following terms shall have the following meanings:
"Collateral" shall have the meaning assigned to such term in Section
2.01.
"General Intangibles" of the Pledgor shall mean (a) all contract
rights to receive dividends, liquidating dividends, distributions, options,
rights to subscribe, cash, instruments and other property and proceeds from
time to time in respect of or in exchange for any or all of the Capital
Stock of the Borrower and (b) all rights of the Pledgor (including all
choses in action and causes of action) under all agreements that in any way
relate to such Capital Stock.
"Pledged Securities" shall mean (a) the Capital Stock listed and
described on Schedule 2 hereto, and the certificates, if any, representing
such Capital Stock, (b) all additional Capital Stock from time to time
acquired by the Pledgor in any manner (which shares shall be considered to
be Pledged Securities under this Agreement), together in each case with the
certificates representing such additional Capital Stock and (c) all
dividends, liquidating dividends, stock dividends, distributions, stock or
partnership rights, options, rights to subscribe, cash, instruments and
other property and proceeds from time to time received, receivable or
otherwise distributed in respect of or in exchange for any or all of such
listed Capital Stock referenced in clause (a) above or such additional
Capital Stock referenced in clause (b) above.
"Proceeds" shall mean all proceeds, including (a) whatever is received
upon any collection, exchange, sale or other disposition of any of the
Collateral and any property into which any of the Collateral is converted,
whether cash or non-cash and (b) any and all other amounts from time to
time paid or payable under or in connection with any of the Collateral.
<PAGE> 5
"Secured Obligations" of the Pledgor shall mean (a) all amounts now or
hereafter payable by the Pledgor under the Parent Guarantee Agreement and
(b) all expenses (including reasonable counsel fees and expenses) incurred
in enforcing any rights of the Agent and the Secured Parties against the
Pledgor under this Agreement.
"UCC" shall mean at any time the Uniform Commercial Code as the same
may from time to time be in effect in the State of New York; provided that
if, by reason of mandatory provisions of law, the validity or perfection of
any security interest granted herein is governed by the Uniform Commercial
Code as in effect in a jurisdiction other than New York, then, as to the
validity or perfection of such security interest, "UCC" shall mean the
Uniform Commercial Code in effect in such other jurisdiction.
SECTION 1.03. UCC Definitions. The uncapitalized terms "contract right",
"instrument", "general intangible", "money" and "proceeds", as used in Section
1.02 or elsewhere in this Agreement shall have the meanings ascribed thereto in
the UCC.
SECTION 1.04. Terms Generally. The definitions in the Credit Agreement and
in Section 1.02 shall apply equally to both the singular and plural forms of the
terms defined. Whenever the context may require, any pronoun shall include the
corresponding masculine, feminine and neuter forms. The words "include",
"includes" and "including" shall be deemed to be followed by the phrase "without
limitation". All references herein to Articles, Sections, Exhibits and Schedules
shall be deemed references to Articles and Sections of, and Exhibits and
Schedules to, this Agreement unless the context shall otherwise require. Unless
otherwise expressly provided herein, the word "day" means a calendar day.
ARTICLE II
SECURITY INTERESTS
SECTION 2.01. The Security Interests. To secure the due and punctual
payment of all Secured Obligations of the Pledgor, howsoever created, arising or
evidenced, whether direct or indirect, absolute or contingent, now or hereafter
existing or due or to become due, in accordance with the terms thereof, (a) the
Pledgor hereby grants to the Agent, its successors and its assigns, for the
ratable benefit of the Secured Parties, a security interest in and (b) the
Pledgor hereby pledges to the Agent, its successors and assigns, for the ratable
benefit of the Secured Parties, all of the Pledgor's right, title and interest
in, to and under the following, whether now existing or hereafter acquired (all
of which are herein collectively called the "Collateral"):
(i) all General Intangibles;
(ii) all Pledged Securities; and
(iii) to the extent not otherwise included, all Proceeds and products
of any or all of the foregoing, whether existing on the date hereof or
arising hereafter.
SECTION 2.02. Continuing Liability of the Pledgor. Anything herein to the
contrary notwithstanding, the Pledgor shall remain liable to observe and perform
all the terms and conditions to be observed and performed by it under any
contract, agreement, warranty or other obligation with respect to the
Collateral, and shall do nothing to impair the security interests herein
granted. Neither the Agent nor any Secured Party shall have any obligation or
liability under any such contract, agreement, warranty or obligation by reason
of or arising out of this Agreement or the receipt by the Agent or any Secured
Party of any payment relating to any Collateral, nor shall the Agent or any
Secured Party be required to perform or fulfill any of the obligations of the
Pledgor with respect to any of the Collateral, to make any inquiry as to the
nature or sufficiency of any payment received by it or the sufficiency of the
performance of any party's obligations with respect to any Collateral.
Furthermore, neither the Agent nor any Secured Party shall be required to file
any claim or demand to collect any amount due or to enforce the performance of
any party's obligations with respect to the Collateral.
SECTION 2.03. Delivery of Pledged Securities. All certificates or
instruments representing or evidencing the Pledged Securities shall be delivered
to and held by or on behalf of the Agent, for the ratable benefit of
2
<PAGE> 6
the Secured Parties, pursuant hereto and shall be in suitable form for transfer
by delivery, duly endorsed and shall be accompanied by duly executed instruments
of transfer or assignments in blank, with signatures appropriately guaranteed,
and accompanied in each case by any required transfer tax stamps, all in form
and substance satisfactory to the Agent. The Agent shall have the right, at any
time in its discretion and without notice to the Pledgor after the occurrence
and continuance of an Event of Default, to cause any or all of the Pledged
Securities to be transferred of record into the name of the Agent or its
nominee.
SECTION 2.04. Security Interests Absolute. All rights of the Agent and the
Secured Parties hereunder, and all obligations of the Pledgor hereunder, shall
be absolute and unconditional and, without limiting the generality of the
foregoing, shall not be released, discharged or otherwise affected by:
(a) any extension, renewal, settlement, compromise, waiver or release
in respect of any Secured Obligation or any document securing any Secured
Obligation, by operation of law or otherwise;
(b) any modification or amendment or supplement to the Credit
Agreement, any Collateral Document, or any other document evidencing or
securing any Secured Obligation;
(c) any release, non-perfection or invalidity of any direct or
indirect security for any Secured Obligation;
(d) any change in the existence, structure or ownership of the
Borrower, the Pledgor or other Loan Party, or any insolvency, bankruptcy,
reorganization or other similar proceeding affecting the Borrower, the
Pledgor or other Loan Party or its assets or any resulting disallowance,
release or discharge of all or any portion of the Secured Obligations;
(e) the existence of any claim, set-off or other right which the
Pledgor may have at any time against the Borrower, any other Loan Party,
the Agent, any Secured Party or any other corporation or person, whether in
connection herewith or any unrelated transactions; provided that nothing
herein shall prevent the assertion of any such claim by separate suit or
compulsory counterclaim;
(f) any invalidity or unenforceability for any reason of any Secured
Obligation relating to or against the Borrower, the Pledgor or any other
Loan Party, or any provision of applicable law or regulation purporting to
prohibit the payment by the Borrower, the Pledgor or any other Loan Party
of the Secured Obligations;
(g) any failure by the Agent or any Secured Party (i) to file or
enforce a claim against the Borrower, the Pledgor or any other Loan Party
or its estate (in a bankruptcy or other proceeding), (ii) to give notice of
the existence, creation or incurrence by the Borrower, the Pledgor or any
other Loan Party of any new or additional indebtedness or obligation under
or with respect to the Secured Obligations, (iii) to commence any action
against the Borrower, the Pledgor or any other Loan Party, (iv) to disclose
to the Borrower, the Pledgor or any other Loan Party any facts which the
Agent or any Secured Party may now or hereafter know with regard to the
Borrower, the Pledgor or any other Loan Party or (v) to proceed with due
diligence in the collection, protection or realization upon any collateral
securing the Secured Obligations; or
(h) any other act or omission to act or delay of any kind by the
Borrower, the Pledgor, any other Loan Party, the Agent, any Secured Party
or any other person or any other circumstance whatsoever which might, but
for the provisions of this clause, constitute a legal or equitable
discharge of the Pledgor's obligations hereunder.
SECTION 2.05. Release of Collateral. Upon (a) the indefeasible payment in
full in cash of all of the Secured Obligations, (b) the termination of the
Commitments, (c) the cancellation or expiration of all Letters of Credit and the
reimbursement in full of all Letter of Credit Disbursements and (d) the
satisfaction by the Borrower of all terms and conditions hereof, the Credit
Agreement, the Notes, the Collateral Documents and all other documents or
agreements governing the Secured Obligations, the Agent will (as soon as
reasonably practicable after receipt of notice from the Pledgor requesting the
same, but at the expense of the Pledgor) execute and send to the Pledgor, (i)
for each filing made under Section 4.01 or 4.02 to perfect the security
interests granted to the Agent and the Secured Parties hereunder, a termination
statement
3
<PAGE> 7
prepared by the Pledgor to the effect that the Agent and the other Secured
Parties no longer claim a security interest under such filing and (ii) all
documents and instruments previously pledged to the Agent hereunder.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
The Pledgor represents and warrants to the Agent and each of the Secured Parties
that:
SECTION 3.01. Credit Agreement. All representations and warranties
contained in the Credit Agreement that relate to the Pledgor are true and
correct. The Pledgor agrees to comply with each of the covenants contained in
the Credit Agreement that imposes or purports to impose, through agreements with
the Borrower, restrictions or obligations on the Pledgor. The Pledgor
acknowledges that any default in the due observance or performance by the
Pledgor of any covenant, condition or agreement contained herein may constitute
an Event of Default under Article VII of the Credit Agreement. There are no
conditions precedent to the effectiveness of this Agreement that have not been
satisfied or waived.
SECTION 3.02. Pledged Securities. All Pledged Securities have been duly
authorized and validly issued by the Borrower and are fully paid and
nonassessable. The Pledgor owns good, valid and marketable title to all the
outstanding Capital Stock of the Borrower, free and clear of all Liens, other
than the Liens of the Collateral Documents, of every kind, whether absolute,
matured, contingent or otherwise. None of the Pledged Securities is subject to
options to purchase or similar rights of any person. The Pledgor is not and will
not become a party to or otherwise bound by any agreement, other than this
Agreement, which restricts in any manner the rights of any present or future
holder of any of the Pledged Securities with respect thereto. The Pledged
Securities constitute and will at all times constitute 100% of the Capital Stock
of the Borrower.
SECTION 3.03. Validity, Perfection and Priority of Security Interests. (a)
By complying with Section 4.01 and by delivering all certificates or
instruments, if any, representing or evidencing the Collateral to the Agent, the
Pledgor will have created a valid and duly perfected security interest in favor
of the Agent for the benefit of the Secured Parties as security for the due and
punctual payment of all Secured Obligations of the Pledgor in all Collateral and
identifiable Proceeds of such Collateral, as to which a security interest may be
perfected by (i) filing UCC financing statements and (ii) possession. Continuing
compliance by the Pledgor with the provisions of Section 4.02 will also (i)
create and duly perfect valid security interests in all Collateral acquired or
otherwise coming into existence after the date hereof and in all identifiable
Proceeds of such Collateral as security for the due and punctual payment of all
Secured Obligations of the Pledgor and (ii) cause such security interests in all
Collateral and in all Proceeds which are (A) identifiable cash Proceeds of
Collateral covered by financing statements required to be filed hereunder and
(B) identifiable Proceeds in which a security interest may be perfected by such
filing under the UCC to be duly perfected under the UCC.
(b) The security interests of the Agent in the Collateral rank first in
priority. Other than financing statements or other similar documents perfecting
the security interests of the Agent, no financing statements or similar
documents covering all or any part of the Collateral are on file or of record in
any government office in any jurisdiction in which such filing or recording
would be effective to perfect a security interest in such Collateral, nor is any
of the Collateral in the possession of any person (other than the Pledgor)
asserting any claim thereto or security interest therein.
SECTION 3.04. Place of Business; Location of Collateral. Schedule 1
correctly sets forth (a) the Pledgor's chief executive office and principal
place of business and (b) the offices of the Pledgor where records concerning
the General Intangibles are kept.
SECTION 3.05. Effectiveness. The pledge and grant effected hereby is
effective to vest in the Agent, on behalf of the Secured Parties, the rights of
the Agent in the Collateral as set forth herein.
4
<PAGE> 8
ARTICLE IV
COVENANTS
The Pledgor covenants and agrees with the Agent that until (a) all the
Secured Obligations have been indefeasibly paid in full in cash, (b) the
Commitments have been terminated, (c) all Letters of Credit have been cancelled
or have expired and all Letter of Credit Disbursements have been reimbursed in
full and (d) all terms and conditions hereof, the Credit Agreement, the
Collateral Documents and all other documents or agreements governing the Secured
Obligations have been satisfied, the Pledgor will comply with the following:
SECTION 4.01. Perfection of Security Interests. The Pledgor will, at its
own expense, cause all filings and recordings and other actions specified on
Schedule 4 to have been completed and filed on or prior to the Effective Date
(as defined in Section 7.03).
SECTION 4.02. Further Actions. (a) At all times after the Effective Date,
the Pledgor will, at its own expense, comply with the following:
(i) as to all General Intangibles and Pledged Securities, it will
cause UCC financing statements and continuation statements to be filed and
to be on file in all applicable jurisdictions as required to perfect the
security interests granted to the Agent and the Secured Parties hereunder,
to the extent that applicable law permits perfection of a security interest
by filing under the UCC;
(ii) as to all Proceeds, it will cause all UCC financing statements
and continuation statements filed in accordance with clause (i) above to
include a statement or a checked box indicating that Proceeds of all items
of Collateral described therein are covered; and
(iii) as to any Capital Stock hereafter acquired by the Pledgor, the
Pledgor will immediately pledge and deliver the corresponding certificates,
upon the acquisition or certification thereof, or other instruments to the
Agent as part of the Pledged Securities duly endorsed in a manner
satisfactory to the Agent.
(b) The Pledgor will, from time to time and at its own expense, execute,
deliver, file or record such financing statements pursuant to the UCC and such
other statements, assignments, instruments, documents, agreements or other
papers and take any other action that may be necessary or desirable, or that the
Agent may reasonably request, in order to create, preserve, perfect, confirm or
validate the security interests, to enable the Agent and the Secured Parties to
obtain the full benefits of this Agreement or to enable the Agent to exercise
and enforce any of its rights, powers and remedies hereunder, including, without
limitation, its right to take possession of the Collateral.
(c) To the fullest extent permitted by law, the Pledgor authorizes the
Agent (i) to sign and file financing and continuation statements and amendments
thereto with respect to the Collateral without its signature thereon and (ii) to
the extent permissible by applicable law, file this Agreement in any UCC filing
jurisdiction as a financing statement with respect to the Collateral. In
furtherance of the foregoing, the Pledgor hereby irrevocably constitutes and
appoints the Agent, with full power of substitution, as its true and lawful
attorney-in-fact with full irrevocable power and authority in the place and
stead of the Pledgor and in the name of the Pledgor, or in its own name, from
time to time in the Agent's reasonable discretion, to execute, deliver, file or
record financing statements pursuant to the UCC as may be necessary or desirable
in order to create, preserve, perfect, confirm or validate the security
interests.
SECTION 4.03. Change of Name, Identity or Structure. The Pledgor will not
change its name, identity or corporate structure in any manner unless it shall
have given the Agent at least 30 days' prior written notice thereof and shall
have taken all action (or made arrangements to take such action substantially
simultaneously with such change if it is impossible to take such action in
advance) necessary or reasonably requested by the Agent to amend any financing
statement or continuation statement relating to the security interests granted
hereby in order to preserve such security interests and to effectuate or
maintain the priority thereof against all persons.
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SECTION 4.04. Place of Business and Collateral. The Pledgor will not
change the location of its chief executive office unless, prior to such change,
(i) it notifies the Agent of such change, (ii) makes all UCC filings required by
Section 4.02 and (iii) takes all other action necessary or that the Agent may
reasonably request to preserve, perfect, confirm and protect the security
interests granted hereby.
SECTION 4.05. Maintenance of Records. The Pledgor will keep and maintain
at its own cost and expense complete books and records relating to the
Collateral which are satisfactory to the Agent, including, without limitation, a
record of all dividends received with respect to the Collateral and all of its
other dealings with the Collateral. The Pledgor will provide the Agent with
access to or copies of such records promptly upon Agent's request therefor.
SECTION 4.06. Compliance with Laws, etc. The Pledgor will comply in all
material respects with all applicable statutes, rules, regulations, and orders
of, and all applicable restrictions imposed by, the United States of America,
foreign countries, states, provinces and municipalities, and of or by any
Governmental Authority, including any court, arbitrator or grand jury, in
respect of the Collateral except such as are being contested in good faith by
appropriate proceedings promptly initiated and diligently conducted and if such
reserve or other appropriate provision, if any, as shall be required by GAAP
shall have been made therefor and the failure to so comply could not reasonably
be expected to have a Material Adverse Effect.
SECTION 4.07. Payment of Taxes, etc. The Pledgor will pay all taxes,
assessments and other governmental charges or levies imposed upon the Collateral
or in respect of any of its income or profits therefrom when the same become due
and payable, but in any event before any penalty or interest accrues thereon,
and all claims (including claims for labor, services, materials and supplies)
for sums which have become due and payable and which by law have or might become
a Lien upon any of its properties or assets, and promptly reimburse the Agent or
any Secured Party for any such taxes, assessments, charges or claims paid by
them; provided that no such tax, assessment, charge or claim need be paid or
reimbursed if being contested in good faith by appropriate proceedings promptly
initiated and diligently conducted and if such reserves or other appropriate
provision, if any, as shall be required by GAAP shall have been made therefor
and be adequate in the good faith judgment of the Pledgor.
SECTION 4.08. Limitation on Liens on Collateral. The Pledgor will not,
create, permit or suffer to exist, but will defend the Collateral and the
Pledgor's rights with respect thereto against and take such other action as is
necessary to remove, any security interest, encumbrance, claim or other Lien in
respect of the Collateral.
SECTION 4.09. Limitations on Dispositions of Collateral. The Pledgor will
not, directly or indirectly, sell, transfer, lease or otherwise dispose of any
of the Collateral (or any interest therein), or attempt, offer or contract to do
so. The inclusion of Proceeds of the Collateral under the security interest
granted hereby shall not be deemed a consent by the Agent to any sale or
disposition of any Collateral.
SECTION 4.10. Notices. The Pledgor will advise the Agent promptly and in
reasonable detail, (a) of any security interest, encumbrance or claim made or
other Lien asserted against any of the Collateral, (b) of any material change in
the composition of the Collateral and (c) of the occurrence of any other event
which would have a material effect on the aggregate value of the Collateral or
on the security interests granted to the Agent in this Agreement.
SECTION 4.11. Change of Law. The Pledgor shall promptly notify the Agent
in writing of any change in law known to it which (i) adversely affects or will
adversely affect the validity, perfection or priority of the security interests
granted hereby, (ii) requires or will require a change in the procedures to be
followed in order to maintain and protect such validity, perfection and priority
or (iii) could result in the Agent not having a perfected security interest in
any of the Collateral.
SECTION 4.12. Reimbursement Obligation. Should the Pledgor fail to comply
with the provisions of this Agreement or any other agreement relating to the
Collateral such that the value of any Collateral or the validity, perfection,
rank or value of any security interest granted to the Agent hereunder or
thereunder is thereby diminished or potentially diminished in any material
respect or put at risk in any material respect (as reasonably determined by the
Agent), the Agent on behalf of the Pledgor may, but shall not be required to,
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effect such compliance on behalf of the Pledgor, and the Pledgor shall reimburse
the Agent for the costs thereof on demand, and interest shall accrue on any such
unpaid reimbursement obligation from the date the relevant costs are incurred
until reimbursement thereof in full at the default rate provided in Section 2.07
of the Credit Agreement.
SECTION 4.13. Pledgor's Business. The Pledgor will not engage in any
activity (including any merger, consolidation or sale of assets), issue any
securities, incur any Indebtedness, incur any other material liability or create
or permit to exist any Lien on its assets, other than the ownership of the
common stock of the Borrower and related de minimis activities incidental
thereto. Notwithstanding the foregoing sentence, the Pledgor may, so long as any
such action is not prohibited by any other applicable provision of this
Agreement, (i) engage in any activity incidental to the maintenance of the
corporate existence of the Pledgor and compliance with applicable law, (ii)
enter into and perform the obligations of the Pledgor under the Parent Guarantee
Agreement and the Parent Pledge Agreement, (iii) enter into (or issue, as
applicable), perform the obligations of the Pledgor under and exercise the
rights of the Pledgor under (A) stock options exercisable for Common Stock
granted to employees of the Borrower and directors of the Borrower or the
Pledgor and other customary participants or an employee stock option plan
established for the benefit of employees of the Borrower and directors of the
Borrower or the Pledgor and other customary participants, (B) the Shareholders
Agreement, (C) the Recapitalization Agreement and (D) the Seller Registration
Rights Agreement and the Buyer Registration Rights Agreement, (iv) issue
additional shares of the Common Stock or receive any capital contribution, so
long as 100% of the net cash proceeds, if any, of any such issuance or
contribution are contributed by the Pledgor to the capital of the Borrower and
(v) engage in the Permitted Drop Down Transaction and administer on behalf of
the Borrower, pursuant to an agency agreement satisfactory to the Agent and the
Required Lenders (which shall be assigned to the Agent on behalf of the Secured
Parties), any nontransferable assets which remain owned by the Pledgor after
consummation of the Permitted Drop Down Transaction.
ARTICLE V
DISTRIBUTIONS ON PLEDGED SECURITIES; VOTING
SECTION 5.01. Right to Receive Distributions on Pledged Collateral;
Voting. (a) So long as no Event of Default shall have occurred and be
continuing:
(i) The Pledgor shall be entitled to exercise any and all voting and
other consensual rights pertaining to the Pledged Securities or any part
thereof for any purpose permitted by the terms of this Agreement, the
Credit Agreement and the other Loan Documents.
(ii) The Pledgor shall be entitled to receive and retain any and all
dividends, interest and principal paid in cash on the Pledged Securities to
the extent and only to the extent that such cash dividends, interest and
principal are permitted by, and otherwise paid in accordance with, the
terms and conditions of the Credit Agreement and applicable laws. Other
than pursuant to the first sentence of this paragraph (a)(ii), all
principal, all noncash dividends, interest and principal, and all
dividends, interest and principal paid or payable in cash or otherwise in
connection with a partial or total liquidation or dissolution, return of
capital, capital surplus or paid-in surplus, and all other distributions
made on or in respect of Pledged Securities, whether paid or payable in
cash or otherwise, whether resulting from a subdivision, combination or
reclassification of the outstanding Capital Stock of the Borrower or
received in exchange for Pledged Securities or any part thereof, or in
redemption thereof, or as a result of any merger, consolidation,
acquisition or other exchange of assets to which the Borrower may be a
party or otherwise, shall be and become part of the Collateral, and, if
received by the Pledgor, shall not be commingled by the Pledgor with any of
its other funds or property but shall be held separate and apart therefrom,
shall be held in trust for the benefit of the Agent and shall be forthwith
delivered to the Agent in the form in which received (with any necessary
endorsement).
(iii) The Agent shall execute and deliver (or cause to be executed and
delivered) to the Pledgor all such proxies, powers of attorney, consents,
ratifications and waivers and other instruments as the Pledgor
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may reasonably request for the purpose of enabling the Pledgor to exercise
the voting and other rights which it is entitled to exercise pursuant to
paragraph (i) above and to receive the dividends or interest payments which
it is authorized to receive and retain pursuant to paragraph (ii) above.
(b) Upon the occurrence and during the continuance of an Event of Default:
(i) All rights of the Pledgor to receive the dividends and interest
payments which it would otherwise be authorized to receive and retain
pursuant to Section 5.01(a)(ii) shall cease, and all such rights shall
thereupon become vested in the Agent which shall thereupon have the sole
right to receive and hold as Collateral such dividends and interest
payments.
(ii) All dividends and interest payments which are received by the
Pledgor contrary to the provisions of paragraph (i) of this Section 5.01(b)
shall be received in trust for the benefit of the Agent, shall be
segregated from other funds of the Pledgor and shall be forthwith paid over
to the Agent as Collateral in the same form as so received (with any
necessary endorsement).
(c) Upon the occurrence and during the continuance of an Event of Default,
all rights of the Pledgor to exercise the voting and other consensual rights
which it would otherwise be entitled to exercise pursuant to Section 5.01(a)(i)
shall cease, and all such rights shall thereupon become vested in the Agent,
which shall thereupon have the sole right to exercise such voting and other
consensual rights. After all Events of Default have been cured or waived, the
Pledgors will have the right to exercise the voting and consensual rights and
powers to which they would otherwise be entitled pursuant to the terms of
paragraph (a)(i).
ARTICLE VI
REMEDIES; RIGHTS UPON DEFAULT
SECTION 6.01. UCC Rights. If any Event of Default shall have occurred, the
Agent may, in addition to all other rights and remedies granted to it in this
Agreement and in any other instrument or agreement securing, evidencing or
relating to the Secured Obligations, exercise all rights and remedies of a
secured party under the UCC and all other rights available to the Agent at law
or in equity.
SECTION 6.02. Sale of Collateral. (a) The Pledgor expressly agrees that if
an Event of Default shall occur and be continuing, the Agent, without demand of
performance or other demand or notice of any kind (except the notice specified
below of the time and place of any public or private sale) to the Pledgor or any
other person (all of which demands and/or notices are hereby waived by the
Pledgor), may forthwith collect, receive, appropriate and realize upon the
Collateral and/or forthwith sell, lease, assign, give an option or options to
purchase or otherwise dispose of and deliver the Collateral (or contract to do
so) or any part thereof in one or more parcels at public or private sale, at any
exchange, broker's board or at any office of the Agent or elsewhere in such
manner as is commercially reasonable and as the Agent may deem best, for cash or
on credit or for future delivery without assumption of any credit risk. The
Agent or any Secured Party shall have the right upon any such public sale and,
to the extent permitted by law, upon any such private sale, to purchase the
whole or any part of the Collateral so sold. The Pledgor further agrees, at the
Agent's request, to assemble the Collateral, and to make it available to the
Agent at places which the Agent may reasonably select. To the extent permitted
by applicable law, the Pledgor waives all claims, damages and demands against
the Agent arising out of the sale of the Collateral except to the extent that a
court of competent jurisdiction shall have determined by final nonappealable
judgment that any action taken by the Agent or any Secured Party with respect to
such sale constitutes gross negligence or willful misconduct.
(b) Unless the Collateral threatens to decline speedily in value or is of a
type customarily sold in a recognized market, the Agent shall give the Pledgor
10 days' written notice of its intention to make any such public or private sale
or sale at a broker's board or on a securities exchange. Such notice shall (i)
in the case of a public sale, state the time and place fixed for such sale, (ii)
in the case of a sale at a broker's board or on a securities exchange, state the
board or exchange at which such sale is to be made and the day on which the
Collateral, or any portion thereof being sold, will first be offered for sale
and (iii) in the case of a private sale, state the day after which such sale may
be consummated. The Agent shall not be required or obligated to
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make any such sale pursuant to any such notice. The Agent may adjourn any public
or private sale or cause the same to be adjourned from time to time by
announcement at the time and place fixed for the sale, and such sale may be made
at any time or place to which the same may be so adjourned. In the case of any
sale of all or any part of the Collateral for credit or for future delivery, the
Collateral so sold may be retained by the Agent until the selling price is paid
by the purchaser thereof, but the Agent shall not incur any liability in case of
failure of such purchaser to pay for the Collateral so sold and, in the case of
such failure, such Collateral may again be sold upon like notice.
SECTION 6.03. Rights of Purchasers. Upon any sale of the Collateral
(whether public or private), the Agent shall have the right to deliver, assign
and transfer to the purchaser thereof the Collateral so sold. Each purchaser
(including the Agent and the other Secured Parties) at any such sale shall hold
the Collateral so sold free from any claim or right of whatever kind, including
any equity or right of redemption of the Pledgor, and the Pledgor, to the extent
permitted by law, hereby specifically waives (to the extent permitted by law)
all rights of redemption, stay, valuation and appraisal which it has or may at
any time in the future have under any law now existing or hereafter adopted.
SECTION 6.04. Additional Rights of the Agent. Upon the occurrence and
during the continuance of an Event of Default:
(a) The Agent shall have the right and power to institute and maintain
such suits and proceedings as it may deem appropriate to protect and
enforce the rights vested in it by this Agreement and may proceed by suit
or suits at law or in equity to enforce such rights and to foreclose upon
and sell the Collateral or any part thereof pursuant to the judgment or
decree of a court of competent jurisdiction.
(b) The Agent shall, to the extent permitted by law and without regard
to the solvency or insolvency at the time of any person then liable for the
payment of any of the Secured Obligations or the then value of the
Collateral, and without requiring any bond from any party to such
proceedings, be entitled to the appointment of a special receiver or
receivers (who may be the Agent or any other Secured Party) for the
Collateral or any part thereof and for the rents, issues, tolls, profits,
royalties, revenues and other income therefrom, which receiver shall have
such powers as the court making such appointment shall confer, and to the
entry of an order directing that the rents, issues, tolls, profits,
royalties, revenues and other income of the property constituting the whole
or any part of the Collateral be segregated, sequestered and impounded for
the benefit of the Agent and the other Secured Parties, and the Pledgor
irrevocably consents to the appointment of such receiver or receivers and
to the entry of such order.
SECTION 6.05. Securities Act, etc. (a) In view of the position of the
Pledgor in relation to its Pledged Securities, or because of other present or
future circumstances, a question may arise under the Securities Act of 1933, as
now or hereafter in effect, or any similar statute hereafter enacted analogous
in purpose or effect (such Act and any such similar statute as from time to time
in effect being herein called the "Federal Securities Laws"), with respect to
any disposition of the Pledged Securities permitted hereunder. The Pledgor
understands that compliance with the Federal Securities Laws might very strictly
limit the course of conduct of the Agent if the Agent were to attempt to dispose
of all or any part of the Pledged Securities, and might also limit the extent to
which or the manner in which any subsequent transferee of any such Pledged
Securities could dispose of the same. Similarly, there may be other legal
restrictions or limitations affecting the Agent and the other Secured Parties in
any attempt to dispose of all or part of the Pledged Securities under applicable
Blue Sky or other state securities laws or similar laws analogous in purpose or
effect.
Accordingly, the Pledgor expressly agrees that the Agent is authorized, in
connection with any sale of the Pledged Securities, if it deems it advisable so
to do, (i) to restrict the prospective bidders on or purchasers of any of the
Pledged Securities to a limited number of sophisticated investors who will
represent and agree that they are purchasing for their own account for
investment and not with a view to the distribution or sale of any of such
Pledged Securities, (ii) to cause to be placed on certificates for any or all of
the Pledged Securities or on any other securities pledged hereunder a legend to
the effect that such security has not been registered under the Federal
Securities Laws and may not be disposed of in violation of the provision of the
Federal Securities Laws and (iii) to impose such other limitations or conditions
in connection with any such sale as the Agent deems necessary or advisable in
order to comply with the Federal Securities Laws or any other law.
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The Pledgor covenants and agrees that it will execute and deliver such documents
and take such other action as the Agent deems necessary or advisable in order to
comply with the Federal Securities Laws or any other law. The Pledgor
acknowledges and agrees that such limitations may result in prices and other
terms less favorable to the seller than if such limitations were not imposed,
and, notwithstanding such limitations, agrees that any such sale shall be deemed
to have been made in a commercially reasonable manner, it being the agreement of
the Pledgor, the Agent and the other Secured Parties that the provisions of this
Section 6.05 will apply notwithstanding the existence of a public or private
market upon which the quotations or sales prices may exceed substantially the
price at which the Agent sells the Pledged Securities. The Agent shall be under
no obligation to delay a sale of any Pledged Securities for a period of time
necessary to permit the issuer of any securities contained therein to register
such securities under the Federal Securities Laws, or under applicable state
securities laws, even if the issuer would agree to do so.
(b) If the Agent shall determine to exercise its right to sell all or any
of the Pledged Securities and if in the opinion of counsel for the Agent it is
necessary, or if in the opinion of the Agent it is advisable, to have the
securities included in the Pledged Securities or the portion thereof to be sold
registered under the provisions of the Federal Securities Laws, the Pledgor
agrees, at its own expense, (i) to execute and deliver, and to use its best
efforts to cause the Borrower and its directors and officers to execute and
deliver, all such instruments and documents, and to do or cause to be done all
other such acts and things, as may be necessary or, in the opinion of the Agent,
advisable to register such securities under the provisions of the Federal
Securities Laws and to cause the registration statement relating thereto to
become effective and to remain effective for such period as prospectuses are
required by law to be furnished, and to make or cause to be made all amendments
and supplements thereto and to the related prospectus which, in the opinion of
the Agent, are necessary or advisable, all in conformity with the requirements
of the Federal Securities Laws and the rules and regulations of the Securities
and Exchange Commission thereunder, (ii) to use its best efforts to cause the
Borrower to agree to prepare, and to make available to its security holders as
soon as practicable, an earnings statement (which need not be audited) covering
the period of at least 12 months beginning with the first month after the
effective date of any such registration statement, which earning statement will
satisfy the provisions of Section 11(a) of the Federal Securities Laws, (iii) to
use its best efforts to qualify such securities under state Blue Sky or
securities laws and to obtain the approval of any governmental authorities for
the sale of such securities as requested by the Agent and (iv) at the request of
the Agent, to indemnify and hold harmless the Agent, any other Secured Party and
any underwriters (and any person controlling any of the foregoing) from and
against any loss, liability, claim, damage and expense (and reasonable counsel
fees incurred in connection therewith) under the Federal Securities Laws or
otherwise insofar as such loss, liability, claim, damage or expense arises out
of or is based upon any untrue statement or alleged untrue statement of a
material fact contained in such registration statement or prospectus or in any
preliminary prospectus or any amendment or supplement thereto, or arises out of
or is based upon any omission or alleged omission to state therein a material
fact required to be stated or necessary to make the statements therein not
misleading, such indemnification to remain operative regardless of any
investigation made by or on behalf of the Agent, any other Secured Party or any
underwriters (or any person controlling any of the foregoing); provided that the
Pledgor shall not be liable in any case to the extent that any such loss,
liability, claim, damage or expense arises out of or is based on an untrue
statement or alleged untrue statement or an omission or an alleged omission made
in reliance upon and in conformity with written information furnished to such
person by the Agent or any underwriter expressly for use in such registration
statement or prospectus.
SECTION 6.06. Remedies Not Exclusive. (a) No remedy conferred upon or
reserved to the Agent in this Agreement is intended to be exclusive of any other
remedy or remedies, but every such remedy shall be cumulative and shall be in
addition to every other remedy conferred herein or now or hereafter existing at
law, in equity or by statute.
(b) If the Agent shall have proceeded to enforce any right, remedy or power
under this Agreement and the proceeding for the enforcement thereof shall have
been discontinued or abandoned for any reason or shall have been determined
adversely to the Agent, the Pledgor and the Agent shall, subject to any
determination in such proceeding, severally and respectively be restored to
their former positions and rights under this
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Agreement, and thereafter all rights, remedies and powers of the Agent shall
continue as though no such proceedings had been taken.
(c) All rights of action under this Agreement may be enforced by the Agent
without the possession of any instrument evidencing any Secured Obligation or
the production thereof at any trial or other proceeding relative thereto, and
any suit or proceeding instituted by the Agent shall be brought in its name and
any judgment shall be held as part of the Collateral.
SECTION 6.07. Waiver and Estoppel. (a) The Pledgor, to the extent it may
lawfully do so, agrees that it will not at any time in any manner whatsoever
claim or take the benefit or advantage of any appraisement, valuation, stay,
extension, moratorium, turnover or redemption law, or any law now or hereafter
in force permitting it to direct the order in which the Collateral shall be sold
which may delay, prevent or otherwise affect the performance or enforcement of
this Agreement and the Pledgor hereby waives the benefits or advantage of all
such laws, and covenants that it will not hinder, delay or impede the execution
of any power granted to the Agent in this Agreement but will permit the
execution of every such power as though no such law were in force; provided that
nothing contained in this Section 6.07 shall be construed as a waiver of any
rights of the Pledgor under any applicable Federal bankruptcy law.
(b) The Pledgor, to the extent it may lawfully do so, on behalf of itself
and all who may claim through or under it, including any and all subsequent
creditors, vendees, assignees and lienors, waives and releases all rights to
demand or to have any marshalling of the Collateral upon any sale, whether made
under any power of sale granted herein or pursuant to judicial proceedings or
upon any foreclosure or any enforcement of this Agreement and consents and
agrees that all of the Collateral may at any such sale be offered and sold as an
entirety.
(c) The Pledgor, to the extent it may lawfully do so, waives presentment,
demand, protest and any notice of any kind (except notices explicitly required
hereunder) in connection with this Agreement and any action taken by the Agent
with respect to the Collateral.
SECTION 6.08. Power of Attorney. The Pledgor hereby irrevocably
constitutes and appoints the Agent, with full power of substitution, as its true
and lawful attorney-in-fact with full irrevocable power and authority in the
place and stead of the Pledgor and in the name of the Pledgor or in its own
name, from time to time in the Agent's discretion for the purpose of carrying
out the terms of this Agreement, to take any and all appropriate action and to
execute any and all documents and instruments which may be necessary or
desirable to accomplish the purposes of this Agreement and, without limiting the
generality of the foregoing, hereby gives the Agent the power and right, on
behalf of the Pledgor, without notice to or assent by the Pledgor to do the
following:
(a) upon the occurrence and during the continuance of any Event of
Default, to pay or discharge taxes, liens, security interests or other
encumbrances levied or placed on or threatened against the Collateral; and
(b) upon the occurrence and during the continuance of any Event of
Default and otherwise to the extent provided in this Agreement, (i) to
direct any party liable for any payment under any of the Collateral to make
payment of any and all moneys due and to come due thereunder directly to
the Agent or as the Agent shall direct; (ii) to receive payment of and
receipt for any and all moneys, claims and other amounts due and to become
due at any time in respect of or arising out of any Collateral; (iii) to
commence and prosecute any suits, actions or proceedings at law or in
equity in any court of competent jurisdiction to collect the Collateral or
any thereof and to enforce any other right in respect of any Collateral;
(iv) to defend any suit, action or proceeding brought against the Pledgor
with respect to any Collateral; (v) to settle, compromise and adjust any
suit, action or proceeding described above and, in connection therewith, to
give such discharges or releases as the Agent may deem appropriate; and
(vi) generally to sell, transfer, pledge, make any agreement with respect
to or otherwise deal with any of the Collateral as fully and completely as
though the Agent were the absolute owner thereof for all purposes, and to
do, at the option of the Agent and the Pledgor's expense, at any time, or
from time to time, all acts and things which the Agent deems necessary to
protect, preserve or realize upon the
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Collateral and the Agent's security interest therein, in order to effect
the intent of this Agreement, all as fully and effectively as the Pledgor
might do.
The Pledgor hereby ratifies all that such attorneys shall lawfully do or
cause to be done by virtue hereof. This power of attorney is a power coupled
with an interest and shall be irrevocable.
Except as provided by law or the UCC or its equivalent, nothing herein
contained shall be construed as requiring or obligating the Agent to make any
commitment or to make any inquiry as to the nature or sufficiency of any payment
received by the Agent, or to present or file any claim or notice, or to take any
action with respect to the Collateral or any part thereof or the moneys due or
to become due in respect thereof or any property covered thereby, and the Agent
shall not be liable hereunder for any action taken by the Agent or omitted to be
taken with respect to the Collateral or any part thereof (other than any action
or inaction that a court of competent jurisdiction shall have determined by
final and nonappealable judgment to constitute gross negligence or willful
misconduct). It is understood and agreed that the appointment of the Agent as
the agent of the Pledgor for the purposes set forth above in this Section 6.08
is coupled with an interest and is irrevocable. The provisions of this Section
6.08 shall in no event relieve the Pledgor of any of its obligations hereunder
with respect to the Collateral or any part thereof or impose any obligation on
the Agent to proceed in any particular manner with respect to the Collateral or
any part thereof, or in any way limit the exercise by the Agent of any other or
further right which it may have on the date of this Agreement or hereafter,
whether hereunder or by law or otherwise.
SECTION 6.09. Application of Proceeds. (a) The Agent shall apply the
proceeds of any collection, sale or other disposition of the Collateral as
follows:
FIRST, to the payment of all reasonable costs and expenses incurred by
the Agent (in its capacity as such hereunder or under any other Loan
Document) and the Lenders in connection with such collection or sale or
otherwise in connection with this Agreement or any of the Secured
Obligations, including all court costs and the reasonable fees and expenses
of their agents and legal counsel, the repayment of all reasonable advances
made by the Agent and the Lenders hereunder or under any other Loan
Document and all reasonable costs or expenses incurred in connection with
the exercise of any right or remedy hereunder or under any other Loan
Document;
SECOND, to the payment in full of the Secured Obligations (the amounts
so applied to be distributed among the Secured Parties pro rata in
accordance with the amounts of the Secured Obligations owed to them on the
date of any such distribution); and
THIRD, to the Pledgor, its successors or assigns, or as a court of
competent jurisdiction may otherwise direct.
(b) In the event that the proceeds of any collection, recovery, receipt,
appropriation, realization, or sale as aforesaid are insufficient to pay all
amounts to which the Agent or any or all of the Lenders are legally entitled,
the Pledgor will be jointly and severally liable for the deficiency, together
with interest thereon, at the applicable default rate under Section 2.07 of the
Credit Agreement, and the reasonable fees of any attorneys employed by the Agent
or any or all of the Lenders to collect such deficiency, pursuant to the Credit
Agreement.
The Agent shall have absolute discretion as to the time of application of
any such proceeds, moneys or balances in accordance with this Agreement. Upon
any sale of the Collateral by the Agent (including pursuant to a power of sale
granted by statute or under a judicial proceeding), the receipt of the Agent or
of the officer making the sale shall be a sufficient discharge to the purchaser
or purchasers of the Collateral so sold and such purchaser or purchasers shall
not be obligated to see to the application of any part of the purchase money
paid over to the Agent or such officer or be answerable in any way for the
misapplication thereof.
12
<PAGE> 16
ARTICLE VII
MISCELLANEOUS
SECTION 7.01. Notices. Unless otherwise specified herein, all notices,
requests or other communications to any party hereunder shall be in writing,
shall be delivered by hand or overnight courier service, mailed by certified or
registered mail or sent by telecopy and shall be given to such party at its
address or telecopy number set forth in Section 8 of the Parent Guarantee
Agreement or at any other address or telecopy number which such party shall have
specified for the purpose of communications hereunder by notice to the other
parties hereunder. All notices and other communications given to any party
hereto in accordance with the provisions of this Agreement shall be deemed to
have been given on the date of receipt if delivered by hand or overnight courier
service or sent by telecopy or on the date five Business Days after dispatch by
certified or registered mail if mailed, in each case delivered, sent or mailed
(properly addressed) to such party as provided in this Section 7.01 or in
accordance with the latest unrevoked direction from such party given in
accordance with this Section 7.01.
SECTION 7.02. Survival of Agreement. All covenants, agreements,
representations and warranties made by the Pledgor herein and in the
certificates or other instruments prepared or delivered in connection with or
pursuant to this Agreement shall be considered to have been relied upon by the
Agent and the Secured Parties and shall survive the making by the Lenders of the
Loans and the execution and delivery to the Lenders of the Notes evidencing such
Loans, regardless of any investigation made by the Lenders or on their behalf,
and shall continue in full force and effect until the Secured Obligations have
been indefeasibly paid in full in cash, the Commitments have been terminated,
all Letters of Credit have been cancelled or have expired, all Letter of Credit
Disbursements have been reimbursed in full and all terms and conditions hereof,
the Credit Agreement, the Collateral Documents and all other documents or
agreements governing the Secured Obligations have been satisfied. This Agreement
shall terminate when the security interests granted hereunder have terminated
and the Collateral has been released as provided in Section 2.05; provided that
the obligations of the Pledgor under Section 4.12 shall survive any such
termination.
SECTION 7.03. Counterparts; Effectiveness. (a) This Agreement may be
executed in two or more counterparts, each of which shall constitute an
original, but all of which, when taken together, shall constitute but one
instrument.
(b) This Agreement shall be effective with respect to the Pledgor on the
date (the "Effective Date") when a counterpart hereof which bears the signature
of the Pledgor shall have been delivered to the Agent.
SECTION 7.04. Amendments, Etc. No amendment, modification or waiver of any
provision of this Agreement and no consent to any departure by the Pledgor
therefrom shall in any event be effective unless the same shall be in writing
and shall be executed and delivered in accordance with Section 9.08 of the
Credit Agreement, and then such amendment, modification, waiver or consent shall
be effective only in the specific instance and for the specific purpose for
which given.
SECTION 7.05. Assignments. This Agreement and the terms, covenants and
conditions hereof shall be binding upon the Pledgor and its successors and shall
inure to the benefit of the Agent and the Secured Parties and their respective
successors and assigns. Upon the assignment by any Lender of all or any portion
of its rights and obligations under the Credit Agreement (including all or any
portion of its Commitment and the Loans owing to it) to any other person, such
other person shall thereupon become vested with all the benefits in respect
thereof granted to such transferor or assignor herein or otherwise. The Pledgor
shall not be permitted to assign, transfer or delegate any of its rights or
obligations under this Agreement (and any such purported assignment, transfer or
delegation without such consent shall be void).
SECTION 7.06. Savings Clause. In the event any one or more of the
provisions contained in this Agreement should be held invalid, illegal or
unenforceable in any respect with respect to the Pledgor, no party hereto shall
be required to comply with such provision with respect to the Pledgor for so
long as such provision is held to be invalid, illegal or unenforceable, and the
validity, legality and enforceability of the remaining provisions contained
herein, and of such invalid, illegal or unenforceable provision with respect to
any other party, shall not in any way be affected or impaired. The parties shall
endeavor in good-faith negotiations to
13
<PAGE> 17
replace any invalid, illegal or unenforceable provisions with valid provisions,
the economic effect of which comes as close as possible to that of the invalid,
illegal or unenforceable provisions.
SECTION 7.07. Governing Law. This Agreement shall be construed in
accordance with and governed by the laws of the state of New York.
SECTION 7.08. Entire Agreement. This Agreement, the other Loan Documents
and the Fee Letter constitute the entire contract between the parties relative
to the subject matter hereof. Any previous agreement among the parties with
respect to the subject matter hereof is superseded by this Agreement, the other
Loan Documents and the Fee Letter. Nothing in this Agreement, expressed or
implied, is intended to confer upon any party other than the parties hereto and
the Secured Parties, any rights, remedies, obligations or liabilities under or
by reason of this Agreement.
SECTION 7.09. No Waiver; Remedies. No failure on the part of the Agent or
any Secured Party to exercise, and no delay in exercising, any right, power or
remedy hereunder shall operate as a waiver thereof, nor shall any single or
partial exercise of any such right, power or remedy by such person preclude any
other or further exercise thereof or the exercise of any other right, power or
remedy. All remedies hereunder and under the Loan Documents are cumulative and
are not exclusive of any other remedies provided by law.
SECTION 7.10. Headings. Article and Section headings and the Table of
Contents used herein are for convenience of reference only, are not part of this
Agreement and are not to affect the construction of, or to be taken into
consideration in interpreting, this Agreement.
SECTION 7.11. Submission to Jurisdiction. (a) The Pledgor hereby
irrevocably and unconditionally submits, for itself and its property, to the
nonexclusive jurisdiction of any New York State court or Federal court of the
United States of America sitting in New York, New York, and any appellate court
from any thereof, in any action or proceeding arising out of or relating to this
Agreement or the other Loan Documents, or for recognition or enforcement of any
judgment, and hereby irrevocably and unconditionally agrees that all claims in
respect of any such action or proceeding may be heard and determined in such New
York State or, to the extent permitted by law, in such Federal court. Each of
the parties hereto agrees that a final judgment in any such action or proceeding
shall be conclusive and may be enforced in other jurisdictions by suit on the
judgment or in any other manner provided by law. Nothing in this Agreement shall
affect any right that the Agent or any Secured Party may otherwise have to bring
any action or proceeding relating to this Agreement or the other Loan Documents
against the Pledgor or its properties in the courts of any jurisdiction.
(b) The Pledgor hereby irrevocably and unconditionally waives, to the
fullest extent it may legally and effectively do so, any objection which it may
now or hereafter have to the laying of venue of any suit, action or proceeding
arising out of or relating to this Agreement or the other Loan Documents in any
New York State court or Federal court of the United States of America sitting in
New York, New York. Each of the parties hereto hereby irrevocably waives, to the
fullest extent permitted by law, the defense of an inconvenient forum to the
maintenance of such action or proceeding in any such court.
(c) Each party to this Agreement irrevocably consents to service of process
in the manner provided for notices in Section 7.01. Nothing in this Agreement
will affect the right of any party to this Agreement to serve process in any
other manner permitted by law.
SECTION 7.12. No Oral Agreements. This Agreement and the instruments and
documents executed in connection herewith represent the final agreement between
the parties and may not be contradicted by evidence of prior, contemporaneous or
subsequent oral agreements of the parties.
14
<PAGE> 18
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective authorized officers as of the day and year
first written above.
FIREARMS TRAINING SYSTEMS, INC.
By: /s/ DAVID A. APSELOFF
------------------------------------
Name: David A. Apseloff
Title: Chief Financial Officer
NATIONSBANK, N.A. (SOUTH),
as Agent
By: /s/ GREG MCCRERY
------------------------------------
Name: Greg McCrery
Title: Vice President
15
<PAGE> 19
SCHEDULE 1
CHIEF EXECUTIVE OFFICE AND PRINCIPAL PLACE OF BUSINESS
<TABLE>
<CAPTION>
NAME MAILING ADDRESS COUNTY STATE
- ---- --------------- ------ -----
<S> <C> <C> <C>
Firearms Training Systems, Inc.................. 7340 McGinnis Ferry Road Gwinnett Georgia
Suwanee, Georgia 30174
</TABLE>
LOCATIONS OF RECORDS OF RECEIVABLES AND GENERAL INTANGIBLES
<TABLE>
<CAPTION>
NAME MAILING ADDRESS COUNTY STATE
- ---- --------------- ------ -----
<S> <C> <C> <C>
Firearms Training Systems, Inc.................. 7340 McGinnis Ferry Road Gwinnett Georgia
Suwanee, Georgia 30174
</TABLE>
<PAGE> 20
SCHEDULE 2
PLEDGED SECURITIES
<TABLE>
<CAPTION>
ISSUER OWNERSHIP INTERESTS
- ------ -------------------
<S> <C>
FATS, Inc.......................... 1000 shares of Common Stock, par
value $1.00 per share
</TABLE>
<PAGE> 21
SCHEDULE 3
TRADE NAMES, DIVISION NAMES, ETC.
<TABLE>
<CAPTION>
PLEDGOR TRADE NAMES, DIVISION NAMES, ETC.
- ------- ---------------------------------
<S> <C>
Firearms Training Systems, Inc............................. F.A.T.S.
FATS
F.A.T.S., Inc.
FATS, Inc.
</TABLE>
<PAGE> 22
SCHEDULE 4
REQUIRED FILINGS AND RECORDINGS
<TABLE>
<CAPTION>
PLEDGOR UCC FILINGS & LOCATIONS OTHER FILINGS
- ------- ----------------------- -------------
<S> <C> <C>
Firearms Training Systems, Inc.......... Any county in the state of Georgia None
</TABLE>
<PAGE> 1
EXHIBIT 10.06
[FORM OF]
PARENT'S CONSENT AND AGREEMENT
PARENT'S CONSENT AND AGREEMENT dated as of October 15, 1997 between
Firearms Training Systems, Inc. (the "Parent") and NationsBank, N.A. (formerly
known as NationsBank, N.A. (South)), as Agent (in such capacity, the "Agent")
for the Lenders (as defined herein).
Reference is made to (a) the Credit Agreement dated as of July 31, 1996
(the "Original Credit Agreement"), among the Parent, the financial institutions
party thereto as lenders (the "Lenders") and the Agent, (b) the Guarantee
Agreement dated as of January 1, 1997 (the "Parent Guarantee Agreement") between
the Parent and the Agent, (c) the Parent Pledge Agreement dated as of January 1,
1997 (the "Pledge Agreement") between the Parent and the Agent and (d) the
Assignment and Assumption Agreement dated as of January 1, 1997 (the "Assignment
and Assumption") among the Parent, FATS, Inc. (the "Borrower") and the Agent
pursuant to which, in connection with the Permitted Drop Down Transaction (as
defined in the Original Credit Agreement), the Parent assigned to the Borrower
and the Borrower assumed from the Parent all of the obligations of the Parent
under the Original Credit Agreement and the other Loan Documents. To induce the
Lenders to enter into the Original Credit Agreement and the Agent to enter into
the Assignment and Assumption, the Parent guaranteed, pursuant to the Parent
Guarantee Agreement, all of the obligations of the Borrower to such Lenders
under the Original Credit Agreement and secured their obligations under the
Parent Guarantee Agreement by pledging certain securities pursuant to the Pledge
Agreement.
The Parent, the Borrower and the Agent desire to amend and restate the
Original Credit Agreement in order to (i) increase the aggregate Revolving
Credit Commitment thereunder from $15,000,000 to $25,000,000, and (ii) permit
(A) Foreign Currency Letters of Credit, (B) Permitted Acquisitions and (C) the
repurchase by the Borrower of certain Capital Stock, all in the form and
pursuant to the terms and conditions set forth in the Amended and Restated
Credit Agreement dated as of October 10, 1997 (as such agreement may be amended
or modified from time to time, the "Amended Agreement"). Terms used herein and
not otherwise defined herein shall have the meanings assigned to them in the
Amended Agreement. To induce the Agent and the Lenders to enter into the Amended
Agreement, the Parent hereby agrees as follows:
SECTION 1. Consent of Parent. The Parent acknowledges that it is familiar
with the contents of the Amended Agreement. The Parent consents to the
transactions contemplated by the Amended Agreement and acknowledges and agrees
that its obligations under the Parent Guarantee Agreement and the Pledge
Agreement shall continue in full force and effect, taking into account the
amendments contemplated by the Amended Agreement and this Consent and Agreement.
In particular, the Parent hereby acknowledges the increase in the Revolving
Credit Commitments, agrees that all Obligations (as defined in the Amended
Agreement) shall constitute obligations guaranteed by the Parent pursuant to the
Parent Guarantee Agreement and agrees that all such guarantee obligations
pursuant to the Parent Guarantee Agreement shall constitute obligations secured
by the Parent pursuant to the Pledge Agreement. Accordingly, the Parent
acknowledges and agrees that (a) the definition of "Guaranteed Obligations" in
the Parent Guarantee Agreement is hereby amended to include and consist of all
Obligations (as defined in the Amended Agreement), (b) the definition of
"Secured Obligations" in the Pledge Agreement is hereby amended to include and
consist of all obligations of the Parent under the Parent Guarantee Agreement
(as amended by the foregoing clause (a)) and (c) any reference to the terms
"Loans", "Letters of Credit", "Notes", "Letter of Credit Disbursements" and
"Obligations" in the Guarantee Agreement and the Pledge Agreement (as amended by
the foregoing clauses (a) and (b)), shall have the meaning ascribed to such
terms in the Amended Agreement.
SECTION 2. Effectiveness. This Consent and Agreement shall become
effective on the Effective Date. On and after the Effective Date, the rights and
obligations of the parties hereto shall be governed by the Parent Guarantee
Agreement and the Pledge Agreement, in each case as amended and modified by this
Consent and Agreement, and the other Loan Documents.
SECTION 3. Integration; Confirmation. On and after the Effective Date,
each reference in the Parent Guarantee Agreement and the Pledge Agreement to
"this Agreement", "herein", "hereunder" or words of
<PAGE> 2
similar import, each reference in any other document delivered in connection
with any of the Loan Documents to the "Parent Guarantee Agreement" or words of
similar import, and each reference in any other document delivered in connection
with any of the Loan Documents to the "Pledge Agreement" or words of similar
import, shall be deemed to be a reference to the Parent Guarantee Agreement or
the Pledge Agreement, as applicable, in each case as amended and modified by
this Consent and Agreement. All other terms and provisions of the Parent
Guarantee Agreement and the Pledge Agreement shall continue in full force and
effect and unchanged and are hereby confirmed in all respects. On and after the
Effective Date, all references in the Parent Guarantee Agreement and in the
Pledge Agreement, or any other document delivered in connection therewith, to
the "Credit Agreement" shall be deemed to be a reference to the Original Credit
Agreement, as amended and restated by the Amended Agreement.
SECTION 4. Representations and Warranties. All representations and
warranties contained in the Amended Agreement that relate to the Parent are true
and correct.
SECTION 5. Counterparts. This Consent and Agreement may be executed by the
parties hereto in several counterparts and each such counterpart shall be deemed
to be an original, admissible into evidence, but all such counterparts shall
together constitute but one and the same Consent and Agreement. Delivery of an
executed counterpart of this Consent and Agreement by telefacsimile shall be
equally as effective as delivery of a manually executed counterpart of this
Consent and Agreement. Any party delivering an executed counterpart of this
Consent and Agreement by telefacsimile shall also deliver a manually executed
counterpart of this Consent and Agreement, but the failure to deliver a manually
executed counterpart shall not affect the validity, enforceability and binding
effect of this Consent and Agreement.
SECTION 6. Governing Law. THIS CONSENT AND AGREEMENT SHALL BE CONSTRUED IN
ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK.
IN WITNESS WHEREOF, each party hereto has caused this Consent and Agreement
to be duly executed and delivered by its officers thereunto duly authorized as
of the date first above written.
FIREARMS TRAINING SYSTEMS, INC., as
Parent
By: /s/ DAVID A. APSELOFF
------------------------------------
Name: David A. Apseloff
Title: Vice President
NATIONSBANK, N.A., as Agent
By: /s/ DERRICK C. BELL
------------------------------------
Name: Derrick C. Bell
Title: Vice President
<PAGE> 1
EXHIBIT 11.01
FIREARMS TRAINING SYSTEMS, INC.
STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
BASIC EARNINGS PER SHARE(1) DILUTED EARNINGS PER SHARE(1)
YEARS ENDED MARCH 31, YEARS ENDED MARCH 31,
------------------------------- ---------------------------------
1998 1997 1996 1998 1997 1996
------- -------- -------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Weighted average number
of common shares
outstanding............ 20,408 51,887(2) 49,800(2) 20,408 51,887(2) 49,800(2)
Shares repurchased in
conjunction with the
Recapitalization....... -- (46,832)(3) (46,832)(3) -- (46,832)(3) (46,832)(3)
Shares issued in
conjunction with the
Recapitalization....... -- 11,165(4) 11,165(4) -- 11,165(4) 11,165(4)
Shares granted to
management............. -- 37(5) 37(5) -- 37(5) 37(5)
Shares purchased by
management............. -- 232(5) 232(5) -- 232(5) 232(5)
Shares issued upon
assumed exercise of
outstanding warrants... -- -- -- -- 188(6) 288(6)
Shares issued upon
assumed exercise of
outstanding options.... -- -- -- 1,048 1,332(7) 1,339(7)
------- -------- -------- ------- -------- --------
Weighted average common
and common equivalent
shares outstanding..... 20,408 16,489 14,402 21,456 18,009 16,029
======= ======== ======== ======= ======== ========
Net income............... $ 3,233 $ 9,014 $ 12,790 $ 3,233 $ 9,014 $ 12,790
======= ======== ======== ======= ======== ========
Earnings per share....... $ 0.16 $ 0.55 $ 0.89 $ 0.15 $ 0.50 $ 0.80
======= ======== ======== ======= ======== ========
</TABLE>
- ---------------
(1) Shares reflect a 100,000-for-one stock split in July 1996 in connection with
the recapitalization and a split of 1.66-for-one in October 1996.
(2) Shares reflect the weighted average shares prior to the recapitalization of
49,800,000 shares and the weighted average shares from the initial public
offering in November 1996 of 6,000,000 shares.
(3) Shares were repurchased from THIN International for $171.2 million in
connection with the recapitalization and are assumed to be outstanding for
all periods presented.
(4) Shares were issued for $36 million in connection with the recapitalization
and are assumed to be outstanding for all periods presented.
(5) Shares purchased by or granted to management for approximately $3.25 per
share which are assumed to be outstanding for all periods presented.
(6) Represents warrants attached to the bridge notes, at approximately $0.000006
per warrant, which are assumed to be outstanding for all periods presented
through the date of the offering, using the treasury stock method at the
initial offering price of $14 per share. These warrants were repurchased and
retired by the Company with proceeds from the offering.
(7) Represents 1,742,834 stock options exercisable at approximately $3.25 per
option, which are assumed to be outstanding for all periods presented, using
the treasury stock method.
<PAGE> 1
EXHIBIT 21.01
SUBSIDIARIES OF THE CORPORATION
<TABLE>
<CAPTION>
NAME JURISDICTION OF COMPANY
- ---- -----------------------
<S> <C>
FATS, Inc................................................... Delaware, U.S.A
FSS, Inc.................................................... Delaware, U.S.A
DART International, Inc..................................... Colorado, U.S.A
Firearms Training Systems Limited........................... United Kingdom
F.A.T.S. Singapore PTE Ltd.................................. Republic of Singapore
F.A.T.S. Foreign Sales Corporation.......................... Barbados
Firearms Training Systems Netherlands, B.V.................. The Netherlands
FATS Canada, Inc............................................ Canada
Simtran Technologies, Inc................................... Canada
FATS Canada Holdings, Inc................................... Canada
</TABLE>
<PAGE> 1
EXHIBIT 23.01
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our report included in this Form 10-K, into the Company's previously filed
Registration Statement File No. 333-22349 and File No. 333-31219.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
June 26, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<CASH> 3,395
<SECURITIES> 0
<RECEIVABLES> 22,810
<ALLOWANCES> 100
<INVENTORY> 17,725
<CURRENT-ASSETS> 45,474
<PP&E> 7,193
<DEPRECIATION> 3,222
<TOTAL-ASSETS> 56,380
<CURRENT-LIABILITIES> 26,567
<BONDS> 57,700
0
0
<COMMON> 112,390
<OTHER-SE> (140,621)
<TOTAL-LIABILITY-AND-EQUITY> 56,380
<SALES> 73,547
<TOTAL-REVENUES> 73,547
<CGS> 33,867
<TOTAL-COSTS> 33,867
<OTHER-EXPENSES> 26,650
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,905
<INCOME-PRETAX> 7,125
<INCOME-TAX> 3,892
<INCOME-CONTINUING> 3,233
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,233
<EPS-PRIMARY> .16
<EPS-DILUTED> .15
</TABLE>
