Firearms Training Systems, Inc.

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Firearms Training Systems, Inc.

7340 McGinnis Ferry Road
Suwanee, Georgia 30024
U.S.A.
(770) 813-0180
Fax: (770) 622-3505
Web site: http://www.fatsinc.com

Public Company
Incorporated: 1984 as Firearms Simulations Technology, Inc.
Employees: 464
Sales: $73.5 million (1998)
Stock Exchanges: NASDAQ
Ticker Symbol: FATS
SICs: 7999 Gun Safety and Marksmanship Instruction; 3484 Firearms Manufacturers; 7373 Computer Integrated Systems Design

Firearms Training Systems, Inc., better known by the acronym FATS, provides weapons training for law enforcement agencies, military forces, and individuals. Its headquarters are in Suwanee, Georgia, which at the time of the company’s founding in 1984 was still a sleepy town some 45 minutes north of downtown Atlanta. By the late 1990s, however, Suwanee was another bustling suburb to one of the nation’s fastest-growing metropolises, and FATS had become what one analyst called “the ’Kleenex’ of firearms training.” International from its origins as the brainchild of South African race-car driver Jody Scheckter, the company has facilities not only in the United States, but in Canada, Barbados, Great Britain, The Netherlands, and Singapore. Among its clients are the U.S. Army, Air Force, and Marine Corps, along with the Bureau of Alcohol, Tobacco, and Firearms (BATF), the Federal Bureau of Investigation (FBI), and the Los Angeles Police Department. Its international clients include the armies of Great Britain, Italy, The Netherlands, Singapore, and many other countries. With the attractiveness of simulation over live-fire exercises—both in terms of safety and of cost—it is likely that the client list of FATS will continue to grow.

From Auto Racing to Weapons Simulation

In 1979, South African race-car driver Jody Scheckter won the Formula One championship for Ferrari. He then decided to quit while he was ahead and chose to settle in Atlanta and start his own company. Many other sports figures had similarly retired in a blaze of glory and started a business—only to fail abysmally in the world of commerce, or to make an abortive comeback to the arena that had given them so much satisfaction in the past, or both. Scheckter did neither. He did spend a lot of time in the mid-1980s “playing around with laser disc technology,” in the words of the Atlanta Constitution’s John McCosh. “There was a lot more tinkering than profiting in the early days,” according to McCosh.

This was the—by Scheckter’s reckoning at least—inauspicious beginning of Firearms Simulation Technologies, Inc. “I always felt I was really stupid,” Scheckter told McCosh, “when I’d run into a guy who imported plastic wheelbarrows and he was doing $2 million a year doing trade shows and I had all this technology and was doing $1 million a year.” Geoff Lonsdale, head of European operations during the Scheckter era at FATS, gave Philip Swinden of Corporate Location quite a different appraisal of his boss: “He runs this company like he drives cars—flat out.”

The idea behind FATS was to use computer technology to provide interactive live-fire simulations for police forces, the military, and hunters. Thus the company could not have existed prior to the explosion in computer technology that occurred in the mid-1980s; as it was, the world was certainly waiting for its product. “We think we have chosen the best system we could find on the market,” J.H.J. Rosenboom of the Netherlands Ministry of Defence told McCosh, adding ’ There is savings on ammunition and savings on trainers. With the FATS system there is one trainer for 10 soldiers, rather than one trainer for almost every soldier on the shooting range.”

That one of FATS’ most significant contracts should come from The Netherlands was no accident, given the fact that its founder was a descendant of the Dutch colonists who founded South Africa. FATS itself was at that time a subsidiary of THIN International N.V., formerly known as Firearms Training Systems International N.V., a Netherlands Antilles corporation. By 1992, the company had facilities in The Netherlands to supply its Dutch army contract. Discussing the decision to expand from England to Holland, Lonsdale told Swinden that the British location “wasn’t really good enough” to manage the company’s Dutch accounts. “We also needed the capability to speak in Dutch. Although people in Holland speak English very well, they don’t always know all the technical words, and if any of the military people had a problem with the equipment they really didn’t want to be ringing England,” Lonsdale related.

But that was in 1992; in its earliest years of operation, during the mid-1980s, FATS built is client base much closer to home. In 1985, it produced its first simulation training system for the U.S. Post Office, thus beginning a tradition of involvement between the company and agencies of the federal government. It also began developing relationships with the police forces of major urban centers, and by 1988 its systems were in use by the police departments of Los Angeles, New York, Philadelphia, and San Francisco. By then FATS had begun to establish a presence overseas as well.

FATS Goes to War in the Persian Gulf

FATS technology makes use of film, which creates a realistic backdrop for simulations. Thus although participants are actually conducting their fire exercise inside a darkened studio, projected images of various scenarios—an urban landscape, a battlefield, farmhouses and open fields—create a sense of a particular environment. The company made training films in California’s Mojave Desert, which the U.S. military put to use in 1990 for training personnel in Operation Desert Storm. Though the Iraqi desert in which the forces operated in the Persian Gulf War was on the other side of the planet from the Mojave, to some extent a desert is a desert, and the company’s simulation technology proved a great asset during the Gulf War.

Moreover, the war gave FATS great exposure as well. With the Cold War over, military forces around the world were scaling back. Not only were they cutting costs, they were no longer preparing for a nuclear armageddon or some other superpower confrontation, but for a clash with smaller forces—whether religious fundamentalists, nationalist splinter organizations, or other groups. In such an environment, characterized by the redirection of funds from the military to other uses, a reallocation nicknamed “the peace dividend,” FATS proved one of the beneficiaries. “We were in the right place at the right time with the peace dividend and with everyone having less money,” Scheckter told McCosh, explaining “They save money by training for less.”

Scheckter Sells the Company

By the mid-1990s, FATS’ growth had begun in earnest. As McCosh reported, it was rapidly becoming too big for its facilities, then located at Peachtree Corners on Atlanta’s north side. Not only had it secured the Dutch contract in 1992, it had added the British military to its client list, and in just a few weeks’ time it had taken in $80 million work of contracts. Given estimates by the U.S. Air Force that it had saved several million dollars by using the FATS system, it was clear that the contracts would continue to mount up—with no end in sight. “We can double our business again next year,” Juan de Lebedur, head of the international department, told McCosh. “This is just the tip of the iceberg.”

Lebedur, who had previously worked in military information systems and spoke six languages, was an example of the highly skilled personnel that had been recruited by Scheckter. Ed Schumacher, director of marksmanship training, had in his earlier army career trained with the AT4 antitank weapon he now wielded in demonstrations at FATS—only the army’s version fired live ammunition, whereas the FATS version fired harmless lasers akin to those used in a laser-tag arcade. Schumacher was one of 45 FATS employees, nearly one-third of its work force at that time, with an extensive military background.

With a lock on the police and military market, in 1995 FATS expanded its offerings when it introduced a simulator, complete with woodland scenarios involving wildlife, specifically for hunters. By the end of that year, the company had become a $30 million enterprise with 250 employees, a far cry from the shoestring operation it had been when Scheckter founded it more than a decade before. Its revenues doubled in 1996, to $65 million, and in July 1996 Scheckter sold FATS to a New York-based private equity investment firm called Centre Partners. “He built the company through sheer entrepreneurial energy,” said the new chief executive officer (CEO), Peter Marino, “but he wanted to raise his children back in England.”

Going Public in 1996

With the end of Scheckter’s 12 years of leadership, the company began to move in new directions. On the recommendation of Craig Fields, chairman of the Defense Science Board—which acts in an advisory capacity for the U.S. Secretary of Defense—FATS brought in Marino, who had spent 17 years with the Central Intelligence Agency (CIA) before going on to a second career as a defense contractor. Marino took the CEO position in the fall, just before the company’s initial public offering (IPO) in November.

Company Perspectives:

FATS’ 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.

The company had a number of factors on its side as it went public. Certainly not the least of these was the sheer romantic appeal of its enterprise, training the warrior for combat, and no doubt many corporate warriors saw themselves in a similar position. Thus Bethany McLean of Fortune, which listed FATS among “Companies to Watch” in March 1997, noted that “during the company’s November IPO road show, banker types, crouched behind M-16s, gleefully took out targets.” But entertainment value alone did not explain what McLean called the “whopping paper profit” of more than $120 million which Centre Partners made on the stock offering. There was also the fact that FATS enjoyed the trust of the U.S. government—and the fact of its outstanding bottom line. In 1995, it had made $2.8 million profit on $30 million in revenues; and in 1996, as sales figures more than doubled, profits increased by almost five times, to $12.7 million.

Coupled with these selling points was the fact that FATS had established itself as a leading player in a new and exciting—not to mention profitable—field. McLean, while observing that “interactive simulation is in infancy,” went on to quote analysts regarding a $4 billion potential market, much of which would come from expanded offerings to the existing customer base among the military and police. Hence the comment by John Hancock Funds portfolio manager Kevin Baker that FATS was the “Kleenex” of firearms training: just as Kleenex had long been such a leader among tissue manufacturers that its brand name had become a generic term for tissue, so FATS’ name had become more or less synonymous with the entire interactive simulation market—of which it controlled 80 percent.

Still, such exposure carried liabilities. FATS’ outstanding performance could not help but attract the attention of investors—and potential competitors. “One of the pitfalls of going public is that it broadens the awareness of a potential market,” Chief Financial Officer David Apseloff told Jason Kelly of the Atlanta Business Chronicle, noting “Before, we could labor in relative obscurity.” And life in such a growth company was no place for someone who wanted a restful job: “Working here is like being on a treadmill running full speed at the highest incline,” Marino told Kelly.

New Products and Acquisitions in the Late 1990s

FATS maintained its edge with continual research and development (R & D). According to a company publication, “A rigorous qualification process has produced a highly capable, dedicated engineering staff, with Ph.D. and Masters degrees, each devoted to the development of advanced simulation products. Capabilities include Booch Method software development, 3-D audio, interactive 3-D graphics, Distributed Interactive Simulation (DIS), video special effects, lasers, extremely accurate ballistics, optics, image processing, Newtonian-based target modelling, and motion platforms.”

Out of its R & D department in 1997 came two important new products. The first of these was its Vessel Weapons Engagement Training System (VWETS), for training military or law-enforcement personnel—including river police, the Navy, and the Coast Guard—for operations in a marine environment. Also, FATS developed what it called an Indirect Fire Trainer (IFT), an artillery application complete with a full authoring suite and interactive targets. In October 1997, the Canadian Department of National Defence became the first customer for this product.

In 1998, FATS made two important acquisitions. In March, it purchased all the outstanding stock of Simtran Technologies, Inc., a simulation training company based in Canada. Working extensively with the Canadian Department of National Defence, Simtran produced an air defense missile trainer, an appended armored vehicle crew trainer, and a stand-alone armored vehicle crew trainer. In April of that year, FATS acquired Dart International, a hunter/sports simulation company based in Colorado, which thenceforth took over all of FATS’ hunter and sports business.

Also in 1998 the company experienced one of the only setbacks in its history when it lost its bid to provide the U.S. Army Engagement Skill Trainer. “As many of you are aware,” Marino announced in the shareholders’ letter that accompanied the 1998 annual report, “all of us at FATS were quite surprised at this announcement as FATS has consistently been the overwhelming first choice of military and law enforcement professionals around the world for interactive small arts training systems. To date, the U.S. Army has not awarded a contract for small arms simulators. We are exercising every approach available to correct this situation as we are confident that FATS offers the best simulator solution.” It was a rare negative experience for a company whose history had been almost unremittingly positive, and the resolve with which the leadership at FATS proposed to redress the problem was characteristic.

The military made up 70 percent of the company’s revenues in 1998, compared with 29 percent from law enforcement and just one percent from the hunter and sportsman market—a category expected to grow in coming years. The split between domestic and international business was almost even, with 54 percent for the former and 46 percent for the latter. FATS continued to improve its product lines, which included some 1,000 scenarios involving more than 180 varieties of weapon ranging from small arms to artillery. Using real firearms as their model, FATS technicians created non-lethal versions which in all other respects (including recoil) duplicated the qualities of their more dangerous counterparts. As Marino noted at the conclusion of his shareholders’ letter, FATS remained the leader in its field by a long shot: “Few companies in the world can offer the combined expertise in weapons, simulation, training, and international sales that FATS represents.”

Principal Subsidiaries

FATS, Inc.; FSS, Inc.; DART International, Inc.; Firearms Training Systems Limited (U.K.); F.A.T.S. Singapore PTE Ltd.; F.A.T.S. Foreign Sales Corporation (Barbados); Firearms Training Systems Netherlands, B.V. (Netherlands); FATS Canada, Inc.; Simtran Technologies, Inc. (Canada); FATS Canada Holdings, Inc.