SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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FORM 10-Q
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(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED September 30, 2003, or
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO _________.
COMMISSION FILE NUMBER 0-18863
ARMOR HOLDINGS, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 59-3392443
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1400 MARSH LANDING PARKWAY, SUITE 112
JACKSONVILLE, FLORIDA 32250
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (904) 741-5400
-----------------------------------------
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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
The number of shares outstanding of the registrant's Common Stock as of November
6, 2003 is 28,175,133.
1
ARMOR HOLDINGS, INC.
FORM 10-Q
INDEX
Page
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS............................................. 3
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS......................................34
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.......51
ITEM 4. CONTROLS AND PROCEDURES..........................................52
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS................................................54
ITEM 5. OTHER INFORMATION................................................54
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.................................54
SIGNATURES
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements
of Armor Holdings, Inc. and its wholly-owned subsidiaries include all
adjustments (consisting only of normal recurring accruals and the elimination of
all material intercompany accounts and transactions) which management considers
necessary for a fair presentation of operating results as of September 30, 2003
and for the three-month and nine-month periods ended September 30, 2003 and
September 30, 2002.
These unaudited condensed consolidated financial statements should be
read in conjunction with the financial statements included in our Annual Report
on Form 10-K for the year ended December 31, 2002.
3
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
SEPTEMBER 30, 2003 DECEMBER 31, 2002
(UNAUDITED) *
------------------ -----------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 154,766 $ 12,913
Accounts receivable (net of allowance for doubtful
accounts of $1,269 and $1,428) 59,215 58,513
Costs and earned gross profit in excess of billings 1,088 234
Inventories 60,068 62,330
Prepaid expenses and other current assets 21,321 12,212
Current assets of discontinued operations (Note 2) 47,958 28,825
------------------ -----------------
Total current assets 344,416 175,027
PROPERTY AND EQUIPMENT (net of accumulated depreciation
of $17,243 and $12,919) 49,531 47,136
GOODWILL (net of accumulated amortization
of $4,024 and $4,024) 98,934 98,736
PATENTS, LICENSES AND TRADEMARKS
(net of accumulated amortization of $2,366 and $2,169) 7,419 7,521
OTHER ASSETS 21,048 9,048
LONG-TERM ASSETS OF DISCONTINUED OPERATIONS (Note 2) 20,045 30,285
------------------ -----------------
TOTAL ASSETS $ 541,393 $ 367,753
================== =================
* Condensed from audited financial statements.
See notes to condensed consolidated financial statements.
4
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
(IN THOUSANDS, EXCEPT FOR SHARE DATA)
SEPTEMBER 30, 2003 DECEMBER 31, 2002
(UNAUDITED) *
------------------- -----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 765 $ 1,813
Short-term debt 608 599
Accounts payable 22,013 23,770
Accrued expenses and other current liabilities 38,965 25,116
Income taxes payable 3,914 5,913
Current liabilities of discontinued operations (Note 2) 23,942 17,225
------------------ -----------------
Total current liabilities 90,207 74,436
LONG-TERM LIABILITIES:
Long-term debt, less current portion 159,921 5,072
Discontinued operations (Note 2) 125 168
------------------ -----------------
Total liabilities 250,253 79,676
COMMITMENTS AND CONTINGENCIES (NOTE 14)
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 5,000,000 shares
authorized; no shares issued and outstanding - -
Common stock, $.01 par value; 50,000,000 shares
authorized; 34,207,688 and 33,593,977 issued and
28,147,466 and 29,456,692 outstanding at
September 30, 2003 and December 31, 2002,
respectively 342 336
Additional paid-in capital 315,148 307,487
Retained earnings 49,871 34,056
Accumulated other comprehensive loss (1,904) (4,169)
Treasury stock (72,317) (49,633)
------------------ -----------------
Total stockholders' equity 291,140 288,077
------------------ -----------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 541,393 $ 367,753
================== =================
* Condensed from audited financial statements.
See notes to condensed consolidated financial statements.
5
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------------------------- ---------------------------------------
SEPTEMBER 30, 2003 SEPTEMBER 30, 2002 SEPTEMBER 30, 2003 SEPTEMBER 30, 2002
------------------ ------------------ ------------------ ------------------
REVENUES:
Products $ 50,786 $ 49,047 $ 144,140 $ 131,049
Mobile Security 40,096 31,510 108,875 90,717
------------------ ------------------ ------------------- ------------------
Total Revenues 90,882 80,557 253,015 221,766
------------------ ------------------ ------------------- ------------------
COSTS AND EXPENSES:
Cost of sales 61,953 55,947 176,396 152,481
Operating expenses 15,977 12,852 44,505 37,046
Amortization 72 62 201 213
Integration and other non-recurring charges 368 1,359 4,565 4,476
------------------ ------------------ ------------------- ------------------
OPERATING INCOME 12,512 10,337 27,348 27,550
Interest expense, net 1,475 343 2,291 669
Other expense (income), net 96 (13) 181 (77)
------------------ ------------------ ------------------- ------------------
INCOME FROM CONTINUING OPERATIONS BEFORE
PROVISION FOR INCOME TAXES 10,941 10,007 24,876 26,958
PROVISION FOR INCOME TAXES 4,832 7,043 10,044 13,603
------------------ ------------------ ------------------- ------------------
INCOME FROM CONTINUING OPERATIONS 6,109 2,964 14,832 13,355
------------------ ------------------ ------------------- ------------------
DISCONTINUED OPERATIONS (NOTE 2):
INCOME (LOSS) FROM DISCONTINUED OPERATIONS
BEFORE PROVISION FOR INCOME TAXES 1,679 (17,032) 3,593 (17,606)
PROVISION FOR INCOME TAXES 1,673 639 2,610 421
------------------ ------------------ ------------------- ------------------
INCOME (LOSS) FROM DISCONTINUED OPERATIONS 6 (17,671) 983 (18,027)
------------------ ------------------ ------------------- ------------------
NET INCOME (LOSS) $ 6,115 $ (14,707) $ 15,815 $ (4,672)
================== ================== =================== ==================
NET INCOME (LOSS) PER COMMON SHARE - BASIC
INCOME FROM CONTINUING OPERATIONS $ 0.22 $ 0.10 $ 0.52 $ 0.44
INCOME (LOSS) FROM DISCONTINUED OPERATIONS 0.00 (0.60) 0.04 (0.59)
------------------ ------------------ ------------------- ------------------
BASIC EARNINGS (LOSS) PER SHARE $ 0.22 $ (0.50) $ 0.56 $ (0.15)
================== ================== =================== ==================
See notes to condensed consolidated financial statements.
6
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - CONTINUED (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2003 SEPTEMBER 30, 2002 SEPTEMBER 30, 2003 SEPTEMBER 30, 2002
-------------------- ------------------- ------------------- -------------------
NET INCOME (LOSS) PER COMMON SHARE - DILUTED
INCOME FROM CONTINUING OPERATIONS $ 0.22 $ 0.10 $ 0.52 $ 0.43
INCOME (LOSS) FROM DISCONTINUED OPERATIONS 0.00 (0.59) 0.04 (0.58)
-------------------- ------------------- ------------------- -------------------
DILUTED EARNINGS (LOSS) PER SHARE $ 0.22 $ (0.49) $ 0.56 $ (0.15)
==================== =================== =================== ===================
WEIGHTED AVERAGE SHARES - BASIC 27,811 29,708 28,106 30,639
==================== =================== =================== ===================
WEIGHTED AVERAGE SHARES - DILUTED 28,249 30,037 28,438 31,373
==================== =================== =================== ===================
See notes to condensed consolidated financial statements.
7
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
ARMOR HOLDINGS, INC. AND SUBSIDIARIES (UNAUDITED)
(IN THOUSANDS)
NINE MONTHS ENDED
--------------------------------------------------
SEPTEMBER 30, 2003 SEPTEMBER 30, 2002
----------------------- ------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Income from continuing operations $ 14,832 $ 13,355
Adjustments to reconcile income from continuing operations to cash
used in operating activities:
Depreciation and amortization 5,380 4,049
Loss on disposal of fixed assets 167 136
Deferred income taxes 3,676 (680)
Non-cash termination charge 2,093 --
Changes in operating assets and liabilities, net of acquisitions:
Increase in accounts receivable (1,556) (3,130)
Decrease (increase) in inventories 2,173 (10,203)
Increase in prepaid expenses and other assets (3,682) (3,569)
Increase (decrease) in accounts payable, accrued
expenses and other current liabilities 11,808 (6,775)
(Decrease) increase in income taxes payable (1,999) 6,345
----------------------- ------------------------
Net cash provided by (used in) operating activities 32,892 (472)
----------------------- ------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (5,645) (4,548)
Purchase of patents and trademarks (99) (45)
Additional consideration for purchased businesses (740) (2,652)
Purchase of businesses, net of cash acquired (5,828) (7,411)
----------------------- ------------------------
Net cash used in investing activities (12,312) (14,656)
----------------------- ------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the exercise of stock options 6,588 4,237
Treasury stock purchases (22,684) (26,054)
Cash paid for financing costs (4,020) (326)
Proceeds from the issuance of long-term debt 147,504 --
Repayments of long-term debt (1,399) (591)
Borrowings under line of credit 31,744 27,763
Repayments under line of credit (32,070) (20,701)
----------------------- ------------------------
Net cash provided by (used in) financing activities 125,663 (15,672)
----------------------- ------------------------
Effect of exchange rate changes on cash and cash equivalents 478 (872)
Net cash (used in) transferred from discontinued operations (4,868) 767
----------------------- ------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 141,853 (30,905)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 12,913 47,489
----------------------- ------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 154,766 $ 16,584
======================= ========================
CASH AND CASH EQUIVALENTS, END OF PERIOD
CONTINUING OPERATIONS $ 154,766 $ 16,584
DISCONTINUED OPERATIONS 5,051 4,819
----------------------- ------------------------
$ 159,817 $ 21,403
======================= ========================
See notes to condensed consolidated financial statements.
8
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED (UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
of Armor Holdings, Inc. and its wholly-owned subsidiaries (the "Company", "we",
"our", "us") have been prepared in accordance with generally accepted accounting
principles for interim information and the instructions to Form 10-Q and Rule
10-01 of Regulation S-X, and do not include all the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting only of
normal recurring accruals and the elimination of all material intercompany
accounts and transactions) considered necessary by management to present a fair
presentation have been included. The results of operations for the three and
nine-month periods are not necessarily indicative of the results to be expected
for the full year and should be read in conjunction with the consolidated
financial statements and notes thereto included in our Annual Report on Form
10-K for the year ended December 31, 2002. The amounts disclosed in the
footnotes are related to continuing operations unless otherwise indicated.
As discussed in Note 2 and elsewhere in this Form 10-Q, we announced
our intention to sell our ArmorGroup Services Division (the "Services
Division"). As a result, the assets and liabilities of the Services Division
have been classified as assets and liabilities of discontinued operations on our
balance sheet and the results of their operations classified as income from
discontinued operations in the accompanying unaudited condensed consolidated
financial statements.
NOTE 2 - DISCONTINUED OPERATIONS
On July 15, 2002, we announced plans to sell the Services Division and
the retention of Merrill Lynch & Company to assist in the sale. In accordance
with Statement of Financial Accounting Standards No. 144, "Accounting for
Impairment or Disposal of Long-Lived Assets," (SFAS 144) the assets and
liabilities of the Services Division have been classified as held for sale, with
its operating results in the current and prior periods reported in discontinued
operations for the three and nine-month periods ended September 30, 2003 and
2002.
On April 17, 2003, we announced that we had completed the sale of our
ArmorGroup Integrated Systems business through the sale of 100% of the stock of
ArmorGroup Integrated Systems, Inc. and Low Voltage Systems Technologies, Inc.
to Aerwav Integration Systems, Inc. ("AIS"). AIS is a wholly owned subsidiary of
Aerwav Holdings, LLC. As consideration for the integrated systems business, we
received a $4.1 million collateralized note due in two years and a warrant for
approximately 2.5% of AIS. In accordance with SFAS 144, we have recorded a loss
of $366,000 on the sale.
For the three months ended September 30, 2003, net income from
discontinued operations was $6,000 compared to a net loss of $17.7 million in
the comparable period in the prior year. Excluding the ArmorGroup Integrated
Systems business net loss of $13.9 million, the net loss was $3.7 million for
the three-month period ended September 30, 2002.
For the nine months ended September 30, 2003, net income from
discontinued operations was $983,000 compared to a net loss of $18.0 million in
the comparable period in the prior year. Excluding the pre-tax loss of $366,000
(after-tax loss of $238,000) on the sale of ArmorGroup Integrated Systems
9
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED (UNAUDITED)
business, a net loss of $613,000 in the nine-month period ended September 30,
2003 and a net loss of $14.3 million for the nine-month period ended September
30, 2002, net income was $1.8 million and a net loss of $3.7 million for the
nine months ended September 30, 2003 and 2002, respectively.
Based upon our analysis and discussions with our advisors regarding the
estimated realizable value, net of selling costs, of the Services Division, we
reduced its carrying value, and recorded net impairment charges of $30.3 million
in fiscal 2002 and $1.3 million in the three months ended September 30, 2003.
These impairment charges consisted of approximately $6.3 million in estimated
disposal costs and a $35.1 million non-cash goodwill reduction, net of an
expected $10.0 million income tax benefit. The provision for income taxes for
discontinued operations was $1.7 million and $2.6 million for the three and
nine-month periods ended September 30, 2003, respectively. The reduction in the
carrying value of the Services Division is management's best estimate based upon
currently available information, including discussions with our investment
bankers. The actual proceeds from the disposal of our Services Division may
differ materially from our current estimates and could result in either a gain
or a loss upon final disposal. We are actively pursuing a sale of this business.
A summary of the operating results of the discontinued operations for
the three months and nine months ended September 30, 2003 and 2002 is as
follows.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2003 SEPTEMBER 30, 2002 SEPTEMBER 30, 2003 SEPTEMBER 30, 2002
------------------ ------------------ ------------------ ------------------
(IN THOUSANDS) (IN THOUSANDS)
Revenue $ 26,039 $ 23,747 $ 75,738 $ 74,273
Cost of sales 18,078 19,730 53,447 55,840
Operating expenses 4,882 8,018 16,299 22,582
Charge for impairment of long-lived assets 11,258 11,905 11,258 11,905
Integration and other non-recurring charges 104 836 598 1,225
------------------ ------------------ ------------------ ------------------
Operating loss (8,283) (16,742) (5,864) (17,279)
Interest expense, net 18 34 71 127
Other expense, net 20 256 472 200
------------------ ------------------ ------------------ ------------------
Loss from discontinued
operations before (benefit) provision for
income taxes (8,321) (17,032) (6,407) (17,606)
(Benefit) provision for income taxes (8,327) 639 (7,390) 421
------------------ ------------------ ------------------ ------------------
(Loss) income from discontinued operations $ 6 $(17,671) $ 983 $ (18,027)
================== ================== ================== ==================
10
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED (UNAUDITED)
The following is a summary of the assets and liabilities of our discontinued
operations:
SEPTEMBER 30, 2003 DECEMBER 31, 2002
------------------ -----------------
(IN THOUSANDS)
Assets
Cash and cash equivalents $ 5,051 $ 3,638
Accounts receivable, net 19,810 16,228
Other current assets 23,097 8,959
------------------ -----------------
Total current assets 47,958 28,825
Property and equipment, net 13,588 12,481
Goodwill, net 1,961 12,995
Other assets 4,496 4,809
------------------ -----------------
Total assets of discontinued operations $ 68,003 $ 59,110
================== =================
Liabilities
Current portion of long-term debt $ 125 $ 186
Short-term debt 6,604 350
Accounts payable 2,115 2,405
Accrued expenses and other current liabilities 15,098 14,284
------------------ -----------------
Total current liabilities 23,942 17,225
Long-term debt 125 168
------------------ -----------------
Total liabilities of discontinued operations $ 24,067 $ 17,393
================== =================
11
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED (UNAUDITED)
NOTE 3 - COMPREHENSIVE INCOME
The components of comprehensive income, net of tax provision (benefit)
of $31,000 and ($26,000) for the three months ended September 30, 2003 and 2002,
respectively, and $255,000 and ($197,000) for the nine months September 30, 2003
and 2002, respectively, are listed below:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2003 SEPTEMBER 30, 2002 SEPTEMBER 30, 2003 SEPTEMBER 30, 2002
------------------ ------------------ ------------------ ------------------
(IN THOUSANDS) (IN THOUSANDS)
Net income (loss) $ 6,115 $ (14,707) $ 15,815 $ (4,672)
Other comprehensive income (loss):
Foreign currency translations, net of tax 34 (617) 2,265 (852)
------------------- ------------------- -------------------- -------------------
Comprehensive income (loss): $ 6,149 $ (15,324) $ 18,080 $ (5,524)
=================== =================== ==================== ===================
NOTE 4 - INVENTORIES
Inventories are stated at the lower of cost or market using the
first-in, first-out (FIFO) method and are summarized as follows:
SEPTEMBER 30, 2003 DECEMBER 31, 2002
------------------ -----------------
(IN THOUSANDS)
Raw material $ 34,067 $ 30,211
Work-in-process 12,573 15,733
Finished goods 13,428 16,386
------------------ -----------------
Total inventories $ 60,068 $ 62,330
================== =================
NOTE 5 - ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities are summarized as
follows:
SEPTEMBER 30, 2003 DECEMBER 31, 2002
---------------------- ---------------------
(IN THOUSANDS)
Accrued expenses and other current liabilities $ 25,328 $ 16,988
Deferred consideration for acquisitions 1,310 1,826
Customer deposits 12,327 6,302
---------------------- ---------------------
Total accrued expenses and other current liabilities $ 38,965 $ 25,116
====================== =====================
12
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED (UNAUDITED)
NOTE 6 - DEBT
SEPTEMBER 30, 2003 DECEMBER 31, 2002
-------------------- -------------------
(IN THOUSANDS)
Credit facility (a) $ -- $ --
Senior Subordinated Notes (b) 147,538 --
Ontario Industrial Development Authority Variable Rate Demand Industrial
Development Revenue Bonds, Series 1989 payable in annual installments
of $200 to $300, through August 1, 2014, with interest paid monthly
at varying rates 2,600 2,800
Note payable in scheduled installments through 2013, with interest rate
of 5% 1,482 1,582
Economic Development Revenue Bonds, payable in scheduled installments
through September 2016, with a variable interest rate approximating
85% of the bond equivalent yield of the 13-week U.S. Treasury bills
(not to exceed 12%), which was 2.75% at December 31, 2002. -- 1,075
Note to former officer payable in monthly principal and interest
installments of $7 through December 31, 2009 with an imputed interest
rate of 9.25% 367 399
Minimum guaranteed royalty to former officer payable in monthly principal
and interest installments of $4 through August 2005, with an imputed
interest rate of 9.2% 85 114
Minimum guaranteed royalty to former officer payable in monthly principal
and interest installments of $36 through April 2005, with an imputed
interest rate of 7.35% 638 915
Plus fair value of interest rate swaps (c) 7,976 --
------------------- -------------------
$ 160,686 $ 6,885
Less current portion (765) (1,813)
------------------- -------------------
Total $ 159,921 $ 5,072
=================== ===================
(a) Credit Facility - On August 12, 2003, we terminated our existing
credit facility and entered into a new collateralized revolving credit facility
with Bank of America N.A., Wachovia Bank, N.A. and Key Bank, N.A. The new
credit facility is a five-year revolving credit facility and, among other
things, provides for: 1) total maximum borrowings of $60 million; 2) a $25
million sub-limit for the issuances of standby and commercial letters of credit;
3) a $5 million sub-limit for swing-line loans; and 4) a $5 million sub-limit
for multi-currency borrowings. All borrowings under the new credit facility will
bear interest at either 1) a rate equal to LIBOR, plus an applicable margin
ranging from 1.125% to 1.625%; 2) an alternate base rate which will be the
higher of (a) the Bank of America prime rate and (b) the Federal Funds rate plus
..50%; or 3) with respect to foreign currency loans, a fronted offshore currency
rate, plus an applicable margin ranging from 1.125% to 1.625%, depending on
certain conditions.
13
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED (UNAUDITED)
(b) Senior Subordinated Notes - On August 12, 2003, we completed a
private placement of $150 million aggregate principal amount of 8.25% senior
subordinated notes due 2013 (the "Notes"). The Notes are guaranteed by certain
of our domestic subsidiaries on a senior subordinated basis (see Note 13). The
Notes have been sold to qualified institutional buyers in reliance on Rule 144A
of the Securities Act of 1933 and to non-U.S. persons in reliance on Regulation
S under the Securities Act of 1933. The Notes were rated B1/B+ by Moody's
Investors' Service and Standard & Poor's Rating Services, respectively. We
intend to use the net proceeds of the offering to fund future acquisitions,
including some or all of the purchase price for our pending acquisition of
Simula, Inc., repay a portion of our outstanding debt and for general corporate
and working capital purposes, including the funding of capital expenditures.
Interest on the Notes is payable semiannually on the fifteenth of February and
August of each year. The Notes were issued at a discount of approximately $2.5
million to investors.
(c) Fair Value of Interest Rate Swaps - On September 2, 2003, we
entered into interest rate swap agreements, designated as a fair value hedge as
defined under Statement of Financial Accounting Standard No. 133, "Accounting
for Derivative Instruments and Hedge Activities," (SFAS 133) with an aggregate
notional amount totaling $150 million. The agreements were entered to exchange
the fixed interest rate on the Notes for a variable interest rate equal to
six-month LIBOR, set in arrears, plus a spread ranging from 2.735% to 2.75%
fixed semi-annually on the fifteenth of February and August. At September 30,
2003, the six-month LIBOR was 1.18%. The agreements are subject to other terms
and conditions common to transactions of this type. In accordance with SFAS 133,
changes in the fair value of the interest rate swap agreements offset changes in
the fair value of the fixed rate debt due to changes in the market interest
rate. The fair value of the interest rate swap agreements was approximately $8.0
million at September 30, 2003. The agreements are deemed to be a perfectly
effective fair value hedge and therefore qualify for the short-cut method of
accounting under SFAS 133. As a result, no ineffectiveness is expected to be
recognized in our earnings associated with the interest rate swap agreements on
the Notes.
NOTE 7 - DERIVATIVE FINANCIAL INSTRUMENTS
We account for derivative instruments in accordance with SFAS 133,
which requires all freestanding and embedded derivative instruments to be
measured at fair value and recognized on the balance sheet as either assets or
liabilities. In addition, all derivative instruments used in hedging
relationships must be designated, reassessed and accounted for as either fair
value hedges or cash flow hedges pursuant to the provisions of SFAS 133.
We hedge the fair value of our Notes using interest rate swaps. We
enter into these derivative contracts to manage fair value changes which could
be caused by our exposure to interest rate changes. On September 2, 2003, we
entered into interest rate swap agreements, designated as fair value hedges as
defined under SFAS 133 with an aggregate notional amount totaling $150 million.
The agreements were entered to exchange the fixed interest rate on the Notes for
a variable interest rate equal to six-month LIBOR, set in arrears, plus a spread
ranging from 2.735% to 2.75% fixed semi-annually on the fifteenth of February
and August. The agreements are subject to other terms and conditions common to
transactions of this type. These fair value hedges qualify for hedge accounting
using the short-cut method since the swap terms match the critical terms of the
Notes. Accordingly, changes in the fair value of the interest rate swap
agreements offset changes in the fair value of the Notes due to changes in
14
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED (UNAUDITED)
the market interest rate. As a result, no ineffectiveness is expected to be
recognized in our earnings associated with the interest rate swap agreements on
the Notes.
The fair values of our interest rate swap agreements are obtained from
dealer quotes and represent the estimated amount we would receive or pay to
terminate the agreement, taking into consideration the difference between the
contract rate of interest and rates currently quoted for agreements of similar
terms and maturities.
NOTE 8 - INFORMATION CONCERNING BUSINESS SEGMENTS AND GEOGRAPHICAL SALES
We are a leading manufacturer and provider of security products,
vehicle armor systems, and security training services. Our products and services
are used by military, law enforcement, security and corrections personnel
throughout the world, as well as governmental agencies, multinational
corporations and non-governmental organizations. Our continuing operations are
organized and operated under two business segments: Armor Holdings Products and
Armor Mobile Security. Our Services Division has been classified as discontinued
operations and is no longer included in this presentation (See Note 2).
Armor Holdings Products. Our Armor Holdings Products Division
manufactures and sells a broad range of high quality equipment marketed under
brand names that are well known and respected in the military and law
enforcement communities. Products manufactured by this division include
concealable and tactical body armor, hard armor, duty gear, less-lethal
munitions, anti-riot products, police batons, emergency lighting products,
forensic products, firearms accessories and weapon maintenance products.
Armor Mobile Security. Our Armor Mobile Security Division manufactures
and installs ballistic and blast protection armoring systems for military
vehicles, commercial vehicles, military aircraft and missile components. Under
the brand name O'Gara-Hess & Eisenhardt ("O'Gara"), we are the sole-source
provider to the U.S. military for the supply of armoring and blast protection
systems as well as maintenance services for the High Mobility Multi-purpose
Wheeled Vehicle (HMMWV, commonly known as the Humvee). Additionally, we have
been subcontracted to develop a ballistically armored and sealed truck cab for
the High Mobility Artillery Rocket System (HIMARS) a program currently in
low-rate initial production for the U.S. Army. We armor a variety of commercial
vehicles including limousines, sedans, sport utility vehicles, commercial trucks
and cash-in-transit vehicles, to protect against varying degrees of ballistic
and blast threats. The Armor Mobile Security Division was created in connection
with our acquisition of O'Gara on August 22, 2001 (the "O'Gara acquisition").
We have invested substantial resources outside of the United States and
plan to continue to do so in the future. The Armor Mobile Security Division has
invested substantial resources in Europe and South America. These operations are
subject to the risk of new and different legal and regulatory requirements in
local jurisdictions, tariffs and trade barriers, potential difficulties in
staffing and
15
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED (UNAUDITED)
managing local operations, currency risks, potential imposition of restrictions
on investments, potentially adverse tax consequences, including imposition or
increase of withholding and other taxes on remittances and other payments by
subsidiaries, and local economic, political and social conditions. Governments
of many developing countries have exercised and continue to exercise substantial
influence over many aspects of the private sector. Government actions in the
future could have a significant adverse effect on economic conditions in a
developing country or may otherwise have a material adverse effect on us and our
operating companies. We do not have political risk insurance in the countries in
which we currently conduct business. Moreover, applicable agreements relating to
our interests in our operating companies are frequently governed by foreign law.
As a result, in the event of a dispute, it may be difficult for us to enforce
our rights. Accordingly, we may have little or no recourse upon the occurrence
of any of these developments.
16
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED (UNAUDITED)
Revenues, operating income and total assets for each of our continuing
operating segments are as follows (net of intercompany eliminations):
NINE MONTHS ENDED
SEPTEMBER 30, 2003 SEPTEMBER 30, 2002
--------------------------- --------------------------
(IN THOUSANDS)
Revenues:
Products $ 144,140 $ 131,049
Mobile Security 108,875 90,717
--------------------------- --------------------------
Total revenues $ 253,015 $ 221,766
=========================== ==========================
Operating income (loss):
Products $ 24,619 $ 24,068
Mobile Security 13,491 9,156
Corporate (10,762) (5,674)
--------------------------- --------------------------
Total operating income $ 27,348 $ 27,550
=========================== ==========================
Total assets:
Products $ 177,754 $ 176,951
Mobile Security 115,801 112,136
Corporate 179,835 18,777
--------------------------- --------------------------
Total assets $ 473,390 $ 307,864
=========================== ==========================
17
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED (UNAUDITED)
The following unaudited information with respect to revenues, operating
income from continuing operations (geographic operating income from continuing
operations before amortization expense and integration and other non-recurring
charges) and total assets to principal geographic areas are as follows:
NINE MONTHS ENDED
SEPTEMBER 2003 SEPTEMBER 30, 2002
------------------------ -------------------------
(IN THOUSANDS)
Revenues:
North America $ 186,754 $ 157,069
South America 10,547 21,983
Africa 1,578 1,344
Europe/Asia 54,136 41,370
------------------------- --------------------------
Total revenue $ 253,015 $ 221,766
========================= ==========================
Geographic operating income:
North America $ 24,973 $ 23,928
South America 618 1,690
Africa 377 430
Europe/Asia 6,146 6,191
------------------------- --------------------------
Total geographic operating income $ 32,114 $ 32,239
========================= ==========================
Total assets:
North America $ 419,966 $ 258,123
South America 6,301 9,856
Africa - -
Europe/Asia 47,123 39,885
------------------------- --------------------------
Total assets $ 473,390 $ 307,864
========================= ==========================
A reconciliation of consolidated geographic operating income from
continuing operations to consolidated operating income from continuing
operations follows:
NINE MONTHS ENDED
SEPTEMBER 30, 2003 SEPTEMBER 30, 2002
------------------------ -------------------------
(IN THOUSANDS)
Consolidated geographic operating income $ 32,114 $ 32,239
Amortization (201) (213)
Integration and other non-recurring charges (4,565) (4,476)
------------------------ -------------------------
Operating income $ 27,348 $ 27,550
======================== =========================
18
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED (UNAUDITED)
NOTE 9 - EARNINGS PER SHARE
The following details the numerators and denominators of the basic and
diluted earnings per share computations for net income from continuing
operations:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2003 SEPTEMBER 30, 2002 SEPTEMBER 30, 2003 SEPTEMBER 30, 2002
------------------ ------------------ ------------------ ------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Numerator for basic and diluted
earnings per share:
Income from continuing operations $ 6,109 $ 2,964 $ 14,832 $ 13,355
Denominator for basic earnings per
share - weighted average shares outstanding: 27,811 29,708 28,106 30,639
Effect of shares issuable under stock
option and stock grant plans, based on
the treasury stock method 438 329 332 734
----------------- ----------------- ----------------- -----------------
Denominator for diluted earnings per share-
Adjusted weighted average shares outstanding 28,249 30,037 28,438 31,373
----------------- ----------------- ----------------- -----------------
Basic earnings per share from
continuing operations $ 0.22 $ 0.10 $ 0.52 $ 0.44
================= ================= ================= =================
Diluted earnings per share from
continuing operations $ 0.22 $ 0.10 $ 0.52 $ 0.43
================= ================= ================= =================
19
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED (UNAUDITED)
NOTE 10 - NEW ACCOUNTING PRONOUNCEMENTS
In November 2002, the FASB issued FASB Interpretation No. 45
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others, an Interpretation of FASB
Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34 ("FIN
45"). FIN 45 elaborates on the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under certain
guarantees that it has issued. It also clarifies that a guarantor is required to
recognize, at the inception of a guarantee, a liability for the fair value of
the obligation undertaken in issuing the guarantee. The initial recognition and
initial measurement provisions of FIN 45 are applicable on a prospective basis
to guarantees issued or modified after December 31, 2002, irrespective of the
guarantor's fiscal year-end. We adopted the provisions of this Statement on
January 1, 2003, which did not have a significant impact on our consolidated
financial statements.
In January 2003, the FASB issued FASB Interpretation No. 46,
Consolidation of Variable-Interest Entities - an Interpretation of ARB No. 51
("FIN 46"). FIN 46 addresses consolidation by business enterprises of variable
interest entities, which have one or both of the following characteristics: (1)
the equity investment at risk is not sufficient to permit the entity to finance
its activities without additional subordinated financial support from other
parties, which is provided through other interests that will absorb some or all
of the expected losses of the entity and (2) the equity investors lack one or
more of the following essential characteristics of a controlling financial
interest:
o The direct or indirect ability to make decisions about the entity's
activities through voting rights or similar rights
o The obligation to absorb the expected losses of the entity if they
occur, which makes it possible for the entity to finance its activities
o The right to receive the expected residual returns of the entity if
they occur, which is the compensation for the risk of absorbing the
expected losses.
This Interpretation applies immediately to variable interest entities
created after January 31, 2003, and to variable interest entities in which an
enterprise obtains an interest after that date. It applies in the first fiscal
year or interim period beginning after June 15, 2003, to variable interest
entities in which an enterprise holds a variable interest that it acquired
before February 1, 2003. The adoption of FIN 46 did not have a significant
impact on our consolidated financial statements.
20
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED (UNAUDITED)
In April 2003, the FASB issued Statement of Financial Accounting
Standard No. 149, "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities" (SFAS 149). SFAS 149 amends and clarifies financial
accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities
under Statement of Financial Accounting Standard No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (SFAS 133). SFAS 149 is effective
for contracts entered into or modified and hedging relationships designated
after June 30, 2003, except for the provisions of SFAS 149 that relate to SFAS
133 Implementation Issues that have been effective for fiscal quarters that
began prior to June 15, 2003, which should continue to be applied in accordance
with their respective effective dates. Adoption of this standard had no effect
on us.
In May 2003, the FASB issued Statement of Financial Accounting Standard
No. 150, "Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity" (SFAS 150). SFAS 150 establishes standards for how
an issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an issuer
classify a financial instrument that is within its scope as a liability (or an
asset in some circumstances). Many of those instruments were previously
classified as equity. SFAS 150 is effective for financial instruments entered
into or modified after May 31, 2003, and otherwise is effective at the beginning
of the first interim period beginning after June 15, 2003. Adoption of this
standard had no effect on us.
In September 2003, the FASB issued FASB Staff Position No. 146-1,
Determining Whether a One-Time Termination Benefit Offered in Connection with an
Exit or Disposal Activity Is, in Substance, an Enhancement to an Ongoing Benefit
Arrangement. This Staff Position states that in order to be considered an
enhancement to an ongoing benefit arrangement, the additional termination
benefits must represent a revision to the ongoing arrangement that is not
limited to a specified termination event or a specified future period. Otherwise
the additional termination benefits should be considered one-time termination
benefits and accounted for under SFAS 146. The guidance in this Staff Position
is effective for exit or disposal activities initiated in interim or annual
reporting periods beginning after September 15, 2003. The adoption of this Staff
Position is not expected to have a material impact on our consolidated financial
statements.
In October 2003, the FASB issued FASB Staff Position No. FIN 46-6,
Effective Date of FASB Interpretation No. 46, Consolidation of Variable Interest
Entities. This Staff Position defers the effective date for applying the
provisions of FIN 46 for interests held by public entities in variable interest
entities or potential variable interest entities created before February 1, 2003
and non-registered investment companies. This adoption of this Staff Position is
not expected to have a material impact on our consolidated financial statements.
21
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED (UNAUDITED)
NOTE 11 - STOCKHOLDERS' EQUITY
Statement of Financial Accounting Standard No. 123, "Accounting for
Stock-Based Compensation" (SFAS 123), as amended by SFAS 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure," establishes a fair value
based method of accounting for stock-based employee compensation plans; however,
it also allows an entity to continue to measure compensation cost for those
plans using the intrinsic value based method of accounting prescribed by
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB 25). Under the fair value based method, compensation cost is
measured at the grant date based on the value of the award and is recognized
over the service period, which is usually the vesting period. Under the
intrinsic value based method, compensation costs is the excess, if any, of the
quoted market price of the stock at the grant date or other measurement date
over the amount an employee must pay to acquire the stock. We have elected to
continue to account for our employee stock compensation plans under APB 25 with
pro forma disclosures of net earnings and earnings per share, as if the fair
value based method of accounting defined in SFAS 123 had been applied. If
compensation cost for stock option grants had been determined based on the fair
value on the grant dates for September 30, 2003 and 2002 consistent with the
method prescribed by SFAS 123, our net earnings and earnings per share would
have been adjusted to the pro forma amounts indicated below:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2003 SEPTEMBER 30, 2002 SEPTEMBER 30, 2003 SEPTEMBER 30, 2002
------------------ ------------------ ------------------ ------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income (loss) as reported: $ 6,115 $(14,707) $ 15,815 $ (4,672)
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects (671) (1,699) (2,985) (3,434)
------------------- ------------------ ------------------- -------------------
Pro-forma net income (loss) $ 5,444 $(16,406) $ 12,830 $ (8,106)
=================== ================== =================== ===================
Earnings (loss) per share:
Basic - as reported $ 0.22 $ (0.50) $ 0.56 $ (0.15)
=================== ================== =================== ===================
Basic - pro-forma $ 0.20 $ (0.55) $ 0.46 $ (0.26)
=================== ================== =================== ===================
Diluted - as reported $ 0.22 $ (0.49) $ 0.56 $ (0.15)
=================== ================== =================== ===================
Diluted - pro-forma $ 0.19 $ (0.55) $ 0.45 $ (0.26)
=================== ================== =================== ===================
22
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED (UNAUDITED)
NOTE 12 - LEGAL PROCEEDINGS
On or about March 22, 2002, O'Gara-Hess & Eisenhardt Armoring Company
(OHEAC), one of our subsidiaries, received a civil subpoena from the Department
of Defense (DOD) requesting documents and information concerning various quality
control documentation regarding parts delivered by its subcontractors and
vendors in support of the HMMWV armored at its Fairfield, Ohio facility for the
period October 1, 1999 through May 1, 2001. OHEAC has complied fully with the
subpoena. In early 2003, OHEAC was advised that the Department of Justice (DOJ)
was also investigating separate claims against OHEAC filed by individuals that
involve the same time frame and issues covered by the DOD subpoena. OHEAC has
learned that the DOJ investigation relates to a certain unidentified action
filed under the federal False Claims Act pursuant to which the United States
government may intervene and recover damages. OHEAC has fully responded to, and
cooperated with, the government's questions and investigation. The DOJ has since
notified OHEAC that it has declined to intervene in the case. On September 30,
2003, the action filed under the federal False Claims Act was voluntarily
withdrawn without prejudice.
In October 2002, we were sued in the United States District Court for
the District of Wyoming. The plaintiffs in that lawsuit asserted various state
law tort claims and federal environmental law claims under the Resource
Conservation and Recovery Act and the Clean Air Act stemming from one of our
subsidiaries' Casper, Wyoming tear gas plant. The plaintiffs have not yet
quantified their alleged damages. The plaintiffs filed their suit as a potential
class action. On June 19, 2003, the court denied plaintiff's motion for class
certification. The alleged actions took place over time periods during which we
were covered by different insurance policies. We have notified our insurance
carriers of the suit. Our prior insurance carrier has agreed, under a full
reservation of rights, including with respect to any liability which relates to
the time its policy was in effect, to provide a defense and to address the
question of liability indemnification in the future. Our current insurance
carrier has declined defense and indemnification coverage. While we do not carry
specific environment insurance coverage, we have reserved the right to challenge
our insurance carrier's determination. The case is currently pending, and while
we are contesting the allegations vigorously, we are unable to predict the
outcome of this matter. At this time, we do not believe this matter will have a
material impact on our financial position, operations or liquidity.
Reference is made to Note 10, Commitments and Contingencies, in our
Annual Report on Form 10-K for the year ended December 31, 2002, and Note 10,
Legal Proceedings in our Quarterly Report on Form 10-Q for the quarter ended
March 31, 2003 for a description of other legal proceedings.
23
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED (UNAUDITED)
NOTE 13 -GUARANTOR AND NONGUARANTOR FINANCIAL STATEMENTS
On August 12, 2003 we sold $150 million of Senior Subordinated Notes in
private placements pursuant to Rule 144A and Regulation S. The Senior
Subordinated Notes are uncollateralized obligations and rank junior in right of
payment to our existing and future senior debt. The Senior Subordinated Notes
are guaranteed, jointly and severally on a senior uncollateralized basis, by
certain domestic subsidiaries.
The following consolidating condensed financial information presents
the consolidating condensed balance sheets as of September 30, 2003 and December
31, 2002, the related condensed statements of income for each of the three and
nine month periods ended September 30, 2003 and September 30, 2002 and the
related condensed statements of cash flows for the nine month periods ended
September 30, 2003 and September 30, 2002 for:
a) Armor Holdings, Inc., the parent,
b) the guarantor subsidiaries,
c) the nonguarantor subsidiaries, and
d) Armor Holdings, Inc. on a consolidated basis
The information includes elimination entries necessary to consolidate
Armor Holdings, Inc., the parent, with the guarantor and nonguarantor
subsidiaries.
Investments in subsidiaries are accounted for by the parent using the
equity method of accounting. The guarantor and nonguarantor subsidiaries are
presented on a combined basis. The principal elimination entries eliminate
investments in subsidiaries and intercompany balances and transactions. Separate
financial statements for the guarantor and nonguarantor subsidiaries are not
presented because management believes such financial statements would not be
meaningful to investors.
24
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED (UNAUDITED)
ARMOR HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
SEPTEMBER 30, 2003
--------------------------------------------------------------------------------
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
---------- ------------ --------------- ------------- -------------
(IN THOUSANDS)
ASSETS
Current Assets:
Cash and cash equivalents $ 144,037 $ 2,620 $ 8,109 $ -- $ 154,766
Accounts receivable, net -- 47,925 11,290 -- 59,215
Costs and earned gross profit in excess
of billings -- 1,088 -- -- 1,088
Intercompany receivables 86,614 50,744 5,661 (143,019) --
Inventories -- 45,296 14,772 -- 60,068
Prepaid expenses and other current assets 19,520 12,931 3,271 (14,401) 21,321
Current assets of discontinued operations -- 7,971 39,987 -- 47,958
---------- ------------ --------------- ------------- -------------
Total Current Assets 250,171 168,575 83,090 (157,420) 344,416
Property and equipment, net 2,183 27,742 19,606 -- 49,531
Goodwill, net -- 97,002 1,932 -- 98,934
Patents, licenses and trademarks, net -- 7,233 186 -- 7,419
Other assets 20,903 232 (87) -- 21,048
Long-term assets of discontinued operations -- 7,205 12,840 -- 20,045
Investment in subsidiaries 197,975 10,007 21,734 (229,716) --
---------- ------------ --------------- ------------- -------------
Total Assets $ 471,232 $ 317,996 $ 139,301 $ (387,136) $ 541,393
========== ============ =============== ============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ -- $ 765 $ -- $ -- $ 765
Short-term debt -- -- 608 -- 608
Accounts payable 215 15,988 5,810 -- 22,013
Accrued expenses and other current
liabilities 8,335 13,102 17,528 -- 38,965
Income taxes payable 2,604 -- 1,310 -- 3,914
Intercompany payables 13,424 99,192 11,658 (124,274) --
Current liabilities of discontinued
operations -- 8,047 34,515 (18,745) 23,942
---------- ------------ --------------- ------------- -------------
Total Current Liabilities 24,578 137,094 71,429 (143,019) 90,207
Long-term debt, less current portion 155,514 4,407 -- -- 159,921
Long-term liabilities of discontinued
operations -- 2,778 11,873 (14,401) 125
---------- ------------ --------------- ------------- -------------
Total Liabilities 180,092 144,279 83,302 (157,420) 250,253
Stockholders' Equity:
Preferred stock -- 1,450 -- (1,450) --
Common stock 342 5,523 26,314 (31,837) 342
Additional paid in capital 315,148 71,816 31,615 (103,431) 315,148
Retained earnings (accumulated deficit) 49,871 94,928 (1,930) (92,998) 49,871
Accumulated other comprehensive loss (1,904) -- -- -- (1,904)
Treasury stock (72,317) -- -- -- (72,317)
---------- ------------ --------------- ------------- -------------
Total Stockholders' Equity 291,140 173,717 55,999 (229,716) 291,140
---------- ------------ --------------- ------------- -------------
Total Liabilities and Stockholders' Equity $ 471,232 $ 317,996 $ 139,301 $ (387,136) $ 541,393
========== ============ =============== ============= =============
25
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED (UNAUDITED)
ARMOR HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
DECEMBER 31, 2002
--------------------------------------------------------------------------------
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
---------- ------------ --------------- ------------- -------------
(IN THOUSANDS)
ASSETS
Current Assets:
Cash and cash equivalents $ 7,152 $ 3,556 $ 2,205 $ -- $ 12,913
Accounts receivable, net -- 44,864 13,649 -- 58,513
Costs and earned gross profit in excess
of billings -- 234 -- -- 234
Intercompany receivables 123,744 33,165 3,800 (160,709) --
Inventories -- 46,591 15,739 -- 62,330
Prepaid expenses and other current assets 12,490 21,999 2,368 (24,645) 12,212
Current assets of discontinued operations -- 10,351 18,474 -- 28,825
---------- ------------ --------------- ------------- -------------
Total Current Assets 143,386 160,760 56,235 (185,354) 175,027
Property and equipment, net 2,456 27,250 17,430 -- 47,136
Goodwill, net -- 96,903 1,833 -- 98,736
Patents, licenses and trademarks, net -- 7,326 195 -- 7,521
Other assets 916 6,872 1,260 -- 9,048
Long-term assets of discontinued operations -- 6,910 23,375 -- 30,285
Investment in subsidiaries 161,805 10,078 -- (171,883) --
---------- ------------ --------------- ------------- -------------
Total Assets $308,563 $316,099 $ 100,328 $(357,237) $ 367,753
========== ============ =============== ============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ -- $ 1,813 $ -- $ -- $ 1,813
Short-term debt -- -- 599 -- 599
Accounts payable 828 15,751 7,191 -- 23,770
Accrued expenses and other current
liabilities 1,790 11,324 12,002 -- 25,116
Income taxes payable 4,831 (148) 1,230 -- 5,913
Intercompany payables 13,037 115,658 10,434 (139,129) --
Current liabilities of discontinued
operations -- 14,267 24,538 (21,580) 17,225
---------- ------------ --------------- ------------- -------------
Total Current Liabilities 20,486 158,665 55,994 (160,709) 74,436
Long-term debt, less current portion -- 5,072 -- -- 5,072
Long-term liabilities of discontinued
operations -- 13,022 11,791 (24,645) 168
---------- ------------ --------------- ------------- -------------
Total Liabilities 20,486 176,759 67,785 (185,354) 79,676
Stockholders' Equity:
Preferred stock -- 1,450 -- (1,450) --
Common stock 336 5,681 26,318 (31,999) 336
Additional paid in capital 307,487 73,836 10,016 (83,852) 307,487
Retained earnings (accumulated deficit) 34,056 58,373 (3,791) (54,582) 34,056
Accumulated other comprehensive loss (4,169) -- -- -- (4,169)
Treasury stock (49,633) -- -- -- (49,633)
---------- ------------ --------------- ------------- -------------
Total Stockholders' Equity 288,077 139,340 32,543 (171,883) 288,077
---------- ------------ --------------- ------------- -------------
Total Liabilities and Stockholders' Equity $308,563 $316,099 $ 100,328 $ (357,237) $ 367,753
========== ============ =============== ============= =============
26
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED (UNAUDITED)
ARMOR HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING INCOME STATEMENTS
THREE MONTHS ENDED SEPTEMBER 30, 2003
-----------------------------------------------------------------------------
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
---------- ------------ --------------- ------------- -------------
(IN THOUSANDS)
REVENUES:
Products $ -- $ 42,110 $ 8,676 $ -- $ 50,786
Mobile Security -- 24,338 15,758 -- 40,096
---------- ----------- -------------- ------------- -------------
Total revenues -- 66,448 24,434 -- 90,882
---------- ----------- -------------- ------------- -------------
COSTS AND EXPENSES:
Cost of sales -- 42,120 19,833 -- 61,953
Operating expenses 2,661 10,945 2,371 -- 15,977
Amortization -- 69 3 -- 72
Integration and other non-recurring
charges 107 261 -- -- 368
Related party management (income) fees (1,859) -- 2,339 (480) --
---------- ----------- -------------- ------------- -------------
OPERATING (LOSS) INCOME (909) 13,053 (112) 480 12,512
Interest expense, net 1,371 59 45 -- 1,475
Other expense (income), net -- 129 (33) -- 96
Equity in (earnings) losses of
subsidiaries (7,603) 256 -- 7,347 --
---------- ----------- -------------- ------------- -------------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE PROVISION (BENEFIT) FOR INCOME TAXES 5,323 12,609 (124) (6,867) 10,941
PROVISION (BENEFIT) FOR INCOME TAXES (792) 4,748 876 -- 4,832
---------- ----------- -------------- ------------- -------------
INCOME (LOSS) FROM CONTINUING OPERATIONS 6,115 7,861 (1,000) (6,867) 6,109
DISCONTINUED OPERATIONS:
Income from discontinued operations
before provision for income taxes -- 1,697 462 (480) 1,679
Provision for income taxes -- 702 971 -- 1,673
---------- ----------- -------------- ------------- -------------
Net income (loss) from discontinued
operations -- 995 (509) (480) 6
---------- ----------- -------------- ------------- -------------
NET INCOME (LOSS) $ 6,115 $ 8,856 $ (1,509) $ (7,347) $ 6,115
========== =========== ============== ============= =============
27
ARMOR HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING INCOME STATEMENTS
THREE MONTHS ENDED SEPTEMBER 30, 2002
----------------------------------------------------------------------------------
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
---------- ------------ --------------- ------------- -------------
(IN THOUSANDS)
REVENUES:
$
Products $ -- $ 41,763 $ 7,284 -- $ 49,047
Mobile Security -- 21,282 10,228 -- 31,510
----------- ----------- ---------------- -------------- -------------
Total revenues -- 63,045 17,512 -- 80,557
----------- ----------- ---------------- -------------- -------------
COSTS AND EXPENSES:
Cost of sales -- 41,269 14,678 -- 55,947
Operating expenses 1,552 9,417 1,883 -- 12,852
Amortization -- 62 -- -- 62
Integration and other non-recurring
charges 335 1,024 -- -- 1,359
----------- ----------- ---------------- -------------- -------------
OPERATING (LOSS) INCOME (1,887) 11,273 951 -- 10,337
Interest expense, net 230 45 68 -- 343
Other (income) expense, net -- (38) 25 -- (13)
Equity in losses of subsidiaries 9,611 92 -- (9,703) --
Related parting interest income, net -- 122 -- (122) --
----------- ----------- ---------------- -------------- -------------
(LOSS) INCOME FROM CONTINUING
OPERATIONS BEFORE PROVISION FOR INCOME
TAXES (11,728) 11,052 858 9,825 10,007
PROVISION FOR INCOME TAXES 2,979 3,781 283 -- 7,043
----------- ----------- ---------------- -------------- -------------
(LOSS) INCOME FROM CONTINUING OPERATIONS (14,707) 7,271 575 9,825 2,964
----------- ----------- ---------------- -------------- -------------
DISCONTINUED OPERATIONS:
Loss from discontinued operations
before provision for income taxes -- (14,361) (2,549) (122) (17,032)
Provision for income taxes -- 29 610 -- 639
----------- ----------- ---------------- -------------- -------------
Net loss from discontinued operations -- (14,390) (3,159) (122) (17,671)
----------- ----------- ---------------- -------------- -------------
NET LOSS $ (14,707) $ (7,119) $ (2,584) $ 9,703 $ (14,707)
=========== =========== ================ ============== =============
28
ARMOR HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING INCOME STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2003
-----------------------------------------------------------------------------------
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
---------- ------------ --------------- ------------- -------------
(IN THOUSANDS)
REVENUES:
Products $ -- $ 117,863 $ 26,277 $ -- $ 144,140
Mobile Security -- 63,110 45,765 -- 108,875
------------ ----------- ----------------- ------------- -------------
Total revenues -- 180,973 72,042 -- 253,015
------------ ----------- ----------------- ------------- -------------
COSTS AND EXPENSES:
Cost of sales -- 117,278 59,118 -- 176,396
Operating expenses 7,203 29,732 7,570 -- 44,505
Amortization -- 193 8 -- 201
Integration and other non-recurring
charges 3,456 1,109 -- -- 4,565
Related party management (income) fees (1,859) -- 2,339 (480) --
------------ ----------- ----------------- ------------- -------------
OPERATING (LOSS) INCOME (8,800) 32,661 3,007 -- 27,348
Interest expense, net 1,866 250 175 -- 2,291
Other expense, net -- 131 50 -- 181
Equity in (earnings) losses of
subsidiaries (22,688) 419 -- 22,269 --
Related parting interest expense
(income), net 16 (16) -- -- --
------------ ----------- ----------------- ------------- -------------
INCOME FROM CONTINUING OPERATIONS BEFORE
PROVISION (BENEFIT) FOR INCOME TAXES 12,006 31,877 2,782 (21,789) 24,876
PROVISION (BENEFIT) FOR INCOME TAXES (3,809) 12,011 1,842 -- 10,044
------------ ----------- ----------------- ------------- -------------
INCOME FROM CONTINUING OPERATIONS 15,815 19,866 940 (21,789) 14,832
------------ ----------- ----------------- ------------- -------------
DISCONTINUED OPERATIONS:
Income from discontinued operations
before provision for income taxes -- 1,480 2,593 (480) 3,593
Provision for income taxes -- 938 1,672 -- 2,610
------------ ----------- ----------------- ------------- -------------
Net income from discontinued operations -- 542 921 (480) 983
------------ ----------- ----------------- ------------- -------------
NET INCOME $ 15,815 $ 20,408 $ 1,861 $ (22,269) $ 15,815
============ =========== ================= ============= =============
29
ARMOR HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING INCOME STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2002
-----------------------------------------------------------------------------------
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
---------- ------------ --------------- ------------- -------------
(IN THOUSANDS)
REVENUES:
Products $ -- $ 112,437 $ 18,612 $ -- $ 131,049
Mobile Security -- 57,439 33,278 -- 90,717
----------- -------------- -------------- -------------- -------------
Total revenues -- 169,876 51,890 -- 221,766
----------- -------------- -------------- -------------- -------------
COSTS AND EXPENSES:
Cost of sales -- 109,621 42,860 -- 152,481
Operating expenses 4,866 27,073 5,107 -- 37,046
Amortization -- 213 -- -- 213
Integration and other non-recurring
charges 687 3,789 -- -- 4,476
Related party income -- -- -- -- --
----------- -------------- -------------- -------------- -------------
OPERATING (LOSS) INCOME (5,553) 29,180 3,923 -- 27,550
Interest expense, net 361 161 147 -- 669
Other income, net (2) (21) (54) -- (77)
Equity in earnings of subsidiaries (2,898) (1,087) -- 3,985 --
Related party interest income, net -- (102) -- 102 --
----------- -------------- -------------- -------------- -------------
(LOSS) INCOME FROM CONTINUING
OPERATIONS BEFORE PROVISION FOR INCOME
TAXES (3,014) 30,229 3,830 (4,087) 26,958
PROVISION FOR INCOME TAXES 1,658 10,597 1,348 -- 13,603
----------- -------------- -------------- -------------- -------------
(LOSS) INCOME FROM CONTINUING OPERATIONS (4,672) 19,632 2,482 (4,087) 13,355
----------- -------------- -------------- -------------- -------------
DISCONTINUED OPERATIONS:
Loss from discontinued operations
before income tax (benefit) provision -- (14,015) (3,693) 102 (17,606)
Income tax (benefit) provision -- (722) 1,143 -- 421
----------- -------------- -------------- -------------- -------------
Net loss from discontinued operations -- (13,293) (4,836) 102 (18,027)
----------- -------------- -------------- -------------- -------------
NET (LOSS) INCOME $ (4,672) $ 6,339 $ (2,354) $ (3,985) $ (4,672)
=========== ============== ============== ============== =============
30
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED (UNAUDITED)
ARMOR HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2003
------------------------------------------------------------------------------
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
---------- ------------ --------------- ------------- ------------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Income from continuing operations $ 15,815 $ 19,866 $ 940 $ (21,789) $ 14,832
Adjustments to reconcile income from
continuing operations to cash
provided by operating activities.
Depreciation and amortization 974 2,972 1,434 -- 5,380
Loss on disposal of fixed assets -- 58 109 -- 167
Deferred income taxes (4,379) 6,428 1,627 -- 3,676
Non-cash termination charge 2,093 -- -- -- 2,093
Changes in operating assets & liabilities, net
of acquisitions:
(Increase) decrease in accounts receivable -- (3,915) 2,359 -- (1,556)
Decrease (increase) in intercompany
receivables & payables 19,723 (19,090) (153) (480) --
Decrease in inventory -- 1,206 967 -- 2,173
(Increase) decrease in prepaid expenses &
other assets (7,347) 4,848 (1,183) -- (3,682)
Increase in accounts payable, accrued
expenses and other current liabilities 5,043 2,620 4,145 -- 11,808
(Decrease) increase in income taxes
payable (2,227) 148 80 -- (1,999)
------------ ------------ -------------- ------------- -------------
Net cash provided by operating activities 29,695 15,141 10,325 (22,269) 32,892
------------ ------------ -------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (126) (3,330) (2,189) -- (5,645)
Purchase of patents and trademarks -- (99) -- -- (99)
Additional consideration for purchased
businesses -- (740) -- -- (740)
Investment in subsidiaries (22,337) 203 (135) 22,269 --
Purchase of businesses, net of cash
acquired -- (5,828) -- -- (5,828)
------------ ------------ -------------- ------------- -------------
Net cash used in investing activities (22,463) (9,794) (2,324) 22,269 (12,312)
------------ ------------ -------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 6,588 -- -- -- 6,588
Treasury stock repurchases (22,684) -- -- -- (22,684)
Cash paid for financing costs (4,020) -- -- -- (4,020)
Proceeds from the issuance of long-term
debt 147,504 -- -- -- 147,504
Repayments of long-term debt -- (1,399) -- -- (1,399)
Borrowings under lines of credit 30,406 168 1,170 -- 31,744
Repayments under lines of credit (30,406) (484) (1,180) -- (32,070)
------------ ------------ -------------- ------------- -------------
Net cash provided by (used in) financing
activities 127,388 (1,715) (10) -- 125,663
------------ ------------ -------------- ------------- -------------
Effect of exchange rate on cash and cash
equivalents 2,265 (186) (1,601) -- 478
Net cash used in discontinued operations -- (4,382) (486) -- (4,868)
------------ ------------ -------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 136,885 (936) 5,904 -- 141,853
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD 7,152 3,556 2,205 -- 12,913
------------ ------------ -------------- ------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 144,037 $ 2,620 $ 8,109 $ -- $ 154,766
============ ============ ============== ============= =============
31
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED (UNAUDITED)
ARMOR HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2002
------------------------------------------------------------------------------
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
---------- ------------ --------------- ------------- ------------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Income from continuing operations $ (4,672) $ 19,632 $ 2,650 $ (4,255) $ 13,355
Adjustments to reconcile income from
continuing operations to cash used in
operating activities.
Depreciation and amortization 625 2,764 660 -- 4,049
Loss on disposal of fixed assets -- 37 99 -- 136
Deferred taxes (3,927) 1,592 1,655 -- (680)
Changes in operating assets & liabilities, net
of acquisitions:
(Increase) decrease in accounts receivable -- (5,890) 2,760 -- (3,130)
(Increase) decrease in intercompany
receivables & payables (5,414) 8,148 (3,004) 270 --
Increase in inventory -- (6,692) (3,511) -- (10,203)
Increase in prepaid expenses & other
assets (313) (2,898) (358) -- (3,569)
Decrease in accounts payable, accrued
expenses and other current liabilities (1,539) (1,490) (3,746) -- (6,775)
Increase in income taxes payable 4,724 -- 1,621 -- 6,345
------------ ------------ -------------- ------------- -------------
Net cash (used in) provided by operating
activities (10,516) 15,203 (1,174) (3,985) (472)
------------ ------------ -------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (70) (3,044) (1,434) -- (4,548)
Purchase of patents and trademarks -- (45) -- -- (45)
Additional consideration for purchased
businesses -- (2,652) -- -- (2,652)
Investment in subsidiaries (7,166) (5,540) 8,721 3,985 --
Purchase of businesses, net of cash
acquired -- (5,916) (1,495) -- (7,411)
------------ ------------ -------------- ------------- -------------
Net cash (used in) provided by investing
activities (7,236) (17,197) 5,792 3,985 (14,656)
------------ ------------ -------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 4,237 -- -- -- 4,237
Treasury stock purchases ((26,054) -- -- -- (26,054)
Cash paid for financing costs (326) -- -- -- (326)
Repayments of long-term debt -- (591) -- -- (591)
Borrowings under lines of credit 27,763 -- -- -- 27,763
Repayments under lines of credit (20,563) -- (138) -- (20,701)
------------ ------------ -------------- ------------- -------------
Net cash provided by (used in) financing
activities (14,943) (591) (138) -- (15,672)
------------ ------------ -------------- ------------- -------------
Effect of exchange rate on cash and cash
equivalents (851) (385) 364 -- (872)
Net cash transferred from (used in)
discontinued operations -- 2,306 (1,539) -- 767
------------ ------------ -------------- ------------- -------------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS (33,546) (664) 3,305 -- (30,905)
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD 38,627 5,536 3,326 -- 47,489
------------ ------------ -------------- ------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 5,081 $ 4,872 $6,631 $ -- $ 16,584
============ ============ ============== ============= =============
32
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
NOTE 14 - COMMITMENTS AND CONTINGENCIES
On September 2, 2003, we entered into a definitive Agreement and Plan of
Merger to acquire Simula, Inc., for $110.5 million, subject to adjustment based
on various factors, payable in cash or, at our option, in a combination of cash
and registered shares of our common stock. Upon consummation of the acquisition,
we will acquire all of the outstanding common stock of Simula, retire Simula's
outstanding indebtedness, and assume all liabilities of Simula. The Agreement
provides for a good faith deposit, payment of a break-up fee if Simula accepts a
competing offer, and other terms customary for similar transactions. The
acquisition is subject to, among other conditions, the approval of Simula's
stockholders. In connection with the acquisition, we registered approximately
2.3 million shares of common stock on a Form S-4 with the Securities and
Exchange Commission. The registration statement was declared effective on
November 10, 2003. We anticipate completion of the acquisition in the fourth
quarter of 2003.
NOTE 15 - SUBSEQUENT EVENT
On July 26, 2003, we awarded Warren B. Kanders, our Chairman and Chief
Executive Officer, a stock bonus award of 200,000 shares of our common stock in
accordance with his amended employment agreement. On November 4, 2003, we
awarded Robert R. Schiller, our Chief Operating Officer and Chief Financial
Officer, a stock bonus award of 150,000 shares of our common stock in accordance
with his amended employment agreement. On November 11, 2003, our stock price
closed above $20 for the fifth consecutive trading day, which caused the
complete vesting of the stock bonus awards. The complete vesting of the stock
bonus awards results in a charge of $7.3 million, which will be recorded in the
three months ended December 31, 2003. The payment of the stock bonus awards to
Messrs. Kanders and Schiller will be deferred for a period of five years after
November 11, 2003, subject to acceleration under certain circumstances as set
forth in their respective employment agreements, as amended.
33
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following is a discussion of the results of operations and analysis
of financial condition for the three months and nine months ended September 30,
2003. The results of operations for purchase business combinations are included
since their effective acquisition dates. The following discussion may be
understood more fully by reference to the consolidated financial statements,
notes to the consolidated financial statements, and management's discussion and
analysis contained in our Annual Report on Form 10-K for the year ended December
31, 2002, as filed with the Securities and Exchange Commission.
CRITICAL ACCOUNTING POLICIES (INCLUDING NEW ACCOUNTING PRONOUNCEMENTS):
Revenue Recognition. We record products revenue at the time of shipment.
Returns are minimal and do not materially affect the financial statements.
We record revenue from our Mobile Security Division when the vehicle is
shipped, except for larger commercial contracts typically longer than four
months in length and the contract for the delivery of HMMWVs to the U.S.
Government, which continues through 2005. Revenue from such contracts is
recognized on the percentage of completion, units-of-work performed method.
HMMWV units sold to the U.S. Government are considered complete when the onsite
Department of Defense officer finishes the inspection of the HMMWV and approves
it for delivery. Should such contracts be in a loss position, the entire
estimated loss would be recognized for the balance of the contract at such time.
Current contracts are profitable.
We record service revenue as services are provided on a
contract-by-contract basis. Revenues from service contracts are recognized over
the term of the contract.
Comprehensive income and foreign currency translation. In accordance
with Statement of Financial Accounting Standard No. 130, "Reporting
Comprehensive Income" (SFAS 130), assets and liabilities denominated in a
foreign currency are translated into U.S. dollars at the current rate of
exchange existing at period-end and revenues and expenses are translated at the
average monthly exchange rates. The cumulative translation adjustment, net of
tax, which represents the effect of translating assets and liabilities of our
foreign operations is recorded as a reduction of equity of $1,904,000 and
$4,169,000 as of September 30, 2003 and December 31, 2002, respectively, and is
classified as accumulated other comprehensive loss. The current year change in
the accumulated amount, net of tax, is included as a component of comprehensive
income.
Stock options and Grants. Statement of Financial Accounting Standard No.
123, "Accounting for Stock-Based Compensation" (SFAS 123), as amended by SFAS
148, "Accounting for Stock-Based Compensation - Transition and Disclosure,"
establishes a fair value based method of accounting for stock-based employee
compensation plans; however, it also allows an entity to continue to measure
compensation cost for those plans using the intrinsic value based method of
accounting prescribed by Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" (APB 25). Under the fair value based method,
compensation cost is measured at the grant date based on the value of the award
and is recognized over the service period, which is usually the vesting period.
Under the
34
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
intrinsic value based method, compensation costs is the excess, if any, of the
quoted market price of the stock at the grant date or other measurement date
over the amount an employee must pay to acquire the stock. We have elected to
continue to account for our employee stock compensation plans under APB 25 with
pro forma disclosures of net earnings and earnings per share, as if the fair
value based method of accounting defined in SFAS 123 had been applied. If
compensation cost for stock option grants had been determined based on the fair
value on the grant dates for September 30, 2003 and 2002 consistent with the
method prescribed by SFAS 123, our net earnings and earnings per share would
have been adjusted to the pro forma amounts indicated below:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2003 SEPTEMBER 30, 2002 SEPTEMBER 30, 2003 SEPTEMBER 30, 2002
-------------------- -------------------- --------------------- --------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income (loss) as reported: $ 6,115 $ (14,707) $ 15,815 $ (4,672)
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects (671) (1,699) (2,985) (3,434)
-------------------- -------------------- --------------------- --------------------
Pro-forma net income (loss) $ 5,444 $ (16,406) $ 12,830 $ (8,106)
==================== ==================== ===================== ====================
Earnings (loss) per share:
Basic - as reported $ 0.22 $ (0.50) $ 0.56 $ (0.15)
==================== ==================== ===================== ====================
Basic - pro-forma $ 0.20 $ (0.55) $ 0.46 $ (0.26)
==================== ==================== ===================== ====================
Diluted - as reported $ 0.22 $ (0.49) $ 0.56 $ (0.15)
==================== ==================== ===================== ====================
Diluted - pro-forma $ 0.19 $ (0.55) $ 0.45 $ (0.26)
==================== ==================== ===================== ====================
Discontinued Operations. In accordance with Statement of Financial
Accounting Standards No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" (SFAS 144), a component classified as held for sale is
reported in discontinued operations when the following conditions are met: (a)
the operations and cash flows of the component have been (or will be) eliminated
from the ongoing operations of the entity as a result of the disposal
transaction and (b) the entity will not have any significant continuing
involvement in the operations of the component after the disposal transaction.
In a period in which a component of an entity either has been disposed of or is
classified as held for sale, the income statement for current and prior periods
reports the results of operations of the component, including any gain or loss
recognized in accordance with SFAS 144 paragraph 37, in discontinued operations.
The results of discontinued operations, less applicable income taxes (benefit),
is reported as a separate component of income before extraordinary items and the
cumulative effect of accounting changes (if applicable). The assets and
liabilities of a disposal group classified as held for sale is presented
separately in the asset and liability sections, respectively, of the statement
of financial position.
35
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
Derivative Instruments and Hedging Activities. We account for derivative
instruments and hedging activities in accordance with Statement of Financial
Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedge
Activities" (SFAS 133) as amended. All derivative instruments are recorded on
the balance sheet at fair value. Changes in the fair value of derivatives are
recorded each period in current earnings or other comprehensive income,
depending on whether a derivative is designated as part of a hedge transaction
and, if it is, depending on the type of hedge transaction. For fair-value hedge
transactions in which we hedge changes in an asset's, liability's, or firm
commitment's fair value, changes in the fair value of the derivative instrument
will generally be offset in the income statement by changes in the hedged item's
fair value. We adopted SFAS 133 in the first quarter of 2001. However, we had no
derivatives to be measured at the time of adoption. We do not hold or issue
interest rate swap agreements or other derivative instruments for trading
purposes.
Changes in the fair value of the interest rate swap agreements offset
changes in the fair value of the fixed rate debt due to changes in the market
interest rate. Accordingly, the other assets on the Condensed Consolidated
Balance Sheets as of September 30, 2003 increased by $8.0 million, which
reflected an increase in the fair value of the interest rate swap agreements.
The corresponding increase in the hedge liability was recorded in long-term
debt. The agreements are deemed to be a perfectly effective fair value hedge and
therefore qualify for the short-cut method of accounting under SFAS 133. As a
result, no ineffectiveness is expected to be recognized in our earnings
associated with the interest rate swap agreements.
36
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
NEW ACCOUNTING PRONOUNCEMENTS:
In November 2002, the FASB issued FASB Interpretation No. 45 Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, an Interpretation of FASB Statements No.
5, 57, and 107 and Rescission of FASB Interpretation No. 34 ("FIN 45"). FIN 45
elaborates on the disclosures to be made by a guarantor in its interim and
annual financial statements about its obligations under certain guarantees that
it has issued. It also clarifies that a guarantor is required to recognize, at
the inception of a guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. The initial recognition and initial
measurement provisions of FIN 45 are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002, irrespective of the
guarantor's fiscal year-end. We adopted the provisions of this Statement on
January 1, 2003, which did not have a significant impact on our consolidated
financial statements.
In January 2003, the FASB issued FASB Interpretation No. 46,
Consolidation of Variable-Interest Entities - an Interpretation of ARB No. 51
("FIN 46"). FIN 46 addresses consolidation by business enterprises of variable
interest entities, which have one or both of the following characteristics: (1)
the equity investment at risk is not sufficient to permit the entity to finance
its activities without additional subordinated financial support from other
parties, which is provided through other interests that will absorb some or all
of the expected losses of the entity and (2) the equity investors lack one or
more of the following essential characteristics of a controlling financial
interest:
o The direct or indirect ability to make decisions about the
entity's activities through voting rights or similar rights
o The obligation to absorb the expected losses of the entity if
they occur, which makes it possible for the entity to finance
its activities
o The right to receive the expected residual returns of the entity
if they occur, which is the compensation for the risk of
absorbing the expected losses.
This Interpretation applies immediately to variable interest entities
created after January 31, 2003, and to variable interest entities in which an
enterprise obtains an interest after that date. It applies in the first fiscal
year or interim period beginning after June 15, 2003, to variable interest
entities in which an enterprise holds a variable interest that it acquired
before February 1, 2003. The adoption of FIN 46 did not have a significant
impact on our consolidated financial statements.
In April 2003, the FASB issued Statement of Financial Accounting
Standard No. 149, " Amendment of Statement 133 on Derivative Instruments and
Hedging Activities" (SFAS 149). SFAS 149 amends and clarifies financial
accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities
under Statement of Financial Accounting Standard No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (SFAS 133). SFAS 149 is effective
for contracts entered into or modified and hedging relationships designated
after June 30, 2003, except for the provisions of SFAS 149 that relate to SFAS
133 Implementation Issues that have been effective for fiscal quarters that
began prior to June 15, 2003, which should continue to be applied in accordance
with their respective effective dates. Adoption of this standard had no effect
on us.
37
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
In May 2003, the FASB issued Statement of Financial Accounting Standard
No. 150, " Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity" (SFAS 150). SFAS 150 establishes standards for how
an issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an issuer
classify a financial instrument that is within its scope as a liability (or an
asset in some circumstances). Many of those instruments were previously
classified as equity. SFAS 150 is effective for financial instruments entered
into or modified after May 31, 2003, and otherwise is effective at the beginning
of the first interim period beginning after June 15, 2003. Adoption of this
standard had no effect on us.
In September 2003, the FASB issued FASB Staff Position No. 146-1,
Determining Whether a One-Time Termination Benefit Offered in Connection with an
Exit or Disposal Activity Is, in Substance, an Enhancement to an Ongoing Benefit
Arrangement. This Staff Position states that in order to be considered an
enhancement to an ongoing benefit arrangement, the additional termination
benefits must represent a revision to the ongoing arrangement that is not
limited to a specified termination event or a specified future period. Otherwise
the additional termination benefits should be considered one-time termination
benefits and accounted for under SFAS 146. The guidance in this Staff Position
is effective for exit or disposal activities initiated in interim or annual
reporting periods beginning after September 15, 2003. The adoption of this Staff
Position is not expected to have a material impact on our consolidated financial
statements.
In October 2003, the FASB issued FASB Staff Position No. FIN 46-6,
Effective Date of FASB Interpretation No. 46, Consolidation of Variable Interest
Entities. This Staff Position defers the effective date for applying the
provisions of FIN 46 for interests held by public entities in variable interest
entities or potential variable interest entities created before February 1, 2003
and non-registered investment companies. This adoption of this Staff Position is
not expected to have a material impact on our consolidated financial statements.
38
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2002.
Net income (loss). Net income (loss) increased $20.8 million to net
income of $6.1 million for the three months ended September 30, 2003 compared to
a net loss of ($14.7) million for the three months ended September 30, 2002. Net
income for the three months ended September 30, 2003 includes income from
continuing operations of $6.1 million and income from discontinued operations of
$6,000, compared to income from continuing operations of $3.0 million and a
loss from discontinued operations of ($17.7) million for the three months ended
September 30, 2002.
CONTINUING OPERATIONS
Products revenues. Products Division revenues increased $1.7 million, or
3.5%, to $50.8 million in the three months ended September 30, 2003, compared to
$49.0 million in the three months ended September 30, 2002. For the three months
ended September 30, 2003, Products Division revenue increased 2.1% internally,
including year over year changes in acquired businesses, and 1.4% due to the
acquisitions of Evi-Paq, Inc., B-Square, Inc. and 911 Emergency Products, Inc.,
all of which were completed during or subsequent to the third quarter of 2002.
Mobile Security revenues. Mobile Security Division revenues increased
$8.6 million, or 27.2%, to $40.1 million in the three months ended September 30,
2003, compared to $31.5 million in the three months ended September 30, 2002.
Mobile Security Division revenues for the three months ended September 30, 2003,
increased $6.3 million due to the acquisition of substantially all of the assets
of Trasco-Bremen on September 24, 2002. Excluding the $6.3 million of 2003
revenue increase relating to Trasco-Bremen, Mobile Security Division revenues
increased $2.3 million, or 7.3%, in the three months ended September 30, 2003,
compared to the three months ended September 30, 2002. The majority of the $2.3
million revenue increase relates to increased sales of up-armored Humvees and
armored cars to the US military and US government.
Cost of sales. Cost of sales increased $6.0 million, or 10.7%, to $62.0
million for the three months ended September 30, 2003 compared to $55.9 million
for the three months ended September 30, 2002. As a percentage of total
revenues, cost of sales decreased to 68.2% of total revenues for the three
months ended September 30, 2003 from 69.5% for the three months ended September
30, 2002.
Gross margins in the Products Division were 36.1% for the three months
ended September 30, 2003, compared to 36.7% for the three-months ended September
30, 2002. The small drop in Products Division gross margins resulted primarily
from a negative change in product mix within our hard armor and less lethal
businesses. Excluding USDSI, our Products Division training subsidiary, the
Products Division gross margins were 38.4%, compared to 39.3% reported in the
same period last year.
Gross margins in the Mobile Security Division were 26.4% in the
three-months ended September 30, 2003, compared to 21.0% for the three-months
ended September 30, 2002. The increase in the Mobile Security Division gross
margin is primarily attributable to: 1) favorable manufacturing overhead cost
absorption relating to increased manufacturing volumes in our Cincinnati
manufacturing facility;
39
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
and 2) operational efficiencies in our Cincinnati manufacturing facility as the
plant continues to reduce its per vehicle labor and material costs.
Operating expenses. Operating expenses increased $3.1 million, or 24.3%,
to $16.0 million (17.6% of total revenues) for the three months ended September
30, 2003 compared to $12.9 million (16.0% of total revenues) for the three
months ended September 30, 2002.
Products Division operating expenses increased $0.2 million, or 2.1%, to
$8.2 million (16.1% of Products Division revenues) for the three months ended
September 30, 2003 compared to $8.0 million (16.3% of Products Division
revenues) for the three months ended September 30, 2002. This increase is due
primarily to the incremental operating expenses associated with acquired
businesses completed during or subsequent to the third quarter of 2002.
Mobile Security Division operating expenses increased $925,000, or
28.8%, to $4.1 million (10.3% of Mobile Security Division revenues) for the
three months ended September 30, 2003, compared to $3.2 million (10.2% of Mobile
Security Division revenues) for the three months ended September 30, 2002.
Excluding the increase in 2003 operating expenses resulting from the acquisition
of substantially all of the assets of Trasco-Bremen on September 24, 2002, the
operating expenses for the three months ended September 30, 2003, increased $0.3
million to $3.5 million (10.5% of Mobile Security Division revenues) versus $3.2
million (10.2% of Mobile Security Division revenues) in the same period in the
prior year.
Corporate operating expenses increased $2.0 million, or 125.2%, to $3.7
million (4.0% of total revenues) for the three months ended September 30, 2003
compared to $1.6 million (2.0% of total revenues) for the three months ended
September 30, 2002. This increase is due primarily to increased insurance costs,
increased internal audit costs necessary to comply with Sarbanes-Oxley
requirements, increased legal provisions, and increased bonus provisions.
Amortization. Amortization expense increased $10,000, or 16.1%, to
$72,000 for the three months ended September 30, 2003 compared to $62,000 for
the three months ended September 30, 2002. SFAS 142, which we adopted on January
1, 2002, eliminated amortization of intangible assets with indefinite lives and
goodwill for all acquisitions completed after July 1, 2001, as well as for all
fiscal years ending after January 1, 2002. Remaining amortization expense is
related to patents and trademarks with finite lives.
Integration and other non-recurring charges. Integration and other
non-recurring charges for the three months ended September 30, 2003, totaled
$368,000, compared to $1.4 million in the same period last year. The decrease in
integration and other non-recurring items is primarily related to the
elimination of expense associated with the 2001 acquisitions of O'Gara-Hess &
Eisenhardt and Identicator. The integration and other non-recurring charges for
the three months ended September 30, 2003 primarily related to the integration
of Evi-Paq, B-Square, 911 Emergency Products, and Trasco-Bremen all of which
were completed during or subsequent to the third quarter of 2002.
Operating income. Operating income from continuing operations increased
$2.2 million to $12.5 million for the three months ended September 30, 2003
compared to $10.3 million in the three months ended September 30, 2002 due to
the factors discussed above.
40
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
Interest expense, net. Interest expense, net increased $1.1 million, or
330.0%, to $1.5 million for the three months ended September 30, 2003 compared
to $343,000 for the three months ended September 30, 2002. This increase was due
primarily to interest expense associated with the $150 million aggregate
principal amount of 8.25% senior subordinated notes due 2013. On September 2,
2003, we entered into interest rate swap agreements that effectively exchanged
the 8.25% fixed rate for a variable rate of six-month LIBOR (1.18% at September
30, 2003), set in arrears, plus a spread of 2.735% to 2.75%.
Other expense (income), net. Other expense (income), net, was $96,000
for the three months ended September 30, 2003, compared to other expense
(income), net, of ($13,000) for the three months ended September 30, 2002.
Income from continuing operations before provision for income taxes.
Income from continuing operations before provision for income taxes increased by
$934,000 to $10.9 million for the three months ended September 30, 2003 compared
to $10.0 million for the three months ended September 30, 2002 due to the
reasons discussed above.
Provision for income taxes. Provision for income taxes was $4.8 million
for the three months ended September 30, 2003, compared to $7.0 million for the
three months ended September 30, 2002. The effective tax rate was 44.2% for the
three months ended September 30, 2003, compared to 70.4% for the three months
ended September 30, 2002. Our income tax rate for the full year 2003 is now
estimated at 40.4%. This is an increase from the 37.4% tax rate that was
utilized in the three months ended March 31, 2003, and June 30, 2003.
Accordingly, we had to record an additional tax expense in the three months
ended September 30, 2003. The increase in estimated tax rate was due to, among
other things, the revaluation of certain intellectual property utilized in our
discontinued operations to comply with tax code provisions. The increased tax
expense associated with the revaluation is recorded in continuing operations as
required by generally accepted accounting principles and resulted in an
incremental non-cash tax expense of $635,000, for which foreign tax credits are
available to offset the tax otherwise payable.
Income from continuing operations. Income from continuing operations
increased $3.1 million to $6.1 million for the three months ended September 30,
2003 compared to $3.0 million for the three months ended September 30, 2002 due
to the factors discussed above.
DISCONTINUED OPERATIONS
Services revenues. Services Division revenue increased $2.3 million, or
9.7%, to $26.0 million for the three months ended September 30, 2003 compared to
$23.7 million for the three months ended September 30, 2002. Exclusive of
ArmorGroup Integrated Systems, which we sold on April 17, 2003, revenue
increased $6.2 million, or 31.5% to $26.0 million for the three months ended
September 30, 2003 compared to $19.8 million for the three months ended
September 30, 2002. This increase is due to strong performance primarily in the
Middle East with strong growth coming from Iraq along with ongoing strong
training revenues from the Athens Olympics build up. These are tempered by weak
revenues in mine action business, investigations business and the Latin American
business.
Cost of sales. Cost of sales decreased $1.7 million, or 8.4%, to $18.1
million for the three months ended September 30, 2003 compared to $19.7 million
for the three months ended September 30,
41
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
2002. This decrease is a result of the sale of the ArmorGroup Integrated Systems
business. Exclusive of ArmorGroup Integrated Systems, cost of sales increased
$3.5 million, or 24.0% to $18.1 million for the three months ended September 30,
2003 compared to $14.6 million for the three months ended September 30, 2002.
As a percentage of total revenue, cost of sales decreased to 69.4% of
total revenues for the three months ended September 30, 2003 from 83.1% for the
three months ended September 30, 2002. This decease in cost of sales as a
percentage of total revenue was primarily a result of the proportion of the
revenue growth coming from expatriate intensive security contracts in Iraq and
continued high margin training contracts.
Operating expenses. Operating expenses decreased $3.1 million, or 39.1%,
to $4.9 million (18.8% of Services revenues) for the three months ended
September 30, 2003 compared to $8.0 million (33.8% of Services revenues) for the
three months ended September 30, 2002. This decrease was partly due to the sale
of the ArmorGroup Integrated Systems business. Exclusive of ArmorGroup
Integrated Systems, operating expenses decreased $1.2 million, or 19.9% to $4.9
million for the three months ended September 30, 2003 compared to $6.1 million
for the three months ended September 30, 2002. . This decrease was due to
reduced foreign currency expenses and a reduction in salary costs as a result of
restructuring last year.
Charge for impairment of long-lived asset. The net charge for impairment
of long-lived asset was $1.3 million for the three months ended September 30,
2003, compared to $11.9 million for the three months ended September 30, 2002.
The $1.3 million net non-recurring charge was recorded to maintain the proper
carrying value of our discontinued operations at $43.4 million as of September
30, 2003, which amount reflects management's continued best estimate of fair
value.
Integration and other non-recurring charges. Integration and other
non-recurring charges decreased $732,000, or 87.6%, to $104,000 for the three
months ended September 30, 2003 compared to $836,000 for the three months ended
September 30, 2002. This decrease is primarily due to severance payments to
certain personnel in the prior year.
Operating income (loss). Operating income was $1.7 million for the three
months ended September 30, 2003, compared to operating loss of ($16.7) million
for the three months ended September 30, 2002 due to the factors discussed
above. Operating loss from the ArmorGroup Integrated Systems business was
($15.0) million for the three months ended September 30, 2002 primarily due to
the $11.9 million charge for impairment of long-lived assets. Excluding the
ArmorGroup Integrated Systems business, the balance of the assets held for sale
generated an operating income of $1.7 million for the three months ended
September 30, 2003 compared to an operating loss of ($1.7) million for the three
months ended September 30, 2002.
Interest expense, net. Interest expense, net, decreased $16,000, or
47.1%, to $18,000 for the three months ended September 30, 2003 compared to
$34,000 for the three months ended September 30, 2002. This decrease was due to
reduced utilization of the Services Division's line of credit.
Other expense, net. Other expense, net, decreased $236,000, or 92.2%, to
$20,000 for the three months ended September 30, 2003, compared to other
expense, net, of $256,000 for the three months
42
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
ended September 30, 2002. This decrease is due to reduced losses on disposal of
fixed assets and other asset write-offs.
Income (loss) from discontinued operations before provision for income
taxes. Income from discontinued operations before provision for income taxes was
$1.7 million for the three months ended September 30, 2003 and a loss of ($17.0)
million for the three months ended September 30, 2002, due to the reasons
discussed above.
Provision for income taxes. Provision for income taxes was $1.7 million
for the three months ended September 30, 2003 compared to a provision of
$639,000 for the three months ended September 30, 2002. The effective tax rate
for the three months ended September 30, 2003 was a provision of 99.6% compared
to a provision of 3.8% for the three months ended September 30, 2002. The
provision of 99.6% for the three months ended September 30, 2003, is due to
unrecognized potential deferred tax assets associated with foreign subsidiaries,
which recorded pretax losses in the three months of 2003. These potential tax
benefits were not recognized due to the uncertainty regarding the specific
subsidiary's ability to utilize the net operating loss carry-forwards in future
periods. The provision for the three months ended September 30, 2003 also
relates to the net impairment charge of $1.3 million, $1.1 million of which was
non-deductible goodwill write-offs.
Income (Loss) from discontinued operations. Income from discontinued
operations was $6,000 for the three months ended September 30, 2003 compared to
a loss from discontinued operations of ($17.7) million for the three months
ended September 30, 2002 due to the factors discussed above.
NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2002.
Net income (loss). Net income (loss) increased $20.5 million to net
income of $15.8 million for the nine months ended September 30, 2003 compared to
a net loss of ($4.7) million for the nine months ended September 30, 2002. Net
income for the nine months ended September 30, 2003 includes income from
continuing operations of $14.8 million and income from discontinued operations
of $983,000, compared to income from continuing operations of $13.4 million and
a loss from discontinued operations of ($18.0) million for the nine months ended
September 30, 2002.
CONTINUING OPERATIONS
Products revenues. Products Division revenues increased $13.1 million,
or 10.0%, to $144.1 million in the nine months ended September 30, 2003,
compared to $131.0 million in the nine months ended September 30, 2002. For the
nine months ended September 30, 2003, Products Division revenue increased 6.2%
internally, including year over year changes in acquired businesses, and 3.8%
due to the acquisitions of Speedfeed, Inc., the Foldable Products Group,
Evi-Paq, Inc., B-Square, Inc. and 911 Emergency Products, Inc., all of which
were completed during 2002.
Mobile Security revenues. Mobile Security Division revenues increased
$18.2 million, or 20.0% to $108.9 million in the nine months ended September 30,
2003, compared to $90.7 million in the nine months ended September 30, 2002.
Mobile Security Division revenues for the nine months ended
43
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
September 30, 2003, increased $15.2 million due to the acquisition of
substantially all of the assets of Trasco-Bremen on September 24, 2002.
Excluding the $15.2 million of 2003 revenue increase relating to Trasco-Bremen,
Mobile Security Division revenues increased $3.0 million, or 3.3%, in the nine
months ended September 30, 2003, compared to the nine months ended September 30,
2002.
Cost of sales. Cost of sales increased $23.9 million, or 15.7%, to
$176.4 million for the nine months ended September 30, 2003 compared to $152.5
million for the nine months ended September 30, 2002. As a percentage of total
revenues, cost of sales increased to 69.7% of total revenues for the nine months
ended September 30, 2003 from 68.8% for the nine months ended September 30,
2002.
Gross margins in the Products Division were 34.5% for the nine months
ended September 30, 2003, compared to 37.5% for the nine months ended September
30, 2002. The decline in Products Division's gross margins resulted primarily
from: (1) an increase in "low margin" training revenues; (2) an increase in low
margin gas mask sales; (3) an increase in lower margin international body armor
sales produced overseas at Armor Products International; (4) lower production
volumes within our less lethal, automotive, and hard armor product lines, which
resulted in reduced fixed cost absorption and certain labor inefficiencies; and
(5) moving costs and labor inefficiencies at Protech associated with the
relocation of its manufacturing facility. Excluding our Products training
division subsidiary, the Products Division gross margins were 36.8%, compared to
39.9% reported in the same period last year.
Gross margins in the Mobile Security Division were 24.7% in the nine
months ended September 30, 2003, compared to 22.2% for the nine months ended
September 30, 2002. The increase in the Mobile Security Division gross margin is
primarily attributable to: 1) favorable manufacturing overhead cost absorption
relating to increased manufacturing volumes at our Cincinnati manufacturing
facility; and 2) operational efficiencies in our Cincinnati manufacturing
facility.
Operating expenses. Operating expenses increased $7.5 million, or 20.1%,
to $44.5 million (17.6% of total revenues) for the nine months ended September
30, 2003 compared to $37.0 million (16.7% of total revenues) for the nine months
ended September 30, 2002.
Products Division operating expenses increased $1.4 million, or 6.0%, to
$24.2 million (16.8% of Products Division revenues) for the nine months ended
September 30, 2003 compared to $22.8 million (17.4% of Products Division
revenues) for the nine months ended September 30, 2002. This increase is due
primarily to the incremental operating expenses associated with acquired
businesses completed during or subsequent to the third quarter of 2002.
Mobile Security Division operating expenses increased $2.4 million, or
25.7%, to $11.6 million (10.7% of Mobile Security Division revenues) for the
nine months ended September 30, 2003, compared to $9.2 million (10.2% of Mobile
Security Division revenues) for the nine months ended September 30, 2002.
Excluding the increase in 2003 operating expenses resulting from the acquisition
of substantially all of the assets of Trasco-Bremen on September 24, 2002, the
operating expenses for the nine months ended September 30, 2003, increased less
than $0.4 million, versus the same period in the prior year. The increase in
operating expenses was primarily due to: (1) increased expenses associated with
the start-up of operations in Caracas, Venezuela in late 2002; and (2) increased
insurance costs.
Corporate operating expenses increased $3.7 million, or 74.4%, to $8.7
million (3.4% of total revenues) for the nine months ended September 30, 2003
compared to $5.0 million (2.2% of total revenues) for the nine months ended
September 30, 2002. This increase is due primarily to increased insurance costs,
increased internal audit costs necessary to comply with Sarbanes-Oxley
requirements, increased legal provisions, and increased bonus provisions.
44
Amortization. Amortization expense decreased $12,000, or 5.6%, to
$201,000 for the nine months ended September 30, 2003 compared to $213,000 for
the nine months ended September 30, 2002. SFAS 142, which we adopted on January
1, 2002, eliminated amortization of intangible assets with indefinite lives and
goodwill for all acquisitions completed after July 1, 2001, as well as for all
fiscal years ending after January 1, 2002. Remaining amortization expense is
related to patents and trademarks with finite lives.
Integration and other non-recurring charges. Integration and other
non-recurring charges for the nine months ended September 30, 2003, totaled $4.6
million, compared to $4.5 million for the nine months ended September 30, 2002.
The increase in integration and other non-recurring items is primarily related
to a $3.3 million (including a $2.1 million non-cash charge) severance charge
related to the recent departure of our former Chief Executive Officer. Excluding
this $3.3 million severance charge, integration and other non-recurring charges
were $1.3 million for the nine months ended September 30, 2003, a decrease of
$3.2 million from the nine months ended September 30, 2002. This decrease was
primarily due to the elimination of expense associated with the 2001
acquisitions of O'Gara-Hess & Eisenhardt and Identicator.
Operating income. Operating income from continuing operations decreased
$202,000 to $27.3 million for the nine months ended September 30, 2003 compared
to $27.6 million in the nine months ended September 30, 2002 due to the factors
discussed above.
Interest expense, net. Interest expense, net increased $1.6 million, or
242.5% to $2.3 million for the nine months ended September 30, 2003 compared to
$669,000 for the nine months ended September 30, 2002. This increase was due
primarily to interest expense associated with the $150 million aggregate
principal amount of 8.25% senior subordinated notes due 2013. On September 2,
2003, we entered into interest rate swap agreements that effectively exchanged
the 8.25% fixed rate for a variable rate of six-month LIBOR, set in arrears,
plus a spread of 2.735% to 2.75%.
Other expense (income), net. Other expense, net, was $181,000 for the
nine months ended September 30, 2003, compared to other income, net, of
($77,000) for the nine months ended September 30, 2002.
Income from continuing operations before provision for income taxes.
Income from continuing operations before provision for income taxes decreased by
$2.1 million to $24.9 million for the nine months ended September 30, 2003
compared to $27.0 million for the nine months ended September 30, 2002 due to
the reasons discussed above.
Provision for income taxes. Provision for income taxes was $10.0 million
for the nine months ended September 30, 2003, compared to $13.6 million for the
nine months ended September 30, 2002. The effective tax rate was 40.4% for the
nine months ended September 30, 2003, compared to 50.5% for the nine months
ended September 30, 2002 based on our current expectations of annual income
amounts and jurisdictions in which such amounts are expected to be taxable. The
estimated 2003 income tax rate of 40.4% is higher than the 37.4% estimated
income tax rate that was utilized in the first half of 2003 due to, among other
things, a taxable gain that was realized in the third quarter when certain
intellectual property utilized in our discontinued operations was revalued in
order to comply with tax code provisions. The impact of the incremental tax is
recorded in continuing operations as required by
45
generally accepted accounting principles, and resulted in an incremental
non-cash tax expense, for which foreign tax credits are available to offset the
tax otherwise payable.
Income from continuing operations. Income from continuing operations
increased $1.5 million to $14.8 million for the nine months ended September 30,
2003 compared to $13.4 million for the nine months ended September 30, 2002 due
to the factors discussed above.
DISCONTINUED OPERATIONS
Services revenues. Services Division revenue increased $1.5 million, or
2.0%, to $75.7 million for the nine months ended September 30, 2003 compared to
$74.3 million for the nine months ended September 30, 2002. Exclusive of
ArmorGroup Integrated Systems, which we sold on April 17, 2003, revenue
increased $9.5 million, or 15.5% to $71.0 million for the nine months ended
September 30, 2003 compared to $61.5 million for the nine months ended September
30, 2002. This increase is due to strong performance in the Middle East with
equally strong performance by the ArmorGroup training division, which increased
as a result of the Athens Olympics contract. These strong performances were
tempered by weak revenues in mine action business, investigations business and
the Latin American business due to a weak economy and the completion of a BP
security contract in Colombia in the second quarter of 2002.
Cost of sales. Cost of sales decreased $2.4 million, or 4.3%, to $53.4
million for the nine months ended September 30, 2003 compared to $55.8 million
for the nine months ended September 30, 2002. This decrease is a result of the
sale of the ArmorGroup Integrated Systems business. Exclusive of ArmorGroup
Integrated Systems, cost of sales increased $5.2 million, or 12.1%, to $48.3
million for the nine months ended September 30, 2003 compared to $43.1 million
for the nine months ended September 30, 2002.
As a percentage of total revenue, cost of sales decreased to 70.6% of
total revenues for the nine months ended September 30, 2003 from 75.2% for the
nine months ended September 30, 2002. This decrease in cost of sales as a
percentage of total revenue was primarily due to (1) the sale of the Integrated
Systems Division, which operates on lower margins than the rest of the Services
Division; (2) high margins achieved by the Training Division; and (3) new
contracts in the Middle East at higher than average margins.
Operating expenses. Operating expenses decreased $6.3 million, or 27.8%,
to $16.3 million (21.5% of total revenues) for the nine months ended September
30, 2003 compared to $22.6 million (30.4% of total revenues) for the nine months
ended September 30, 2002. This decrease was primarily due to the sale of the
ArmorGroup Integrated Systems business. Exclusive of ArmorGroup Integrated
Systems, operating expenses decreased $3.1 million, or 16.6%, to $15.8 million
for the nine months ended September 30, 2003 compared to $18.9 million for the
nine months ended September 30, 2002. The nine months ended September 30, 2003
has benefited from no depreciation being charged as a result of the assets being
held out for sale in accordance with SFAS 144 " Accounting for Impairment or
Disposal of Long-Lived Assets," currency movement costs being less than prior
year, and a reduction in salary costs as result of restructuring taken last
year.
Charge for impairment of long-lived asset. The net charge for impairment
of long-lived asset was $1.3 million for the nine months ended September 30,
2003 compared to $11.9 million for the nine months ended September 30, 2002. The
$1.3 million net non-recurring charge was recorded to maintain
46
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
the proper carrying value of our discontinued operations at $43.4 million as of
September 30, 2003, which amount reflects management's continued best estimate
of fair value.
Integration and other non-recurring charges. Integration and other
non-recurring charges decreased $627,000, or 51.2%, to $598,000 for the nine
months ended September 30, 2003 compared to $1.2 million for the nine months
ended September 30, 2002. This decrease is primarily due to severance payments
to certain personnel in the prior year.
Operating income (loss). Operating income (loss) was $4.1 million for
the nine months ended September 30, 2003, compared to operating loss of ($17.3)
million for the nine months ended September 30, 2002 due to the factors
discussed above. Operating loss from the ArmorGroup Integrated Systems business,
which was sold on April 17, 2003, was ($987,000) for the period ended April 17,
2003, compared to an operating loss of ($15.6) million for the nine months ended
September 30, 2002 due to the factors discussed above. Excluding the ArmorGroup
Integrated Systems business, the balance of the assets held for sale generated
an operating income of $5.1 million for the nine months ended September 30, 2003
compared to an operating loss of ($1.7) million for the nine months ended
September 30, 2002.
Interest expense, net. Interest expense, net decreased $56,000, or
44.1%, to $71,000 for the nine months ended September 30, 2003 compared to
$127,000 for the nine months ended September 30, 2002. This decrease was due to
reduced utilization of the Services Division's line of credit.
Other expense (income), net. Other expense (income), net, was $472,000
for the nine months ended September 30, 2003, compared to other expense
(income), net of $200,000 for the nine months ended September 30, 2002. The net
increase in expense was a result of a pre-tax loss of $366,000 on the sale of
our ArmorGroup Integrated System business on April 17, 2003.
Income (loss) from discontinued operations before provision for income
taxes. Income (loss) from discontinued operations before provision for income
taxes was $3.6 million for the nine months ended September 30, 2003 and ($17.6)
million for the nine months ended September 30, 2002, due to the reasons
discussed above.
Provision for income taxes. Provision for income taxes was $2.6 million
for the nine months ended September 30, 2003 compared to a provision of $421,000
for the nine months ended September 30, 2002. The effective tax rate for the
nine months ended September 30, 2003 was a provision of 72.6% compared to a
provision of 2.4% for the nine months ended September 30, 2002. The provision of
72.6% for the nine months ended September 30, 2003, is due to unrecognized
potential deferred tax assets associated with foreign subsidiaries, which
recorded pretax losses in the nine months of 2003. These potential tax benefits
were not recognized due to the uncertainty regarding the specific subsidiary's
ability to utilize the net operating loss carry-forwards in future periods. The
provision for the nine months ended September 30, 2003 also relates to the net
impairment charge of $1.3 million, $1.1 million of which was non-deductible
goodwill write-offs.
Income (loss) from discontinued operations. Income (loss) from
discontinued operations was $983,000 for the nine months ended September 30,
2003 compared to a loss from discontinued operations of ($18.0) million for the
nine months ended September 30, 2002 due to the factors discussed above.
47
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
LIQUIDITY AND CAPITAL RESOURCES
On August 12, 2003, we terminated our prior credit facility and enter
into a new secured revolving credit facility (the "Credit Facility") with Bank
of America N.A., Wachovia Bank, National Association and a syndicate of other
financial institutions arranged by Bank of America Securities LLC. The Credit
Facility consists of a five-year revolving credit facility and, among other
things, provides for (i) total maximum borrowings of $60 million, (ii) a $25
million sub-limit for the issuances of standby and commercial letters of credit,
(iii) a $5 million sub-limit for swing-line loans, and (iv) a $5 million
sub-limit for multi-currency borrowings. All borrowings under the Credit
Facility will bear interest at either (i) a rate equal to LIBOR, plus an
applicable margin ranging from 1.125% to 1.625%, (ii) an alternate base rate
which will be the higher of (a) the Bank of America prime rate and (b) the
Federal Funds rate plus .50%, or (iii) with respect to foreign currency loans, a
fronted offshore currency rate, plus an applicable margin ranging from 1.125% to
1.625%, depending on certain conditions. The Credit Facility is guaranteed by
certain of our direct and indirect domestic subsidiaries and is collateralized
by, among other things (i) a pledge of all of the issued and outstanding shares
of stock or other equity interests of certain of our direct and indirect
domestic subsidiaries, (ii) a pledge of 65% of the issued and outstanding voting
shares of stock or other voting equity interests of certain of our direct and
indirect foreign subsidiaries, (iii) a pledge of 100% of the issued and
outstanding nonvoting shares of stock or other nonvoting equity interests of
certain of our direct and indirect foreign subsidiaries, and (iv) a first
priority perfected security interest on certain of our domestic assets and
certain domestic assets of certain of our direct and indirect subsidiaries that
will become guarantors of our obligations under the new credit facility,
including, among other things, accounts receivable, inventory, machinery,
equipment, certain contract rights, intellectual property rights and general
intangibles.
As of September 30, 2003 we were in compliance with all of our negative
and affirmative covenants.
On August 12, 2003, we completed a private placement of $150 million
aggregate principal amount of 8.25% Senior Subordinated Notes due 2013 (the
"Notes"). The Notes are guaranteed by certain of our domestic subsidiaries on a
senior subordinated basis. The Notes have been sold to qualified institutional
buyers in reliance on Rule 144A of the Securities Act of 1933 and to non-U.S.
persons in reliance on Regulation S under the Securities Act of 1933. The Notes
were rated B1/B+ by Moody's Investors' Service and Standard & Poor's Rating
Services, respectively. We intend to use the net proceeds of the offering to
fund future acquisitions, including our pending acquisition of Simula, Inc.,
repay a portion of our outstanding debt and for general corporate and working
capital purposes, including the funding of capital expenditures.
On September 2, 2003, we entered into interest rate swap agreements,
designated as a fair value hedge as defined under Statement of Financial
Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedge
Activities," (SFAS 133) with a notional amount totaling $150 million. The
agreements were entered to exchange the fixed interest rate on the Notes for a
variable interest rate equal to six-month LIBOR, set in arrears, plus a spread
ranging from 2.735% to 2.75% fixed semi-annually on the fifteenth of February
and August. The agreements are subject to other terms and conditions common to
transactions of this type. In accordance with SFAS 133, changes in the fair
value of the interest rate swap agreements offset changes in the fair value of
the fixed rate debt due to changes in the market interest rate. Accordingly, the
other assets on the Condensed Consolidated Balance
48
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
Sheets as of September 30, 2003 increased by $8.0 million, which reflected an
increase in the fair value of the interest rate swap agreements. The
corresponding increase in the hedge liability was recorded in long-term debt.
The agreements are deemed to be a perfectly effective fair value hedge and
therefore qualify for the short-cut method of accounting under SFAS 133. As a
result, no ineffectiveness is expected to be recognized in our earnings
associated with the interest rate swap agreements.
In March 2002, our Board of Directors approved a stock repurchase
program authorizing the repurchase of up to a maximum 3.2 million shares of our
common stock. In February 2003, the Board of Directors increased this stock
repurchase program to authorize the repurchase, from time to time depending upon
market conditions and other factors, of up to an additional 4.4 million shares.
During the three-months ended September 30, 2003 no additional shares were
repurchased.
Through September 30, 2003, we repurchased 3.8 million shares of our
common stock under the stock repurchase program at an average price of $12.49
per share, leaving us with the ability to repurchase up to 3.8 million
additional shares of common stock. At September 30, 2003, we had 28,147,466
shares of common stock outstanding.
We expect to continue our policy of repurchasing our common stock from
time to time. In addition, our Credit Facility permits us to repurchase shares
of our common stock with no limitation if our ratio of Consolidated Total
Indebtedness to Consolidated EBITDA (as such terms are defined in the Credit
Facility) for any rolling twelve-month period is less than 1.00 to 1. At ratios
greater than 1.00 to 1 our credit agreement limits our ability to repurchase
shares at $15.0 million. This basket resets to $0 each time the ratio is less
than 1.0 to 1.
Working capital for continuing operations was $230.2 million and $89.0
million as of September 30, 2003 and December 31, 2002, respectively.
Our fiscal 2003 capital expenditures for continuing operations are
expected to be approximately $8.4 million, of which we have spent approximately
$5.6 million through the nine months ended September 30, 2003. Our fiscal 2003
capital expenditures for discontinued operations are expected to be
approximately $4.0 million, of which we have already spent approximately $2.8
million through the nine months ended September 30, 2003. Such expenditures
include leasehold improvements, information technology and communications
infrastructure equipment and software, and manufacturing machinery and
equipment.
We anticipate that the cash generated from operations, proceeds from the
sale of the Notes and the sale of discontinued operations, cash on hand and
available borrowings under the Credit Facility will enable us to meet liquidity,
working capital and capital expenditure requirements during the next twelve
months. We may, however, require additional financing to pursue our strategy of
growth through acquisitions. If such financing is required, there are no
assurances that it will be available, or if available, that it can be obtained
on terms favorable to us or on a basis that is not dilutive to our stockholders.
49
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
FORWARD LOOKING AND CAUTIONARY STATEMENTS
Except for the historical information and discussions contained herein,
statements contained in this Form 10-Q may constitute "forward looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. These statements involve a number of risks, uncertainties and other
factors that could cause actual results to differ materially, including, but not
limited to, our failure to continue to develop and market new and innovative
products and services and to keep pace with technological change; competitive
pressures; failure to obtain or protect intellectual property rights; the
ultimate effect of various domestic and foreign political and economic issues on
our business, financial condition or results of operations; quarterly
fluctuations in revenues and volatility of stock prices; contract delays; cost
overruns; our ability to attract and retain key personnel; currency and customer
financing risks; dependence on certain suppliers; changes in the financial or
business condition of our distributors or resellers; our ability to successfully
manage acquisitions, alliances and integrate past and future business
combinations; regulatory, legal, political and economic changes, our ability to
sell the Services Division on favorable terms and other risks, uncertainties and
factors inherent in our business and otherwise discussed elsewhere in this Form
10-Q and in our other filings with the Securities and Exchange Commission or in
materials incorporated therein by reference.
50
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a result of our global operating and financial activities, we are
exposed to changes in raw material prices, interest rates and foreign currency
exchange rates, which may adversely affect our results of operations and
financial position. In seeking to minimize the risks and/or costs associated
with such activities, we manage exposure to changes in raw material prices,
interest rates, and foreign currency exchange rates through our regular
operating and financing activities. We have entered into interest rate swap
agreements to reduce our overall interest expense. We do not utilize financial
instruments for trading purposes.
MARKET RATE RISK
The following discussion about our market rate risk involves
forward-looking statements. Actual results could differ materially from those
projected in the forward-looking statements. We are exposed to market risk
related to changes in interest rates, foreign currency exchange rates, and
equity security price risk.
Interest Rate Risk. Our exposure to market rate risk for changes in
interest rates relate primarily to borrowings under our $150 million senior
subordinated notes, our credit facilities and our short-term monetary
investments. To the extent that, from time to time, we hold short-term money
market instruments, there is a market rate risk for changes in interest rates on
such instruments. To that extent, there is inherent rollover risk in the
short-term money market instruments as they mature and are renewed at current
market rates. The extent of this risk is not quantifiable or predictable because
of the variability of future interest rates and business financing requirements.
However, there is no risk of loss of principal in the short-term money market
instruments, only a risk related to a potential reduction in future interest
income.
On September 2, 2003, we entered into interest rate swap agreements in
which we effectively exchanged the $150 million fixed rate 8.25% interest on the
senior notes for variable rates in the notional amount of $80 million, $50
million, and $20 million at six-month LIBOR, set in arrears, plus 2.75%, 2.75%,
and 2.735%, respectively. The agreement involves receipt of fixed rate amounts
in exchange for floating rate interest payments over the life of the agreement
without an exchange of the underlying principal amount. The variable interest
rates are fixed semi-annually on the fifteen day of February and August. The
six-month LIBOR rate was 1.24% on November 6, 2003. The maturity dates of the
interest rate swap agreements match those of the underlying debt. Our objective
for entering into these interest rate swaps were to reduce our exposure to
changes in the fair value of senior notes and to obtain variable rate financing
at an attractive cost. Changes in the six month LIBOR would affect our earnings
either positively or negatively. An assumed 100 basis point increase in the six
month LIBOR would increase our interest obligations under the interest rate
swaps by approximately $750,000 for a six month period.
In accordance with SFAS 133, we designated the interest rate swap
agreements as perfectly effective fair value hedges and, accordingly, use the
short-cut method of evaluating effectiveness. As permitted by the short-cut
method, the change in fair value of the interest rate swaps will be reflected in
earnings and an equivalent amount will be reflected as a change in the carrying
value of the swaps, with an offset to earnings. There is no ineffectiveness to
be recorded. On September 30, 2003, we recorded the fair value of the interest
rate swap agreements of $8.0 million and recorded the corresponding fair value
adjustment to the 8.25% senior subordinated notes in long-term debt and other
assets sections of the Condensed Consolidated Balance Sheets, respectively.
51
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS -
CONTINUED
We are exposed to credit-related losses in the event of nonperformance
by counterparties to these financial instruments. However, counterparties to
these agreements are major financial institutions and the risk of loss due to
nonperformance is considered by management to be minimal. We do not hold or
issue interest rate swap agreements or other derivative instruments for trading
purposes.
Foreign Currency Exchange Rate Risk. The majority of our business is
denominated in U.S. dollars. There are costs associated with our operations in
foreign countries that require payments in the local currency. Where appropriate
and to partially manage our foreign currency risk related to those payments we
receive payment from customers in local currencies in amounts sufficient to meet
our local currency obligations. We do not use derivatives or other financial
instruments to hedge foreign currency risk.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
We do business in numerous countries, including emerging markets in
Africa, Asia, South America, Russia, and the former CIS. We have invested
substantial resources outside of the United States and plan to continue to do so
in the future. Our international operations are subject to the risk of new and
different legal and regulatory requirements in local jurisdictions, tariffs and
trade barriers, potential difficulties in staffing and managing local
operations, potential imposition of restrictions on investments, potentially
adverse tax consequences, including imposition or increase of withholding and
other taxes on remittances and other payments by subsidiaries, and local
economic, political and social conditions. Governments of many developing
countries have exercised and continue to exercise substantial influence over
many aspects of the private sector. Government actions in the future could have
a significant adverse effect on economic conditions in a developing country or
may otherwise have a material adverse effect on us and our operating companies.
We do not have political risk insurance in the countries in which we currently
conducts business, but periodically analyze the need for and cost associated
with this type of policy. Moreover, applicable agreements relating to our
interests in our operating companies are frequently governed by foreign law. As
a result, in the event of a dispute, it may be difficult for us to enforce our
rights. Accordingly, we may have little or no recourse upon the occurrence of
any of these developments.
ITEM 4. CONTROLS AND PROCEDURES
We evaluated the effectiveness of the design and operation of our
disclosure controls and procedures as of the end of the period covered by this
report. Our disclosure controls and procedures are designed to provide
reasonable assurance that the information that we must disclose in our reports
filed under the Securities and Exchange Act is communicated and processed in a
timely manner. Warren B. Kanders, Chairman and Chief Executive Officer, and
Robert R. Schiller, Chief Operating Officer and Chief Financial Officer,
participated in this evaluation.
Based on such evaluation, Mr. Kanders and Mr. Schiller concluded that,
as of the date of such evaluation, our disclosure controls and procedures were
effective, except as noted in the next paragraph. During the quarter covered by
this report, there have not been any significant changes in our internal
controls or in other factors that could significantly affect those controls
except as indicated in the next paragraph.
52
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS -
CONTINUED
During the twelve months ended December 31, 2002 financial reporting
process, management, in consultation with our independent accountants,
identified a deficiency in our tax financial reporting process relating to the
reconciliation of provisions for income taxes for our discontinued operations to
tax filings and inventory of deferred tax assets and liabilities which
constituted a "Reportable Condition" under standards established by the American
Institute of Certified Public Accountants. We believe that this matter has not
had any material impact on our financial statements. We have hired an internal
tax director and completed the design, development and implementation of
processes and controls to address this deficiency. We are currently in the
process of formally documenting these policies and procedures.
53
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
PART II
ITEM 1. LEGAL PROCEEDINGS
On or about March 22, 2002, O'Gara-Hess & Eisenhardt Armoring Company
(OHEAC), one of our subsidiaries, received a civil subpoena from the Department
of Defense (DOD) requesting documents and information concerning various quality
control documentation regarding parts delivered by its subcontractors and
vendors in support of the HMMWV armored at its Fairfield, Ohio facility for the
period October 1, 1999 through May 1, 2001. OHEAC has complied fully with the
subpoena. In early 2003, OHEAC was advised that the Department of Justice (DOJ)
was also investigating separate claims against OHEAC filed by individuals that
involve the same time frame and issues covered by the DOD subpoena. OHEAC has
learned that the DOJ investigation relates to a certain unidentified action
filed under the federal False Claims Act pursuant to which the United States
government may intervene and recover damages. OHEAC has fully responded to, and
cooperated with, the government's questions and investigation. The DOJ has since
notified OHEAC that it has declined to intervene in the case. On September 30,
2003, the action filed under the federal False Claims Act was voluntarily
withdrawn without prejudice.
In October 2002, we were sued in the United States District Court for
the District of Wyoming. The plaintiffs in that lawsuit asserted various state
law tort claims and federal environmental law claims under the Resource
Conservation and Recovery Act and the Clean Air Act stemming from one of our
subsidiaries' Casper, Wyoming tear gas plant. The plaintiffs have not yet
quantified their alleged damages. The plaintiffs filed their suit as a potential
class action. On June 19, 2003, the court denied plaintiff's motion for class
certification. The alleged actions took place over time periods during which we
were covered by different insurance policies. We have notified our insurance
carriers of the suit. Our prior insurance carrier has agreed, under a full
reservation of rights, including with respect to any liability which relates to
the time its policy was in effect, to provide a defense and to address the
question of liability indemnification in the future. Our current insurance
carrier has declined defense and indemnification coverage. While we do not carry
specific environment insurance coverage, we have reserved the right to challenge
our insurance carrier's determination. The case is currently pending, and while
we are contesting the allegations vigorously, we are unable to predict the
outcome of this matter. At this time, we do not believe this matter will have a
material impact on our financial position, operations or liquidity.
Reference is made to Part I, Item 3, Legal Proceedings, in our Annual
Form Report on 10-K for the year ended December 31, 2002, and Part II, Item 1,
Legal Proceedings in our Quarterly Report on Form 10-Q for the quarter ended
March 31, 2003 for a description of other legal proceedings.
ITEM 5. OTHER INFORMATION
On July 26, 2003, we awarded Warren B. Kanders, our Chairman and Chief
Executive Officer, a stock bonus award of 200,000 shares of our common stock in
accordance with his amended employment agreement. On November 4, 2003, we
awarded Robert R. Schiller, our Chief Operating Officer and Chief Financial
Officer, a stock bonus award of 150,000 shares of our common stock in accordance
with his amended employment agreement. On November 11, 2003, our stock price
closed above $20 for the fifth consecutive trading day, which caused the
complete vesting of the stock bonus awards. The complete vesting of the stock
bonus awards results in a charge of $7.3 million, which will be recorded in the
three months ended December 31, 2003. The payment of the stock bonus awards to
Messrs. Kanders and Schiller will be deferred for a period of five years after
November 11, 2003, subject to acceleration under certain circumstances as set
forth in their respective employment agreements, as amended.
On September 2, 2003, we entered into a definitive Agreement and Plan
of Merger to acquire Simula, Inc., for $110.5 million, subject to adjustment
based on various factors, payable in cash or, at our option, in a combination of
cash and registered shares of our common stock. Upon consummation of the
acquisition, we will acquire all of the outstanding common stock of Simula,
retire Simula's outstanding indebtedness, and assume all liabilities of Simula.
The Agreement provides for a good faith deposit, payment of a break-up fee if
Simula accepts a competing offer, and other terms customary for similar
transactions. The acquisition is subject to, among other conditions, the
approval of Simula's stockholders. In connection with the acquisition, we
registered approximately 2.3 million shares of common stock on a Form S-4 with
the Securities and Exchange Commission. The registration statement was declared
effective on November 10, 2003. We anticipate completion of the acquisition in
the fourth quarter of 2003.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are filed as part of this quarterly report on
Form 10-Q.
10.1 Amendment No. 2 dated November 4, 2003 to the Employment Agreement
between Armor Holdings, Inc. and Warren B. Kanders.
54
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
10.2 Amendment dated November 4, 2003 to the Employment Agreement between
Armor Holdings, Inc. and Robert Schiller.
31.1 Certification of Principal Executive Officer Pursuant to Rule
13a-14(a) (17 CFR 240.13a-14(b)).
31.2 Certification of Principal Financial Officer Pursuant to Rule
13a-14(a) (17 CFR 240.13a-14(b)).
32.1 Certification of Principal Executive Officer Pursuant to Rule
13a-14(b) (17 CFR 240.13a-14(b)) and Section 1350 of Chapter 63 of Title 18 of
the United States Code (18 U.S.C. 1350).
32.2 Certification of Principal Financial Officer Pursuant to Rule
13a-14(b) (17 CFR 240.13a-14(b)) and Section 1350 of Chapter 63 of Title 18 of
the United States Code (18 U.S.C. 1350).
(b) Reports on Form 8-K.
Form 8-K filed on August 13, 2003, relating to a press release, issued
on August 12, 2003, announcing our earnings for the six-month period ended June
30, 2003
Form 8-K filed on August 8, 2003, announcing an amendment of Warren B.
Kanders', our Chief Executive Officer, employment agreement, the pricing of a
private placement of $150 million aggregate principal amount of 8.25% Senior
Subordinated Notes due 2013, and the entering into a new secured revolving
credit facility
Form 8-K filed on July 24, 2003, announcing our anticipated revenues and
earnings before taxes from continuing operations for the three-month period
ended June 30, 2003
55
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
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, thereunto duly authorized.
ARMOR HOLDINGS, INC.
/s/ Warren B. Kanders
----------------------------------
Warren B. Kanders
Chairman and Chief Executive Officer
Dated: November 17, 2003
/s/ Robert R. Schiller
-------------------------------------
Robert R. Schiller
Chief Operating Officer and Chief Financial Officer
Dated: November 17, 2003
56