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 MARCH 31, 2004, 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
May 4, 2004 is 28,613,101.
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.............. 30
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK.......................................... 42
ITEM 4. CONTROLS AND PROCEDURES...................................... 44
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS............................................ 45
ITEM 5. OTHER INFORMATION............................................ 46
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................. 46
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 March 31, 2004 and
for the three-month periods ended March 31, 2004 and March 31, 2003.
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, 2003.
3
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
MARCH 31, 2004 DECEMBER 31, 2003
(UNAUDITED) *
------------------------ ------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 75,835 $ 111,850
Restricted cash - 2,600
Accounts receivable (net of allowance for
doubtful accounts of $2,126 and $1,673) 89,196 72,635
Costs and earned gross profit in excess of billings 860 -
Inventories 92,903 80,527
Prepaid expenses and other current assets 24,994 22,032
Current assets of discontinued operations (Note 2) 857 753
------------------------ ------------------------
Total current assets 284,645 290,397
PROPERTY AND EQUIPMENT (net of
accumulated depreciation of $21,137 and
$19,046) 58,667 57,576
GOODWILL (net of accumulated amortization
of $4,024 and $4,024) 176,146 175,707
PATENTS, LICENSES AND TRADEMARKS
(net of accumulated amortization of $3,601 and $2,627) 46,073 44,174
OTHER ASSETS 20,653 16,169
LONG-TERM ASSETS OF DISCONTINUED OPERATIONS (Note 2) 1,717 1,603
------------------------ ------------------------
TOTAL ASSETS $ 587,901 $ 585,626
======================== ========================
* 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)
MARCH 31, 2004 DECEMBER 31, 2003
(UNAUDITED) *
------------------------ ------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 778 $ 32,107
Short-term debt 622 498
Accounts payable 42,081 30,304
Accrued expenses and other current liabilities 57,584 58,218
Income taxes payable 3,849 -
Current liabilities of discontinued operations (Note 2) 344 626
------------------------ ------------------------
Total current liabilities 105,258 121,753
LONG-TERM LIABILITIES:
Long-term debt, less current portion 159,264 158,300
Other long-term liabilities 11,034 10,208
------------------------ ------------------------
Total liabilities 275,556 290,261
COMMITMENTS AND CONTINGENCIES
(NOTE 11)
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; 34,646,849 and 34,337,034 issued and
28,586,627 and 28,267,812 outstanding at
March 31, 2004 and December 31, 2003,
respectively 347 344
Additional paid-in capital 323,275 318,460
Retained earnings 57,432 44,942
Accumulated other comprehensive income 3,608 3,936
Treasury stock (72,317) (72,317)
------------------------ ------------------------
Total stockholders' equity 312,345 295,365
------------------------ ------------------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 587,901 $ 585,626
======================== =========================
* 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
MARCH 31, 2004 MARCH 31, 2003
------------------------ ------------------------
REVENUES:
Aerospace & Defense $ 81,008 $ 15,910
Products 53,840 44,007
Mobile Security 26,780 20,557
------------------------ ------------------------
Total Revenues 161,628 80,474
------------------------ ------------------------
COSTS AND EXPENSES:
Cost of sales 114,068 57,162
Operating expenses 23,251 14,004
Amortization 980 60
Integration and other charges 681 422
------------------------ ------------------------
OPERATING INCOME 22,648 8,826
Interest expense, net 1,728 379
Other expense, net 115 69
------------------------ ------------------------
INCOME FROM CONTINUING OPERATIONS BEFORE PROVISION FOR INCOME TAXES 20,805 8,378
PROVISION FOR INCOME TAXES 8,177 3,133
------------------------ ------------------------
INCOME FROM CONTINUING OPERATIONS 12,628 5,245
DISCONTINUED OPERATIONS (NOTE 2):
LOSS FROM DISCONTINUED OPERATIONS, NET OF TAX (138) (158)
------------------------ ------------------------
NET INCOME $ 12,490 $ 5,087
======================== ========================
NET INCOME PER COMMON SHARE - BASIC
INCOME FROM CONTINUING OPERATIONS $ 0.44 $ 0.18
LOSS FROM DISCONTINUED OPERATIONS 0.00 (0.01)
------------------------ ------------------------
BASIC EARNINGS PER SHARE $ 0.44 $ 0.17
======================== ========================
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
MARCH 31, 2004 MARCH 31, 2003
------------------------ ------------------------
NET INCOME PER COMMON SHARE - DILUTED
INCOME FROM CONTINUING OPERATIONS $ 0.42 $ 0.18
LOSS FROM DISCONTINUED OPERATIONS 0.00 (0.01)
------------------------ ------------------------
DILUTED EARNINGS PER SHARE $ 0.42 $ 0.17
======================== ========================
WEIGHTED AVERAGE SHARES - BASIC 28,472 28,964
======================== ========================
WEIGHTED AVERAGE SHARES - DILUTED 29,934 29,111
======================== ========================
See notes to condensed consolidated financial statements.
7
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31, 2004 MARCH 31, 2003
------------------------ ------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Income from continuing operations $ 12,628 $ 5,245
Adjustments to reconcile income from continuing operations to cash
provided by operating activities:
Depreciation and amortization 3,414 1,702
Loss on disposal of fixed assets 6 8
Deferred income taxes (438) 199
Changes in operating assets and liabilities, net of acquisitions:
(Increase) decrease in accounts receivable (17,173) 2,878
(Increase) decrease in inventories (12,232) 1,082
(Increase) in prepaid expenses and other assets (5,222) (3,143)
Increase (decrease) in accounts payable, accrued
expenses and other current liabilities 12,395 (1,900)
Increase (decrease) in income taxes payable 7,221 (1,662)
------------------------ ------------------------
Net cash provided by operating activities 599 4,409
------------------------ ------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (3,814) (1,727)
Purchase of patents and trademarks (49) -
Purchase of equity investment (1,374) -
Collection of note receivable 375 -
Decrease in restricted cash 2,600 -
Additional consideration for purchased businesses (1,832) -
Purchase of business, net of cash acquired (2,729) -
------------------------ ------------------------
Net cash used in investing activities (6,823) (1,727)
------------------------ ------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the exercise of stock options 4,488 -
Repurchases of treasury stock - (15,684)
Repayments of long-term debt (33,897) (239)
Borrowings under lines of credit 5,449 22,916
Repayments under lines of credit (5,327) (2,887)
------------------------ ------------------------
Net cash (used in) provided by financing activities (29,287) 4,106
------------------------ ------------------------
Effect of exchange rate changes on cash and cash equivalents 134 (55)
Net cash used in discontinued operations (638) (3,636)
------------------------ ------------------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (36,015) 3,097
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 111,850 12,913
------------------------ ------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 75,835 $ 16,010
======================== ========================
CASH AND CASH EQUIVALENTS, END OF PERIOD
CONTINUING OPERATIONS $ 75,835 $ 16,010
DISCONTINUED OPERATIONS 383 5,589
------------------------ ------------------------
$ 76,218 $ 21,599
======================== ========================
See notes to condensed consolidated financial statements.
8
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS -
(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-month
period is 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, 2003. The amounts disclosed in the footnotes are related
to continuing operations unless otherwise indicated.
Effective in the first quarter 2004, we instituted a new segment reporting
format to include three reportable business divisions: Aerospace & Defense
Group, the Products Division (Armor Holdings Products), and the Mobile Security
Division (Armor Mobile Security). The Aerospace & Defense Group was formed upon
the completion of our acquisition of Simula, Inc. on December 9, 2003, and
results have been included since the acquisition date. The Aerospace & Defense
Group also includes the military business, including armor and blast protection
systems for M1114 Up-Armored High Mobility Multi-Purpose Wheeled Vehicles
(HMMWVs), and other military vehicle armor programs, which previously were
included in the Mobile Security Division. The Aerospace & Defense Group also
includes the small arms protective insert (SAPI) plate produced by our Protech
subsidiary in Pittsfield, Massachusetts, which was previously reported as part
of the Products Division. The historical results of these businesses have been
reclassified as part of the Aerospace & Defense Group. This reporting change was
made to better reflect management's approach to operating and directing the
businesses, and, in certain instances, to align financial reporting with our
market and customer segments. Immediately after filing this Form 10-Q, we will
file a Form 10-K/A with restated financial information in the new segment format
with no impact on consolidated revenues, gross profit, operating income or net
income as a result of this reclassification.
As discussed in Note 2 in this Form 10-Q, in 2003 we sold the majority of
our ArmorGroup Services Division (the "Services Division"). The assets and
liabilities of the Services Division have been classified as assets and
liabilities of discontinued operations on our balance sheets and the results of
their operations classified as income from discontinued operations in the
accompanying unaudited condensed consolidated statement of operations.
9
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED (UNAUDITED)
NOTE 2 - DISCONTINUED OPERATIONS
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. $375,000 of the balance due was paid in advance in
November 2003. In accordance with SFAS 144, we recorded a loss of $366,000 on
the sale in the second quarter of 2003.
On November 26, 2003, we announced that we completed the sale of
ArmorGroup, our security service division, for $33,660,000 in total
consideration to a group of private investors led by Granville Baird Capital
Partners of London, England and Management. We received $31,360,000 in cash at
closing and are scheduled to receive another $2,300,000 by the end of 2004, of
which we have received $500,000 through May 10, 2004. We recorded a loss of $8.8
million on the sale in the fourth quarter of 2003. In accordance with generally
accepted accounting principles, unrealized gains and losses, which are included
in equity as accumulated other comprehensive income or loss, are not recognized
until the period in which the related assets and liabilities are disposed of.
At March 31, 2004, our litigation support services subsidiary remains in
discontinued operations. The actual proceeds from the disposal of this business
may differ materially from our current estimates, and, therefore, could result
in either a gain or a loss upon final disposal.
A summary of the operating results of the discontinued operations for the
three months ended March 31, 2004 and 2003 is as follows.
THREE MONTHS ENDED
MARCH 31, 2004 MARCH 31, 2003
------------------------ ------------------------
(IN THOUSANDS)
Revenue $ 720 $ 25,788
Cost of sales 236 19,182
Operating expenses 436 6,412
Integration and other charges - 42
------------------------ ------------------------
Operating income 48 152
Interest expense, net 2 38
Other expense, net 263 60
------------------------ ------------------------
(Loss) income from discontinued operations before
(benefit) provision for income taxes (217) 54
(Benefit) provision for income taxes (79) 212
------------------------ ------------------------
(Loss) from discontinued operations $ (138) $ (158)
======================== ========================
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:
MARCH 31, 2004 DECEMBER 31, 2003
------------------------ ------------------------
(IN THOUSANDS)
Assets
Cash and cash equivalents $ 383 $ 76
Accounts receivable, net 257 549
Other current assets 217 128
------------------------ ------------------------
Total current assets 857 753
Property and equipment, net 1,320 1,206
Goodwill, net 356 356
Other assets 41 41
------------------------ ------------------------
Total assets of discontinued operations $ 2,574 $ 2,356
======================== ========================
Liabilities
Current portion of long-term debt $ - $ 125
Accounts payable 50 5
Accrued expenses and other current liabilities 294 496
------------------------ ------------------------
Total current liabilities 344 626
------------------------ ------------------------
Total liabilities of discontinued operations $ 344 $ 626
======================== ========================
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 $12.4 million
in the third quarter of fiscal 2003. The 2003 impairment charges consisted of a
non-cash goodwill reduction. The benefit for income taxes for discontinued
operations was $8.3 million for fiscal 2003. The reductions in the carrying
value of the Services Division were management's best estimate based upon the
information currently available, including discussions with our investment
bankers.
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 of $20,000 and
$96,000 for the three months ended March 31, 2004 and 2003, respectively, are
listed below:
THREE MONTHS ENDED
MARCH 31, 2004 MARCH 31, 2003
------------------------ ------------------------
(IN THOUSANDS)
Net income $ 12,490 $ 5,087
Other comprehensive income:
Unrealized gain on equity securities, net of tax 37 -
Foreign currency translations (365) 369
------------------------ ------------------------
Comprehensive income $ 12,162 $ 5,456
======================== ========================
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:
MARCH 31, 2004 DECEMBER 31, 2003
------------------------ ------------------------
(IN THOUSANDS)
Raw material $ 49,927 $ 40,397
Work-in-process 26,170 25,422
Finished goods 16,806 14,708
------------------------ ------------------------
Total inventories $ 92,903 $ 80,527
======================== ========================
NOTE 5 - ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities are summarized as follows:
MARCH 31, 2004 DECEMBER 31, 2003
------------------------ ------------------------
(IN THOUSANDS)
Accrued expenses and other current liabilities $ 42,012 $ 40,787
Deferred consideration for acquisitions 3,403 2,780
Customer deposits 12,169 14,651
------------------------ ------------------------
Total accrued expenses and other current liabilities $ 57,584 $ 58,218
======================== ========================
12
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED (UNAUDITED)
NOTE 6 - DERIVATIVE FINANCIAL INSTRUMENTS
We account for derivative instruments in accordance with Statement of
Financial Accounting Standards No. 133, " Accounting for Derivative Instruments
and Hedging Activities," as amended by Statement of Financial Accounting
Standards No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities - an Amendment of FAS 133", and Statement of Financial
Accounting Standards No. 149 "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities" (collectively "SFAS 133"). SFAS 133 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 8.25% $150 million Senior Subordinated Notes
due 2013 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 into to
exchange the fixed interest rate on the Notes for a variable interest rate equal
to six-month LIBOR (1.16% at March 31, 2004), 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 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 value of the interest rate swap agreements was approximately
$9.3 million at March 31, 2004 and is included in other assets and long-term
debt on the accompanying condensed consolidated balance sheet.
The fair values of our interest rate swap agreements are obtained from our
counter-parties 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 7 - INFORMATION CONCERNING BUSINESS SEGMENTS AND GEOGRAPHICAL SALES
We are a leading manufacturer and provider of specialized security
products; training and support services related to these products; vehicle armor
systems; military helicopter seating systems; aircraft and land vehicle safety
systems; protective equipment for military personnel; and other technologies
used to protect humans in a variety of life-threatening or catastrophic
situations. Our products and systems are used domestically and internationally
by military, law enforcement, security and corrections personnel, as well as
governmental agencies, multinational corporations and individuals. We are
organized and operated under three business divisions: Aerospace & Defense
Group, Armor Holdings Products, also referred
13
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED (UNAUDITED)
to as our Products Division, and Armor Mobile Security, also referred to as our
Mobile Security Division. The Aerospace & Defense Group was formed with our
acquisition of Simula, Inc. on December 9, 2003, and results have been included
since the acquisition date. The Aerospace & Defense Group also includes the
military business formerly in the Mobile Security Division, including armor and
blast protection systems for M1114 Up-Armored HMMWVs, and the SAPI business
produced by our Protech subsidiary in Pittsfield, Massachusetts, which was
previously reported as part of the Products Division. The historical results of
these businesses have been reclassified to the Aerospace & Defense Group. Our
Services division has been classified as discontinued operations and is no
longer included in this presentation (See Note 2).
Aerospace & Defense Group. Our Aerospace & Defense Group supplies human
safety and survival systems to the U.S. military, and major aerospace and
defense prime contractors. Our core markets are military aviation safety,
military personnel safety, and land and marine safety. Under the brand name
O'Gara-Hess & Eisenhardt, we are the sole-source provider to the U.S. military
of the armor and blast protection systems for M1114 Up-Armored HMMWVs. We are
also under contract with the U.S. Army to provide spare parts, logistics and
ongoing field support services for the currently installed base of approximately
4,933 Up-Armored HMMWVs. Additionally, we provide blast and ballistic protection
kits for the standard HMMWVs, which are installed on existing equipment in the
field. Our Aerospace & Defense Group is also subcontracted to develop a
ballistic and blast protected armored and sealed truck cab for the HIMARS, a
program recently transitioned by the U.S. Army and U.S. Marine Corps from
developmental to a low rate of initial production, deliveries of which commenced
in 2003. We also supply armor sub-systems for other tactical wheeled vehicles.
Through Simula, we provide military helicopter seating systems, helicopter
cockpit airbag systems, aircraft and land vehicle armor kits, body armor and
other protective equipment for military personnel, emergency bailout parachutes
and survival ensembles worn by military aircrew. The primary customers for our
products are the U.S. Army, U.S. Marine Corps, Boeing, and Sikorsky Aircraft.
Most of Simula's aviation safety products are provided on a sole source basis.
The U.S. armed forces have adopted ceramic body armor as a key element of the
protective ensemble worn by our troops in Iraq and Afghanistan. Simula was the
developer of this specialized product called SAPI, and is the largest supplier
to U.S. forces.
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, weapon maintenance products, foldable ladders, and
specialty gloves.
Armor Mobile Security. Our Armor Mobile Security division manufactures and
installs ballistic and blast protection armoring systems for 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. Our customers in this business include
the US and foreign governments, international corporations, non-government
organizations and high net worth individuals. In addition, we supply ballistic
and blast protected armoring systems to U.S. federal law enforcement and
intelligence agencies and foreign heads of state.
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
14
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED (UNAUDITED)
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 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.
Revenues, operating income and total assets for each of our continuing
operating segments are as follows (net of intercompany eliminations):
THREE MONTHS ENDED
MARCH 31, 2004 MARCH 31, 2003
------------------------ ------------------------
(IN THOUSANDS)
Revenues:
Aerospace & Defense $ 81,008 $ 15,910
Products 53,840 44,007
Mobile Security 26,780 20,557
------------------------ ------------------------
Total revenues $ 161,628 $ 80,474
======================== ========================
Operating income (loss):
Aerospace & Defense $ 19,479 $ 3,625
Products 5,685 6,861
Mobile Security 1,073 519
Corporate (3,589) (2,179)
------------------------ ------------------------
Total operating income $ 22,648 $ 8,826
======================== ========================
MARCH 31, 2004 DECEMBER 31, 2003
--------------------------------------------------------
(IN THOUSANDS)
Total assets:
Aerospace & Defense $ 230,729 $ 209,834
Products 190,261 183,972
Mobile Security 70,373 63,161
Corporate 93,964 126,303
------------------------ ------------------------
Total assets $ 585,327 $ 583,270
======================== ========================
15
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 charges) and
total assets to principal geographic areas are as follows:
THREE MONTHS ENDED
MARCH 31, 2004 MARCH 31, 2003
------------------------ ------------------------
(IN THOUSANDS)
Revenues:
North America $ 131,351 $ 56,624
South America 3,476 3,427
Africa 1,206 485
Europe/Asia 25,595 19,938
------------------------ ------------------------
Total revenue $ 161,628 $ 80,474
======================== ========================
Geographic operating income:
North America $ 21,638 $ 6,953
South America 231 54
Africa 99 98
Europe/Asia 2,341 2,203
------------------------ ------------------------
Total geographic operating income $ 24,309 $ 9,308
======================== ========================
MARCH 31, 2004 DECEMBER 31, 2003
--------------------------------------------------------
(IN THOUSANDS)
Total assets:
North America $ 536,269 $ 523,954
South America 6,674 6,433
Africa - -
Europe/Asia 42,384 52,883
------------------------ ------------------------
Total assets $ 585,327 $ 583,270
======================== ========================
A reconciliation of consolidated geographic operating income from
continuing operations to consolidated operating income from continuing
operations follows:
THREE MONTHS ENDED
MARCH 31, 2004 MARCH 31, 2003
------------------------ ------------------------
(IN THOUSANDS)
Consolidated geographic operating income $ 24,309 $ 9,308
Amortization (980) (60)
Integration and other charges (681) (422)
------------------------ ------------------------
Operating income $ 22,648 $ 8,826
======================== ========================
16
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED (UNAUDITED)
NOTE 8 - 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
MARCH 31, 2004 MARCH 31, 2003
------------------- ---------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Numerator for basic and diluted earnings per share:
Income from continuing operations $ 12,628 $ 5,245
=================== =====================
Denominator for basic earnings per share - weighted
average shares outstanding: 28,472 28,964
Effect of shares issuable under stock option and stock grant
plans, based on the treasury stock method 1,462 147
------------------- ---------------------
Denominator for diluted earnings per share- adjusted weighted
average shares outstanding 29,934 29,111
=================== =====================
Basic earnings per share from continuing operations $ 0.44 $ 0.18
=================== =====================
Diluted earnings per share from continuing operations $ 0.42 $ 0.18
=================== =====================
17
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED (UNAUDITED)
NOTE 9 - NEW ACCOUNTING PRONOUNCEMENTS
In April 2004, the FASB issued FASB Staff Position No. 129-1, Disclosure
Requirements under FASB Statement No. 129, "Disclosure of Information about
Capital Structure," relating to contingently convertible securities ("FSP
129-1"). The purpose of FSP 129-1 is to interpret how the disclosure provisions
of FASB Statement No. 129 apply to contingently convertible securities and to
their potentially dilutive effects on earnings per share. The guidance in this
FSP is effective April 2004 and applies to all existing and newly created
securities.
18
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED (UNAUDITED)
NOTE 10 - 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 cost 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 the three-month periods ended March 31, 2004 and
2003 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
MARCH 31, 2004 MARCH 31, 2003
------------------- -----------------------
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
Net income as reported $ 12,490 $ 5,087
Deduct: Total stock-based employee
compensation expense determined under fair
value based method for all awards, net of
related tax effects (1,247) (1,158)
------------------- -----------------------
Pro forma net income $ 11,243 $ 3,929
=================== =======================
Earnings per share:
Basic - as reported $ 0.44 $ 0.17
=================== =======================
Basic - pro forma $ 0.39 $ 0.14
=================== =======================
Diluted - as reported $ 0.42 $ 0.17
=================== =======================
Diluted - pro forma $ 0.38 $ 0.13
=================== =======================
19
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED (UNAUDITED)
NOTE 11 - LEGAL PROCEEDINGS
In October 2002, we were sued in the United States District Court for the
District of Wyoming with respect to one of our subsidiaries' Casper, Wyoming
tear gas plant. The plaintiffs in the 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 the tear gas plant. In February
2004, we agreed with the plaintiffs to settle the lawsuit for an amount of money
that is not material to us, and on April 19, 2004, the court dismissed the
lawsuit with prejudice.
In September 2003, Second Chance Body Armor, Inc., a body armor
manufacturer and one of our competitors, has notified its customers of a
potential safety issue with its Ultima(R) and Ultimax(R) models. Second Chance
Body Armor has claimed that Zylon(R) fiber, which is made by Toyobo, a Japanese
corporation, and used in the ballistic fabric construction of its Ultima(R) and
Ultimax(R) models, degraded more rapidly than originally anticipated. Second
Chance Body Armor has also stated that the Zylon(R) degradation problem affects
the entire body armor industry, not just its products. Both private claimants
and State Attorneys General have already commenced legal action against Second
Chance Body Armor based upon its Ultima(R) and Ultimax(R) model vests and we
have received investigative demands from state agencies in Texas and
Connecticut. Second Chance Body Armor licenses from Simula a certain patented
technology which is used in some of the body armor it manufactures, but to our
knowledge, no lawsuit has yet been brought against Second Chance Body Armor
based upon this licensed technology, although a letter was received by Simula
from an attorney representing a police officer who was injured while wearing a
Second Chance Body Armor vest alleging potential liability against Simula. In
addition, the U.S. Attorney General has asked the U.S. Department of Justice to
investigate the claims regarding the use of Zylon(R) in bulletproof vests, which
we use in the manufacturing of certain of our body armor models for law
enforcement personnel. As Simula has licensed its technology to Second Chance
Body Armor, it may be impacted by the pending claims against Second Chance Body
Armor and the investigation being conducted by the U.S. Department of Justice.
If Simula is included in the claims pending against Second Chance Body Armor and
the investigation being conducted by the U.S. Department of Justice, we cannot
assure you that any judgment, settlement or resolution against Simula will not
have a material impact on Simula's financial position, operations or liquidity.
The National Institute of Justice ("NIJ") is engaged in an ongoing inquiry
and investigation of bullet-resistant vests and the protocol for testing used
vests, as well as the reliability of Zylon(R) and other fibers. We have
consulted with and cooperated fully with the NIJ in this endeavor. To date, the
NIJ has embarked only in its first phase of testing, which entails vests that
have been heavily worn or exposed to adverse conditions, and which involves the
ballistic standard applicable to new vests. Although some of the vests tested,
including ours, experienced some level of penetration, the NIJ specifically
warned against the misuse and misinterpretation of these results, emphasizing
that the data produced so far is preliminary in nature, applies to a very small
sample size, and, therefore, it is not possible to draw any statistically-based
conclusions from these results. The NIJ will continue to conduct further testing
and analyze these issues in order to determine if any conclusions can be reached
as to the performance and reliability of aged vests. We have requested but not
yet received the NIJ to provide us with its testing data, and we intend to
evaluate and review the NIJ results upon receipt in our continuing effort to
assist the NIJ in developing uniform standards for certification of new vests
and the testing of used vests. The NIJ continues to encourage law enforcement
officers to wear body armor, in light of the fact that
20
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED (UNAUDITED)
"the lives of more than 2,700 law enforcement officers have been saved by the
use of bullet-resistant body armor over the past 30 years."
In April 2004, two class action complaints were filed in Florida state
courts by police organizations and individual police officers, alleging that our
vests do not have the qualities and performance characteristics as warranted,
thereby breaching express warranty, implied warranty of merchantability, implied
warranty of fitness for a particular purpose and duty to warn. We strenuously
disagree with the allegations set forth in these complaints and intend to
present a vigorous defense. By letter dated April 14, 2004, an attorney
representing the Ohio State Troopers Association, Inc. wrote to us demanding a
full refund of the purchase price for our vests containing Zylon(R) purchased by
Ohio Highway Patrol Troopers. We have responded by denying his demand for a
refund and explaining that there have been no incidents of injury related to our
vests, that our vests meet the NIJ certification standards and that there exists
no reliable evidence to show that our vests are sub-standard or inappropriate
for their intended use.
Except for the updates noted above, please see footnote 11 Commitments and
Contingencies Legal/Litigation Matters in our Annual Report on Form 10-K for the
fiscal year ended December 31, 2003, for a description of other legal
proceedings.
21
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED (UNAUDITED)
NOTE 12 -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 March 31, 2004 and December 31,
2003, the related condensed statements of operations for each of the three month
periods ended March 31, 2004 and March 31, 2003 and the related condensed
statements of cash flows for the three month periods ended March 31, 2004 and
March 31, 2003 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.
22
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED (UNAUDITED)
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
MARCH 31, 2004
--------------------------------------------------------------------------------
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
---------- ------------ --------------- ------------- -------------
(IN THOUSANDS)
ASSETS
Current Assets:
Cash and cash equivalents $ 58,030 $ 6,325 $ 11,480 $ - $ 75,835
Accounts receivable, net 989 74,854 13,353 - 89,196
Costs and earned gross profit in excess
of billings - 860 - - 860
Intercompany receivables 64,093 52,197 38,352 (154,642) -
Inventories - 73,555 19,348 - 92,903
Prepaid expenses and other current assets 4,160 20,744 2,743 (2,653) 24,994
Current assets of discontinued operations - 41,216 6,235 (46,594) 857
---------- ------------ --------------- ------------- -------------
Total Current Assets 127,272 269,751 91,511 (203,889) 284,645
Property and equipment, net 2,238 36,851 19,578 - 58,667
Goodwill, net - 174,051 2,095 - 176,146
Patents, licenses and trademarks, net - 45,893 180 - 46,073
Other assets 18,361 2,133 159 - 20,653
Long-term assets of discontinued operations - 1,717 - - 1,717
Investment in subsidiaries 418,148 9,858 - (428,006) -
---------- ------------ --------------- ------------- -------------
Total Assets $566,019 $ 540,254 $ 113,523 $ (631,895) $ 587,901
========== ============ =============== ============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ - $ 635 $ 143 $ - $ 778
Short-term debt - - 622 - 622
Accounts payable 916 34,975 6,190 - 42,081
Accrued expenses and other current
liabilities 7,078 30,016 20,490 - 57,584
Income taxes payable (10,237) 13,561 525 - 3,849
Intercompany payables 93,713 49,309 10,314 (153,336) -
Current liabilities of discontinued
operations - 5,001 43,243 (47,900) 344
---------- ------------ --------------- ------------- -------------
Total Current Liabilities 91,470 133,497 81,527 (201,236) 105,258
Long-term debt, less current portion 157,002 1,725 537 - 159,264
Other long-term liabilities 5,202 4,622 1,210 - 11,034
Long-term liabilities of discontinued
operations - 2,653 - (2,653) -
---------- ------------ --------------- ------------- -------------
Total Liabilities 253,674 142,497 83,274 (203,889) 275,556
Stockholders' Equity:
Preferred stock - 1,450 - (1,450) -
Common stock 347 4,393 7,854 (12,247) 347
Additional paid in capital 323,275 273,326 46,095 (319,421) 323,275
Retained earnings (accumulated deficit) 57,432 118,588 (23,700) (94,888) 57,432
Accumulated other comprehensive loss 3,608 - - - 3,608
Treasury stock (72,317) - - - (72,317)
---------- ------------ --------------- ------------- -------------
Total Stockholders' Equity 312,345 397,757 30,249 (428,006) 312,345
---------- ------------ --------------- ------------- -------------
Total Liabilities and Stockholders' Equity $566,019 $ 540,254 $ 113,523 $ (631,895) $ 587,901
========== ============ =============== ============= =============
23
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, 2003
--------------------------------------------------------------------------------
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
---------- ------------ --------------- ------------- -------------
(IN THOUSANDS)
ASSETS
Current Assets:
Cash and cash equivalents $ 90,764 $ 11,084 $ 10,002 $ - $ 111,850
Restricted cash 2,600 - - - 2,600
Accounts receivable, net 1,201 59,470 11,964 - 72,635
Costs and earned gross profit in excess
of billings - - - - -
Intercompany receivables 60,974 2,600 38,352 (101,926) -
Inventories - 61,494 19,033 - 80,527
Prepaid expenses and other current assets 20,241 1,844 2,600 (2,653) 22,032
Current assets of discontinued operations - 753 - - 753
---------- ------------ --------------- ------------- -------------
Total Current Assets 175,780 137,245 81,951 (104,579) 290,397
Property and equipment, net 2,122 34,853 20,601 - 57,576
Goodwill, net - 173,640 2,067 - 175,707
Patents, licenses and trademarks, net - 43,991 183 - 44,174
Other assets 14,092 1,924 153 - 16,169
Long-term assets of discontinued operations - 1,603 - - 1,603
Investment in subsidiaries 320,034 10,038 - (330,072) -
---------- ------------ --------------- ------------- -------------
Total Assets $512,028 $403,294 $ 104,955 $ (434,651) $ 585,626
========== ============ =============== ============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ - $ 31,960 $ 147 $ - $ 32,107
Short-term debt - - 498 - 498
Accounts payable 1,584 20,941 7,779 - 30,304
Accrued expenses and other current
liabilities 12,403 27,113 18,702 - 58,218
Income taxes payable - - - - -
Intercompany payables 44,251 47,073 9,933 (101,257) -
Current liabilities of discontinued
operations - (35,714) 37,009 (669) 626
---------- ------------ --------------- ------------- -------------
Total Current Liabilities 58,238 91,373 74,068 (101,926) 121,753
Long-term debt, less current portion 153,452 4,257 591 - 158,300
Other long-term liabilities 4,973 4,008 1,227 - 10,208
Long-term liabilities of discontinued
operations - 2,653 - (2,653) -
---------- ------------ --------------- ------------- -------------
Total Liabilities 216,663 102,291 75,886 (104,579) 290,261
Stockholders' Equity:
Preferred stock - 1,450 - (1,450) -
Common stock 344 4,143 7,854 (11,997) 344
Additional paid in capital 318,460 191,781 46,095 (237,876) 318,460
Retained earnings (accumulated deficit) 44,942 103,629 (24,880) (78,749) 44,942
Accumulated other comprehensive loss 3,936 - - - 3,936
Treasury stock (72,317) - - - (72,317)
---------- ------------ --------------- ------------- -------------
Total Stockholders' Equity 295,365 301,003 29,069 (330,072) 295,365
---------- ------------ --------------- ------------- -------------
Total Liabilities and Stockholders' Equity $512,028 $ 403,294 $ 104,955 $ (434,651) $ 585,626
========== ============ =============== ============= =============
24
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED (UNAUDITED)
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2004
-----------------------------------------------------------------------------
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
---------- ------------ --------------- ------------- -------------
(IN THOUSANDS)
REVENUES:
Aerospace & Defense $ - $ 81,008 $ - $ - $ 81,008
Products - 44,249 9,591 - 53,840
Mobile Security - 5,367 21,932 (519) 26,780
---------- ------------ --------------- ------------- -------------
Total revenues - 130,624 31,523 (519) 161,628
---------- ------------ --------------- ------------- -------------
COSTS AND EXPENSES:
Cost of sales - 88,350 26,237 (519) 114,068
Operating expenses 3,502 16,387 3,362 - 23,251
Amortization - 977 3 - 980
Integration and other charges 90 591 - - 681
Related party management (income) fees 16 (17) 1 - -
---------- ------------ --------------- ------------- -------------
OPERATING (LOSS) INCOME (3,608) 24,336 1,920 - 22,648
Interest expense, net 1,656 32 40 - 1,728
Other expense (income), net 50 16 49 - 115
Equity in (earnings) losses of
subsidiaries (16,321) 182 - 16,139 -
---------- ------------ --------------- ------------- -------------
INCOME FROM CONTINUING OPERATIONS BEFORE
PROVISION (BENEFIT) FOR INCOME TAXES 11,007 24,106 1,831 (16,139) 20,805
PROVISION (BENEFIT) FOR INCOME TAXES (1,483) 9,009 651 - 8,177
---------- ------------ --------------- ------------- -------------
INCOME FROM CONTINUING OPERATIONS 12,490 15,097 1,180 (16,139) 12,628
DISCONTINUED OPERATIONS:
(Loss) from discontinued operations,
net of tax - (138) - - (138)
---------- ------------ --------------- ------------- -------------
NET INCOME $12,490 $ 14,959 $ 1,180 $ (16,139) $ 12,490
========== ============ =============== ============= =============
25
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS -
(UNAUDITED)
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2003
----------------------------------------------------------------------------------
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
---------- ------------ --------------- ------------- -------------
(IN THOUSANDS)
REVENUES:
Aerospace & Defense $ - $ 15,910 $ - $ - $ 15,910
Products - 36,684 7,323 - 44,007
Mobile Security - 4,089 16,468 - 20,557
---------- ------------ --------------- ------------- -------------
Total revenues - 56,683 23,791 - 80,474
---------- ------------ --------------- ------------- -------------
COSTS AND EXPENSES:
Cost of sales - 37,220 19,942 - 57,162
Operating expenses 2,072 9,302 2,630 - 14,004
Amortization - 57 3 - 60
Integration and other charges 76 346 - - 422
---------- ------------ --------------- ------------- -------------
OPERATING (LOSS) INCOME (2,148) 9,758 1,216 - 8,826
Interest expense, net 228 70 81 - 379
Other expense, net - - 69 - 69
Equity in (earnings) losses of
subsidiaries (6,664) 282 - 6,382 -
---------- ------------ --------------- ------------- -------------
INCOME FROM CONTINUING OPERATIONS
BEFORE PROVISION (BENEFIT) FOR INCOME
TAXES 4,288 9,406 1,066 (6,382) 8,378
PROVISION (BENEFIT) FOR INCOME TAXES (799) 3,560 372 - 3,133
---------- ------------ --------------- ------------- -------------
INCOME FROM CONTINUING OPERATIONS 5,087 5,846 694 (6,382) 5,245
DISCONTINUED OPERATIONS:
(Loss) income from discontinued
operations,
net of tax - (447) 289 - (158)
---------- ------------ --------------- ------------- -------------
NET INCOME $ 5,087 $ 5,399 $ 983 $ (6,382) $ 5,087
========== ============ =============== ============= =============
26
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
THREE MONTHS ENDED MARCH 31, 2004
-------------------------------------------------------------------------------
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------------ ------------ -------------- ------------- -------------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Income from continuing operations $ 12,490 $ 15,097 $ 1,180 $ (16,139) $ 12,628
Adjustments to reconcile income from
continuing operations to cash
provided by (used in) operating
activities:
Depreciation and amortization 348 2,275 791 - 3,414
Loss on disposal of fixed assets - - 6 - 6
Deferred income taxes 104 (521) (21) - (438)
Changes in operating assets &
liabilities, net of acquisitions:
Decrease (increase) in accounts receivable 212 (15,996) (1,389) - (17,173)
Decrease (increase) in intercompany
receivables & payables 46,016 (46,396) 380 - -
Increase in inventory - (11,917) (315) - (12,232)
(Increase) decrease in prepaid expenses
& other assets (3,611) (1,814) 203 - (5,222)
Increase (decrease) in accounts payable,
accrued expenses and other current
liabilities (5,663) 17,859 199 - 12,395
Increase (decrease) in income taxes
payable 8,651 (1,607) 177 - 7,221
------------ ------------ -------------- ------------- -------------
Net cash provided by (used in) operating
activities 58,547 (43,020) 1,211 (16,139) 599
------------ ------------ -------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (254) (3,246) (314) - (3,814)
Purchase of patents and trademarks - (49) - - (49)
Purchase of equity investment - (1,374) - - (1,374)
Collection of note receivable - 375 - - 375
Decrease in restricted cash 2,600 - - - 2,600
Additional consideration for purchased
businesses - (1,832) - - (1,832)
Investment in subsidiaries (98,115) 81,976 - 16,139 -
Purchase of business, net of cash
acquired - (2,729) - - (2,729)
------------ ------------ -------------- ------------- -------------
Net cash (used in) provided by investing
activities (95,769) 73,121 (314) 16,139 (6,823)
------------ ------------ -------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 4,488 - - - 4,488
Repayments of long-term debt - (33,863) (34) - (33,897)
Borrowings under lines of credit 5,303 - 146 - 5,449
Repayments under lines of credit (5,303) - (24) - (5,327)
------------ ------------ -------------- ------------- -------------
Net cash provided by (used in) financing
activities 4,488 (33,863) 88 - (29,287)
------------ ------------ -------------- ------------- -------------
Effect of exchange rate on cash and cash
equivalents - (359) 493 - 134
Net cash used in discontinued operations - (638) - - (638)
------------ ------------ -------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (32,734) (4,759) 1,478 - (36,015)
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD 90,764 11,084 10,002 - 111,850
------------ ------------ -------------- ------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 58,030 $ 6,325 $ 11,480 $ - $ 75,835
============ ============ ============== ============= =============
27
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
THREE MONTHS ENDED MARCH 31, 2003
-------------------------------------------------------------------------------
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------------ ------------ -------------- ------------- -------------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Income from continuing operations $ 5,087 $ 5,846 $ 694 $ (6,382) $ 5,245
Adjustments to reconcile income from
continuing operations to cash
provided by operating activities:
Depreciation and amortization 257 988 457 - 1,702
Loss on disposal of fixed assets - - 8 - 8
Deferred taxes (1,264) 413 1,050 - 199
Changes in operating assets &
liabilities, net of acquisitions:
Decrease in accounts receivable - 2,852 26 - 2,878
(Increase) decrease in intercompany
receivables & payables (624) (15) 639 - -
(Increase) decrease in inventory - (60) 1,142 - 1,082
Increase in prepaid expenses & other
assets (1,335) (807) (1,001) - (3,143)
Increase (decrease) in accounts payable,
accrued expenses and other current
liabilities 654 (2,103) (451) - (1,900)
Increase (decrease) in income taxes
payable (2,076) 148 266 - (1,662)
------------ ------------ -------------- ------------- -------------
Net cash provided by operating activities 699 7,262 2,830 (6,382) 4,409
------------ ------------ -------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (62) (1,255) (410) - (1,727)
Investment in subsidiaries (6,661) 414 (135) 6,382 -
------------ ------------ -------------- ------------- -------------
Net cash used in investing activities (6,723) (841) (545) 6,382 (1,727)
------------ ------------ -------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchases of treasury stock (15,684) - - - (15,684)
Repayments of long-term debt - (239) - - (239)
Borrowings under lines of credit 22,740 - 176 - 22,916
Repayments under lines of credit (2,740) - (147) - (2,887)
------------ ------------ -------------- ------------- -------------
Net cash provided by (used in) financing
activities 4,316 (239) 29 - 4,106
------------ ------------ -------------- ------------- -------------
Effect of exchange rate on cash and cash
equivalents 369 (52) (372) - (55)
Net cash used in discontinued operations - (2,428) (1,208) - (3,636)
------------ ------------ -------------- ------------- -------------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS (1,339) 3,702 734 - 3,097
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD 7,152 3,556 2,205 - 12,913
------------ ------------ -------------- ------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 5,813 $ 7,258 $ 2,939 $ - $ 16,010
============ ============ ============== ============= =============
28
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED (UNAUDITED)
NOTE 13 - CREDIT AGREEMENT AMENDMENT
On March 29, 2004, we amended our credit agreement to allow us to pay
dividends subject to certain limitations.
NOTE 14 - ACQUISITION
On March 5, 2004, we acquired a majority of the assets and assumed certain
liabilities of Vector Associations, Inc. (dba ODV, Inc.), a leading manufacturer
and distributor of field drug test kits and crime scene products. The purchase
price was $3,289,000 including $2,739,000 in cash at closing, an additional
$275,000 plus interest payable on December 31, 2004, subject to certain
adjustments and an additional $275,000 plus interest payable on April 30, 2005,
subject to certain adjustments.
29
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
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 ended March 31, 2004. 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, 2003, 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 Aerospace & Defense Group and 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. In accordance with Statement of Financial Accounting Standards
No. 115, "Accounting for Certain Investments in Debt and Equity Securities,"
(SFAS 115) we record changes in the market value of available-for-sale
securities in the accumulated other comprehensive income caption of
stockholders' equity in the condensed consolidated balance sheet, until we
dispose of the securities. Once these securities are disposed of, either by sale
or maturity, the gain or loss is recognized in other income or expense. The
cumulative translation adjustment, which represents the effect of translating
assets and liabilities of our foreign operations and changes in market value of
available-for-sale securities is recorded as an increase of equity of $3,608,000
and $3,936,000 as of March 31, 2004 and December 31, 2003, respectively, and is
classified as accumulated other comprehensive income. The current year change in
the accumulated amount 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
30
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
intrinsic value based method, compensation cost 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 March 31, 2004 and 2003 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
MARCH 31, 2004 MARCH 31, 2003
------------------- -----------------------
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
Net income as reported: $ 12,490 $ 5,087
Deduct: Total stock-based employee
compensation expense determined under fair
value based method for all awards, net of
related tax effects (1,247) (1,158)
------------------- -----------------------
Pro forma net income $ 11,243 $ 3,929
=================== =======================
Earnings per share:
Basic - as reported $ 0.44 $ 0.17
=================== =======================
Basic - pro forma $ 0.39 $ 0.14
=================== =======================
Diluted - as reported $ 0.42 $ 0.17
=================== =======================
Diluted - pro forma $ 0.38 $ 0.13
=================== =======================
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, 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.
See Note 2 to the Condensed Consolidated Interim Financial Statements.
31
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
Derivative Instruments and Hedging Activities. We account for derivative
instruments in accordance with Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities", as amended
by Statement of Financial Accounting Standards No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities - an Amendment of FAS
133", and Statement of Financial Accounting Standards No. 149 "Amendment of
Statement 133 on Derivative Instruments and Hedging Activities" collectively
("SFAS 133"). 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 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, other assets on the Condensed Consolidated Balance
Sheet as of March 31, 2004 increased by $3.5 million from December 31, 2003,
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.
Goodwill. Goodwill represents the excess of the purchase price over the
fair value of the net assets acquired in a purchase business combination.
Goodwill and other intangible assets are stated on the basis of cost. The $124.8
million in goodwill resulting from acquisitions made subsequent to June 30, 2001
was immediately subjected to the non-amortization provisions of SFAS 142.
Estimates. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts in the financial statements and
accompanying notes. Significant estimates inherent in the preparation of the
accompanying consolidated financial statements include periodic testing of the
carrying value of long-lived assets for impairment, valuation allowances for
receivables, inventories and deferred income tax assets, liabilities for
potential litigation claims and settlements, and contract contingencies and
obligations. Actual results could differ from those estimates.
Impairment. Long-lived assets including certain identifiable intangibles,
and the goodwill related to those assets, are reviewed annually for impairment
whenever events or changes in circumstances indicate that the carrying amount of
the asset in question may not be recoverable including, but not limited to, a
deterioration of profits for a business segment that has long-lived assets, and
when other changes occur which might impair recovery of long-lived assets.
Management reviewed our long-lived assets and has taken an impairment charge of
$12.4 million in fiscal 2003 to reduce the carrying value of the Services
Division to estimated realizable value. The method used to determine the
existence of an impairment would generally be discounted operating cash flows
estimated over the remaining useful lives of the related long-lived assets for
continuing operations in accordance with SFAS No. 142, "Goodwill and Other
Intangible Assets." Impairment is measured as the difference between fair value
and unamortized cost at the date impairment is determined.
32
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
NEW ACCOUNTING PRONOUNCEMENTS:
In April 2004, the FASB issued FASB Staff Position No. 129-1, Disclosure
Requirements under FASB Statement No. 129, "Disclosure of Information about
Capital Structure," relating to contingently convertible securities ("FSP
129-1"). The purpose of FSP 129-1 is to interpret how the disclosure provisions
of FASB Statement No. 129 apply to contingently convertible securities and to
their potentially dilutive effects on earnings per share. The guidance in this
FSP is effective April 2004 and applies to all existing and newly created
securities.
33
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2004 COMPARED TO THREE MONTHS ENDED MARCH 31, 2003.
Net income (loss). Net income increased $7.4 million, or 145.5% to $12.5
million for the three months ended March 31, 2004 compared to $5.1 million for
the three months ended March 31, 2003. Net income for the three months ended
March 31, 2004, includes income from continuing operations of $12.6 million and
a loss from discontinued operations of ($138,000), compared to income from
continuing operations of $5.2 million and a loss from discontinued operations of
($158,000) for the three months ended March 31, 2003.
CONTINUING OPERATIONS
Aerospace & Defense Group revenues. Aerospace & Defense Group revenues
increased $65.1 million, or 409.2%, to $81.0 million in the three months ended
March 31, 2004, compared to $15.9 million in the three months ended March 31,
2003. For the three months ended March 31, 2004, Aerospace & Defense Group
revenue increased 172.7% internally and 236.5% from acquisitions. Internal
growth was due to strong demand for the M1114 Up-Armored HWMMV and SAPI plates,
while acquired growth was a function of the Simula, Inc. acquisition on December
9, 2003.
Products Division revenues. Products Division revenues increased $9.8
million, or 22.3%, to $53.8 million in the three months ended March 31, 2004,
compared to $44.0 million in the three months ended March 31, 2003. For the
three months ended March 31, 2004, Products Division revenue increased 14.8%
internally, including year over year changes in acquired businesses, and 7.5%
due to the acquisitions of Vector Associations, Inc. (dba ODV, Inc.), which was
completed during the first quarter of 2004, and Hatch Imports, Inc., which was
completed during the fourth quarter of 2003. Internal growth was due primarily
to strong sales of International body armor, and other soft armor and hard armor
sectors, providing protection to troops and private sector employees within
Iraq.
Mobile Security revenues. Mobile Security Division revenues increased $6.2
million, or 30.3%, to $26.8 million in the three months ended March 31, 2004,
compared to $20.6 million in the three months ended March 31, 2003, primarily
due to increased revenues from our Germany subsidiary Trasco-Bremen, which is
experiencing increased demand in the Middle East.
Cost of sales. Cost of sales increased $56.9 million, or 99.6%, to $114.1
million for the three months ended March 31, 2004, compared to $57.2 million for
the three months ended March 31, 2003. As a percentage of total revenues, cost
of sales decreased to 70.6% of total revenues for the three months ended March
31, 2004, from 71.0% for the three months ended March 31, 2003.
Gross margins in the Aerospace & Defense Group were 32.1% for the three
months ended March 31, 2004, compared to 29.8% for the three months ended March
31, 2003, primarily due to the acquisition of Simula, Inc., which operated at
higher average gross margins than the M1114 Up-Armored HWWMV program for the
quarter, as well as improved gross margins for both HWWMV's and HWWMV spare
parts.
34
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
Gross margins in the Products Division were 31.5% for the three months
ended March 31, 2004, compared to 34.2% for the three months ended March 31,
2003. The decrease in Products Division gross margins resulted primarily from
product mix , certain large lower margin international and governmental orders
and certain additional inventory reserves provided for during the quarter.
Gross margins in the Mobile Security Division were 17.3% in the three
months ended March 31, 2004, compared to 17.2% for the three months ended March
31, 2003.
Operating expenses. Operating expenses increased $9.3 million, or 66.0%, to
$23.3 million (14.4% of total revenues) for the three months ended March 31,
2004 compared to $14.0 million (17.4% of total revenues) for the three months
ended March 31, 2003. The decrease as a percentage of revenues was largely a
function of increased revenues, and the Simula, Inc. acquisition, which operates
with lower operating expenses as a percent of revenues than the Products
Division and the Mobile Security Division.
Aerospace & Defense Group operating expenses increased $4.5 million, or
585.2%, to $5.3 million (6.5% of Aerospace & Defense Group revenues) for the
three months ended March 31, 2004, compared to $0.8 million (4.8% of Aerospace &
Defense Group revenues) for the three months ended March 31, 2003. The increase
in operating expenses is due primarily to the acquisition of Simula, Inc. on
December 9, 2003, as well as additional operating expenses in the M1114
Up-Armored HWMMV program as we increase production. The increase in operating
expense as a percentage of revenue was due to the fact that Simula incurs higher
operating expenses as a percentage of revenue than the other businesses within
the Aerospace & Defense Group.
Products Division operating expenses increased $3.0 million, or 38.0%, to
$10.9 million (20.3% of Products Division revenues) for the three months ended
March 31, 2004, compared to $7.9 million (18.0% of Products Division revenues)
for the three months ended March 31, 2003. This increase is due primarily to
acquisitions, increased research and development spending, higher sales expenses
as related to increased sales volumes, wage increases, higher insurance cost,
increased bad debt provisions, and bonus expenses that previously were allocated
to corporate operating expenses.
Mobile Security Division operating expenses increased $0.4 million, or
10.6%, to $3.6 million (13.3% of Mobile Security Division revenues) for the
three months ended March 31, 2004, compared to $3.2 million (15.6% of Mobile
Security Division revenues) for the three months ended March 31, 2003. This
increase is due primarily to increased operating expenses related to significant
revenue growth and increased warranty provisions.
Corporate operating expenses increased $1.4 million, or 66.4%, to $3.5
million (2.2% of total revenues) for the three months ended March 31, 2004,
compared to $2.1 million (2.6% of total revenues) for the three months ended
March 31, 2003. This increase in administrative expenses is associated with the
acquisition of Simula, overall growth of the Company, and Sarbanes-Oxley
requirements.
Amortization. Amortization expense increased $920,000, or 1,533.3% to
$980,000 for the three months ended March 31, 2004, compared to $60,000 for the
three months ended March 31, 2003, primarily due to the acquisitions of Simula
and Hatch in December 2003. 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, and acquired
35
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
amortizable intangible assets that meet the criteria for recognition as an asset
apart from goodwill under SFAS 141.
Integration and other charges. Integration and other charges increased
$259,000, or 61.4%, to $681,000 for the three months ended March 31, 2004,
compared to $422,000 for the three months ended March 31, 2003. The integration
and other charges for the three months ended March 31, 2004 primarily related to
the integration of Simula, Inc., Hatch Imports, Inc., and ODV, Inc., all of
which were acquired subsequent to the first quarter of 2003.
Operating income. Operating income from continuing operations increased
$13.8 million, or 156.6%, to $22.6 million for the three months ended March 31,
2004, compared to $8.8 million in the three months ended March 31, 2003, due to
the factors discussed above.
Interest expense, net. Interest expense, net increased $1.3 million, or
355.9%, to $1.7 million for the three months ended March 31, 2004, compared to
$379,000 for the three months ended March 31, 2003. This increase was due
primarily to interest expense associated with the $150 million aggregate
principal amount of 8.25% senior subordinated notes due 2013 issued in August
2003. 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 (1.16% at March 31, 2004), set in arrears, plus a spread of 2.735% to
2.75%.
Other expense, net. Other expense, net, was $115,000 for the three months
ended March 31, 2004, compared to other expense, net, of $69,000 for the three
months ended March 31, 2003.
Income from continuing operations before provision for income taxes. Income
from continuing operations before provision for income taxes increased $12.4
million, or 148.3%, to $20.8 million for the three months ended March 31, 2004,
compared to $8.4 million for the three months ended March 31, 2003, due to the
reasons discussed above.
Provision for income taxes. Provision for income taxes was $8.2 million for
the three months ended March 31, 2004, compared to $3.1 million for the three
months ended March 31, 2003. The effective tax rate was 39.3% for the three
months ended March 31, 2004, compared to 37.4% for the three months ended March
31, 2003. The increased tax rate relates to an increased mix of profitability
generated by our Ohio, Arizona and Massachusetts locations, which operate in
higher-taxed jurisdictions.
Income from continuing operations. Income from continuing operations
increased $7.4 million to $12.6 million for the three months ended March 31,
2004, compared to $5.2 million for the three months ended March 31, 2003 due to
the factors discussed above.
DISCONTINUED OPERATIONS
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
36
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
received a $4.1 million collateralized note due in two years and a warrant for
approximately 2.5% of AIS. We have recorded a loss of $366,000 on the sale.
On November 26, 2003, we announced that we completed the sale of
ArmorGroup, our security service division, for $33.7 million in consideration to
a group of private investors led by Granville Baird Capital Partners of London,
England and Management. We received $31.4 million in cash at closing and are
scheduled to receive another $2.3 million by the end of 2004, of which we have
received $500,000 through May 10, 2004. We have recorded a loss of $8.8 million
on the sale. In accordance with generally accepted accounting principles,
unrealized gains and losses, which are included in equity as accumulated other
comprehensive income or loss, are not recognized until the period of disposition
of the related assets and liabilities (which was a large component of the loss).
At December 31, 2003, our litigation support services subsidiary remains
our only operating subsidiary in discontinued operations.
Services revenues. Services Division revenue decreased $25.1 million to
$720,000 for the three months ended March 31, 2004, compared to $25.8 million
for the three months ended March 31, 2003. Exclusive of ArmorGroup Integrated
Systems, which we sold on April 17, 2003, and ArmorGroup, which we sold on
November 26, 2003, revenue decreased $220,000, or 23.4%, to $720,000 for the
three months ended March 31, 2004, compared to $940,000 for the three months
ended March 31, 2003. This decrease was due to a delay in the release of
enhanced software tools.
Cost of sales. Cost of sales decreased $18.9 million to $236,000 for the
three months ended March 31, 2004, compared to $19.2 million for the three
months ended March 31, 2003. Exclusive of ArmorGroup Integrated Systems and
ArmorGroup, cost of sales decreased $105,000, or 30.8%, to $236,000 for the
three months ended March 31, 2004, compared to $341,000 for the three months
ended March 31, 2003. As a percentage of total revenue exclusive of ArmorGroup
Integrated Systems and ArmorGroup, cost of sales decreased to 32.8% of total
revenues for the three months ended March 31, 2004, from 36.3% for the three
months ended March 31, 2003.
Operating expenses. Operating expenses decreased $6.0 million to $436,000
(60.6% of Services revenues) for the three months ended March 31, 2004, compared
to $6.4 million (24.9% of Services revenues) for the three months ended March
31, 2003. Exclusive of ArmorGroup Integrated Systems and ArmorGroup, operating
expenses decreased $51,000, or 10.5%, to $436,000 for the three months ended
March 31, 2004, compared to $487,000 for the three months ended March 31, 2003.
This decrease was due to a decline in revenues.
Integration and other charges. Integration and other charges decreased to
zero for the three months ended March 31, 2004, compared to $42,000 for the
three months ended March 31, 2003.
Operating income. Operating income was $48,000 for the three months ended
March 31, 2004, compared to operating income of $152,000 for the three months
ended March 31, 2003, due to the factors discussed above. Excluding the
ArmorGroup Integrated Systems and ArmorGroup, the balance of the assets held for
sale generated operating income of $48,000 for the three months ended March 31,
2004, compared to operating income of $113,000 for the three months ended March
31, 2003, due to reasons discussed above.
37
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
Interest expense, net. Interest expense, net, decreased $36,000, or 94.7%,
to $2,000 for the three months ended March 31, 2004, compared to $38,000 for the
three months ended March 31, 2003, primarily due to the sale of ArmorGroup
Integrated Systems and ArmorGroup.
Other expense, net. Other expense, net, increased $203,000, or 338.3%, to
$263,000 for the three months ended March 31, 2004, compared to other expense,
net, of $60,000 for the three months ended March 31, 2003. The increase was due
to additional accounting fees incurred in connection with the sale of
ArmorGroup.
Income (loss) from discontinued operations before provision for income
taxes. Income (loss) from discontinued operations before provision for income
taxes was ($217,000) for the three months ended March 31, 2004, compared to
income of $54,000 for the three months ended March 31, 2003, due to the reasons
discussed above.
(Benefit) Provision for income taxes. Benefit for income taxes was $79,000
for the three months ended March 31, 2004 compared to a provision for income
taxes of $212,000 for the three months ended March 31, 2003. The effective tax
rate for the three months ended March 31, 2004 was a benefit of 36.4% compared
to a provision of 392.6% for the three months ended March 31, 2003. The large
provision of 392.6% for the three months ended March 31, 2003, was primarily due
to unrecognized potential deferred tax assets associated with foreign
subsidiaries, which recorded pretax losses in the first quarter 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.
(Loss) from discontinued operations. Loss from discontinued operations was
($138,000) for the three months ended March 31, 2004, compared to a loss from
discontinued operations of ($158,000) for the three months ended March 31, 2003,
due to the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
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 all of our domestic subsidiaries,
excluding Cyconics International Training Services, Inc. (formally known as
Advanced Training Solutions, Inc. which was formally known as USDS, Inc.), on a
senior subordinated basis. The Notes have been sold to qualified institutional
investors in reliance on Rule 144A of the Securities Act of 1933, as amended,
and to non-U.S. persons in reliance on Regulation S under the Securities Act of
1933, as amended. The Notes were initially rated B1/B+ by Moody's Investors'
Service and Standard & Poor's Rating Services, respectively. We used a portion
the funds to repay debt, acquire Simula, Inc., Hatch Imports, Inc., and ODV,
Inc. and we intend to use the remaining proceeds of the offering to fund
acquisitions, for general corporate and working capital purposes, including the
funding of capital expenditures. On March 29, 2004, we completed a registered
exchange offer for the Notes and exchanged the Notes for new Notes that were
registered under the Securities Act of 1933, as amended.
On August 12, 2003, in concert with our high yield note offering, we
entered 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
new Credit Facility consists of a five-year revolving credit facility, and,
among other things,
38
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
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 0.50%, 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 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. On March 29, 2004, we amended our credit agreement to allow
us to pay dividends subject to certain limitations.
As of March 31, 2004, we were in compliance with all of our negative and
affirmative covenants.
On September 2, 2003, we entered into interest rate swap agreements, which
have been designated as fair value hedges as defined under SFAS 133 with a
notional amount totaling $150 million. The agreements were entered into 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 day 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, other assets on the
Consolidated Balance Sheet as of March 31, 2004 increased by $3.5 million from
December 31, 2003, 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. Through
May 10, 2004, 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 an additional 3.8 million shares of our
common stock. Repurchases may be made in the open market, in privately
negotiated transactions or otherwise. At March 31, 2004, we had 28.6 million
shares of common stock outstanding.
We expect to continue our policy of repurchasing our common stock from time
to time, subject to the restrictions contained in our Credit Facility and our
indenture. Our Credit Facility permits us
39
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
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 $178.9 million and $168.5
million as of March 31, 2004, and December 31, 2003, respectively.
Our fiscal 2004 capital expenditures for continuing operations are expected
to be approximately $13.9 million, of which we have spent approximately $3.8
million through the three months ended March 31, 2004. 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, 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 12 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.
40
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 and customers; 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; an
adverse determination in connection with the Zylon(R) investigation being
conducted by the U.S. Department of Justice and certain state agencies and/or
other Zylon(R)-related litigation; 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.
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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 relates 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 agreements involve 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 1.38% on May 4, 2004. The maturity dates of the
interest rate swap agreements match those of the underlying debt. Our objective
for entering into these interest rate swaps was 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 March 31, 2004, we recorded the fair value of the interest rate
swap agreements of $9.3 million and recorded the corresponding fair value
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ARMOR HOLDINGS, INC. AND SUBSIDIARIES
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS -
CONTINUED
adjustment to the 8.25% senior subordinated notes in other assets and long-term
debt sections of the Condensed Consolidated Balance Sheets, respectively.
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 South
America. 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 conduct 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.
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ARMOR HOLDINGS, INC. AND SUBSIDIARIES
ITEM 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, we evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures. 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 Exchange Act of 1934, as amended, is communicated and
processed in a timely manner. Warren B. Kanders, Chairman and Chief Executive
Officer, and Glenn J. Heiar, Chief Financial Officer, participated in this
evaluation.
Based on such evaluation, Mr. Kanders and Mr. Heiar concluded that, as of
the date of such evaluation, our disclosure controls and procedures were
effective. During the most recent fiscal quarter, there have not been any
significant changes in our internal controls over financial reporting or in
other factors that could significantly affect those controls.
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ARMOR HOLDINGS, INC. AND SUBSIDIARIES
PART II
ITEM 1. LEGAL PROCEEDINGS
In October 2002, we were sued in the United States District Court for the
District of Wyoming with respect to one of our subsidiaries' Casper, Wyoming
tear gas plant. The plaintiffs in the 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 the tear gas plant. In February
2004, we agreed with the plaintiffs to settle the lawsuit for an amount of money
that is not material to us, and on April 19, 2004, the court dismissed the
lawsuit with prejudice.
In September 2003, Second Chance Body Armor, Inc., a body armor
manufacturer and one of our competitors, has notified its customers of a
potential safety issue with its Ultima(R) and Ultimax(R) models. Second Chance
Body Armor has claimed that Zylon(R) fiber, which is made by Toyobo, a Japanese
corporation, and used in the ballistic fabric construction of its Ultima(R) and
Ultimax(R) models, degraded more rapidly than originally anticipated. Second
Chance Body Armor has also stated that the Zylon(R) degradation problem affects
the entire body armor industry, not just its products. Both private claimants
and State Attorneys General have already commenced legal action against Second
Chance Body Armor based upon its Ultima(R) and Ultimax(R) model vests and we
have received investigative demands from state agencies in Texas and
Connecticut. Second Chance Body Armor licenses from Simula a certain patented
technology which is used in some of the body armor it manufactures, but to our
knowledge, no lawsuit has yet been brought against Second Chance Body Armor
based upon this licensed technology, although a letter was received by Simula
from an attorney representing a police officer who was injured while wearing a
Second Chance Body Armor vest alleging potential liability against Simula. In
addition, the U.S. Attorney General has asked the U.S. Department of Justice to
investigate the claims regarding the use of Zylon(R) in bulletproof vests, which
we use in the manufacturing of certain of our body armor models for law
enforcement personnel. As Simula has licensed its technology to Second Chance
Body Armor, it may be impacted by the pending claims against Second Chance Body
Armor and the investigation being conducted by the U.S. Department of Justice.
If Simula is included in the claims pending against Second Chance Body Armor and
the investigation being conducted by the U.S. Department of Justice, we cannot
assure you that any judgment, settlement or resolution against Simula will not
have a material impact on Simula's financial position, operations or liquidity.
The National Institute of Justice ("NIJ") is engaged in an ongoing inquiry
and investigation of bullet-resistant vests and the protocol for testing used
vests, as well as the reliability of Zylon(R) and other fibers. We have
consulted with and cooperated fully with the NIJ in this endeavor. To date, the
NIJ has embarked only in its first phase of testing, which entails vests that
have been heavily worn or exposed to adverse conditions, and which involves the
ballistic standard applicable to new vests. Although some of the vests tested,
including ours, experienced some level of penetration, the NIJ specifically
warned against the misuse and misinterpretation of these results, emphasizing
that the data produced so far is preliminary in nature, applies to a very small
sample size and therefore it is not possible to draw any statistically-based
conclusions from these results. The NIJ will continue to conduct further testing
and analyze these issues in order to determine if any conclusions can be reached
as to the performance and reliability of aged vests. We have requested but not
yet received the NIJ to provide us with its testing data, and we intend to
evaluate and review the NIJ results upon receipt in our continuing effort to
assist the NIJ in developing uniform standards for certification of new vests
and the testing of used vests. The NIJ continues to encourage law enforcement
officers to wear body armor, in light of the fact that "the
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ARMOR HOLDINGS, INC. AND SUBSIDIARIES
lives of more than 2,700 law enforcement officers have been saved by the use of
bullet-resistant body armor over the past 30 years."
In April 2004, two class action complaints were filed in Florida state
courts by police organizations and individual police officers, alleging that our
vests do not have the qualities and performance characteristics as warranted,
thereby breaching express warranty, implied warranty of merchantability, implied
warranty of fitness for a particular purpose and duty to warn. We strenuously
disagree with the allegations set forth in these complaints and intend to
present a vigorous defense. By letter dated April 14, 2004, an attorney
representing the Ohio State Troopers Association, Inc. wrote to us demanding a
full refund of the purchase price for our vests containing Zylon(R) purchased by
Ohio Highway Patrol Troopers. We have responded by denying his demand for a
refund and explaining that there have been no incidents of injury related to our
vests, that our vests meet the NIJ certification standards and that there exists
no reliable evidence to show that our vests are sub-standard or inappropriate
for their intended use.
Reference is made to Part I, Item 3, Legal Proceedings, in our Annual
Report on Form 10-K for the fiscal year ended December 31, 2003, for a
description of other legal proceedings.
ITEM 5. OTHER INFORMATION
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.
3.1 Amended and Restated Bylaws of Armor Holdings, Inc.
4.1 Fourth Supplemental Indenture, dated as of March 24, 2004 among
Armor Holdings, Inc., the subsidiary guarantors listed as
signatories to the Indenture dated as of August 12, 2003, the
subsidiary guarantors listed on Exhibit A attached thereto, ODV
Holdings Corp., and Wachovia Bank, National Association, as
trustee.
10.1 First Amendment to Credit Agreement, dated as of January 9, 2004,
by and among Armor Holdings, Inc., as Borrower, the lenders from
time to time party to the Credit Agreement, Bank of America,
N.A., as Administrative Agent, Wachovia Bank, National
Association, as Syndication Agent, and Keybank National
Association, as Documentation Agent.
10.2 Second Amendment to Credit Agreement, dated as of March 29, 2004
by and among Armor Holdings, Inc., as Borrower, the lenders from
time to time party to the Credit Agreement, Bank of America,
N.A., as Administrative Agent,
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ARMOR HOLDINGS, INC. AND SUBSIDIARIES
Wachovia Bank National Association, as Syndication Agent, and
Keybank National Association, as Documentation Agent.
10.3 Transportation Services Agreement, dated as of December 10, 2003,
by and between Kanders Aviation, LLC and Armor Holdings, Inc.
10.4 Form of Indemnification Agreement of Armor Holdings, Inc. for
Directors, Chief Executive Officer and Chief Financial Officer.
31.1 Certification of Principal Executive Officer Pursuant to Rule
13a-14(a) (17 CFR 240.13a-14(a)).
31.2 Certification of Principal Financial Officer Pursuant to Rule
13a-14(a) (17 CFR 240.13a-14(a)).
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/A filed on January 22, 2004, supplementing our Form 8-K filed on
December 23, 2003 by providing financial statement information of Simula, Inc.
and pro forma financial information of Armor Holdings, Inc.
Form 8-K filed on January 27, 2004, relating to a press release, issued on
January 27, 2004, announcing, among other things, preliminary guidance for the
full fiscal year and the first quarter of 2004.
Form 8-K filed on February 12, 2004, relating to a press release, issued on
February 12, 2004, announcing our earnings for the fiscal quarter and year ended
December 31, 2003.
Form 8-K filed on March 22, 2004, disclosing pro forma financial information of
Armor Holdings, Inc. for the fiscal years ended 2002 and 2003.
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ARMOR HOLDINGS, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements 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: May 10, 2004
/s/ Glenn J. Heiar
------------------------------
Glenn J. Heiar
Chief Financial Officer
Dated: May 10, 2004
48