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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO 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.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 59-3392443
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
1400 MARSH LANDING PARKWAY, SUITE 112
JACKSONVILLE, FLORIDA 32250
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(904) 741-5400
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
Title of each class: Common Stock, $0.01 par value
Name of each exchange on which registered: New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None
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 twelve months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ x ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, if definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [ ]
The aggregate market value of voting and non-voting common equity held by
non-affiliates of the Registrant as of March 22, 2002 (based on the closing sale
price of the Common Stock on the New York Stock Exchange on such date) was
$798,822,242.
The number of shares of the Registrant's Common Stock outstanding as of
March 22, 2002 was 33,231,108.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of our Proxy Statement for our Annual Meeting of Stockholders
to be held on June 18, 2002, are incorporated by reference into Part III hereof.
TABLE OF CONTENTS AND
CROSS REFERENCE SHEET
Page Number
-----------
PART I Item 1. Description of Business 3
Company Overview 3
Material Developments 4
Industry Overview 5
Information Concerning Business Segments and
Geographical Sales 5
Business Strengths 6
Growth Strategy 7
Acquisitions 8
Products and Services 9
Customers 14
Marketing and Distribution 16
Product Manufacturing and Raw Materials 18
Backlog 19
Competition 19
Employees 20
Patents and Trademarks 20
Government Regulation 21
Environmental Matters 21
Item 2. Properties 22
Item 3. Legal Proceedings 23
Item 4. Submission of Matters to a Vote of Security Holders 23
PART II Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 24
Item 6. Selected Financial Data 25
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 25
Item 7.A Quantitative and Qualitative Disclosures About
Market Risk 36
Item 8. Financial Statements and Supplementary Data 37
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 38
PART III 38
PART IV Item 14. Exhibits, Financial Statements and Schedules,
and Reports on Form 8-K 39
2
PART I
ITEM 1. DESCRIPTION OF BUSINESS
COMPANY OVERVIEW
We are a leading manufacturer and provider of security products,
vehicle armor systems and security risk management services. Our products and
services are used by military, law enforcement, security and corrections
personnel throughout the world, as well as governmental agencies, multinational
corporations and non-governmental organizations. Our company is organized and
operated under three business segments: Armor Holdings Products; Armor Mobile
Security; and ArmorGroup, also referred to as our Services Division.
Armor Holdings Products. Our Armor Holdings Products Division
manufactures and sells a broad range of high quality, branded law enforcement
equipment, such as tactical armor, hard armor, duty gear, less-lethal munitions,
anti-riot products, police batons, forensic products and weapon maintenance
products. Our products are marketed under brand names that are well-known and
respected in the military and law enforcement communities such as American Body
Armor, Safariland, Defense Technology, Federal Laboratories, MACE (R), Guardian,
PROTECH, NIK (R) Public Safety, Break-Free, Monadnock Lifetime Products,
Identicator and Lightning Powder. We sell our manufactured products primarily to
law enforcement agencies through a worldwide network of over 500 distributors
and sales agents, including approximately 350 in the United States. Our
extensive distribution capabilities and commitment to customer service and
training have enabled us to become a leading provider of security equipment to
law enforcement agencies.
Armor Mobile Security. Our Armor Mobile Security Division manufactures
and installs ballistic and blast protected armoring systems for military
vehicles, commercial vehicles, military aircraft and missile components. Under
the brand name O'Gara-Hess & Eisenhardt, we are the sole-source provider to the
U.S. military for the supply of armoring and blast protection systems for the
High Mobility Multi-purpose Wheeled Vehicle (the "HMMWV"). We have also entered
into an agreement to provide the U.S. military with certain maintenance services
with respect to its HMMWVs. There is currently an installed base of
approximately 2,800 up-armored HMMWVs subject to this maintenance arrangement.
We expect that our maintenance services may increase if the U.S. military
substantially increases its HMMWV purchases or substantially increases its use
of the current installed base. Additionally, the Armor Mobile Security Division
has been subcontracted to develop a ballistically armored and sealed truck cab
for the High Mobility Artillery Rocket System ("HIMARS"), a program currently in
development for the U.S. Army, and also markets armor sub-systems for other
tactical wheeled vehicles. We armor a variety of commercial vehicles, including
limousines, sedans, sport utility vehicles, commercial trucks and
cash-in-transit vehicles, to protect against varying degrees of ballistic and
blast threats.
ArmorGroup. Our Services Division provides a broad range of
sophisticated security risk management solutions to multinational corporations
in diverse industries such as natural resources, financial services and consumer
products, and to governmental and non-governmental agencies such as the U.S.
Departments of State and Defense, the United Nations, United States Agency for
International Development ("USAID") and Britain's Department for International
Development. Our clients typically have personnel and other investments in
unstable and often violent areas of
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the world. Through our offices on five continents, we provide our multinational
clients with a diversified portfolio of security solutions to assist them in
mitigating risks to their operations around the world. Our highly trained,
multilingual and experienced security personnel work closely with our clients to
create and implement solutions to complex security problems. These services
include security planning, advice and management, security systems integration,
intellectual property asset protection, due diligence investigations and
training programs in counterintelligence, countersurveillance, advanced driving
techniques and ballistics. We believe that many of our security services, while
often representing a small portion of our clients' overall cost of doing
business, are critical to our clients' success. We believe that this creates a
consistent demand for our premium services at attractive margins.
MATERIAL DEVELOPMENTS
On August 22, 2001, we paid $52.0, million of which $37.2 million was
paid in cash and $14.8 million was paid by issuing 1,009,422 shares of our
common stock, to Kroll O'Gara for all of the issued and outstanding capital
stock of O'Gara-Hess & Eisenhardt Armoring Company, The O'Gara Company, and
O'Gara Security Associates, Inc. These acquired companies constituted the
majority of what was formerly known as the Security Products and Services Group
of Kroll, Inc. (formerly, part of the Kroll-O'Gara Company). These companies now
constitute our Armor Mobile Security Division.
In December 2001, we and certain selling stockholders sold shares of
our common stock in a public offering. We sold 5,765,000 shares of our common
stock and the selling stockholders sold 1,250,000 shares of our common stock in
the offering. Our net proceeds from the offering, after deducting the
underwriting discounts and commissions, were approximately $119.9 million. We
used the net proceeds of the offering to repay indebtedness under our credit
facility, for working capital and for general corporate purposes. Funds that
were not used were invested in money market funds, certificates of deposits, and
other investment grade securities and are expected to be used to finance future
acquisitions, for working capital and for general corporate purposes.
Approximately $2.2 million was paid for costs and expenses related to the
offering excluding the fees paid to underwriters. None of the costs and expenses
related to the offering were paid directly or indirectly to any of our
directors, officers, or their associates, or persons owning 10 percent or more
of our common stock.
4
INDUSTRY OVERVIEW
We participate in the defense and global security products and services
industries through the manufacture of security products marketed to military,
law enforcement, security and corrections personnel, by providing specialized
security services to multinational corporations and governmental agencies and by
manufacturing and installing ballistic and blast protected armoring systems for
military vehicles, commercial vehicles, military aircraft, and missile
components. Increasingly, governments, militaries, businesses, and individuals
have recognized the need for our products and services to protect them from the
risks associated with terrorism, physical attacks, threats of violence,
white-collar crime and fraud.
The U.S. has been the target of several deadly terrorist attacks
directed towards its citizens and facilities around the world. In 1998, U.S.
embassies in Nairobi, Kenya and Dar Es Salaam, Tanzania were bombed. In 2000,
the U.S. Navy destroyer, USS Cole, was bombed in the Yemeni port of Aden. Most
recent were the terrorist attacks on September 11, 2001 against the World Trade
Center in New York and the Pentagon in Washington, D.C. As a result,
institutions, including the U.S. government, Department of Defense, government
agencies and multinational corporations are redefining strategies to protect
against and combat terrorism.
Law Enforcement Security Products Market. In response to an increased
emphasis on safety and protection, the number of active police officers has
increased significantly over the past several years. By 1999 there were
approximately 933,000 law enforcement personnel in the U.S. We expect an
increase in law enforcement personnel as a partial response to the September 11,
2001, attacks which will lead to increased demand for our products. We also
believe the historical rise in the prison population has spurred demand from
institutional corrections facilities for law enforcement security products.
Vehicle Armor Market. Recent terrorist activities may accelerate the
need for armoring light military vehicles that will be utilized in hostile
environments in order to carry out mission objectives required by the U.S.
military's war on terrorism. As multinational corporations seek to implement
more comprehensive security programs, one area of focus will be executive
protection. We believe that the use of armored commercial vehicles in high
fright areas will increase as multinational corporations expand their
operations.
Specialized Security Services Market. Corporations are increasingly
contracting experienced private companies to handle their security services.
Industry studies demonstrate that the worldwide security services market has
grown at a rate of 8.0% annually from 1995 to 2000. Total revenues for the
worldwide market have reached $61.8 billion and are expected to continue to grow
to $87.9 billion by 2005. We believe that demand by multinational corporations
and governmental agencies operating in developing nations for security services
such as risk assessment, crisis management, guard force management, security
force organization and executive protection is likely to increase as these
entities continue to establish operations and manufacturing facilities in
developed and developing countries. In addition, there are risks related to
white-collar crime and fraud. Demand for corporate investigative services
continues to grow as corporations react to the need to protect their assets
against the growing threat of fraud, counterfeiting and piracy of intellectual
property.
INFORMATION CONCERNING BUSINESS SEGMENTS AND GEOGRAPHICAL SALES
For information concerning our business segments and geographical
sales, please refer to Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations and Note 11 to our Consolidated Financial
Statements included elsewhere in this report.
5
BUSINESS STRENGTHS
We believe that the following strengths are critical to our success as
a leading provider of security products, vehicle armor systems and security risk
management services.
Broad Portfolio of Products and Services. We offer a broad portfolio of
security products, armor systems and security services which enables us to
provide comprehensive solutions to our customers' security needs. We seek to
strengthen our capabilities as a single source provider of global security
services to our clients. Our worldwide infrastructure enables us to follow our
governmental and multinational corporate clients to new geographical markets and
cross-sell additional services to these customers. Similarly, through our
extensive product distribution network we can provide our customers a broad
array of complementary, manufactured law enforcement equipment. We expect to
continue to expand our product and service offerings and further diversify our
revenue base.
Strong Brands with Leading Market Positions. Product lines are marketed
under brand names widely recognized in the military and law enforcement
communities, such as American Body Armor, NIK (R), Defense Technology, Federal
Laboratories, MACE (R), Safariland, Monadnock, Breakfree, Lightning Powder,
Identicator, O'Gara-Hess & Eisenhardt and others. Due to the life protecting
nature of the products in the markets that we serve, end users prefer to
purchase premium products with brand names that have solid reputations for
quality and that provide high levels of performance. The strength of our brand
names has contributed to our leading market positions in several of the product
categories in which we compete.
Strong Client Base and Extensive Distribution Network. Armor Holdings
Products has a broad, full service network of approximately 350 domestic
distributors and 150 international agents to sell our portfolio of manufactured
law enforcement equipment. The Armor Mobile Security Division's client base
includes governmental and private buyers and employs a global sales force to
market its commercial products. ArmorGroup has a global footprint and currently
operates in 38 countries that enables it to serve a client base representing
governmental and non-governmental agencies and approximately 500 multinational
corporations worldwide. The quality and scope of our products and the strength
of our brand names have enabled us to establish one of the largest distribution
networks in the industry and engendered the loyalty of our distributors. We work
closely with our distributors and agents to respond to and anticipate the needs
of end users, allowing us to maintain our market leadership position. The
diversity of our clients' end markets, the continued globalization of our
clients and the strength of our distribution relationships minimize our
dependence on any particular product, market, or customer.
Proven Track Record of Identifying, Completing and Integrating
Acquisitions. Since January 1996, we have completed 28 acquisitions. We employ a
disciplined approach to evaluating acquisition opportunities and integrating the
operations of acquired businesses. These acquisitions, in the aggregate, have
strengthened our market position, leveraged our distribution network and
expanded our product and service offerings. Our performance based compensation
plan enables us to retain strong managers of acquired businesses and provides
for timely and efficient integration of acquired operations.
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Sole-Source Provider of Up-Armored HMMWVs. Through our Armor Mobile
Security Division, we are the sole-source provider of Up-Armored HMMWVs to the
U.S. military, as well as the armoring of the HIMARS cab, a program currently in
development for the U.S. Army. Contracted by the Department of Defense, the
Armor Mobile Security Division (which prior to August 22, 2001 was a division of
The Kroll-O'Gara Company) delivered 377 HMMWVs in 2000 and 522 HMMWVs in 2001.
This growth is driven by an increased defense budget for procurement, heightened
demand due to recent military deployments and activation of U.S. Reserve and
National Guard units, and the potential of a long-term, multi-front offensive
against terrorism. Aftermarket sales of spare parts and services/maintenance are
also extremely attractive, as we are the incumbent provider of the armoring on
an installed base of over 2,800 Up-Armored HMMWVs. We believe our strength in
this product segment is significant and should drive future growth.
GROWTH STRATEGY
The demand for security products, vehicle armor systems, and security
risk management services will continue to grow. We will address this growth by
offering a comprehensive array of premium security risk management products and
services. We will enhance our leadership position through strategic acquisitions
by creating a broad portfolio of products and services to satisfy all of our
customers' increasingly complex security needs. By establishing a critical mass
of products and services and a broad base of customers, we have developed the
capacity to perform multiple aspects of our clients' threat analyses and
security provisions on a comprehensive basis. We will continue to execute this
growth strategy primarily through internal expansion of our existing businesses
and through strategic acquisitions of businesses offering complementary
services, markets, and customer bases. The following elements define our growth
strategy:
Capitalize on Exposure to Military Programs. The events of September
11, 2001, are likely to result in additional spending by the Department of
Defense. We expect several of our military programs may be positively affected.
These include the Concealable Body Armor Program through which we supply
concealable body armor to the U.S. Army and the Special operation forces
Personal Equipment Advance Requirement ("SPEAR") program, which supplies special
ballistic vests and load bearing equipment to U.S. Special Forces. We are the
sole-source provider to the U.S. military for the supply of armor and blast
protection to the HMMWVs. We are well positioned on these programs and have a
proven track record and a strong relationship with the U.S. military.
Additionally, we expect to participate in other existing and future military
programs that require our unique products and services.
Expand Distribution Network and Product Offerings. We will continue to
leverage our distribution network by expanding our range of branded law
enforcement equipment through the acquisition of niche defensive security
products manufacturers and by investing in the development of new and enhanced
products which complement our existing offerings. A broader product line will
strengthen our relationships with distributors, and allow us to add additional
quality distributors, enhancing our brand appeal with military, law enforcement
and other end users.
Capitalize on Increased Homeland Security Requirements. We are well
positioned to provide products, services and specialized training essential to
establishing a sustainable homeland security infrastructure. After the September
11, 2001 terrorist attacks on the United States, the U.S. government has created
the Office of Homeland Security. Although this Office's mandate is still being
finalized, a homeland security infrastructure will be developed. We believe that
our three divisions are well equipped and prepared to help build this
infrastructure. Our Armor Holdings Products
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Division is positioned to provide products that additional military, law
enforcement, security and corrections personnel require to combat terrorism and
threats to our homeland. Our Armor Mobile Security Division is prepared for an
expected increase in armored commercial vehicles for use by federal, state and
local government agencies. The services provided by our Services Division are
expected to be more sought after as U.S. government agencies and corporations
re-evaluate their security programs. For example, we expect to leverage our
global experience and reputation into domestic airport security training.
Increase Global Position in High Fright Areas. We expect to service the
heightened security concerns of governments, agencies and corporations in
existing high fright areas and will leverage our global expertise and reputation
for providing security products and services in newly developing high fright
areas. We target regions with economic and political instability as well as
regions with increased regulation, growth in prison populations and growing
national and regional security concerns. We also grow the scope of our existing
product and service offerings by servicing existing customers who expand
geographically.
Broaden Service Offerings to Existing Client Base. We expect to broaden
our existing service offerings through strategic acquisitions and develop a
comprehensive range of security risk management offerings with a global network
of service providers. We will continue to market expanded offerings, increasing
penetration of our existing client base with sales of additional services.
Pursue Strategic Acquisitions. The security risk management products
and services industry is highly fragmented and characterized primarily by
smaller, geographically restricted single product or service providers. We
believe many clients in the industry would prefer to deal with a single entity
that can provide a broad spectrum of services and/or products in the security
risk management industry covering their needs across entire regions, or
globally. We selectively pursue acquisitions that complement and expand our
product and service offerings and provide access to new geographic markets,
additional distribution channels and new client relationships.
ACQUISITIONS
We have pursued a strategy of growth by acquiring businesses and assets
that complement our existing operations. We use several criteria to evaluate
prospective acquisitions, including whether the business to be acquired:
o broadens the scope of the services or products we offer or the geographic
areas we serve;
o offers attractive margins;
o is accretive to earnings;
o offers opportunity to improve profitability by increasing the efficiency of
our operations;
o is managed in a manner consistent with our existing businesses; and
o complements our portfolio of existing businesses by increasing our ability
to manage our customers' needs.
We exercise a high degree of financial discipline and strictly adhere to
these criteria. As a result, we do not enter into transactions that we
8
believe would be dilutive to our earnings. Since January 1996, we have
consummated 28 acquisitions.
The Armor Holdings Products Division has acquired 12 companies since 1996.
The largest acquisition completed by this division was Safariland, a producer of
law enforcement products such as body armor, duty gear, and automotive
accessories in 1999. Safariland had approximately $47.0 million in annual
revenues at the time of acquisition. The Armor Mobile Security Division was
acquired from The Kroll-O'Gara Company in August 2001. The Armor Mobile Security
Division provides ballistic and blast protection armoring systems and training
(training was integrated into the Services Division). The businesses acquired in
the O'Gara acquisition had approximately $112.4 million ($6.1 million of which
relates to businesses integrated into our ArmorGroup Services Division) in
annual revenues at the time of acquisition. The Services Division has acquired
15 companies since 1996. The largest acquisition occurred in 1997 when DSL Group
Limited, a security risk management and consulting services firm, was acquired.
DSL Group Limited had approximately $31.0 million in annual revenues at the time
of acquisition.
PRODUCTS AND SERVICES
ARMOR HOLDINGS PRODUCTS
Body Armor. We manufacture and sell a wide array of armor products
under the leading brand names American Body Armor, PROTECH and Safariland that
are designed to protect against bodily injury caused by bullets, knives and
explosive shrapnel. Our principal armor products are ballistic resistant vests,
sharp instrument penetration armor, hard armor such as anti-riot gear, shields
and upgrade armor plates, and bomb protective gear. Our line of ballistic
protective vests provides varying levels of protection depending upon the
configuration of ballistic materials and the standards (domestic or
international) to which the armor is built. We primarily sell ballistic
resistant vests, under the brand names Xtreme (TM) and Zero-G (TM). Our body
armor products that are manufactured in the United States are certified under
guidelines established by the National Institute of Justice.
We offer two types of body armor, concealable armor and tactical armor.
Concealable armor, which generally is worn beneath the user's clothing, is our
basic line of body armor. These vests are often sold with a shock plate, which
is an insert designed to improve the protection of vital organs from sharp
instrument attack and to provide enhanced blunt trauma protection. Tactical
armor is worn externally and is designed to provide protection over a wider area
of a user's body and defeat higher levels of ballistic threats. The vests, which
are usually manufactured with hard armor ballistic plates that provide
additional protection against rifle fire, are designed to afford the user
maximum protection and may be purchased with enhanced protection against neck
and shoulder injuries. Tactical armor is offered in a variety of styles,
including tactical assault vests, tactical police jackets, floatation vests,
high coverage armor and flak jackets.
Our sharp instrument penetration armor is designed primarily for use by
personnel in corrections facilities and by other law enforcement employees who
are primarily exposed to threats from knives and other sharp instruments. These
vests are constructed with special, blended fabrics, as well as flexible woven
fabrics and are available in both concealable and tactical models. In addition,
these vests can be combined with ballistic armor configurations to provide both
ballistic and sharp instrument penetration protection.
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We manufacture several hard armor products under the PROTECH brand
name. PROTECH products include ballistic shields, and other personal protection
accessories and armor products for helicopters, automobiles and riot control
vehicles.
We also manufacture a variety of hard armor ballistic shields primarily
for use in tactical clearance applications. These shields are manufactured using
a variety of ballistic fibers, polyethylene ballistic materials, ballistic
steel, ballistic glass or a combination of any one or more of these materials.
Other hard armor products include barrier shields and blankets. These products
allow tactical police officers to enter high threat environments with maximum
ballistic protection.
Other specialty products that we manufacture include armored press
vests, executive vests, raincoats and fireman turnout coats. These specialty
products can be custom designed to provide various levels of ballistic
protection. We also distribute a variety of items manufactured by others,
including gas masks, helmets, goggles, face shields and crowd management systems
for protection from blunt trauma.
Duty Gear. We are a leading supplier of duty gear to law enforcement
personnel in the United States. Uniformed police officers require a wide
assortment of duty gear, which typically includes items such as belts, safety
holsters, handcuff and flashlight holders and related accessories. We
manufacture and sell duty gear and accessories under the widely recognized
brands Safariland (Safari-Laminate (TM)) and NYLOK (R) (nylon). Duty gear
represents a very attractive market and one in which brand appeal, safety and
quality dictate demand. Replacement sales represent significant recurring demand
for duty gear.
Less-Lethal Products. Under the Defense Technology, First Defense
(TM), Federal Laboratories, MACE (R) and Guardian brands, we manufacture and
sell a complete line of less-lethal, anti-riot and crowd control products
designed to assist law enforcement and military personnel in handling situations
that do not require the use of deadly force. These products, which generally are
available for use only by authorized public safety agencies, include pepper
sprays, tear gas, specialty impact munitions and diversionary devices. We are
also the exclusive distributor of Mine Safety Appliance Advantage 1000 and
Millenium model gas masks in the United States.
Through the acquisition of the assets of the law enforcement division
of Mace Security International, Inc., we acquired the exclusive license to use
the MACE (R) brand in connection with the manufacturing and sale of MACE (R)
aerosol sprays to law enforcement entities worldwide. We also manufacture pepper
sprays containing the active ingredient Oleoresin Capsicum, a cayenne pepper
extract. Our pepper spray formula is patented and carries the trademark name of
First Defense (TM). The products range from small "key-ring" and hand held units
to large volume canisters for anti-riot and crowd control applications.
Our tear gases are manufactured using Orthochlorabenzalmalononitrile
and Chloroacetophenone. These products are packaged in hand held or launchable
grenades, both pyrotechnic and non-pyrotechnic, as well as in 37mm, 40mm and 12
gauge munitions. The munitions include barricade rounds, blast dispersions and
pyrotechnic canisters. We hold a patented design covering two of our
non-pyrotechnic grenades.
We manufacture a wide range of specialty impact munitions that can be
used against either individual targets or in anti-riot and crowd control
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situations. These products, which range from single projectiles, such as bean
bags, rubber balls, sponge rounds, wood and rubber batons, to multiple
projectile products containing rubber pellets, rubber balls or foam, can be
fired from standard 12 gauge shotguns, 37mm gas guns and 40mm launchers.
We also manufacture a patented and trademarked device that is used for
dynamic entries by specially trained forces where it is necessary to divert the
attention of individuals away from an entry area. This product, which carries
the trademark name of Distraction Device (TM), emits a loud bang and
brilliant flash of light when used.
Police Batons. We manufacture police batons of wood, alloy steel,
acetate, aluminum and polycarbonate products under our brand name Monadnock.
Branded products include our trademarked, patent pending new Auto-Lock (TM)
baton and our friction lock baton. Our batons are manufactured in a variety of
lengths for different intended users, including patrol officers, detectives,
corrections officers and other law enforcement personnel in smaller portable
units. We believe that our manufacturing specifications are among the highest in
the marketplace and set the standard in the industry.
Forensic Products. We assemble and market portable narcotic
identification kits under the NIK (R) brand name that are used in the field by
law enforcement personnel to identify a variety of controlled substances,
including Ecstasy, cocaine, marijuana, heroin and methamphetamine. We also
assemble and market evidence collection kits and evidence tape, and have the
exclusive rights to distribute Flex-Cuf (R) disposable restraints.
We manufacture and distribute a more extensive line of evidence
collection equipment under our brand name Lightning Powder. These products, such
as fingerprint powders, dusting brushes, and lifting tape, are used to collect
latent fingerprints. Other supplies for evidence collection that we distribute
include bags, tapes, stone casting equipment and high powered, distortion free
magnifying glasses.
We design, manufacture and market proprietary cost-effective
fingerprint products for business, government and law enforcement agencies under
the Identicator brand name. These products are designed to deter fraud and
produce positive identification in many different applications. We have earned a
reputation as one of the most responsive companies in the forensic community. We
produce many unique products for various specialized investigative and evidence
collection applications. Whether Inkless, Perfect Ink, child identification,
baby foot printing, single digit endorsement, enrollment by mail or custom
application, the common denominator of these systems is that they are simple to
operate, clean, and cost-effective. All products produce non-smearing, instantly
permanent, black prints acceptable to the FBI for scanning, classification,
search and retention.
Weapon Maintenance Products. We manufacture synthetic based lubricants,
cleaners and preservative compounds for military weapon maintenance, law
enforcement, civilian firearms/sports equipment and industrial machinery. Our
flagship weapon maintenance product, Break Free CLP (R), was specifically
developed to provide reliable weapon lubrication in battlefield conditions;
remove firing residues, carbon deposits and other firing contaminants; repel
water and dirt and prevent corrosion; and keep weapons combat ready and
functional in steamy jungles, dust blown deserts, salty air of sea and coast,
and cold and icy climates.
Automotive Accessories. Through our Safariland subsidiary, we
manufacture and supply automotive accessories such as tire covers, seat
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covers, cargo organizers and grill covers to automobile manufacturers, including
Toyota, Ford, Honda, Nissan, Mitsubishi, Kia and Subaru.
ARMOR MOBILE SECURITY
We provide ballistic and blast protection armoring systems for military
vehicles, commercial vehicles, military aircraft, and missile components,
including the following:
Military Products. We are the sole-source provider to the U.S. military
for the supply of armoring and blast protection systems for the HMMWV. The HMMWV
chassis is produced by AM General Corporation and shipped directly to our
facility in Fairfield, Ohio, where armor and blast protection components are
added. The Up-Armored HMMWVs provide exterior protection against various levels
of armor piercing ammunition, overhead airburst protection and underbody blast
protection against anti-tank and anti-personnel mines. In addition, we install
other features designed to enhance crew safety, comfort and performance, such as
air conditioning, weapon turrets and mounts, door locks and shock absorbing
seats. We charge $70,000 to $110,000 for these ballistic and blast protective
systems. During 2001, the Armor Mobile Security Division shipped 522 Up-Armored
HMMWVs (including 344 which were shipped prior to August 22, 2001, the date we
acquired the Armor Mobile Security Division). We also supply engineering design
and prototype services in support of the up-armored HMMWV program, and supply
spare parts and logistic support.
We are serving as a subcontractor to develop a ballistically armored
and sealed truck cab for HIMARS, a program currently in development for the U.S.
Army. The truck is used to fire missiles which are a part of either the Multiple
Launch Rocket System or the Army Tactical Missile System.
We market armor sub-systems for other tactical wheeled vehicles, such
as 2.5 ton and 5.0 ton trucks. We also produce various armor systems as a
subcontractor to larger defense contractors, such as Lockheed Martin
Corporation. These products include armor for containers for fuels and missile
launchers and for pilot protection, and often involve the use of unique
materials or methods.
Commercial Products. We armor a variety of vehicles, including
limousines, sedans, sport utility vehicles, commercial trucks and
cash-in-transit vehicles, to protect against varying degrees of ballistic and
blast threats. The armoring process begins with the disassembly of a new base
vehicle. This disassembly normally involves the removal of the interior trim,
seats, doors and windows. The passenger compartment then is armored with both
opaque and transparent armor. Other features, such as run flat tires and
non-exploding gas tanks, may also be added. Finally, the vehicle is reassembled
as close to its original appearance as possible. Our relationship with various
vehicle manufacturers has been valuable in permitting us to armor certain
vehicles while allowing the customer to maintain the benefits of warranties
issued by the vehicle manufacturer. During 2001, the Armor Mobile Security
Division shipped approximately 1,300 commercial armored vehicles including 788
which were shipped prior to our acquisition of the Armor Mobile Security
Division on August 22, 2001.
We produce fully armored vehicles and light armored vehicles. Fully
armored vehicles, such as limousines, large sedans or sport utility vehicles,
typically are armored to protect against attacks from military assault rifles
such as AK-47s and M16s. These vehicles also can be blast protected by enhancing
the ballistic and underbody protection with proprietary materials and
installation methods that protect the occupants against a defined blast threat.
Blast protected vehicles defend against threats such as pipe bombs
12
attached to the exterior of the vehicle and nondirectional charges of 20 kg of
TNT detonated approximately five meters from the vehicle. Fully armored vehicles
typically sell for $70,000 to $200,000, exclusive of the cost of the base
vehicle.
Fully armored vehicles also include Parade Cars, which are formal
limousines used predominantly for official functions by a president or other
head of state. These vehicles are usually customized based upon a commercially
available chassis which we essentially rebuild completely. Because the threat of
organized assassination attempts is greater for heads of state, these vehicles
normally incorporate more advanced armor and sophisticated protection features.
These features can include supplemental air and oxygen systems, air purification
systems to protect against chemical or biological contamination, underbody fire
suppressant systems, tear gas launchers, anti-explosive self-sealing fuel tanks,
electric deadbolt door locks, gun ports and bomb scanners. Parade Cars normally
sell for $300,000 to in excess of $1.0 million, inclusive of the cost of the
base vehicle.
Light armored vehicles are similar in all respects to fully armored
vehicles except that substantially less total weight of armoring is added.
Therefore, it is possible to armor smaller vehicles such as the Volkswagen Jetta
and the General Motors Omega, as well as larger vehicles such as the Mercedes
Benz S600 and the Jeep Grand Cherokee. Light armored vehicles are designed to
protect against attacks from handguns, such as a 9mm or .357 Magnum. The price
of a light armored vehicle ranges from $5,000 to $60,000, exclusive of the cost
of the base vehicle.
We also produce specialty vehicles and cash-in-transit vehicles.
Specialty vehicles are custom built for a specific mission. Examples of
specialty vehicles are Escort Cars, usually convertibles, and Chase Cars,
usually closed top vehicles, in which security personnel ride while in a head of
state motorcade. Cash-in-transit vehicles are used by banks or other businesses
to transport currency and other valuables. After starting with a van or small
truck, we modify the base vehicle to provide protection for the cargo and
passengers from ballistic and blast threats.
ARMORGROUP
Our Services Division provides a broad range of sophisticated security
risk management services to multinational corporations and to governmental and
non-governmental agencies, including the following services:
Security Planning, Advice and Management. We are a leading
international provider of specialized security risk management services. We
operate in high risk and hostile environments characterized by political
instability, diminished law-and-order, emerging market conditions and/or
significant natural resources, such as Africa, South America, Southeast Asia,
Central Asia, the Balkans and Russia. The core of our service business is the
creation and implementation of risk management plans and solutions to complex
security problems in high risk areas through detailed and targeted analysis of
potential threats to security, assistance in the secure design of facilities,
the provision of highly qualified specialists with extensive international
experience in practical security applications and on-going training of security
personnel and client personnel with respect to preventive security measures. We
also provide post-conflict support and services, including specialized mine
clearance, to humanitarian organizations, including agencies of the United
Nations. We provide a full range of services including surveys, technical
advice, explosive ordinance disposal and mine awareness training for local
communities.
13
We offer security solutions that involve law enforcement training,
security consultation services and experienced security personnel who act as
planners, trainers, managers, advisors, instructors and liaison personnel. We
also provide teams of security consultants and advisors, many of whom are
British Special Air Services veterans. We provide security services including
risk assessment, project organization and management, equipment, training and
management of existing guard forces, system design, procurement and
installation, crisis management, VIP protection, specialist training and
evacuation planning. On-site guards are supervised, managed and trained by our
professional security staff. Our clients are multinational corporations in
industries including petrochemical and natural resource extraction,
manufacturing, travel and financial services. Additionally, we serve
governmental and non-governmental agencies.
Security Systems Integration. We are a provider of security systems
specializing in the design, integration, maintenance and technical support of
sophisticated electronic and computer driven security and fire alarm systems. We
specialize in high speed analog and digital transmission designs for life
safety, communication, alarm, closed circuit television, access control,
television and security systems. These systems are installed in airports, banks,
government buildings, hospitals, prisons, universities, stores, office
buildings, telecommunications centers, radio and television stations, and
similar locations. Our clients include multinational corporations, major
contractors, embassies, and high commissions.
Investigation, Due Diligence and Intellectual Property Asset
Protection. We provide fraud investigation, asset tracing, computer forensic,
computer evidence consulting, due diligence, litigation research, political risk
analysis, other business intelligence services and intellectual property asset
protection; the latter against counterfeiting, patent infringements, product
tampering, gray market distribution, and extortion to identifying unethical
supplier activities such as the use of child labor. In offering brand protection
we work with our clients during product development to establish trademark and
patent protection strategies and work to protect the brand throughout its
lifecycle. These services are provided by professionals with extensive
backgrounds in related areas, including trade, finance, law enforcement and
intelligence and customs, who gather and decipher hard to find information
through extensive networks of business intelligence contacts, many proprietary
and public databases. Our clients include multinational branded product
companies involved in tobacco, sportswear, spirits, and pharmaceuticals, as well
as investment and commercial banks, law firms and insurance companies.
Training. We offer comprehensive security training programs in
counterintelligence, countersurveillance, advanced driving techniques, and
ballistics at our facilities near Washington, D.C., San Antonio, Texas and
Mexico City, Mexico and at customer designated locations. We also offer
security, counterintelligence and countersurveillance training courses for both
U.S. government agencies and clients in the private sector. The training
includes instruction on methods of recognizing and deterring security risks.
Students learn methodologies utilized by terrorists, what information is needed
by terrorists in order to plan an attack and how to block or manipulate this
flow of intelligence.
CUSTOMERS
Armor Holdings Products. In 2001, we sold approximately 81.9% of our
products in North America, with the balance sold internationally. The primary
end users of our products are federal, state and local law enforcement
14
agencies, local police departments, state corrections facilities, U.S. and
allied militaries, highway patrols and sheriffs' departments. We reach these
customers through a distribution strategy that utilizes a worldwide distribution
network of approximately 350 domestic distributors and 150 international agents,
as well as twenty-five domestic sales representatives, three regional sales
managers, and four technical sales specialists, who promote our products but
refer customers to a local distributor for purchasing.
Armor Mobile Security Division. The market for military hardware
products is worldwide in scope, including the U.S. military and foreign defense
forces. Our major contracts for delivery of Up-Armored HMMWVs are with the U.S.
military. We are also serving as a subcontractor to develop a ballistically
armored and sealed truck cab for HIMARS, a program currently in development for
use by the U.S. Army. Additionally, we provide protected container systems,
typically used to protect missile systems from small arms fire, to the U.S.
military under a subcontract with Lockheed Martin Corporation.
Our armored commercial vehicle customers include governmental and
private buyers. U.S. and foreign governmental buyers purchase both fully and
light-armored vehicles. Governmental buyers also comprise the market for Parade
Cars. Typically, governmental buyers consist of ministries of foreign affairs,
defense and internal affairs and offices of presidential security. These
customers are not constrained in their purchasing decisions by considerations
such as import duties and taxes and are free to search globally for the best
product available. The procurement cycles of governmental buyers can range from
relatively rapid, when the vehicles are for the use of the head of state or in
response to a particular crisis, to prolonged bureaucratic bids and evaluations
for normally budgeted items. Private customers for armored commercial vehicles
include corporations and individuals. Private buyers are much more sensitive to
cost, of which import duties and taxes may be a substantial part, and,
therefore, often will buy a locally produced product, if one exists that meets
their needs. Local servicing of the vehicle is also a critical concern to
private buyers. Customers for cash-in-transit vehicles are generally financial
institutions. Purchasing decisions for cash-in-transit vehicles depend on many
criteria including insurance and regulatory requirements and costs, and whether
the financial institution is private or governmental.
ArmorGroup. Our principal security services clients include
multinational corporations that have significant investments in remote and
hostile areas of the world. We currently serve clients in over 15 industries
including petrochemical, mining, branded products, financial services, insurance
and legal. Other significant clients include the U.S. Departments of State and
Defense, the United Nations, USAID and Britain's Department for International
Development and a variety of banking, finance, aid and humanitarian
organizations and companies engaged in international trade and commerce.
No customer accounted for more than 10% of total sales of the Armor
Holdings Products Division or the Services Division during our fiscal year ended
December 31, 2001 ("Fiscal 2001"). Our ten largest customers accounted for
approximately 18.4% of total sales for Fiscal 2001. Approximately 34.9% of the
Armor Mobile Security Division's net sales for the period commencing August 22,
2001, and ending December 31, 2001, were derived from U.S. military contracts
and an additional 18.0% were derived from commercial contracts with U.S.
governmental agencies or foreign governments. Military and governmental
contracts generally are awarded on a periodic or sporadic basis. On a pro forma
basis, assuming the Armor Mobile Security Division had been acquired on January
1, 2001, U.S. military contracts would have
15
accounted for approximately 32.7% of the total sales of the Armor Mobile
Security Division and 13.8% of our total sales during Fiscal 2001 and commercial
contracts with U.S. governmental agencies and foreign governments would have
accounted for approximately 12.1% of the total sales of the Armor Mobile
Security Division and 5.1% of our total sales during Fiscal 2001.
MARKETING AND DISTRIBUTION
Armor Holdings Products. As a result of our history of providing high
quality and reliable armor, tactical armor, hard armor, duty gear, less-lethal
munitions, anti-riot products and forensic products, we enjoy excellent name
recognition and a strong reputation in the law enforcement equipment industry.
The central element of our marketing strategy is to capitalize on our name
recognition and reputation amongst our customers by positioning ourselves as a
global provider of many of the premier security risk management products and
services that our customers may need. By positioning ourselves in this manner,
we can capitalize on our existing customer base and our extensive global
distribution network, maximize the benefits of our long history of supplying
security related products around the world and leverage our leadership position
in the security risk management products and services markets. When entering a
foreign market, we penetrate the market by offering the most comprehensive range
of products and services available in the security industry. We tailor our
marketing strategy to each geographic area of the world and will often tailor
our product offering by country. There are opportunities for cross marketing of
military and law enforcement products, which could strengthen the image of each
product group. We believe that our ability to cross-market our security risk
management products and services will enhance our position as an integrated
provider of an extensive assortment of such products and services.
In addition, we have designed comprehensive training programs to
provide initial and continuing training in the proper use of our various
products. These training programs, offered by The Training Academy for
Technology and Tactics, are typically conducted by trained law enforcement and
military personnel that we hire for such purposes. Certain of our training
programs also contribute to revenues. Training programs are an integral part of
our customer service. In addition to enhancing customer satisfaction, we believe
that they also help breed customer loyalty and brand awareness, so that we may
sell additional products to the same customer. Our marketing efforts are further
augmented by our involvement with and support of several important law
enforcement associations, including the National Tactical Officer's Association,
the International Law Enforcement Firearms Instructors, the American Society of
Law Enforcement Trainers and the International Association of Chiefs of Police.
We further reinforce distributor loyalty by offering price discounts to
high volume distributors. We believe that relationships with our distributors
are strong. The distributors benefit from their association with us due to the
quality of our manufactured products, the scope of our product line, the high
degree of service we provide and the distributor's opportunity to participate
profitably in the sale of our products.
We seek to expand our distribution network. As we identify and acquire
businesses that fit strategically into our existing product and service
portfolio, we maximize our distribution network by offering additional products
and services. Recent acquisitions have opened new channels of global
distribution to parts of the world not previously penetrated and have enabled us
to more fully exploit our extensive access to multinational corporations, whose
security service needs in unstable countries may in the future require
16
security products that complement the services provided. The addition of these
new distribution channels will allow us to take advantage of our various units'
distribution networks by offering a wider variety of products, thereby
increasing operating efficiencies.
We are strategically selling our product on the World Wide Web. We have
created a secured website targeting government agencies exclusively.
GSA-Buy.com, launched in 2000, contains an on-line catalog and secured
transaction platform for all Armor Holdings Products Division General Services
Administration contracts. We are also selling a small array of our concealable
and competition holsters to the consumer market on Holsters.com. All of the
products offered on this website are targeted to consumer markets and do not
infringe on our strong relationships with our distributor network.
Armor Mobile Security Division. On a worldwide basis, the Armor Mobile
Security Division employs approximately 24 full-time sales professionals in
connection with its commercial sales. These employees operate out of Washington,
D.C.; Miami, Florida; Fairfield, Ohio; Sao Paulo, Brazil; Lamballe, France;
Mexico City, Mexico; Bogota, Colombia; and Geneva, Switzerland. All personnel
have a geographic and/or product-specific responsibility. In most cases, the
sales personnel also recruit and maintain sales agents or distributors. The
agents or distributors have geographic and product specific agreements, and
compensation in most cases is based upon a commission arrangement. The sales
personnel use a consultative approach when offering solutions to customers'
security problems. Sales cycles for commercial physical security products can
range from several months to a matter of days, depending upon the product and
the urgency associated with the security problem being addressed. Physical
security products which are readily available, such as the fully armored
Chevrolet Suburban, allow us to assist customers who have, or believe they have
developed an immediate threat.
The Armor Mobile Security Division has positioned itself in the
marketplace as a commercial company with a military production capability. As
such, the Armor Mobile Security Division emphasizes its ability to develop new
products, or product adaptations, quickly and more cost effectively than
traditional defense contractors. In marketing its products to the military, the
Armor Mobile Security Division places strong emphasis on its superior antitank
and antipersonnel mine protection for the occupants of tactical wheeled
vehicles. We market our military products through a combination of trade show
exhibitions, print advertising in military-related periodicals and direct
customer visits. We emphasize the cross-marketing of military and commercial
products, which we believe strengthens the image of each product group. We have
also entered into exclusive teaming and joint marketing agreements with AM
General, the manufacturer of the basic HMMWV, for sales in the military and
commercial areas. These agreements designate the Armor Mobile Security Division
as the exclusive armorer to AM General for HMMWVs and allows us to benefit from
the AM General distribution network and save on certain costs, such as
exhibitions where both AM General and we otherwise would both show products. We
have also entered into an agreement with Stewart & Stevenson Services, Inc. to
jointly develop the enhanced armoring and blast specifications for Stewart &
Stevenson's Family of Medium Tactical Vehicles. Stewart & Stevenson already
provide the chasis for the HIMARs project for which we have already armored
several prototypes.
Our military sales activities are directed toward identifying contract
bid opportunities with various U.S. government agencies and private enterprises
acting as prime contractors on government contracts and to making sales through
the Foreign Military Sales Program and directly to foreign military
organizations. We have three full time business development managers who are
responsible for this activity and also have contractual arrangements
17
with several outside consultants who assist the business development managers in
their activities. Proposal preparation and presentation for government projects
is done by a team which normally consists of program managers, a contracting
officer, a cost accountant and various manufacturing and engineering personnel.
ArmorGroup. As we have expanded our service offerings, more active
marketing has become an integral part of our growth efforts. In addition to
sourcing new business from client referrals, we continue to follow our clients
into new geographic areas where significant security risks exist. We rarely
enter a country without a substantial contract for services already in place.
Once established in a country, we seek to expand our service offerings and our
customer base through active marketing. As we have integrated new services, our
professionals have increasingly relied on active marketing to generate new
business. We have fostered the cross selling of our services by physically
locating our professionals in common space and educating our professionals about
all of our service business lines. Further, a rebranding effort has been
completed in order to market our services under the ArmorGroup brand. A
comprehensive web presence has been established (www.armorgroup.com) as a key
marketing tool for the business and with potential to deliver risk information
services on-line. We are focusing on clients in high growth industries where the
need for investigation, brand protection and other security services are
critical to success. The industries we are targeting include financial services,
imaging supplies, insurance, natural resource extraction, and global consumer
brands.
PRODUCT MANUFACTURING AND RAW MATERIALS
The raw materials used in manufacturing ballistic resistant garments
and Up-Armored vehicles include various ballistic fibers such as Kevlar, Twaron,
SpectraShield, Zylon and Z-Shield. Kevlar is a patented product of E.I. du Pont
de Nemours Co., Inc. ("Du Pont") and is only available from Du Pont and its
European licensee. We purchase Twaron, SpectraShield, Zylon and Z-Shield fibers
directly from the manufacturers, and from weaving companies who convert the raw
fibers into ballistic fabric. We believe that we enjoy a good relationship with
these weaving companies. However, if necessary, we believe that we could readily
find replacement weavers. We also use SpectraShield and Kevlar in our hard and
vehicle armor products. Additionally, we use polycarbonates, acrylics, ballistic
quality steel, ceramics, and ballistic glass. We are aware of multiple suppliers
for these materials and would not anticipate a significant impact if we were to
lose any suppliers. We do not manufacture equipment used in our security systems
integration business.
We purchase other raw materials used in the manufacture of our various
products from a variety of sources and additional sources of supply of these
materials are readily available. We also own several molds, which are used
throughout our less-lethal product line. In addition, we are working on the
development and certification of flat ballistic glass for use in HMMWVs. We hope
to certify glass that we manufacture with the military by the end of the second
quarter of 2002 and to be in production in the second half of 2002.
We adhere to strict quality control standards and conduct extensive
product testing throughout our manufacturing processes. Raw materials are also
tested to ensure quality. We have obtained ISO 9001 certification for, our
Wyoming manufacturing facility for less-lethal products, and our Safariland
facility in Ontario, California for body armor and duty gear holsters and
accessories. We have obtained ISO 9002 certification for our Westhoughton,
England manufacturing facility for body armor and high visibility garments. ISO
standards are promulgated by the International Organization of Standardization
and have been adopted by more than 100
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countries worldwide. We obtain ISO certification by successfully completing an
audit certifying our compliance with a comprehensive series of quality
management and quality control standards.
The Armor Mobile Security Division emphasizes engineering excellence
and has an extensive engineering staff. Design engineers use state-of-the-art
two-dimensional and three-dimensional computer aided design and engineering or
CAD/CAE systems in conjunction with coordinate measuring machines to develop
electronic models which generally are converted to solid models or prototypes.
Manufacturing engineers concentrate on improvements in the production process
and on overall cost reductions from better methods, fewer components and less
expensive materials with equal or superior quality. Applying these techniques,
over the years the Armor Mobile Security Division has been able to reduce both
the time and cost necessary to produce its armored vehicles. Our ballistic
engineer, in conjunction with our design and manufacturing engineers, develops
and tests new ballistic and blast protection systems that meet ever changing
threats. Advanced engineering is responsible for new product development in
conjunction with design engineering, manufacturing engineering and ballistic
engineering.
BACKLOG
Armor Holdings Products. At December 31, 2001 Armor Holdings Products
Division had unfilled customer orders of approximately $9.0 million compared
with approximately $8.5 million of such orders at December 31, 2000. These
orders were shipped in the first quarter of the subsequent year.
Armor Mobile Security. At December 31, 2001 Armor Mobile Security
Division had unfilled customer orders of approximately $65.6 million compared
with approximately $70.8 million of such orders at December 31, 2000.
Approximately $22.7 million of these orders were shipped in the first quarter of
the subsequent year.
COMPETITION
The market for our products is highly competitive and we compete in a
variety of fields with competitors ranging from small businesses to
multinational corporations. In the body armor business, we compete by providing
superior design, engineering and production expertise in our line of
fully-integrated ballistic and blast protective wear. Our principal competitors
in this market include Point Blank Body Armor, Inc., Second Chance Body Armor,
Inc. as well as several international competitors on a region by region basis.
In the less-lethal product industry, we compete by providing a broad variety of
less-lethal products with unique features and formulations which we believe
afford us a competitive advantage over our competitors. The principal
competitive factors for all of our products are quality of engineering and
design, reputation in the industry, production capability and capacity, price
and ability to meet delivery schedules.
The markets for the Armor Mobile Security Division's products and
services are highly competitive. We compete in a variety of fields, with
competitors ranging from small businesses to multinational corporations. We
believe that the Armor Mobile Security Division's design, engineering and
production expertise in providing fully integrated ballistic and blast protected
vehicles gives it a competitive advantage over those competitors who provide
protection against only selected ballistic threats. The largest competitors on a
worldwide basis in the production of armored commercial vehicles are
DaimlerChrysler AG, which sells its armored Mercedes Benz products on a special
order basis as well as through its worldwide
19
distribution system, and BMW AG, which sells its products through its worldwide
dealer distribution system. In addition, there are a number of other vehicle
armorers in Europe, the Middle East and Latin America that armor primarily
locally manufactured automobiles. U.S.-based protected passenger automobile
armorers include Moloney Coachbuilders, Inc., Square One Armoring Services and
Armet Armored Vehicles, Inc. The principal competitive factors are price,
quality of engineering and design, production capability and capacity, ability
to meet delivery schedules and reputation in the industry. There are a large
number of companies that provide specific armoring packages for tactical wheeled
vehicles, helicopters and selected other military applications.
The security services industry is highly competitive, and we compete in
a variety of fields with competitors ranging from small business to
multinational corporations. Within the security services industry we compete on
the basis of the quality of services provided, ability to provide national and
international services and range of services offered, as well as price and
reputation. Our security services also face a wide variety of competition in
different areas, although there is no single organization that competes directly
with us globally. Our principal global competitors in this market include The
Wackenhut Corporation, Securitas AB, Pinkerton's, Inc. and Control Risks Group.
On a region by region basis, we also compete with local providers. Our primary
competitors in supplying security services to the petrochemical and mining
industries are local security companies, in-house security programs and small
consultancy companies. Our primary competitors in the embassy and international
agency protection business are local companies and large manned guarding
companies including The Wackenhut Corporation, Securicor, and Group 4 Falck A/S.
As the countries within which we operate become more mature and stable,
competition is likely to increase.
EMPLOYEES
As of March 15, 2002, we have a total of approximately 11,829
employees, of which approximately 1,019 were employed at Armor Holdings
Products, 800 were employed at Armor Mobile Security, 10,000 were employed at
ArmorGroup and 10 employees were located at our corporate headquarters.
Approximately 21 employees employed by our Supercraft subsidiary are
represented by the General Municipal Boilermaker and Allied Trade Union. Also,
our Low Voltage Systems subsidiary has 5 employees covered under a collective
bargaining agreement and are represented by the International Brotherhood of
Electrical Workers. None of our remaining employees are represented by unions or
covered by any collective bargaining agreements. We have not experienced any
work stoppages or employee related slowdowns and believe that the relationship
with our employees is good.
PATENTS AND TRADEMARKS
We currently own numerous issued United States and foreign patents and
pending patent applications for inventions relating to our product lines as well
as several registered and unregistered trademarks and service marks relating to
our products and services. The registered trademarks include FERRET(R), BREAK
FREE(R), DEF-TEC PRODUCTS(R), DISTRACTION DEVICE(R), NIK(R), IDENTIDRUG(R),
FEDERAL LABORATORIES(R), FIRST DEFENSE(R), IMPAK(R) and O'GARA-HESS & EISENHARDT
ARMORING COMPANY(R). We also have an exclusive license to use the MACE(R)
trademarks in the law enforcement market. Although we do not believe that our
ability to compete in any of our product markets is dependent solely on our
patents and trademarks, we do believe that the protection afforded by our
intellectual property provides us with important technological and marketing
advantages over our competitors. Although we have protected our
20
technologies to the extent that we believe appropriate, the measures taken to
protect our proprietary rights may not deter or prevent unauthorized use of our
technologies. In other countries, our proprietary rights may not be protected to
the same extent as in the United States.
GOVERNMENT REGULATION
We are subject to federal licensing requirements with respect to the
sale in foreign countries of certain of our products. In addition, we are
obligated to comply with a variety of federal, state and local regulations, both
domestically and abroad, governing certain aspects of our operations and the
workplace. We are also regulated by the U.S. Bureau of Alcohol, Tobacco, and
Firearms as a result of our manufacturing of certain destructive devices and by
the use of ethyl alcohol in certain products. We also ship hazardous goods, and
in doing so, must comply with the regulations of the U.S. Department of
Transportation for packaging and labeling. We are also subject to certain
regulations promulgated by, among others, the U.S. Departments of Commerce and
State and the U.S. Environmental Protection Agency. Additionally, as a
government contractor, we are subject to rules, regulation and approvals
applicable to government contractors.
ENVIRONMENTAL MATTERS
We are subject to federal, state, and local laws and regulations
governing the protection of the environment, including those regulating
discharges to the air and water, the management of wastes, and the control of
noise and odors. While we always strive to operate in compliance with these
requirements, we cannot assure you that we are at all times in complete
compliance with all such requirements. Like all companies, we are subject to
potentially significant fines or penalties if we fail to comply with
environmental requirements. Although we have made and will continue to make
capital expenditures in order to comply with environmental requirements, we do
not expect material capital expenditures for environmental controls in 2002.
However, environmental requirements are complex, change frequently, and could
become more stringent in the future. Accordingly, we cannot assure you that
these requirements will not change in a manner that will require material
capital or operating expenditures or will otherwise have a material adverse
effect on us in the future.
The United States Environmental Protection Agency issued a request for
information to us pursuant to Section 104(e) of the Comprehensive Environmental
Response, Compensation and Liability Act in August 2001, regarding the possible
impact of our Casper, Wyoming tear gas facility on the environment. We have
responded to this request. The EPA's inquiry is in its initial stage, and we
cannot predict the outcome of this matter.
We are also subject to environmental laws requiring the investigation
and cleanup of environmental contamination. We may be subject to liability,
including liability for cleanup costs, if contamination is discovered at one of
our current or former facilities or at a landfill or other location where we
have disposed wastes. The amount of such liability could be material. We use
Orthochlorabenzalmalononitrile and Chloroacetophenone chemical agents in
connection with our production of tear gas. These chemicals are hazardous and
could cause environmental damage if not handled and disposed of properly.
21
ITEM 2. PROPERTIES
The following table identifies and provides certain information
regarding our principal facilities.
LOCATION ANNUAL RENT OWNED/LEASED APPROXIMATE SIZE PRODUCTS MANUFACTURED
Jacksonville, FL N/A Owned 14 Acres Body armor,
70,000 sq. ft. Forensic products,
Weapon cleaning
lubricants
Casper, WY N/A Owned 66 Acres Tear gas,
72,234 sq. ft. Pepper spray,
Less-lethal munitions
Westhoughton, England N/A Owned 44,000 sq. ft. Body armor
London, England $327,500 Leased 9,964 sq. ft. ArmorGroup
Ontario, CA N/A Owned 117,500 sq. ft. Body armor,
Duty gear,
Automotive accessories
Pittsfield, MA $46,800 Leased 16,000 sq. ft. Hard armor, Vehicle
armor
Pittsfield, MA N/A Owned 19,700 sq. ft. Hard armor,
Vehicle armor
Tijuana, Mexico $143,412 Leased 31,452 sq. ft. Duty gear,
Body armor, Automotive
accessories
Fitzwilliam, NH $24,000 Leased 22,848 sq. ft. Police batons
Fairfield, OH N/A Owned 130,000 sq. ft. Armored vehicles
Lamballe, France (1) $101,000 Leased 52,000 sq. ft. Armored vehicles
Sao Paulo, Brazil $257,000 Leased 56,000 sq. ft. Armored vehicles
Bogota, Colombia $94,776 Leased 35,000 sq. ft. Armored vehicles
Mexico City, Mexico N/A Owned 20,000 sq. ft. Armored vehicles,
training
Mexico City, Mexico $31,500 Leased 5,380 sq. ft. Armored vehicles
West Point, VA $67,740 Leased 490 Acres, Training
6,694 sq. ft.
San Antonio, TX N/A Owned 261 Acres, Training
2,600 sq. ft.
El Segundo, CA $68,960 Leased 6,500 sq. ft. Fingerprint equipment
Note 1 - For accounting purposes, the Lamballe, France facility is considered
owned and financed by a capital lease that is recorded as a liability on our
financial statements.
22
We also lease an average of 5,000 square feet at each of 45 worldwide
locations, at an aggregate annual rental of approximately $1,000,000 having
terms expiring from 1 to 10 years.
We believe our manufacturing, warehouse and office facilities are
suitable and adequate and afford sufficient manufacturing capacity for our
current and anticipated requirements. We believe we have adequate insurance
coverage for our properties and their contents.
ITEM 3. LEGAL PROCEEDINGS
The United States Environmental Protection Agency issued a request for
information to us pursuant to Section 104(e) of the Comprehensive Environmental
Response, Compensation and Liability Act in August 2001, regarding the possible
impact of our Casper, Wyoming tear gas facility on the environment. We have
responded to this request. The EPA's inquiry is in its initial stage, and we
cannot predict the outcome of this matter.
On January 16, 1998, our Services division ceased operations in the
country of Angola. The cessation of operations in Angola was dictated by that
government's decision to deport all of our expatriate management and
supervisors. As a result of the cessation of operations in Angola, our Services
division is involved in various disputes with SHRM S.A.("SHRM"), its minority
joint venture partner relating to the Angolan business. On March 6, 1998, SIA (a
subsidiary of SHRM) filed a complaint against Defense Systems France, SA ("DSF")
before the Commercial Court of Nanterre (Tribunal de Commerce de Nanterre)
seeking to be paid an amount of $577,286 corresponding to an alleged debt of
DSIA to SIA. On, June 27, 2000, the judge of the Paris Commercial Court ruled
SHRM did not provide evidence required to establish its standing and the
proceedings brought by SHRM were cancelled. On October 3, 2000, a winding up
petition was served by DSF against DSIA. On October 31, 2000, SHRM filed a
counterclaim seeking to have this winding up petition dismissed. On November 28,
2000, SHRM appealed the judgement rendered by the Paris Commercial Court on June
27, 2000, claiming that the Paris Commercial Court no longer has jurisdiction
over the case. On September 18, 2001, the Paris Commercial Court stayed the
proceeding pending the outcome of the appeal. A hearing with the Court of Appeal
on the standing of SHRM and on the merits is scheduled for October 24, 2002,
briefs for which are due September 6, 2002. The Commercial Court of Nanterre has
stayed the proceedings before it, pending the decisions of the Court of Appeal
and the Paris Commercial Court.
On or about March 22, 2002, O'Gara-Hess & Eisenhardt Armoring Company
(OHEAC), one of our subsidiaries, received a request from the Department of
Defense to produce documents and information for the period October 1, 1999
through May 1, 2001. The request did not state the nature of the investigation
or that there has been any allegation of wrong-doing by OHEAC. OHEAC is
complying with the document request. To the extent that there may be any
liability, we believe that we are entitled to indemnification from Kroll, Inc.
under our purchase agreement pursuant to which we acquired OHEAC.
In addition to the above, in the normal course of business, we are
subjected to claims and litigation in the areas of product and general
liability. We believe that we have adequate insurance coverage for most claims
that are incurred in the normal course of business. In such cases, the effect on
our financial statements is generally limited to the amount of our insurance
deductibles. At this time, we do not believe any such claims will have a
material impact on our financial position, operations and liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during
the fourth quarter of the fiscal year covered by this report.
23
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock, par value $.01 per share (the "Common Stock") is
traded under the symbol "AH" on the New York Stock Exchange (the "NYSE"). The
following table sets forth the range of high and low sales prices for our Common
Stock on the NYSE for fiscal years 2001 and 2000 and for the first quarter of
fiscal year 2002 (through March 22, 2002).
HIGH LOW
---- ---
2002
1st Quarter................................... 28.25 20.45
2001
4th Quarter .................................. 27.60 19.25
3rd Quarter .................................... 23.50 14.20
2nd Quarter................................... 19.25 11.00
1st Quarter................................... 17.75 14.60
2000
4th Quarter .................................. 17.69 13.56
3rd Quarter .................................... 18.13 13.00
2nd Quarter................................... 14.69 8.63
1st Quarter................................... 13.38 10.00
HOLDERS
As of March 22, 2002, we had approximately 609 stockholders of record.
Only record holders of shares held in "nominee" or street names are included in
this number.
DIVIDENDS
We have never declared or paid cash dividends on our Common Stock. We
intend to retain future earnings, if any, for use in the operations of our
business including working capital, repayment of indebtedness, capital
expenditures and general corporate purposes. We do not anticipate paying any
cash dividends on our Common Stock in the foreseeable future. In addition, we
are restricted from paying dividends on our Common Stock pursuant to our Credit
Agreement. See Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations-Liquidity and Capital Resources" and Note 6
to Consolidated Financial Statements.
RECENT SALES OF UNREGISTERED SECURITIES
The following information relates to sales or issuances of unregistered
securities by us during fiscal 2001. All of these sales or issuances of
securities were made in reliance upon an exemption from the registration
provisions of the Securities Act of 1933, as amended, set forth in Sections 4(2)
and/or 4(b) thereof and the rules and regulations under the Securities Act,
including Regulation D, as transactions by an issuer not involving any public
offering and/or sales to a limited number of purchasers who were acquiring such
securities for their own account for investment purposes and not with a view to
the resale or distribution thereof.
24
During the fourth quarter of our 2001 fiscal year, we issued 17,000
shares of our common stock as an earnout payment for performance during the
period of June 1998 to December 1999.
STOCK OPTION PLANS
During fiscal 2001, we granted options to various employees and
directors to purchase an aggregate of 892,159 shares of Common Stock under the
1999 Stock Incentive Plan at exercise prices ranging from $14.17 to $17.54 per
share. The options granted to non-employee directors vest immediately, and
options granted to employees typically vest equally over a period of three years
from the date of the grant. The vesting of the options may be accelerated in the
event of the occurrence of certain events.
ITEM 6. SELECTED FINANCIAL DATA
FINANCIAL OVERVIEW
FIVE-YEAR SUMMARY
The table below sets forth a summary of our results of operations and
financial condition as of and for the periods then ended.
(Amounts in thousands, 2001 2000 1999 1998 1997
except per share amounts) ---- ---- ---- ---- ----
Total Revenues $292,028 $220,955 $156,664 $97,207 $78,314
Net Income (1) $10,128 $17,048 $13,196 $8,596 $3,158
Operating Income $19,532 $26,483 $20,400 $13,645 $5,285
Basic Earnings Per Share $0.42 $0.75 $0.63 $0.53 $0.23
Diluted Earnings Per Share $0.41 $0.73 $0.61 $0.50 $0.21
Note 1 - 2001 Net income and 2001 operating income include a pre-tax
restructuring charge of $10.3 million.
Total Assets $388,057 $225,957 $178,562 $94,353 $75,487
Working Capital $142,723 $68,125 $53,993 $24,366 $31,934
Long-Term Obligations $4,640 $39,360 $2,699 $344 $11
Stockholders' Equity $326,019 $166,771 $157,883 $75,102 $64,598
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act.
Statements that are predictive in nature, that depend upon or refer to future
events or conditions or that include the words such as "expects", "anticipates",
"intends", "plans", "believes", "estimates", "could be" and similar expressions
are forward looking statements. Although we believe that these statements are
based upon reasonable assumptions, we can give no assurance that our goals will
be achieved. See "Forward Looking Statements."
Our actual results may differ from those expressed or implied in
forward-looking statements. We believe that we are subject to a number of risk
factors, including: the inherent unpredictability of currency
25
fluctuations; competitive actions, including pricing; the ability to realize
cost reductions and operating efficiencies, including the ability to implement
headcount reduction programs timely and in a manner that does not unduly disrupt
business operations and the ability to identify and to realize other
cost-reduction opportunities; and general economic and business conditions. Any
forward-looking statements in this report should be evaluated in light of these
and other important risk factors listed in this Management's Discussion and
Analysis of Financial Condition and Results of Operations and elsewhere in this
Annual Report on Form 10-K including the accompanying financial statements.
COMPANY OVERVIEW
We are a leading manufacturer and provider of security products,
vehicle armor systems and security risk management services. Our products and
services are used by military, law enforcement, security and corrections
personnel throughout the world, as well as governmental agencies, multinational
corporations and non-governmental organizations. Our company is organized and
operated under three business segments: Armor Holdings Products; Armor Mobile
Security; and ArmorGroup.
Armor Holdings Products. Our Armor Holdings Products Division
manufactures and sells a broad range of high quality branded law enforcement
equipment, such as tactical armor, hard armor, duty gear, less-lethal munitions,
anti-riot products, police batons, forensic products and weapon maintenance
products. Our products are marketed under brand names that are well-known and
respected in the military and law enforcement communities such as American Body
Armor, Safariland, Defense Technology, Federal Laboratories, MACE (R), PROTECH,
NIK (R) Public Safety, Break-Free, Monadnock Lifetime Products, Identicator and
Lightning Powder. We sell our manufactured products primarily to law enforcement
agencies through a worldwide network of over 500 distributors and sales agents,
including approximately 350 in the United States. Our extensive distribution
capabilities and commitment to customer service and training have enabled us to
become a leading provider of security equipment to law enforcement agencies.
Armor Mobile Security. Our Armor Mobile Security Division, created upon
the acquisition of O'Gara-Hess & Eisenhardt Armoring Company, The O'Gara
Comopany, and O'Gara Security Associates, Inc. on August 22, 2001, manufactures
and installs ballistic and blast protected armoring systems for military
vehicles, commercial vehicles, military aircraft and missile components. Under
the brand name O'Gara-Hess & Eisenhardt, we are the sole-source provider to the
U.S. military for the supply of armoring and blast protection systems for the
High Mobility Multi-purpose Wheeled Vehicle (the "HMMWV"). We have also entered
into an agreement to provide the U.S. military with certain maintenance services
with respect to its HMMWVs. There is currently an installed base of
approximately 2,800 up-armored HMMWVs subject to this maintenance arrangement.
We expect that our maintenance services may increase if the U.S. military
substantially increases its HMMWV purchases or substantially increases its use
of the current installed base. Additionally, the Armor Mobile Security Division
has been subcontracted to develop a ballistically armored and sealed truck cab
for HIMARS, a program currently in development for the U.S. Army, and also
markets armor sub-systems for other tactical wheeled vehicles. We armor a
variety of commercial vehicles, including limousines, sedans, sport utility
vehicles, commercial trucks and cash-in-transit vehicles, to protect against
varying degrees of ballistic and blast threats.
ArmorGroup. Our Services Division provides a broad range of
sophisticated security risk management solutions to multinational
26
corporations in diverse industries such as natural resources, financial services
and consumer products, and to governmental and non-governmental agencies such as
the U.S. Departments of State and Defense, the United Nations, USAID and
Britain's Department for International Development. Our clients typically have
personnel and other investments in unstable and often violent areas of the
world. Through our offices on five continents, we provide our multinational
clients with a diversified portfolio of security solutions to assist them in
mitigating risks in their operations around the world. Our highly trained,
multilingual and experienced security personnel work closely with our clients to
create and implement solutions to complex security problems. These services
include security planning, advice and management, security systems integration,
intellectual property asset protection, due diligence investigations and
training programs in counterintelligence, countersurveillance, advanced driving
techniques and ballistics. We believe that many of our security services, while
often representing a small portion of our clients' overall cost of doing
business, are critical to our clients' success. We believe that this creates a
consistent demand for our premium services at attractive margins.
CRITICAL ACCOUNTING POLICIES
Our significant accounting policies are described in Note 1 to the
consolidated financial statements included in Item 8 of this Form 10-K. We
believe our most critical accounting policies include revenue recognition, the
use of estimates, income taxes and impairment.
Revenue Recognition - We record products revenue at the time of shipment.
Returns are minimal and do not materially effect the financial statements.
We record revenue from our Mobile Security Division when the vehicle is
shipped, except for larger commercial contracts typically longer than four
months in length and the contract for the delivery of HMMWVs to the U.S.
Government which continues through 2005. Revenue from such contracts is
recognized on the percentage of completion, units-of-work performed method.
HMMWV units sold to the U.S. Government are considered complete when the onsite
Department of Defense officer finishes the inspection of the HMMWV and approves
it for delivery. Should such contracts be in a loss position, the entire
estimated loss would be recognized for the balance of the contract at such time.
Current contracts are profitable.
We record service revenue as services are provided on a contract by
contract basis. Revenues from service contracts are recognized over the term of
the contract.
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 the carrying value of
long-lived assets, 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.
Income taxes - We account for income taxes pursuant to Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes".
Under the asset and liability method specified thereunder, deferred taxes are
determined based on the difference between the financial reporting and tax bases
of assets and liabilities. Deferred tax liabilities are offset by deferred tax
assets relating to net operating loss carryforwards and deductible temporary
differences. Future benefits obtained from utilization of net operating loss
carryforwards or from the reduction in the income tax asset valuation allowance
existing on September 20, 1993 have been and will
27
be applied to reduce reorganization value in excess of amounts allocable to
identifiable assets. At December 31, 2000 and 2001, the Company's consolidated
foreign subsidiaries have unremitted earnings of approximately $10 million and
$14 million, respectively on which the Company has not recorded a provision for
United States Federal income taxes since these earnings are considered to be
permanently invested. Such foreign earnings have been taxed according to the
regulations existing in the countries in which they were earned.
Impairment - Long-lived assets including certain identifiable intangibles,
and the goodwill related to those assets, are reviewed 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 has reviewed the Company's long-lived assets and has determined that
there are no events requiring impairment loss recognition at December 31, 2001.
The method used to determine the existence of an impairment would be
undiscounted operating cash flows estimated over the remaining amortization
period for the related long-lived assets. Impairment is measured as the
difference between fair value and unamortized cost at the date impairment is
determined. See "Recently Issued Accounting Standards" on page 34.
RESULTS OF OPERATIONS
The following table sets forth selected statement of operations data as a
percentage of total revenues for the periods indicated:
FISCAL YEAR
----------------------------
1999 2000 2001
---- ---- ----
Revenue
Products 62% 61% 49%
Mobile Security 0% 0% 16%
Services 38% 39% 35%
Total revenues 100% 100% 100%
Cost of sales 60% 62% 66%
Operating expenses 24% 23% 22%
Amortization 2% 2% 1%
Equity in earnings of investees 0% 0% 0%
Restructuring and related charges 0% 0% 4%
Integration and other non-recurring charges 2% 1% 1%
Operating income 13% 12% 7%
Interest expense, net 0% 1% 1%
Other income, net 1% 1% 0%
Income before provision for income taxes 13% 12% 5%
Provision for income taxes 5% 4% 2%
Net income 8% 8% 3%
EBITDA 15% 16% 10%
FISCAL 2001 AS COMPARED TO FISCAL 2000
Product Revenues. Armor Holdings Product Division revenue increased $7.3
million, or 5.4% to $142.7 million for the year ended December 31, 2001 ("Fiscal
2001"), compared to $135.3 million for the year ended December 31, 2000 ("Fiscal
2000"). Revenue increased during the year due to the acquisitions completed in
Fiscal 2000 and additional Fiscal 2001
28
acquisitions. All of these acquisitions were accounted for as purchases and
accordingly the results of their operations are included only from the date of
acquisition. Not including these acquisitions, the Armor Holdings Product
Division revenue decreased 1.4% during Fiscal 2001, due in part to shipping
interruptions and order cancellations that resulted from the September 11
terrorist attacks against the World Trade Center and the Pentagon and to a
slowdown in purchasing during the first quarter of 2001. The Company associated
the first quarter slowdown with the Bulletproof Vest Partnership Act (the "BVP
Money") that provides federal matching funds to law enforcement agencies
purchasing bullet resistant vests. The Company believes that agencies delayed
their purchasing decisions during the first quarter of 2001 until such time as
the BVP Money was fully allocated.
Mobile Security Revenues. Armor Mobile Security Division revenues totaled
$47.2 million from August 22, 2001, the acquisition date, to December 31, 2001.
The Mobile Security Division was created through the O'Gara acqusition.
Service Revenues. ArmorGroup Service Division revenues increased $16.5
million, or 19.3%, to $102.1 million in Fiscal 2001, compared to $85.6 million
in Fiscal 2000. Revenue increased 17.2% from internal sources and 2.1% from the
acquisition of International Training Inc. ("ITI") which was acquired as a part
of the O'Gara acquisition and integrated into the ArmorGroup Services Division
as ArmorGroup North America.
Cost of Sales. Cost of sales increased $53.9 million, or 39.2% to $191.4
million in Fiscal 2001, compared to $137.5 million in Fiscal 2000. Increased
cost of sales is directly related to revenue increases associated with the
O'Gara acquisition and internal revenue growth in our ArmorGroup Services
Division. As a percentage of total revenues, cost of sales increased to 65.5% in
Fiscal 2001 from 62.2% in Fiscal 2000. Increasing cost of sales as a percentage
of total revenue reflects both the acquisition of our Mobile Security Division,
which operates at lower average gross margins, as well as, a shift in revenue
mix in the ArmorGroup Service Division from Investigations to Security Services
which has lower margins. During 2001, ArmorGroup abandoned its US Investigations
strategy by closing several higher margin business units while replacing this
revenue with growth in lower margin Security Service revenue.
Operating Expenses. Operating expenses increased $12.9 million, or 25.5%,
to $63.2 million in Fiscal 2001, compared to $50.3 million in Fiscal 2000.
Increased operating expenses are directly related to internal revenue growth and
the incremental selling, general and administrative expenses associated with the
acquisitions of Monadnock , Lightning Powder and O'Gara, all of which were
acquired subsequent to November 2000. As a percentage of total revenue,
operating expenses decreased to 21.6% in Fiscal 2001, from 22.8% in Fiscal 2000
due to the consolidation of sales, marketing and distribution expenses at
Monadnock and Lightning Powder and lower overall selling expenses as a
percentage of sales at O'Gara.
Amortization. Amortization expense increased $232,000, or 6.8%, to $3.7
million in Fiscal 2001, compared to $3.4 million in Fiscal 2000. Amortization
expense increased during the year due to amortization of intangible assets
acquired during Fiscal 2000 through the acquisitions of OVG/Traquair, Monadnock,
and Lightning Powder, offset by a reduction in amortization expense resulting
from goodwill write-offs contained in the Company's restructuring charge in the
first quarter of 2001. In accordance with SFAS 142, we are not amortizing the
goodwill from the O'Gara acquisition, which occurred subsequent to June 30,
2001.
Equity in earnings of investees. Equity in earnings of investee was
$87,000 in Fiscal 2000 and relates to the Company's 20% investment in Jardine
29
Securicor Gurkha Services Limited, a Hong Kong joint venture company ("JSGS"),
which the Company sold during Fiscal 2000.
Restructuring and related charges. In January 2001, the Company's Board of
Directors approved a restructuring plan to close its Services Division's U.S.
investigative businesses, realign the Division's organization, eliminate excess
facilities and reduce overhead in its business worldwide. In connection with
this restructuring charge, the Services Division performed a review of its
long-lived assets to identify potential impairments. Pursuant to this
restructuring plan, the Company a) eliminated 26 employees, primarily from its
investigative business; b) eliminated an additional 24 employees from its
security consulting business; c) incurred lease and other exit costs as a result
of the closure of its investigative businesses; and d) wrote-down the value of
both tangible and intangible assets as a result of the impairment review. Most
of the significant actions contemplated by the restructuring plan have been
completed.
As a result of the restructuring plan, the Company recorded a pre-tax
charge of $10.3 million. As of December 31, 2001, the Company had a remaining
liability of $354,000 relating to lease termination and other exit costs. This
liability has been classified in accrued expenses and other current liabilities
on the Company's consolidated balance sheet and will be funded through cash
provided by operating activities and the Company's credit facility.
Integration and other non-recurring charges. Integration and other
non-recurring charges increased by $782,000, or 23.8% to $4.1 million in Fiscal
2001, compared to $3.3 million in Fiscal 2000. Fiscal 2001 integration expenses
represent costs associated with the acquisitions and integration of O'Gara,
Monadnock and Lightning Powder as well as costs associated with the Company
international tax minimization program. Fiscal 2000 integration expenses
included costs associated with the acquisitions of Safariland, OVG/Traquair,
Special Clearance Services and Break-Free, as well as, costs associated with the
Company's international tax minimization program and other one time expenses
incurred in the third quarter of 2000.
Operating Income. Operating income decreased $7.0 million, or 26.2%, to
$19.5 million in Fiscal 2001, compared to $26.5 million in Fiscal 2000. Lower
operating income in Fiscal 2001 is due primarily to the Company's first quarter
restructuring charge, in addition to those other factors discussed above.
Interest Expense, net. Interest expense, net was $4.0 million in Fiscal
2001, compared to interest expense, net of $1.9 million in Fiscal 2000. Interest
expense, net increased during Fiscal 2001 primarily due to interest on debt
incurred to fund the acquisitions of Monadnock, Lightning Powder and O'Gara,
which were each funded in part with cash from the Company's revolving credit
facility. Increased borrowings under the revolving credit facility were offset
by lower interest rates on that debt. Interest expense, net includes interest on
and amortization of the fees associated with the Company's debt obligations,
including its revolving credit facility, and the amortization of the discount on
certain long-term liabilities acquired as part of the Safariland acquisition.
Other income, net. Other income, net decreased $1.5 million, or 83.4% to
$300,000 in Fiscal 2001, compared to $1.8 million in Fiscal 2000. This decrease
was due primarily to the sale of our investment in JSGS in Fiscal 2000.
30
Income before provision for income taxes. Income before provision for
income taxes decreased $10.6 million, or 40.0%, to $15.8 million in Fiscal 2001,
compared to $26.4 million in Fiscal 2000. Lower income before provision for
income taxes Fiscal 2001 is due primarily to our first quarter restructuring
charge, in addition to those other factors discussed above.
Provision for income taxes. The provision for income taxes decreased by
$3.6 million, or 39%, to $5.7 million in Fiscal 2001, compared to $9.3 million
in Fiscal 2000. The provision was based on our blended U.S. federal and state
statutory income tax rate of approximately 25.6% for our U.S.-based companies
and a 272.4% blended effective tax rate for foreign operations and includes an
income tax benefit of $4.6 million associated with investments in certain of our
subsidiaries. Without this benefit, our effective tax rate would have increased
to 41.8% due to the increased effect of non-deductible expense items on a lower
level of income in Fiscal 2001. The overall effective tax rate for our foreign
operations is not necessarily indicative of expected future rates due to the
changing concentration and mix of income in the various countries in which we
operates. The effective tax rate for 2001 and 2000 was 36.0% and 35.4%,
respectively. The increase in our effective tax rate is primarily due to the
increased effect of non-deductible foreign items on a lower level of foreign
income in Fiscal 2001.
Net income. Net income decreased approximately $6.9 million or 40.6%, to
$10.1 million in Fiscal 2001, compared to $17.0 million in Fiscal 2000. This
decrease was primarily due to the restructuring charge and to the factors
discussed above.
FISCAL 2000 AS COMPARED TO FISCAL 1999
Product revenues. Product revenues increased by $38.6 million, or 40.0%,
to $135.3 million for Fiscal 2000, compared to $96.7 million for the year ended
December 31, 1999 ("Fiscal 1999"). This increase was primarily due to strong
internal growth, including year over year comparisons of businesses acquired
during the previous year, of 20.4% as well as the inclusion of full year results
for Safariland and other 1999 acquisitions, and additional acquisitions
completed in Fiscal 2000. All of these acquisitions were accounted for as
purchases and accordingly the results of their operations are included only for
the period after acquisition.
Service revenues. Service revenues increased by $25.7 million, or 42.8%,
to $85.6 million in Fiscal 2000, compared to $60.0 million in Fiscal 1999. This
increase was primarily due to strong internal growth, including year over year
comparisons of security businesses acquired during the previous year, of 23.6%
as well as the inclusion of full year results Fiscal 1999 acquisitions, and the
additional Fiscal 2000 acquisitions. All of these acquisitions were accounted
for as purchases and accordingly the results of their operations are included
only for the period after acquisition.
Cost of sales. Cost of sales increased by $43.1 million, or 45.6%, to
$137.5 million in Fiscal 2000 compared to $94.4 million in Fiscal 1999. This
increase was primarily due to increased revenues in Fiscal 2000, compared to
Fiscal 1999. As a percentage of total revenues, cost of sales increased to 62.2%
in Fiscal 2000 from 60.3% in Fiscal 1999.
Operating expenses. Operating expenses increased by $13.3 million, or
36.0%, to $50.3 million in Fiscal 2000, compared to $37.0 million in Fiscal
1999. This increase was primarily due to the increased revenues from our Armor
Holdings Products and Services Division as well as the acquisitions which
31
were completed in 2000. As a percentage of sales, operating expenses decreased
to 22.8% of sales in Fiscal 2000 compared to 23.6% in Fiscal 1999.
Amortization. Amortization expense increased by $1.0 million, or 39.2%, to
$3.4 million in Fiscal 2000, compared to $2.5 million in Fiscal 1999. This
increase was primarily due to additional amortization of intangible assets
acquired as a result of the acquisitions completed during Fiscal 2000, as well
as a full year of amortization relating to the 1999 acquisitions.
Equity in earnings of investees. Equity in earnings of investees decreased
by $92,000, or 51.4%, to $87,000 in Fiscal 2000, compared to $179,000 in Fiscal
1999. The equity in earnings of investees is comprised of a 20% investment in
JSGS. We sold this investment in Fiscal 2000 (see Other Income).
Integration and other non-recurring charges. Integration and other
non-recurring charges increased by $0.7 million, or 28.1% to $3.3 million in
Fiscal 2000 compared, to $2.6 million in Fiscal 1999 and are related to the
integration of the acquired companies. These costs include relocation expenses
for equipment and employees, severance costs as well as charges for integrating
our sales and marketing efforts.
Operating income. Operating income increased by $6.1 million, or 29.8%, to
$26.5 million in Fiscal 2000, compared to $20.4 million in Fiscal 1999 due to
the reasons discussed above.
Interest expense, net. Net interest expense was $1.9 million in Fiscal
2000 compared to net interest expense of $17,000 in Fiscal 1999. The increase
was primarily due to interest on debt incurred to fund acquisitions and make
purchases under our stock repurchase plan.
Other income. Other income was $1.8 million in Fiscal 2000 compared to
$0.8 million in Fiscal 1999. The increase was primarily due to the gain of
approximately $1.7 million recognized on the sale of our investment in JSGS in
Fiscal 2000.
Provision for income taxes. The provision for income taxes increased by
$1.3 million, or 16.7%, to $9.3 million in Fiscal 2000, compared to $8.0 million
in Fiscal 1999. The provision was based on our U.S. federal and state statutory
income tax rates of approximately 37% for our U.S.-based companies and a 10.6%
blended effective tax rate for our. The effective tax rate for the Company's
foreign operations is not necessarily indicative of expected future rates due to
the changing concentration and mix of income in the various countries in which
we operate. The effective tax rate for 2000 and 1999 was 35.4% and 37.8%,
respectively. The decrease in our effective tax rate is a result of the
increased amount of income earned in jurisdictions whose statutory tax rates are
below those in the United States, as a percentage of operating income.
Net income. Net income increased approximately $3.9 million or 29.2%, to
$17.0 million in Fiscal 2000 compared to $13.2 million in Fiscal 1999. This
increase was primarily due to the combination of acquisitions, internal growth,
and to the factors discussed above.
QUARTERLY RESULTS
Set forth below is certain unaudited quarterly financial data for each of
our last eight quarters and certain such data expressed as a percentage of our
revenue for the respective quarters. The information has been derived
32
from unaudited financial statements that, in the opinion of management, include
all adjustments (consisting only of normal recurring adjustments) necessary to
fairly present such quarterly information in accordance with generally accepted
accounting principles. The operating results for any quarter are not necessarily
indicative of the results to be expected for any future period.
QUARTER ENDED
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(IN THOUSANDS, EXCEPT PER SHARE DATA)
Mar 31 Jun 30 Sept 30 Dec 31 Mar 31 June 30, Sept 30, Dec 31,
2000 2000 2000 2000 2001 2001 2001 2001
Revenues
Products $31,448 $34,053 $34,548 $35,294 $28,813 $36,977 $37,330 $39,554
Mobile Security - - - - - - 9,349 37,883
Services 18,418 21,414 22,570 23,210 22,061 25,079 27,067