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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 2002
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
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ARMOR HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 59-3392443
(State or other jurisdiction of incorporation or (IRS Employer
organization) Identification No.)
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, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [X]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in rule 12B-2 of the Act) Yes [ X ] No [ ]
The aggregate market value of voting and non-voting common equity held
by non-affiliates of the Registrant as of June 30 , 2002 (based on the closing
sale price of the Common Stock on the New York Stock Exchange on such date) was
$890,358,924.
The number of shares of the Registrant's Common Stock outstanding as of
March 17, 2003 was 28,033,755.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of our Proxy Statement for our Annual Meeting of Stockholders to be
held on June 24, 2003, are incorporated by reference into Part III hereof.
TABLE OF CONTENTS AND
CROSS REFERENCE SHEET
Page Number
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PART I Item 1. Description of Business 3
Company Overview 3
Material Developments 4
Industry Overview 4
Information Concerning Business Segments and
Geographical Sales 5
Business Strengths 5
Growth Strategy 6
Acquisitions 7
Products 13
Customers 13
Marketing and Distribution 15
Product Manufacturing and Raw Materials 16
Backlog 16
Competition 16
Employees 17
Patents and Trademarks 17
Government Regulation 17
Environmental Matters 17
Discontinued Operations
Description of Business 18
Industry Overview 18
Geographical Sales 19
Services 19
Customers 20
Marketing and Distribution 20
Competition 21
Employees 21
Item 2. Properties 22
Item 3. Legal Proceedings 23
Item 4. Submission of Matters to a Vote of Security Holders 25
PART II Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 26
Item 6. Selected Financial Data 29
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 30
Item 7.A Quantitative and Qualitative Disclosures About
Market Risk 46
Item 8. Financial Statements and Supplementary Data 47
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 47
PART III Item 14. Controls and Procedures 48
PART IV Item 15. Exhibits, Financial Statements and Schedules,
and Reports on Form 8-K 48
2
PART I
FORWARD LOOKING STATEMENTS
We believe that it is important to communicate our expectations to our
investors. Accordingly, this report contains discussion of events or results
that have not yet occurred or been realized. You can identify this type of
discussion, which is often termed "forward-looking statements", by such words
and phrases as "expects", "anticipates", "intends", "plans", "believes",
"estimates" and "could be". Execution of acquisition or divestiture strategies,
expansion of product lines and increase of distribution networks or product
sales are examples of issues whose future success may be difficult to predict.
You should read forward-looking statements carefully because they discuss our
future expectations, contain projections of our future results of operations or
of our financial position, or state other expectations of future performance.
The actions of current and potential new competitors, changes in technology,
seasonality, business cycles and new regulatory requirements are factors that
impact greatly upon strategies and expectations and are outside our direct
control. There may be events in the future that we are not able accurately to
predict or to control. Any cautionary language in this report provides examples
of risks, uncertainties and events that may cause our actual results to differ
from the expectations we express in our forward-looking statements.
ITEM 1.DESCRIPTION OF BUSINESS
COMPANY OVERVIEW
We are a leading manufacturer and provider of security products, vehicle
armoring 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, also referred
to as our Products Division; Armor Mobile Security, also referred to as our
Mobile Security Division and ArmorGroup, also referred to as our Services
Division.
During the second quarter of 2002 we made the decision to sell our Services
Division. In accordance with Statement of Accounting Standards 144, Accounting
for the Impairment or Disposal of Long-Lived Assets, the assets and liabilities
of our Services Division have been classified as held for sale, with its
operating results reported as discontinued operations in our statement of
operations, for all periods presented. The business of our Services Division is
described in Item 1 under the heading "Discontinued Operations."
Armor Holdings Products. Our Armor Holdings Products Division manufactures and
sells a broad range of high quality, branded law enforcement equipment, such as
concealable and tactical body armor, hard armor, duty gear, less-lethal
munitions, anti-riot products, police batons, emergency lighting products,
forensic products, firearms accessories and weapon maintenance products. 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(TM),
Safariland(R), B-Square(TM), Break-Free(R), Defense Technology/Federal
Laboratories(TM), MACE(R), PROTECH(TM), NIK(R)Public Safety, Monadnock(TM)
Lifetime Products, Identicator(TM), Lightning Powder(R), SpeedFeed(TM), and
911EP(R). We sell our manufactured products primarily to law enforcement
agencies through a worldwide network of over 350 distributors and sales agents,
including approximately 200 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.
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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 are also under contract
with the U.S. Army to provide systems technical support for the current
installed base of approximately 3,500 up-armored HMMWV's. We provide spare parts
and maintenance services for the HMMWV's in use and 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 ballistic and blast protected armored and sealed truck cab for the
High Mobility Artillery Rocket System ("HIMARS"), a program recently
transitioned by the U.S. Army from developmental to a low rate of initial
production with deliveries scheduled in late 2003. The Division 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.
MATERIAL DEVELOPMENTS
On January 24, 2003, we executed an agreement to negotiate exclusively with an
undisclosed party for the sale of the security consulting business of our
ArmorGroup Services Division, headquartered in London. Separately, on January
16, 2003 we executed an agreement to negotiate exclusively with an undisclosed
party for the sale of the ArmorGroup Integrated Systems business of our
ArmorGroup Services Division. The terms of both transactions and the identities
of both buyers are protected by confidentiality agreements. These two proposed
transactions represent approximately 94% of the net assets of the Services
Division, currently reported as Discontinued Operations.
Both transactions are subject to, among other conditions, ongoing due diligence
and the execution of definitive purchase agreements.
Based upon our analysis and discussions with our advisors regarding the
estimated realizable value of the Services Division, we have recorded an
impairment charge of $30.3 million. This impairment charge includes
approximately $6.1 million in estimated disposal costs and resulted in a $24.2
million non-cash goodwill reduction. The reduction in the carrying value of the
Services Division is Management's estimate based upon all of the best
information currently available, including discussions with its investment
bankers. The actual proceeds from the disposal of our Services Division may
differ materially from our current estimates and therefore could result in
either a gain or a loss upon final disposal.
In March 2002, our Board of Directors approved a stock repurchase program
authorizing the repurchase of up to a maximum 3.2 million shares of our common
stock. In February 2003, the Board of Directors increased this stock repurchase
program to authorize the repurchase, from time to time depending upon market
conditions and other factors, of up to an additional 4.4 million shares. Through
March 10, 2003, we repurchased 3.3 million shares of our common stock under the
stock repurchase program at an average price of $12.42 per share, leaving us
with the ability to repurchase up to an additional 4.3 million shares of our
common stock. Repurchases may be made in the open market, in privately
negotiated transactions or otherwise. Such repurchases are limited by covenants
under our revolving credit agreement, are made in compliance with applicable
rules and regulations and may be discontinued at any time.
INDUSTRY OVERVIEW
We participate in the defense and global security products industry through the
manufacture of security products marketed to military, law enforcement, security
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and corrections personnel and by manufacturing and installing ballistic and
blast protected armoring systems for military vehicles, commercial vehicles,
military and commercial 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 and threats of violence.
The United States and the international community has been the target of several
deadly terrorist attacks directed towards US 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. and the bombing in Bali in 2002. 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. Industry statistics are difficult to
quantify however, we believe there are approximately 23,000 Law Enforcement
Agencies in the U.S. From 1999 to 2002, we believe the number of active police
officers increased significantly from year to year such that in 2002, there were
approximately 900,000 law enforcement personnel in the U.S. We expect to see
this number continue to rise over the long-term, however, in the short term the
number of law enforcement personnel may decline during 2003 due to funding from
the Federal Government's Department of Homeland Security and budgetary
constraints at the state and local government level.
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.
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 12 to our Consolidated Financial Statements
included elsewhere in this report.
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. We offer a broad portfolio of security products and
armor systems, which enables us to provide comprehensive solutions to a variety
of customers' security needs. We seek to strengthen our capabilities as a single
source provider of security products to our clients. Through our extensive
product distribution network we provide our customers with broad array of
complementary, manufactured law enforcement equipment. We expect to continue to
expand our product 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(TM), Safariland(R), B-Square(TM), Break-Free(R),
Defense Technology/Federal Laboratories(TM), MACE(R), PROTECH(TM), NIK(R)Public
Safety, Monadnock(TM) Lifetime Products, Identicator(TM), Lightning Powder(R),
SpeedFeed(TM), 911EP(R), O'Gara-Hess
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& Eisenhardt and others. Due to the life-protecting nature of many of our
products, end users prefer to purchase innovative premium products with well
known brand names with quality reputations that perform at a high level. 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 200 domestic distributors and
150 international agents to sell our portfolio of manufactured law enforcement
equipment. 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 markets we serve, and the strength of our distribution relationships
minimize our dependence on any particular product, market, or customer.
Organizational Experience Identifying, Completing and Integrating Acquisitions.
Since January 1996, we have completed 19 acquisitions in our Products and Mobile
Security Divisions. We employ a disciplined value oriented approach to
evaluating strategic 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.
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. We are also a subcontractor for the U.S. Army High Mobility Artillery
Rocket System ("HIMARS") program currently in development to produce an armored
cab for the vehicle. The Armor Mobile Security Division delivered 522 HMMWVs in
2001 and 623 HMMWVs in 2002. We believe this growth was driven by increased
deployments of military police and security forces to high risk areas such as
Bosnia, Kosovo and Afghanistan and the potential of a long-term, multi-front
offensive against terrorism. We also provide aftermarket sales of spare parts
and services/maintenance, as the incumbent provider of an installed base of over
3,500 Up-Armored HMMWVs.
GROWTH STRATEGY
We believe the demand for security products and vehicle armor systems will
continue to grow. We expect to address this growth by offering a comprehensive
array of high quality branded security products to meet the needs of law
enforcement and militaries around the globe. We also expect to continue to
develop ballistic and blast protection for high-end commercial vehicles as well
as for military vehicles. We intend to enhance our leadership position through
additional strategic acquisitions by creating a broad portfolio of products and
services to satisfy all of our customers' increasingly complex security products
needs. The following elements define our growth strategy:
Capitalize on Exposure to Military Programs. We believe the events of September
11, 2001, the subsequent "War on Terrorism", the increasing likelihood of
military conflicts abroad, and recent actual events in saving lives through the
performance of armor systems such as the HMMWV are all likely to result in
additional interest by the Department of Defense. We expect that 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 Operations Forces Personal Equipment Advanced Requirements
("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 belive
we are well positioned on these programs and
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are bidding on several others. Additionally, we expect to participate in future
military programs that require our unique products and services.
Expand Distribution Network and Product Offerings. We expect to 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 enhance our brand appeal with
military, law enforcement and other end users.
Capitalize on Increased Homeland Security Requirements. While Homeland Security
spending is still not fully defined and in many cases has not yet reached down
to the first responder, police officer level, we believe 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
Department of Homeland Security. We believe that we are well equipped and
prepared to help build the infrastructure the Department of Homeland Security is
expected to develop. Our Armor Holdings Products 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 has the capacity to respond to an increase in
demand for armored commercial vehicles for use by federal, state and local
government agencies.
Pursue Strategic Acquisitions. We selectively pursue strategic acquisitions that
complement and or expand our product offerings, provide access to new geographic
markets, and provide additional distribution channels and new customer
relationships.
ACQUISITIONS
Since 1996 we have pursued a strategy of growth thru acquisition 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 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 meet 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 believe would
be dilutive to our earnings per share. Since January 1996, we have consummated
17 acquisitions in our Products and Mobile Security Divisions.
The Armor Holdings Products Division has acquired 17 companies since 1996. The
Safariland acquisition completed by the Products Division in 1999, 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
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of acquisition. The Armor Mobile Security Division was created by the
acquisition of O'Gara-Hess & Eisenhardt Corporation (OHEAC) from The
Kroll-O'Gara Company in August 2001 which provides ballistic and blast
protection armoring systems for military and commercial vehicles. OHEAC had
approximately $95 million of revenue at the time of the acquisition. The Armor
Mobile Security Division acquired Trasco Bremen, located in Bremmen, Germany, a
leading high-end, luxury line armored vehicle manufacturer which had
approximately $16 million in annual revenues at the time of acquisition.
PRODUCTS
ARMOR HOLDINGS PRODUCTS
Body Armor. We manufacture and sell a wide array of armor products under the
leading brand names American Body Armor(R), Safariland(R) and PROTECH(TM) 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), American Body Armor(TM),
Safariland, Protech and Zero-G(R). Our body armor products that are manufactured
in the United States are certified under guidelines established by the National
Institute of Justice. We also manufacture body armor in Manchester, England that
is certified under various international standards.
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 typically 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
"multi-threat protection" against both ballistic and sharp instrument
penetration.
We also distribute a variety of items manufactured by others, including helmets,
goggles, face shields and crowd management systems for protection from blunt
trauma.
Hard Armor. We manufacture hard armor products under the PROTECH(TM) brand name.
PROTECH(TM) products include ballistic shields, and other personal protection
accessories and armor products for aircrafts, automobiles and riot control
vehicles.
PROTECH(TM) emerged as a key participant in the construction of bulletproof
cockpit doors for the US commercial airline industry following the terrorist
attacks of September 11, 2001. By partnering with C&D Aerospace of California,
we produced the first armored cockpit door to receive official certification by
the U.S.
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Federal Aviation Administration (FAA). Since the July 3, 2002 certification,
PROTECH(TM) and C&D obtained contracts to supply cockpit doors for more than
5,000 aircraft.
Ballistic Resistent Enclosures -- Manufactured by PROTECH to meet exacting
customer specifications, these products are primarily used as guard booths,
shacks and towers. We also manufacture ballistic protected custom firing
positions for use within existing structures. Protection ranges from .357 Magnum
to .50APM2.
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.
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(R)
(Safari-LaminateTM) and NYLOK(R)(nylon). Duty gear represents a market 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/Federal Laboratories(TM),
First Defense(R), MACE(R) for Law Enforcement and Guardian(TM) 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 market and distribute CBA and RCA-rated Mine Safety Appliance
Advantage 1000 and Millenium model gas masks to law enforcement and public
safety agencies 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 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.
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Police Batons. We manufacture police batons of wood, alloy steel, acetate,
aluminum and polycarbonate products under our brand name Monadnock. Branded
products include our patented Auto-Lock(TM) baton and our Classic-Friction
Lock(TM) 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 have earned a reputation as one of the most responsive
companies in the forensic community. 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(R). These products, such as
fingerprint powders, dusting brushes, and lifting tape, are used to collect
latent fingerprints. We distribute other supplies for evidence collection
including 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(TM) brand name. These products are designed to deter fraud and
produce positive identification in many different 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.
We also produce a variety of unique products for various specialized
investigative and evidence collection applications under the brand name
Evi-Paq(TM).
Firearm Accessories. We manufacture non-destructive, non-gunsmithing mounts as
well as synthetic stocks and forends. Our Speedfeed high quality synthetic
stocks and forends, fit most makes and models. Our B-Square(TM) subsidiary is a
leading designer, manufacturer and marketer of quality aluminum and steel sight
mounts, tools and accessories for the law enforcement, military and sporting
goods (hunting and target shooting) markets.
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.
Warning Light Products and Technology. We manufacture emergency lighting
products using LED technology branded as 911EP(R).
LED technology offers patrol car lighting systems efficient energy consumption
combined with safety and durability in primary and secondary warning lights.
911EP(R)'s unique design utilizes the patrol vehicles existing 12-volt
electrical system and consumes 70% less energy than traditional strobe or
halogen systems. The products deliver optical superiority by radiating a narrow,
color-specific wavelength of light. This light requires no filters or tinted
lenses so none of
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the emitted light is wasted and it can be seen at great distances. While
weatherproof and extremely long-lasting with over 100,000 hours of operation,
maintenance and replacement is easy through 911EP's unique change-out
capability. Light patterns are easily created on our lightbars, which are
available in a variety of lengths and configurations, through the patrol car's
existing on-board computer and our unique controlled programming capabilities.
Automotive Accessories. Through our Safariland subsidiary, we manufacture and
supply automotive accessories such as tire covers, seat covers, cargo organizers
and grill covers to automobile manufacturers, including Toyota, Ford, Honda,
Nissan, Mitsubishi, Kia and Subaru.
Safety Products. QUIKSTEP Ladders(TM): We manufacture strong, lightweight, and
compact ladders designed to be deployed quickly in emergency situations.
Constructed with aluminum alloy and stainless steel, our 12-foot ladder weighs
only 31 pounds and folds up to a briefcase size of 23.5 inches wide, 13 inches
high and 3.5 inches thick.
We are also the exclusive U.S. distributor of the V-Top(TM) Crowd Management
Protective System from Med-Eng Systems and the Thermal-Air(TM) Mask Engineered
by Polar-Wrap. Designed to protect the wearer in a broad range of situations
where officers commonly face blunt impact threats, the V-Top(TM) Crowd
Management Protective System is designed for public protests, riots, prison
uprisings and cell extractions. Manufactured with a patented heat exchange
module that captures the wearer's own breath and uses it to preheat cold air
coming in the mouth, the Thermal-Air(TM) products help keep the body core
temperature at a higher level increasing the time law enforcement officers can
effectively perform their duties outdoors, even in cold temperatures.
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 2002, the Armor Mobile Security Division shipped 623 Up-Armored HMMWVs.
We also supply engineering design and prototype services in support of the
up-armored HMMWV program, and supply spare parts and logistical support.
We are serving as a subcontractor for the U. S. Army to supply a ballistically
armored and sealed truck cab for the High Mobility Artillery Rocket System
(HIMARS), a program recently transitioned by the U.S. Army from developmental to
low rate initial production quantities for delivery scheduled in late 2003. The
truck is used to fire missiles which are a part of either the Multiple Launch
Rocket System or the Army Tactical Missile System. This program consisted of
shipping seven prototypes in 2001 and two in 2002 for test and evaluation by the
U.S. Army and U.S. Marine Corps. The program is currently approved for a low
rate initial production in 2003.
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We market armor sub-systems for other tactical wheeled vehicles, such as medium
and heavy military trucks. We also produce various armor systems as a
subcontractor to a number of large defense contractors. 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
commercial vehicle 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. The entire conversion process
results in an low profile, integrated ballistic protective system. 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. The Armor Mobile
Security Division shipped 1,284 commercial armored vehicles in 2002.
We produce fully armored vehicles and light armored vehicles. Fully armored
commercial 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 attached to
the exterior of the vehicle and non-directional 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 we add substantially less total weight to a light armored vehicle.
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.
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CUSTOMERS
Armor Holdings Products. In 2002, we sold approximately 81.1% 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 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 200 domestic distributors and 150 international agents, as well as
approximately twenty-five domestic sales representatives, three regional sales
managers, and six technical sales specialists, who promote our products but
refer customers to a local distributor for purchasing.
Armor Mobile Security Division. In 2002, we sold approximately 58.3% of our
products in North America, with the balance sold internationally. The market for
military hardware products is worldwide in scope, including the U.S. military
and foreign defense forces. The primary contract for delivery of Up-Armored
HMMWVs is with the U.S. military. We also serve as a subcontractor to provide
ballistically armored and sealed truck cabs for High Mobility Artillery Rocket
System (HIMARS) for use by the U.S. Army and the U.S. marines Corps, a program
recently transitioned to low rate initial production. Additionally, we provide
protected container systems, typically used to protect missile systems from
small arms fire, to the U.S. military under a subcontract to a major defense
contractor.
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 highly documented bids and
evaluations for normally budgeted items. Private customers for armored
commercial vehicles include corporations and individuals. Private buyers are
much more sensitive to price, 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 companies which provide cash in transit services to financial
institutions. Purchasing decisions for cash-in-transit vehicles depend on many
criteria including insurance, regulatory requirements and costs, and depend on
whether the financial institution is private or governmental.
There are no customers who accounted for more than 10% of net sales of the Armor
Holdings Products Division during our fiscal year ended December 31, 2002
("Fiscal 2002"). Our ten largest customers accounted for approximately 27.1% of
total sales for Fiscal 2002. Approximately 39.0% of the Armor Mobile Security
Division's net sales for Fiscal 2002 were derived from U.S. military contracts,
and an additional 17.2% were derived from commercial contracts with non-military
U.S. governmental agencies and foreign governments. Military and governmental
contracts generally are awarded on a periodic or sporadic basis. If the Armor
Mobile Security Division were to lose the HMMWV contract, which continues
through June 2005, the Division's financial performance would experience a
materially negative impact.
MARKETING AND DISTRIBUTION
Armor Holdings Products. As a result of our history of providing high quality
and reliable concealable armor, tactical armor, hard armor, duty gear,
less-lethal munitions, anti-riot products and forensic products, we enjoy broad
brand name recognition and a strong reputation in the law enforcement equipment
industry. The central element of our marketing strategy is to capitalize on our
brand name recognition and reputation among our customers by positioning
ourselves as a global
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provider of many of the premier security risk management products that our
customers may need. By positioning ourselves in this manner, we expect to
capitalize on our existing customer base and our extensive global distribution
network and, maximize the benefits of our long history of supplying security
related products around the world. For a variety of reasons, we have not
historically targeted the military markets for our product offerings. We
currently see opportunities to increase penetration of the military markets with
our law enforcement products, which could strengthen the image of each product
group.
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. However, certain of our training programs also
contribute to revenues. Training programs are an integral part of our customer
service strategy. In addition to enhancing customer satisfaction, we believe
that training also helps breed customer loyalty and brand awareness. Moreover,
many of our products are consumable and used in training, which generates
replacement orders. 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 we have strong relationships with our
distributors. 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 continually seek to expand our distribution network. As we identify and
acquire businesses that fit strategically into our existing product portfolio,
we maximize our distribution network by offering additional products. Certain
acquisitions, from time to time, can open new channels of global distribution to
parts of the world not previously penetrated.
Armor Holdings Products Division also sells a selected number of civilian
products into mass merchandise stores and sporting goods stores via a network of
national sporting goods wholesalers. These products include concealment
holsters, hunting and sports shooting accessories, cleaning equipment and
pepper spray products.
In addition to our traditional distribution channels, we are also selling our
products on the World Wide Web through a variety of sites. 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
targeting government agencies exclusively. For Forensic Specialists, we market
our products via Lightning Powder's website, redwop.com. We also sell a small
array of our concealable and competition holsters to the consumer market on
Holsters.com, limiting distribution of our law enforcement equipment to law
enforcement channels of distribution.
Armor Mobile Security Division. On a worldwide basis, the Armor Mobile Security
Division employs approximately 28 full-time sales professionals in connection
with its commercial sales. These employees operate out of Washington, D.C.;
Fairfield, Ohio; Sao Paulo, Brazil; Lamballe, France; Mexico City, Mexico;
Bogota, Colombia; Bremen, Germany, Geneva, Switzerland and Caracas, Venezuela.
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. 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.
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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 various Original Equipment
Manufacturers (OEMs)to manufacturer the Up-armored HMMWV, HIMARS and FMTV
(Family of Medium Tactical Vehicles) for sales in domestic and international
military and commercial areas. Such agreements allow us to benefit from the OEM
distribution network and save on certain selling costs.
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
our 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 have contractual arrangements 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.
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 suppliers. 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 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.
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, our PROTECH facility in
Pittsfield, Massachusetts for hard armor 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 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.
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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
engineers, in conjunction with our design and manufacturing engineers, develop
and test new ballistic and blast protection systems that meet ever-changing
threats.
BACKLOG
Armor Holdings Products. At December 31, 2002, Armor Holdings Products Division
had unfilled customer orders of approximately $7.8 million compared with
approximately $9.0 million of such orders at December 31, 2001. These orders
were shipped in the first quarter of 2003.
Armor Mobile Security. At December 31, 2002, Armor Mobile Security Division had
unfilled customer orders of approximately $78.2 million compared with
approximately $65.6 million of such orders at December 31, 2001. Approximately
$26.3 million of these orders were shipped in the first quarter of 2003.
COMPETITION
The market for our law enforcement products is highly competitive and we compete
by niche in a variety of distribution channels with competitors ranging from
small businesses to multinational corporations. For example, 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 niche include Point Blank Body Armor,
Inc. and 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
also highly competitive. We compete in a variety of markets and geographic
regions, 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.
Geographically there are a number of complete vehicle armorers in Europe, the
Middle East and Latin America that armor primarily locally manufactured
automobiles. In the U.S. protected passenger automobile armorers include
Scaletta Maloney, International Armor and Square One Armoring Services. In each
of the South American markets in which we compete there exist a variety of
different competitors. In the high-end luxury sedan market we compete with a
variety of original equipment manufacturers ("OEMs"), our US competitors as well
as a variety of small independent automotive integrators such as Carat Du
Chatelet and SVOS in Europe.
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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.
EMPLOYEES
As of January 1, 2003, we have a total of approximately 1,913 employees in
continuing operations, of which approximately 1,050 were employed at Armor
Holdings Products, approximately 850 at Armor Mobile Security and 13 employees
at our corporate headquarters.
Approximately 23 employees employed by our Armor Products International
subsidiary are represented by the General Municipal Boilermaker and Allied Trade
Union. 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 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. The
U.S. Bureau of Alcohol, Tobacco, and Firearms also regulates us 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 REGULATIONS
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 and we
do not currently carry insurance for such events should they occur. Although we
have made and will continue to make capital expenditures in order to comply with
environmental
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requirements, we do not expect material capital expenditures for environmental
controls in 2003. 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.
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 and we do
not currently carry insurance for such events should they occur. 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.
AVAILABLE INFORMATION
Our Internet address is www.armorholdings.com. We make available free of charge
on or through our Internet website our annual reports on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K, and amendments to those
reports, and the proxy statement for our annual meeting of stockholders as soon
as reasonably practicable after we electronically file such material with, or
furnish it to, the Securities and Exchange Commission. The information found on
our website shall not be deemed incorporated by reference by any general
statement incorporating by reference this report into any filing under the
Securities Act of 1933 or under the Securities Exchange Act of 1934, and shall
not otherwise be deemed filed under such Acts.
DISCONTINUED OPERATIONS
DESCRIPTION OF BUSINESS
Services Division. 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
more risky 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 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,
counter-surveillance, 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.
INDUSTRY OVERVIEW
Specialized Security Services Market. Corporations, governmental and non-
governmental organizations as well as humanitarian organizations are
increasingly contracting experienced private companies to handle their security
services. We believe that demand from these customers operating in developing
nations for security services such as risk assessment, crisis management, guard
force
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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.
GEOGRAPHICAL SALES
Broad Portfolio of Services. We offer a broad portfolio of 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 continue to expand the scope of our services.
Strong Client Base. ArmorGroup has a global footprint and currently operates in
35 countries that enable it to serve a client base representing governmental and
non-governmental agencies and approximately 500 multinational corporations
worldwide.
SERVICES
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 commercial and
humanitarian organizations, including agencies of the United Nations. We provide
a full range of services including surveys, technical advice, explosive ordnance
disposal and mine awareness training for local communities.
We offer security solutions that involve 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 who 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.
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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.
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, and 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, counter-surveillance, advanced driving techniques, and
ballistics at our facilities in West Point, Virginia, San Antonio, Texas and
Mexico City, Mexico and at customer designated locations. We also offer
security, counterintelligence and counter-surveillance 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
Services Division. 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 revenues of the Services Division
during our fiscal year ended December 31, 2002.
MARKETING AND DISTRIBUTION
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. 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
20
are targeting include financial services, imaging supplies, insurance, natural
resource extraction, and global consumer brands.
COMPETITION
The security services industry is highly competitive, and we compete in a
variety of fields with competitors ranging from small businesses to
multinational corporations. Our Services Division competes 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, Group 4 Falck A/S, Kroll, 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 January 1, 2003, we had approximately 9,200 employees in our discontinued
operations. Our Low Voltage Systems subsidiary has 4 employees covered under a
collective bargaining agreement and are represented by the International
Brotherhood of Electrical Workers. None of our remaining employees in our
discontinued operations are represented by unions or covered by any collective
bargaining agreements.
21
ITEM 2. PROPERTIES
The following table identifies and provides certain information regarding
our principal facilities.
CONTINUING OPERATIONS
OWNED/
LOCATION ANNUAL RENT LEASED APPROXIMATE SIZE PRODUCTS MANUFACTURED
- ----------------------------------- --------------- ------------ ---------------------- ---------------------------------
Jacksonville, FL N/A Owned 14 Acres Body armor, Forensic products,
70,000 sq. ft. Weapon cleaning lubricants
Jacksonville, FL $ 92,227 Leased 3,465 sq. ft. Corporate headquarters.
Casper, WY N/A Owned 66 Acres Tear gas, Pepper spray,
72,234 sq. ft. Less-lethal munitions
Westhoughton, England N/A Owned 44,000 sq. ft. Body armor
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 $ 159,422 Leased 31,452 sq. ft. Duty gear, Body armor,
Automotive accessories
Fitzwilliam, NH $ 24,000 Leased 22,848 sq. ft. Police batons
El Segundo, CA $ 68,960 Leased 6,500 sq.ft. Fingerprint equipment
Fort Worth, TX $ 26,460 Leased 10,000 sq. ft. Scope Mounts & Rings
St Cloud, MN $ 60,000 Leased 10,000 sq. ft. LED Light Bars
Fort Worth, TX $ 17,940 Leased 5,000 sq. ft. Scope mounts & rings
Bremen, Germany (1) N/A Owned 150,000 sq. ft. Armored vehicles
Fairfield, OH N/A Owned 130,000 sq. ft. Armored vehicles
Lamballe, France (2) $101,000 Leased 52,000 sq. ft. Armored vehicles
Sao Paulo, Brazil $201,000 Leased 56,000 sq. ft. Armored vehicles
Rio De Janeiro, Brazil $12,448 Leased sq. ft. Armored vehicles
Bogota, Colombia $ 83,000 Leased 35,000 sq. ft. Armored vehicles
Bogota, Colombia $ 22,200 Leased Armored vehicles
Mexico City, Mexico $ 62,500 Leased 20,000 sq. ft. Armored vehicles, training
Mexico City, Mexico N/A Owned 5,380 sq. ft. Armored vehicles
Caracas, Venezuela $ 128,484 Leased Sq. ft. Armored vehicles
Plattsburgh, NY $ 42,000 Leased 3,000 sq. ft. Hard armor, vehicle armor
Champlain, NY $ 18,508 Leased 7,000 sq. ft. Hard armor, vehicle armor
Note 1 - For accounting purposes, the land underneath our owned facility in
Bremen, Germany is financed by a capital lease that is recorded as a liability
on our financial statements.
Note 2 - 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.
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.
DISCONTINUED OPERATIONS
London, England $327,500 Leased 9,964 sq. ft. ArmorGroup
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.
We also lease an average of 5,000 square feet at each of 35 worldwide locations,
at an aggregate annual rental of approximately $1,000,000 having terms expiring
from 1 to 10 years.
- --------------------------------------------------------------------------------
22
ITEM 3. LEGAL PROCEEDINGS
In 1997 we terminated several agreements with a Dutch company, Airmunition
International, B.V. (AMI), and with a British company, Crown Limited (Crown).
AMI and Crown started an action against us before the Netherlands Arbitration
Institute in Rotterdam, Holland claiming breach of contract and unauthorized use
of confidential information and seeking damages of $20.5 Million. The case is
currently pending, and while we are contesting the allegations vigorously, we
are unable to predict the outcome of this matter. Although we do not have
insurance coverage for this matter, at this time, we do not believe this matter
will have a material impact on our financial position, operations or liquidity.
On January 16, 1998, our Services Division ceased operations in 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 became involved in
various disputes with SHRM S.A.("SHRM"), its minority joint venture partner
relating to the Angolan joint venture known as Defense System International
Africa ("DSIA"). 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 June 27, 2000
judgement rendered by the Paris Commercial Court, claiming that the Paris
Commercial Court no longer had 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 was held on October 24, 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. In February 2003, the Court of Appeal ruled
against SHRM and its parent entity, Compass Group, effectively ending all
further proceedings on the merits of Compass'claims. The decision is appealable
by Compass.
In 1999 and prior to our acquisition of OHEAC in 2001, O'Gara-Hess & Eisenhardt
Armoring do Brasil Ltda. (OHE Brazil) was audited by the Brazilian federal tax
authorities and assessed over Ten Million Reals (US$2.8 Million based on the
exchange rate as of December 31, 2002). OHE Brazil has appealed the tax
assessment and the case is pending. To the extent that there may be any
liability, we believe that we are entitled to indemnification from Kroll, Inc.
under the terms of our purchase agreement dated April 20, 2001, despite the
denial by Kroll, Inc. of any such liability, because the events occurred prior
to our purchase of the O'Gara Companies from Kroll, Inc. Additionally, Kroll,
Inc. has provided us with a US$1.5 Million letter of credit until August 21,
2008 in order to collateralize Kroll's indemnification obligation, which is
capped at US$5 Million with respect to this matter. At this time, we do not
believe this matter will have a material impact on our financial position,
operations or liquidity.
In 1999 and prior to our acquisition of OHEAC in 2001, several of the former
employees of Kroll O'Gara Company de Mexico, S.A. de C.V. (O'Gara Mexico), a
subsidiary of OHEAC, commenced labor claims against O'Gara Mexico seeking
damages for unjustified termination. These cases are still pending before the
labor board in Mexico City. The terminated employees are seeking back pay and
benefits since the date of termination amounting to approximately US $2,890,998,
and accruing at approximately US $50,400 per month. To the extent that there
may be any liability, we believe that we are entitled to indemnification from
Kroll, Inc. under the terms of our purchase agreement dated April 20, 2001,
despite the denial by Kroll, Inc. of any such liability, because the events
occurred prior to our purchase of the
23
O'Gara Companies from Kroll, Inc. Although we do not have any insurance coverage
for this matter, at this time, we do not believe this matter will have a
material impact on our financial position, operations or liquidity.
In August 2001, Defense Technology Corporation of America ("DTC"), one of our
subsidiaries, received a civil subpoena from the United States Environmental
Protection Agency requesting information pursuant to Section 104(e) of the
Comprehensive Environmental Response, Compensation and Liability Act regarding
the possible impact of the Casper, Wyoming tear gas facility on the environment.
DTC responded to the request, and to date the EPA has not taken any further
action with respect to the matter. At this time, we do not believe this matter
will have a material impact on our financial position, operations or liquidity.
In December 2001, OHE France sold its industrial bodywork business operated
under the name Labbe/Division de O'Gara Hess & Eisenhardt France/ Carrosserie
Industriells to SNC Labbe. Subsequent to the sale the Labbe Family Trust (LFT),
owner of the leasehold interest upon which the Carrosserie business is operated,
sued OHE France and SNC Labbe claiming that transfer of the leasehold was not
valid because the LFT had not given its consent to the transfer as required
under the terms of the lease. Further, LFT seeks to have OHE France, as the sole
tenant, maintain and repair the leased building. The approximate cost of
renovating the building is estimated to be between US $3.2 and US $6.4 million,
based on the exchange rate as of December 31, 2002. The case is currently
pending, and while we are contesting the allegations vigorously, we are unable
to predict the outcome of this matter. Although we do not have any insurance
coverage for this matter, at this time, we do not believe this matter will have
a material impact on our financial position, operations or liquidity.
In December 2001, an action was filed against us in the Regional Court of
Nuremberg, Germany alleging unauthorized use of the trademarks "First Defense"
and "First Defense Aerosol Pepper Projector." The case is currently pending, and
while we are contesting the allegations vigorously, we are unable to predict the
outcome of this matter. Although we do not have any insurance coverage for this
matter, at this time, we do not believe this matter will have a material impact
on our financial position, operations or liquidity.
On or about March 22, 2002, O'Gara-Hess & Eisenhardt Armoring Company (OHEAC),
one of our subsidiaries, received a civil subpoena from the Department of
Defense (DOD) requesting documents and information concerning various quality
control documentation regarding parts delivered by its subcontractors and
vendors in support of the High Mobility Multipurpose Wheeled Vehicles (HMMWV)
armored at its Fairfield, Ohio facility for the period October 1, 1999 through
May 1, 2001. OHEAC has complied fully with the subpoena. In early 2003, OHEAC
was advised that the Department of Justice (DOJ) was also investigating separate
claims against OHEAC filed by individuals that involve the same time frame and
issues covered by the DOD subpoena. OHEAC is responding to the government's
questions and expects to meet with the DOJ to discuss the current status of the
investigation and explore closure. Given the stage of these investigations, it
is not possible to predict the outcome of this matter. To the extent that there
may be any liability, we believe that we are entitled to indemnification from
Kroll, Inc. under the terms of our purchase agreement dated April 20, 2001,
despite the denial by Kroll, Inc. of any such liability, because the events
occurred prior to our purchase of the O'Gara Companies from Kroll, Inc. At this
time, we do not believe this matter will have a material impact on our financial
position, operations or liquidity.
In June 2002, O'Gara Hess & Eisenhardt France S.A. (OHE France) received a tax
reassessment from the French tax authorities for the tax years ended on March
31, 1999, 2000 and 2001 totaling approximately (euro)720,940 (Euro) (US$755,761
based on the exchange rate as of December 31, 2002). OHE France has appealed the
tax assessment and the case is pending. To the extent that there may be any
liability, we believe that we are entitled to indemnification from Kroll, Inc.
under the terms of our
24
purchase agreement dated April 20, 2001, despite the denial by Kroll, Inc. of
any such liability, because the events occurred prior to our purchase of the
O'Gara Companies from Kroll, Inc. At this time, we do not believe this matter
will have a material impact on our financial position, operations or liquidity.
On October 18, 2002, we were notified by the Internal Revenue Service that our
tax return for the tax year ended December 31, 2000 had been selected for
examination. Further, on January 30, 2003 we were notified that our tax return
for the tax year ended December 31, 2001 had been selected for examination. The
examinations are currently pending, and at this time we are unable to predict
the outcome of these matters.
In October 2002, we were sued in the United States District Court for the
District of Wyoming. The plaintiffs in that lawsuit asserted various state law
tort claims and federal environmental law claims under the Resource Conservation
and Recovery Act and the Clean Air Act stemming from DTC's Casper, Wyoming tear
gas plant. The plaintiffs have not yet quantified their alleged damages. The
plaintiffs have filed their suit as a potential class action, but have not yet
sought judicial certification of the class. The alleged actions took place over
time periods during which we were covered by different insurance policies. We
have notified our insurance carriers of the suit. Our prior insurance carrier
has agreed, under a full reservation of rights, including with respect to any
liability which relates to the time its policy was in effect, to provide a
defense and to address the question of liability indemnification in the future.
Our current insurance carrier has declined defense and indemnification coverage.
While we do not carry specific environment insurance coverage, we have reserved
the right to challenge our insurance carrier's determination. The case is
currently pending, and while we are contesting the allegations vigorously, we
are unable to predict the outcome of this matter. At this time, we do not
believe this matter will have a material impact on our financial position,
operations or liquidity.
In addition to the above, in the normal course of business, we are subjected to
various types of claims and currently have on-going litigations in the areas of
products liability and general liability. Our products are used in a wide
variety of law enforcement situations and environments. Some of our products can
cause serious personal or property injury or death if not carefully and properly
used by adequately trained personnel. 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 deductible or self-insured retention. Our annual
insurance premiums and self insurance retention amounts have risen significantly
over the past several years and may continue to do so to the extent we are able
to purchase insurance coverage. At this time, we do not believe any such claims
or litigations 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.
25
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 2002 and 2001 and for the first quarter of fiscal year
2003 (through March 21, 2003).
HIGH LOW
---- ---
2003
1st Quarter - through March 21, 2003 $ 14.60 $9.40
2002
4th Quarter ........................... $ 16.50 $ 12.50
3rd Quarter ........................... $ 25.50 $ 12.00
2nd Quarter............................ $ 29.55 $ 22.00
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
HOLDERS
As of March 18, 2003, we had approximately 485 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 8 to Consolidated Financial
Statements.
RECENT SALES OF UNREGISTERED SECURITIES
None.
26
STOCK OPTION PLANS
The table below shows the number of options and range of exercise prices we
granted to various employees and directors during our fiscal year ended December
31, 2002 under our 1999 Stock Incentive Plan, 2002 Stock Incentive Plan and 2002
Executive Stock Plan.
PLAN NAME NUMBER OF GRANTS GRANT PRICE RANGES
----------------------------------------------- -------------------------- ----------------------------------
1999 Stock Incentive Plan 471,501 $21.75 - $23.93
2002 Stock Incentive Plan 117,500 $13.77 - $14.99
2002 Stock Incentive Plan 935,659 $15.00 - $25.80
2002 Executive Stock Plan 370,000 $23.93 - $23.93
----------------------------------------------- -------------------------- ----------------------------------
Total 1,894,660 $13.77 - $25.80
=============================================== ========================== ==================================
The options granted to non-employee directors vest in one year, 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.
The following table sets forth certain information regarding our equity plans as
at December 31, 2002.
-------------------------- ------------------------- -------------------------
(C )
Number of securities
(A) (B) remaining available for
Number of securities to Weighted-average future issuance under
be issued upon exercise exercise price of equity compensation
of outstanding options, outstanding options, plans (excluding
warrants and rights warrants and rights securities reflected in
Plan Category column (a))
- ---------------------------------- -------------------------- ------------------------- -------------------------
Equity compensation 3,289,658 $17.17 1,418,635
plans approved by
security holders
Equity compensation 995,000 $16.00 --
plans not approved by ----------
security holders
Total 4,284,658
We have two non-qualified equity plans that have not been approved by
stockholders. The 2002 Executive Stock Plan provides for the grant of a total of
470,000 stock options and stock awards to our key employees. The Board of
Directors, or a committee designated by the Board consisting of two or more
independent directors, is authorized to set the price and terms and conditions
of the options and awards granted under the 2002 Executive Stock Plan. Options
under the 2002 Executive Stock Plan are substantially the same as the 2002
Incentive Stock Plan except that we may only grant non-qualified stock options
under the 2002 Executive Stock Plan. The 2002 Executive Stock Plan was adopted
on March 13, 2002 and all shares available for grant under the 2002 Executive
Stock Plan were granted to our executive officers on March 13, 2002.
27
The 1998 Stock Option Plan provides for the grant of a total of 725,000 stock
options to our key employees. The Board of Directors, or a committee designated
by the Board consisting of two or more independent directors, is aughorized to
set the terms and conditions of the options granted under the 1998 Stock Option
Plan. The exercise price of all options granted under the 1998 Stock Option Plan
is equal to the fair market value of our common stock on the date of grant. As
of the end of our last fiscal year, there were no shares available for options
to be granted under the 1998 Stock Option Plan.
28
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.
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(AMOUNTS IN THOUSANDS,EXCEPT PER SHARE AMOUNTS)
Total Revenues (1) $ 305,117 $197,100 $139,904 $ 96,706 $45,644
Operating Income $ 38,365 $ 26,673 $ 19,869 $ 15,126 $ 6,326
Income from continuing operations $ 21,337 $ 14,684 $ 10,847 $ 11,217 $ 4,718
Net Income (2) $ (17,689) $ 10,128 $ 17,048 $ 13,196 $ 8,596
Basic income from continuing operations
per common share $ 0.70 $ 0.61 $ 0.48 $ 0.53 $ 0.29
Diluted income from continuing operations
per common share $ 0.69 $ 0.59 $ 0.46 $ 0.52 $ 0.27
Basic Earnings Per Share $ (0.58) $ 0.42 $ 0.75 $ 0.63 $ 0.53
Diluted Earnings Per Share $ (0.57) $ 0.41 $ 0.73 $ 0.61 $ 0.50
Note 1 - Revenue for all periods presented represents revenue from continuing operations only while net income includes
income and losses from discontinued operations.
Note 2 - 2001 Net income includes a pre-tax restructuring charge of $10.3 million in discontinued operations.
Total Assets $360,836 $388,057 $225,957 $178,922 $94,353
Working Capital $100,591 $142,723 $ 67,937 $ 53,993 $24,366
Long-Term Obligations $5,240 $ 4,640 $ 38,288 $ 2,453 $ 344
Stockholders' Equity $288,077 $326,019 $166,771 $157,883 $75,102
29
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 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; general
economic and business conditions, our ability or inability to successfully sell
the Services Division; our ability to successfully execute changes to
operations, such as the move of our corporate headquarters and certain of our
manufacturing operations, without disrupting our operations; and our ability to
obtain supplies and raw materials without disruption.
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, which is accounted for as a discontinued operation.
CONTINUING OPERATIONS
Armor Holdings Products. Our Armor Holdings Products Division manufactures and
sells a broad range of high quality, branded law enforcement equipment, such as
concealable and tactical body armor, hard armor, duty gear, less-lethal
munitions, anti-riot products, police batons, emergency lighting products,
forensic products, firearms accessories and weapon maintenance products. 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(TM),
Safariland(R), B-Square(TM), Break-Free(R), Defense Technology/Federal
Laboratories(TM), MACE(R), PROTECH(TM), NIK(R)Public Safety, Monadnock(TM)
Lifetime Products, Identicator(TM), Lightning Powder(R), SpeedFeed(TM), and
911EP(R). We sell our manufactured products primarily to law enforcement
agencies through a worldwide network of over 350 distributors and sales agents,
including approximately 200 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.
30
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 are also under contract
with the U.S. Army to provide systems technical support for the installed base
of approximately 3,500 up-armored HMMWV's. We provide spare parts and
maintenance services for the HMMWV's in use and 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 ballistic and blast protected armored and sealed truck cab for the
High Mobility Artillery Rocket System ("HIMARS"), a U.S. Army and Marine Corps
program recently transitioned from developmental to low rate initial production
with deliveries scheduled in late 2003. The Division 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.
DISCONTINUED OPERATIONS
Services Division. 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
more risky 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 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,
counter-surveillance, 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 affect the financial statements.
We record revenue from our Mobile Security Division when the vehicle is shipped,
except for larger commercial contracts typically longer than four months in
length and the contract for the delivery of HMMWVs to the U.S. Government, which
continues through 2005. Revenue from such larger 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. We believe
that our current contracts are profitable.
31
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 periodic testing of the
carrying value of long-lived assets for impairment, valuation allowances for
receivables, inventories and deferred income tax assets, liabilities for
potential litigation claims and settlements; and contract contingencies and
obligations. Actual results could differ from those estimates.
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 either 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 be applied to reduce
reorganization value in excess of amounts allocable to identifiable assets. At
December 31, 2002 and 2001, our consolidated foreign subsidiaries have
unremitted earnings of approximately $3.0 million and $1.3 million, respectively
on which the Company has not recorded a provision for United States Federal
income taxes sinc