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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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FORM 10-Q
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(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED September 30, 2003, or
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO _________.
COMMISSION FILE NUMBER 0-18863
ARMOR HOLDINGS, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 59-3392443
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1400 MARSH LANDING PARKWAY, SUITE 112
JACKSONVILLE, FLORIDA 32250
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (904) 741-5400
-----------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
The number of shares outstanding of the registrant's Common Stock as of November
6, 2003 is 28,175,133.
1
ARMOR HOLDINGS, INC.
FORM 10-Q
INDEX
Page
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS............................................. 3
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS......................................34
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.......51
ITEM 4. CONTROLS AND PROCEDURES..........................................52
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS................................................54
ITEM 5. OTHER INFORMATION................................................54
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.................................54
SIGNATURES
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements
of Armor Holdings, Inc. and its wholly-owned subsidiaries include all
adjustments (consisting only of normal recurring accruals and the elimination of
all material intercompany accounts and transactions) which management considers
necessary for a fair presentation of operating results as of September 30, 2003
and for the three-month and nine-month periods ended September 30, 2003 and
September 30, 2002.
These unaudited condensed consolidated financial statements should be
read in conjunction with the financial statements included in our Annual Report
on Form 10-K for the year ended December 31, 2002.
3
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
SEPTEMBER 30, 2003 DECEMBER 31, 2002
(UNAUDITED) *
------------------ -----------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 154,766 $ 12,913
Accounts receivable (net of allowance for doubtful
accounts of $1,269 and $1,428) 59,215 58,513
Costs and earned gross profit in excess of billings 1,088 234
Inventories 60,068 62,330
Prepaid expenses and other current assets 21,321 12,212
Current assets of discontinued operations (Note 2) 47,958 28,825
------------------ -----------------
Total current assets 344,416 175,027
PROPERTY AND EQUIPMENT (net of accumulated depreciation
of $17,243 and $12,919) 49,531 47,136
GOODWILL (net of accumulated amortization
of $4,024 and $4,024) 98,934 98,736
PATENTS, LICENSES AND TRADEMARKS
(net of accumulated amortization of $2,366 and $2,169) 7,419 7,521
OTHER ASSETS 21,048 9,048
LONG-TERM ASSETS OF DISCONTINUED OPERATIONS (Note 2) 20,045 30,285
------------------ -----------------
TOTAL ASSETS $ 541,393 $ 367,753
================== =================
* Condensed from audited financial statements.
See notes to condensed consolidated financial statements.
4
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
(IN THOUSANDS, EXCEPT FOR SHARE DATA)
SEPTEMBER 30, 2003 DECEMBER 31, 2002
(UNAUDITED) *
------------------- -----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 765 $ 1,813
Short-term debt 608 599
Accounts payable 22,013 23,770
Accrued expenses and other current liabilities 38,965 25,116
Income taxes payable 3,914 5,913
Current liabilities of discontinued operations (Note 2) 23,942 17,225
------------------ -----------------
Total current liabilities 90,207 74,436
LONG-TERM LIABILITIES:
Long-term debt, less current portion 159,921 5,072
Discontinued operations (Note 2) 125 168
------------------ -----------------
Total liabilities 250,253 79,676
COMMITMENTS AND CONTINGENCIES (NOTE 14)
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 5,000,000 shares
authorized; no shares issued and outstanding - -
Common stock, $.01 par value; 50,000,000 shares
authorized; 34,207,688 and 33,593,977 issued and
28,147,466 and 29,456,692 outstanding at
September 30, 2003 and December 31, 2002,
respectively 342 336
Additional paid-in capital 315,148 307,487
Retained earnings 49,871 34,056
Accumulated other comprehensive loss (1,904) (4,169)
Treasury stock (72,317) (49,633)
------------------ -----------------
Total stockholders' equity 291,140 288,077
------------------ -----------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 541,393 $ 367,753
================== =================
* Condensed from audited financial statements.
See notes to condensed consolidated financial statements.
5
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------------------------- ---------------------------------------
SEPTEMBER 30, 2003 SEPTEMBER 30, 2002 SEPTEMBER 30, 2003 SEPTEMBER 30, 2002
------------------ ------------------ ------------------ ------------------
REVENUES:
Products $ 50,786 $ 49,047 $ 144,140 $ 131,049
Mobile Security 40,096 31,510 108,875 90,717
------------------ ------------------ ------------------- ------------------
Total Revenues 90,882 80,557 253,015 221,766
------------------ ------------------ ------------------- ------------------
COSTS AND EXPENSES:
Cost of sales 61,953 55,947 176,396 152,481
Operating expenses 15,977 12,852 44,505 37,046
Amortization 72 62 201 213
Integration and other non-recurring charges 368 1,359 4,565 4,476
------------------ ------------------ ------------------- ------------------
OPERATING INCOME 12,512 10,337 27,348 27,550
Interest expense, net 1,475 343 2,291 669
Other expense (income), net 96 (13) 181 (77)
------------------ ------------------ ------------------- ------------------
INCOME FROM CONTINUING OPERATIONS BEFORE
PROVISION FOR INCOME TAXES 10,941 10,007 24,876 26,958
PROVISION FOR INCOME TAXES 4,832 7,043 10,044 13,603
------------------ ------------------ ------------------- ------------------
INCOME FROM CONTINUING OPERATIONS 6,109 2,964 14,832 13,355
------------------ ------------------ ------------------- ------------------
DISCONTINUED OPERATIONS (NOTE 2):
INCOME (LOSS) FROM DISCONTINUED OPERATIONS
BEFORE PROVISION FOR INCOME TAXES 1,679 (17,032) 3,593 (17,606)
PROVISION FOR INCOME TAXES 1,673 639 2,610 421
------------------ ------------------ ------------------- ------------------
INCOME (LOSS) FROM DISCONTINUED OPERATIONS 6 (17,671) 983 (18,027)
------------------ ------------------ ------------------- ------------------
NET INCOME (LOSS) $ 6,115 $ (14,707) $ 15,815 $ (4,672)
================== ================== =================== ==================
NET INCOME (LOSS) PER COMMON SHARE - BASIC
INCOME FROM CONTINUING OPERATIONS $ 0.22 $ 0.10 $ 0.52 $ 0.44
INCOME (LOSS) FROM DISCONTINUED OPERATIONS 0.00 (0.60) 0.04 (0.59)
------------------ ------------------ ------------------- ------------------
BASIC EARNINGS (LOSS) PER SHARE $ 0.22 $ (0.50) $ 0.56 $ (0.15)
================== ================== =================== ==================
See notes to condensed consolidated financial statements.
6
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - CONTINUED (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2003 SEPTEMBER 30, 2002 SEPTEMBER 30, 2003 SEPTEMBER 30, 2002
-------------------- ------------------- ------------------- -------------------
NET INCOME (LOSS) PER COMMON SHARE - DILUTED
INCOME FROM CONTINUING OPERATIONS $ 0.22 $ 0.10 $ 0.52 $ 0.43
INCOME (LOSS) FROM DISCONTINUED OPERATIONS 0.00 (0.59) 0.04 (0.58)
-------------------- ------------------- ------------------- -------------------
DILUTED EARNINGS (LOSS) PER SHARE $ 0.22 $ (0.49) $ 0.56 $ (0.15)
==================== =================== =================== ===================
WEIGHTED AVERAGE SHARES - BASIC 27,811 29,708 28,106 30,639
==================== =================== =================== ===================
WEIGHTED AVERAGE SHARES - DILUTED 28,249 30,037 28,438 31,373
==================== =================== =================== ===================
See notes to condensed consolidated financial statements.
7
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
ARMOR HOLDINGS, INC. AND SUBSIDIARIES (UNAUDITED)
(IN THOUSANDS)
NINE MONTHS ENDED
--------------------------------------------------
SEPTEMBER 30, 2003 SEPTEMBER 30, 2002
----------------------- ------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Income from continuing operations $ 14,832 $ 13,355
Adjustments to reconcile income from continuing operations to cash
used in operating activities:
Depreciation and amortization 5,380 4,049
Loss on disposal of fixed assets 167 136
Deferred income taxes 3,676 (680)
Non-cash termination charge 2,093 --
Changes in operating assets and liabilities, net of acquisitions:
Increase in accounts receivable (1,556) (3,130)
Decrease (increase) in inventories 2,173 (10,203)
Increase in prepaid expenses and other assets (3,682) (3,569)
Increase (decrease) in accounts payable, accrued
expenses and other current liabilities 11,808 (6,775)
(Decrease) increase in income taxes payable (1,999) 6,345
----------------------- ------------------------
Net cash provided by (used in) operating activities 32,892 (472)
----------------------- ------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (5,645) (4,548)
Purchase of patents and trademarks (99) (45)
Additional consideration for purchased businesses (740) (2,652)
Purchase of businesses, net of cash acquired (5,828) (7,411)
----------------------- ------------------------
Net cash used in investing activities (12,312) (14,656)
----------------------- ------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the exercise of stock options 6,588 4,237
Treasury stock purchases (22,684) (26,054)
Cash paid for financing costs (4,020) (326)
Proceeds from the issuance of long-term debt 147,504 --
Repayments of long-term debt (1,399) (591)
Borrowings under line of credit 31,744 27,763
Repayments under line of credit (32,070) (20,701)
----------------------- ------------------------
Net cash provided by (used in) financing activities 125,663 (15,672)
----------------------- ------------------------
Effect of exchange rate changes on cash and cash equivalents 478 (872)
Net cash (used in) transferred from discontinued operations (4,868) 767
----------------------- ------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 141,853 (30,905)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 12,913 47,489
----------------------- ------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 154,766 $ 16,584
======================= ========================
CASH AND CASH EQUIVALENTS, END OF PERIOD
CONTINUING OPERATIONS $ 154,766 $ 16,584
DISCONTINUED OPERATIONS 5,051 4,819
----------------------- ------------------------
$ 159,817 $ 21,403
======================= ========================
See notes to condensed consolidated financial statements.
8
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED (UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
of Armor Holdings, Inc. and its wholly-owned subsidiaries (the "Company", "we",
"our", "us") have been prepared in accordance with generally accepted accounting
principles for interim information and the instructions to Form 10-Q and Rule
10-01 of Regulation S-X, and do not include all the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting only of
normal recurring accruals and the elimination of all material intercompany
accounts and transactions) considered necessary by management to present a fair
presentation have been included. The results of operations for the three and
nine-month periods are not necessarily indicative of the results to be expected
for the full year and should be read in conjunction with the consolidated
financial statements and notes thereto included in our Annual Report on Form
10-K for the year ended December 31, 2002. The amounts disclosed in the
footnotes are related to continuing operations unless otherwise indicated.
As discussed in Note 2 and elsewhere in this Form 10-Q, we announced
our intention to sell our ArmorGroup Services Division (the "Services
Division"). As a result, the assets and liabilities of the Services Division
have been classified as assets and liabilities of discontinued operations on our
balance sheet and the results of their operations classified as income from
discontinued operations in the accompanying unaudited condensed consolidated
financial statements.
NOTE 2 - DISCONTINUED OPERATIONS
On July 15, 2002, we announced plans to sell the Services Division and
the retention of Merrill Lynch & Company to assist in the sale. In accordance
with Statement of Financial Accounting Standards No. 144, "Accounting for
Impairment or Disposal of Long-Lived Assets," (SFAS 144) the assets and
liabilities of the Services Division have been classified as held for sale, with
its operating results in the current and prior periods reported in discontinued
operations for the three and nine-month periods ended September 30, 2003 and
2002.
On April 17, 2003, we announced that we had completed the sale of our
ArmorGroup Integrated Systems business through the sale of 100% of the stock of
ArmorGroup Integrated Systems, Inc. and Low Voltage Systems Technologies, Inc.
to Aerwav Integration Systems, Inc. ("AIS"). AIS is a wholly owned subsidiary of
Aerwav Holdings, LLC. As consideration for the integrated systems business, we
received a $4.1 million collateralized note due in two years and a warrant for
approximately 2.5% of AIS. In accordance with SFAS 144, we have recorded a loss
of $366,000 on the sale.
For the three months ended September 30, 2003, net income from
discontinued operations was $6,000 compared to a net loss of $17.7 million in
the comparable period in the prior year. Excluding the ArmorGroup Integrated
Systems business net loss of $13.9 million, the net loss was $3.7 million for
the three-month period ended September 30, 2002.
For the nine months ended September 30, 2003, net income from
discontinued operations was $983,000 compared to a net loss of $18.0 million in
the comparable period in the prior year. Excluding the pre-tax loss of $366,000
(after-tax loss of $238,000) on the sale of ArmorGroup Integrated Systems
9
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED (UNAUDITED)
business, a net loss of $613,000 in the nine-month period ended September 30,
2003 and a net loss of $14.3 million for the nine-month period ended September
30, 2002, net income was $1.8 million and a net loss of $3.7 million for the
nine months ended September 30, 2003 and 2002, respectively.
Based upon our analysis and discussions with our advisors regarding the
estimated realizable value, net of selling costs, of the Services Division, we
reduced its carrying value, and recorded net impairment charges of $30.3 million
in fiscal 2002 and $1.3 million in the three months ended September 30, 2003.
These impairment charges consisted of approximately $6.3 million in estimated
disposal costs and a $35.1 million non-cash goodwill reduction, net of an
expected $10.0 million income tax benefit. The provision for income taxes for
discontinued operations was $1.7 million and $2.6 million for the three and
nine-month periods ended September 30, 2003, respectively. The reduction in the
carrying value of the Services Division is management's best estimate based upon
currently available information, including discussions with our investment
bankers. The actual proceeds from the disposal of our Services Division may
differ materially from our current estimates and could result in either a gain
or a loss upon final disposal. We are actively pursuing a sale of this business.
A summary of the operating results of the discontinued operations for
the three months and nine months ended September 30, 2003 and 2002 is as
follows.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2003 SEPTEMBER 30, 2002 SEPTEMBER 30, 2003 SEPTEMBER 30, 2002
------------------ ------------------ ------------------ ------------------
(IN THOUSANDS) (IN THOUSANDS)
Revenue $ 26,039 $ 23,747 $ 75,738 $ 74,273
Cost of sales 18,078 19,730 53,447 55,840
Operating expenses 4,882 8,018 16,299 22,582
Charge for impairment of long-lived assets 11,258 11,905 11,258 11,905
Integration and other non-recurring charges 104 836 598 1,225
------------------ ------------------ ------------------ ------------------
Operating loss (8,283) (16,742) (5,864) (17,279)
Interest expense, net 18 34 71 127
Other expense, net 20 256 472 200
------------------ ------------------ ------------------ ------------------
Loss from discontinued
operations before (benefit) provision for
income taxes (8,321) (17,032) (6,407) (17,606)
(Benefit) provision for income taxes (8,327) 639 (7,390) 421
------------------ ------------------ ------------------ ------------------
(Loss) income from discontinued operations $ 6 $(17,671) $ 983 $ (18,027)
================== ================== ================== ==================
10
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED (UNAUDITED)
The following is a summary of the assets and liabilities of our discontinued
operations:
SEPTEMBER 30, 2003 DECEMBER 31, 2002
------------------ -----------------
(IN THOUSANDS)
Assets
Cash and cash equivalents $ 5,051 $ 3,638
Accounts receivable, net 19,810 16,228
Other current assets 23,097 8,959
------------------ -----------------
Total current assets 47,958 28,825
Property and equipment, net 13,588 12,481
Goodwill, net 1,961 12,995
Other assets 4,496 4,809
------------------ -----------------
Total assets of discontinued operations $ 68,003 $ 59,110
================== =================
Liabilities
Current portion of long-term debt $ 125 $ 186
Short-term debt 6,604 350
Accounts payable 2,115 2,405
Accrued expenses and other current liabilities 15,098 14,284
------------------ -----------------
Total current liabilities 23,942 17,225
Long-term debt 125 168
------------------ -----------------
Total liabilities of discontinued operations $ 24,067 $ 17,393
================== =================
11
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED (UNAUDITED)
NOTE 3 - COMPREHENSIVE INCOME
The components of comprehensive income, net of tax provision (benefit)
of $31,000 and ($26,000) for the three months ended September 30, 2003 and 2002,
respectively, and $255,000 and ($197,000) for the nine months September 30, 2003
and 2002, respectively, are listed below:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2003 SEPTEMBER 30, 2002 SEPTEMBER 30, 2003 SEPTEMBER 30, 2002
------------------ ------------------ ------------------ ------------------
(IN THOUSANDS) (IN THOUSANDS)
Net income (loss) $ 6,115 $ (14,707) $ 15,815 $ (4,672)
Other comprehensive income (loss):
Foreign currency translations, net of tax 34 (617) 2,265 (852)
------------------- ------------------- -------------------- -------------------
Comprehensive income (loss): $ 6,149 $ (15,324) $ 18,080 $ (5,524)
=================== =================== ==================== ===================
NOTE 4 - INVENTORIES
Inventories are stated at the lower of cost or market using the
first-in, first-out (FIFO) method and are summarized as follows:
SEPTEMBER 30, 2003 DECEMBER 31, 2002
------------------ -----------------
(IN THOUSANDS)
Raw material $ 34,067 $ 30,211
Work-in-process 12,573 15,733
Finished goods 13,428 16,386
------------------ -----------------
Total inventories $ 60,068 $ 62,330
================== =================
NOTE 5 - ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities are summarized as
follows:
SEPTEMBER 30, 2003 DECEMBER 31, 2002
---------------------- ---------------------
(IN THOUSANDS)
Accrued expenses and other current liabilities $ 25,328 $ 16,988
Deferred consideration for acquisitions 1,310 1,826
Customer deposits 12,327 6,302
---------------------- ---------------------
Total accrued expenses and other current liabilities $ 38,965 $ 25,116
====================== =====================
12
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED (UNAUDITED)
NOTE 6 - DEBT
SEPTEMBER 30, 2003 DECEMBER 31, 2002
-------------------- -------------------
(IN THOUSANDS)
Credit facility (a) $ -- $ --
Senior Subordinated Notes (b) 147,538 --
Ontario Industrial Development Authority Variable Rate Demand Industrial
Development Revenue Bonds, Series 1989 payable in annual installments
of $200 to $300, through August 1, 2014, with interest paid monthly
at varying rates 2,600 2,800
Note payable in scheduled installments through 2013, with interest rate
of 5% 1,482 1,582
Economic Development Revenue Bonds, payable in scheduled installments
through September 2016, with a variable interest rate approximating
85% of the bond equivalent yield of the 13-week U.S. Treasury bills
(not to exceed 12%), which was 2.75% at December 31, 2002. -- 1,075
Note to former officer payable in monthly principal and interest
installments of $7 through December 31, 2009 with an imputed interest
rate of 9.25% 367 399
Minimum guaranteed royalty to former officer payable in monthly principal
and interest installments of $4 through August 2005, with an imputed
interest rate of 9.2% 85 114
Minimum guaranteed royalty to former officer payable in monthly principal
and interest installments of $36 through April 2005, with an imputed
interest rate of 7.35% 638 915
Plus fair value of interest rate swaps (c) 7,976 --
------------------- -------------------
$ 160,686 $ 6,885
Less current portion (765) (1,813)
------------------- -------------------
Total $ 159,921 $ 5,072
=================== ===================
(a) Credit Facility - On August 12, 2003, we terminated our existing
credit facility and entered into a new collateralized revolving credit facility
with Bank of America N.A., Wachovia Bank, N.A. and Key Bank, N.A. The new
credit facility is a five-year revolving credit facility and, among other
things, provides for: 1) total maximum borrowings of $60 million; 2) a $25
million sub-limit for the issuances of standby and commercial letters of credit;
3) a $5 million sub-limit for swing-line loans; and 4) a $5 million sub-limit
for multi-currency borrowings. All borrowings under the new credit facility will
bear interest at either 1) a rate equal to LIBOR, plus an applicable margin
ranging from 1.125% to 1.625%; 2) an alternate base rate which will be the
higher of (a) the Bank of America prime rate and (b) the Federal Funds rate plus
..50%; or 3) with respect to foreign currency loans, a fronted offshore currency
rate, plus an applicable margin ranging from 1.125% to 1.625%, depending on
certain conditions.
13
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED (UNAUDITED)
(b) Senior Subordinated Notes - On August 12, 2003, we completed a
private placement of $150 million aggregate principal amount of 8.25% senior
subordinated notes due 2013 (the "Notes"). The Notes are guaranteed by certain
of our domestic subsidiaries on a senior subordinated basis (see Note 13). The
Notes have been sold to qualified institutional buyers in reliance on Rule 144A
of the Securities Act of 1933 and to non-U.S. persons in reliance on Regulation
S under the Securities Act of 1933. The Notes were rated B1/B+ by Moody's
Investors' Service and Standard & Poor's Rating Services, respectively. We
intend to use the net proceeds of the offering to fund future acquisitions,
including some or all of the purchase price for our pending acquisition of
Simula, Inc., repay a portion of our outstanding debt and for general corporate
and working capital purposes, including the funding of capital expenditures.
Interest on the Notes is payable semiannually on the fifteenth of February and
August of each year. The Notes were issued at a discount of approximately $2.5
million to investors.
(c) Fair Value of Interest Rate Swaps - On September 2, 2003, we
entered into interest rate swap agreements, designated as a fair value hedge as
defined under Statement of Financial Accounting Standard No. 133, "Accounting
for Derivative Instruments and Hedge Activities," (SFAS 133) with an aggregate
notional amount totaling $150 million. The agreements were entered to exchange
the fixed interest rate on the Notes for a variable interest rate equal to
six-month LIBOR, set in arrears, plus a spread ranging from 2.735% to 2.75%
fixed semi-annually on the fifteenth of February and August. At September 30,
2003, the six-month LIBOR was 1.18%. The agreements are subject to other terms
and conditions common to transactions of this type. In accordance with SFAS 133,
changes in the fair value of the interest rate swap agreements offset changes in
the fair value of the fixed rate debt due to changes in the market interest
rate. The fair value of the interest rate swap agreements was approximately $8.0
million at September 30, 2003. The agreements are deemed to be a perfectly
effective fair value hedge and therefore qualify for the short-cut method of
accounting under SFAS 133. As a result, no ineffectiveness is expected to be
recognized in our earnings associated with the interest rate swap agreements on
the Notes.
NOTE 7 - DERIVATIVE FINANCIAL INSTRUMENTS
We account for derivative instruments in accordance with SFAS 133,
which requires all freestanding and embedded derivative instruments to be
measured at fair value and recognized on the balance sheet as either assets or
liabilities. In addition, all derivative instruments used in hedging
relationships must be designated, reassessed and accounted for as either fair
value hedges or cash flow hedges pursuant to the provisions of SFAS 133.
We hedge the fair value of our Notes using interest rate swaps. We
enter into these derivative contracts to manage fair value changes which could
be caused by our exposure to interest rate changes. On September 2, 2003, we
entered into interest rate swap agreements, designated as fair value hedges as
defined under SFAS 133 with an aggregate notional amount totaling $150 million.
The agreements were entered to exchange the fixed interest rate on the Notes for
a variable interest rate equal to six-month LIBOR, set in arrears, plus a spread
ranging from 2.735% to 2.75% fixed semi-annually on the fifteenth of February
and August. The agreements are subject to other terms and conditions common to
transactions of this type. These fair value hedges qualify for hedge accounting
using the short-cut method since the swap terms match the critical terms of the
Notes. Accordingly, changes in the fair value of the interest rate swap
agreements offset changes in the fair value of the Notes due to changes in
14
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED (UNAUDITED)
the market interest rate. As a result, no ineffectiveness is expected to be
recognized in our earnings associated with the interest rate swap agreements on
the Notes.
The fair values of our interest rate swap agreements are obtained from
dealer quotes and represent the estimated amount we would receive or pay to
terminate the agreement, taking into consideration the difference between the
contract rate of interest and rates currently quoted for agreements of similar
terms and maturities.
NOTE 8 - INFORMATION CONCERNING BUSINESS SEGMENTS AND GEOGRAPHICAL SALES
We are a leading manufacturer and provider of security products,
vehicle armor systems, and security training services. Our products and services
are used by military, law enforcement, security and corrections personnel
throughout the world, as well as governmental agencies, multinational
corporations and non-governmental organizations. Our continuing operations are
organized and operated under two business segments: Armor Holdings Products and
Armor Mobile Security. Our Services Division has been classified as discontinued
operations and is no longer included in this presentation (See Note 2).
Armor Holdings Products. Our Armor Holdings Products Division
manufactures and sells a broad range of high quality equipment marketed under
brand names that are well known and respected in the military and law
enforcement communities. Products manufactured by this division include
concealable and tactical body armor, hard armor, duty gear, less-lethal
munitions, anti-riot products, police batons, emergency lighting products,
forensic products, firearms accessories and weapon maintenance products.
Armor Mobile Security. Our Armor Mobile Security Division manufactures
and installs ballistic and blast protection armoring systems for military
vehicles, commercial vehicles, military aircraft and missile components. Under
the brand name O'Gara-Hess & Eisenhardt ("O'Gara"), we are the sole-source
provider to the U.S. military for the supply of armoring and blast protection
systems as well as maintenance services for the High Mobility Multi-purpose
Wheeled Vehicle (HMMWV, commonly known as the Humvee). Additionally, we have
been subcontracted to develop a ballistically armored and sealed truck cab for
the High Mobility Artillery Rocket System (HIMARS) a program currently in
low-rate initial production for the U.S. Army. We armor a variety of commercial
vehicles including limousines, sedans, sport utility vehicles, commercial trucks
and cash-in-transit vehicles, to protect against varying degrees of ballistic
and blast threats. The Armor Mobile Security Division was created in connection
with our acquisition of O'Gara on August 22, 2001 (the "O'Gara acquisition").
We have invested substantial resources outside of the United States and
plan to continue to do so in the future. The Armor Mobile Security Division has
invested substantial resources in Europe and South America. These operations are
subject to the risk of new and different legal and regulatory requirements in
local jurisdictions, tariffs and trade barriers, potential difficulties in
staffing and
15
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED (UNAUDITED)
managing local operations, currency risks, potential imposition of restrictions
on investments, potentially adverse tax consequences, including imposition or
increase of withholding and other taxes on remittances and other payments by
subsidiaries, and local economic, political and social conditions. Governments
of many developing countries have exercised and continue to exercise substantial
influence over many aspects of the private sector. Government actions in the
future could have a significant adverse effect on economic conditions in a
developing country or may otherwise have a material adverse effect on us and our
operating companies. We do not have political risk insurance in the countries in
which we currently conduct business. Moreover, applicable agreements relating to
our interests in our operating companies are frequently governed by foreign law.
As a result, in the event of a dispute, it may be difficult for us to enforce
our rights. Accordingly, we may have little or no recourse upon the occurrence
of any of these developments.
16
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED (UNAUDITED)
Revenues, operating income and total assets for each of our continuing
operating segments are as follows (net of intercompany eliminations):
NINE MONTHS ENDED
SEPTEMBER 30, 2003 SEPTEMBER 30, 2002
--------------------------- --------------------------
(IN THOUSANDS)
Revenues:
Products $ 144,140 $ 131,049
Mobile Security 108,875 90,717
--------------------------- --------------------------
Total revenues $ 253,015 $ 221,766
=========================== ==========================
Operating income (loss):
Products $ 24,619 $ 24,068
Mobile Security 13,491 9,156
Corporate (10,762) (5,674)
--------------------------- --------------------------
Total operating income $ 27,348 $ 27,550
=========================== ==========================
Total assets:
Products $ 177,754 $ 176,951
Mobile Security 115,801 112,136
Corporate 179,835 18,777
--------------------------- --------------------------
Total assets $ 473,390 $ 307,864
=========================== ==========================
17
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED (UNAUDITED)
The following unaudited information with respect to revenues, operating
income from continuing operations (geographic operating income from continuing
operations before amortization expense and integration and other non-recurring
charges) and total assets to principal geographic areas are as follows:
NINE MONTHS ENDED
SEPTEMBER 2003 SEPTEMBER 30, 2002
------------------------ -------------------------
(IN THOUSANDS)
Revenues:
North America $ 186,754 $ 157,069
South America 10,547 21,983
Africa 1,578 1,344
Europe/Asia 54,136 41,370
------------------------- --------------------------
Total revenue $ 253,015 $ 221,766
========================= ==========================
Geographic operating income:
North America $ 24,973 $ 23,928
South America 618 1,690
Africa 377 430
Europe/Asia 6,146 6,191
------------------------- --------------------------
Total geographic operating income $ 32,114 $ 32,239
========================= ==========================
Total assets:
North America $ 419,966 $ 258,123
South America 6,301 9,856
Africa - -
Europe/Asia 47,123 39,885
------------------------- --------------------------
Total assets $ 473,390 $ 307,864
========================= ==========================
A reconciliation of consolidated geographic operating income from
continuing operations to consolidated operating income from continuing
operations follows:
NINE MONTHS ENDED
SEPTEMBER 30, 2003 SEPTEMBER 30, 2002
------------------------ -------------------------
(IN THOUSANDS)
Consolidated geographic operating income $ 32,114 $ 32,239
Amortization (201) (213)
Integration and other non-recurring charges (4,565) (4,476)
------------------------ -------------------------
Operating income $ 27,348 $ 27,550
======================== =========================
18
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED (UNAUDITED)
NOTE 9 - EARNINGS PER SHARE
The following details the numerators and denominators of the basic and
diluted earnings per share computations for net income from continuing
operations:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2003 SEPTEMBER 30, 2002 SEPTEMBER 30, 2003 SEPTEMBER 30, 2002
------------------ ------------------ ------------------ ------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Numerator for basic and diluted
earnings per share:
Income from continuing operations $ 6,109 $ 2,964 $ 14,832 $ 13,355
Denominator for basic earnings per
share - weighted average shares outstanding: 27,811 29,708 28,106 30,639
Effect of shares issuable under stock
option and stock grant plans, based on
the treasury stock method 438 329 332 734
----------------- ----------------- ----------------- -----------------
Denominator for diluted earnings per share-
Adjusted weighted average shares outstanding 28,249 30,037 28,438 31,373
----------------- ----------------- ----------------- -----------------
Basic earnings per share from
continuing operations $ 0.22 $ 0.10 $ 0.52 $ 0.44
================= ================= ================= =================
Diluted earnings per share from
continuing operations $ 0.22 $ 0.10 $ 0.52 $ 0.43
================= ================= ================= =================
19
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED (UNAUDITED)
NOTE 10 - NEW ACCOUNTING PRONOUNCEMENTS
In November 2002, the FASB issued FASB Interpretation No. 45
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others, an Interpretation of FASB
Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34 ("FIN
45"). FIN 45 elaborates on the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under certain
guarantees that it has issued. It also clarifies that a guarantor is required to
recognize, at the inception of a guarantee, a liability for the fair value of
the obligation undertaken in issuing the guarantee. The initial recognition and
initial measurement provisions of FIN 45 are applicable on a prospective basis
to guarantees issued or modified after December 31, 2002, irrespective of the
guarantor's fiscal year-end. We adopted the provisions of this Statement on
January 1, 2003, which did not have a significant impact on our consolidated
financial statements.
In January 2003, the FASB issued FASB Interpretation No. 46,
Consolidation of Variable-Interest Entities - an Interpretation of ARB No. 51
("FIN 46"). FIN 46 addresses consolidation by business enterprises of variable
interest entities, which have one or both of the following characteristics: (1)
the equity investment at risk is not sufficient to permit the entity to finance
its activities without additional subordinated financial support from other
parties, which is provided through other interests that will absorb some or all
of the expected losses of the entity and (2) the equity investors lack one or
more of the following essential characteristics of a controlling financial
interest:
o The direct or indirect ability to make decisions about the entity's
activities through voting rights or similar rights
o The obligation to absorb the expected losses of the entity if they
occur, which makes it possible for the entity to finance its activities
o The right to receive the expected residual returns of the entity if
they occur, which is the compensation for the risk of absorbing the
expected losses.
This Interpretation applies immediately to variable interest entities
created after January 31, 2003, and to variable interest entities in which an
enterprise obtains an interest after that date. It applies in the first fiscal
year or interim period beginning after June 15, 2003, to variable interest
entities in which an enterprise holds a variable interest that it acquired
before February 1, 2003. The adoption of FIN 46 did not have a significant
impact on our consolidated financial statements.
20
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED (UNAUDITED)
In April 2003, the FASB issued Statement of Financial Accounting
Standard No. 149, "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities" (SFAS 149). SFAS 149 amends and clarifies financial
accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities
under Statement of Financial Accounting Standard No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (SFAS 133). SFAS 149 is effective
for contracts entered into or modified and hedging relationships designated
after June 30, 2003, except for the provisions of SFAS 149 that relate to SFAS
133 Implementation Issues that have been effective for fiscal quarters that
began prior to June 15, 2003, which should continue to be applied in accordance
with their respective effective dates. Adoption of this standard had no effect
on us.
In May 2003, the FASB issued Statement of Financial Accounting Standard
No. 150, "Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity" (SFAS 150). SFAS 150 establishes standards for how
an issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an issuer
classify a financial instrument that is within its scope as a liability (or an
asset in some circumstances). Many of those instruments were previously
classified as equity. SFAS 150 is effective for financial instruments entered
into or modified after May 31, 2003, and otherwise is effective at the beginning
of the first interim period beginning after June 15, 2003. Adoption of this
standard had no effect on us.
In September 2003, the FASB issued FASB Staff Position No. 146-1,
Determining Whether a One-Time Termination Benefit Offered in Connection with an
Exit or Disposal Activity Is, in Substance, an Enhancement to an Ongoing Benefit
Arrangement. This Staff Position states that in order to be considered an
enhancement to an ongoing benefit arrangement, the additional termination
benefits must represent a revision to the ongoing arrangement that is not
limited to a specified termination event or a specified future period. Otherwise
the additional termination benefits should be considered one-time termination
benefits and accounted for under SFAS 146. The guidance in this Staff Position
is effective for exit or disposal activities initiated in interim or annual
reporting periods beginning after September 15, 2003. The adoption of this Staff
Position is not expected to have a material impact on our consolidated financial
statements.
In October 2003, the FASB issued FASB Staff Position No. FIN 46-6,
Effective Date of FASB Interpretation No. 46, Consolidation of Variable Interest
Entities. This Staff Position defers the effective date for applying the
provisions of FIN 46 for interests held by public entities in variable interest
entities or potential variable interest entities created before February 1, 2003
and non-registered investment companies. This adoption of this Staff Position is
not expected to have a material impact on our consolidated financial statements.
21
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED (UNAUDITED)
NOTE 11 - STOCKHOLDERS' EQUITY
Statement of Financial Accounting Standard No. 123, "Accounting for
Stock-Based Compensation" (SFAS 123), as amended by SFAS 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure," establishes a fair value
based method of accounting for stock-based employee compensation plans; however,
it also allows an entity to continue to measure compensation cost for those
plans using the intrinsic value based method of accounting prescribed by
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB 25). Under the fair value based method, compensation cost is
measured at the grant date based on the value of the award and is recognized
over the service period, which is usually the vesting period. Under the
intrinsic value based method, compensation costs is the excess, if any, of the
quoted market price of the stock at the grant date or other measurement date
over the amount an employee must pay to acquire the stock. We have elected to
continue to account for our employee stock compensation plans under APB 25 with
pro forma disclosures of net earnings and earnings per share, as if the fair
value based method of accounting defined in SFAS 123 had been applied. If
compensation cost for stock option grants had been determined based on the fair
value on the grant dates for September 30, 2003 and 2002 consistent with the
method prescribed by SFAS 123, our net earnings and earnings per share would
have been adjusted to the pro forma amounts indicated below:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2003 SEPTEMBER 30, 2002 SEPTEMBER 30, 2003 SEPTEMBER 30, 2002
------------------ ------------------ ------------------ ------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income (loss) as reported: $ 6,115 $(14,707) $ 15,815 $ (4,672)
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects (671) (1,699) (2,985) (3,434)
------------------- ------------------ ------------------- -------------------
Pro-forma net income (loss) $ 5,444 $(16,406) $ 12,830 $ (8,106)
=================== ================== =================== ===================
Earnings (loss) per share:
Basic - as reported $ 0.22 $ (0.50) $ 0.56 $ (0.15)
=================== ================== =================== ===================
Basic - pro-forma $ 0.20 $ (0.55) $ 0.46 $ (0.26)
=================== ================== =================== ===================
Diluted - as reported $ 0.22 $ (0.49) $ 0.56 $ (0.15)
=================== ================== =================== ===================
Diluted - pro-forma $ 0.19 $ (0.55) $ 0.45 $ (0.26)
=================== ================== =================== ===================
22
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED (UNAUDITED)
NOTE 12 - LEGAL PROCEEDINGS
On or about March 22, 2002, O'Gara-Hess & Eisenhardt Armoring Company
(OHEAC), one of our subsidiaries, received a civil subpoena from the Department
of Defense (DOD) requesting documents and information concerning various quality
control documentation regarding parts delivered by its subcontractors and
vendors in support of the HMMWV armored at its Fairfield, Ohio facility for the
period October 1, 1999 through May 1, 2001. OHEAC has complied fully with the
subpoena. In early 2003, OHEAC was advised that the Department of Justice (DOJ)
was also investigating separate claims against OHEAC filed by individuals that
involve the same time frame and issues covered by the DOD subpoena. OHEAC has
learned that the DOJ investigation relates to a certain unidentified action
filed under the federal False Claims Act pursuant to which the United States
government may intervene and recover damages. OHEAC has fully responded to, and
cooperated with, the government's questions and investigation. The DOJ has since
notified OHEAC that it has declined to intervene in the case. On September 30,
2003, the action filed under the federal False Claims Act was voluntarily
withdrawn without prejudice.
In October 2002, we were sued in the United States District Court for
the District of Wyoming. The plaintiffs in that lawsuit asserted various state
law tort claims and federal environmental law claims under the Resource
Conservation and Recovery Act and the Clean Air Act stemming from one of our
subsidiaries' Casper, Wyoming tear gas plant. The plaintiffs have not yet
quantified their alleged damages. The plaintiffs filed their suit as a potential
class action. On June 19, 2003, the court denied plaintiff's motion for class
certification. The alleged actions took place over time periods during which we
were covered by different insurance policies. We have notified our insurance
carriers of the suit. Our prior insurance carrier has agreed, under a full
reservation of rights, including with respect to any liability which relates to
the time its policy was in effect, to provide a defense and to address the
question of liability indemnification in the future. Our current insurance
carrier has declined defense and indemnification coverage. While we do not carry
specific environment insurance coverage, we have reserved the right to challenge
our insurance carrier's determination. The case is currently pending, and while
we are contesting the allegations vigorously, we are unable to predict the
outcome of this matter. At this time, we do not believe this matter will have a
material impact on our financial position, operations or liquidity.
Reference is made to Note 10, Commitments and Contingencies, in our
Annual Report on Form 10-K for the year ended December 31, 2002, and Note 10,
Legal Proceedings in our Quarterly Report on Form 10-Q for the quarter ended
March 31, 2003 for a description of other legal proceedings.
23
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED (UNAUDITED)
NOTE 13 -GUARANTOR AND NONGUARANTOR FINANCIAL STATEMENTS
On August 12, 2003 we sold $150 million of Senior Subordinated Notes in
private placements pursuant to Rule 144A and Regulation S. The Senior
Subordinated Notes are uncollateralized obligations and rank junior in right of
payment to our existing and future senior debt. The Senior Subordinated Notes
are guaranteed, jointly and severally on a senior uncollateralized basis, by
certain domestic subsidiaries.
The following consolidating condensed financial information presents
the consolidating condensed balance sheets as of September 30, 2003 and December
31, 2002, the related condensed statements of income for each of the three and
nine month periods ended September 30, 2003 and September 30, 2002 and the
related condensed statements of cash flows for the nine month periods ended
September 30, 2003 and September 30, 2002 for:
a) Armor Holdings, Inc., the parent,
b) the guarantor subsidiaries,
c) the nonguarantor subsidiaries, and
d) Armor Holdings, Inc. on a consolidated basis
The information includes elimination entries necessary to consolidate
Armor Holdings, Inc., the parent, with the guarantor and nonguarantor
subsidiaries.
Investments in subsidiaries are accounted for by the parent using the
equity method of accounting. The guarantor and nonguarantor subsidiaries are
presented on a combined basis. The principal elimination entries eliminate
investments in subsidiaries and intercompany balances and transactions. Separate
financial statements for the guarantor and nonguarantor subsidiaries are not
presented because management believes such financial statements would not be
meaningful to investors.
24
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED (UNAUDITED)
ARMOR HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
SEPTEMBER 30, 2003
--------------------------------------------------------------------------------
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
---------- ------------ --------------- ------------- -------------
(IN THOUSANDS)
ASSETS
Current Assets:
Cash and cash equivalents $ 144,037 $ 2,620 $ 8,109 $ -- $ 154,766
Accounts receivable, net -- 47,925 11,290 -- 59,215
Costs and earned gross profit in excess
of billings -- 1,088 -- -- 1,088
Intercompany receivables 86,614 50,744 5,661 (143,019) --
Inventories -- 45,296 14,772 -- 60,068
Prepaid expenses and other current assets 19,520 12,931 3,271 (14,401) 21,321
Current assets of discontinued operations -- 7,971 39,987 -- 47,958
---------- ------------ --------------- ------------- -------------
Total Current Assets 250,171 168,575 83,090 (157,420) 344,416
Property and equipment, net 2,183 27,742 19,606 -- 49,531
Goodwill, net -- 97,002 1,932 -- 98,934
Patents, licenses and trademarks, net -- 7,233 186 -- 7,419
Other assets 20,903 232 (87) -- 21,048
Long-term assets of discontinued operations -- 7,205 12,840 -- 20,045
Investment in subsidiaries 197,975 10,007 21,734 (229,716) --
---------- ------------ --------------- ------------- -------------
Total Assets $ 471,232 $ 317,996 $ 139,301 $ (387,136) $ 541,393
========== ============ =============== ============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ -- $ 765 $ -- $ -- $ 765
Short-term debt -- -- 608 -- 608
Accounts payable 215 15,988 5,810 -- 22,013
Accrued expenses and other current
liabilities 8,335 13,102 17,528 -- 38,965
Income taxes payable 2,604 -- 1,310 -- 3,914
Intercompany payables 13,424 99,192 11,658 (124,274) --
Current liabilities of discontinued
operations -- 8,047 34,515 (18,745) 23,942
---------- ------------ --------------- ------------- -------------
Total Current Liabilities 24,578 137,094 71,429 (143,019) 90,207
Long-term debt, less current portion 155,514 4,407 -- -- 159,921
Long-term liabilities of discontinued
operations -- 2,778 11,873 (14,401) 125
---------- ------------ --------------- ------------- -------------
Total Liabilities 180,092 144,279 83,302 (157,420) 250,253
Stockholders' Equity:
Preferred stock -- 1,450 -- (1,450) --
Common stock 342 5,523 26,314 (31,837) 342
Additional paid in capital 315,148 71,816 31,615 (103,431) 315,148
Retained earnings (accumulated deficit) 49,871 94,928 (1,930) (92,998) 49,871
Accumulated other comprehensive loss (1,904) -- -- -- (1,904)
Treasury stock (72,317) -- -- -- (72,317)
---------- ------------ --------------- ------------- -------------
Total Stockholders' Equity 291,140 173,717 55,999 (229,716) 291,140
---------- ------------ --------------- ------------- -------------
Total Liabilities and Stockholders' Equity $ 471,232 $ 317,996 $ 139,301 $ (387,136) $ 541,393
========== ============ =============== ============= =============
25
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED (UNAUDITED)
ARMOR HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
DECEMBER 31, 2002
--------------------------------------------------------------------------------
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
---------- ------------ --------------- ------------- -------------
(IN THOUSANDS)
ASSETS
Current Assets:
Cash and cash equivalents $ 7,152 $ 3,556 $ 2,205 $ -- $ 12,913
Accounts receivable, net -- 44,864 13,649 -- 58,513
Costs and earned gross profit in excess
of billings -- 234 -- -- 234
Intercompany receivables 123,744 33,165 3,800 (160,709) --
Inventories -- 46,591 15,739 -- 62,330
Prepaid expenses and other current assets 12,490 21,999 2,368 (24,645) 12,212
Current assets of discontinued operations -- 10,351 18,474 -- 28,825
---------- ------------ --------------- ------------- -------------
Total Current Assets 143,386 160,760 56,235 (185,354) 175,027
Property and equipment, net 2,456 27,250 17,430 -- 47,136
Goodwill, net -- 96,903 1,833 -- 98,736
Patents, licenses and trademarks, net -- 7,326 195 -- 7,521
Other assets 916 6,872 1,260 -- 9,048
Long-term assets of discontinued operations -- 6,910 23,375 -- 30,285
Investment in subsidiaries 161,805 10,078 -- (171,883) --
---------- ------------ --------------- ------------- -------------
Total Assets $308,563 $316,099 $ 100,328 $(357,237) $ 367,753
========== ============ =============== ============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ -- $ 1,813 $ -- $ -- $ 1,813
Short-term debt -- -- 599 -- 599
Accounts payable 828 15,751 7,191 -- 23,770
Accrued expenses and other current
liabilities 1,790 11,324 12,002 -- 25,116
Income taxes payable 4,831 (148) 1,230 -- 5,913
Intercompany payables 13,037 115,658 10,434 (139,129) --
Current liabilities of discontinued
operations -- 14,267 24,538 (21,580) 17,225
---------- ------------ --------------- ------------- -------------
Total Current Liabilities 20,486 158,665 55,994 (160,709) 74,436
Long-term debt, less current portion -- 5,072 -- -- 5,072
Long-term liabilities of discontinued
operations -- 13,022 11,791 (24,645) 168
---------- ------------ --------------- ------------- -------------
Total Liabilities 20,486 176,759 67,785 (185,354) 79,676
Stockholders' Equity:
Preferred stock -- 1,450 -- (1,450) --
Common stock 336 5,681 26,318 (31,999) 336
Additional paid in capital 307,487 73,836 10,016 (83,852) 307,487
Retained earnings (accumulated deficit) 34,056 58,373 (3,791) (54,582) 34,056
Accumulated other comprehensive loss (4,169) -- -- -- (4,169)
Treasury stock (49,633) -- -- -- (49,633)
---------- ------------ --------------- ------------- -------------
Total Stockholders' Equity 288,077 139,340 32,543 (171,883) 288,077
---------- ------------ --------------- ------------- -------------
Total Liabilities and Stockholders' Equity $308,563 $316,099 $ 100,328 $ (357,237) $ 367,753
========== ============ =============== ============= =============
26
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED (UNAUDITED)
ARMOR HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING INCOME STATEMENTS
THREE MONTHS ENDED SEPTEMBER 30, 2003
-----------------------------------------------------------------------------
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
---------- ------------ --------------- ------------- -------------
(IN THOUSANDS)
REVENUES:
Products $ -- $ 42,110 $ 8,676 $ -- $ 50,786
Mobile Security -- 24,338 15,758 -- 40,096
---------- ----------- -------------- ------------- -------------
Total revenues -- 66,448 24,434 -- 90,882
---------- ----------- -------------- ------------- -------------
COSTS AND EXPENSES:
Cost of sales -- 42,120 19,833 -- 61,953
Operating expenses 2,661 10,945 2,371 -- 15,977
Amortization -- 69 3 -- 72
Integration and other non-recurring
charges 107 261 -- -- 368
Related party management (income) fees (1,859) -- 2,339 (480) --
---------- ----------- -------------- ------------- -------------
OPERATING (LOSS) INCOME (909) 13,053 (112) 480 12,512
Interest expense, net 1,371 59 45 -- 1,475
Other expense (income), net -- 129 (33) -- 96
Equity in (earnings) losses of
subsidiaries (7,603) 256 -- 7,347 --
---------- ----------- -------------- ------------- -------------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE PROVISION (BENEFIT) FOR INCOME TAXES 5,323 12,609 (124) (6,867) 10,941
PROVISION (BENEFIT) FOR INCOME TAXES (792) 4,748 876 -- 4,832
---------- ----------- -------------- ------------- -------------
INCOME (LOSS) FROM CONTINUING OPERATIONS 6,115 7,861 (1,000) (6,867) 6,109
DISCONTINUED OPERATIONS:
Income from discontinued operations
before provision for income taxes -- 1,697 462 (480) 1,679
Provision for income taxes -- 702 971 -- 1,673
---------- ----------- -------------- ------------- -------------
Net income (loss) from discontinued
operations -- 995 (509) (480) 6
---------- ----------- -------------- ------------- -------------
NET INCOME (LOSS) $ 6,115 $ 8,856 $ (1,509) $ (7,347) $ 6,115
========== =========== ============== ============= =============
27
ARMOR HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING INCOME STATEMENTS
THREE MONTHS ENDED SEPTEMBER 30, 2002
----------------------------------------------------------------------------------
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
---------- ------------ --------------- ------------- -------------
(IN THOUSANDS)
REVENUES:
$
Products $ -- $ 41,763 $ 7,284 -- $ 49,047
Mobile Security -- 21,282 10,228 -- 31,510
----------- ----------- ---------------- -------------- -------------
Total revenues -- 63,045 17,512 -- 80,557
----------- ----------- ---------------- -------------- -------------
COSTS AND EXPENSES:
Cost of sales -- 41,269 14,678 -- 55,947
Operating expenses 1,552 9,417 1,883 -- 12,852
Amortization -- 62 -- -- 62
Integration and other non-recurring
charges 335 1,024 -- -- 1,359
----------- ----------- ---------------- -------------- -------------
OPERATING (LOSS) INCOME (1,887) 11,273 951 -- 10,337
Interest expense, net 230 45 68 -- 343
Other (income) expense, net -- (38) 25 -- (13)
Equity in losses of subsidiaries 9,611 92 -- (9,703) --
Related parting interest income, net -- 122 -- (122) --
----------- ----------- ---------------- -------------- -------------
(LOSS) INCOME FROM CONTINUING
OPERATIONS BEFORE PROVISION FOR INCOME
TAXES (11,728) 11,052 858 9,825 10,007
PROVISION FOR INCOME TAXES 2,979 3,781 283 -- 7,043
----------- ----------- ---------------- -------------- -------------
(LOSS) INCOME FROM CONTINUING OPERATIONS (14,707) 7,271 575 9,825 2,964
----------- ----------- ---------------- -------------- -------------
DISCONTINUED OPERATIONS:
Loss from discontinued operations
before provision for income taxes -- (14,361) (2,549) (122) (17,032)
Provision for income taxes -- 29 610 -- 639
----------- ----------- ---------------- -------------- -------------
Net loss from discontinued operations -- (14,390) (3,159) (122) (17,671)
----------- ----------- ---------------- -------------- -------------
NET LOSS $ (14,707) $ (7,119) $ (2,584) $ 9,703 $ (14,707)
=========== =========== ================ ============== =============
28
ARMOR HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING INCOME STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2003
-----------------------------------------------------------------------------------
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
---------- ------------ --------------- ------------- -------------
(IN THOUSANDS)
REVENUES:
Products $ -- $ 117,863 $ 26,277 $ -- $ 144,140
Mobile Security -- 63,110 45,765 -- 108,875
------------ ----------- ----------------- ------------- -------------
Total revenues -- 180,973 72,042 -- 253,015
------------ ----------- ----------------- ------------- -------------
COSTS AND EXPENSES:
Cost of sales -- 117,278 59,118 -- 176,396
Operating expenses 7,203 29,732 7,570 -- 44,505
Amortization -- 193 8 -- 201
Integration and other non-recurring
charges 3,456 1,109 -- -- 4,565
Related party management (income) fees (1,859) -- 2,339 (480) --
------------ ----------- ----------------- ------------- -------------
OPERATING (LOSS) INCOME (8,800) 32,661 3,007 -- 27,348
Interest expense, net 1,866 250 175 -- 2,291
Other expense, net -- 131 50 -- 181
Equity in (earnings) losses of
subsidiaries (22,688) 419 -- 22,269 --
Related parting interest expense
(income), net 16 (16) -- -- --
------------ ----------- ----------------- ------------- -------------
INCOME FROM CONTINUING OPERATIONS BEFORE
PROVISION (BENEFIT) FOR INCOME TAXES 12,006 31,877 2,782 (21,789) 24,876
PROVISION (BENEFIT) FOR INCOME TAXES (3,809) 12,011 1,842 -- 10,044
------------ ----------- ----------------- ------------- -------------
INCOME FROM CONTINUING OPERATIONS 15,815 19,866 940 (21,789) 14,832
------------ ----------- ----------------- ------------- -------------
DISCONTINUED OPERATIONS:
Income from discontinued operations
before provision for income taxes -- 1,480 2,593 (480) 3,593
Provision for income taxes -- 938 1,672 -- 2,610
------------ ----------- ----------------- ------------- -------------
Net income from discontinued operations -- 542 921 (480) 983
------------ ----------- ----------------- ------------- -------------
NET INCOME $ 15,815 $ 20,408 $ 1,861 $ (22,269) $ 15,815
============ =========== ================= ============= =============
29
ARMOR HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING INCOME STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2002
-----------------------------------------------------------------------------------
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
---------- ------------ --------------- ------------- -------------
(IN THOUSANDS)
REVENUES:
Products $ -- $ 112,437 $ 18,612 $ -- $ 131,049
Mobile Security -- 57,439 33,278 -- 90,717
----------- -------------- -------------- -------------- -------------
Total revenues -- 169,876 51,890 -- 221,766
----------- -------------- -------------- -------------- -------------
COSTS AND EXPENSES:
Cost of sales -- 109,621 42,860 -- 152,481
Operating expenses 4,866 27,073 5,107 -- 37,046
Amortization -- 213 -- -- 213
Integration and other non-recurring
charges 687 3,789 -- -- 4,476
Related party income -- -- -- -- --
----------- -------------- -------------- -------------- -------------
OPERATING (LOSS) INCOME (5,553) 29,180 3,923 -- 27,550
Interest expense, net 361 161 147 -- 669
Other income, net (2) (21) (54) -- (77)
Equity in earnings of subsidiaries (2,898) (1,087) -- 3,985 --
Related party interest income, net -- (102) -- 102 --
----------- -------------- -------------- -------------- -------------
(LOSS) INCOME FROM CONTINUING
OPERATIONS BEFORE PROVISION FOR INCOME
TAXES (3,014) 30,229 3,830 (4,087) 26,958
PROVISION FOR INCOME TAXES 1,658 10,597 1,348 -- 13,603
----------- -------------- -------------- -------------- -------------
(LOSS) INCOME FROM CONTINUING OPERATIONS (4,672) 19,632 2,482 (4,087) 13,355
----------- -------------- -------------- -------------- -------------
DISCONTINUED OPERATIONS:
Loss from discontinued operations
before income tax (benefit) provision -- (14,015) (3,693) 102 (17,606)
Income tax (benefit) provision -- (722) 1,143 -- 421
----------- -------------- -------------- -------------- -------------
Net loss from discontinued operations -- (13,293) (4,836) 102 (18,027)
----------- -------------- -------------- -------------- -------------
NET (LOSS) INCOME $ (4,672) $ 6,339 $ (2,354) $ (3,985) $ (4,672)
=========== ============== ============== ============== =============
30
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED (UNAUDITED)
ARMOR HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2003
------------------------------------------------------------------------------
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
---------- ------------ --------------- ------------- ------------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Income from continuing operations $ 15,815 $ 19,866 $ 940 $ (21,789) $ 14,832
Adjustments to reconcile income from
continuing operations to cash
provided by operating activities.
Depreciation and amortization 974 2,972 1,434 -- 5,380
Loss on disposal of fixed assets -- 58 109 -- 167
Deferred income taxes (4,379) 6,428 1,627 -- 3,676
Non-cash termination charge 2,093 -- -- -- 2,093
Changes in operating assets & liabilities, net
of acquisitions:
(Increase) decrease in accounts receivable -- (3,915) 2,359 -- (1,556)
Decrease (increase) in intercompany
receivables & payables 19,723 (19,090) (153) (480) --
Decrease in inventory -- 1,206 967 -- 2,173
(Increase) decrease in prepaid expenses &
other assets (7,347) 4,848 (1,183) -- (3,682)
Increase in accounts payable, accrued
expenses and other current liabilities 5,043 2,620 4,145 -- 11,808
(Decrease) increase in income taxes
payable (2,227) 148 80 -- (1,999)
------------ ------------ -------------- ------------- -------------
Net cash provided by operating activities 29,695 15,141 10,325 (22,269) 32,892
------------ ------------ -------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (126) (3,330) (2,189) -- (5,645)
Purchase of patents and trademarks -- (99) -- -- (99)
Additional consideration for purchased
businesses -- (740) -- -- (740)
Investment in subsidiaries (22,337) 203 (135) 22,269 --
Purchase of businesses, net of cash
acquired -- (5,828) -- -- (5,828)
------------ ------------ -------------- ------------- -------------
Net cash used in investing activities (22,463) (9,794) (2,324) 22,269 (12,312)
------------ ------------ -------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 6,588 -- -- -- 6,588
Treasury stock repurchases (22,684) -- -- -- (22,684)
Cash paid for financing costs (4,020) -- -- -- (4,020)
Proceeds from the issuance of long-term
debt 147,504 -- -- -- 147,504
Repayments of long-term debt -- (1,399) -- -- (1,399)
Borrowings under lines of credit 30,406 168 1,170 -- 31,744
Repayments under lines of credit (30,406) (484) (1,180) -- (32,070)
------------ ------------ -------------- ------------- -------------
Net cash provided by (used in) financing
activities 127,388 (1,715) (10) -- 125,663
------------ ------------ -------------- ------------- -------------
Effect of exchange rate on cash and cash
equivalents 2,265 (186) (1,601) -- 478
Net cash used in discontinued operations -- (4,382) (486) -- (4,868)
------------ ------------ -------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 136,885 (936) 5,904 -- 141,853
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD 7,152 3,556 2,205 -- 12,913
------------ ------------ -------------- ------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 144,037 $ 2,620 $ 8,109 $ -- $ 154,766
============ ============ ============== ============= =============
31
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED (UNAUDITED)
ARMOR HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2002
------------------------------------------------------------------------------
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
---------- ------------ --------------- ------------- ------------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Income from continuing operations $ (4,672) $ 19,632 $ 2,650 $ (4,255) $ 13,355
Adjustments to reconcile income from
continuing operations to cash used in
operating activities.
Depreciation and amortization 625 2,764 660 -- 4,049
Loss on disposal of fixed assets -- 37 99 -- 136
Deferred taxes (3,927) 1,592 1,655 -- (680)
Changes in operating assets & liabilities, net
of acquisitions:
(Increase) decrease in accounts receivable -- (5,890) 2,760 -- (3,130)
(Increase) decrease in intercompany
receivables & payables (5,414) 8,148 (3,004) 270 --
Increase in inventory -- (6,692) (3,511) -- (10,203)
Increase in prepaid expenses & other
assets (313) (2,898) (358) -- (3,569)
Decrease in accounts payable, accrued
expenses and other current liabilities (1,539) (1,490) (3,746) -- (6,775)
Increase in income taxes payable 4,724 -- 1,621 -- 6,345
------------ ------------ -------------- ------------- -------------
Net cash (used in) provided by operating
activities (10,516) 15,203 (1,174) (3,985) (472)
------------ ------------ -------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (70) (3,044) (1,434) -- (4,548)
Purchase of patents and trademarks -- (45) -- -- (45)
Additional consideration for purchased
businesses -- (2,652) -- -- (2,652)
Investment in subsidiaries (7,166) (5,540) 8,721 3,985 --
Purchase of businesses, net of cash
acquired -- (5,916) (1,495) -- (7,411)
------------ ------------ -------------- ------------- -------------
Net cash (used in) provided by investing
activities (7,236) (17,197) 5,792 3,985 (14,656)
------------ ------------ -------------- ------------- -------------
CASH FLOWS FROM FINANCING ACT