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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, 2003
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 ORGANIZATION) (IRS EMPLOYER 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, 2003, the last business day
of the Registrant's most recently completed second fiscal quarter (based on the
closing sale price of the Common Stock on the New York Stock Exchange on such
date) was $369,446,455.
The number of shares of the Registrant's Common Stock outstanding as of
March 5, 2004 was 28,542,987.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of our Proxy Statement for our Annual Meeting of Stockholders to be
held on June, 22, 2004, are incorporated by reference into Part III hereof.
TABLE OF CONTENTS AND
CROSS REFERENCE SHEET
Page Number
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PART I Forward Looking Statements 3
Factors That May Affect Our Future Business 3
Item 1. Description of Business 10
Company Overview 10
Material Developments 11
Industry Overview 12
Information Concerning Business Segments and
Geographical Sales 13
Business Strengths 14
Growth Strategy 15
Acquisitions 16
Products 16
Customers 22
Marketing and Distribution 23
Product Manufacturing and Raw Materials 24
Backlog 25
Competition 25
Employees 26
Patents and Trademarks 26
Government Regulation 27
Environmental Matters 27
Available Information 27
Discontinued Operations 28
Item 2. Properties 29
Item 3. Legal Proceedings 30
Item 4. Submission of Matters to a Vote of Security Holders 32
PART II Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 33
Item 6. Selected Financial Data 34
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 35
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk 53
Item 8. Financial Statements and Supplementary Data 54
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 54
Item 9A. Controls and Procedures 54
PART III 55
PART IV Item 15. Exhibits, Financial Statements and Schedules,
and Reports on Form 8-K 56
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 examples of
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, and
the risk factors set forth below, provide examples of risks, uncertainties and
events that may cause our actual results to differ from the expectations we
express in our forward-looking statements.
FACTORS THAT MAY AFFECT OUR FUTURE RESULTS
In addition to other information in this Annual Report on Form 10-K, the
following risk factors should be carefully considered in evaluating our business
because such factors may have a significant impact on our business, operating
results, liquidity and financial condition. As a result of the risk factors set
forth below, actual results could differ materially from those projected in any
forward-looking statements. Additional risks and uncertainties not presently
known to us, or that we currently consider to be immaterial, may also impact our
business, operating results, liquidity and financial condition. If any of the
following risks occur, our business, operating results, liquidity and financial
condition could be materially adversely affected. In such case, the trading
price of our securities could decline, and you may lose all or part of your
investment.
RISKS RELATED TO OUR INDUSTRY
THE PRODUCTS WE SELL ARE INHERENTLY RISKY AND COULD GIVE RISE TO PRODUCT
LIABILITY AND OTHER CLAIMS.
The products that we manufacture are typically used in applications and
situations that involve high levels of risk of personal injury. Failure to use
our products for their intended purposes, failure to use them properly, their
malfunction, or, in some limited circumstances, even correct use of our
products, could result in serious bodily injury or death. Our products include:
body armor and plates designed to protect against ballistic and sharp instrument
penetration; less-lethal products such as less-lethal munitions, pepper sprays,
distraction devices and flameless expulsion grenades; various models of police
batons; rotary and fixed-wing aircraft seating systems; parachutes; vehicle and
hard armoring systems; and police duty gear.
Claims have been made and are pending against certain of our subsidiaries,
involving permanent physical injury and death caused by self-defense sprays and
other munitions intended to be less-lethal. In addition, the manufacture and
sale of certain less-lethal products may be the subject of product liability
claims arising from the design, manufacture or sale of such goods. If these
claims are decided against us and we are found to be liable, we may be required
to pay substantial damages and our insurance costs may increase significantly as
a result. Also, a significant or extended lawsuit, such as a class action, could
also divert significant amounts of management's time and attention. We cannot
assure you that our insurance coverage would be sufficient to cover the payment
of any potential claim. In addition, we cannot assure you that this or any other
insurance coverage will continue to be available or, if available, that we will
be able to obtain it at a reasonable cost. Our cost of obtaining insurance
coverage has risen substantially since September 11, 2001. Any material
uninsured loss could have a material adverse effect on our business, financial
condition and results of operations. In addition, the inability to obtain
product liability coverage would prohibit us from bidding for orders from
certain governmental customers since, at present, many bids from governmental
entities require such coverage, and any such inability would have a material
adverse effect on our business, financial condition and results of operations.
Both private claimants and State Attorneys General have already commenced legal
action against Second Chance Body Armor based upon its Ultima(R) and Ultimax(R)
model vests. Second Chance Body Armor licenses from Simula, one of our indirect
subsidiaries, a certain patented technology which is used in some of the body
armor it manufactures, but to our knowledge, no lawsuit has yet been brought
against Second Chance Body
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Armor based upon this licensed technology, although a letter was received by
Simula from an attorney representing a police officer who was injured while
wearing a Second Chance Body Armor vest alleging potential liability against
Simula. In addition, the U.S. Attorney General has asked the U.S. Department of
Justice to investigate the claims regarding the Zylon(R) vests. As Simula has
licensed its technology to Second Chance Body Armor, it may be impacted by the
pending claims against Second Chance Body Armor and the investigation being
conducted by the U.S. Department of Justice. If Simula is included in the claims
pending against Second Chance Body Armor and the investigation being conducted
by the U.S. Department of Justice, we cannot assure you that any judgment,
settlement or resolution against Simula will not have a material adverse effect
on Simula's business, financial condition and results of operations.
The National Institute of Justice (NIJ) is engaged in an ongoing inquiry and
investigation of bullet-resistant vests and the protocol for testing used vests,
as well as the reliability of Zylon and other fibers. We have consulted with and
cooperated fully with the NIJ in this endeavor. To date, the NIJ has embarked
only in its first phase of testing, which entails vests that have been heavily
worn or exposed to adverse conditions, and which involves the ballistic standard
applicable to new vests. Although some of the vests tested, including ours,
experienced some level of penetration, the NIJ specifically warned against the
misuse and misinterpretation of these results, emphasizing that the data
produced so far is preliminary in nature, applies to a very small sample size
and therefore it is not possible to draw any statistically-based conclusions
from these results. The NIJ will continue to conduct further testing and analyze
these issues in order to determine if any conclusions can be reached as to the
performance and reliability of aged vests. We have requested the NIJ to provide
us with its testing data, and we intend to evaluate and review the NIJ results
in our continuing effort to assist the NIJ in developing uniform standards for
certification of new vests and the testing of used vests. The NIJ continues to
encourage law enforcement officers to wear body armor, in light of the fact that
"the lives of more than 2,700 law enforcement officers have been saved by the
use of bullet-resistant body armor over the past 30 years."
WE ARE SUBJECT TO EXTENSIVE GOVERNMENT REGULATION AND OUR FAILURE OR INABILITY
TO COMPLY WITH THESE REGULATIONS COULD MATERIALLY RESTRICT OUR OPERATIONS AND
SUBJECT US TO SUBSTANTIAL PENALTIES.
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
workplace, including regulations promulgated by, among others, the U.S.
Departments of Commerce, State and Transportation, the Federal Aviation
Administration, the U.S. Environmental Protection Agency and the U.S. Bureau of
Alcohol, Tobacco and Firearms. 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. Additionally, the
failure to obtain applicable governmental approval and clearances could
adversely affect our ability to continue to service the government contracts we
maintain. Furthermore, we have material contracts with governmental entities and
are subject to rules, regulations and approvals applicable to government
contractors. We are also subject to routine audits to assure our compliance with
these requirements. We have become aware that we are not in full compliance with
certain regulations governing the export of equipment and related technology
used for military purposes that are applicable to certain of our products. We
have undertaken steps to comply with these regulations and to help ensure
compliance in the future. We do not believe that such noncompliance will have a
material adverse effect on our business. In addition, a number of our employees
involved with certain of our federal government contracts are required to obtain
specified levels of security clearances. Our business may suffer if we or our
employees are unable to obtain the security clearances that are needed to
perform services contracted for the Department of Defense, one of our major
customers. Our failure to comply with these contract terms, rules or regulations
could expose us to substantial penalties, including the loss of these contracts
and disqualification as a U.S. government contractor.
Like other companies operating internationally, we are subject to the Foreign
Corrupt Practices Act and other laws which prohibit improper payments to foreign
governments and their officials by U.S. and other business entities. We operate
in countries known to experience endemic corruption. Our extensive operations in
such countries creates the risk of an unauthorized payment by one of our
employees or agents which would be in violation of various laws including the
Foreign Corrupt Practices Act. Violations of the Foreign Corrupt Practices Act
may result in severe criminal penalties which could have a material adverse
effect on our business, financial condition and results of operations.
WE HAVE SIGNIFICANT INTERNATIONAL OPERATIONS AND ASSETS AND ARE THEREFORE
SUBJECT TO ADDITIONAL FINANCIAL AND REGULATORY RISKS.
We sell our products in foreign countries and seek to increase our level of
international business activity. Our overseas operations are subject to various
risks, including: U.S.-imposed embargoes of sales to specific countries (which
could prohibit sales of our products there); foreign import controls (which may
be arbitrarily imposed and enforced and which could interrupt our supplies or
prohibit customers from purchasing our products); exchange rate fluctuations;
dividend remittance restrictions; expropriation of assets; war, civil uprisings
and riots; government instability; the necessity of obtaining government
approvals for both new and continuing operations; and legal systems of decrees,
laws, taxes, regulations, interpretations and court decisions that are not
always fully developed and that may be retroactively or arbitrarily applied.
One component of our strategy is to expand our operations into selected
international markets. Military procurement, for example, has traditionally had
a large international base. Countries in which we are actively marketing include
Germany, Canada, France, Italy, the United Kingdom, Norway, Japan, India, Korea
and Australia. We, however, may be unable to execute our business model in these
markets or new markets. Further, foreign providers of competing products and
services may have a substantial advantage over us in attracting consumers and
businesses in their country due to earlier established businesses in that
country, greater knowledge with respect to the cultural differences of consumers
and businesses residing in that country and/or their focus on a single market.
We expect to continue to experience higher costs as a percentage of revenues in
connection with the development and maintenance of international products and
services. In pursuing our international expansion strategy, we face several
additional risks, including:
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o foreign laws and regulations, which may vary country by country, that
may impact how we conduct our business;
o higher costs of doing business in foreign countries, including
different employment laws;
o potential adverse tax consequences if taxing authorities in different
jurisdictions worldwide disagree with their interpretation of various
tax laws or their determinations as to the income and expenses
attributable to specific jurisdictions, which could result in our
paying additional taxes, interest and penalties;
o technological differences that vary by marketplace, which we may not be
able to support;
o longer payment cycles and foreign currency fluctuations;
o economic downturns; and
o revenue growth outside of the United States may not continue at the
same rate if it is determined that we have already launched our
products and services in the most significant markets.
We may also be subject to unanticipated income taxes, excise duties, import
taxes, export taxes or other governmental assessments. In addition, a percentage
of the payments to us in our international markets are often in local
currencies. Although most of these currencies are presently convertible into
U.S. dollars, we cannot be sure that convertibility will continue. Even if
currencies are convertible, the rate at which they convert is subject to
substantial fluctuation. Our ability to transfer currencies into or out of local
currencies may be restricted or limited. Any of these events could result in a
loss of business or other unexpected costs which could reduce revenue or profits
and have a material adverse effect on our business, financial condition and
results of operations.
We routinely operate in areas where local government policies regarding foreign
entities and the local tax and legal regimes are often uncertain, poorly
administered and in a state of flux. We cannot, therefore, be certain that we
are in compliance with, or will be protected by, all relevant local laws and
taxes at any given point in time. A subsequent determination that we failed to
comply with relevant local laws and taxes could have a material adverse effect
on our business, financial condition and results of operations. One or more of
these factors could adversely effect our future international operations and,
consequently, could have a material adverse effect on our business, financial
condition and results of operation.
RISKS RELATED TO OUR BUSINESS
MANY OF OUR CUSTOMERS HAVE FLUCTUATING BUDGETS WHICH MAY CAUSE SUBSTANTIAL
FLUCTUATIONS IN OUR RESULTS OF OPERATIONS.
Customers for our products include federal, state, municipal, foreign and
military, law enforcement and other governmental agencies. Government tax
revenues and budgetary constraints, which fluctuate from time to time, can
affect budgetary allocations for these customers. Many domestic and foreign
government agencies have in the past experienced budget deficits that have led
to decreased spending in defense, law enforcement and other military and
security areas. Our results of operations may be subject to substantial
period-to-period fluctuations because of these and other factors affecting
military, law enforcement and other governmental spending. A reduction of
funding for federal, state, municipal, foreign and other governmental agencies
could have a material adverse effect on sales of our products and our business,
financial condition and results of operations.
THE LOSS OF, OR A SIGNIFICANT REDUCTION IN, U.S. MILITARY BUSINESS WOULD HAVE A
MATERIAL ADVERSE EFFECT ON US.
U.S. military contracts account for a significant portion of our business. The
U.S. military funds these contracts in annual increments. These contracts
require subsequent authorization and appropriation that may not occur or that
may be greater than or less than the total amount of the contract. Changes in
the U.S. military's budget, spending allocations, and the timing of such
spending could adversely affect our ability to receive future contracts. None of
our contracts with the U.S. military have a minimum purchase commitment and the
U.S. military generally has the right to cancel its contracts unilaterally
without prior notice. We are the sole-source provider to the U.S. military for
up-armoring of the U.S. military's High Mobility Multipurpose Wheeled Vehicles
("HMMWVs"). The HMMWVs are manufactured by AM General Corporation under separate
U.S. military contracts. Should production or deliveries of HMMWVs be
significantly interrupted, or should other single source suppliers significantly
interrupt deliveries of our components for up-armoring the HMMWVs, we will not
be able to deliver such up-armoring systems for the HMMWVs to the U.S. military
on schedule, which could have a material adverse effect on our business,
financial condition and results of operations. We also manufacture for the U.S.
military helicopter seating systems, aircraft and land vehicle armor systems,
protective equipment for military personnel and other technologies used to
protect soldiers in a variety of life-threatening or catastrophic situations.
The loss of, or a significant reduction in,
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U.S. military business for our helicopter seating systems, aircraft and land
vehicle armor systems and other protective equipment could have a material
adverse effect on our business, financial condition and results of operations.
WE MAY LOSE MONEY OR GENERATE LESS THAN EXPECTED PROFITS ON OUR FIXED-PRICE
CONTRACTS.
Some of our government contracts provide for a predetermined, fixed price for
the products we make regardless of the costs we incur. Therefore, fixed-price
contracts require us to price our contracts by forecasting our expenditures.
When making proposals for fixed-price contracts, we rely on our estimates of
costs and timing for completing these projects. These estimates reflect
management's judgments regarding our capability to complete projects efficiently
and timely. Our production costs may, however, exceed forecasts due to
unanticipated delays or increased cost of materials, components, labor, capital
equipment or other factors. Therefore, we may incur losses on fixed price
contracts that we had expected to be profitable, or such contracts may be less
profitable than expected, which could have a material adverse effect on our
business, financial condition and results of operations.
OUR BUSINESS IS SUBJECT TO VARIOUS LAWS AND REGULATIONS FAVORING THE U.S.
GOVERNMENT'S CONTRACTUAL POSITION, AND OUR FAILURE TO COMPLY WITH SUCH LAWS AND
REGULATIONS COULD HARM OUR OPERATING RESULTS AND PROSPECTS.
As a contractor to the U.S. government, we must comply with laws and regulations
relating to the formation, administration and performance of the federal
government contracts that affect how we do business with our clients and may
impose added costs on our business. These rules generally favor the U.S.
government's contractual position. For example, these regulations and laws
include provisions that subject contracts we have been awarded to:
o protest or challenge by unsuccessful bidders; and
o unilateral termination, reduction or modification by the government.
The accuracy and appropriateness of certain costs and expenses used to
substantiate our direct and indirect costs for the U.S. government under both
cost-plus and fixed-price contracts are subject to extensive regulation and
audit by the Defense Contract Audit Agency, an arm of the U.S. Department of
Defense. Responding to governmental audits, inquiries or investigations may
involve significant expense and divert management's attention. Our failure to
comply with these or other laws and regulations could result in contract
termination, suspension or debarment from contracting with the federal
government, civil fines and damages and criminal prosecution and penalties, any
of which could have a material adverse effect on our business, financial
condition and results of operations.
OUR MARKETS ARE HIGHLY COMPETITIVE AND IF WE ARE UNABLE TO COMPETE EFFECTIVELY,
WE WILL BE ADVERSELY AFFECTED.
The markets in which we operate include a large number of competitors ranging
from small businesses to multinational corporations and are highly competitive.
Competitors who are larger, better financed and better known than us may compete
more effectively than we can. In order to stay competitive in our industry, we
must keep pace with changing technologies and client preferences. If we are
unable to differentiate our services from those of our competitors, our revenues
may decline. In addition, our competitors have established relationships among
themselves or with third parties to increase their ability to address client
needs. As a result, new competitors or alliances among competitors may emerge
and compete more effectively than we can. There is also a significant industry
trend towards consolidation, which may result in the emergence of companies
which are better able to compete against us.
THERE ARE LIMITED SOURCES FOR SOME OF OUR RAW MATERIALS WHICH MAY SIGNIFICANTLY
CURTAIL OUR MANUFACTURING OPERATIONS.
The raw materials that we use in manufacturing ballistic resistant garments and
up-armored vehicles include: SpectraShield, a patented product of Honeywell,
Inc.; Z-Shield, a patented product of Honeywell, Inc.; Zylon, a patented product
of Toyobo Co., Ltd.; Kevlar, a patented product of E.I. du Pont de Nemours Co.,
Inc., or DuPont; and Twaron, a patented product of Akzo-Nobel Fibers, B.V. We
purchase these materials in the form of woven cloth from five independent
weaving companies. In the event Du Pont or its licensee in Europe cease, for any
reason, to produce or sell Kevlar to us, we would utilize these other ballistic
resistant materials as a substitute.
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However, none of SpectraShield, Twaron, Z-Shield or Zylon is expected to become
a complete substitute for Kevlar in the near future. We enjoy a good
relationship with our suppliers of Kevlar, SpectraShield, Twaron, Z-Shield and
Zylon. The use of Zylon and Z-Shield in the design of ballistic resistant vests
is a recent technological advancement that is subject to continuing development
and study. Toyobo is the only producer of Zylon, and Honeywell is the only
producer of Z-Shield. Should these materials become unavailable for any reason,
we would be unable to replace them with materials of like weight and strength.
Thus, if our supply of any of these materials were materially reduced or cut off
or if there was a material increase in the prices of these materials, our
manufacturing operations could be adversely affected and our costs increased,
and our business, financial condition and results of operations could be
materially adversely affected.
WE MAY BE UNABLE TO COMPLETE OR INTEGRATE ACQUISITIONS EFFECTIVELY, IF AT ALL,
AND AS A RESULT MAY INCUR UNANTICIPATED COSTS OR LIABILITIES OR OPERATIONAL
DIFFICULTIES.
We intend to grow through the acquisition of businesses and assets that will
complement our current businesses. We cannot be certain that we will be able to
identify attractive acquisition targets, obtain financing for acquisitions on
satisfactory terms or successfully acquire identified targets. Furthermore, we
may have to divert our management's attention and our financial and other
resources from other areas of our business. Our inability to implement our
acquisition strategy successfully may hinder the expansion of our business.
Because we depend in part on acquiring new businesses and assets to develop and
offer new products, failure to implement our acquisition strategy may also
adversely affect our ability to offer new products in line with industry trends.
We may not be successful in integrating acquired businesses into our existing
operations. Integration may result in unanticipated liabilities or unforeseen
operational difficulties, which may be material, or require a disproportionate
amount of management's attention. Acquisitions may result in us incurring
additional indebtedness or issuing preferred stock or additional common stock.
Competition for acquisition opportunities in the industry may rise, thereby
increasing our cost of making acquisitions or causing us to refrain from making
further acquisitions. In addition, the terms and conditions of our secured
revolving credit facility and the indenture governing our 8 1/4% notes impose
restrictions on us that, among other things, restrict our ability to make
acquisitions.
OUR RESOURCES MAY BE INSUFFICIENT TO MANAGE THE DEMANDS IMPOSED BY OUR GROWTH.
We have rapidly expanded our operations, and this growth has placed significant
demands on our management, administrative, operating and financial resources.
The continued growth of our customer base, the types of services and products
offered and the geographic markets served can be expected to continue to place a
significant strain on our resources. In addition, we cannot easily identify and
hire personnel qualified both in the provision and marketing of our security
services and products. Our future performance and profitability will depend in
large part on our ability to attract and retain additional management and other
key personnel; our ability to implement successful enhancements to our
management, accounting and information technology systems; and our ability to
adapt those systems, as necessary, to respond to growth in our business.
WE ARE DEPENDENT ON INDUSTRY RELATIONSHIPS.
A number of our products are components in our customers' final products.
Accordingly, to gain market acceptance, we must demonstrate that our products
will provide advantages to the manufacturers of final products, including
increasing the safety of their products, providing such manufacturers with
competitive advantages or assisting such manufacturers in complying with
existing or new government regulations affecting their products. There can be no
assurance that our products will be able to achieve any of these advantages for
the products of our customers. Furthermore, even if we are able to demonstrate
such advantages, there can be no assurance that such manufacturers will elect to
incorporate our products into their final products, or if they do, that our
products will be able to meet such customers' manufacturing requirements.
Additionally, there can be no assurance that our relationships with our
manufacturer customers will ultimately lead to volume orders for our products.
The failure of manufacturers to incorporate our products into their final
products could have a material adverse effect on our business, financial
condition and results of operations.
WE MAY BE UNABLE TO PROTECT OUR PROPRIETARY TECHNOLOGY, INCLUDING THE
TECHNOLOGIES WE USE TO FURNISH THE UP-ARMORING OF HMMWVS.
We are dependent upon a variety of methods and techniques that we regard as
proprietary trade secrets. We are also dependent upon a variety of trademarks,
service marks and designs to promote brand name development
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and recognition. We rely on a combination of trade secret, copyright, patent,
trademark, unfair competition and other intellectual property laws as well as
contractual agreements to protect our rights to such intellectual property. Due
to the difficulty of monitoring unauthorized use of and access to intellectual
property, however, such measures may not provide adequate protection. It is
possible that our competitors may access our intellectual property and
proprietary information and use it to their advantage. In addition, there can be
no assurance that courts will always uphold our intellectual property rights, or
enforce the contractual arrangements that we have entered into to protect our
proprietary technology. Any unenforceability or misappropriation of our
intellectual property could have a material adverse effect on our business,
financial condition and results of operations. Furthermore, we cannot assure you
that any pending patent application or trademark application made by us will
result in an issued patent or registered trademark, or that, if a patent is
issued, it will provide meaningful protection against competitors or competitor
technologies. In addition, if we bring or become subject to litigation to defend
against claimed infringement of our rights or of the rights of others or to
determine the scope and validity of our intellectual property rights, such
litigation could result in substantial costs and diversion of our resources
which could have a material adverse effect on our business, financial condition
and results of operations. Unfavorable results in such litigation could also
result in the loss or compromise of our proprietary rights, subject us to
significant liabilities, require us to seek licenses from third parties on
unfavorable terms, or prevent us from manufacturing or selling our products, any
of which could have a material adverse effect on our business, financial
condition and results of operations.
TECHNOLOGICAL ADVANCES, THE INTRODUCTION OF NEW PRODUCTS, AND NEW DESIGN AND
MANUFACTURING TECHNIQUES COULD ADVERSELY AFFECT OUR OPERATIONS UNLESS WE ARE
ABLE TO ADAPT TO THE RESULTING CHANGE IN CONDITIONS.
Our future success and competitive position depend to a significant extent upon
our proprietary technology. We must make significant investments to continue to
develop and refine our technologies. We will be required to expend substantial
funds for and commit significant resources to the conduct of continuing research
and development activities, the engagement of additional engineering and other
technical personnel, the purchase of advanced design, production and test
equipment, and the enhancement of design and manufacturing processes and
techniques. Our future operating results will depend to a significant extent on
our ability to continue to provide design and manufacturing services for new
products that compare favorably on the basis of time to introduction, cost and
performance with the design and manufacturing capabilities. The success of new
design and manufacturing services depends on various factors, including
utilization of advances in technology, innovative development of new solutions
for customer products, efficient and cost-effective services, timely completion
and delivery of new product solutions and market acceptance of customers' end
products. Because of the complexity of our products, we may experience delays
from time to time in completing the design and manufacture of new product
solutions. In addition, there can be no assurance that any new product solutions
will receive or maintain customer or market acceptance. If we are unable to
design and manufacture solutions for new products of our customers on a timely
and cost-effective basis, such inability could have a material adverse effect on
our business, financial condition and results of operations.
WE MAY BE ADVERSELY AFFECTED BY APPLICABLE ENVIRONMENTAL LAWS AND REGULATIONS.
We are subject to federal, state, local and foreign laws and regulations
governing the protection of the environment and human health, including those
regulating discharges to the air and water, the management of wastes, and the
control of noise and odors. We cannot assure you that we are at all times in
complete compliance with all such requirements. Like all companies in our
industry, we are subject to potentially significant fines or penalties if we
fail to comply with environmental requirements. 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. In addition, we
are also subject to environmental laws requiring the investigation and clean-up
of environmental contamination. We may be subject to liability, including
liability for clean-up costs, if contamination is discovered at one of our
current or former facilities, in some circumstances even if such contamination
was caused by a third party such as a prior owner. We also may be subject to
liability if contamination is discovered at a landfill or other location where
we have disposed of wastes, notwithstanding that its historic disposal practices
may have been in accordance with all applicable requirements. We use
Orthochlorabenzalmalononitrile and Chloroacetophenone chemical agents in
connection with our production of tear gas, and these chemicals are hazardous
and could cause environmental damage if not handled and disposed of properly.
Moreover, private parties may bring claims against us based on alleged adverse
health impacts or property damage caused by our operations. The amount of
liability for cleaning up contamination or defending against private party
claims could be material.
8
RISKS RELATED TO OWNERSHIP OF OUR COMMON STOCK
DELAWARE LAW MAY LIMIT POSSIBLE TAKEOVERS.
Our certificate of incorporation makes us subject to the anti-takeover
provisions of Section 203 of the General Corporation Law of the State of
Delaware. In general, Section 203 prohibits publicly-held Delaware corporations
to which it applies from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. This provision could
discourage others from bidding for our shares and could, as a result, reduce the
likelihood of an increase in our stock price that would otherwise occur if a
bidder sought to buy our stock.
OUR CERTIFICATE OF INCORPORATION AUTHORIZES THE ISSUANCE OF SHARES OF BLANK
CHECK PREFERRED STOCK.
Our certificate of incorporation provides that our board of directors will be
authorized to issue from time to time, without further stockholder approval, up
to 5,000,000 shares of preferred stock in one or more series and to fix or alter
the designations, preferences, rights and any qualifications, limitations or
restrictions of the shares of each series, including the dividend rights,
dividend rates, conversion rights, voting rights, terms of redemption, including
sinking fund provisions, redemption price or prices, liquidation preferences and
the number of shares constituting any series or designations of any series. Such
shares of preferred stock could have preferences over our common stock with
respect to dividends and liquidation rights. We may issue additional preferred
stock in ways which may delay, defer or prevent a change in control of us
without further action by our stockholders. Such shares of preferred stock may
be issued with voting rights that may adversely affect the voting power of the
holders of our common stock by increasing the number of outstanding shares
having voting rights, and by the creation of class or series voting rights.
THE MARKET PRICE FOR OUR COMMON STOCK IS VOLATILE.
The market price for our common stock may be highly volatile. We believe that a
variety of factors, including announcements by us or our competitors, quarterly
variations in financial results, trading volume, general market trends and other
factors, could cause the market price of our common stock to fluctuate
substantially. Additionally, due to our relatively modest size, our winning or
losing a large contract may have the effect of distorting our overall financial
results.
WE MAY ISSUE A SUBSTANTIAL AMOUNT OF OUR COMMON STOCK IN CONNECTION WITH FUTURE
ACQUISITIONS AND THE SALE OF THOSE SHARES COULD ADVERSELY AFFECT OUR STOCK
PRICE.
As part of our acquisition strategy, we anticipate issuing additional shares of
common stock as consideration for such acquisitions. To the extent that we are
able to grow through acquisitions and issue our shares of common stock as
consideration, the number of outstanding shares of common stock that will be
eligible for sale in the future is likely to increase substantially. Persons
receiving shares of our common stock in connection with these acquisitions may
be more likely to sell large quantities of their common stock that may influence
the price of our common stock. In addition, the potential issuance of additional
shares in connection with anticipated acquisitions could lessen demand for our
common stock and result in a lower price than would otherwise be obtained.
OUR STOCK PRICE MAY BE ADVERSELY AFFECTED WHEN ADDITIONAL SHARES ARE SOLD.
If our stockholders sell substantial amounts of our common stock in the public
market, the market price of our common stock could fall. These sales might make
it more difficult for us to sell equity or equity-related securities in the
future at a time and price that we deem appropriate and may require us to issue
greater amounts of our common stock to finance future acquisitions. Additional
shares sold to finance acquisitions may dilute our earnings per share if the new
operations' earnings are disappointing.
9
OUR DEBT AGREEMENTS RESTRICT OUR ABILITY TO PAY DIVIDENDS OR MAKE OTHER
DISTRIBUTIONS TO OUR STOCKHOLDERS.
Our debt agreements, such as the indenture governing the 8 1/4% senior
subordinated notes and the senior credit facility, contain covenants that limit
our ability to pay dividends or make other distributions to our stockholders. We
intend to seek an amendment to our senior credit facility so that we can pay
dividends or make other distributions to our stockholders. However, we cannot
assure you that we will obtain the amendment to our senior credit facility and
be permitted pursuant to our indenture to pay dividends or make other
distributions to our stockholders.
WE HAVE A HIGH LEVEL OF DEBT.
Our high level of debt could have important consequences to you and to us. For
example:
o No payment of any kind may be made to our common stockholders
without first meeting our obligations under our senior credit
facility and the indenture governing our 8 1/4% notes;
o We may become more vulnerable to general adverse economic and
industry conditions and adverse changes in governmental regulations;
o We may have to dedicate a substantial portion of our cash flow
from operations to make payments required under our senior credit
facility and the 8 1/4% notes, reducing the availability of cash
flow to fund future capital expenditures, working capital,
execution of our growth strategy, research and development costs
and other general corporate requirements;
o We may have limited flexibility in planning for, or reacting to,
changes in our business and our industry, which may place us at a
competitive disadvantage compared with competitors that have less
debt or more financial resources;
o We may have limited ability to borrow additional funds, even when
necessary to maintain adequate liquidity; and
o The terms of our senior credit facility and the indenture governing
the 8 1/4% notes will allow us to incur substantial amounts of
additional debt, subject to certain limitations. We might incur
additional debt for various reasons, including to pay for additional
acquisitions that we may make and assuming debt of companies that we
may acquire.
ITEM 1. DESCRIPTION OF BUSINESS
COMPANY OVERVIEW
We are a leading manufacturer and provider of specialized security products;
training and support services related to these products; vehicle armor systems;
military helicopter seating systems, aircraft and land vehicle armor systems;
protective equipment for military personnel; and other technologies used to
protect humans in a variety of life-threatening or catastrophic situations. Our
products and systems are used domestically and internationally by military, law
enforcement, security and corrections personnel, as well as governmental
agencies, multinational corporations and individuals. We are organized and
operated under three business divisions: Armor Holdings Products, also referred
to as our Products Division, Armor Mobile Security, also referred to as our
Mobile Security Division, and Simula.
Products. Our Products Division manufactures and sells a broad range of high
quality security products, equipment and related consumable items, 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, weapon maintenance products, foldable
ladders and specialty gloves. Our products are marketed under brand names that
are well established in the military and law enforcement communities such as
AMERICAN BODY ARMOR(TM), B-SQUARE(R), BREAK FREE(R), CLP(R), DEFENSE
TECHNOLOGY/FEDERAL LABORATORIES(R), DEF-TEC PRODUCTS(R), DISTRACTION DEVICE(R),
FEDERAL LABORATORIES(R), FERRET(R), FIRST DEFENSE(R), IDENTICATOR(R),
IDENTIDRUG(R), LIGHTNING POWDER(R), MONADNOCK(R), NIK(R), PROTECH(TM), QUIKSTEP
LADDERS(TM), PORTAL LADDERS(TM), QUIKSHIELD(TM), SAFARILAND(R), SPEEDFEED(R),
and 911EP(R) and DESIGN(TM). We sell our products through a 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.
10
Mobile Security. Our Mobile Security Division manufactures and installs
ballistic and blast protected armoring systems for privately owned vehicles.
Under the brand name O'GARA-HESS & EISENHARDT ARMORING COMPANY(R), we armor a
variety of privately owned commercial vehicles, including limousines, sedans,
sport utility vehicles, commercial trucks and cash-in-transit vehicles, to
protect against varying degrees of ballistic and blast threats. Our customers in
this business include international corporations and high net worth individuals.
Under the brand name O'Gara-Hess & Eisenhardt, we are the sole-source provider
to the U.S. military of the armor and blast protection systems for M1114
Up-Armored High Mobility Multi-Purpose Wheeled Vehicles (HMMWVs). We are also
under contract with the U.S. Army to provide spare parts, logistics and ongoing
field support services for the currently installed base of approximately 4,415
Up-Armored HMMWVs. Additionally, we provide blast and ballistic protection kits
for the standard HMMWVs, which are installed on existing equipment in the field.
Our Mobile Security Division is also 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 and
U.S. Marine Corps from developmental to a low rate of initial production,
deliveries of which commenced in 2003. We also supply armor sub-systems for
other tactical wheeled vehicles. In addition, we supply ballistic and blast
protected armoring systems to U.S. federal law enforcement and intelligence
agencies and foreign heads of state.
Simula. Simula, a wholly-owned indirect subsidiary of Armor Holdings, supplies
human safety and survival systems to the U.S. military, and major aerospace and
defense prime contractors. Our core markets are military aviation safety,
military personnel safety, and land and marine safety. Through Simula, we
provide military helicopter seating systems, helicopter cockpit airbag systems,
aircraft and land vehicle armor kits, body armor and other protective equipment
for military personnel, emergency bailout parachutes and survival ensembles worn
by military aircrew. The primary customers for our products are the U.S. Army,
U.S. Marine Corps, Boeing, and Sikorsky Aircraft. Most of Simula's aviation
safety products are provided on a sole source basis. The U.S. armed forces have
adopted ceramic body armor as a key element of the protective ensemble worn by
our troops in Iraq and Afghanistan. Simula was the developer of this specialized
product called small arms protective insert (SAPI), and is the largest supplier
to U.S. forces. Simula was acquired by Armor Holdings on December 9, 2003, and
results have been included herein since the acquisition date.
MATERIAL DEVELOPMENTS
Sale of Services Division
On November 26, 2003, we announced that we completed the sale of ArmorGroup, our
security service division, for $33,660,000 in total consideration to a group of
private investors led by Granville Baird Partners of London, England and
Management. We received $31,360,000 in cash at closing and are scheduled to
receive another $2,300,000 by the end of 2004, of which we have received
$375,000 through March 6, 2004.
Simula, Inc. Acquisition
On December 9, 2003, we completed our acquisition of Simula, an Arizona
corporation, pursuant to the Agreement and Plan of Merger, dated as of August
29, 2003, by and among Armor Holdings, AHI Bulletproof Acquisition Corp., a
wholly-owned subsidiary of Armor Holdings, and Simula. The consummation of the
merger followed the Special Meeting of Shareholders of Simula held on December
5, 2003, at which the requisite shareholder approval was obtained. In the
merger, we acquired all of the outstanding common stock of Simula and retired a
majority of Simula's outstanding indebtedness for $110.5 million in cash. Of
this amount, approximately $31 million principal amount of 8% debentures
remained outstanding for approximately 30 days at which time we repaid these
debentures, plus accrued interest, in their entirety. After payment of 100% of
the outstanding indebtedness and transaction expenses, the merger consideration
payable to Simula shareholders at closing pursuant to the merger agreement was
approximately $43.5 million or approximately $3.21 per share. The source of the
funds used in the acquisition was our working capital, which was derived from
proceeds received from our private placement of $150 million aggregate principal
amount of 8 1/4% Senior Subordinated Notes due 2013.
Hatch Imports, Inc. Acquisition
On December 16, 2003, we acquired all of the issued and outstanding common stock
of Hatch Imports, Inc. for $8.0 million dollars in cash and $2.0 million in
deferred consideration payable in April 2005, subject to adjustments. Hatch
designs, imports and distributes a variety of specialty gloves and accessories,
including goggles, hoods, riot gear and bags for law enforcement, military,
corrections, medical, safety and other markets.
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Zylon(R) Investigation
Second Chance Body Armor, Inc., a body armor manufacturer and competitor to
Armor Holdings, has notified its customers of a potential safety issue with its
Ultima(R) and Ultimax(R) models. Second Chance Body Armor has claimed that
Zylon(R) fiber, which is made by Toyobo, a Japanese corporation, and used in the
ballistic fabric construction of those two models, degraded more rapidly than
originally anticipated. Second Chance Body Armor has also stated that the
Zylon(R) degradation problem affects the entire body armor industry, not just
its products. Both private claimants and State Attorneys General have already
commenced legal action against Second Chance Body Armor based upon its Ultima(R)
and Ultimax(R) model vests. Second Chance Body Armor licenses from Simula a
certain patented technology which is used in some of the body armor it
manufactures, but to our knowledge, no lawsuit has yet been brought against
Second Chance Body Armor based upon this licensed technology, although a letter
was received by Simula from an attorney representing a police officer who was
injured while wearing a Second Chance Body Armor vest alleging potential
liability against Simula.
We use Zylon(R) fiber in a number of concealable body armor models for law
enforcement, but our design and construction are different. We have been testing
our Zylon(R)-based vests since their 2000 introduction and to date these tests
of our Zylon(R)-based vests show no unanticipated degradation in ballistic
performance. In addition, to our knowledge, no other body armor manufacturer has
reported or experienced similar problems as those cited by Second Chance Body
Armor. Finally, the National Institute of Justice tests and certifies each of
our body armor designs before we begin to produce or sell any particular model.
Following the Second Chance Body Armor assertions, several key law enforcement
associations have raised the issue to the U.S. Department of Justice and
Attorney General's Office. The U.S. Attorney General has asked the U.S.
Department of Justice to investigate the concerns and produce information to
clarify the issues. We support the Attorney General's directive and the
investigation.
As Simula has licensed a soft body armor technology to Second Chance Body Armor,
it may be impacted by the pending suits filed against Second Chance Body Armor
and the on-going investigation being conducted by the U.S. Department of
Justice. However, the licensed technology is not specifically related to use of
Zylon(R) fiber in Second Chance Body Armor vests.
The National Institute of Justice (NIJ) is engaged in an ongoing inquiry and
investigation of bullet-resistant vests and the protocol for testing used vests,
as well as the reliability of Zylon and other fibers. We have consulted with and
cooperated fully with the NIJ in this endeavor. To date, the NIJ has embarked
only in its first phase of testing, which entails vests that have been heavily
worn or exposed to adverse conditions, and which involves the ballistic standard
applicable to new vests. Although some of the vests tested, including ours,
experienced some level of penetration, the NIJ specifically warned against the
misuse and misinterpretation of these results, emphasizing that the data
produced so far is preliminary in nature, applies to a very small sample size
and therefore it is not possible to draw any statistically-based conclusions
from these results. The NIJ will continue to conduct further testing and analyze
these issues in order to determine if any conclusions can be reached as to the
performance and reliability of aged vests. We have requested the NIJ to provide
us with its testing data, and we intend to evaluate and review the NIJ results
in our continuing effort to assist the NIJ in developing uniform standards for
certification of new vests and the testing of used vests. The NIJ continues to
encourage law enforcement officers to wear body armor, in light of the fact that
"the lives of more than 2,700 law enforcement officers have been saved by the
use of bullet-resistant body armor over the past 30 years."
INDUSTRY OVERVIEW
We participate in the domestic and international markets for military and
commercial security products and armoring systems. Our Products Division
manufactures security equipment used by military, law enforcement, security and
corrections personnel, and other first responders (e.g., fire and rescue
personnel). Our Mobile Security Division provides armoring systems and mobile
security systems used by militaries, government agencies, law enforcement
personnel, corporations and private individuals. Increasingly, governments,
militaries, businesses, and individuals have recognized the need for security
products to protect them from the risks of terrorism, physical attacks and
threats of violence. Simula is a provider of military helicopter seating
systems, aircraft and land vehicle armor systems, protective equipment for
military personnel, and other technologies used to protect humans in a variety
of life-threatening or catastrophic situations.
The U.S. government has placed a high priority on fighting terrorism overseas
and securing the homeland from future terrorist attacks. This effort has led
many institutions within the government and private sector to redefine their
strategies to protect against, respond to, and combat terrorism. The creation of
the Department of Homeland Security is one significant step in a reformed and
reorganized effort to make our homeland more secure and better able to respond
in the event of an attack. The Bush Administration's fiscal 2004 budget request
includes $41.3 billion for homeland security spending. While it is impossible to
quantify the effects that spending by the U.S. government on homeland security
will have on our businesses, we expect to benefit to the extent that spending is
allocated to increase the number of law enforcement personnel, to purchase
security equipment and consumables used in equipping and training these
personnel, and the armoring of vehicles.
Law Enforcement Security Products Market. According to the most recent data
available from the Department of Justice, direct expenditures for police
protection services in the United States grew at a compound annual growth rate
of 7.3% from 1984 through 1999, to a total of $65.4 billion in 1999. We
currently believe that this growth rate will continue, as will the growth in the
number of police officers and other first responders in the United States. The
Bush Administration estimates that there are more than 1.9 million first
responders in the United States, categorized as follows:
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o Over 17,000 state and local law enforcement agencies employing more
than 700,000 full-time sworn law enforcement personnel.
o 69 federal law enforcement agencies employing more than 88,000 persons.
o Over 1 million firefighters, of which approximately 750,000 are
volunteers
o Over 155,000 nationally registered emergency medical technicians.
Vehicle Armor Market. Recent conflicts, military actions, and protracted
involvement in peacekeeping missions around the globe have increased the demand
for rapidly deployable and highly mobile armored vehicles. The Up-Armored HMMWV
has proven its ability to survive front-line combat action in Bosnia, Kosovo,
Afghanistan, and Iraq. The Government Electronics and Information Technology
Association, a defense budget forecasting service, estimates that between 2003
and 2007, over $2.2 billion will be spent by the U.S. military for HMMWV
procurement and research and development efforts. The continuing terrorist
attacks on U.S. forces deployed in Iraq and Afghanistan have created significant
interest in providing armor protection for the full range of light, medium and
heavy vehicles. Congressional testimony provided by the U.S. Army leadership has
indicated a desire to procure armor kits for these vehicles that can be
installed on the vehicle at its deployed location. Foreign governments and
militaries are also investing in armored vehicle technology, including the
Up-Armored HMMWV, and other armored vehicle alternatives. In addition, we
believe that the use of lightly armored commercial vehicles in countries with
high levels of crime, terrorism and violence ("high fright areas") around the
world will continue to increase as corporations, foreign governments and wealthy
individuals re-evaluate their personnel protection policies and procedures.
Military Personnel Body Armor Market. A revolution is taking place in the type
and extent to which U.S. forces are being provided protective body armor. In
1998, the Army and Marines adopted a new body armor ensemble called Interceptor.
This ensemble is made up of a soft armor vest for fragmentation protection
(using similar materials and design concepts to law enforcement vests) and hard,
ceramic body armor plates inserted into the soft vest to provide rifle
protection over vital organs. The concept was first deployed in a combat zone in
Afghanistan with tremendous success measured in the reduction of
life-threatening chest wounds. During the invasion of Iraq, front line U.S.
forces were widely equipped with the Interceptor system. The use of the
Interceptor system was extended to cover all deployed troops in the combat zone
by order of the Secretary of the Army in mid-2003. Extensive procurement actions
by the Army and Marines are underway to outfit all active, Reserve and National
Guard troops that could be deployed around the world. The market is substantial
and is straining the capacity of the industry to support the need. The product
has a life cycle in use and we expect there will be a sizable ongoing
replacement market in the future. Worldwide military demand for similar body
armor ensembles is in its early stages and offers promise for substantial future
business.
Military Aviation Safety Market. The military aviation safety market is
comprised of three distinct market segments: crash safety, ballistic
survivability, and personnel safety equipment. The primary market for crash
safety is in military helicopters. The marketplace for these features is a
subset of the military helicopter market. The products include crashworthy
seats, airbags, landing gear, fuel systems, and structures. Demand for these
products is currently flat, although there is an expected upturn in the market
over the next 10 years for upgrades to aircraft such as the U.S. Army's UH-60M
Black Hawk and for replacement of a wide range of U.S. military helicopters that
have been damaged in combat operations. The ballistic survivability market is
both for helicopters and fixed wing aircraft. Many front line aircraft have some
basic armor protection. There is a growing interest in new protective solutions
that can offer more complete ballistic protection within the limited available
weight on an aircraft. Foreign markets for crash safety and ballistic
survivability products are similar in size to the U.S. market, although the
types of aircraft and customer base are more fragmented. The personnel safety
market for aviators and passengers of aircraft include equipment such as: body
armor, uniforms and helmets, survival vests and survival equipment, inflatable
life preservers, parachutes, and emergency oxygen. The market is experiencing
some growth as new ensembles incorporating lessons learned from combat are
introduced and replacement equipment is increased due to the increased pace of
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.
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BUSINESS STRENGTHS
We believe that the following strengths are critical to our success as a leading
provider of specialized security products, training and support services, human
safety and survival systems, and vehicle armor systems.
Valuable Brands with Leading Market Positions. Our products and brands are well
established and have developed a reputation for high quality and dependability.
Due to the life-protecting nature of many of our products, customers prefer
premium, well-recognized brands with quality reputations. We believe that our
strong brand recognition attracts customer loyalty and repeat customer business
and helps us establish leading market share positions in many of our product
offerings.
Broad Portfolio of Products. Our broad product portfolio and our ability to
offer that portfolio in both domestic and overseas markets result in a balanced
revenue mix. Our broad array of security products and armor systems allows us to
be a single-source provider of comprehensive solutions for our customers'
security needs. Cross selling among our products creates additional business
opportunities and increases the value of our client relationships. We believe
that our acquisition of Simula will increase our access to superior technology
and know-how and will enhance our efforts to develop new products.
Extensive Distribution Network. We market and deliver our products through an
extensive network of approximately 200 domestic distributors, 150 international
distributors and through a sales force of 34 representatives and specialists. We
believe that we have one of the largest distribution networks of security
products, which provides a foundation for our continued growth and expansion.
The diversity of the markets we serve and the strength of our distribution
relationships reduces our dependence on any particular product, market, or
customer.
Long-Term Relationships with Government and Military Customers. We derive the
majority of our sales from domestic and foreign law enforcement, government and
military customers. Over many years, we have developed strong relationships with
military, law enforcement, security and corrections customers both in the United
States and overseas. We believe that our solid reputation and longstanding
relationships with customers support our continued growth.
Sole-Source Provider of M1114 Up-Armored HMMWVs. We are the sole-source provider
of up-armoring for new M1114 Up-Armored HMMWVs procured by the U.S. military.
Since August 2001, we have furnished the up-armoring for approximately 1,100
M1114 Up-Armored HMMWVs to the U.S. military. We are also currently under
contract to provide spare parts, logistics and ongoing field support services
for the U.S. military's M1114 Up-Armored HMMWV fleet. In addition, we have begun
providing up-armoring of M1114 HMMWVs to a number of foreign military customers
including Canada, Egypt and Israel.
Extensive Portfolio of Armor Kits for Military Trucks. The two predominate
developers and manufacturers of mine blast and ballistic protection kits for
military trucks over the last 10 years have been O'Gara-Hess & Eisenhardt and
Simula. The acquisition of Simula brings these two organizations together as
well as provides a very complete portfolio of kit designs for light, medium and
heavy trucks used by the U.S. military and foreign militaries. Although the
market has not been sizeable in the past, recent actions by the services and by
Congress indicate that substantial quantities of vehicles will be armored in the
near term and future vehicles will be designed to readily accept these kits. The
combined capabilities of O'Gara-Hess & Eisenhardt and Simula also provide the
complete capability of armor technologies from basic steel armors to
sophisticated ceramic/composite armor systems that will be used to armor the
fleet of trucks.
Industry-leading Market Position in Body Armor. Within the Armor Holdings family
of companies is contained industry leading technology, manufacturing and supply
relationships for all types of body armor. This includes soft armor vests used
in the law enforcement marketplace, as well as soft armor vests and hard armor
plates used by military forces. There are substantial technical synergies that
enable us to stay at the forefront of the market. The combined buying power for
ballistic fabrics and ceramics, which is the largest in the world, is being
utilized today to manage costs and to gain preferred supply relationships.
Sole-Source Provider of Aviation Safety Products. We are the sole supplier of
crew seats for 14 different helicopter models and other variants of these
aircraft. We have also developed and patented the Cockpit Airbag System (CABS)
that is currently being installed on two front-line helicopter platforms and has
substantial U.S. and
14
foreign market potential. Our reputation in these areas has enabled us to assume
the systems integrator role for our customer base and allows us access to a
range of new technologies.
Experienced Management Team. Our management team brings extensive knowledge of
our customers and a proven ability to effectively manage our operations. The
team has been augmented through acquisitions in the area of engineering and R&D
to provide the capability to develop a range of new products. In addition, our
management has a proven record of identifying, executing and integrating
strategic acquisitions into our business, including our two largest acquisitions
to date: Simula. in 2003 and the O'Gara group of companies in 2001.
GROWTH STRATEGY
We believe the demand for security products, vehicle armor systems and human
safety and survival 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:
Focus on Core Competencies. Our primary strength lies in our ability to
manufacture and distribute high quality security products, vehicle armoring
systems and human safety and survival systems. We plan to leverage this core
strength by expanding our research and development efforts, developing new
products and acquiring businesses that complement our existing technical base
and manufacturing operations. We plan to continue to streamline our
manufacturing process, aggressively integrate acquisitions and pursue additional
operating efficiencies to maximize the profitability of our business.
Expand Distribution Network and Product Offerings. We plan to leverage our
distribution network by expanding our range of branded law enforcement equipment
through the acquisition of security products manufacturers and by investing in
the development of new and enhanced products that complement our existing
offerings. We believe that a broader product line will further strengthen our
relationships with distributors and enhance our brand appeal with military, law
enforcement and other end users.
Increase Exposure to Military Programs. As the sole-source provider of M1114
Up-Armored HMMWV for the U.S. military's HMMWVs, we believe that we are in a
strong position to capture opportunities to provide armoring of additional
vehicles for the Department of Defense. We believe the proven success of
M1114 Up-Armored HMMWVs in combat has led to increased interest in armoring
other vehicles. Examples include recent successful efforts to develop and supply
armor kits for various types of light through heavy tactical trucks and the
continued relationship with the original equipment manufacturers to explore
up-armoring opportunities for the U.S. Army's tactical vehicle fleet. We have
developed and own the proprietary technology for the M1114 Up-Armored HMMWV. We
believe that the cost and time required for the development of an alternative
protection system increases the likelihood that we will maintain our sole source
position on this program.
Capitalize on Increased Homeland Security Requirements. The creation of the
Department of Homeland Security has increased the U.S. government's focus on
strengthening the infrastructure of homeland security. Our Products Division is
well positioned to provide security equipment and materials required by
military, law enforcement, and security personnel to combat terrorism, respond
to attacks and counter homeland threats. Our Mobile Security Division is well
positioned to provide armored vehicles for federal, state and local government
agencies.
Pursue Strategic Acquisitions. Since January 1, 1999, we have completed 15
acquisitions and integrated the acquired businesses into our Products Division,
Mobile Security Division, and Simula. We will continue to seek opportunities to
make value-based acquisitions that complement our business operations or expand
our product offerings, provide access to new geographic markets and provide
additional distribution channels and new customer relationships. We have
historically taken a disciplined value-based approach to evaluating acquisition
opportunities, driven by a prudent use of our capital, rigorous due diligence
standards and a targeted expected return on our investment. No assurances can be
given that any such potential acquisitions will be consummated or, if any such
acquisition is consummated, as to the terms of such acquisition, including
price.
15
ACQUISITIONS
We pursue a strategy of growth through acquisition by acquiring businesses and
assets that complement our existing operations. We exercise a high degree of
financial discipline and strictly adhere to the following 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 have completed 15 acquisitions since January 1, 1999. The following table
sets forth information regarding each of these acquired businesses and their
respective products:
YEAR OF
BUSINESS OR ASSETS ACQUIRED ACQUISITION DIVISION PRIMARY PRODUCT CATEGORIES
--------------------------- ----------- -------- --------------------------
Safariland 1999 Products Duty Gear
Break Free 2000 Products Weapons Maintenance Products
Lightning Powder 2000 Products Forensics
Monadnock Lifetime Products 2000 Products Police Batons
Guardian Products 2001 Products Less Lethal Products
O'Gara-Hess & Eisenhardt Companies 2001 Mobile Security Commercial and Military Vehicles
Identicator 2001 Products Forensics
Speedfeed 2002 Products Firearm Accessories
Evi-Paq 2002 Products Forensics
Foldable Products Group 2002 Products Safety Products
B-Square 2002 Products Firearm Accessories
Trasco Bremen 2002 Mobile Security Commercial Vehicles
911 Emergency Products 2002 Products Warning and Emergency Lighting, Safety Products
Simula 2003 Simula Human Safety and Survival Systems
Hatch Imports 2003 Products Specialty Gloves and Accessories
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(R), Protech(TM) 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,
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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.
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 Chemical Biological Agent and Riot Control
Agent rated Mine Safety Appliance Advantage 1000 and Millennium model gas masks
to law enforcement and public safety agencies in the United States.
We hold an 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 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
DeviceTM, emits a loud bang and brilliant flash of light when used.
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.
Tactical Products; Structural Armor Systems. 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 aircraft,
automobiles and riot control vehicles.
Following the terrorist attacks of September 11, 2001, we partnered with C&D
Aerospace of California to produce armored commercial airline cockpit doors
certified by the U.S. Federal Aviation Administration (FAA). To date, we have
retrofitted approximately 8,307 cockpit doors on commercial aircraft; we expect
any future orders to be associated with new aircraft production.
We also manufacture a variety of hard armor ballistic shields primarily for use
in tactical clearance applications and ballistic resistant enclosures for use as
guard booths, shacks and towers. These shields are manufactured
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using a variety of ballistic fibers, polyethylene ballistic materials, ballistic
steel, ballistic glass or a combination 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.
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.
Forensic Products. We assemble and market portable narcotic identification kits
under the NIK(R) brand name that is 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. We have the exclusive rights to
distribute Flex-Cuf(R) disposable restraints and hold a license to use the
Flex-Cuf(R) trademark. We believe we have earned a reputation as one of the most
responsive companies in the forensic community.
We manufacture and distribute an 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, and must be
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 specialized
products for various investigative and evidence collection applications under
the brand name Evi-Paq(TM).
Batons. We manufacture batons of wood, alloy steel, acetate, aluminum and
polycarbonate products under our brand name Monadnock(R). Branded products
include our patented Auto-Lock(TM) baton and our Classic-Friction LockTM 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 and military and federal
agencies. We believe that our manufacturing specifications are among the highest
in the marketplace and set the standard in the industry.
Firearm Accessories. We manufacture non-destructive, non-gunsmith mounts as well
as synthetic stocks and for ends. Our Speedfeed high quality synthetic stocks
and for ends fit most makes and models. Our B-Square(TM) subsidiary is a leading
designer, manufacturer and marketer of quality aluminum and steel sight mount,
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 a wide variety of
climates.
Warning and Emergency Lighting; Safety Products. We manufacture emergency
lighting products using LED technology branded as 911EP(R). LED technology
offers patrol car lighting systems that are energy efficient, safe and durable
for use in primary and secondary warning lights. 911EP(R)'s unique design
utilizes the patrol vehicle's existing 12-volt electrical system and consumes
70% less energy than traditional strobe or halogen systems. We also manufacture
strong, lightweight, and compact ladders designed to be deployed quickly in
emergency situations, branded as Quikstep(TM). Constructed with aluminum alloy
and stainless steel, our 12-foot ladder weighs only 31 pounds and folds up to a
briefcase size.
We are the exclusive U.S. distributor of the Thermal-Air(TM) Mask Engineered by
Polar-Wrap. The Thermal-Air products are 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 and helps 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.
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Specialty Gloves & Protective Gear. The newly acquired Hatch is a leading
supplier of high quality gloves and other protective gear serving the law
enforcement, correctional, military, medical and industrial markets. We excel at
providing new, innovative products using proprietary materials and designs to
the law enforcement and military fields. Of note are our patented SOG
Operator(TM) Kevlar(R) and Kangaroo leather series of gloves used by tactical
personnel worldwide. The Exo-Tech(TM) disturbance control suit along with the
Centurion(TM) single piece body protection provide law enforcement unrivaled
protection for riots, prisoner extraction and civil disturbance. Duty gloves
range from those lined with cut resistant Spectra(R) to Thinsulate(R) insulated
fine leather gloves. To provide users in the field with optimum performance our
high tech tactical products incorporate materials such as Kevlar(R), Nomex(R),
Kangaroo leather, and Schoeller Dynamic Extreme(TM) textiles. In addition the
Boss(TM) line of tactical eyewear yields a goggle with a hybrid and highly
proprietary design. Hatch's Knee pads, elbow protection along with Nomex (R) and
Kevlar(R) hoods give SWAT and other officers the protection they demand.
Commercial offerings consist of the shooting, dress, industrial safety
anti-vibration, motorcycle and ergonomic gloves.
ARMOR MOBILE SECURITY
We provide ballistic and blast protection-armoring systems for military vehicles
and commercial vehicles, including the following:
Military Products. We are the sole-source provider to the U.S. military for
up-armoring of the M1114 Up-Armored HMMWV. The HMMWV chassis is produced by AM
General Corporation and shipped directly to our facility in Fairfield, Ohio,
where up-armoring components are added. The M1114 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. During 2003, the Armor
Mobile Security Division shipped 873 M1114 Up-Armored HMMWVs. We also supply
engineering design and prototype services in support of the M1114 Up-Armored
HMMWV program, and supply spare parts and logistics and ongoing field support
services. None of our contracts with the U.S. military have a minimum purchase
commitment and the U.S. military generally has the right to cancel its contracts
unilaterally, at its convenience.
We are serving as a subcontractor to Stewart & Stevenson Services which is
contracted with Lockheed Martin under a U. S. Army and U.S. Marine Corps program
to supply a ballistically armored and sealed truck cab for the HIMARS. The truck
is used to fire missiles that are a part of either the Multiple Launch Rocket
System or the Army Tactical Missile System. This program consisted of shipping
several prototypes in 2001 and 2002 for test and evaluation by the U.S. Army and
U.S. Marine Corps, and has been transitioned to a low rate initial production in
2003.
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.
These specialized armoring products 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 a 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 Mobile Security
Division shipped 1,127 commercial armored vehicles in 2003.
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. Fully armored vehicles typically sell for $70,000
to $250,000, exclusive of the cost of the base vehicle.
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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. 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.
SIMULA
We are a provider of military helicopter seating systems, aircraft and land
vehicle armor systems, protective equipment for military personnel, and other
technologies used to protect humans in a variety of life-threatening or
catastrophic situations.
Our products are deployed on a wide range of high-profile military platforms
such as the AH-64 Apache and the UH-60 Black Hawk helicopters, the C-17
Globemaster III Transport Aircraft, the M1117 Guardian Armored Security Vehicle,
various versions of the HMMWV, and body-worn equipment for personal protection
of the United States Army, Marine Corps, and Air Force Special Operations
Forces. Primary Aerospace and Defense customers include Boeing, Sikorsky, Bell
Helicopter, Oshkosh Truck, General Motors, the U.S. military services, and the
U.S. Coast Guard.
Aviation Safety Systems. Our core capabilities and technologies in the aircraft
safety market include protective seating, inflatable restraints, and armor.
We have been a major supplier of crash-resistant, energy-absorbing seating
systems for military helicopters and other military aircraft to various branches
of the United States military and its prime defense contractors, and foreign
customers for over 25 years. We currently supply approximately 75% of the new
and replacement crew seating systems for U.S. military helicopters. The seating
systems focus on reducing injury and increasing survivability in aircraft
crashes. Many of our seating systems incorporate our advanced armor systems. We
are the sole supplier of crew seats for 14 different helicopter models and other
variants of these aircraft. Military helicopters for which we have designed and
manufactured crew seat assemblies include the AH-64 Apache attack helicopter,
UH-60 Black Hawk utility helicopter, SH-60 Sea Hawk ASW helicopter, ASW and
Transport helicopters, Italy's EH101 MMI ASW and Transport helicopters, Canada's
CH-149 Cormorant Search-and-Rescue helicopter, and Norway's Sea King Multi-role
helicopter. Aircraft manufacturers in our customer base include Boeing
Helicopters, Sikorsky Aircraft Corporation, Bell Helicopter, Textron, Inc.,
Kaman Aerospace, Kawasaki Heavy Industries, Mitsubishi Heavy Industries,
Hindustan Aeronautics, and Agusta Westland. We also supply crew seats directly
to various agencies of the U.S. Department of Defense and various foreign
militaries
Our expertise in military seating systems also extends to troop seats for both
helicopters and fixed-wing aircraft. Simula is the sole-source provider of troop
seats for the C-17 Globemaster transport aircraft. We were selected as the sole
supplier by the U.S. Air Force to develop a common wall-mounted troop seat for
its C-130, C-141, and KC-135 aircraft. The common troop seat also has
application to a range of transport helicopters and various fixed-wing aircraft
flown by other U.S. services and foreign militaries.
Our expertise in helicopter crash safety led to the development of cockpit
airbag systems ("CABS") with U.S.
20
Army funding over the last five years. Our role has evolved into the position as
a system integrator incorporating airbags, gas generators, and complex
three-dimensional crash sensors into helicopter cockpits. In 2001, we were
awarded the first ever production contracts for aircraft airbag systems. These
are currently being produced for the U.S. Army's UH-60 Black Hawk and OH-58
Kiowa Warrior helicopters. We received one production contract in 2002 and two
production contracts in 2003, which represents less than 5 percent of the
potential world market for CABS. Thus we believe there is substantial growth
potential in this business area.
Ground Vehicles. Our expertise in military vehicle safety systems focuses on
two areas: armor kits for the tactical vehicles, and ballistic armor systems
for combat vehicles.
Our experience in high-performance, lightweight armor for aircraft has enabled
us to build a business around armoring thin-skinned vehicles for priority
missions during peacekeeping operations. Work in this area includes ballistic
and mine-blast kits for HMMWVs, 5-ton trucks, and large off-road trucks such as
the Heavy Expanded Mobility Tactical Truck (HEMTT). We have responded to urgent
armor requirements in most major conflicts involving U.S. peacekeepers in the
last 10 years. We are currently under contract to supply armor kits for HMMWVs
and for four heavy transport trucks. Our customers for these kits are
predominately the U.S. Army and Marine Corps.
Our ground vehicle armor business also includes production armor kits for the
M1117 Guardian Armored Security Vehicle for the U.S. Army. This small armored
personnel carrier is used by military police in a peacekeeping role. The armor
kits consist of an array of ceramic composite armor panels that form the armor
system with the vehicle hull and internal composite spall liner. We have
completed more than 75 kits, which represents all ASVs produced to date. Simula
has also provided similar ceramic composite armor kits for the U.S. Army's first
Stryker vehicle deployments.
Military Personnel Safety Systems. Our core competencies and technologies in
personnel safety include ballistic body armor, emergency bailout parachutes,
flotation collars, survival vests, and integrated ensembles incorporating
multiple capabilities.
Simula Inc.'s body armor business includes a range of hard armor plates used in
conjunction with soft vests to minimize injury from handgun bullets, rifle
bullets and fragments from explosive warheads. The primary product in the
product line is the small arms protective insert (SAPI) plate, developed by
Simula in 1998 and which has now become the standard product for all U.S. Army
and Marine Corps ground troops. Simula is the largest producer of SAPI plates in
the world. SAPI plates of similar design are also produced by Protech in the
Armor Holdings Products Division. The combined production of Simula and Protech
represents more than 40 percent of the U.S. military market share for these
products. More than 275,000 SAPI plates have been produced to date.
We have applied our technologies and overall knowledge of materials and
structures to develop a parachute system that solves numerous functional
problems attendant to traditional military bailout parachutes. Our Thin-Pack
Parachute (TPP) incorporates patented environmental sealing technology, which
reduces repackaging and maintenance costs, and extends the service life of the
parachute without jeopardizing user safety. To date, we have supplied over 5,000
TPPs to the U.S. Navy.
We have also developed a line of flotation collars that are designed to provide
additional buoyancy for a person that enters water in an emergency. The basic
configuration of the product, called the Low Profile Flotation Collar, can fit a
wide range of applications. For example, aviators that eject or bailout can use
it over water and rescue swimmers, divers and naval personnel can utilize it as
well. In addition, it can be worn with a wide range of other equipment and
clothing for ground troops being ferried over water and also by commercial
personnel who work around water. The U.S. Navy, U.S. Marine Corps, and the U.S.
Air Fore have adopted our system. To date, we have supplied over 20,000 collars.
We have seen a trend among our customers to integrate various armor, survival
and flotation technologies in a common vest ensemble. We were selected to
develop the U.S. Army's new Air Warrior ensemble and the product will begin
sales in 2004. The Army has a stated need for 9,300 over systems. The Air
Warrior ensemble may also be adopted by other services.
Technology Development and Licensing. An important part of our business is a
growing portfolio of licensed technologies. Our principal licenses include soft
armor and a patented family of transparent polymers. We currently license our
patented SimuLITE(TM) material technology to Second Chance Body Armor, for use
in concealable personal body armor used by police forces.
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Simula has developed a number of advanced transparent polymers, trademarked as
CleargardTM, and has introduced these materials to a variety of customers in
numerous markets. These patented and proprietary transparent plastics are
high-strength, impact resistant, lightweight and dye compatible materials, which
possess the ability to withstand extreme temperatures and chemical attack.
Potential uses for such materials include transparent armor, laser protective
devices, aircraft canopies, high performance windows for aircraft and
automobiles, industrial and protective lenses and visors, medical products and
sun, sport and ophthalmic lenses. We have taken steps to commercialize the
transparent polymer material through our own products and through licenses in
other markets. We have licensed our optical polymer for use in ophthalmic lenses
with PPG Industries, Inc. and for sun and sport lenses and motorcycle helmets
with Intercast Europe. PPG introduced Simula's polymer in 2001 under the
tradename of TrivexTM. Intercast introduced a product trade named NXT(TM) to the
sunglass market in early 2002. In 2002, we completed a license with the prime
contractor for the Joint Services General Purpose Gas Mask (JSGPM) to develop a
Cleargard lens with chemical agent resistance and ballistic properties.
CUSTOMERS
Products Division. In 2003, we sold approximately 86.5% 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 25 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.
Mobile Security Division. In 2003, we sold approximately 60.6% 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, although smaller quantities are also sold overseas. We also
serve as a subcontractor to provide ballistically armored and sealed truck cabs
for HIMARS for use by the U.S. Army and the U.S. Marine Corps, a program
recently transitioned to low rate initial production.
Our armored commercial vehicle customers include governmental and private
buyers. U.S. and foreign governmental buyers who purchase both fully and
light-armored vehicles. Governmental buyers and foreign royalty 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 tend to
be more price-sensitive and will often purchase locally manufactured vehicles to
reduce taxes and avoid import duties. Local servicing of the vehicle is also a
critical concern to private buyers. Customers for cash-in-transit vehicles are
generally companies that 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 whether the
financial institution is private or governmental.
Simula. In 2003, Simula sold more than 95% of its products in North America,
with the balance sold internationally. Sales of our products to all branches of
the United States military and its prime contractors such as Boeing and Sikorsky
Aircraft represented approximately 87% of our revenue. Our businesses have
relied to a great extent on relatively few major customers, although 2003 saw
the development of additional major users of our products within our existing
customer base (e.g. other users within the U.S. Army). We believe that
historical customers, such as the U.S. Army and other branches of the United
States military, to whom we have supplied products for approximately 25 years,
will continue to be major customers. Current commercial and licensing customers
include Boeing, Bell Helicopter Textron, Second Chance Body Armor, PPG
Industries, Intercast Europe, and Avon Rubber Company. The loss of or
significant reduction in sales to a major customer could potentially harm our
business, operations and financial condition.
Approximately 38.3% of our revenues were from our ten largest customers for the
year ended December 31, 2003 ("Fiscal 2003"). Approximately 21.0% of our
revenues came from U.S. military contracts. The Products Division's ten largest
customers accounted for approximately 28.4% of total Products revenues for
Fiscal 2003. The Mobile Security Division's ten largest customers accounted for
approximately 59.5% of total Mobile Security
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Division's revenues for Fiscal 2003. Approximately 46.0% of the Mobile Security
Division's revenues for Fiscal 2003 were derived from U.S. military contracts,
and an additional 12.7% 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 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. Simula's ten largest customers accounted for approximately
98.6% of total revenues for Fiscal 2003.
MARKETING AND DISTRIBUTION
Products Division. 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 an
international provider of many of the premier security risk management products
that our customers require. By positioning ourselves in this manner, we expect
to capitalize on our existing customer base and our extensive global
distribution network, and to maximize the benefits of our long history of
supplying security related products around the world.
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. 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 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, accessing new customers and penetrating new geographic
markets. We also sell a selected number of civilian products into mass
merchandise 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 also sell our products
on the World Wide Web through a variety of sites. GSA-Buy.com contains an
on-line catalog and secured transaction platform for all Products Division
General Services Administration contracts targeting government agencies
exclusively. 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.
Mobile Security Division. On a worldwide basis, the Mobile Security Division
employs approximately 40 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.
The Mobile Security Division has positioned itself in the marketplace as a
commercial company with a military production capability. As such, the 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 Mobile Security
Division places strong emphasis on its superior antitank and
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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 prime contractors
in connection with the Up-Armored HMMWV and up-armoring for HIMARS and Family of
Medium Tactical Vehicles (FMTV) for sales in domestic and international military
and commercial areas. Such agreements allow us to benefit from the prime
contractor's marketing 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 prime contractors.
International sales are made through the Department of Defense's 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.
Simula Most of Simula's products are distributed as a component supplier to
original equipment manufacturers (OEMs) or as a direct contractor to the U.S.
Government. The products are built to order. We do not directly serve mass
consumer markets and supply directly from manufacturing facilities. Thus, the
distribution of Simula's products does not invo