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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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FORM 10-Q
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(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004, or
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NUMBER 0-18863
ARMOR HOLDINGS, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 59-3392443
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1400 MARSH LANDING PARKWAY, SUITE 112
JACKSONVILLE, FLORIDA 32250
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (904) 741-5400
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
The number of shares outstanding of the registrant's Common Stock as of July 16,
2004 is 32,758,987.
1
ARMOR HOLDINGS, INC.
FORM 10-Q
INDEX
Page
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS................................. 3
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS........ 34
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK.................................... 56
ITEM 4. CONTROLS AND PROCEDURES.............................. 58
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.................................... 59
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS.............................................. 64
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K..................... 65
SIGNATURES 66
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements
of Armor Holdings, Inc. and its wholly-owned subsidiaries include all
adjustments (consisting only of normal recurring accruals and the elimination of
all material intercompany accounts and transactions) which management considers
necessary for a fair presentation of operating results and financial position as
of June 30, 2004 and for the three-month and six-months periods ended June 30,
2004 and June 30, 2003.
These unaudited condensed consolidated financial statements should be
read in conjunction with the financial statements included in our Annual Report
on Form 10-K/A for the fiscal year ended December 31, 2003.
3
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
JUNE 30, 2004 DECEMBER 31, 2003
(UNAUDITED) *
------------- -----------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $229,083 $111,850
Restricted cash -- 2,600
Accounts receivable (net of allowance for
doubtful accounts of $2,358 and $1,673) 110,821 72,635
Costs and earned gross profit in excess of billings 834 --
Inventories 112,523 80,527
Prepaid expenses and other current assets 27,198 22,032
Current assets of discontinued operations (Note 2) 1,096 753
-------- --------
Total current assets 481,555 290,397
PROPERTY AND EQUIPMENT (net of
accumulated depreciation of $22,562 and
$19,046) 59,780 57,576
GOODWILL (net of accumulated amortization
of $4,024 and $4,024) 176,169 175,707
PATENTS, LICENSES AND TRADEMARKS
(net of accumulated amortization of $4,575 and $2,627) 45,127 44,174
OTHER ASSETS 12,811 16,169
LONG-TERM ASSETS OF DISCONTINUED OPERATIONS (Note 2) 458 1,603
-------- --------
TOTAL ASSETS $775,900 $585,626
======== ========
* Condensed from audited financial statements.
See notes to condensed consolidated financial statements.
4
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS - CONTINUED
(IN THOUSANDS, EXCEPT FOR SHARE DATA)
JUNE 30, 2004 DECEMBER 31, 2003
(UNAUDITED) *
------------- -----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 717 $ 32,107
Short-term debt 1,274 498
Accounts payable 49,701 30,304
Accrued expenses and other current liabilities 62,537 58,218
Income taxes payable 12,741 --
Current liabilities of discontinued operations (Note 2) 554 626
--------- ---------
Total current liabilities 127,524 121,753
LONG-TERM LIABILITIES:
Long-term debt, less current portion 151,542 158,300
Other long-term liabilities 4,619 10,208
--------- ---------
Total liabilities 283,685 290,261
COMMITMENTS AND CONTINGENCIES
(NOTE 11)
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 5,000,000 shares
authorized; no shares issued and outstanding -- --
Common stock, $.01 par value; 75,000,000 and
50,000,000 shares authorized; 38,815,098 and
34,337,034 issued and 32,754,876 and
28,267,812 outstanding at June 30, 2004
and December 31, 2003, respectively 389 344
Additional paid-in capital 485,512 318,460
Retained earnings 75,253 44,942
Accumulated other comprehensive income 3,378 3,936
Treasury stock (72,317) (72,317)
--------- ---------
Total stockholders' equity 492,215 295,365
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 775,900 $ 585,626
========= =========
* Condensed from audited financial statements.
See notes to condensed consolidated financial statements.
5
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2004 JUNE 30, 2003 JUNE 30, 2004 JUNE 30, 2003
------------- ------------- ------------- -------------
REVENUES:
Aerospace & Defense $ 129,773 $ 15,793 $ 210,781 $ 31,703
Products 65,743 49,347 119,583 93,354
Mobile Security 28,188 16,519 54,968 37,076
--------- --------- --------- ---------
Total Revenues 223,704 81,659 385,332 162,133
--------- --------- --------- ---------
COSTS AND EXPENSES:
Cost of sales 157,246 57,281 271,314 114,443
Operating expenses 23,386 14,524 46,637 28,528
Amortization 973 69 1,953 129
Integration and other charges 8,123 3,775 8,804 4,197
--------- --------- --------- ---------
OPERATING INCOME 33,976 6,010 56,624 14,836
Interest expense, net 2,057 437 3,785 816
Other (income) expense, net (390) 16 (275) 85
--------- --------- --------- ---------
INCOME FROM CONTINUING OPERATIONS BEFORE
PROVISION FOR INCOME TAXES 32,309 5,557 53,114 13,935
PROVISION FOR INCOME TAXES 14,588 2,079 22,765 5,212
--------- --------- --------- ---------
INCOME FROM CONTINUING OPERATIONS 17,721 3,478 30,349 8,723
DISCONTINUED OPERATIONS (NOTE 2):
INCOME (LOSS) FROM DISCONTINUED OPERATIONS, NET
OF TAX 100 1,135 (38) 977
--------- --------- --------- ---------
NET INCOME $ 17,821 $ 4,613 $ 30,311 $ 9,700
========= ========= ========= =========
NET INCOME PER COMMON SHARE - BASIC
INCOME FROM CONTINUING OPERATIONS $ 0.60 $ 0.13 $ 1.04 $ 0.31
INCOME FROM DISCONTINUED OPERATIONS 0.00 0.04 0.00 0.03
--------- --------- --------- ---------
BASIC EARNINGS PER SHARE $ 0.60 $ 0.17 $ 1.04 $ 0.34
========= ========= ========= =========
See notes to condensed consolidated financial statements.
6
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - CONTINUED (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2004 JUNE 30, 2003 JUNE 30, 2004 JUNE 30, 2003
------------- ------------- ------------- -------------
NET INCOME PER COMMON SHARE - DILUTED
INCOME FROM CONTINUING OPERATIONS $ 0.57 $ 0.13 $ 0.99 $ 0.31
INCOME FROM DISCONTINUED OPERATIONS 0.00 0.04 0.00 0.03
---------- ---------- ---------- ----------
DILUTED EARNINGS PER SHARE $ 0.57 $ 0.17 $ 0.99 $ 0.34
========== ========== ========== ==========
WEIGHTED AVERAGE SHARES - BASIC 29,670 27,555 29,236 28,255
========== ========== ========== ==========
WEIGHTED AVERAGE SHARES - DILUTED 31,008 27,836 30,469 28,511
========== ========== ========== ==========
See notes to condensed consolidated financial statements.
7
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
SIX MONTHS ENDED
--------------------------------
JUNE 30, 2004 JUNE 30, 2003
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Income from continuing operations $ 30,349 $ 8,723
Adjustments to reconcile income from continuing operations to cash provided
by operating activities:
Depreciation and amortization 6,603 3,468
Loss on disposal of fixed assets 115 39
Deferred income taxes (197) 1,713
Non-cash charge for acceleration of performance-based
restricted stock awards 5,913 --
Non-cash impairment charge 1,408 --
Non-cash termination charge -- 2,093
Changes in operating assets and liabilities, net of acquisitions:
(Increase) in accounts receivable (38,772) (753)
(Increase) decrease in inventories (31,997) 1,332
(Increase) in prepaid expenses and other assets (8,881) (4,170)
Increase in accounts payable, accrued expenses
and other current liabilities 27,649 3,971
Increase (decrease) in income taxes payable 17,475 (3,648)
--------- ---------
Net cash provided by operating activities 9,665 12,768
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (7,104) (3,918)
Purchase of patents and trademarks (77) (38)
Purchase of equity investment (5,275) --
Proceeds from sale of equity investment 5,823 --
Collection of note receivable 375 --
Decrease in restricted cash 2,600 --
Additional consideration for purchased businesses (1,855) (243)
Purchase of business, net of cash acquired (2,729) --
--------- ---------
Net cash used in investing activities (8,242) (4,199)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the exercise of stock options 8,310 136
Proceeds from the issuance of common stock 142,500 --
Cash paid for common stock offering costs (1,057) --
Repurchases of treasury stock -- (22,684)
Repayments of long-term debt (34,052) (362)
Borrowings under lines of credit 8,885 30,205
Repayments under lines of credit (8,122) (15,009)
--------- ---------
Net cash provided by (used in) financing activities 116,464 (7,714)
--------- ---------
Effect of exchange rate changes on cash and cash equivalents 63 467
Net cash used in discontinued operations (717) (3,394)
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 117,233 (2,072)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 111,850 12,913
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 229,083 $ 10,841
========= =========
CASH AND CASH EQUIVALENTS, END OF PERIOD
CONTINUING OPERATIONS $ 229,083 $ 10,841
DISCONTINUED OPERATIONS 157 1,916
--------- ---------
$ 229,240 $ 12,757
========= =========
See notes to condensed consolidated financial statements.
8
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
of Armor Holdings, Inc. and its wholly-owned subsidiaries (the "Company", "we",
"our", "us") have been prepared in accordance with generally accepted accounting
principles for interim information and the instructions to Form 10-Q and Rule
10-01 of Regulation S-X, and do not include all the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting only of
normal recurring accruals and the elimination of all material intercompany
accounts and transactions) considered necessary by management to present a fair
presentation have been included. The results of operations for the three month
and six month period is not necessarily indicative of the results to be expected
for the full year and should be read in conjunction with the consolidated
financial statements and notes thereto included in our Annual Report on Form
10-K/A for the year ended December 31, 2003. The amounts disclosed in the
footnotes are related to continuing operations unless otherwise indicated.
Effective in the first quarter 2004, we instituted a new segment
reporting format to include three reportable business segments: Aerospace &
Defense Group, the Products Division ("Armor Holdings Products"), and the Mobile
Security Division ("Armor Mobile Security"). The Aerospace & Defense Group was
formed upon the completion of our acquisition of Simula, Inc. on December 9,
2003, and results have been included since the acquisition date. The Aerospace &
Defense Group also includes the military business, including armor and blast
protection systems for M1114 Up-Armored High Mobility Multi-Purpose Wheeled
Vehicles ("HMMWVs"), and other military vehicle armor programs, which previously
were included in the Mobile Security Division. The Aerospace & Defense Group
also includes the small arms protective insert ("SAPI") plate produced by our
Protech subsidiary in Pittsfield, Massachusetts, which was previously reported
as part of the Products Division. The historical results of these businesses
have been reclassified as part of the Aerospace & Defense Group. This reporting
change was made to better reflect management's approach to operating and
directing the businesses, and, in certain instances, to align financial
reporting with our market and customer segments. The reporting change had no
impact on consolidated revenues, gross profit, operating income or net income.
As discussed in Note 2, in 2003 we sold the majority of our ArmorGroup
Services Division (the "Services Division"). The assets and liabilities of the
Services Division have been classified as assets and liabilities of discontinued
operations on our condensed consolidated balance sheets and the results of their
operations classified as income (loss) from discontinued operations in the
accompanying unaudited condensed consolidated statements of operations.
9
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (UNAUDITED)
NOTE 2 - DISCONTINUED OPERATIONS
On April 17, 2003, we announced that we had completed the sale of our
ArmorGroup Integrated Systems business through the sale of 100% of the stock of
ArmorGroup Integrated Systems, Inc. and Low Voltage Systems Technologies, Inc.
to Aerwav Integration Systems, Inc. ("AIS"). AIS is a wholly owned subsidiary of
Aerwav Holdings, LLC. As consideration for the integrated systems business, we
received a $4.1 million collateralized note due in two years and a warrant for
approximately 2.5% of AIS. $475,000 of the balance due was paid in advance
through June 2004. In accordance with Statement of Financial Accounting
Standards No. 144, we recorded a loss of $366,000 on the sale in the second
quarter of 2003.
On November 26, 2003, we announced that we completed the sale of
ArmorGroup, our security service division, for $33,660,000 in total
consideration to a group of private investors led by Granville Baird Capital
Partners of London, England and Management. We received $31,360,000 in cash at
closing and are scheduled to receive another $2,300,000 by the end of 2004, of
which we have received $500,000 through July 23, 2004. We recorded a loss of
$8.8 million on the sale in the fourth quarter of 2003. In accordance with
generally accepted accounting principles, unrealized foreign currency
translation gains and losses, which are included in equity as accumulated other
comprehensive income or loss, are not recognized until the period in which the
related assets and liabilities are disposed of.
On June 30, 2004, our litigation support services subsidiary, New
Technologies Armor, Inc. ("NTI"), was the last remaining business in
discontinued operations. On July 2, 2004, we sold the security consulting
division of NTI. The remaining division in NTI, consisting primarily of training
services, will be included as part of the Products Division segment. In the
second quarter of 2004, we recorded an impairment charge of $1.4 million in
integration and other charges in continuing operations to reduce the carrying
value of remaining portion of NTI to its estimated fair value.
10
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (UNAUDITED)
A summary of the operating results of the discontinued operations for
the three months and six months ended June 30, 2004 and 2003 is as follows.
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------------- ------------------------------
JUNE 30, 2004 JUNE 30, 2003 JUNE 30, 2004 JUNE 30, 2003
------------- ------------- ------------- -------------
(IN THOUSANDS) (IN THOUSANDS)
Revenue $ 1,013 $23,911 $ 1,733 $49,699
Cost of sales 461 16,187 697 35,369
Operating expenses 385 5,005 821 11,417
Integration and other charges -- 452 -- 494
------- ------- ------- -------
Operating income 167 2,267 215 2,419
Interest expense, net -- 15 2 53
Other expense, net 10 392 273 452
------- ------- ------- -------
Income (loss) from discontinued
operations before provision (benefit)
for income taxes 157 1,860 (60) 1,914
Provision (benefit) for
income taxes 57 725 (22) 937
------- ------- ------- -------
Income (loss) from discontinued
operations $ 100 $ 1,135 $ (38) $ 977
======= ======= ======= =======
11
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (UNAUDITED)
The following is a summary of the assets and liabilities of our discontinued
operations:
JUNE 30, 2004 DECEMBER 31, 2003
------------- -----------------
(IN THOUSANDS)
Assets
Cash and cash equivalents $ 157 $ 76
Accounts receivable, net 806 549
Other current assets 133 128
------ ------
Total current assets 1,096 753
Property and equipment, net 437 1,206
Goodwill, net -- 356
Other assets 21 41
------ ------
Total assets of discontinued operations $1,554 $2,356
====== ======
Liabilities
Current portion of long-term debt $ -- $ 125
Accounts payable 142 5
Accrued expenses and other current liabilities 412 496
------ ------
Total current liabilities 554 626
------ ------
Total liabilities of discontinued operations $ 554 $ 626
====== ======
Based upon our analysis and discussions with our advisors regarding the
estimated realizable value, net of selling costs, of the Services Division, we
reduced its carrying value and recorded net impairment charges of $12.4 million
in the third quarter of fiscal 2003. The 2003 impairment charges consisted of a
non-cash goodwill reduction. The benefit for income taxes for discontinued
operations was $8.3 million for fiscal 2003. The reductions in the carrying
value of the Services Division were management's best estimate based upon the
information available at the time, including discussions with our investment
bankers.
12
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (UNAUDITED)
NOTE 3 - COMPREHENSIVE INCOME
The components of comprehensive income, net of tax provision of zero
and $128,000 for the three months ended June 30, 2004 and 2003, respectively,
and zero and $224,000 for the six months ended June 30, 2004 and 2003,
respectively, are listed below:
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------------ -----------------------------
JUNE 30, 2004 JUNE 30, 2003 JUNE 30, 2004 JUNE 30, 2003
------------- ------------- ------------- -------------
(IN THOUSANDS) (IN THOUSANDS)
Net income $ 17,821 $ 4,613 $ 30,311 $ 9,700
Other comprehensive income (loss):
Foreign currency translations, net
of tax (230) 1,861 (558) 2,230
-------- -------- -------- --------
Comprehensive income: $ 17,591 $ 6,474 $ 29,753 $ 11,930
======== ======== ======== ========
NOTE 4 - INVENTORIES
Inventories are stated at the lower of cost or market using the
first-in, first-out (FIFO) method and are summarized as follows:
JUNE 30, 2004 DECEMBER 31, 2003
------------- -------------------
(IN THOUSANDS)
Raw material $ 67,500 $ 40,397
Work-in-process 28,367 25,422
Finished goods 16,656 14,708
-------- --------
Total inventories $112,523 $ 80,527
======== ========
NOTE 5 - ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities are summarized as
follows:
JUNE 30, 2004 DECEMBER 31, 2003
------------- -------------------
(IN THOUSANDS)
Accrued expenses and other current liabilities $43,539 $40,787
Deferred consideration for acquisitions 3,403 2,780
Customer deposits 15,595 14,651
------- -------
Total accrued expenses and other current liabilities $62,537 $58,218
======= =======
13
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (UNAUDITED)
NOTE 6 - DERIVATIVE FINANCIAL INSTRUMENTS
We account for derivative instruments in accordance with Statement of
Financial Accounting Standards No. 133, " Accounting for Derivative Instruments
and Hedging Activities," as amended by Statement of Financial Accounting
Standards No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities - an Amendment of SFAS 133", and Statement of Financial
Accounting Standards No. 149 "Amendment of SFAS 133 on Derivative Instruments
and Hedging Activities" (collectively "SFAS 133"). SFAS 133 requires all
freestanding and embedded derivative instruments to be measured at fair value
and recognized on the balance sheet as either assets or liabilities. In
addition, all derivative instruments used in hedging relationships must be
designated, reassessed and accounted for as either fair value hedges or cash
flow hedges pursuant to the provisions of SFAS 133.
We hedge the fair value of our 8.25% $150 million Senior Subordinated
Notes due 2013 (the "Notes") using interest rate swaps. We enter into these
derivative contracts to manage fair value changes which could be caused by our
exposure to interest rate changes. On September 2, 2003, we entered into
interest rate swap agreements, designated as fair value hedges as defined under
SFAS 133 with an aggregate notional amount totaling $150 million. The agreements
were entered into to exchange the fixed interest rate on the Notes for a
variable interest rate equal to six-month LIBOR (1.94% at June 30, 2004), set in
arrears, plus a spread ranging from 2.735% to 2.75% fixed semi-annually on the
fifteenth of February and August each year through maturity. The agreements are
subject to other terms and conditions common to transactions of this type. These
fair value hedges qualify for hedge accounting using the short-cut method since
the swap terms match the critical terms of the Notes. Accordingly, changes in
the fair value of the interest rate swap agreements offset changes in the fair
value of the Notes due to changes in the market interest rate. As a result, no
ineffectiveness is expected to be recognized in our earnings associated with the
interest rate swap agreements on the Notes. The fair value of the interest rate
swap agreements was approximately $1.7 million and $5.9 million at June 30, 2004
and December 31, 2003, respectively, and is included in other assets and long-
term debt on the accompanying condensed consolidated balance sheet.
The fair values of our interest rate swap agreements are obtained from
our counter-parties and represent the estimated amount we would receive or pay
to terminate the agreement, taking into consideration the difference between the
contract rate of interest and rates currently quoted for agreements of similar
terms and maturities.
NOTE 7 - INFORMATION CONCERNING BUSINESS SEGMENTS AND
GEOGRAPHICAL SALES
We are a leading manufacturer and provider of specialized security
products; training and support services related to these products; vehicle armor
systems; military helicopter seating systems; aircraft and land vehicle safety
systems; protective equipment for military personnel; and other technologies
used to protect humans in a variety of life-threatening or catastrophic
situations. Our products and systems are used domestically and internationally
by military, law enforcement, security and corrections personnel, as well as
governmental agencies, multinational corporations and individuals. We are
organized and operated under three business segments: Aerospace & Defense Group,
Armor
14
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (UNAUDITED)
Holdings Products, also referred to as our Products Division, and Armor
Mobile Security, also referred to as our Mobile Security Division. Our Services
Division has been classified as discontinued operations and is no longer
included in this presentation (See Note 2).
Aerospace & Defense Group. Our Aerospace & Defense Group supplies human
safety and survival systems to the U.S. military, and major aerospace and
defense prime contractors. Our core markets are military aviation safety,
military personnel safety, and land and marine safety. Under the brand name
O'Gara-Hess & Eisenhardt, we are the sole-source provider to the U.S. military
of the armor and blast protection systems for M1114 Up-Armored HMMWVs. We are
also under contract with the U.S. Army to provide spare parts, logistics and
ongoing field support services for the currently installed base of approximately
5,862 Up-Armored HMMWVs. Additionally, we provide blast and ballistic protection
kits for the standard HMMWVs, which are installed on existing equipment in the
field. Our Aerospace & Defense Group is also subcontracted to develop a
ballistic and blast protected armored and sealed truck cab for the 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. Through Simula, we provide
military helicopter seating systems, helicopter cockpit airbag systems, aircraft
and land vehicle armor kits, body armor and other protective equipment for
military personnel, emergency bailout parachutes and survival ensembles worn by
military aircrew. The primary customers for our products are the U.S. Army, U.S.
Marine Corps, Boeing, and Sikorsky Aircraft. Most of Simula's aviation safety
products are provided on a sole source basis. The U.S. armed forces have adopted
ceramic body armor as a key element of the protective ensemble worn by our
troops in Iraq and Afghanistan. Simula was the developer of this specialized
product called SAPI, and is the largest supplier to U.S. forces.
Armor Holdings Products. Our Armor Holdings Products division
manufactures and sells a broad range of high quality equipment marketed under
brand names that are well known and respected in the military and law
enforcement communities. Products manufactured by this division include
concealable and tactical body armor, hard armor, duty gear, less-lethal
munitions, anti-riot products, police batons, emergency lighting products,
forensic products, firearms' accessories, weapon maintenance products, foldable
ladders, and specialty gloves.
Armor Mobile Security. Our Armor Mobile Security division manufactures
and installs ballistic and blast protection armoring systems for a variety of
commercial vehicles including limousines, sedans, sport utility vehicles,
commercial trucks, and cash-in-transit vehicles, to protect against varying
degrees of ballistic and blast threats. Our customers in this business include
the US and foreign governments, international corporations, non-government
organizations and high net worth individuals. In addition, we supply ballistic
and blast protected armoring systems to U.S. federal law enforcement and
intelligence agencies and foreign heads of state.
We have invested substantial resources outside of the United States and
plan to continue to do so in the future. The Armor Mobile Security Division has
invested substantial resources in Europe and South America. These operations are
subject to the risk of new and different legal and regulatory requirements in
local jurisdictions, tariffs and trade barriers, potential difficulties in
staffing and managing local operations, currency risks, potential imposition of
restrictions on investments, potentially
15
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (UNAUDITED)
adverse tax consequences, including imposition or increase of withholding and
other taxes on remittances and other payments by subsidiaries, and local
economic, political and social conditions. Governments of many developing
countries have exercised and continue to exercise substantial influence over
many aspects of the private sector. Government actions in the future could have
a significant adverse effect on economic conditions in a developing country or
may otherwise have a material adverse effect on us and our operating companies.
We do not have political risk insurance in the countries in which we currently
conduct business. Moreover, applicable agreements relating to our interests in
our operating companies are frequently governed by foreign law. As a result, in
the event of a dispute, it may be difficult for us to enforce our rights.
Accordingly, we may have little or no recourse upon the occurrence of any of
these developments.
Revenues, operating income and total assets for each of our continuing
operating segments are as follows (net of intercompany eliminations):
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------------- ------------------------------
JUNE 30, 2004 JUNE 30, 2003 JUNE 30, 2004 JUNE 30, 2003
------------- ------------- ------------- -------------
(IN THOUSANDS) (IN THOUSANDS)
Revenues:
Aerospace & Defense $ 129,773 $ 15,793 $ 210,781 $ 31,703
Products 65,743 49,347 119,583 93,354
Mobile Security 28,188 16,519 54,968 37,076
--------- --------- --------- ---------
Total revenues $ 223,704 $ 81,659 $ 385,332 $ 162,133
========= ========= ========= =========
Operating income (loss):
Aerospace & Defense $ 31,552 $ 4,051 $ 51,031 $ 7,676
Products 11,259 7,798 16,944 14,659
Mobile Security 3,847 (58) 4,920 461
Corporate (12,682) (5,781) (16,271) (7,960)
--------- --------- --------- ---------
Total operating income $ 33,976 $ 6,010 $ 56,624 $ 14,836
========= ========= ========= =========
JUNE 30, 2004 DECEMBER 31, 2003
------------- -----------------
(IN THOUSANDS)
Total assets:
Aerospace & Defense $ 264,862 $ 209,834
Products 194,278 183,972
Mobile Security 80,014 63,161
Corporate 235,192 126,303
--------- ---------
Total assets $ 774,346 $ 583,270
========= =========
16
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (UNAUDITED)
The following unaudited information with respect to revenues, operating
income from continuing operations (geographic operating income from continuing
operations before amortization expense and integration and other charges) and
total assets from continuing operations to principal geographic areas are as
follows:
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------------- ------------------------------
JUNE 30, 2004 JUNE 30, 2003 JUNE 30, 2004 JUNE 30, 2003
------------- ------------- ------------- -------------
(IN THOUSANDS) (IN THOUSANDS)
Revenues:
North America $188,654 $ 61,206 $320,005 $117,830
South America 4,185 2,664 7,661 6,091
Africa 475 319 1,681 804
Europe/Asia 30,390 17,470 55,985 37,408
-------- -------- -------- --------
Total revenues $223,704 $ 81,659 $385,332 $162,133
======== ======== ======== ========
Geographic operating income:
North America $ 37,745 $ 7,707 $ 59,383 $ 14,660
South America 387 51 618 105
Africa 107 96 206 194
Europe/Asia 4,833 2,000 7,174 4,203
-------- -------- -------- --------
Total geographic operating
income $ 43,072 $ 9,854 $ 67,381 $ 19,162
======== ======== ======== ========
JUNE 30, 2004 DECEMBER 31, 2003
------------- -----------------
(IN THOUSANDS)
Total assets:
North America $703,476 $523,954
South America 7,728 6,433
Africa -- --
Europe/Asia 63,142 52,883
-------- --------
Total assets $774,346 $583,270
======== ========
A reconciliation of consolidated geographic operating income from
continuing operations to consolidated operating income from continuing
operations follows:
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------------- ------------------------------
JUNE 30, 2004 JUNE 30, 2003 JUNE 30, 2004 JUNE 30, 2003
------------- ------------- ------------- -------------
(IN THOUSANDS) (IN THOUSANDS)
Consolidated geographic operating
income $ 43,072 $ 9,854 $ 67,381 $ 19,162
Amortization (973) (69) (1,953) (129)
Integration and other charges (8,123) (3,775) (8,804) (4,197)
-------- -------- -------- --------
Operating income $ 33,976 $ 6,010 $ 56,624 $ 14,836
======== ======== ======== ========
17
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (UNAUDITED)
NOTE 8 - EARNINGS PER SHARE
The following details the numerators and denominators of the basic and
diluted earnings per share computations for net income from continuing
operations:
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------------- ----------------------------
JUNE 30, 2004 JUNE 30, 2003 JUNE 30, 2004 JUNE 30, 2003
------------- ------------- ------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Numerator for basic and diluted earnings per share:
Income from continuing operations $17,721 $ 3,478 $30,349 $ 8,723
------- ------- ------- -------
Denominator for basic earnings per share -
weighted average shares outstanding: 29,670 27,555 29,236 28,255
Effect of shares issuable under stock
option and stock grant plans, based on the
treasury stock method 1,338 281 1,233 256
------- ------- ------- -------
Denominator for diluted earnings per share-
Adjusted weighted average shares outstanding 31,008 27,836 30,469 28,511
======= ======= ======= =======
Basic earnings per share from
continuing operations $ 0.60 $ 0.13 $ 1.04 $ 0.31
======= ======= ======= =======
Diluted earnings per share from
continuing operations $ 0.57 $ 0.13 $ 0.99 $ 0.31
======= ======= ======= =======
NOTE 9 - NEW ACCOUNTING PRONOUNCEMENT
In April 2004, the FASB issued FASB Staff Position No. 129-1,
Disclosure Requirements under FASB Statement No. 129, "Disclosure of Information
about Capital Structure," relating to contingently convertible securities ("FSP
129-1"). The purpose of FSP 129-1 is to interpret how the disclosure provisions
of FASB Statement No. 129 apply to contingently convertible securities and to
their potentially dilutive effects on earnings per share. The guidance in FSP
129-1 is effective April 2004 and applies to all existing and newly created
securities. This pronouncement has no effect on the Company.
18
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (UNAUDITED)
NOTE 10 - STOCKHOLDERS' EQUITY
On June 15, 2004, we sold 4,000,000 shares of common stock at a price
of $37.50 per share, raising $142.5 million of net proceeds after deducting the
underwriter discounts and commissions. In addition, certain of our directors and
officers granted the underwriters a 30-day option to purchase up to 600,000
shares. The 30-day option expired unexercised on July 15, 2004. We intend to use
the net proceeds from the offering to fund future acquisitions, to take
advantage of business development opportunities, and for general corporate and
working capital purposes, including the funding of capital expenditures. Funds
that are not immediately used are invested in money market funds, certificates
of deposits, and other investment grade securities until needed.
On June 22, 2004, our stockholders approved an amendment to our
Certificate of Incorporation that increased the number of shares of our
authorized common stock to 75,000,000. The amendment was filed with the
Secretary of State of the State of Delaware and became effective on July 22,
2004.
On July 15, 2004, our stockholders approved the increase in number of
shares in our 2002 stock incentive plan by 4,000,000, however, we will not issue
more than 2,000,000 of these shares without additional stockholder approval.
Statement of Financial Accounting Standard No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"), as amended by Statement of Financial
Accounting Standard No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure," ("SFAS 148") establishes a fair value based method
of accounting for stock-based employee compensation plans; however, it also
allows an entity to continue to measure compensation cost for those plans using
the intrinsic value based method of accounting prescribed by Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25"). Under the fair value based method, compensation cost is measured at
the grant date based on the value of the award and is recognized over the
service period, which is usually the vesting period. Under the intrinsic value
based method, compensation cost is the excess, if any, of the quoted market
price of the stock at the grant date or other measurement date over the amount
an employee must pay to acquire the stock. We have elected to continue to
account for our employee stock compensation plans under APB 25 with pro forma
disclosures of net earnings and earnings per share, as if the fair value based
method of accounting defined in SFAS 123 had been applied. If compensation cost
for stock option grants had been determined based on the fair value on the grant
dates for the three and six month periods ended June 30, 2004 and 2003
consistent with the method prescribed by SFAS 123, our net earnings and earnings
per share would have been adjusted to the pro forma amounts indicated below:
19
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------------- -------------------------------
JUNE 30, 2004 JUNE 30, 2003 JUNE 30, 2004 JUNE 30, 2003
------------- ------------- ------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income as reported: $ 17,821 $ 4,613 $ 30,311 $ 9,700
Deduct: Total stock-based employee
compensation expense determined under fair
value based method for all awards, net of
related tax effects (1,290) (1,156) (2,533) (2,314)
Add: Employee compensation expense for
modification of stock option awards included
in reported net income, net of income taxes 57 506 57 506
-------- ------- -------- ---------
Pro-forma net income $ 16,588 $ 3,963 $ 27,835 $ 7,892
======== ======= ======== =========
Earnings per share:
Basic - as reported $ 0.60 $ 0.17 $ 1.04 $ 0.34
======== ======= ======== =========
Basic - pro-forma $ 0.56 $ 0.14 $ 0.95 $ 0.28
======== ======= ======== =========
Diluted - as reported $ 0.57 $ 0.17 $ 0.99 $ 0.34
======== ======= ======== =========
Diluted - pro-forma $ 0.53 $ 0.14 $ 0.91 $ 0.28
======== ======= ======== =========
NOTE 11 - LEGAL PROCEEDINGS
On January 16, 1998, our Services Division ceased operations in Angola
and subsequently became involved in various disputes with SHRM S.A. ("SHRM"),
its minority joint venture partner relating to the Angolan joint venture known
as Defense System International Africa ("DSIA"). On March 6, 1998, SIA (a
subsidiary of SHRM) filed a complaint against Defense Systems France, SA ("DSF")
before the Commercial Court of Nanterre (Tribunal de Commerce de Nanterre)
seeking to be paid an amount of $577,286 corresponding to an alleged debt of
DSIA to SIA. In October 2002, the Commercial Court of Nanterre stayed the
proceedings before it, pending the decisions of the Court of Appeal and the
Paris Commercial Court. In February 2003, the Court of Appeal ruled against SHRM
and its parent entity, Compass Group, effectively ending all further proceedings
on the merits of Compass' claims. Compass has appealed the decision before the
French Court of Cassation, which reviews only matters of law.
In 1999 and prior to our acquisition of O'Gara-Hess & Eisenhardt
Armoring Company (which has been converted to a limited liability company and is
now known as O'Gara-Hess & Eisenhardt Armoring Company, L.L.C.) ("OHEAC") in
2001, O'Gara-Hess & Eisenhardt Armoring de Brasil Ltda.
20
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (UNAUDITED)
("OHE Brazil") was audited by the Brazilian federal tax authorities and assessed
over Ten Million Reals (US$3.4 million based on the exchange rate as of December
31, 2003). OHE Brazil has appealed the tax assessment and the case is pending.
To the extent that there may be any liability resulting from the 2001 audit, we
believe that we are entitled to indemnification from Kroll, Inc. under the terms
of our purchase agreement dated April 20, 2001, despite the denial by Kroll,
Inc. of any such liability, because the events occurred prior to our purchase of
the O'Gara Companies from Kroll, Inc. However, to the extent that the appeal
relating to 2001 activity results in an unfavorable ruling, we could be liable
for unpaid taxes incurred subsequent to the acquisition from Kroll.
In 1999 and prior to our acquisition of OHEAC in 2001, several of the
former employees of Kroll O'Gara Company de Mexico, S.A. de C.V. ("O'Gara
Mexico"), a subsidiary of OHEAC, commenced labor claims against O'Gara Mexico
seeking damages for unjustified termination. These cases are still pending
before the labor board in Mexico City. The terminated employees are seeking back
pay and benefits since the date of termination amounting to approximately US
$2.9 million, and accruing at approximately US $50,400 per month. To the extent
that there may be any liability, we believe that we are entitled to
indemnification from Kroll, Inc. under the terms of our purchase agreement dated
April 20, 2001, despite the denial by Kroll, Inc. of any such liability, because
the events occurred prior to our purchase of the O'Gara Companies from Kroll,
Inc. Although we do not have any insurance coverage for this matter, at this
time, we do not believe this matter will have a material impact on our financial
position, operations or liquidity.
In December 2001, O'Gara-Hess & Eisenhardt France S.A. ("OHE France")
sold its industrial bodywork business operated under the name Labbe/Division de
O'Gara Hess & Eisenhardt France/ Carrosserie Industriells to SNC Labbe.
Subsequent to the sale, the Labbe Family Trust ("LFT"), owner of the leasehold
interest upon which the Carrosserie business is operated, sued OHE France and
SNC Labbe claiming that the transfer of the leasehold was not valid because the
LFT had not given its consent to the transfer as required under the terms of the
lease. Further, LFT seeks to have OHE France, as the sole tenant, maintain and
repair the leased building. The approximate cost of renovating the building is
estimated to be between US $3.2 and US $6.4 million, based on the exchange rate
as of December 31, 2003. The case is currently pending, and while we are
contesting the allegations vigorously, we are unable to predict the outcome of
this matter. Although we do not have any insurance coverage for this matter, at
this time, we do not believe this matter will have a material impact on our
financial position, operations or liquidity.
On October 18, 2002, we were notified by the Internal Revenue Service
that our tax return for the tax year ended December 31, 2000 had been selected
for examination. Further, on January 30, 2003 we were notified that our tax
return for the tax year ended December 31, 2001 had been selected for
examination. In April 2004, we reached an agreement with the Internal Revenue
Service regarding our tax returns for the years ended December 31, 2000 and 2001
that did not have a material impact on our financial position, operations or
liquidity.
In October 2002, we were sued in the United States District Court for
the District of Wyoming with respect to one of our subsidiaries' Casper, Wyoming
tear gas plant. The plaintiffs in the lawsuit asserted various state law tort
claims and federal environmental law claims under the Resource Conservation and
Recovery Act and the Clean Air Act stemming from the tear gas plant. In February
21
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (UNAUDITED)
2004, we agreed with the plaintiffs to settle the lawsuit for an amount of money
that is not material to us, and on April 19, 2004, the court dismissed the
lawsuit with prejudice.
In September 2003, Second Chance Body Armor, Inc. ("Second Chance"), a
body armor manufacturer and competitor to Armor Holdings, notified its customers
of a potential safety issue with its Ultima(R) and Ultimax(R) models. Second
Chance 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 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 based upon its Ultima(R)
and Ultimax(R) model vests.
We use Zylon(R) fiber in a number of concealable body armor models for
law enforcement, but our vest design and construction are different from Second
Chance. In addition, to our knowledge, no other body armor manufacturer has
reported or experienced problems with Zylon(R)-based vests similar to those
cited by Second Chance. The National Institute of Justice ("NIJ") tests and has
certified each of our body armor designs before we begin to produce or sell any
particular model.
In the Fall of 2003, following the assertions made by Second Chance,
several law enforcement associations raised this issue to the U.S. Attorney
General ("USAG"), who then asked the DOJ through the NIJ to investigate these
concerns and attempt to clarify the issues. We have and continue to support the
Attorney General's directive and investigation.
As a result of the USAG's and DOJ's initiative, the NIJ commenced an
inquiry and investigation regarding the protocol for testing used vests, as well
as the reliability of Zylon(R) and other ballistic fibers. We have consulted and
continue to cooperate 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 utilized the ballistic
testing standard applicable to new vests. Although some of the vests tested,
including ours, experienced a 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 definitive 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's results
upon our receipt of such data in our continuing effort to assist the NIJ in
developing uniform standards for certification of new vests and the testing of
used vests.
In April 2004, two class action complaints were filed in Florida state
court by police organizations and individual police officers, alleging, among
other things, that our vests do not have the qualities and performance
characteristics as warranted, thereby breaching express warranty, implied
warranty of merchantability, implied warranty of fitness for a particular
purpose and duty to warn. The complaints allege no specific amount, although it
has been publicly stated that they are seeking $77 million in compensatory
damages. We disagree with the allegations set forth in these complaints, are
vigorously defending these lawsuits and have moved to dismiss the claims
asserted against us. However, any adverse resolution of these matters could have
a material adverse effect on our business,
22
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (UNAUDITED)
financial condition, results of operations and liquidity. We have also received
investigative demands from state agencies in Texas and Connecticut to which we
have complied, as well as letters from two private attorneys threatening
potential litigation.
It should be stressed that our vests are certified by the NIJ, have
never suffered any penetration in the field and continue to save lives and
protect officers from injury. In fact, neither of the two recently commenced
lawsuits allege personal injuries of any kind, but instead speculate that our
vests which contain Zylon(R) are defective without any reliable evidence of any
defect.
Second Chance 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 based upon this licensed
technology. Although Simula may be impacted by the pending suits filed against
Second Chance, the licensed technology is not specifically related to the use of
Zylon(R) fiber, however, any adverse resolution of these matters could have a
material adverse effect on our business, financial condition, results of
operations and liquidity.
In addition to the above, in the normal course of business, we are
subjected to various types of claims and currently have on-going litigations in
the areas of products liability and general liability. Our products are used in
a wide variety of law enforcement situations and environments. Some of our
products can cause serious personal or property injury or death if not carefully
and properly used by adequately trained personnel. We believe that we have
adequate insurance coverage for most claims that are incurred in the normal
course of business. In such cases, the effect on our financial statements is
generally limited to the amount of our insurance deductible or self-insured
retention. Our annual insurance premiums and self insurance retention amounts
have risen significantly over the past several years and may continue to do so
to the extent we are unable to purchase insurance coverage. At this time, we do
not believe any such claims or pending litigation will have a material impact on
our financial position, operations and liquidity.
Except for the updates noted above, please see footnote 11 Commitments
and Contingencies Legal/Litigation Matters in our Annual Report on Form 10-K/A
for the fiscal year ended December 31, 2003, for a description of other legal
proceedings.
23
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (UNAUDITED)
NOTE 12 - GUARANTOR AND NONGUARANTOR FINANCIAL STATEMENTS
On August 12, 2003 we sold $150 million of Senior Subordinated Notes in
private placements pursuant to Rule 144A and Regulation S. The Senior
Subordinated Notes are uncollateralized obligations and rank junior in right of
payment to our existing and future senior debt. The Senior Subordinated Notes
are guaranteed, jointly and severally on a senior subordinated and
uncollateralized basis, by certain domestic subsidiaries.
The following condensed consolidating financial information presents
the condensed consolidating balance sheets as of June 30, 2004 and December 31,
2003, the related condensed consolidating statements of operations for each of
the three and six-month periods ended June 30, 2004 and June 30, 2003 and the
related condensed consolidating statements of cash flows for the six month
periods ended June 30, 2004 and June 30, 2003 for:
a) Armor Holdings, Inc., the parent,
b) the guarantor subsidiaries,
c) the nonguarantor subsidiaries, and
d) Armor Holdings, Inc. on a consolidated basis
The information includes elimination entries necessary to consolidate
Armor Holdings, Inc., the parent, with the guarantor and nonguarantor
subsidiaries.
Investments in subsidiaries are accounted for by the parent using the
equity method of accounting. The guarantor and nonguarantor subsidiaries are
presented on a combined basis. The principal elimination entries eliminate
investments in subsidiaries and intercompany balances and transactions. Separate
financial statements for the guarantor and nonguarantor subsidiaries are not
presented because management believes such financial statements would not be
meaningful to investors.
24
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (UNAUDITED)
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
JUNE 30, 2004
-------------------------------------------------------------------------------
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------ ------------ ------------ ------------ ------------
(IN THOUSANDS)
ASSETS
Current Assets:
Cash and cash equivalents $ 213,065 $ 2,108 $ 13,910 $ -- $ 229,083
Accounts receivable, net -- 96,296 14,525 -- 110,821
Costs and earned gross profit in excess
of billings -- 834 -- -- 834
Intercompany receivables 62,608 44,475 38,352 (145,435) --
Inventories -- 89,252 23,271 -- 112,523
Prepaid expenses and other current assets 3,809 22,383 3,659 (2,653) 27,198
Current assets of discontinued operations -- 41,455 6,235 (46,594) 1,096
--------- --------- --------- --------- ---------
Total Current Assets 279,482 296,803 99,952 (194,682) 481,555
Property and equipment, net 2,741 37,857 19,182 -- 59,780
Goodwill, net -- 174,094 2,075 -- 176,169
Patents, licenses and trademarks, net -- 44,950 177 -- 45,127
Other assets 10,546 2,107 158 -- 12,811
Long-term assets of discontinued operations -- 458 -- -- 458
Investment in subsidiaries 440,257 10,672 -- (450,929) --
--------- --------- --------- --------- ---------
Total Assets $ 733,026 $ 566,941 $ 121,544 $(645,611) $ 775,900
========= ========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ -- $ 574 $ 143 $ -- $ 717
Short-term debt -- -- 1,274 -- 1,274
Accounts payable 1,245 41,624 6,832 -- 49,701
Accrued expenses and other current
liabilities 8,786 33,740 20,011 -- 62,537
Income taxes payable (2,735) 13,559 1,917 -- 12,741
Intercompany payables 85,984 46,444 13,029 (145,457) --
Current liabilities of discontinued
operations -- 3,883 43,243 (46,572) 554
--------- --------- --------- --------- ---------
Total Current Liabilities 93,280 139,824 86,449 (192,029) 127,524
Long-term debt, less current portion 149,382 1,663 497 -- 151,542
Other long-term liabilities (1,851) 5,263 1,207 -- 4,619
Long-term liabilities of discontinued
operations -- 2,653 -- (2,653) --
--------- --------- --------- --------- ---------
Total Liabilities 240,811 149,403 88,153 (194,682) 283,685
Stockholders' Equity:
Preferred stock -- 1,450 -- (1,450) --
Common stock 389 4,392 7,854 (12,246) 389
Additional paid in capital 485,512 265,598 46,095 (311,693) 485,512
Retained earnings (accumulated deficit) 75,253 146,098 (20,558) (125,540) 75,253
Accumulated other comprehensive loss 3,378 -- -- -- 3,378
Treasury stock (72,317) -- -- -- (72,317)
--------- --------- --------- --------- ---------
Total Stockholders' Equity 492,215 417,538 33,391 (450,929) 492,215
--------- --------- --------- --------- ---------
Total Liabilities and Stockholders' Equity $ 733,026 $ 566,941 $ 121,544 $(645,611) $ 775,900
========= ========= ========= ========= =========
25
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (UNAUDITED)
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
DECEMBER 31, 2003
--------------------------------------------------------------------------------
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
---------- ------------ --------------- ------------- -------------
ASSETS (IN THOUSANDS)
Current Assets:
Cash and cash equivalents $ 90,764 $ 11,084 $ 10,002 $ - $ 111,850
Restricted cash 2,600 - - - 2,600
Accounts receivable, net 1,201 59,470 11,964 - 72,635
Costs and earned gross profit in excess
of billings - - - - -
Intercompany receivables 60,974 2,600 38,352 (101,926) -
Inventories - 61,494 19,033 - 80,527
Prepaid expenses and other current assets 20,241 1,844 2,600 (2,653) 22,032
Current assets of discontinued operations - 753 - - 753
---------- ------------ --------------- ------------- -------------
Total Current Assets 175,780 137,245 81,951 (104,579) 290,397
Property and equipment, net 2,122 34,853 20,601 - 57,576
Goodwill, net - 173,640 2,067 - 175,707
Patents, licenses and trademarks, net - 43,991 183 - 44,174
Other assets 14,092 1,924 153 - 16,169
Long-term assets of discontinued operations - 1,603 - - 1,603
Investment in subsidiaries 320,034 10,038 - (330,072) -
---------- ------------ --------------- ------------- -------------
Total Assets $512,028 $403,294 $ 104,955 $(434,651) $ 585,626
========== ============ =============== ============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ - $ 31,960 $ 147 $ - $ 32,107
Short-term debt - - 498 - 498
Accounts payable 1,584 20,941 7,779 - 30,304
Accrued expenses and other current
liabilities 12,403 27,113 18,702 - 58,218
Income taxes payable - - - - -
Intercompany payables 44,251 47,073 9,933 (101,257) -
Current liabilities of discontinued
operations - (35,714) 37,009 (669) 626
---------- ------------ --------------- ------------- -------------
Total Current Liabilities 58,238 91,373 74,068 (101,926) 121,753
Long-term debt, less current portion 153,452 4,257 591 - 158,300
Other long-term liabilities 4,973 4,008 1,227 - 10,208
Long-term liabilities of discontinued
operations - 2,653 - (2,653) -
---------- ------------ --------------- ------------- -------------
Total Liabilities 216,663 102,291 75,886 (104,579) 290,261
Stockholders' Equity:
Preferred stock - 1,450 - (1,450) -
Common stock 344 4,143 7,854 (11,997) 344
Additional paid in capital 318,460 191,781 46,095 (237,876) 318,460
Retained earnings (accumulated deficit) 44,942 103,629 (24,880) (78,749) 44,942
Accumulated other comprehensive loss 3,936 - - - 3,936
Treasury stock (72,317) - - - (72,317)
---------- ------------ --------------- ------------- -------------
Total Stockholders' Equity 295,365 301,003 29,069 (330,072) 295,365
---------- ------------ --------------- ------------- -------------
Total Liabilities and Stockholders' Equity $512,028 $403,294 $ 104,955 $ (434,651) $ 585,626
========== ============ =============== ============= =============
26
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (UNAUDITED)
ARMOR HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2004
----------------------------------------------------------------------------------
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
---------- ------------ -------------- ------------- -------------
(IN THOUSANDS)
REVENUES:
Aerospace & Defense $ -- $ 129,773 $ -- $ -- $ 129,773
Products -- 53,367 12,376 -- 65,743
Mobile Security -- 6,216 22,604 (632) 28,188
--------- --------- --------- --------- ---------
Total revenues -- 189,356 34,980 (632) 223,704
--------- --------- --------- --------- ---------
COSTS AND EXPENSES:
Cost of sales -- 130,793 27,085 (632) 157,246
Operating expenses 5,246 15,252 2,888 -- 23,386
Amortization -- 970 3 -- 973
Integration and other charges 7,431 692 -- -- 8,123
Related party management (income) fees -- (1) 1 -- --
--------- --------- --------- --------- ---------
OPERATING (LOSS) INCOME: (12,677) 41,650 5,003 -- 33,976
Interest expense, net 1,890 144 23 -- 2,057
Other expense, net (23) (338) (29) -- (390)
Equity in (earnings) losses of
subsidiaries (29,840) (812) -- 30,652 --
--------- --------- --------- --------- ---------
INCOME FROM CONTINUING OPERATIONS BEFORE
(BENEFIT) PROVISION FOR INCOME TAXES 15,296 42,656 5,009 (30,652) 32,309
(BENEFIT) PROVISION FOR INCOME TAXES (2,525) 15,246 1,867 -- 14,588
--------- --------- --------- --------- ---------
INCOME FROM CONTINUING OPERATIONS 17,821 27,410 3,142 (30,652) 17,721
DISCONTINUED OPERATIONS:
Income from discontinued operations,
net of tax -- 100 -- -- 100
--------- --------- --------- --------- ---------
NET INCOME $ 17,821 $ 27,510 $ 3,142 $ (30,652) $ 17,821
========= ========= ========= ========= =========
27
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (UNAUDITED)
ARMOR HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2003
-----------------------------------------------------------------------------
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
---------- ----------- ------------ ------------- -------------
(IN THOUSANDS)
REVENUES:
Aerospace & Defense $ -- $ 15,793 $ -- $ -- $ 15,793
Products -- 39,069 10,278 -- 49,347
Mobile Security -- 2,980 13,539 -- 16,519
-------- -------- -------- -------- --------
Total revenues -- 57,842 23,817 -- 81,659
-------- -------- -------- -------- --------
COSTS AND EXPENSES:
Cost of sales -- 37,938 19,343 -- 57,281
Operating expenses 2,470 9,485 2,569 -- 14,524
Amortization -- 67 2 -- 69
Integration and other charges 3,273 502 -- -- 3,775
-------- -------- -------- -------- --------
OPERATING (LOSS) INCOME: (5,743) 9,850 1,903 -- 6,010
Interest expense, net 267 121 49 -- 437
Other expense, net -- 2 14 -- 16
Equity in earnings of subsidiaries (8,421) (119) -- 8,540 --
Related parting interest expense
(income), net 16 (16) -- -- --
-------- -------- -------- -------- --------
INCOME FROM CONTINUING OPERATIONS BEFORE
(BENEFIT) PROVISION FOR INCOME TAXES 2,395 9,862 1,840 (8,540) 5,557
(BENEFIT) PROVISION FOR INCOME TAXES (2,218) 3,703 594 -- 2,079
-------- -------- -------- -------- --------
INCOME FROM CONTINUING OPERATIONS 4,613 6,159 1,246 (8,540) 3,478
DISCONTINUED OPERATIONS:
(Loss) income from discontinued
operations, net of tax -- (6) 1,141 -- 1,135
-------- -------- -------- -------- --------
NET INCOME $ 4,613 $ 6,153 $ 2,387 $ (8,540) $ 4,613
======== ======== ======== ======== ========
28
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (UNAUDITED)
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2004
----------------------------------------------------------------------------------
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
---------- ------------ ------------ ------------ -------------
(IN THOUSANDS)
REVENUES:
Aerospace & Defense $ -- $ 210,781 $ -- $ -- $ 210,781
Products -- 97,616 21,967 -- 119,583
Mobile Security -- 11,583 44,536 (1,151) 54,968
--------- --------- --------- --------- ---------
Total revenues -- 319,980 66,503 (1,151) 385,332
--------- --------- --------- --------- ---------
COSTS AND EXPENSES:
Cost of sales -- 219,143 53,322 (1,151) 271,314
Operating expenses 8,748 31,639 6,250 -- 46,637
Amortization -- 1,947 6 -- 1,953
Integration and other charges 7,521 1,283 -- -- 8,804
Related party management (income) fees 16 (18) 2 -- --
--------- --------- --------- --------- ---------
OPERATING (LOSS) INCOME (16,285) 65,986 6,923 -- 56,624
Interest expense, net 3,546 176 63 -- 3,785
Other expense (income), net 27 (322) 20 -- (275)
Equity in (earnings) losses of
subsidiaries (46,161) (630) -- 46,791 --
--------- --------- --------- --------- ---------
INCOME FROM CONTINUING OPERATIONS BEFORE
PROVISION (BENEFIT) FOR INCOME TAXES 26,303 66,762 6,840 (46,791) 53,114
PROVISION (BENEFIT) FOR INCOME TAXES (4,008) 24,255 2,518 -- 22,765
--------- --------- --------- --------- ---------
INCOME FROM CONTINUING OPERATIONS 30,311 42,507 4,322 (46,791) 30,349
DISCONTINUED OPERATIONS:
(Loss) from discontinued operations,
net of tax -- (38) -- -- (38)
--------- --------- --------- --------- ---------
NET INCOME $ 30,311 $ 42,469 $ 4,322 $ (46,791) $ 30,311
========= ========= ========= ========= =========
29
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (UNAUDITED)
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2003
-----------------------------------------------------------------------------------
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------------ ------------ ------------ ------------- -------------
(IN THOUSANDS)
REVENUES:
Aerospace & Defense $ -- $ 31,703 $ -- $ -- $ 31,703
Products -- 75,753 17,601 -- 93,354
Mobile Security -- 7,069 30,007 -- 37,076
--------- --------- --------- --------- ---------
Total revenues -- 114,525 47,608 -- 162,133
--------- --------- --------- --------- ---------
COSTS AND EXPENSES:
Cost of sales -- 75,158 39,285 -- 114,443
Operating expenses 4,542 18,787 5,199 -- 28,528
Amortization -- 124 5 -- 129
Integration and other charges 3,349 848 -- -- 4,197
--------- --------- --------- --------- ---------
OPERATING (LOSS) INCOME: (7,891) 19,608 3,119 -- 14,836
Interest expense, net 495 191 130 -- 816
Other expense, net -- 2 83 -- 85
Equity in earnings of subsidiaries (15,085) 163 -- 14,922 --
Related parting interest expense
(income), net 16 (16) -- -- --
--------- --------- --------- --------- ---------
INCOME FROM CONTINUING OPERATIONS BEFORE
(BENEFIT) PROVISION FOR INCOME TAXES 6,683 19,268 2,906 (14,922) 13,935
(BENEFIT) PROVISION FOR INCOME TAXES (3,017) 7,263 966 -- 5,212
--------- --------- --------- --------- ---------
INCOME FROM CONTINUING OPERATIONS 9,700 12,005 1,940 (14,922) 8,723
DISCONTINUED OPERATIONS:
(Loss) income from discontinued
operations, net of tax -- (453) 1,430 -- 977
--------- --------- --------- --------- ---------
NET INCOME $ 9,700 $ 11,552 $ 3,370 $ (14,922) $ 9,700
========= ========= ========= ========= =========
30
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (UNAUDITED)
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2004
---------------------------------------------------------------------------------
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------------ ------------ ------------ ------------ -------------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Income from continuing operations $ 30,311 $ 42,507 $ 4,322 $ (46,791) $ 30,349
Adjustments to reconcile income from
continuing operations to cash
provided by (used in) operating
activities:
Depreciation and amortization 556 4,735 1,312 -- 6,603
Loss on disposal of fixed assets -- 106 9 -- 115
Deferred income taxes 492 (665) (24) -- (197)
Non-cash charge for acceleration of
performance-based restricted stock awards 5,913 -- -- -- 5,913
Non-cash impairment charge 1,408 -- -- -- 1,408
Changes in operating assets & liabilities,
net of acquisitions:
Decrease (increase) in accounts receivable 1,201 (37,412) (2,561) -- (38,772)
Decrease (increase) in intercompany
receivables & payables 38,134 (41,229) 3,095 -- --
Increase in inventory -- (27,759) (4,238) -- (31,997)
(Increase) decrease in prepaid expenses
& other assets (3,678) (4,491) (712) -- (8,881)
(Decrease) increase in accounts payable,
accrued expenses and other current
liabilities (1,153) 28,440 362 -- 27,649
Increase (decrease) in income taxes
payable 17,515 (1,609) 1,569 -- 17,475
--------- --------- --------- --------- ---------
Net cash provided by (used in) operating
activities 90,699 (37,377) 3,134 (46,791) 9,665
--------- --------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (902) (5,570) (632) -- (7,104)
Purchase of patents and trademarks -- (77) -- -- (77)
Purchase of equity investment -- (5,275) -- -- (5,275)
Proceeds from sale of equity investment -- 5,823 -- -- 5,823
Collection of note receivable 375 -- -- -- 375
Decrease in restricted cash 2,600 -- -- -- 2,600
Additional consideration for purchased
businesses -- (1,855) -- -- (1,855)
Investment in subsidiaries (120,224) 73,433 -- 46,791 --
Purchase of businesses net of cash
acquired -- (2,729) -- -- (2,729)
--------- --------- --------- --------- ---------
Net cash (used in) provided by investing
activities (118,151) 63,750 (632) 46,791 (8,242)
--------- --------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 8,310 -- -- -- 8,310
Proceeds from the issuance of common
stock 142,500 -- -- -- 142,500
Cash paid for common stock offering costs (1,057) -- -- -- (1,057)
Repayments of long-term debt -- (33,981) (71) -- (34,052)
Borrowings under lines of credit 8,083 -- 802 -- 8,885
Repayments under lines of credit (8,083) -- (39) -- (8,122)
--------- --------- --------- --------- ---------
Net cash provided by (used in) financing
activities 149,753 (33,981) 692 -- 116,464
--------- --------- --------- --------- ---------
Effect of exchange rate on cash and cash
equivalents -- (651) 714 -- 63
Net cash used in discontinued operations -- (717) -- -- (717)
--------- --------- --------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 122,301 (8,976) 3,908 -- 117,233
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD 90,764 11,084 10,002 -- 111,850
--------- --------- --------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 213,065 $ 2,108 $ 13,910 $ -- $ 229,083
========= ========= ========= ========= =========
31
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (UNAUDITED)
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2003
---------------------------------------------------------------------------------
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------------ ------------ ------------ ------------ -------------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Income from continuing operations $ 9,700 $ 12,005 $ 1,940 $(14,922) $ 8,723
Adjustments to reconcile income from
continuing operations to cash used in
operating activities
Depreciation and amortization 514 2,005 949 -- 3,468
Deferred income taxes (5,330) 5,912 1,131 -- 1,713
(Gain) loss on disposal of fixed assets -- (3) 42 -- 39
Non-cash termination charge 2,093 -- -- -- 2,093
Changes in operating assets & liabilities,
net of acquisitions
Decrease (increase) in accounts receivable -- 350 (1,103) -- (753)
Decrease (increase) in intercompany
receivables & payables 11,697 (12,294) 597 -- --
Decrease in inventory -- 679 653 -- 1,332
Increase in prepaid expenses & other
assets (2,107) (933) (1,130) -- (4,170)
Increase (decrease) in accounts payable,
accrued expenses and other current
liabilities 3,252 (1,505) 2,224 -- 3,971
(Decrease) increase in income taxes
payable (3,998) 148 202 -- (3,648)
-------- -------- -------- -------- --------
Net cash provided by operating activities 15,821 6,364 5,505 (14,922) 12,768
-------- -------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (81) (2,176) (1,661) -- (3,918)
Purchase of patents and trademarks -- (38) -- -- (38)
Additional consideration for purchased
businesses -- (243) -- -- (243)
Investment in subsidiaries (14,735) (52) (135) 14,922 --
-------- -------- -------- --------