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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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FORM 10-Q
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(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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
October 15, 2004 is 33,196,008.
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.... 38
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK................................ 57
ITEM 4. CONTROLS AND PROCEDURES............................. 59
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS................................... 60
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS.......................................... 64
ITEM 6. EXHIBITS ........................................... 64
SIGNATURES 65
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 September 30, 2004 and for the three month and nine months periods ended
September 30, 2004 and September 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)
SEPTEMBER 30, 2004 DECEMBER 31, 2003
(UNAUDITED) *
------------------ -----------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $234,487 $111,850
Restricted cash - 2,600
Accounts receivable (net of allowance for
doubtful accounts of $2,540 and $1,673) 126,185 72,635
Costs and earned gross profit in excess of billings 157 -
Inventories 139,820 80,527
Prepaid expenses and other current assets 26,482 22,032
Current assets of discontinued operations (Note 2) - 753
-------- --------
Total current assets 527,131 290,397
PROPERTY AND EQUIPMENT (net of
accumulated depreciation of $24,710 and $19,046) 62,006 57,576
GOODWILL (net of accumulated amortization
of $4,024 and $4,024) 181,613 175,707
PATENTS, LICENSES AND TRADEMARKS
(net of accumulated amortization of $5,518 and $2,627) 45,070 44,174
OTHER ASSETS 16,631 16,169
LONG-TERM ASSETS OF DISCONTINUED OPERATIONS (Note 2) - 1,603
-------- --------
TOTAL ASSETS $832,451 $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)
SEPTEMBER 30, 2004 DECEMBER 31, 2003
(UNAUDITED) *
------------------ -----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 612 $ 32,107
Short-term debt 973 498
Accounts payable 50,469 30,304
Accrued expenses and other current liabilities 73,625 58,218
Income taxes payable 22,283 -
Current liabilities of discontinued operations (Note 2) - 626
--------- ---------
Total current liabilities 147,962 121,753
LONG-TERM LIABILITIES:
Long-term debt, less current portion 155,436 158,300
Other long-term liabilities 8,671 10,208
--------- ---------
312,069 290,261
Total liabilities
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; 39,135,873 and
34,337,034 issued and 33,075,651 and
28,276,812 outstanding at September 30, 2004
and December 31, 2003, respectively 392 344
Additional paid-in capital 489,293 318,460
Retained earnings 99,127 44,942
Accumulated other comprehensive income 3,887 3,936
Treasury stock (72,317) (72,317)
--------- ---------
Total stockholders' equity 520,382 295,365
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 832,451 $ 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 NINE MONTHS ENDED
SEPTEMBER 30, 2004 SEPTEMBER 30, 2003 SEPTEMBER 30, 2004 SEPTEMBER 30, 2003
------------------ ------------------ ------------------ ------------------
REVENUES:
Aerospace & Defense $160,238 $21,136 $ 371,019 $ 52,839
Products 64,659 49,804 184,242 143,158
Mobile Security 31,906 19,942 86,874 57,018
-------- ------- --------- --------
Total Revenues 256,803 90,882 642,135 253,015
-------- ------- --------- --------
COSTS AND EXPENSES:
Cost of revenues 185,457 61,953 456,771 176,396
Cost of warranty revision 5,000 - 5,000 -
Operating expenses 22,695 15,977 69,332 44,505
Amortization 984 72 2,937 201
Integration and other charges 932 368 9,736 4,565
-------- ------- --------- --------
OPERATING INCOME 41,735 12,512 98,359 27,348
Interest expense, net 1,400 1,475 5,185 2,291
Other expense (income), net 154 96 (121) 181
-------- ------- --------- --------
INCOME FROM CONTINUING OPERATIONS BEFORE
PROVISION FOR INCOME TAXES 40,181 10,941 93,295 24,876
PROVISION FOR INCOME TAXES 16,307 4,832 39,072 10,044
-------- ------- --------- --------
INCOME FROM CONTINUING OPERATIONS 23,874 6,109 54,223 14,832
DISCONTINUED OPERATIONS (NOTE 2):
INCOME (LOSS) FROM DISCONTINUED OPERATIONS,
NET OF TAX - 6 (38) 983
-------- ------- --------- --------
NET INCOME $ 23,874 $ 6,115 $ 54,185 $ 15,815
======== ======= ========= ========
NET INCOME PER COMMON SHARE - BASIC
INCOME FROM CONTINUING OPERATIONS $ 0.73 $ 0.22 $ 1.79 $ 0.52
INCOME FROM DISCONTINUED OPERATIONS 0.00 0.00 0.00 0.04
-------- ------- --------- --------
BASIC EARNINGS PER SHARE $ 0.73 $ 0.22 $ 1.79 $ 0.56
======== ======= ========= ========
See notes to condensed consolidated financial statements.
6
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - CONTINUED (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2004 SEPTEMBER 30, 2003 SEPTEMBER 30, 2004 SEPTEMBER 30, 2003
------------------ ------------------ ------------------ ------------------
NET INCOME PER COMMON SHARE - DILUTED
INCOME FROM CONTINUING OPERATIONS $ 0.70 $ 0.22 $ 1.72 $ 0.52
INCOME FROM DISCONTINUED OPERATIONS 0.00 0.00 0.00 0.04
---------- ---------- ---------- ----------
DILUTED EARNINGS PER SHARE $ 0.70 $ 0.22 $ 1.72 $ 0.56
========== ========== ========== ==========
WEIGHTED AVERAGE SHARES - BASIC 32,861 27,811 30,221 28,106
========== ========== ========== ==========
WEIGHTED AVERAGE SHARES - DILUTED 34,198 28,249 31,498 28,438
========== ========== ========== ==========
See notes to condensed consolidated financial statements.
7
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30, 2004 SEPTEMBER 30, 2003
------------------ ------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Income from continuing operations $ 54,223 $ 14,832
Adjustments to reconcile income from continuing operations to cash
provided by operating activities:
Depreciation and amortization 9,954 5,380
Loss on disposal of fixed assets 426 167
Deferred income taxes 2,785 3,676
Non-cash charge for acceleration of performance-based
restricted stock awards 6,294 -
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 (52,331) (1,556)
(Increase) decrease in inventories (58,848) 2,173
(Increase) in prepaid expenses and other assets (7,723) (3,682)
Increase in accounts payable, accrued expenses
and other current liabilities 37,594 11,808
Increase (decrease) in income taxes payable 28,235 (1,999)
--------- ---------
Net cash provided by operating activities 22,017 32,892
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (11,061) (5,645)
Purchase of patents and trademarks (117) (99)
Purchase of equity investment (5,275) -
Proceeds from sale of equity investment 5,823 -
Collection of note receivable 975 -
Decrease in restricted cash 2,600 -
Sale of business, net of cash disposed 125 -
Additional consideration for purchased businesses (2,323) (740)
Purchase of business, net of cash acquired (8,373) (5,828)
--------- ---------
Net cash used in investing activities (17,626) (12,312)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the exercise of stock options 11,448 6,588
Proceeds from the issuance of common stock 142,500 -
Cash paid for common stock offering costs (1,339) -
Repurchases of treasury stock - (22,684)
Proceeds from the issuance of long-term debt - 147,504
Cash paid for financing costs - (4,020)
Repayments of long-term debt (34,339) (1,399)
Borrowings under lines of credit 18,507 31,744
Repayments under lines of credit (18,054) (32,070)
--------- ---------
Net cash provided by financing activities 118,723 125,663
--------- ---------
Effect of exchange rate changes on cash and cash equivalents 240 478
Net cash used in discontinued operations (717) (4,868)
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 122,637 141,853
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 111,850 12,913
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 234,487 $ 154,766
========= =========
CASH AND CASH EQUIVALENTS, END OF PERIOD
CONTINUING OPERATIONS $ 234,487 $ 154,766
DISCONTINUED OPERATIONS - 5,051
--------- ---------
$ 234,487 $ 159,817
========= =========
See notes to condensed consolidated financial statements.
8
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED 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 nine 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, on July 2, 2004, we sold the security
consulting division of our litigation support services subsidiary, New
Technologies Armor, Inc. ("NTI"), which was the last remaining business in
discontinued operations. The remaining division in NTI, consisting primarily of
training services, has been included as part of the Products Division segment,
where management now resides. This business represented the last remaining
business in 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 CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
CONTINUED
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 September 30, 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 $1.4 million through October 15, 2004. We recorded a loss
of $8.8 million on the sale in the fourth quarter of 2003 primarily due to
unrealized foreign currency translation loss. 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, NTI, was
the last remaining business in discontinued operations. On July 2, 2004, we sold
the security consulting division of NTI. 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 the remaining portion
of NTI to its estimated fair value.
10
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
CONTINUED
A summary of the operating results of the discontinued operations for
the three months and nine months ended September 30, 2004 and 2003 is as
follows.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2004 SEPTEMBER 30, 2003 SEPTEMBER 30, 2004 SEPTEMBER 30, 2003
------------------ ------------------ ------------------ ------------------
(IN THOUSANDS) (IN THOUSANDS)
Revenue $ - $ 26,039 $ 1,733 $ 75,738
Cost of revenues - 18,078 697 53,447
Operating expenses - 4,882 821 16,299
Charge for impairment of long-lived
assets - 11,258 - 11,258
Integration and other charges - 104 - 598
-------- -------- ------- --------
Operating (loss) income - (8,283) 215 (5,864)
Interest expense, net - 18 2 71
Other expense, net - 20 273 472
-------- -------- ------- --------
Loss from discontinued operations before - (8,321) (60) (6,407)
for income tax benefit
Income tax benefit - (8,327) (22) (7,390)
-------- -------- ------- --------
Income (loss) from discontinued
operations
$ - $ 6 $ (38) $ 983
======== ======== ======= ========
11
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
CONTINUED
The following is a summary of the assets and liabilities of our discontinued
operations:
SEPTEMBER 30, DECEMBER 31,
2004 2003
------------- ------------
(IN THOUSANDS)
Assets
Cash and cash equivalents $ - $ 76
Accounts receivable, net - 549
Other current assets - 128
------ ------
Total current assets - 753
Property and equipment, net - 1,206
Goodwill, net - 356
Other assets - 41
------ ------
Total assets of discontinued operations $ - $2,356
====== ======
Liabilities
Current portion of long-term debt $ - $ 125
Accounts payable - 5
Accrued expenses and other current liabilities - 496
------ ------
Total current liabilities - 626
------ ------
Total liabilities of discontinued operations $ - $ 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 $11.3 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 $7.4 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 CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
CONTINUED
NOTE 3 - COMPREHENSIVE INCOME
The components of comprehensive income, net of tax provision of zero
and $31,000 for the three months ended September 30, 2004 and 2003,
respectively, and zero and $255,000 for the nine months ended September 30, 2004
and 2003, respectively, are listed below:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2004 SEPTEMBER 30, 2003 SEPTEMBER 30, 2004 SEPTEMBER 30, 2003
------------------ ------------------ ------------------ ------------------
(IN THOUSANDS) (IN THOUSANDS)
Net income $23,874 $6,115 $ 54,185 $15,815
Other comprehensive income (loss):
Foreign currency translations, net
of tax 507 34 (51) 2,265
------- ------ -------- -------
Comprehensive income: $24,381 $6,149 $ 54,134 $18,080
======= ====== ======== =======
NOTE 4 - INVENTORIES
Inventories are stated at the lower of cost or market using the
first-in, first-out (FIFO) method and are summarized as follows:
SEPTEMBER 30, 2004 DECEMBER 31, 2003
------------------ -----------------
(IN THOUSANDS)
Raw material $ 85,098 $ 40,397
Work-in-process 36,284 25,422
Finished goods 18,438 14,708
-------- --------
Total inventories $139,820 $ 80,527
======== ========
NOTE 5 - ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities are summarized as
follows:
SEPTEMBER 30, 2004 DECEMBER 31, 2003
--------------------- --------------------
(IN THOUSANDS)
Accrued expenses and other current liabilities $53,426 $ 40,787
Deferred consideration for acquisitions 4,383 2,780
Customer deposits 15,816 14,651
------- --------
Total accrued expenses and other current liabilities $73,625 $ 58,218
======= ========
13
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
CONTINUED
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 (2.20% at September 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 $5.7 million
and $5.9 million at September 30, 2004 and December 31, 2003, respectively, and
is included in other assets and long-term debt on the accompanying condensed
consolidated balance sheets.
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 REVENUES
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 CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
CONTINUED
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
7,000 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 the Aerospace & Defense Group
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 U.S. 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 resources outside of the United States and plan to
continue to do so in the future. The Armor Mobile Security Division has invested
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 adverse tax consequences,
15
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
CONTINUED
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 NINE MONTHS ENDED
SEPTEMBER 30, 2004 SEPTEMBER 30, 2003 SEPTEMBER 30, 2004 SEPTEMBER 30, 2003
------------------ ------------------ ------------------ ------------------
(IN THOUSANDS) (IN THOUSANDS)
Revenues:
Aerospace & Defense $ 160,238 $ 21,136 $ 371,019 $ 52,839
Products 64,659 49,804 184,242 143,158
Mobile Security 31,906 19,942 86,874 57,018
--------- -------- --------- ---------
Total revenues $ 256,803 $ 90,882 $ 642,135 $ 253,015
========= ======== ========= =========
Operating income (loss):
Aerospace & Defense $ 35,146 $ 5,088 $ 86,177 $ 12,431
Products 6,849 9,588 23,793 24,247
Mobile Security 3,699 638 8,619 1,432
Corporate (3,959) (2,802) (20,230) (10,762)
--------- -------- --------- ---------
Total operating income $ 41,735 $ 12,512 $ 98,359 $ 27,348
========= ======== ========= =========
SEPTEMBER 30, 2004 DECEMBER 31, 2003
------------------ -----------------
(IN THOUSANDS)
Total assets:
Aerospace & Defense $305,782 $209,834
Products 197,417 183,972
Mobile Security 88,912 63,161
Corporate 240,340 126,303
-------- --------
Total assets $832,451 $583,270
======== ========
16
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
CONTINUED
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 NINE MONTHS ENDED
SEPTEMBER 30, 2004 SEPTEMBER 30, 2003 SEPTEMBER 30, 2004 SEPTEMBER 30, 2003
------------------ ------------------ ------------------ ------------------
(IN THOUSANDS) (IN THOUSANDS)
Revenues:
North America $217,143 $68,924 $537,148 $186,754
South America 4,390 4,456 12,051 10,547
Africa 351 774 2,032 1,578
Europe/Asia 34,919 16,728 90,904 54,136
-------- ------- -------- --------
Total revenues $256,803 $90,882 $642,135 $253,015
======== ======= ======== ========
Geographic operating income:
North America $ 37,524 $10,313 $ 96,906 $ 24,973
South America 810 513 1,428 618
Africa 128 183 334 377
Europe/Asia 5,189 1,943 12,364 6,146
-------- ------- -------- --------
Total geographic operating Income $ 43,651 $12,952 $111,032 $ 32,114
======== ======= ======== ========
SEPTEMBER 30, 2004 DECEMBER 31, 2003
------------------ -----------------
(IN THOUSANDS)
Total assets:
North America $756,590 $523,954
South America 8,793 6,433
Africa - -
Europe/Asia 67,068 52,883
-------- --------
Total assets $832,451 $583,270
======== ========
A reconciliation of consolidated geographic operating income from
continuing operations to consolidated operating income from continuing
operations follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2004 SEPTEMBER 30, 2003 SEPTEMBER 30, 2004 SEPTEMBER 30, 2003
------------------ ------------------ ------------------ ------------------
(IN THOUSANDS) (IN THOUSANDS)
Consolidated geographic operating income $ 43,651 $ 12,952 $ 111,032 $ 32,114
Amortization (984) (72) (2,937) (201)
Integration and other charges (932) (368) (9,736) (4,565)
-------- -------- --------- --------
Operating income $ 41,735 $ 12,512 $ 98,359 $ 27,348
======== ======== ========= ========
17
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
CONTINUED
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 NINE MONTHS ENDED
SEPTEMBER 30, 2004 SEPTEMBER 30, 2003 SEPTEMBER 30, 2004 SEPTEMBER 30, 2003
------------------ ------------------ ------------------ ------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Numerator for basic and diluted
earnings per share:
Income from continuing operations $23,874 $ 6,109 $54,223 $14,832
------- ------- ------- -------
Denominator for basic earnings per share -
weighted average shares outstanding: 32,861 27,811 30,221 28,106
Effect of shares issuable under stock
option and stock grant plans, based on the
treasury stock method 1,337 438 1,277 332
------- ------- ------- -------
Denominator for diluted earnings per
share- Adjusted weighted average shares
outstanding 34,198 28,249 31,498 28,438
======= ======= ======= =======
Basic earnings per share from
continuing operations $ 0.73 $ 0.22 $ 1.79 $ 0.52
======= ======= ======= =======
Diluted earnings per share from
continuing operations $ 0.70 $ 0.22 $ 1.72 $ 0.52
======= ======= ======= =======
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 us.
18
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
CONTINUED
NOTE 10 - STOCKHOLDERS' EQUITY
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.
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 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.
Statement of Financial Accounting Standard No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"), as amended by Statement of Financial
Accounting Standard Number 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 nine month periods ended September 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 CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
CONTINUED
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2004 SEPTEMBER 30, 2003 SEPTEMBER 30, 2004 SEPTEMBER 30, 2003
------------------ ------------------ ------------------ ------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income as reported: $ 23,874 $ 6,115 $ 54,185 $ 15,815
Deduct: Total stock-based employee
compensation expense determined under fair
value based method for all awards, net of
related tax effects (1,368) (671) (3,902) (2,985)
Add: Employee compensation expense for
modification of stock option awards
included in reported net income, net of
income taxes - 506 57 506
-------- ------- -------- --------
Pro-forma net income $ 22,506 $ 5,950 $ 50,340 $ 13,336
======== ======= ======== ========
Earnings per share:
Basic - as reported $ 0.73 $ 0.22 $ 1.79 $ 0.56
======== ======= ======== ========
Basic - pro-forma $ 0.68 $ 0.21 $ 1.67 $ 0.47
======== ======= ======== ========
Diluted - as reported $ 0.70 $ 0.22 $ 1.72 $ 0.56
======== ======= ======== ========
Diluted - pro-forma $ 0.66 $ 0.21 $ 1.60 $ 0.47
======== ======= ======== ========
20
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
CONTINUED
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. ("OHE Brazil") was
audited by the Brazilian federal tax authorities and assessed over Ten Million
Reals (US$3.5 million based on the exchange rate as of September 30, 2004). OHE
Brazil has appealed the tax assessment and the case is pending. To the extent
that there may be any liability resulting from the 1999 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 1999 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 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
21
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
CONTINUED
estimated to be between US $3.8 and US $7.5 million, based on the exchange rate
as of September 30, 2004. 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
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. 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 U.S. Department of Justice ("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. In
2004 we 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.
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
22
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
CONTINUED
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 against us in
Florida state court by police organizations and individual police officers,
alleging, among other things, that our bullet-resistant soft body armor (vests)
manufactured and sold under the American Body Armor, Safariland and ProTech(TM)
brands, 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. On August 12,
2004, we announced that we had reached a preliminary settlement with respect to
the class action lawsuit filed in Duval County, Florida by the Southern States
Police Benevolent Association ("Southern States PBA"), subject to final court
approval. After a fairness hearing held on September 30, 2004, the Florida
Circuit Court gave final approval to that settlement as to all purchasers of
Zylon(R)-containing body armor manufactured under the brand name American Body
Armor, and scheduled a final fairness hearing for November 5, 2004, with regard
to purchasers of all other Zylon(R)-containing body armor manufactured by our
subsidiaries, Safariland(R) and ProTech(TM).
Pursuant to the terms of the class action settlement, the warranty on
the American Body Armor Xtreme ZX(R) vest (both NIJ threat level II and IIIA)
has been reduced from 5 years to 2 1/2 years. In addition, a purchaser of the
Xtreme ZX(R) vest has one of the following two options: (1) receive a new
American Body Armor Xtreme ZX(R) vest (either threat level II or IIIA) with a 2
1/2 year warranty, an extra carrier and a transferable rebate coupon for $100
applicable toward the next purchase of any soft body armor from American Body
Armor, Safariland, or ProTech(TM); or (2) receive any new vest of his/her
choosing from American Body Armor, Safariland, or ProTech, which must be the
same threat level as the original vest purchased, and a transferable rebate
coupon for $100 applicable toward the next purchase of any soft body armor from
American Body Armor, Safariland, or ProTech. The exchange for the new vest will
be at no additional cost to the purchaser. In addition, if the purchase price of
the new vest is less than the credit (based upon a court approved formula) for
the original vest, the purchaser will receive a cash refund for the difference.
We will also make available on our website, and pursuant to a request made from
the NIJ or a bona fide law enforcement agency to our customer service
department, testing data and protocols, and results relating to the testing of
our vests. We will also continue to test all of our Zylon(R)-containing vests,
and if such testing demonstrates that the tested vests fail to perform in
accordance with their warranties, we will implement an exchange program for
those models on a reasonably comparable basis to the American Body Armor Xtreme
ZX(R) exchange program outlined above.
All of the potential class members in the other Zylon(R)-related class
action lawsuit filed against us by the National Association of Police
Organizations, Inc. ("NAPO"), in Lee County, Florida, are also
23
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
CONTINUED
among the class members in the Southern States PBA case and are therefore
covered by the terms of the settlement. Accordingly, we believe that the NAPO
lawsuit should be dismissed and we are seeking a voluntary discontinuance from
plaintiffs' counsel, and if necessary, will move to dismiss that action.
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 recent lawsuits
alleged personal injuries of any kind, but instead speculated that our vests
which contained Zylon(R) were defective without the benefit of any scientific
studies that supported any claim of defect.
Second Chance Body Armor, one of our competitors in the
bullet-resistant market, 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 regarding its Zylon(R)-containing vests, the licensed technology
is not specifically related to the use of Zylon(R) fiber. Any adverse resolution
of these matters, however, 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, general liability and intellectual property.
Our products are used in a wide variety of law enforcement situations and
environments. Some of our products can cause serious personal or property injury
or death if not carefully and properly used by adequately trained personnel. We
believe that we have adequate insurance coverage for most claims that are
incurred in the normal course of business. In such cases, the effect on our
financial statements is generally limited to the amount of our insurance
deductible or self-insured retention. Our annual insurance premiums and self
insurance retention amounts have risen significantly over the past several years
and may continue to do so to the extent we are able to purchase insurance
coverage. At this time, we do not believe any such claims or pending litigation
will have a material impact on our financial position, operations and liquidity.
Reference is made to Part I, Item 3, Legal Proceedings, in our Annual
Report on Form 10-K/A for the fiscal year ended December 31, 2003, for a
description of other legal proceedings.
24
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
CONTINUED
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 September 30, 2004 and December
31, 2003, the related condensed consolidating statements of operations for each
of the three and nine month periods ended September 30, 2004 and September 30,
2003 and the related condensed consolidating statements of cash flows for the
nine month periods ended September 30, 2004 and September 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.
25
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
CONTINUED
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
SEPTEMBER 30, 2004
--------------------------------------------------------------------------------
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
---------- ------------ --------------- ------------- -------------
(IN THOUSANDS)
ASSETS
Current Assets:
Cash and cash equivalents $214,731 $ 8,350 $ 11,406 $ - $ 234,487
Accounts receivable, net - 111,599 14,586 - 126,185
Costs and earned gross profit in excess
of billings - 157 - - 157
Intercompany receivables 67,215 78,395 38,354 (183,964) -
Inventories - 109,789 30,031 - 139,820
Prepaid expenses and other current assets 2,999 20,369 3,114 - 26,482
Current assets of discontinued operations - - - - -
---------- ------------ --------------- ------------- -------------
Total Current Assets 284,945 328,659 97,491 (183,964) 527,131
Property and equipment, net 3,365 38,958 19,683 - 62,006
Goodwill, net - 179,536 2,077 - 181,613
Patents, licenses and trademarks, net - 44,896 174 - 45,070
Other assets 14,241 2,115 275 - 16,631
Long-term assets of discontinued operations - - - - -
Investment in subsidiaries 467,713 11,887 - (479,600) -
---------- ------------ --------------- ------------- -------------
Total Assets $770,264 $ 606,051 $119,700 $ (663,564) $ 832,451
========== ============ =============== ============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ - $ 466 $ 146 $ - $ 612
Short-term debt - - 973 - 973
Accounts payable 787 43,316 6,366 - 50,469
Accrued expenses and other current
liabilities 7,028 42,787 23,810 - 73,625
Income taxes payable 7,294 13,561 1,428 - 22,283
Intercompany payables 82,816 52,135 49,013 (183,964) -
Current liabilities of discontinued
operations - - - - -
---------- ------------ --------------- ------------- -------------
Total Current Liabilities 97,925 152,265 81,736 (183,964) 147,962
Long-term debt, less current portion 153,444 1,521 471 - 155,436
Other long-term liabilities (1,487) 8,988 1,170 - 8,671
Long-term liabilities of discontinued
operations - - - - -
---------- ------------ --------------- ------------- -------------
Total Liabilities 249,882 162,774 83,377 (183,964) 312,069
Stockholders' Equity:
Preferred stock - 1,450 - (1,450) -
Common stock 392 3,792 7,854 (11,646) 392
Additional paid in capital 489,293 265,353 46,094 (311,447) 489,293
Retained earnings (accumulated deficit) 99,127 172,682 (17,625) (155,057) 99,127
Accumulated other comprehensive loss 3,887 - - - 3,887
Treasury stock (72,317) - - - (72,317)
---------- ------------ --------------- ------------- -------------
Total Stockholders' Equity 520,382 443,277 36,323 (479,600) 520,382
---------- ------------ --------------- ------------- -------------
Total Liabilities and Stockholders' Equity $770,264 $ 606,051 $119,700 $ (663,564) $ 832,451
========== ============ =============== ============= =============
26
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
CONTINUED
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
========= ========= ========= ========= =========
27
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
CONTINUED
ARMOR HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2004
-----------------------------------------------------------------------------
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
---------- ----------- -------------- ------------- -------------
(IN THOUSANDS)
REVENUES:
Aerospace & Defense $ - $160,238 $ - $ - $ 160,238
Products - 53,621 11,038 - 64,659
Mobile Security - 6,556 26,103 (753) 31,906
---------- ----------- -------------- ------------- -------------
Total revenues - 220,415 37,141 (753) 256,803
---------- ----------- -------------- ------------- -------------
COSTS AND EXPENSES:
Cost of revenues - 156,777 29,433 (753) 185,457
Cost of warranty revision - 5,000 - - 5,000
Operating expenses 3,295 16,301 3,099 - 22,695
Amortization - 981 3 - 984
Integration and other charges 658 274 - - 932
Related party management (income) fees - - - - -
---------- ----------- -------------- ------------- -------------
OPERATING (LOSS) INCOME: (3,953) 41,082 4,606 - 41,735
Interest expense, net 1,317 23 60 - 1,400
Other expense, net (4) 96 62 - 154
Equity in (earnings) losses of
subsidiaries (28,303) (1,214) - 29,517 -
---------- ----------- -------------- ------------- -------------
INCOME FROM CONTINUING OPERATIONS BEFORE
(BENEFIT) PROVISION FOR INCOME TAXES 23,037 42,177 4,484 (29,517) 40,181
(BENEFIT) PROVISION FOR INCOME TAXES (837) 15,593 1,551 - 16,307
---------- ----------- -------------- ------------- -------------
INCOME FROM CONTINUING OPERATIONS 23,874 26,584 2,933 (29,517) 23,874
DISCONTINUED OPERATIONS:
Income from discontinued operations,
net of tax - - - - -
---------- ----------- -------------- ------------- -------------
NET INCOME $ 23,874 $ 26,584 $ 2,933 $(29,517) $ 23,874
========== =========== ============== ============= =============
28
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
CONTINUED
ARMOR HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2003
-----------------------------------------------------------------------------
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
---------- ------------ -------------- ------------ ------------
(IN THOUSANDS)
REVENUES:
Products $ - $42,110 $ 8,676 $ - $50,786
Mobile Security - 24,338 15,758 - 40,096
------- ------- -------- ------- -------
Total revenues - 66,448 24,434 - 90,882
------- ------- -------- ------- -------
COSTS AND EXPENSES:
Cost of revenues - 42,120 19,833 - 61,953
Operating expenses 2,661 10,945 2,371 - 15,977
Amortization - 69 3 - 72
Integration and other non-recurring charges 107 261 -- - 368
Related party management (income) fees (1,859) - 2,339 (480) -
------- ------- -------- ------- -------
OPERATING (LOSS) INCOME (909) 13,053 (112) 480 12,512
Interest expense, net 1,371 59 45 - 1,475
Other expense (income), net - 129 (33) - 96
Equity in (earnings) losses of subsidiaries (7,603) 256 -- 7,347 -
------- ------- -------- ------- -------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE PROVISION (BENEFIT) FOR INCOME TAXES 5,323 12,609 (124) (6,867) 10,941
PROVISION (BENEFIT) FOR INCOME TAXES (792) 4,748 876 - 4,832
------- ------- -------- ------- -------
INCOME (LOSS) FROM CONTINUING OPERATIONS 6,115 7,861 (1,000) (6,867) 6,109
DISCONTINUED OPERATIONS:
Net income (loss) from discontinued operations - 995 (509) (480) 6
------- ------- -------- ------- -------
NET INCOME (LOSS) $ 6,115 $ 8,856 $ (1,509) $(7,347) $ 6,115
======= ======= ======== ======= =======
29
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
CONTINUED
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2004
-----------------------------------------------------------------------------
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
---------- ----------- -------------- ------------- -------------
(IN THOUSANDS)
REVENUES:
Aerospace & Defense $ - $371,019 $ - $ - $ 371,019
Products - 151,237 33,005 - 184,242
Mobile Security - 18,139 70,639 (1,904) 86,874
---------- ----------- -------------- ------------- -------------
Total revenues - 540,395 103,644 (1,904) 642,135
---------- ----------- -------------- ------------- -------------
COSTS AND EXPENSES:
Cost of revenues - 375,920 82,755 (1,904) 456,771
Cost of warranty revision - 5,000 - - 5,000
Operating expenses 12,043 47,940 9,349 - 69,332
Amortization - 2,928 9 - 2,937
Integration and other charges 8,179 1,557 - - 9,736
Related party management fees (income) 16 (18) 2 - -
---------- ----------- -------------- ------------- -------------
OPERATING (LOSS) INCOME (20,238) 107,068 11,529 - 98,359
Interest expense, net 4,863 199 123 - 5,185
Other expense (income), net 23 (226) 82 - (121)
Equity in (earnings) losses of
subsidiaries (74,464) (1,844) - 76,308 -
---------- ----------- -------------- ------------- -------------
INCOME FROM CONTINUING OPERATIONS BEFORE
(BENEFIT) PROVISION FOR INCOME TAXES 49,340 108,939 11,324 (76,308) 93,295
(BENEFIT) PROVISION FOR INCOME TAXES (4,845) 39,848 4,069 - 39,072
---------- ----------- -------------- ------------- -------------
INCOME FROM CONTINUING OPERATIONS 54,185 69,091 7,255 (76,308) 54,223
DISCONTINUED OPERATIONS:
(Loss) from discontinued operations,
net of tax - (38) - - (38)
---------- ----------- -------------- ------------- -------------
NET INCOME $ 54,185 $ 69,053 $ 7,255 $ (76,308) $ 54,185
========== =========== ============== ============= =============
30
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
CONTINUED
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2003
-----------------------------------------------------------------------------------
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------------ ------------ ------------ ------------- ------------
(IN THOUSANDS)
REVENUES:
Products $ - $ 117,863 $26,277 $ - $144,140
Mobile Security - 63,110 45,765 - 108,875
-------- --------- ------- -------- --------
Total revenues - 180,973 72,042 - 253,015
-------- --------- ------- -------- --------
COSTS AND EXPENSES:
Cost of revenues - 117,278 59,118 - 176,396
Operating expenses 7,203 29,732 7,570 - 44,505
Amortization - 193 8 - 201
Integration and other non-recurring charges 3,456 1,109 - - 4,565
Related party management (income) fees (1,859) - 2,339 (480) -
-------- --------- ------- -------- --------
OPERATING (LOSS) INCOME (8,800) 32,661 3,007 - 27,348
Interest expense, net 1,866 250 175 - 2,291
Other expense, net - 131 50 - 181
Equity in (earnings) losses of
subsidiaries (22,688) 419 - 22,269 -
Related parting interest expense
(income), net 16 (16) - - -
-------- --------- ------- -------- --------
INCOME FROM CONTINUING OPERATIONS BEFORE
PROVISION (BENEFIT) FOR INCOME TAXES 12,006 31,877 2,782 (21,789) 24,876
PROVISION (BENEFIT) FOR INCOME TAXES (3,809) 12,011 1,842 - 10,044
-------- --------- ------- -------- --------
INCOME FROM CONTINUING OPERATIONS 15,815 19,866 940 (21,789) 14,832
-------- --------- ------- -------- --------
DISCONTINUED OPERATIONS:
Net income from discontinued operations - 542 921 (480) 983
-------- --------- ------- -------- --------
NET INCOME $ 15,815 $ 20,408 $ 1,861 $(22,269) $ 15,815
======== ========= ======= ======== ========
31
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
CONTINUED
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2004
------------------------------------------------------------------------------
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
----------- ----------- -------------- ------------- -------------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Income from continuing operations $ 54,185 $69,091 $ 7,255 $ (76,308) $ 54,223
Adjustments to reconcile income from
continuing operations to cash provided
by (used in) operating activities:
Depreciation and amortization 1,176 6,879 1,899 - 9,954
Loss on disposal of fixed assets - 251 175 - 426
Deferred income taxes 883 1,961 (59) - 2,785
Non-cash charge for acceleration of
performance-based restricted stock
awards 6,294 - - - 6,294
Non-cash impairment charge 1,408 - - - 1,408
Changes in operating assets & liabilities,
net of acquisitions:
Decrease (increase) in accounts receivable 1,201 (50,910) (2,622) - (52,331)
Decrease (increase) in intercompany
receivables & payables 30,866 (32,934) 2,068 - -
Increase in inventory - (47,850) (10,998) - (58,848)
Increase in prepaid expenses & other assets (3,589) (3,848) (286) - (7,723)
(Decrease) increase in accounts payable,
accrued expenses and other current liabilities (4,040) 37,939 3,695 - 37,594
Increase (decrease) in income taxes payable 28,762 (1,607) 1,080 - 28,235
----------- ----------- -------------- ------------- -------------
Net cash provided by (used in) operating 117,146 (21,028) 2,207 (76,308) 22,017
activities
----------- ----------- -------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (1,683) (7,890) (1,488) - (11,061)
Purchase of patents and trademarks - (117) - - (117)
Purchase of equity investment - (5,275) - - (5,275)
Proceeds from sale of equity investment - 5,823 - - 5,823
Collection of note receivable 975 - - - 975
Decrease in restricted cash 2,600 - - - 2,600
Sale of business, net of cash disposed - 125 - - 125
Additional consideration for purchased
businesses - (2,323) - - (2,323)
Investment in subsidiaries (147,680) 71,372 - 76,308 -
Purchase of businesses net of cash acquired - (8,373) - - (8,373)
----------- ----------- -------------- ------------- -------------
Net cash (used in) provided by investing
activities (145,788) 53,342 (1,488) 76,308 (17,626)
----------- ----------- -------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 11,448 - - - 11,448
Proceeds from the issuance of common stock 142,500 - - - 142,500
Cash paid for common stock offering costs (1,339) - - - (1,339)
Repayments of long-term debt - (34,232) (107) - (34,339)
Borrowings under lines of credit 17,705 - 802 - 18,507
Repayments under lines of credit (17,705) - (349) - (18,054)
----------- ----------- -------------- ------------- -------------
Net cash provided by (used in) financing 152,609 (34,232) 346 - 118,723
activities
----------- ----------- -------------- ------------- -------------
Effect of exchange rate on cash and cash - (99) 339 - 240
equivalents
Net cash used in discontinued operations - (717) - - (717)
----------- ----------- -------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH 123,967 (2,734) 1,404 - 122,637
EQUIVALENTS
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 90,764 11,084 10,002 - 111,850
----------- ----------- -------------- ------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $214,731 $ 8,350 $11,406 $ - $ 234,487
=========== =========== ============== ============= =============
32
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
CONTINUED
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2003
-------------------------------------------------------------------------------
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------------ ------------ ------------ ------------ ------------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Income from continuing operations $ 15,815 $ 19,866 $ 940 $(21,789) $ 14,832
Adjustments to reconcile income from
continuing operations to cash
provided by operating activities
Depreciation and amortization 974 2,972 1,434 - 5,380
Loss on disposal of fixed assets - 58 109 - 167
Deferred income taxes (4,379) 6,428 1,627 - 3,676
Non-cash termination charge 2,093 - - - 2,093
Changes in operating assets &
liabilities, net of acquisitions:
(Increase) decrease in accounts receivable - (3,915) 2,359 - (1,556)
Decrease (increase) in intercompany
receivables & payables 19,723 (19,090) (153) (480) -
Decrease in inventory - 1,206 967 - 2,173
(Increase) decrease in prepaid expenses &
other assets (7,347) 4,848 (1,183) - (3,682)
Increase in accounts payable, accrued
expenses and other current liabilities 5,043 2,620 4,145 - 11,808
(Decrease) increase in income taxes
payable (2,227) 148 80 - (1,999)
--------- -------- -------- -------- ---------
Net cash provided by operating activities 29,695 15,141 10,325 (22,269) 32,892
--------- -------- -------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (126) (3,330) (2,189) - (5,645)
Purchase of patents and trademarks - (99) - - (99)
Additional consideration for purchased
businesses - (740) - - (740)
Investment in subsidiaries (22,337) 203 (135) 22,269 -
Purchase of businesses, net of cash
acquired - (5,828) - - (5,828)
--------- -------- -------- -------- ---------
Net cash used in investing activities (22,463) (9,794) (2,324) 22,269 (12,312)
--------- -------- -------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 6,588 - - - 6,588
Treasury stock repurchases (22,684) - - - (22,684)
Cash paid for financing costs (4,020) - - - (4,020)
Proceeds from the issuance of long-term
debt 147,504 - - - 147,504
Repayments of long-term debt - (1,399) - - (1,399)
Borrowings under lines of credit 30,406 168 1,170 - 31,744
Repayments under lines of credit (30,406) (484) (1,180) - (32,070)
--------- -------- -------- -------- ---------
Net cash provided by (used in) financing
activities 127,388 (1,715) (10) - 125,663
--------- -------- -------- -------- ---------
Effect of exchange rate on cash and cash
equivalents 2,265 (186) (1,601) - 478
Net cash used in discontinued operations - (4,382) (486) - (4,868)
--------- -------- -------- -------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 136,885 (936) 5,904 - 141,853
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD 7,152 3,556 2,205 - 12,913
--------- -------- -------- -------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 144,037 $ 2,620 $ 8,109 $ - $ 154,766
========= ======== ======== ======== =========
33
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
CONTINUED
NOTE 13 - CREDIT AGREEMENT AMENDMENT
On January, 9, 2004, we amended our credit agreement to broaden our
ability make additional open-market purchases of publicly-traded securities
subject to certain limitations.
On March 29, 2004, we amended our credit agreement to allow us to pay
dividends subject to certain limitations.
NOTE 14 - COMMITMENTS AND CONTINGENCIES
On September 24, 2004, we entered into an off-balance sheet leasing
arrangement for an aircraft for company use. Upon expiration of this lease on
September 24, 2009, a subsidiary of the Company has the option to renew the
lease at fair market value subject to approval by the lessor, or, buy the
aircraft for approximately $10.0 million, or return the aircraft to the lessor
and, under a guarantee, pay any shortfall in sales proceeds from a third party
in an amount not to exceed $8.2 million. Annual rental expense related to this
agreement is approximately $1.0