SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
----------------------------------
FORM 10-Q
----------------------------------
(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, 2003, or
-------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD ________ FROM TO _________.
COMMISSION FILE NUMBER 0-18863
ARMOR HOLDINGS, INC.
-------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 59-3392443
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1400 MARSH LANDING PARKWAY, SUITE 112
JACKSONVILLE, FLORIDA 32250
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (904) 741-5400
-------------------------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No _
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes X No _
The number of shares outstanding of the registrant's Common Stock as of
August 12, 2003 is 27,670,800.
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.......................................... 27
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK................................... 41
ITEM 4. CONTROLS AND PROCEDURES............................. 42
PART II - OTHER INFORMATION.................................................
ITEM 1. LEGAL PROCEEDINGS.................................. 43
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS............................................ 43
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................... 43
SIGNATURES
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements
of Armor Holdings, Inc. and its wholly-owned subsidiaries include all
adjustments (consisting only of normal recurring accruals and the elimination of
all material intercompany accounts and transactions) which management considers
necessary for a fair presentation of operating results as of June 30, 2003 and
for the three-month and six-months periods ended June 30, 2003 and June 30,
2002.
These unaudited condensed consolidated financial statements should be
read in conjunction with the financial statements included in our Annual Report
on Form 10-K for the year ended December 31, 2002.
3
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
JUNE 30, 2003 DECEMBER 31, 2002
(UNAUDITED) *
----------------------- -------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 10,841 $ 12,913
Accounts receivable (net of allowance for
doubtful accounts of $1,431 and $1,428) 58,077 58,513
Costs and earned gross profit in excess of billings 1,423 234
Inventories 60,909 62,330
Prepaid expenses and other current assets 15,840 12,212
Current assets of discontinued operations (Note 2) 28,231 28,825
----------------------- -------------------------
Total current assets 175,321 175,027
PROPERTY AND EQUIPMENT (net of
accumulated depreciation of $15,974 and
$12,919) 49,281 47,136
GOODWILL (net of accumulated amortization
of $4,024 and $4,024) 98,913 98,736
PATENTS, LICENSES AND TRADEMARKS
(net of accumulated amortization of $2,295 and $2,169) 7,433 7,521
OTHER ASSETS 11,552 9,048
LONG-TERM ASSETS OF DISCONTINUED OPERATIONS (Note 2) 30,047 30,285
----------------------- -------------------------
TOTAL ASSETS $ 372,547 $ 367,753
======================= =========================
* Condensed from audited financial statements.
See notes to condensed consolidated financial statements.
4
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
(IN THOUSANDS, EXCEPT FOR SHARE DATA)
JUNE 30, 2003 DECEMBER 31, 2002
(UNAUDITED) *
---------------------- -------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 1,961 $ 1,813
Short-term debt 627 599
Accounts payable 19,417 23,770
Accrued expenses and other current liabilities 34,221 25,116
Income taxes payable 2,265 5,913
Current liabilities of discontinued operations (Note 2) 15,543 17,225
---------------------- -------------------------
Total current liabilities 74,034 74,436
LONG-TERM LIABILITIES:
Long-term debt, less current portion 19,730 5,072
Discontinued operations (Note 2) 245 168
---------------------- -------------------------
Total liabilities 94,009 79,676
COMMITMENTS AND CONTINGENCIES (NOTE 11)
Preferred stock, $.01 par value, 5,000,000 shares
authorized; no shares issued and outstanding - -
Common stock, $.01 par value; 50,000,000 shares
authorized; 33,630,853 and 33,593,977 issued and
27,570,631 and 29,456,692 outstanding at
June 30, 2003 and December 31, 2002,
respectively 336 336
Additional paid-in capital 308,702 307,487
Retained earnings 43,756 34,056
Accumulated other comprehensive loss (1,939) (4,169)
Treasury stock (72,317) (49,633)
---------------------- -------------------------
Total stockholders' equity 278,538 288,077
---------------------- -------------------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 372,547 $ 367,753
====================== =========================
* Condensed from audited financial statements.
See notes to condensed consolidated financial statements.
5
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ ----------------
JUNE 30, 2003 JUNE 30, 2002 JUNE 30, 2003 JUNE 30, 2002
------------- ------------- ------------- -------------
REVENUES:
Products $ 49,347 $ 43,057 $ 93,354 $ 82,002
Mobile Security 32,312 28,548 68,779 59,207
-------------------- ------------------ ----------------- ----------------
Total Revenues 81,659 71,605 162,133 141,209
-------------------- ------------------ ----------------- ----------------
COSTS AND EXPENSES:
Cost of sales 57,281 48,904 114,443 96,534
Operating expenses 14,524 12,781 28,528 24,194
Amortization 69 32 129 151
Integration and other non-recurring
charges 3,775 1,720 4,197 3,117
-------------------- ------------------ ----------------- ----------------
OPERATING INCOME 6,010 8,168 14,836 17,213
Interest expense, net 437 284 816 326
Other expense (income), net 16 - 85 (64)
-------------------- ------------------ ----------------- ----------------
INCOME FROM CONTINUING OPERATIONS BEFORE
PROVISION FOR INCOME TAXES 5,557 7,884 13,935 16,951
PROVISION FOR INCOME TAXES 2,079 3,060 5,212 6,560
-------------------- ------------------ ----------------- ----------------
INCOME FROM CONTINUING OPERATIONS 3,478 4,824 8,723 10,391
-------------------- ------------------ ----------------- ----------------
DISCONTINUED OPERATIONS (NOTE 2):
INCOME (LOSS) FROM DISCONTINUED OPERATIONS
BEFORE PROVISION (BENEFIT) FOR INCOME TAXES 1,860 (817) 1,914 (574)
PROVISION (BENEFIT) FOR INCOME TAXES 725 (68) 937 (218)
-------------------- ------------------ ----------------- ----------------
INCOME (LOSS) FROM DISCONTINUED OPERATIONS 1,135 (749) 977 (356)
-------------------- ------------------ ----------------- ----------------
NET INCOME $ 4,613 $ 4,075 $9,700 $ 10,035
==================== ================== ================= ================
NET INCOME/(LOSS) PER COMMON SHARE - BASIC
INCOME FROM CONTINUING OPERATIONS $ 0.13 $ 0.15 $ 0.31 $ 0.33
INCOME (LOSS) FROM DISCONTINUED OPERATIONS 0.04 (0.02) 0.03 (0.01)
-------------------- ------------------ ----------------- ----------------
BASIC EARNINGS PER SHARE $ 0.17 $ 0.13 $ 0.34 $ 0.32
==================== ================== ================= ================
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, 2003 JUNE 30, 2002 JUNE 30, 2003 JUNE 30, 2002
------------- ------------- ------------- -------------
NET INCOME/(LOSS) PER COMMON SHARE - DILUTED
INCOME FROM CONTINUING OPERATIONS $ 0.13 $ 0.15 $ 0.31 $ 0.32
INCOME (LOSS) FROM DISCONTINUED OPERATIONS 0.04 (0.02) 0.03 (0.01)
-------------------- ------------------- ------------------- -------------------
DILUTED EARNINGS (LOSS) PER SHARE $ 0.17 $ 0.13 $ 0.34 $ 0.31
==================== =================== =================== ===================
WEIGHTED AVERAGE SHARES - BASIC 27,555 31,193 28,255 31,112
==================== =================== =================== ===================
WEIGHTED AVERAGE SHARES - DILUTED 27,836 32,110 28,511 32,044
==================== =================== =================== ===================
See notes to condensed consolidated financial statements.
7
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
ARMOR HOLDINGS, INC. AND SUBSIDIARIES (UNAUDITED)
(IN THOUSANDS)
SIX MONTHS ENDED
----------------
JUNE 30, 2003 JUNE 30, 2002
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Income from continuing operations $ 8,723 $ 10,391
Adjustments to reconcile income from continuing operations to cash used in
operating activities:
Depreciation and amortization 3,468 2,705
Loss on disposal of fixed assets 39 110
Deferred income taxes 1,713 508
Non-cash termination charge 2,093 --
Changes in operating assets and liabilities, net of acquisitions:
Increase in accounts receivable (753) (987)
Decrease (increase) in inventories 1,332 (9,885)
Increase in prepaid expenses and other assets (4,170) (5,343)
Increase (decrease) in accounts payable, accrued
expenses and other current liabilities 3,971 (6,338)
(Decrease) increase in income taxes payable (3,648) 4,988
----------------------- ------------------------
Net cash provided by (used in) operating activities 12,768 (3,851)
----------------------- ------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of patents and trademarks (38) (32)
Purchase of property and equipment (3,918) (1,764)
Additional consideration for purchased businesses (243) (2,029)
Purchase of businesses, net of cash acquired -- (3,380)
----------------------- ------------------------
Net cash used in investing activities (4,199) (7,205)
----------------------- ------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the exercise of stock options 136 2,728
Treasury stock purchases (22,684) (331)
Cash paid for offering costs -- (326)
Repayments of long-term debt (362) (275)
Borrowings under line of credit 30,205 14,202
Repayments under line of credit (15,009) (14,299)
----------------------- ------------------------
Net cash (used in) provided by financing activities (7,714) 1,699
----------------------- ------------------------
Effect of exchange rate changes on cash and cash equivalents 467 79
Net cash used in and transferred from discontinued operations (3,394) (1,702)
----------------------- ------------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (2,072) (10,980)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 12,913 47,489
----------------------- ------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 10,841 $ 36,509
======================= ========================
CASH AND CASH EQUIVALENTS, END OF PERIOD
CONTINUING OPERATIONS $ 10,841 $ 36,509
DISCONTINUED OPERATIONS 1,916 5,254
----------------------- ------------------------
$ 12,757 $ 41,763
======================= ========================
See notes to condensed consolidated financial statements.
8
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED (UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
of Armor Holdings, Inc. and its wholly-owned subsidiaries (the "Company", "we",
"our", "us") have been prepared in accordance with generally accepted accounting
principles for interim information and the instructions to Form 10-Q and Rule
10-01 of Regulation S-X, and do not include all the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting only of
normal recurring accruals and the elimination of all material intercompany
accounts and transactions) considered necessary by management to present a fair
presentation have been included. The results of operations for the three and
six-month periods are not necessarily indicative of the results to be expected
for the full year and should be read in conjunction with the consolidated
financial statements and notes thereto included in our Annual Report on Form
10-K for the year ended December 31, 2002. The amounts disclosed in the
footnotes are related to continuing operations unless otherwise indicated.
As discussed in Note 2 and elsewhere in this Form 10-Q, we announced
our intention to sell our ArmorGroup Services Division (the "Services
Division"). As a result, the assets and liabilities of the Services Division
have been classified as assets and liabilities of discontinued operations on our
balance sheet and the results of their operations classified as income from
discontinued operations in the accompanying unaudited condensed consolidated
financial statements. Certain prior year amounts have been reclassified to
conform to this presentation.
NOTE 2 - DISCONTINUED OPERATIONS
On July 15, 2002, we announced plans to sell the Services Division and
the retention of Merrill Lynch & Company to assist in the sale. In accordance
with Statement of Financial Accounting Standards No. 144, "Accounting for
Impairment or Disposal of Long-Lived Assets," (SFAS 144) the assets and
liabilities of the Services Division have been classified as held for sale, with
its operating results in the current and prior periods reported in discontinued
operations for the three and six-month periods ended June 30, 2003 and 2002.
USDS, Inc., a subsidiary providing certain training services, formerly reported
as a part of the Services Division is not included in the amounts classified as
assets held for sale. The assets and liabilities as well as the operating
results of USDS, Inc. have been reclassified to the Armor Holdings Products
Division where management oversight currently resides.
On January 24, 2003, we executed an agreement to negotiate exclusively
with an undisclosed party for the sale of the Security Consulting business of
the Services Division, headquartered in London. This exclusive agreement has
since expired, however, we are still actively pursuing a sale of this business
to a number of potential buyers.
On April 17, 2003, we announced that we had completed the sale of our
ArmorGroup Integrated Systems business through the sale of 100% of the stock of
ArmorGroup Integrated Systems, Inc. and Low Voltage Systems Technologies, Inc.
to Aerwav Integration Systems, Inc. ("AIS"). AIS is a wholly owned subsidiary of
Aerwav Holdings, LLC. As consideration for the integrated systems business, we
received a $4.1 million collateralized note due in two years and a warrant for
approximately 2.5% of AIS. In accordance with SFAS 144, we have recorded a loss
of $366,000 on the sale.
9
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED (UNAUDITED)
For the three months ended June 30, 2003, net income from discontinued
operations was $1,135,000 compared to a net loss of $749,000 in the comparable
period in the prior year. Excluding the ArmorGroup Integrated Systems business
loss on sale of $366,000 and net income of $88,000 in the three-month period
ended June 30, 2003 and a net loss of $595,000 for the three month period ended
June 30, 2002, net income was $1,413,000 and a net loss of $154,000,
respectively.
For the six months ended June 30, 2003, net income from discontinued
operations was $977,000 compared to a net loss of $356,000 in the comparable
period in the prior year. Excluding the ArmorGroup Integrated Systems business
loss on sale of $366,000 and a net loss of $613,000 in the three-month period
ended June 30, 2003 and a net loss of $723,000 for the six month period ended
June 30, 2002, net income was $2.0 million and $367,000 for the six months ended
June 30, 2003 and 2002, respectively.
Based upon our analysis and discussions with our advisors regarding the
estimated realizable value, net of selling costs, of the Services Division, we
reduced its carrying value, and recorded impairment charges of $30.3 million in
fiscal 2002. This impairment charge consisted of approximately $6.1 million in
estimated disposal costs and a $24.2 million non-cash goodwill reduction. The
reduction in the carrying value of the Services Division is management's best
estimate based upon currently available information, including discussions with
our investment bankers. The actual proceeds from the disposal of our Services
Division may differ materially from our current estimates and could result in
either a gain or a loss upon final disposal.
A summary of the operating results of the discontinued operations for
the three months and six months ended June 30, 2003 and 2002 is as follows.
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ ----------------
JUNE 30, 2003 JUNE 30, 2002 JUNE 30, 2003 JUNE 30, 2002
------------- ------------- ------------- -------------
(IN THOUSANDS) (IN THOUSANDS)
Revenue $ 23,911 $ 26,259 $ 49,699 $ 50,526
Cost of sales 16,187 18,907 35,369 36,110
Operating expenses 5,005 8,052 11,417 14,566
Integration and other non-recurring
charges 452 94 494 389
-------------------- -------------------- -------------------- -------------------
Operating income (loss) 2,267 (794) 2,419 (539)
Interest expense, net 15 39 53 93
Other expense (income), net 392 (16) 452 (58)
-------------------- -------------------- -------------------- -------------------
Income (loss) from discontinued
operations before provision (benefit)
for income taxes 1,860 (817) 1,914 (574)
Provision (benefit) for
income taxes 725 (68) 937 (218)
-------------------- -------------------- -------------------- -------------------
Income (loss) from discontinued
operations $ 1,135 $ (749) $ 977 $ (356)
==================== ==================== ==================== ===================
10
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED (UNAUDITED)
The following is a summary of the assets and liabilities of our discontinued
operations:
JUNE 30, 2003 DECEMBER 31, 2002
---------------------- -------------------------
(IN THOUSANDS)
Assets
Cash and cash equivalents $ 1,916 $ 3,638
Accounts receivable, net 17,115 16,228
Other current assets 9,200 8,959
---------------------- -------------------------
Total current assets 28,231 28,825
Property and equipment, net 12,890 12,481
Goodwill, net 12,995 12,995
Other assets 4,162 4,809
---------------------- -------------------------
Total assets of discontinued operations $58,278 $59,110
====================== =========================
Liabilities
Current portion of long-term debt $ 5 $ 186
Short-term debt 275 350
Accounts payable 2,089 2,405
Accrued expenses and other current liabilities 13,174 14,284
---------------------- -------------------------
Total current liabilities 15,543 17,225
Long-term debt 245 168
---------------------- -------------------------
Total liabilities of discontinued operations $15,788 $17,393
====================== =========================
11
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED (UNAUDITED)
NOTE 3 - COMPREHENSIVE INCOME
The components of comprehensive income, net of tax provision (benefit)
of $128,000 and ($253,000) for the three months ended June 30, 2003 and 2002,
respectively, and $224,000 and ($223,000) for the six months ended June 30, 2003
and 2002, respectively, are listed below:
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ ----------------
JUNE 30, 2003 JUNE 30, 2002 JUNE 30, 2003 JUNE 30, 2002
------------- ------------- ------------- -------------
(IN THOUSANDS) (IN THOUSANDS)
Net income $ 4,613 $ 4,075 $ 9,700 $ 10,035
Other comprehensive income (loss):
Foreign currency translations, net
of tax 1,861 30 2,230 (235)
------------------- ------------------- -------------------- -------------------
Comprehensive income: $ 6,474 $ 4,105 $ 11,930 $ 9,800
=================== =================== ==================== ===================
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, 2003 DECEMBER 31, 2002
------------------------ -----------------------
(IN THOUSANDS)
Raw material $ 33,461 $ 30,211
Work-in-process 13,338 15,733
Finished goods 14,110 16,386
------------------------ -----------------------
Total inventories $ 60,909 $ 62,330
======================== =======================
NOTE 5 - ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities are summarized as
follows:
JUNE 30, 2003 DECEMBER 31, 2002
------------------------ -----------------------
(IN THOUSANDS)
Accrued expenses and other current liabilities $ 22,561 $ 16,988
Deferred consideration for acquisitions 1,757 1,826
Customer deposits 9,903 6,302
------------------------ -----------------------
Total accrued expenses and other current liabilities $ 34,221 $ 25,116
======================== =======================
12
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED (UNAUDITED)
NOTE 6 - INFORMATION CONCERNING BUSINESS SEGMENTS AND
GEOGRAPHICAL SALES
We are a leading manufacturer and provider of security products,
vehicle armor systems, and security training services. Our products and services
are used by military, law enforcement, security and corrections personnel
throughout the world, as well as governmental agencies, multinational
corporations and non-governmental organizations. Our continuing operations are
organized and operated under two business segments: Armor Holdings Products and
Armor Mobile Security. Our Services Division has been classified as discontinued
operations and is no longer included in this presentation (See Note 2).
Armor Holdings Products. Our Armor Holdings Products Division
manufactures and sells a broad range of high quality equipment marketed under
brand names that are well known and respected in the military and law
enforcement communities. Products manufactured by this division include
concealable and tactical body armor, hard armor, duty gear, less-lethal
munitions, anti-riot products, police batons, emergency lighting products,
forensic products, firearms accessories and weapon maintenance products. USDS,
Inc., a small subsidiary providing certain training services formerly reported
as a part of the Services Division, is not included in the assets classified as
assets held for sale or discontinued operations and has been reclassified to our
Armor Holdings Products Division where management oversight currently resides.
Armor Mobile Security. Our Armor Mobile Security Division manufactures
and installs ballistic and blast protection armoring systems for military
vehicles, commercial vehicles, military aircraft and missile components. Under
the brand name O'Gara-Hess & Eisenhardt ("O'Gara"), we are the sole-source
provider to the U.S. military for the supply of armoring and blast protection
systems as well as maintenance services for the High Mobility Multi-purpose
Wheeled Vehicle (HMMWV, commonly known as the Humvee). Additionally, we have
been subcontracted to develop a ballistically armored and sealed truck cab for
the High Mobility Artillery Rocket System (HIMARS) a program currently in
low-rate initial production for the U.S. Army. We armor a variety of commercial
vehicles including limousines, sedans, sport utility vehicles, commercial trucks
and cash-in-transit vehicles, to protect against varying degrees of ballistic
and blast threats. The Armor Mobile Security Division was created in connection
with our acquisition of O'Gara on August 22, 2001 (the "O'Gara acquisition").
We have invested substantial resources outside of the United States and
plan to continue to do so in the future. The Armor Mobile Security Division has
invested substantial resources in Europe and South America. These operations are
subject to the risk of new and different legal and regulatory requirements in
local jurisdictions, tariffs and trade barriers, potential difficulties in
staffing and managing local operations, currency risks, potential imposition of
restrictions on investments, potentially adverse tax consequences, including
imposition or increase of withholding and other taxes on remittances and other
payments by subsidiaries, and local economic, political and social conditions.
Governments of many developing countries have exercised and continue to exercise
substantial influence over many aspects of the private sector. Government
actions in the future could have a significant adverse effect on economic
conditions in a developing country or may otherwise have a material adverse
effect on us and our operating companies. We do not have political risk
insurance in the countries in which we currently conduct business. Moreover,
applicable agreements relating to our
13
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED (UNAUDITED)
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):
SIX MONTHS ENDED
JUNE 30, 2003 JUNE 30, 2002
-------------------------- -------------------------
(IN THOUSANDS)
Revenues:
Products $ 93,354 $ 82,002
Mobile Security 68,779 59,207
--------------------------- --------------------------
Total revenues $ 162,133 $ 141,209
=========================== ==========================
Operating income:
Products $ 14,658 $ 14,814
Mobile Security 8,138 6,113
Corporate (7,960) (3,714)
--------------------------- --------------------------
Total operating income $ 14,836 $ 17,213
=========================== ==========================
Total assets:
Products $ 179,810 $ 166,966
Mobile Security 111,700 103,315
Corporate 22,759 38,515
--------------------------- --------------------------
Total assets $ 314,269 $ 308,796
=========================== ==========================
14
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED (UNAUDITED)
The following unaudited information with respect to revenues, operating
income from continuing operations (geographic operating income from continuing
operations before amortization expense and integration and other non-recurring
charges) and total assets to principal geographic areas are as follows:
SIX MONTHS ENDED
JUNE 30, 2003 JUNE 30, 2002
------------------------ -------------------------
(IN THOUSANDS)
Revenues:
North America $ 117,830 $ 101,434
South America 6,091 9,775
Africa 804 1,036
Europe/Asia 37,408 28,964
------------------------- --------------------------
Total revenue $ 162,133 $ 141,209
========================= ==========================
Geographic operating income:
North America $ 14,660 $ 14,803
South America 105 649
Africa 194 336
Europe/Asia 4,203 4,693
------------------------- --------------------------
Total geographic operating income $ 19,162 $ 20,481
========================= ==========================
Total assets:
North America $262,878 $ 278,553
South America 6,398 6,503
Africa - -
Europe/Asia 44,993 23,740
------------------------- --------------------------
Total assets $314,269 $ 308,796
========================= ==========================
A reconciliation of consolidated geographic operating income from
continuing operations to consolidated operating income from continuing
operations follows:
SIX MONTHS ENDED
JUNE 30, 2003 JUNE 30, 2002
------------------------ -------------------------
(IN THOUSANDS)
Consolidated geographic operating income $ 19,162 $ 20,481
Amortization (129) (151)
Integration and other non-recurring charges (4,197) (3,117)
------------------------ -------------------------
Operating income $ 14,836 $ 17,213
======================== =========================
15
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED (UNAUDITED)
NOTE 7. 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, 2003 JUNE 30, 2002 JUNE 30, 2003 JUNE 30, 2002
------------- ------------- ------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Numerator for basic and diluted earnings per share:
Income from continuing operations $ 3,478 $ 4,824 $ 8,723 $ 10,391
----------------- ------------------ ---------------- -----------------
Denominator for basic earnings per share -
weighted average shares outstanding: 27,555 31,193 28,255 31,112
Effect of shares issuable under stock
option and stock grant plans, based on the
treasury stock method 281 917 256 932
----------------- ------------------ ---------------- -----------------
Denominator for diluted earnings per share-
Adjusted weighted average shares outstanding 27,836 32,110 28,511 32,044
----------------- ------------------ ---------------- -----------------
Basic earnings per share from $ 0.13 $ 0.15 $ 0.31 $ 0.33
continuing operations ================= ================== ================ =================
Diluted earnings per share from
continuing operations $ 0.13 $ 0.15 $ 0.31 $0.32
================= ================== ================ =================
16
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED (UNAUDITED)
NOTE 8. NEW ACCOUNTING PRONOUNCEMENTS
In April 2003, the FASB issued Statement of Financial Accounting
Standard No. 149," Amendment of Statement 133 on Derivative Instruments and
Hedging Activities" (SFAS 149). SFAS 149 amends and clarifies financial
accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities
under Statement of Financial Accounting Standard No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (SFAS 133). SFAS 149 is effective
for contracts entered into or modified and hedging relationships designated
after June 30, 2003, except for the provisions of SFAS 149 that relate to SFAS
133 Implementation Issues that have been effective for fiscal quarters that
began prior to June 15, 2003, which should continue to be applied in accordance
with their respective effective dates. Adoption of this standard will have no
effect on us.
In May 2003, the FASB issued Statement of Financial Accounting Standard
No. 150," Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity" (SFAS 150). SFAS 150 establishes standards for how
an issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an issuer
classify a financial instrument that is within its scope as a liability (or an
asset in some circumstances). Many of those instruments were previously
classified as equity. SFAS 150 is effective for financial instruments entered
into or modified after May 31, 2003, and otherwise is effective at the beginning
of the first interim period beginning after June 15, 2003. Adoption of this
standard will have no effect on us.
17
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED (UNAUDITED)
NOTE 9. STOCKHOLDERS' EQUITY
Statement of Financial Accounting Standard No. 123, "Accounting for
Stock-Based Compensation" (SFAS 123), as amended by SFAS 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure," establishes a fair value
based method of accounting for stock-based employee compensation plans; however,
it also allows an entity to continue to measure compensation cost for those
plans using the intrinsic value based method of accounting prescribed by
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB 25). Under the fair value based method, compensation cost is
measured at the grant date based on the value of the award and is recognized
over the service period, which is usually the vesting period. Under the
intrinsic value based method, compensation costs is the excess, if any, of the
quoted market price of the stock at the grant date or other measurement date
over the amount an employee must pay to acquire the stock. We have elected to
continue to account for our employee stock compensation plans under APB 25 with
pro forma disclosures of net earnings and earnings per share, as if the fair
value based method of accounting defined in SFAS 123 had been applied. If
compensation cost for stock option grants had been determined based on the fair
value on the grant dates for June 30, 2003 and 2002 consistent with the method
prescribed by SFAS 123, the Company's net earnings and earnings per share would
have been adjusted to the pro forma amounts indicated below:
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ ----------------
JUNE 30, 2003 JUNE 30, 2002 JUNE 30, 2003 JUNE 30, 2002
------------- ------------- ------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income as reported: $ 4,613 $ 4,075 $ 9,700 $ 10,035
Deduct: Total stock-based employee
compensation expense determined under fair
value based method for all awards, net of
related tax effects (1,156) (1,180) (2,314) (1,735)
----------------- ------------------ ----------------- ----------------
Pro-forma net income $ 3,457 $ 2,895 $ 7,386 $ 8,300
================= ================== ================= ================
Earnings per share:
Basic - as reported $ 0.17 $ 0.13 $ 0.34 $ 0.32
================= ================== ================= ===============
Basic - pro-forma $ 0.13 $ 0.09 $ 0.26 $ 0.27
================= ================== ================= ================
Diluted - as reported $ 0.17 $ 0.13 $ 0.34 $ 0.31
================= ================== ================= ================
Diluted - pro-forma $ 0.12 $ 0.09 $ 0.26 $ 0.26
================= ================== ================= ================
18
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED (UNAUDITED)
NOTE 10. LEGAL PROCEEDINGS
Reference is made to Part I, Item 3, Legal Proceedings, in our Annual
Report on Form 10-K for the year ended December 31, 2002, and Part II, Item 1,
Legal Proceedings in our Quarterly Report on Form 10-Q for the quarter ended
March 31, 2003 for a description of legal proceedings.
NOTE 11. GUARANTOR AND NONGUARANTOR FINANCIAL STATEMENTS
On August 12, 2003 we sold $150 million of Senior Subordinated Notes in
private placements pursuant to Rule 144A. The Senior Subordinated Notes are
uncollateralized obligations and rank junior in right of payment to our existing
and future senior debt. The Senior Subordinated Notes are guaranteed, jointly
and severally on a senior uncollateralized basis, by certain domestic
subsidiaries.
The following consolidating condensed financial information presents
the consolidating condensed balance sheets as of June 30, 2003 and December 31,
2002, the related condensed statements of income for each of the six and three
month periods ended June 30, 2003 and June 30, 2002 and the related condensed
statements of cash flows for the six month periods ended June 30, 2003 and June
30, 2002 for:
a) Armor Holdings, Inc., the parent,
b) the guarantor subsidiaries,
c) the nonguarantor subsidiaries, and
d) Armor Holdings, Inc. on a consolidated basis
The information includes elimination entries necessary to consolidate
Armor Holdings, Inc., the parent, with the guarantor and nonguarantor
subsidiaries.
Investments in subsidiaries are accounted for by the parent using the
equity method of accounting. The guarantor and nonguarantor subsidiaries are
presented on a combined basis. The principal elimination entries eliminate
investments in subsidiaries and intercompany balances and transactions. Separate
financial statements for the guarantor and nonguarantor subsidiaries are not
presented because management believes such financial statements would not be
meaningful to investors.
19
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, 2003
--------------------------------------------------------------------------------
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
---------- ------------ --------------- ------------- -------------
(IN THOUSANDS)
ASSETS
Current Assets:
Cash and cash equivalents $ 2,839 $ 2,949 $ 5,053 $ -- $ 10,841
Accounts receivable, net -- 43,325 14,752 -- 58,077
Costs and earned gross profit in excess
of billings -- 1,423 -- -- 1,423
Intercompany receivables 94,705 47,645 5,667 (148,017) --
Inventories -- 45,823 15,086 -- 60,909
Prepaid expenses and other current assets 14,070 12,978 3,193 (14,401) 15,840
Current assets of discontinued operations -- -- 28,231 -- 28,231
---------- ------------ --------------- ------------- -------------
Total Current Assets 111,614 154,143 71,982 (162,418) 175,321
Property and equipment, net 2,269 27,544 19,468 -- 49,281
Goodwill, net -- 97,003 1,910 -- 98,913
Patents, licenses and trademarks, net -- 7,244 189 -- 7,433
Other assets 10,363 754 435 -- 11,552
Long-term assets of discontinued operations -- -- 30,047 -- 30,047
Investment in subsidiaries 190,374 10,261 -- (200,635) --
---------- ------------ --------------- ------------- -------------
Total Assets $314,620 $296,949 $ 124,031 $(363,053) $ 372,547
========== ============ =============== ============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ -- $ 1,793 $ 168 $ -- $ 1,961
Short-term debt -- -- 627 -- 627
Accounts payable 634 13,068 5,715 -- 19,417
Accrued expenses and other current
liabilities 6,125 12,394 15,702 -- 34,221
Income taxes payable 833 -- 1,432 -- 2,265
Intercompany payables 13,490 103,455 13,281 (130,226) --
Current liabilities of discontinued
operations -- -- 33,334 (17,791) 15,543
---------- ------------ --------------- ------------- -------------
Total Current Liabilities 21,082 130,710 70,259 (148,017) 74,034
Long-term debt, less current portion 15,000 4,730 -- -- 19,730
Long-term liabilities of discontinued
operations -- -- 14,646 (14,401) 245
---------- ------------ --------------- ------------- -------------
Total Liabilities 36,082 135,440 84,905 (162,418) 94,009
Stockholders' Equity:
Preferred stock -- 1,450 -- (1,450) --
Common stock 336 2,933 32,982 (35,915) 336
Additional paid in capital 308,702 67,739 9,881 (77,620) 308,702
Retained earnings (accumulated deficit) 43,756 89,387 (3,737) (85,650) 43,756
Accumulated other comprehensive loss (1,939) -- -- -- (1,939)
Treasury stock (72,317) -- -- -- (72,317)
---------- ------------ --------------- ------------- -------------
Total Stockholders' Equity 278,538 161,509 39,126 (200,635) 278,538
---------- ------------ --------------- ------------- -------------
Total Liabilities and Stockholders' Equity $314,620 $ 296,949 $ 124,031 $ (363,053) $ 372,547
========== ============ =============== ============= =============
20
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED (UNAUDITED)
ARMOR HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
DECEMBER 31, 2002
--------------------------------------------------------------------------------
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
---------- ------------ --------------- ------------- -------------
(IN THOUSANDS)
ASSETS
Current Assets:
Cash and cash equivalents $ 7,152 $ 3,556 $ 2,205 $ -- $ 12,913
Accounts receivable, net -- 44,864 13,649 -- 58,513
Costs and earned gross profit in excess
of billings -- 234 -- -- 234
Intercompany receivables 123,744 33,165 3,800 (160,709) --
Inventories -- 46,591 15,739 -- 62,330
Prepaid expenses and other current assets 12,490 21,999 2,368 (24,645) 12,212
Current assets of discontinued operations -- -- 32,187 (3,362) 28,825
---------- ------------ --------------- ------------- -------------
Total Current Assets 143,386 150,409 69,948 (188,716) 175,027
Property and equipment, net 2,456 27,250 17,430 -- 47,136
Goodwill, net -- 96,903 1,833 -- 98,736
Patents, licenses and trademarks, net -- 7,326 195 -- 7,521
Other assets 916 6,872 1,260 -- 9,048
Long-term assets of discontinued operations -- -- 30,285 -- 30,285
Investment in subsidiaries 161,805 10,078 -- (171,883) --
---------- ------------ --------------- ------------- -------------
Total Assets $308,563 $298,838 $ 120,951 $ (360,599) $ 367,753
========== ============ =============== ============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ -- $ 1,813 $ -- $ -- $ 1,813
Short-term debt -- -- 599 -- 599
Accounts payable 828 15,751 7,191 -- 23,770
Accrued expenses and other current
liabilities 1,790 11,324 12,002 -- 25,116
Income taxes payable 4,831 (148) 1,230 -- 5,913
Intercompany payables 13,037 115,658 10,434 (139,129) --
Current liabilities of discontinued
operations -- -- 42,167 (24,942) 17,225
---------- ------------ --------------- ------------- -------------
Total Current Liabilities 20,486 144,398 73,623 (164,071) 74,436
Long-term debt, less current portion -- 5,072 -- -- 5,072
Long-term liabilities of discontinued
operations -- -- 24,813 (24,645) 168
---------- ------------ --------------- ------------- -------------
Total Liabilities 20,486 149,470 98,436 (188,716) 79,676
Stockholders' Equity:
Preferred stock -- 1,450 -- (1,450) --
Common stock 336 2,933 35,299 (38,232) 336
Additional paid in capital 307,487 67,604 10,016 (77,620) 307,487
Retained earnings (accumulated deficit) 34,056 77,381 (22,800) (54,581) 34,056
Accumulated other comprehensive loss (4,169) -- -- -- (4,169)
Treasury stock (49,633) -- -- -- (49,633)
---------- ------------ --------------- ------------- -------------
Total Stockholders' Equity 288,077 149,368 22,515 (171,883) 288,077
---------- ------------ --------------- ------------- -------------
Total Liabilities and Stockholders' Equity $308,563 $ 298,838 $ 120,951 $ (360,599) $ 367,753
========== ============ =============== ============= =============
21
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED (UNAUDITED)
ARMOR HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING INCOME STATEMENTS
THREE MONTHS ENDED JUNE 30, 2003
-----------------------------------------------------------------------------
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
---------- ----------- -------------- ------------- -------------
(IN THOUSANDS)
REVENUES:
Products $ -- $ 39,069 $ 10,278 $ -- $ 49,347
Mobile Security -- 18,773 13,539 -- 32,312
---------- ----------- -------------- ------------- -------------
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 non-recurring
changes 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
PROVISION FOR INCOME TAXES 2,395 9,862 1,840 (8,540) 5,557
PROVISION (BENEFIT) 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:
Income from discontinued operations
before provision for income taxes -- -- 1,860 -- 1,860
Provision for income taxes -- -- 725 -- 725
---------- ----------- -------------- ------------- -------------
Net income from discontinued operations -- -- 1,135 -- 1,135
---------- ----------- -------------- ------------- -------------
NET INCOME $ 4,613 $ 6,159 $ 2,381 $ (8,540) $ 4,613
========== =========== ============== ============= =============
22
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED (UNAUDITED)
ARMOR HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING INCOME STATEMENTS
THREE MONTHS ENDED JUNE 30, 2002
----------------------------------------------------------------------------------
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
----------- ----------- ---------------- -------------- -------------
(IN THOUSANDS)
REVENUES:
Products $ -- $ 36,966 $ 6,091 $ -- $ 43,057
Mobile Security -- 15,827 12,721 -- 28,548
----------- ----------- ---------------- -------------- -------------
Total revenues -- 52,793 18,812 -- 71,605
----------- ----------- ---------------- -------------- -------------
COSTS AND EXPENSES:
Cost of sales -- 33,557 15,347 -- 48,904
Operating expenses 1,873 9,267 1,641 -- 12,781
Amortization -- 32 -- -- 32
Integration and other non-recurring
changes 278 1,442 -- -- 1,720
----------- ----------- ---------------- -------------- -------------
OPERATING (LOSS) INCOME: (2,151) 8,495 1,824 -- 8,168
Interest expense, net 183 58 43 -- 284
Other expense (income), net -- 1 (1) -- --
Equity in earnings of subsidiaries (5,652) (732) -- 6,384 --
Related parting interest income, net -- (224) -- 224 --
----------- ----------- ---------------- -------------- -------------
INCOME FROM CONTINUING OPERATIONS
BEFORE PROVISION FOR INCOME TAXES 3,318 9,392 1,782 (6,608) 7,884
PROVISION (BENEFIT) FOR INCOME TAXES (757) 3,211 606 -- 3,060
----------- ----------- ---------------- -------------- -------------
INCOME FROM CONTINUING OPERATIONS 4,075 6,181 1,176 (6,608) 4,824
----------- ----------- ---------------- -------------- -------------
DISCONTINUED OPERATIONS:
Loss from discontinued operations
before income tax benefit -- -- (1,041) 224 (817)
Income tax benefit -- -- (68) -- (68)
----------- ----------- ---------------- -------------- -------------
Net loss from discontinued operations -- -- (973) 224 (749)
----------- ----------- ---------------- -------------- -------------
NET INCOME $ 4,075 $ 6,181 $ 203 $ (6,384) $ 4,075
=========== =========== ================ ============== =============
23
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED (UNAUDITED)
ARMOR HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING INCOME STATEMENTS
SIX MONTHS ENDED JUNE 30, 2003
---------------------------------------------------------------------------------------
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
----------- ------------ ---------------- -------------- -------------
(IN THOUSANDS)
REVENUES:
Products $ -- $ 75,753 $ 17,601 $ -- $ 93,354
Mobile Security -- 38,772 30,007 -- 68,779
--------- --------- --------- --------- ---------
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 non-recurring
changes 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
PROVISION FOR INCOME TAXES 6,683 19,268 2,906 (14,922) 13,935
PROVISION (BENEFIT) 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:
Income from discontinued operations
before provision for income taxes -- -- 1,914 -- 1,914
Provision for income taxes -- -- 937 -- 937
--------- --------- --------- --------- ---------
Net income from discontinued operations -- -- 977 -- 977
--------- --------- --------- --------- ---------
NET INCOME $ 9,700 $ 12,005 $ 2,917 $ (14,922) $ 9,700
========= ========= ========= ========= =========
24
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED (UNAUDITED)
ARMOR HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING INCOME STATEMENTS
SIX MONTHS ENDED JUNE 30, 2002
----------------------------------------------------------------------------------
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
----------- ----------- ---------------- -------------- -------------
(IN THOUSANDS)
REVENUES:
Products $ -- $ 70,674 $ 11,328 $ -- $ 82,002
Mobile Security -- 36,157 23,050 -- 59,207
--------- --------- --------- --------- ---------
Total revenues -- 106,831 34,378 -- 141,209
--------- --------- --------- --------- ---------
COSTS AND EXPENSES:
Cost of sales -- 68,352 28,182 -- 96,534
Operating expenses 3,314 17,656 3,224 -- 24,194
Amortization -- 151 -- -- 151
Integration and other non-recurring 352 2,765 -- -- 3,117
--------- --------- --------- --------- ---------
OPERATING (LOSS) INCOME: (3,666) 17,907 2,972 -- 17,213
Interest expense, net 131 116 79 -- 326
Other (income) expense, net (2) 17 (79) -- (64)
Equity in earnings of subsidiaries (12,509) (1,179) -- 13,688 --
Related party interest income, net -- (224) -- 224 --
--------- --------- --------- --------- ---------
INCOME FROM CONTINUING OPERATIONS
BEFORE PROVISION FOR INCOME TAXES 8,714 19,177 2,972 (13,912) 16,951
PROVISION (BENEFIT) FOR INCOME TAXES (1,321) 6,816 1,065 -- 6,560
--------- --------- --------- --------- ---------
INCOME FROM CONTINUING OPERATIONS 10,035 12,361 1,907 (13,912) 10,391
--------- --------- --------- --------- ---------
DISCONTINUED OPERATIONS:
Loss from discontinued operations -- -- (798) 224 (574)
Income tax benefit -- -- (218) -- (218)
--------- --------- --------- --------- ---------
Net loss from discontinued operations -- -- (580) 224 (356)
--------- --------- --------- --------- ---------
NET INCOME $ 10,035 $ 12,361 $ 1,327 $ (13,688) $ 10,035
========= ========= ========= ========= =========
25
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 $ 12,006 $ 1,939 $ (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 (16,072) 4,375 -- --
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 2,587 9,282 (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
business -- (243) -- -- (243)
Investment in subsidiaries (14,735) (52) (135) 14,922 --
------------ ------------ -------------- ------------- -------------
Net cash used in investing activities (14,816) (2,509) (1,796) 14,922 (4,199)
------------ ------------ -------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of options 136 -- -- -- 136
Repurchase of treasury stock (22,684) -- -- -- (22,684)
Repayments of long-term debt -- (362) -- -- (362)
Borrowings under lines of credit 29,809 -- 396 -- 30,205
Repayments under lines of credit (14,809) -- (200) -- (15,009)
------------ ------------ -------------- ------------- -------------
Net cash (used in) provided by financing
activities (7,548) (362) 196 -- (7,714)
------------ ------------ -------------- ------------- -------------
Effect of exchange rate on cash and cash
equivalents 2,230 (323) (1,440) -- 467
Net cash used in discontinued operations -- -- (3,394) -- (3,394)
------------ ------------ -------------- ------------- -------------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS (4,313) (607) 2,848 -- (2,072)
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD 7,152 3,556 2,205 -- 12,913
------------ ------------ -------------- ------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,839 $ 2,949 $ 5,053 $ -- $ 10,841
============ ============ ============== ============= =============
26
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, 2002
----------------------------------------------------------------------------------
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
----------- ----------- ---------------- -------------- -------------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Income from continuing operations $ 10,035 $ 12,361 $ 1,907 $(13,912) $ 10,391
Adjustments to reconcile income from
continuing operations to cash used
in operating activities
Depreciation and amortization 318 1,958 429 -- 2,705
Deferred income taxes (1,397) 249 1,656 -- 508
Loss on disposal of fixed assets -- 20 90 -- 110
Changes in operating assets & liabilities,
net of acquisitions
(Increase) decrease in accounts receivable -- (1,294) 307 -- (987)
(Increase) decrease in intercompany
receivables and payables (4,746) 4,147 375 224 --
Increase in inventory -- (6,937) (2,948) -- (9,885)
Increase in prepaid expenses & other
assets (2,515) (2,108) (720) -- (5,343)
Decrease in accounts payable, accrued
expenses and other current liabilities (2,469) (1,924) (1,945) -- (6,338)
Increase in income taxes payable 3,500 829 659 -- 4,988
-------- -------- -------- -------- --------
Net cash provided by (used in) operating
activities 2,726 7,301 (190) (13,688) (3,851)
-------- -------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (53) (974) (737) -- (1,764)
Purchase of patents and trademarks -- (32) -- -- (32)
Additional consideration for purchased
businesses -- (2,029) -- -- (2,029)
Investment in subsidiaries (19,300) 4,103 1,509 13,688 --
Purchase of businesses, net of cash
acquired -- (3,380) -- -- (3,380)
-------- -------- -------- -------- --------
Net cash (used in) provided by investing
activities (19,353) (2,312) 772 13,688 (7,205)
-------- -------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of options 2,728 -- -- -- 2,728
Cash paid for offering costs (326) -- -- -- (326)
Repurchase of treasury stock (331) -- -- -- (331)
Repayments of long-term debt -- (275) -- -- (275)
Borrowings under lines of credit 14,202 -- -- -- 14,202
Repayments under lines of credit (14,202) -- (97) -- (14,299)
-------- -------- -------- -------- --------
Net cash provided by (used in) financing
activities 2,071 (275) (97) -- 1,699
-------- -------- -------- -------- --------
Effect of exchange rate on cash and cash
equivalents (235) 538 (224) -- 79
Net cash used in discontinued operations -- -- (1,702) -- (1,702)
-------- -------- -------- -------- --------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS (14,791) 5,252 (1,441) -- (10,980)
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD 38,627 5,536 3,326 -- 47,489
-------- -------- -------- -------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 23,836 $ 10,788 $ 1,885 $ -- $ 36,509
======== ======== ======== ======== ========
27
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED (UNAUDITED)
NOTE 12. SUBSEQUENT EVENTS
On July 23, 2003, we executed a Letter of Intent ("LOI") to acquire
Simula, Inc., for $110.5 million, payable in cash or, at the Company's option,
in a combination of cash and registered shares of Armor Holdings' common stock.
Upon consummation of the acquisition, we will acquire all of the outstanding
common stock of Simula, retire Simula's outstanding indebtedness, and assume all
liabilities of Simula. The LOI provides for a good faith deposit, expedited due
diligence, payment of a break-up fee if Simula accepts a competing offer, and
other terms customary for similar transactions. The acquisition is subject to,
among other conditions, satisfactory completion of due diligence, approval of
each company's board of directors, execution of a definitive merger agreement,
receipt of regulatory approvals, and the approval of Simula's stockholders. The
companies will negotiate exclusively with each other until the LOI is terminated
and anticipate signing a definitive agreement on or before August 29, 2003, with
completion of the acquisition expected in the fourth quarter of 2003.
On August 12, 2003 we closed a private placement of $150,000,000
aggregate principal amount of 8.25% senior subordinated notes due 2013. The
notes are guaranteed by certain domestic subsidiaries of the Company on a senior
subordinated basis. We intend to use the net proceeds of the offering to fund
future acquisitions, including our potential acquisition of Simula, Inc., repay
a portion of our outstanding debt and for general corporate purposes, including
the funding of working capital and capital expenditures.
On August 12, 2003, we terminated our prior credit facility and entered
into a new secured revolving credit facility (the "Credit Facility") with Bank
of America N.A., Wachovia Bank, National Association and a syndicate of other
financial institutions arranged by Bank of America Securities LLC. The Credit
Facility consists of a five-year revolving credit facility and, among other
things, provides for (i) total maximum borrowings of $60 million, (ii) a $25
million sub-limit for the issuances of standby and commercial letters of credit,
(iii) a $5 million sub-limit for swing-line loans, and (iv) a $5 million
sub-limit for multi-currency borrowings. All borrowings under the Credit
Facility will bear interest at either (i) a rate equal to LIBOR, plus an
applicable margin ranging from 1.125% to 1.625%, (ii) an alternate base rate
which will be the higher of (a) the Bank of America prime rate and (b) the
Federal Funds rate plus .50%, or (iii) with respect to foreign currency loans, a
fronted offshore currency rate, plus an applicable margin ranging from 1.125% to
1.625%, depending on certain conditions. The Credit Facility is guaranteed by
certain of our direct and indirect domestic subsidiaries and is secured by,
among other things (i) a pledge of all of the issued and outstanding shares of
stock or other equity interests of certain of our direct and indirect domestic
subsidiaries, (ii) a pledge of 65% of the issued and outstanding voting shares
of stock or other voting equity interests of certain of our direct and indirect
foreign subsidiaries, (iii) a pledge of 100% of the issued and outstanding
nonvoting shares of stock or other nonvoting equity interests of certain of our
direct and indirect foreign subsidiaries, and (iv) a first priority perfected
security interest on certain of our domestic assets and certain domestic assets
of certain of our direct and indirect subsidiaries that will become guarantors
of our obligations under the new credit facility, including, among other things,
accounts receivable, inventory, machinery, equipment, certain contract rights,
intellectual property rights and general intangibles.
As of June 30, 2003 we were in compliance with all of our negative and
affirmative covenants.
28
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following is a discussion of the results of operations and analysis
of financial condition for the three months and six months ended June 30, 2003.
The results of operations for purchase business combinations are included since
their effective acquisition dates. The following discussion may be understood
more fully by reference to the consolidated financial statements, notes to the
consolidated financial statements, and management's discussion and analysis
contained in our Annual Report on Form 10-K for the year ended December 31,
2002, as filed with the Securities and Exchange Commission.
CRITICAL ACCOUNTING POLICIES (INCLUDING NEW ACCOUNTING PRONOUNCEMENTS):
Revenue Recognition. We record products revenue at the time of
shipment. Returns are minimal and do not materially affect the financial
statements.
We record revenue from our Mobile Security Division when the vehicle is
shipped, except for larger commercial contracts typically longer than four
months in length and the contract for the delivery of HMMWVs to the U.S.
Government which continues through 2005. Revenue from such contracts is
recognized on the percentage of completion, units-of-work performed method.
HMMWV units sold to the U.S. Government are considered complete when the onsite
Department of Defense officer finishes the inspection of the HMMWV and approves
it for delivery. Should such contracts be in a loss position, the entire
estimated loss would be recognized for the balance of the contract at such time.
Current contracts are profitable.
We record service revenue as services are provided on a
contract-by-contract basis. Revenues from service contracts are recognized over
the term of the contract.
Comprehensive income and foreign currency translation. In accordance
with Statement of Financial Accounting Standard No. 130, "Reporting
Comprehensive Income" (SFAS 130), assets and liabilities denominated in a
foreign currency are translated into U.S. dollars at the current rate of
exchange existing at period-end and revenues and expenses are translated at the
average monthly exchange rates. The cumulative translation adjustment, net of
tax, which represents the effect of translating assets and liabilities of our
foreign operations is recorded as a reduction of equity of $1,939,000 and
$4,169,000 as of June 30, 2003 and December 31, 2002, respectively, and is
classified as accumulated other comprehensive loss. The current year change in
the accumulated amount, net of tax, is included as a component of comprehensive
income.
Stock options and Grants. Statement of Financial Accounting Standard
No. 123, "Accounting for Stock-Based Compensation" (SFAS 123), as amended by
SFAS 148, "Accounting for Stock-Based Compensation - Transition and Disclosure,"
establishes a fair value based method of accounting for stock-based employee
compensation plans; however, it also allows an entity to continue to measure
compensation cost for those plans using the intrinsic value based method of
accounting prescribed by Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" (APB 25). Under the fair value based method,
compensation cost is measured at the grant date based on the value of the award
and is recognized over the service period, which is usually the vesting period.
Under the intrinsic value based method, compensation costs is the excess, if
any, of the quoted market price of the
29
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
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 June
30, 2003 and 2002 consistent with the method prescribed by SFAS 123, the
Company's net earnings and earnings per share would have been adjusted to the
pro forma amounts indicated below:
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ ----------------
JUNE 30, 2003 JUNE 30, 2002 JUNE 30, 2003 JUNE 30, 2002
------------- ------------- ------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income as reported: $ 4,613 $ 4,075 $ 9,700 $ 10,035
Deduct: Total stock-based employee
compensation expense determined under fair
value based method for all awards, net of
related tax effects (1,156) (1,180) (2,314) (1,735)
--------- ---------- --------- ----------
Pro-forma net income $ 3,457 $ 2,895 $ 7,386 $ 8,300
========= ========== ========= ==========
Earnings per share:
Basic - as reported $ 0.17 $ 0.13 $ 0.34 $ 0.32
========= ========== ========= ==========
Basic - pro-forma $ 0.13 $ 0.09 $ 0.26 $ 0.27
========= ========== ========= ==========
Diluted - as reported $ 0.17 $ 0.13 $ 0.34 $ 0.31
========= ========== ========= ==========
Diluted - pro-forma $ 0.12 $ 0.09 $ 0.26 $ 0.26
========= ========== ========= ==========
Discontinued Operations. In accordance with Statement of Financial
Accounting Standards No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" (SFAS 144), a component classified as held for sale is
reported in discontinued operations when the following conditions are met: (a)
the operations and cash flows of the component have been (or will be) eliminated
from the ongoing operations of the entity as a result of the disposal
transaction and (b) the entity will not have any significant continuing
involvement in the operations of the component after the disposal transaction.
In a period in which a component of an entity either has been disposed of or is
classified as held for sale, the income statement for current and prior periods
reports the results of operations of the component, including any gain or loss
recognized in accordance with SFAS 144 paragraph 37, in discontinued operations.
The results of discontinued operations, less applicable income taxes (benefit),
is reported as a separate component of income before extraordinary items and the
cumulative effect of accounting changes (if applicable). The assets and
liabilities of a disposal group classified as held for sale is presented
separately in the asset and liability sections, respectively, of the statement
of financial position.
30
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
NEW ACCOUNTING PRONOUNCEMENTS:
In April 2003, the FASB issued Statement of Financial Accounting
Standard No. 149, " Amendment of Statement 133 on Derivative Instruments and
Hedging Activities" (SFAS 149). SFAS 149 amends and clarifies financial
accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities
under Statement of Financial Accounting Standard No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (SFAS 133). SFAS 149 is effective
for contracts entered into or modified and hedging relationships designated
after June 30, 2003, except for the provisions of SFAS 149 that relate to SFAS
133 Implementation Issues that have been effective for fiscal quarters that
began prior to June 15, 2003, which should continue to be applied in accordance
with their respective effective dates. Adoption of this standard will have no
effect on us.
In May 2003, the FASB issued Statement of Financial Accounting Standard
No. 150, " Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity" (SFAS 150). SFAS 150 establishes standards for how
an issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an issuer
classify a financial instrument that is within its scope as a liability (or an
asset in some circumstances). Many of those instruments were previously
classified as equity. SFAS 150 is effective for financial instruments entered
into or modified after May 31, 2003, and otherwise is effective at the beginning
of the first interim period beginning after June 15, 2003. Adoption of this
standard will have no effect on us.
31
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2003 COMPARED TO THREE MONTHS ENDED JUNE 30, 2002.
Net income. Net income increased $538,000, or 13.2%, to net income of
$4.6 million for the three months ended June 30, 2003 compared to net income of
$4.1 million for the three months ended June 30, 2002. Net income for the three
months ended June 30, 2003 includes income from continuing operations of $3.5
million and income from discontinued operations of $1.1 million, compared to
income from continuing operations of $4.8 million and a loss from discontinued
operations of $749,000 for the three months ended June 30, 2002.
CONTINUING OPERATIONS
Products revenues. Products Division revenues increased $6.3 million,
or 14.6%, to $49.3 million in the three months ended June 30, 2003, compared to
$43.1 million in the three months ended June 30, 2002. For the three months
ended June 30, 2003, Products Division revenue increased 10.8% internally,
including year over year changes in acquired businesses, and 3.8% due to the
acquisitions of Speedfeed, Inc., the Foldable Products Group, Evi-Paq, Inc.,
B-Square, Inc. and 911 Emergency Products, Inc., all of which were completed
during or subsequent to the second quarter of 2002. Products Division revenues
includes $5.4 million and $3.8 million from USDS, Inc., our training subsidiary,
for the three months ended June 30, 2003 and June 30, 2002, respectively. In our
filings prior to June 30, 2002, we reported USDS, Inc. as a part of the Services
Division.
Mobile Security revenues. Mobile Security Division revenues increased
$3.8 million, or 13.2% to $32.3 million in the three months ended June 30, 2003,
compared to $28.5 million in the three months ended June 30, 2002. Mobile
Security Division revenues for the three months ended June 30, 2003, include
$3.0 million related to the acquisition of substantially all of the assets of
Trasco-Bremen on September 24, 2002. Excluding the $3.0 million of 2003 revenue
relating to Trasco-Bremen, Mobile Security Division revenues increased $0.8
million, or 2.6%, in the three months ended June 30, 2003, compared to the three
months ended June 30, 2002.
Cost of sales. Cost of sales increased $8.4 million, or 17.1%, to $57.3
million for the three months ended June 30, 2003 compared to $48.9 million for
the three months ended June 30, 2002. As a percentage of total revenues, cost of
sales increased to 70.1% of total revenues for the three months ended June 30,
2003 from 68.3% for the three months ended June 30, 2002.
Gross margins in the Products Division were 33.1% for the three months
ended June 30, 2003, compared to 38.6% for the three-months ended June 30, 2002.
The decline in Products Division's gross margins resulted primarily from: (1) an
increase in "low margin" training revenues; (2) an increase in low margin gas
mask sales (3) an increase in lower margin international body armor sales
produced overseas at Armor Products International and (4) lower production
volumes within Less Lethal, Automotive, and Hard Armor, which resulted in
reduced fixed cost absorption and certain labor inefficiencies. Excluding the
training division, the Products Division gross margins were 35.2%, compared to
40.8% reported in the same period last year.
32
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
Gross margins in the Mobile Security Division were 25.0% in the three-months
ended June 30, 2003, compared to 21.4% for the three-months ended June 30, 2002.
The increase in the Mobile Security Division gross margin is primarily
attributable to: 1) favorable manufacturing overhead cost absorption relating to
increased manufacturing volumes in our Cincinnati manufacturing facility; 2)
operational efficiencies in our Cincinnati manufacturing facility; and 3) a
smaller number of purchased base vehicles sold in 2003 compared to 2002. The
Mobile Security Division often purchases and resells base vehicles to customers
as a pass-through service without normal gross profit.
Operating expenses. Operating expenses increased $1.7 million, or
13.6%, to $14.5 million (17.7% of total revenues) for the three months ended
June 30, 2003 compared to $12.8 million (17.8% of total revenues) for the three
months ended June 30, 2002.
Products Division operating expenses increased $316,000, or 4.1%, to
$8.1 million (16.4% of Products Division revenues) for the three months ended
June 30, 2003 compared to $7.8 million (18.1% of Products Division revenues) for
the three months ended June 30, 2002. This increase is due primarily to the
incremental operating expenses associated with acquired businesses completed
during or subsequent to the second quarter of 2002.
Mobile Security Division operating expenses increased $816,000, or
26.4%, to $3.9 million (12.1% of Mobile Security Division revenues) for the
three months ended June 30, 2003, compared to $3.1 million (10.8% of Mobile
Security Division revenues) for the three months ended June 30, 2002. Excluding
the 2003 operating expenses resulting from the acquisition of substantially all
of the assets of Trasco-Bremen on September 24, 2002, the operating expenses for
the three months ended June 30, 2003, increased less than $0.1 million, or
(0.12% of Mobile Security Division Revenues), versus the same period in the
prior year.
Corporate operating expenses increased $610,000, or 32.1%, to $2.5
million (3.1% of total revenues) for the three months ended June 30, 2003
compared to $1.9 million (2.6% of total revenues) for the three months ended
June 30, 2002. This increase is due primarily to increased insurance costs,
increased internal audit costs necessary to comply with Sarbanes-Oxley
requirements, and increased legal expenses.
Amortization. Amortization expense increased $37,000, or 115.6%, to
$69,000 for the three months ended June 30, 2003 compared to $32,000 for the
three months ended June 30, 2002. SFAS 142, which we adopted on January 1, 2002,
eliminated amortization of intangible assets with indefinite lives and goodwill
for all acquisitions completed after July 1, 2001, as well as for all fiscal
years ending after January 1, 2002. Remaining amortization expense is related to
patents and trademarks with finite lives.
Integration and other non-recurring charges. Integration and other
non-recurring charges for the three-months ended June 30, 2003, totaled $3.8
million, compared to $1.7 million in the same period last year. The increase in
integration and other non-recurring items is primarily related to a $3.3 million
(including a $2.1 million non-cash charge) severance charge related to the
recent departure of our former Chief Executive Officer. The remaining charges
relate primarily to the integration of Speedfeed, Foldable, Evi-Paq, B-Square
and 911EP, and Trasco all of which were completed during or subsequent to the
second quarter of 2002.
33
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
Operating income. Operating income from continuing operations decreased
$2.2 million to $6.0 million for the three months ended June 30, 2003 compared
to $8.2 million in the three months ended June 30, 2002 due to the factors
discussed above. USDS, Inc. contributed operating income, that was previously
reported as a part of the Services Division, of $644,000 and $425,000 for the
three months ended June 30, 2003 and 2002, respectively.
Interest expense, net. Interest expense, net increased $153,000, or
53.9% to $437,000 for the three months ended June 30, 2003 compared to $284,000
for the three months ended March 31, 2002. This increase was due primarily to
borrowings of long-term debt under our revolving credit facility with the
proceeds primarily used to repurchase common stock of the Company.
Other expense (income), net. Other expense (income), net, was $16,000
for the three months ended June 30, 2003, compared to other expense (income),
net, of zero for the three months ended June 30, 2002.
Income from continuing operations before provision for income taxes.
Income from continuing operations before provision for income taxes decreased by
$2.3 million to $5.6 million for the three months ended June 30, 2003 compared
to $7.9 million for the three months ended June 30, 2002 due to the reasons
discussed above.
Provision for income taxes. Provision for income taxes was $2.1 million
for the three months ended June 30, 2003, compared to $3.1 million for the three
months ended June 30, 2002. The effective tax rate was 37.4% for the three
months ended June 30, 2003, compared to 38.8% for the three months ended June
30, 2002 based on our current expectations of annual income amounts and
jurisdictions in which such amounts are expected to be taxable.
Income from continuing operations. Income from continuing operations
decreased $1.3 million to $3.5 million for the three months ended June 30, 2003
compared to $4.8 million for the three months ended June 30, 2002 due to the
factors discussed above.
DISCONTINUED OPERATIONS
Services revenues. Services Division revenue decreased $2.3 million, or
8.9%, to $23.9 million for the three months ended June 30, 2003 compared to
$26.3 million for the three months ended June 30, 2002. The revenue decrease is
a result of the sale of the ArmorGroup Integrated Systems business. Exclusive of
ArmorGroup Integrated Systems, revenue increased $1.4 million, or 6.5% to $23.1
million for the three months ended June 30, 2003 compared to $21.7 million for
the three months ended June 30, 2002. This increase is due to strong performance
in North Africa and the Middle East training businesses tempered by weak
revenues in Mine Action business, Investigations business and the Latin
American business.
Cost of sales. Cost of sales decreased $2.7 million, or 14.4%, to $16.2
million for the three months ended June 30, 2003 compared to $18.9 million for
the three months ended June 30, 2002. This decrease is a result of the sale of
the ArmorGroup Integrated Systems business. Exclusive of
34
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
ArmorGroup Integrated Systems, cost of sales increased $800,000, or 5.4% to
$15.6 million for the three months ended June 30, 2003 compared to $14.8 million
for the three months ended June 30, 2002.
As a percentage of total revenue, cost of sales decreased to 67.7% of
total revenues for the three months ended June 30, 2003 from 72.0% for the three
months ended June 30, 2002. This decease in cost of sales as a percentage of
total revenue was primarily a result of strong revenues in our training division
and expatriate intensive contracts in the Middle East.
Operating expenses. Operating expenses decreased $3.0 million, or
37.8%, to $5.0 million (20.9% of total revenues) for the three months ended June
30, 2003 compared to $8.1 million (30.7% of total revenues) for the three months
ended June 30, 2002. This decrease was partly due to the sale of the ArmorGroup
Integrated Systems business. Exclusive of ArmorGroup Integrated Systems,
operating expenses decreased $2.5 million, or 33.8% to $4.8 million for the
three months ended June 30, 2003 compared to $7.3 million for the three months
ended June 30, 2002. This decrease was due to reduced foreign currency expenses
and a reduction in salary costs as a result of restructuring last year.
Integration and other non-recurring charges. Integration and other
non-recurring charges increased $358,000, or 380.9%, to $452,000 for the three
months ended June 30, 2003 compared to $94,000 for the three months ended June
30, 2002. These charges reflect additional professional service fees incurred
for tax reporting associated with preparing the discontinued operations for
sale.
Operating income (loss). Operating income (loss) was $2.3 million for
the three months ended June 30, 2003, compared to operating loss of ($794,000)
for the three months ended June 30, 2002 due to the factors discussed above.
Operating income from the ArmorGroup Integrated Systems business was $88,000 for
the three months ended June 30, 2003, compared to an operating loss of
($413,000) for the three months ended June 30, 2002 due to the factors discussed
above. Excluding the ArmorGroup Integrated Systems business, the balance of the
assets held for sale generated an operating income of $2.2 million for the three
months ended June 30, 2003 compared to an operating loss of ($381,000) for the
three months ended June 30, 2002.
Interest expense, net. Interest expense, net decreased $24,000, or
62.5%, to $15,000 for the three months ended June 30, 2003 compared to $39,000
for the three months ended June 30, 2002. This decrease was due to reduced
utilization of the Services Division's line of credit.
Other expense (income), net. Other expense (income), net, was $392,000
for the three months ended June 30, 2003, compared to other expense (income),
net of ($16,000) for the three months ended June 30, 2002. The net increase in
expense was a result of loss on sale of $366,000 of our Integrated System
business on April 17, 2003.
Income (loss) from discontinued operations before provision (benefit)
for income taxes. Income (loss) from discontinued operations before provision
(benefit) for income taxes was $1.9 million for the three months ended June 30,
2003 and ($817,000) for the three months ended June 30, 2002, due to the reasons
discussed above.
Provision (benefit) for income taxes. Provision for income taxes was
$725,000 for the three months ended June 30, 2003 compared to a benefit of
($68,000) for the three months ended June 30, 2002. The effective tax rate for
the three months ended June 30, 2003 was a provision of 39.0% compared to a
benefit of 8.3% for the three months ended June 30, 2002.
35
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
Income (Loss) from discontinued operations. Income from discontinued
operations was $1.1 million for the three months ended June 30, 2003 compared to
a loss from discontinued operations of ($749,000) for the three months ended
June 30, 2002 due to the factors discussed above.
SIX MONTHS ENDED JUNE 30, 2003 COMPARED TO SIX MONTHS ENDED JUNE 30, 2002.
Net income. Net income decreased $335,000, or 3.3%, to net income of
$9.7 million for the six months ended June 30, 2003 compared to net income of
$10.0 million for the six months ended June 30, 2002. Net income for the six
months ended June 30, 2003 includes income from continuing operations of $8.7
million and income from discontinued operations of $977,000, compared to income
from continuing operations of $10.4 million and a loss from discontinued
operations of $356,000 for the six months ended June 30, 2002.
CONTINUING OPERATIONS
Products revenues. Products Division revenues increased $11.4 million,
or 13.8%, to $93.4 million in the six months ended June 30, 2003, compared to
$82.0 million in the six months ended June 30, 2002. For the six months ended
June 30, 2003, Products Division revenue increased 8.6% internally, including
year over year changes in acquired businesses, and 5.3% due to the acquisitions
of Speedfeed, Inc., the Foldable Products Group, Evi-Paq, Inc., B-Square, Inc.
and 911 Emergency Products, Inc., all of which were completed during or
subsequent to the second quarter of 2002. Products Division revenues includes
$10.5 million and $7.3 million from USDS, Inc., our training subsidiary, for the
six months ended June 30, 2003 and June 30, 2002, respectively. In our filings
prior to June 30, 2002, we reported USDS, Inc. as a part of the Services
Division.
Mobile Security revenues. Mobile Security Division revenues increased
$9.6 million, or 16.2% to $68.8 million in the six months ended June 30, 2003,
compared to $59.2 million in the six months ended June 30, 2002. Mobile Security
Division revenues for the six months ended June 30, 2003, include $8.9 million
related to the acquisition of substantially all of the assets of Trasco-Bremen
on September 24, 2002. Excluding the $8.9 million of 2003 revenue relating to
Trasco-Bremen, Mobile Security Division revenues increased $0.7 million, or
1.1%, in the six months ended June 30, 2003, compared to the six months ended
June 30, 2002.
Cost of sales. Cost of sales increased $17.9 million, or 18.6%, to
$114.4 million for the six months ended June 30, 2003 compared to $96.5 million
for the six months ended June 30, 2002. As a percentage of total revenues, cost
of sales increased to 70.6% of total revenues for the six months ended June 30,
2003 from 68.4% for the six months ended June 30, 2002.
Gross margins in the Products Division were 33.6% for the six months
ended June 30, 2003, compared to 38.0% for the six-months ended June 30, 2002.
The decline in Products Division's gross margins resulted primarily from: (1) an
increase in "low margin" training revenues; (2) an increase in low margin gas
mask sales; (3) an increase in lower margin international body armor sales
produced overseas at Armor Products International; (4) lower production volumes
within our less lethal, automotive, and hard armor product lines, which resulted
in reduced fixed cost absorption and certain labor inefficiencies; and (5)
moving costs and labor inefficiencies at Protech associated with the relocation
of its
36
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
manufacturing facility. Excluding the training division, the Products Division
gross margins were 36.1%, compared to 40.3% reported in the same period last
year.
Gross margins in the Mobile Security Division were 23.7% in the six
months ended June 30, 2003, compared to 22.9% for the six months ended June 30,
2002. The increase in the Mobile Security Division gross margin is primarily
attributable to: 1) favorable manufacturing overhead cost absorption relating to
increased manufacturing volumes at our Cincinnati manufacturing facility; and
2) operational efficiencies in our Cincinnati manufacturing facility.
Operating expenses. Operating expenses increased $4.3 million, or
17.9%, to $28.5 million (17.5% of total revenues) for the six months ended June
30, 2003 compared to $24.2 million (17.1% of total revenues) for the six months
ended June 30, 2002.
Products Division operating expenses increased $1.2 million, or 8.2%,
to $16.0 million (17.2% of Products Division revenues) for the six months ended
June 30, 2003 compared to $14.8 million (18.1% of Products Division revenues)
for the six months ended June 30, 2002. This increase is due primarily to the
incremental operating expenses associated with acquired businesses completed
during or subsequent to the second quarter of 2002.
Mobile Security Division operating expenses increased $1.9 million, or
31.1%, to $7.9 million (11.5% of Mobile Security Division revenues) for the six
months ended June 30, 2003, compared to $6.0 million (10.2% of Mobile Security
Division revenues) for the six months ended June 30, 2002. Excluding the 2003
operating expenses resulting from the acquisition of substantially all of the
assets of Trasco-Bremen on September 24, 2002, the operating expenses for the
six months ended June 30, 2003, increased less than $0.4 million, or (0.52% of
Mobile Security Division Revenues), versus the same period in the prior year.
The increase in operating expenses was primarily due to: (1) increased expenses
associated with the start-up of operations in Caracas, Venezuela in late 2002;
and (2) increased insurance costs.
Corporate operating expenses increased $1.2 million, or 37.0%, to $4.6
million (2.8% of total revenues) for the six months ended June 30, 2003 compared
to $3.4 million (2.4% of total revenues) for the six months ended June 30, 2002.
This increase is due primarily to increased insurance costs, increased internal
audit costs necessary to comply with Sarbanes-Oxley requirements, and increased
legal expenses.
Amortization. Amortization expense decreased $22,000, or 14.6%, to
$129,000 for the six months ended June 30, 2003 compared to $151,000 for the six
months ended June 30, 2002. SFAS 142, which we adopted on January 1, 2002,
eliminated amortization of intangible assets with indefinite lives and goodwill
for all acquisitions completed after July 1, 2001, as well as for all fiscal
years ending after January 1, 2002. Remaining amortization expense is related to
patents and trademarks with finite lives.
Integration and other non-recurring charges. Integration and other
non-recurring charges for the six months ended June 30, 2003, totaled $4.2
million, compared to $3.1 million for the six months ended June 30, 2002. The
increase in integration and other non-recurring items is primarily related to a
$3.3
37
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
million (including a $2.1 million non-cash charge) severance charge related to
the recent departure of our former Chief Executive Officer. This was partially
offset by decreased merger and integration expenses.
Operating income. Operating income from continuing operations decreased
$2.4 million to $14.8 million for the six months ended June 30, 2003 compared to
$17.2 million in the six months ended June 30, 2002 due to the factors discussed
above. USDS, Inc. contributed operating income, that was previously reported as
a part of the Services Division, of $1.2 million and $803,000 for the six months
ended June 30, 2003 and 2002, respectively.
Interest expense, net. Interest expense, net increased $490,000, or
150.3% to $816,000 for the six months ended June 30, 2003 compared to $326,000
for the six months ended June 30, 2002. This increase was due primarily to
borrowings of long-term debt under our revolving credit facility with the
proceeds primarily used to repurchase common stock of the Company.
Other expense (income), net. Other expense (income), net, was $85,000
for the six months ended June 30, 2003, compared to other expense (income), net
of ($64,000) for the six months ended June 30, 2002.
Income from continuing operations before provision for income taxes.
Income from continuing operations before provision for income taxes decreased by
$3.0 million to $13.9 million for the six months ended June 30, 2003 compared to
$17.0 million for the six months ended June 30, 2002 due to the reasons
discussed above.
Provision for income taxes. Provision for income taxes was $5.2 million
for the six months ended June 30, 2003, compared to $6.6 million for the six
months ended June 30, 2002. The effective tax rate was 37.4% for the six months
ended June 30, 2003, compared to 38.7% for the six months ended June 30, 2002
based on our current expectations of annual income amounts and jurisdictions in
which such amounts are expected to be taxable.
Income from continuing operations. Income from continuing operations
decreased $1.7 million to $8.7 million for the six months ended June 30, 2003
compared to $10.4 million for the six months ended June 30, 2002 due to the
factors discussed above.
DISCONTINUED OPERATIONS
Services revenues. Services Division revenue decreased $827,000, or
1.6%, to $49.7 million for the six months ended June 30, 2003 compared to $50.5
million for the six months ended June 30, 2002. The revenue decrease is a result
of the sale of the ArmorGroup Integrated Systems business. Exclusive of
ArmorGroup Integrated Systems, revenue increased $3.3 million, or 7.9% to $45.0
million for the six months ended June 30, 2003 compared to $41.7 million for the
six months ended June 30, 2002. This increase is due to strong performance in
the Middle East with equally strong performance by the Training Division, which
increased as a result of the Athens Olympics contract. These strong performances
were tempered by weak revenues in Mine Action business, Investigations business
and the Latin American business due to a weak economy and the completion of the
BP security contract in Colombia.
Cost of sales. Cost of sales decreased $741,000, or 2.1%, to $35.4
million for the six months ended June 30, 2003 compared to $36.1 million for the
six months ended June 30, 2002. This decrease is a result of the sale of the
ArmorGroup Integrated Systems business. Exclusive of ArmorGroup Integrated
Systems, cost of sales increased $1.7 million, or 6.0% to $30.2 million for the
six months ended June 30, 2003 compared to $28.5 million for the six months
ended June 30, 2002.
38
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
As a percentage of total revenue, cost of sales decreased to 71.2% of
total revenues for the six months ended June 30, 2003 from 71.5% for the six
months ended June 30, 2002. This decrease in cost of sales as a percentage of
total revenue was primarily due to (1) the sale of the Integrated Systems
Division, which operates on lower margins than the rest of the Services
Division, (2) high margins achieved by the Training Division and (3) new
contracts in the Middle East at higher than average margins.
Operating expenses. Operating expenses decreased $3.1 million, or
21.6%, to $11.4 million (22.9% of total revenues) for the six months ended June
30, 2003 compared to $14.6 million (28.8% of total revenues) for the six months
ended June 30, 2002. This decrease was due to the sale of the ArmorGroup
Integrated Systems business. Exclusive of ArmorGroup Integrated Systems,
operating expenses decreased $1.9 million, or 15.0% to $10.9 million for the six
months ended June 30, 2003 compared to $12.8 million for the six months ended
June 30, 2002. The six months ended June 30, 2003 has benefited from no
depreciation being charged as a result of the assets being held out for sale in
accordance with SFAS 144 "Accounting for Impairment or Disposal of Long-Lived
Assets," currency movement costs being $500,000 less than prior year, and a
reduction in salary costs as result of restructuring taken last year.
Integration and other non-recurring charges. Integration and other
non-recurring charges increased $105,000, or 27.0%, to $494,000 for the six
months ended June 30, 2003 compared to $389,000 for the six months ended June
30, 2002. The increase reflects the additional professional service fees related
to tax work performed associated with preparing the discontinued operations for
sale.
Operating income (loss). Operating income (loss) was $2.4 million for
the six months ended June 30, 2003, compared to operating loss of ($539,000) for
the six months ended June 30, 2002 due to the factors discussed above. Operating
loss from the ArmorGroup Integrated Systems business, which was sold on April
17, 2003, was $987,000 for the period ended April 17, 2003, compared to an
operating loss of $530,000 for the six months ended June 30, 2002 due to the
factors discussed above. Excluding the ArmorGroup Integrated Systems business,
the balance of the assets held for sale generated an operating income of $3.4
million for the six months ended June 30, 2002 compared to an operating loss of
($9,000) for the six months ended June 30, 2002.
Interest expense, net. Interest expense, net decreased $40,000, or
43.0%, to $53,000 for the six months ended June 30, 2003 compared to $93,000 for
the six months ended June 30, 2002. This decrease was due to reduced utilization
of the Services Division's line of credit.
Other expense (income), net. Other expense (income), net, was $452,000
for the six months ended June 30, 2003, compared to other expense (income), net
of ($58,000) for the six months ended June 30, 2002. The net increase in expense
was a result of a loss on sale of $366,000 of our ArmorGroup Integrated System
business on April 17, 2003.
Income (loss) from discontinued operations before provision (benefit)
for income taxes. Income (loss) from discontinued operations before provision
(benefit) for income taxes was $1.9 million for the six months ended June 30,
2003 and ($574,000) for the six months ended June 30, 2002, due to the reasons
discussed above.
Provision (benefit) for income taxes. Provision for income taxes was
$937,000 for the six months ended June 30, 2003 compared to a benefit of
($218,000) for the six months ended June 30, 2002. The effective tax rate for
the six months ended June 30, 2003 was a provision of 49.0% compared to a
benefit of 38.0% for the six months ended June 30, 2002. The large provision of
49.0% for the six months ended June 30, 2003, is primarily due to unrecognized
potential deferred tax assets associated with foreign subsidiaries, which
recorded pretax losses in the six months of 2003. These potential tax
39
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
benefits were not recognized due to the uncertainty regarding the specific
subsidiary's ability to utilize the net operating loss carry-forwards in future
periods.
Income (loss) from discontinued operations. Income (loss) from
discontinued operations was $977,000 for the six months ended June 30, 2003
compared to a loss from discontinued operations of ($356,000) for the six months
ended June 30, 2002 due to the factors discussed above. As many of the above
items involve accounting estimates, the income (loss) and amounts above will be
reevaluated in the future for any changes, which might be appropriate.
LIQUIDITY AND CAPITAL RESOURCES
On August 12, 2003, we terminated our prior credit facility and enter
into a new secured revolving credit facility (the "Credit Facility") with Bank
of America N.A., Wachovia Bank, National Association and a syndicate of other
financial institutions arranged by Bank of America Securities LLC. The Credit
Facility consists of a five-year revolving credit facility and, among other
things, provides for (i) total maximum borrowings of $60 million, (ii) a $25
million sub-limit for the issuances of standby and commercial letters of credit,
(iii) a $5 million sub-limit for swing-line loans, and (iv) a $5 million
sub-limit for multi-currency borrowings. All borrowings under the Credit
Facility will bear interest at either (i) a rate equal to LIBOR, plus an
applicable margin ranging from 1.125% to 1.625%, (ii) an alternate base rate
which will be the higher of (a) the Bank of America prime rate and (b) the
Federal Funds rate plus .50%, or (iii) with respect to foreign currency loans, a
fronted offshore currency rate, plus an applicable margin ranging from 1.125% to
1.625%, depending on certain conditions. The Credit Facility is guaranteed by
certain of our direct and indirect domestic subsidiaries and is secured by,
among other things (i) a pledge of all of the issued and outstanding shares of
stock or other equity interests of certain of our direct and indirect domestic
subsidiaries, (ii) a pledge of 65% of the issued and outstanding voting shares
of stock or other voting equity interests of certain of our direct and indirect
foreign subsidiaries, (iii) a pledge of 100% of the issued and outstanding
nonvoting shares of stock or other nonvoting equity interests of certain of our
direct and indirect foreign subsidiaries, and (iv) a first priority perfected
security interest on certain of our domestic assets and certain domestic assets
of certain of our direct and indirect subsidiaries that will become guarantors
of our obligations under the new credit facility, including, among other things,
accounts receivable, inventory, machinery, equipment, certain contract rights,
intellectual property rights and general intangibles.
As of June 30, 2003 we were in compliance with all of our negative and
affirmative covenants.
In March 2002, our Board of Directors approved a stock repurchase
program authorizing the repurchase of up to a maximum 3.2 million shares of our
common stock. In February 2003, the Board of Directors increased this stock
repurchase program to authorize the repurchase, from time to time
40
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
depending upon market conditions and other factors, of up to an additional 4.4
million shares. During the three-months ended June 30, 2003 no additional shares
were repurchased.
Through June 30, 2003, we repurchased 3.8 million shares of our common
stock under the stock repurchase program at an average price of $12.49 per
share, leaving us with the ability to repurchase up to 3.8 million additional
shares of common stock. At June 30, 2003, we had 27,570,631 shares of common
stock outstanding.
We expect to continue our policy of repurchasing our common stock from
time to time. In addition, our Credit Agreement permits us to repurchase shares
of our common stock with no limitation if our ratio of Consolidated Total
Indebtedness to Consolidated EBTIDA (as such terms are defined in the Credit
Agreement) for any rolling twelve-month period is less than 1:00 to 1. At ratios
greater than 1:00 to 1 our credit agreement limits our ability to repurchase
shares at $15.0 million. This basket resets to $0 each time the ratio is less
than 1.0 to 1.
Working capital for continuing operations was $88.6 million and $89.0
million as of June 30, 2003 and December 31, 2002, respectively.
Our fiscal 2003 capital expenditures for continuing operations are
expected to be approximately $8.4 million, of which we have spent approximately
$3.9 million through the six months ended June 30, 2003. Our fiscal 2003 capital
expenditures for discontinued operations are expected to be approximately $2.0
million, of which we have already spent approximately $1.6 million through six
months ended June 30, 2003. Such expenditures include, leasehold improvements,
information technology and communications infrastructure equipment and software,
and manufacturing machinery and equipment.
We anticipate that the cash generated from operations, proceeds from
the sale of discontinued operations, cash on hand and available borrowings under
the Credit Agreement will enable us to meet liquidity, working capital and
capital expenditure requirements during the next twelve months. We may, however,
require additional financing to pursue our strategy of growth through
acquisitions. If such financing is required, there are no assurances that it
will be available, or if available, that it can be obtained on terms favorable
to us or on a basis that is not dilutive to our stockholders.
FORWARD LOOKING AND CAUTIONARY STATEMENTS
Except for the historical information and discussions contained herein,
statements contained in this Form 10-Q may constitute "forward looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. These statements involve a number of risks, uncertainties and other
factors that could cause actual results to differ materially, including, but not
limited to, our failure to continue to develop and market new and innovative
products and services and to keep pace with technological change; competitive
pressures; failure to obtain or protect intellectual property rights; the
ultimate effect of various domestic and foreign political and economic issues on
our business, financial condition or results of operations; quarterly
fluctuations in revenues and volatility of stock prices; contract delays; cost
overruns; our ability to attract and retain key personnel; currency and customer
financing risks; dependence on certain suppliers; changes in the financial or
business condition of our distributors or resellers; our ability to successfully
manage acquisitions, alliances and integrate past and future business
combinations; regulatory, legal, political and economic changes, our ability to
sell the Services Division on favorable terms and other risks, uncertainties and
factors inherent in our business
41
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
and otherwise discussed elsewhere in this Form 10-Q and in our other filings
with the Securities and Exchange Commission or in materials incorporated therein
by reference.
42
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a result of our global operating and financial activities, we are
exposed to changes in raw material prices, interest rates and foreign currency
exchange rates, which may adversely affect our results of operations and
financial position. In seeking to minimize the risks and/or costs associated
with such activities, we manage exposure to changes in raw material prices,
interest rates, and foreign currency exchange rates through our regular
operating and financing activities. We do not utilize financial instruments for
trading or other speculative purposes, nor do we utilize leveraged financial
instruments or other derivatives for such purposes.
MARKET RATE RISK
The following discussion about our market rate risk involves
forward-looking statements. Actual results could differ materially from those
projected in the forward-looking statements. We are exposed to market risk
related to changes in interest rates, foreign currency exchange rates, and
equity security price risk. We do not use derivative financial instruments for
speculative purposes or to hedge these risks.
Interest Rate Risk. Our exposure to market rate risk for changes in
interest rates relate primarily to borrowings under our credit facilities and
our short-term monetary investments. To the extent that, from time to time, we
hold short-term money market instruments, there is a market rate risk for
changes in interest rates on such instruments. To that extent, there is inherent
rollover risk in the short-term money market instruments as they mature and are
renewed at current market rates. The extent of this risk is not quantifiable or
predictable because of the variability of future interest rates and business
financing requirements. However, there is no risk of loss of principal in the
short-term money market instruments, only a risk related to a potential
reduction in future interest income. Derivative instruments are not presently
used to adjust our interest rate risk profile. We do not use derivative
financial instruments to hedge this interest rate risk. However, in the future,
we may consider the use of financial instruments to hedge interest rate risk.
Foreign Currency Exchange Rate Risk. The majority of our business is
denominated in U.S. dollars. There are costs associated with our operations in
foreign countries that require payments in the local currency. Where appropriate
and to partially manage our foreign currency risk related to those payments we
receive payment from customers in local currencies in amounts sufficient to meet
our local currency obligations. We do not use derivatives or other financial
instruments to hedge foreign currency risk.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
We do business in numerous countries, including emerging markets in
Africa, Asia, South America, Russia, and the former CIS. We have invested
substantial resources outside of the United States and plan to continue to do so
in the future. Our international 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, potential imposition of restrictions on investments, potentially
adverse tax consequences, including imposition or increase of withholding and
other taxes on remittances and other payments by subsidiaries, and local
economic, political and social conditions. Governments of many developing
countries have exercised and continue to exercise
43
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS - CONTINUED
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 conducts business, but
periodically analyze the need for and cost associated with this type of policy.
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.
ITEM 4. CONTROLS AND PROCEDURES
We evaluated the effectiveness of the design and operation of our
disclosure controls and procedures as of the end of the period covered by this
report. Our disclosure controls and procedures are designed to provide
reasonable assurance that the information that the Company must disclose in its
reports filed under the Securities and Exchange Act is communicated and
processed in a timely manner. Warren B. Kanders, Chairman and Chief Executive
Officer, and Robert R. Schiller, Chief Operating Officer and Chief Financial
Officer, participated in this evaluation.
Based on such evaluation, Mr. Kanders and Mr. Schiller concluded that,
as of the date of such evaluation, our disclosure controls and procedures were
effective, except as noted in the next paragraph. Since the date of the
evaluation described above, there have not been any significant changes in our
internal controls or in other factors that could significantly affect those
controls except as indicated in the next paragraph.
During the twelve months ended December 31, 2002 financial reporting
process, management, in consultation with our independent accountants,
identified a deficiency in our tax financial reporting process relating to the
reconciliation of provisions for income taxes for our discontinued operations to
tax filings and inventory of deferred tax assets and liabilities which
constituted a "Reportable Condition" under standards established by the American
Institute of Certified Public Accountants. We believe that this matter has not
had any material impact on our financial statements. We have hired an internal
tax director and completed the design, development and implementation of
processes and controls to address this deficiency. We are currently in the
process of formally documenting these policies and procedures.
44
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
PART II
ITEM 1. LEGAL PROCEEDINGS
Reference is made to Part I, Item 3, Legal Proceedings, in our Annual
Report on Form 10-K for the year ended December 31, 2002, and Part II, Item 1,
Legal Proceedings in our Quarterly Report on Form 10-Q for the quarter ended
March 31, 2003 for a description of legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We held our annual meeting of stockholders on June 24, 2003 for the
purpose of electing directors and ratifying the appointment of
PricewaterhouseCoopers LLP as our independent accountants.
Each of Armor's nominees for directors, as listed in the proxy
statement, was elected with the number of votes set forth below.
FOR AGAINST
--- ---------
Warren B. Kanders 22,537,809 4,794,919
Burtt R. Ehrlich 26,444,907 887,821
Nicholas Sokolow 19,486,482 7,846,446
Thomas W. Strauss 23,393,396 3,939,332
Alair A. Townsend 23,393,425 3,939,303
Deborah Zoullas 23,393,428 3,939,300
The ratification of PricewaterhouseCoopers, LLC as our independent
accountants was approved with the number of votes set forth below:
For Against Abstentions
19,818,611 7,510,164 3,953
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are filed as part of this quarterly report on
Form 10-Q.
10.1 Purchase Agreement dated August 6, 2003 by and among Armor Holdings,
Inc., a Delaware corporation, certain of it's domestic subsidiaries and
Wachovia Capital Markets, LLC.
10.2 Indenture dated as of August 12, 2003 by and among Armor Holdings,
Inc., the subsidiary guarantors and Wachovia Bank, National
Association, as trustee, and form of Note attached as Exhibit A
thereto.
10.3 Registration Rights Agreement dated as of August 12, 2003 by and among
Armor Holdings, Inc., the subsidiary guarantors and Wachovia Capital
Markets, LLC.
10.4 Credit Agreement dated as of August 12, 2003 by and among Armor
Holdings, Inc., each lender from time to time party thereto, Bank of
America, N.A., as Administrative Agent, Swing Line Lender and L/C
Issuer, Wachovia Bank, National Association, as Syndication Agent, and
KeyBank National Association, as Documentation Agent.
10.5 Subsidiary Guarantee Agreement dated as of August 12, 2003, by certain
subsidiaries of Armor Holdings, Inc., in favor of Bank of America,
N.A., as Administrative Agent for the benefit of the lenders from time
to time parties to the Credit Agreement dated as of August 12, 2003.
10.6 Collateral Agreement dated as of August 12, 2003 by and among Armor
Holdings, Inc. and certain of its subsidiaries in favor of Bank of
America, N.A., as Administrative Agent for the benefit of the lender
from time to time parties to the Credit Agreement dated August 12,
2003.
10.7 Trademark Security Agreement dated as of August 12, 2003 by certain of
the subsidiaries of Armor Holdings, Inc. in favor of Bank of America,
N.A., as Administrative Agent under the Credit Agreement dated August
12, 2003.
10.8 Patent Security Agreement dated as of August 12, 2003 by Armor
Holdings, Inc. and certain of its subsidiaries in favor of Bank of
America, N.A., as Administrative Agent under the Credit Agreement dated
August 12, 2003.
10.9 Promissory note dated August 12, 2003 in the principal amount of up to
$15,000,000 made by Armor Holdings, Inc. in favor of Keybank National
Association.
10.10 Promissory note dated August 12, 2003 in the principal amount of up to
$22,500,000 in favor of Wachovia Bank, National Association.
31.1 Certification of Principal Executive Officer Pursuant to Rule 13a-14(a)
(17 CFR 240.13a-14(b)).
31.2 Certification of Principal Financial Officer Pursuant to Rule 13a-14(a)
(17 CFR 240.13a-14(b)).
32.1 Certification of Principal Executive Officer Pursuant to Rule 13a-14(b)
(17 CFR 240.13a-14(b)) and Section 1350 of Chapter 63 of Title 18 of
the United States Code (18 U.S.C. 1350).
32.2 Certification of Principal Financial Officer Pursuant to Rule 13a-14(b)
(17 CFR 240.13a-14(b)) and Section 1350 of Chapter 63 of Title 18 of
the United States Code (18 U.S.C. 1350).
45
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
(b) Reports on Form 8-K.
We filed a Form 8-K on May 5, 2003, relating to a press release, issued
on May 5, 2003, announcing our earnings for the three month period ended March
31, 2003.
46
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ARMOR HOLDINGS, INC.
/s/ Warren B. Kanders
----------------------------------
Warren B. Kanders
Chairman and Chief Executive Officer
Dated: August 14, 2003
/s/ Robert R. Schiller
-------------------------------------
Robert R. Schiller
Chief Operating Officer and Chief Financial Officer
Dated: August 14, 2003
47