Filed Pursuant to Rule 424(b)(3)
Registration File No. 333-111742
PROSPECTUS
ARMOR HOLDINGS, INC.
OFFER TO EXCHANGE $150,000,000 PRINCIPAL AMOUNT OF OUR
8 1/4% SENIOR SUBORDINATED NOTES DUE 2013,
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
FOR ANY AND ALL OF OUR OUTSTANDING
8 1/4% SENIOR SUBORDINATED NOTES DUE 2013
UNCONDITIONALLY GUARANTEED BY THE SUBSIDIARY
GUARANTORS LISTED ON PAGE 5 OF THIS PROSPECTUS
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MATERIAL TERMS OF THE EXCHANGE OFFER
o The exchange offer expires at 5:00 p.m., New York City time, on March 23,
2004, unless extended.
o We will exchange all outstanding old notes that are validly tendered and
not validly withdrawn for an equal principal amount of a new series of
notes which are registered under the Securities Act of 1933, as amended
(the "Securities Act"), subject to the satisfaction or waiver of specified
conditions.
o The terms of the new notes are substantially identical to those of the old
notes, except that the transfer restrictions applicable to the old notes
are not applicable to the new notes.
o You may withdraw tenders of old notes at any time before the exchange
offer expires.
o The exchange of new notes for outstanding old notes should not be a
taxable event for U.S. Federal income tax purposes.
o We will not receive any proceeds from the exchange offer.
o We do not intend to apply for listing of any of the new notes to be issued
on any securities exchange or to arrange for them to be quoted on any
quotation system.
o All of our current and future domestic subsidiaries, except USDS, Inc.,
will unconditionally guarantee in full, on a joint and several basis, our
obligation to pay the principal of, premium, if any, and interest on the
new notes. See "Risk Factors - Federal and state statutes allow courts,
under specific circumstances, to void guarantees and require noteholders
to return payments received from guarantors" and "Description of the New
Notes - Subsidiary Guarantees."
o Each broker-dealer that receives new notes for its own account pursuant to
the exchange offer must acknowledge that it will deliver a prospectus in
connection with any resale of such new notes. The Letter of Transmittal
states that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter"
within the meaning of the Securities Act. This prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer
in connection with resales of the new notes received in exchange for the
old notes where such old notes were acquired by such broker-dealer as a
result of market-making activities or other trading activities. We and our
subsidiary guarantors have agreed that we will make this prospectus
available to any broker-dealer for use in connection with any such resale.
See "Plan of Distribution."
---------------
PLEASE REFER TO "RISK FACTORS" BEGINNING ON PAGE 15 FOR A
DESCRIPTION OF THE RISKS YOU SHOULD CONSIDER WHEN EVALUATING THIS INVESTMENT.
---------------
WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND
US A PROXY.
---------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE
SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THE NEW NOTES TO BE ISSUED
IN THE EXCHANGE OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
WE MAY AMEND OR SUPPLEMENT THIS PROSPECTUS FROM TIME TO TIME BY
FILING AMENDMENTS OR SUPPLEMENTS AS REQUIRED. YOU SHOULD READ THIS ENTIRE
PROSPECTUS (AND THE ACCOMPANYING LETTER OF TRANSMITTAL AND RELATED DOCUMENTS)
AND ANY AMENDMENTS OR SUPPLEMENTS CAREFULLY BEFORE MAKING YOUR INVESTMENT
DECISION.
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT
AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
THE DATE OF THIS PROSPECTUS IS FEBRUARY 23, 2004.
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TABLE OF CONTENTS
Page
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SUBSIDIARY GUARANTORS ............................................................... 5
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE ..................................... 6
SUMMARY ............................................................................. 8
RISK FACTORS ........................................................................ 15
RISKS RELATING TO THE NEW NOTES .................................................. 15
If you fail to exchange properly your old notes for new notes, you will
continue to hold old notes subject to transfer restrictions ................... 15
Our significant indebtedness could adversely affect our financial health,
and prevent us from fulfilling our obligations under the notes ................ 15
Your right to receive payments on the notes is junior to our existing
senior indebtedness and possibly all of our future borrowings. Further,
the guarantees of the new notes are junior to all of the guarantors'
existing senior indebtedness and possibly to all their future borrowings ...... 16
Since the notes are unsecured, your right to enforce remedies is limited
by the rights of holders of secured debt ...................................... 17
Not all of our subsidiaries will guarantee our obligations under the
notes, and the assets of the non-guarantor subsidiaries may not be
available to make payments on the notes ....................................... 17
We will require a significant amount of cash to service our indebtedness
Our ability to generate cash depends on many factors beyond our control ....... 18
The indenture and our senior credit facility contain various covenants
which limit our management's discretion in the operation of our business ...... 18
We may not have the ability to raise the funds necessary to finance the
change of control offer required by the indenture ............................. 19
A public market for the new notes may not develop ............................. 19
Federal and state statutes allow courts, under specific circumstances, to
void guarantees and require noteholders to return payments received from
guarantors .................................................................... 19
RISKS RELATED TO ARMOR HOLDINGS' INDUSTRY ........................................ 21
The products we sell are inherently risky and could give rise to product
liability and other claims .................................................... 21
We are subject to extensive government regulation and our failure or
inability to comply with these regulations could materially restrict our
operations and subject us to substantial penalties ............................ 22
We have significant international operations and assets and are therefore
subject to additional financial and regulatory risks .......................... 22
RISKS RELATED TO ARMOR HOLDINGS' BUSINESS ........................................ 24
Many of our customers have fluctuating budgets which may cause substantial
fluctuations in our results of operations ..................................... 24
The loss of, or a significant reduction in, U.S. military business would
have a material adverse effect on us .......................................... 24
We may lose money or generate less than expected profits on our
fixed-price contracts ......................................................... 25
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Page
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Our business is subject to various laws and regulations favoring the U.S.
government's contractual position, and our failure to comply with such
laws and regulations could harm our operating results and prospects ........... 25
Our markets are highly competitive and if we are unable to compete
effectively, we will be adversely affected .................................... 26
There are limited sources for some of our raw materials which may
significantly curtail our manufacturing operations ............................ 26
We may be unable to complete or integrate acquisitions effectively, if at
all, and as a result may incur unanticipated costs or liabilities or
operational difficulties ...................................................... 26
Our resources may be insufficient to manage the demands imposed by our
growth ........................................................................ 27
Armor Holdings is dependent on industry relationships ......................... 27
We may be unable to protect our proprietary technology, including the
technologies we use to furnish the up-armoring of HMMWVS ...................... 27
Technological advances, the introduction of new products, and new design
and manufacturing techniques could adversely affect our operations unless
we are able to adapt to the resulting change in conditions .................... 28
We may be adversely affected by applicable environmental laws and
regulations ................................................................... 29
THE COMPANY ......................................................................... 30
RECENT DEVELOPMENTS ................................................................. 32
FORWARD LOOKING STATEMENTS .......................................................... 34
USE OF PROCEEDS ..................................................................... 34
RATIO OF EARNINGS TO FIXED CHARGES .................................................. 35
CAPITALIZATION ...................................................................... 36
SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA OF ARMOR HOLDINGS, INC .............. 37
SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA OF SIMULA, INC ...................... 39
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ..................... 40
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 48
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ...................... 80
THE EXCHANGE OFFER .................................................................. 82
DESCRIPTION OF THE NEW NOTES ........................................................ 94
DESCRIPTION OF SENIOR INDEBTEDNESS .................................................. 151
FEDERAL INCOME TAX CONSIDERATIONS ................................................... 151
PLAN OF DISTRIBUTION ................................................................ 156
WHERE YOU CAN FIND MORE INFORMATION ................................................. 158
EXPERTS ............................................................................. 158
LEGAL MATTERS ....................................................................... 159
INDEX TO FINANCIAL STATEMENTS ....................................................... F-1
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SUBSIDIARY GUARANTORS
Set forth below is a list of the subsidiary guarantors guarantying the
obligations of Armor Holdings, Inc. pursuant to the terms of the Indenture,
dated as of August 12, 2003, among Armor Holdings, Inc., the subsidiary
guarantors listed as signatories thereto and Wachovia Bank, National
Association, as trustee, as supplemented by the First Supplemental Indenture
dated as of September 30, 2003, as further supplemented by the Second
Supplemental Indenture dated as of December 9, 2003 and as further supplemented
by the Third Supplemental Indenture dated as of December 24, 2003.
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911EP, Inc.
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AHI Bulletproof Acquisition Corp.
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AHI Properties I, Inc.
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AI Capital Corp.
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Armor Brands, Inc.
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ArmorGroup Services, LLC
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Armor Holdings Forensics, Inc.
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Armor Holdings GP, LLC
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Armor Holdings LP, LLC
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Armor Holdings Mobile Security, L.L.C.
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Armor Holdings Payroll Services, LLC
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Armor Holdings Products, Inc.
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Armor Holdings Properties, Inc.
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Armor Safety Products Company
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ASD Capital Corp.
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B-Square, Inc.
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Break-Free Armor Corp.
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Break-Free, Inc.
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Casco International, Inc.
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CCEC Capital Corp.
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CDR International, Inc.
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Defense Technology Corporation of America
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Hatch Imports, Inc.
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Identicator, Inc.
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International Center for Safety Education, Inc.
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Monadnock Lifetime Products, Inc. (Delaware)
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Monadnock Lifetime Products, Inc. (New Hampshire)
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Monadnock Police Training Council, Inc.
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NAP Properties, Ltd.
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NAP Property Managers, LLC
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Network Audit Systems, Inc.
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New Technologies Armor, Inc.
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O'Gara-Hess & Eisenhardt Armoring Company, L.L.C.
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Pro-Tech Armored Products of Massachusetts, Inc.
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5
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Ramtech Development Corp.
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Safari Land Ltd., Inc.
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Safariland Government Sales, Inc.
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SAI Capital Corp.
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Simula Aerospace & Defense Group, Inc.
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Simula, Inc.
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Simula Polymers Systems, Inc.
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Simula Technologies, Inc.
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Simula Transportation Equipment Corporation
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Speedfeed Acquisition Corp.
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The O'Gara Company
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INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents heretofore filed by us with the Securities and
Exchange Commission (the "Commission") pursuant to the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), are hereby incorporated by reference
in this prospectus, except as superseded or modified herein:
(a) Our annual report on Form 10-K/A for the fiscal year ended December
31, 2002;
(b) Our annual report on Form 10-K for the fiscal year ended December
31, 2002;
(c) Our quarterly report on Form 10-Q for the period ended March 31,
2003;
(d) Our quarterly report on Form 10-Q for the period ended June 30,
2003;
(e) Our quarterly report on Form 10-Q for the period ended September 30,
2003;
(f) Our current report on Form 8-K, Date of Event - May 5, 2003, filed
on May 5, 2003;
(g) Our current report on Form 8-K, Date of Event - July 23, 2003, filed
on July 24, 2003;
(h) Our current report on Form 8-K, Date of Event - July 26, 2003, filed
on August 8, 2003;
(i) Our current report on Form 8-K, Date of Event - August 12, 2003,
filed on August 13, 2003;
(j) Our current report on Form 8-K, Date of Event - November 4, 2003,
filed on November 5, 2003;
(k) Our current report on Form 8-K, Date of Event - November 26, 2003,
filed on December 11, 2003;
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(l) Our current report on Form 8-K, Date of Event - December 9, 2003,
filed on December 23, 2003;
(m) Our definitive proxy statement on Schedule 14A filed on April 30,
2003;
(n) Our current report on Form 8-K/A, Date of Event - December 9, 2003,
filed on January 22, 2004;
(o) Our current report on Form 8-K, Date of Event - January 27, 2004,
filed on January 27, 2004; and
(p) Our current report on Form 8-K, Date of Event - February 12, 2004,
filed on February 12, 2004.
All of such documents are on file with the Commission. In addition, all
documents filed by Armor Holdings pursuant to Sections 13(a), 13(c), 14 and
15(d) of the Exchange Act, subsequent to the date of this prospectus and prior
to termination of the exchange offer are incorporated by reference in this
prospectus and are a part hereof from the date of filing of such documents. Any
statement contained in a document incorporated or deemed to be incorporated by
reference herein shall be deemed to be modified or superseded for purposes of
this prospectus to the extent that a statement contained herein or in any
subsequently filed document that is also incorporated by reference herein
modifies or replaces such statement. Any statements so modified or superseded
shall not be deemed, except as so modified or superseded, to constitute a part
of this prospectus.
This prospectus incorporates herein by reference important business and
financial information about Armor Holdings that is not included in or delivered
with this prospectus. This information is available to you without charge upon
written or oral request. If you would like a copy of any of this information,
please submit your request to Armor Holdings, Inc., 1400 Marsh Landing Parkway,
Suite 112, Jacksonville, Florida 32250, Attention: Corporate Secretary, or call
(904) 741-5400. In addition, to obtain timely delivery of any information you
request, you must submit your request no later than March 16, 2004, which is
five business days before the date the exchange offer expires.
7
SUMMARY
This summary highlights material information from the prospectus. It may
not contain all of the information that is important to you. References in this
prospectus to "Armor Holdings," "we," "us" and "our" refer to Armor Holdings,
Inc., and references to Simula refer to Simula, Inc. We urge you to read and
review carefully this entire prospectus, and the other documents to which it
refers, to fully understand the terms of the new notes and the exchange offer.
SUMMARY OF THE TERMS OF THE EXCHANGE OFFER
General........................... On August 12, 2003, we completed a private
offering of the old notes, which consisted
of $150.0 million aggregate principal
amount of our 8 1/4% Senior Subordinated
Notes due 2013. In connection with the
private offering, we entered into a
registration rights agreement in which we
agreed, among other things, to deliver
this prospectus and to complete an
exchange offer for the old notes.
The Exchange Offer................ We are offering to exchange $1,000
principal amount of our registered 8 1/4%
Senior Subordinated Notes due 2013, which
we refer to as the "new notes," for each
$1,000 principal amount of our
unregistered 8 1/4% Senior Subordinated
Notes due 2013, which we refer to as the
"old notes."
We sometimes refer to the new notes and
the old notes together as the "notes."
Currently, $150.0 million principal amount
of old notes are outstanding. The terms of
the new notes are identical in all
material respects to the terms of the old
notes, except that the transfer
restrictions applicable to the old notes
are not applicable to the new notes.
Old notes may be tendered only in $1,000
increments. Subject to the satisfaction or
waiver of specified conditions, we will
exchange the new notes for all old notes
that are validly tendered and not
withdrawn prior to the expiration of the
exchange offer. See "The Exchange Offer --
Terms of the Exchange Offer."
Upon completion of the exchange offer,
there may be no market for the old notes
and you may have difficulty selling them.
See "Risk Factors - If you fail to
exchange properly your old notes for new
notes, you will continue to hold notes
subject to transfer restrictions."
8
Expiration Date................... The exchange offer will expire at 5:00
p.m., New York City time, on March 23,
2004, unless extended, in which case the
expiration date will mean the latest date
and time to which we extend the exchange
offer.
Conditions to the Exchange Offer.. The exchange offer is not subject to
conditions other than that:
o it shall not violate applicable law
or any applicable interpretation of
the staff of the Commission,
o no action or proceeding shall have
been instituted or threatened in any
court or by any governmental agency
which might materially impair our
ability to proceed with the exchange
offer, or
o all governmental approvals which we
deem necessary for the completion of
the exchange offer shall have been
obtained.
The exchange offer is not conditioned upon
any minimum principal amount of old notes
being tendered for exchange.
Procedures for
Tendering Old Notes............... If you wish to tender your old notes for
new notes pursuant to the exchange offer,
you must transmit to Wachovia Bank,
National Association, as exchange agent,
on or before the expiration date, either:
o a computer-generated message
transmitted through The Depository
Trust Company's Automated Tender
Offer Program system and received by
the exchange agent and forming a part
of a confirmation of book-entry
transfer in which you acknowledge and
agree to be bound by the terms of the
letter of transmittal; or
o a properly completed and duly
executed letter of transmittal, which
accompanies this prospectus, or a
facsimile of the letter of
transmittal, together with your old
notes and any other required
documentation, to the exchange agent
at its address listed in this
prospectus and on the front cover of
the letter of transmittal.
If you cannot satisfy either of these
procedures on a timely basis, then you
should comply with the guaranteed delivery
9
procedures described below. By executing
the letter of transmittal, you will make
the representations to us described under
"The Exchange Offer-Procedures for
Tendering."
Special Procedures for
Beneficial Owners................. If you are a beneficial owner whose old
notes are registered in the name of a
broker, dealer, commercial bank, trust
company or other nominee and you wish to
tender your old notes in the exchange
offer, you should contact the registered
holder promptly and instruct the
registered holder to tender on your
behalf. If you wish to tender on your own
behalf, you must either:
o make appropriate arrangements to
register ownership of the old notes
in your name; or
o obtain a properly completed bond
power from the registered holder,
before completing and executing the
letter of transmittal and delivering
your old notes.
Guaranteed Delivery Procedures.... If you wish to tender your old notes and
time will not permit the documents
required by the letter of transmittal to
reach the exchange agent before the
expiration date, or the procedure for
book-entry transfer cannot be completed on
a timely basis, you must tender your old
notes according to the guaranteed delivery
procedure described in this prospectus
under "The Exchange Offer-Guaranteed
Delivery Procedures."
Acceptance of Old Notes and
Delivery of New Notes............. Subject to the satisfaction or waiver of
the conditions to the exchange offer, we
will accept for exchange any and all old
notes which are validly tendered in the
exchange offer and not withdrawn before
5:00 p.m., New York City time, on the
expiration date.
Withdrawal Rights................. You may withdraw the tender of your old
notes at any time before 5:00 p.m., New
York City time, on the expiration date, by
complying with the procedures for
withdrawal described in this prospectus
under "The Exchange Offer-Withdrawal of
Tenders."
Return of Notes................... If we do not accept any tendered old notes
for the reasons described in the terms and
conditions of the exchange offer or if you
withdraw any tendered old notes or submit
old
10
notes for a greater principal amount than
you desire to exchange, we will return the
unaccepted, withdrawn or non-exchanged old
notes without expense to you as promptly
as practicable after the expiration or
termination of the exchange offer. See
"The Exchange Offer-Return of Notes."
Certain Federal Income
Tax Consequences.................. The exchange of old notes for new notes
should not be a taxable event for United
States Federal income tax purposes. For a
discussion of the material Federal income
tax consequences relating to the exchange
of notes, see "Federal Income Tax
Considerations."
Exchange Agent.................... Wachovia Bank, National Association, the
trustee under the indenture governing the
old notes, is serving as the exchange
agent.
Consequence of Failure to
Exchange Notes.................... If you do not exchange your old notes for
new notes, you will continue to be subject
to the restrictions on transfer provided
in the old notes and in the indenture
governing the old notes. In general, the
old notes may not be offered or sold,
unless registered under the Securities
Act, except pursuant to an exemption from,
or in a transaction not subject to, the
Securities Act and applicable state
securities laws. We do not currently plan
to register the old notes under the
Securities Act.
11
SUMMARY OF THE TERMS OF THE NEW NOTES
The summary below describes the material terms of the new notes. Some of
the terms and conditions described below are subject to important limitations
and exceptions. The "Description of the New Notes" section of this prospectus
contains a more detailed description of the terms and conditions of the new
notes. The terms of the new notes are substantially identical to those of the
old notes, except that the transfer restrictions applicable to the old notes are
not applicable to the new notes. The new notes will evidence the same debt as
the old notes. The new notes and the old notes will be governed by the same
indenture.
Issuer............................ Armor Holdings, Inc.
Securities........................ $150.0 million in principal amount of
8 1/4% Senior Subordinated Notes due 2013.
Maturity.......................... August 15, 2013.
Interest.......................... Annual rate: 8 1/4%.
Payment frequency: every six months on
February 15 and August 15.
First payment: February 15, 2004.
Guarantees........................ The new notes will be unconditionally
guaranteed in full on a senior
subordinated basis by all of our existing
and future domestic restricted
subsidiaries except USDS, Inc. If we
cannot make payments on the new notes when
they are due, the guarantors must make
them instead. See "Risk Factors - Federal
and state statutes allow courts, under
specific circumstances, to void guarantees
and require noteholders to return payments
received from guarantors" and "Description
of the New Notes."
Ranking.......................... The new notes and the guarantees will be
unsecured senior subordinated obligations.
Accordingly, they will rank:
o behind all of our and the guarantors'
existing and future senior debt;
o equally with all our and the
guarantors' existing and future
unsecured senior subordinated
obligations issued under the
indenture and which do not expressly
provide that they are subordinated to
the new notes; and
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o ahead of any of our and the
guarantors' future debt that
expressly provides that it is
subordinated to the new notes.
On a pro forma basis as of September 30,
2003, the notes and the guarantees would
have been subordinated to approximately
$45.4 million of senior debt. In addition,
there would have been approximately $60.0
million of unused commitments under our
senior credit facility.
Optional Redemption............... On or after August 15, 2008, we may redeem
some or all of the notes at any time at
the redemption prices listed under
"Description of the New Notes--Optional
Redemption."
Prior to August 15, 2006, we may redeem up
to 35% of the new notes with the proceeds
from certain public equity offerings at
the redemption price listed under
"Description of the New Notes--Optional
Redemption."
Mandatory Offer to Repurchase..... If we sell certain assets or experience
certain types of changes of control, we
must offer to repurchase the new notes at
the prices listed in the section
"Description of the New Notes--Repurchase
at the Option of Holders." There can be no
assurance that we will have available
funds sufficient to repurchase all of the
new notes that might be tendered by
holders of the new notes seeking to accept
the repurchase offer. See "Risk Factors-We
may not have the ability to raise the
funds necessary to finance the change of
control offer required by the indenture."
Certain Covenants................. The indenture governing the new notes
will, among other things, limit our and
the ability of certain of our subsidiaries
to:
o incur additional indebtedness;
o pay dividends or distributions on, or
redeem or repurchase, capital stock;
o make investments;
o engage in certain transactions with
affiliates;
o incur liens;
o transfer or sell assets; and
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o consolidate, merge or transfer all or
substantially all of our assets.
For more details, see "Description of the
New Notes."
Use of Proceeds................... We will not receive any proceeds from the
exchange offer.
YOU SHOULD REFER TO THE SECTION ENTITLED "RISK FACTORS" FOR AN EXPLANATION
OF MATERIAL RISKS OF INVESTING IN THE NEW NOTES.
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RISK FACTORS
Our business, operations and financial condition are subject to various
risks. The material risks are described below, and you should take these risks
into account in evaluating us or any investment decision involving us or in
deciding whether to tender your old notes in exchange for new notes in this
exchange offer. This section does not describe all risks applicable to us, our
industry or our business, and it is intended only as a summary of the material
risk factors. The risk factors set forth below are generally applicable to the
old notes as well as the new notes.
RISKS RELATING TO THE NEW NOTES
IF YOU FAIL TO EXCHANGE PROPERLY YOUR OLD NOTES FOR NEW NOTES, YOU WILL CONTINUE
TO HOLD OLD NOTES SUBJECT TO TRANSFER RESTRICTIONS.
The new notes will be issued in exchange for old notes only after timely
receipt by the exchange agent of the old notes, a properly completed and duly
executed letter of transmittal and all other required documents. Therefore, if
you desire to tender your old notes in exchange for new notes, you should allow
sufficient time to ensure timely delivery. Your failure to follow these
procedures may result in delay in receiving new notes on a timely basis or in
your loss of the right to receive new notes. Neither we nor the exchange agent
is under any duty to give notification of defects or irregularities with respect
to tenders of old notes for exchange. If you tender old notes in the exchange
offer for the purpose of participating in a distribution of the new notes, you
will be required to comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any resale transaction.
See "The Exchange Offer-Procedures for Tendering" and "Plan of Distribution".
If you do not exchange your old notes for new notes pursuant to the
exchange offer, you will continue to be subject to the restrictions on transfer
of the old notes as set forth in the legend on the old notes. In general, the
old notes may not be offered or sold unless registered under the Securities Act,
or pursuant to an exemption from, or in a transaction not subject to, the
Securities Act and applicable state securities laws. We do not currently intend
to register the old notes under the Securities Act. To the extent that old notes
are tendered and accepted in the exchange offer, the trading market for
untendered and tendered but unaccepted old notes could be adversely affected.
OUR SIGNIFICANT INDEBTEDNESS COULD ADVERSELY AFFECT OUR FINANCIAL HEALTH, AND
PREVENT US FROM FULFILLING OUR OBLIGATIONS UNDER THE NOTES.
We have a significant amount of indebtedness. Our significant indebtedness
could:
o make it more difficult for us to satisfy our obligations with
respect to the new notes;
o increase our vulnerability to general adverse economic and industry
conditions;
o require us to dedicate a substantial portion of our cash flow from
operations to payments on our indebtedness, thereby reducing the
availability of our cash flow to fund working
15
capital, capital expenditures, acquisitions and investments and
other general corporate purposes;
o limit our flexibility in planning for, or reacting to, changes in
our business and the markets in which we operate;
o place us at a competitive disadvantage compared to our competitors
that have less debt; and
o limit, among other things, our ability to borrow additional funds.
The following table sets forth our total debt, total stockholders' equity,
total capitalization and ratio of debt to total capitalization:
September 30, 2003
------------------
(Unaudited)
(Dollars in Thousands)
Total debt $168,148
Total stockholders' equity $291,140
--------
Total capitalization $459,288
========
Ratio of debt to total 36.6%
capitalization
The terms of the indenture governing the notes and the senior credit
facility allow us to issue and incur additional debt upon satisfaction of
certain conditions. See "Description of the New Notes" for a description of our
indenture and "Description of Senior Indebtedness" for a description of our
senior credit facility. If new debt is added to current debt levels, the related
risks described above could increase.
YOUR RIGHT TO RECEIVE PAYMENTS ON THE NOTES IS JUNIOR TO OUR EXISTING SENIOR
INDEBTEDNESS AND POSSIBLY ALL OF OUR FUTURE BORROWINGS. FURTHER, THE GUARANTEES
OF THE NEW NOTES ARE JUNIOR TO ALL OF THE GUARANTORS' EXISTING SENIOR
INDEBTEDNESS AND POSSIBLY TO ALL THEIR FUTURE BORROWINGS.
The notes and the guarantees rank behind all of our and the guarantors'
existing senior indebtedness and all of our and the guarantors' future senior
indebtedness. See "Description of Senior Indebtedness" for a description of our
senior credit facility. On a pro forma basis as of September 30, 2003, the notes
and the guarantees would have been subordinated to approximately $5.2 million of
senior debt. In addition, our senior credit facility would have permitted up to
approximately $60 million of additional borrowings, subject to compliance with
the covenants and conditions to borrowing under the senior credit facility,
which borrowings would be senior to the notes and the guarantees. We will be
permitted to borrow substantial additional indebtedness, including senior debt,
in the future.
16
As a result of this subordination, upon any distribution to our creditors
or the creditors of the guarantors in a bankruptcy, liquidation or
reorganization or similar proceedings relating to us or the guarantors or our or
the guarantors' property, the holders of our senior debt and the senior debt of
the guarantors will be entitled to be paid in full in cash before any payment
may be made with respect to the notes or the guarantees.
In addition, all payments on the new notes and the guarantees will be
blocked in the event of a payment default on senior debt and may be blocked for
up to 179 consecutive days in the event of certain non-payment defaults on
designated senior debt.
In the event of a bankruptcy, liquidation or reorganization or similar
proceeding relating to us or the guarantors, the indenture relating to the new
notes will require that amounts otherwise payable to holders of the new notes in
a bankruptcy or similar proceeding be paid to holders of senior debt instead
until the holders of senior debt are paid in full. As a result, holders of the
new notes may not receive all amounts owed to them and may receive less,
ratably, than holders of trade payables and other unsubordinated indebtedness in
any such proceeding.
SINCE THE NOTES ARE UNSECURED, YOUR RIGHT TO ENFORCE REMEDIES IS LIMITED BY THE
RIGHTS OF HOLDERS OF SECURED DEBT.
In addition to being contractually subordinated to all existing and future
senior indebtedness, our obligations under the new notes will be unsecured while
obligations under our senior credit facility will be secured by substantially
all of our assets and those of our subsidiaries. If we become insolvent or are
liquidated, or if payment under the senior credit facility is accelerated, the
lenders under the senior credit facility are entitled to exercise the remedies
available to a secured lender under applicable law. These lenders have a claim
on all assets securing the senior credit facility before the holders of
unsecured debt, including the notes.
NOT ALL OF OUR SUBSIDIARIES WILL GUARANTEE OUR OBLIGATIONS UNDER THE NOTES, AND
THE ASSETS OF THE NON-GUARANTOR SUBSIDIARIES MAY NOT BE AVAILABLE TO MAKE
PAYMENTS ON THE NOTES.
Our present and future domestic restricted subsidiaries will guarantee the
notes. Payments on the notes are only required to be made by us and the
subsidiary guarantors. As a result, no payments are required to be made from
assets of subsidiaries that do not guarantee the notes, unless those assets are
transferred by dividend or otherwise to us or a subsidiary guarantor. On a pro
forma basis, as of and for the year ended December 31, 2002, the aggregate total
assets and net sales of our non-guarantor subsidiaries were $100.3 million and
$75.4 million, respectively, or 27.3% and 24.7%, respectively, of our total
assets and net sales.
In the event of a bankruptcy, liquidation or reorganization of any of the
non-guarantor subsidiaries, holders of their liabilities, including their trade
creditors, will be entitled to payment of their claims from the assets of those
subsidiaries before any assets are made available for distribution to us. As a
result, the notes are effectively subordinated to all indebtedness and other
liabilities of the non-guarantor subsidiaries.
17
WE WILL REQUIRE A SIGNIFICANT AMOUNT OF CASH TO SERVICE OUR INDEBTEDNESS. OUR
ABILITY TO GENERATE CASH DEPENDS ON MANY FACTORS BEYOND OUR CONTROL.
Our ability to make payments on and to refinance our indebtedness,
including the notes and amounts borrowed under our senior credit facility, and
to fund planned capital expenditures and expansion efforts and strategic
acquisitions we may make in the future, if any, will depend on our ability to
generate cash in the future. This, to a certain extent, is subject to general
economic, financial, competitive and other factors that are beyond our control.
Based on our current level of operations, we believe our cash flow from
operations, together with available cash and available borrowings under our
senior credit facility, will be adequate to meet future liquidity needs for at
least the next twelve months. However, we cannot assure you that our business
will generate sufficient cash flow from operations in the future, that our
currently anticipated growth in revenues and cash flow will be realized on
schedule or that future borrowings will be available to us under the senior
credit facility in an amount sufficient to enable us to service indebtedness,
including the new notes, or to fund other liquidity needs. We may need to
refinance all or a portion of our indebtedness, including the notes and our
senior credit facility, on or before maturity. We cannot assure you that we will
be able to do so on commercially reasonable terms or at all.
THE INDENTURE AND OUR SENIOR CREDIT FACILITY CONTAIN VARIOUS COVENANTS WHICH
LIMIT OUR MANAGEMENT'S DISCRETION IN THE OPERATION OF OUR BUSINESS.
Our senior credit facility and the indenture contain various provisions
that limit our management's discretion by restricting our and certain of our
subsidiaries' ability to, among other things:
o incur additional indebtedness;
o pay dividends or distributions on, or redeem or repurchase, capital
stock;
o make investments;
o engage in transactions with affiliates;
o incur liens;
o transfer or sell assets; and
o consolidate, merge or transfer all or substantially all of our
assets.
In addition, our senior credit facility requires us to meet certain
financial ratios. Any failure to comply with the restrictions of our senior
credit facility, the indenture or any other subsequent financing agreements may
result in an event of default. An event of default may allow the creditors, if
the agreements so provide, to accelerate the related debt as well as any other
debt to which a
18
cross-acceleration or cross-default provision applies. In addition, the lenders
may be able to terminate any commitments they had made to supply us with further
funds.
WE MAY NOT HAVE THE ABILITY TO RAISE THE FUNDS NECESSARY TO FINANCE THE CHANGE
OF CONTROL OFFER REQUIRED BY THE INDENTURE.
Upon the occurrence of certain specific kinds of change of control events,
we will be required to offer to repurchase all outstanding new notes. However,
it is possible that we will not have sufficient funds at the time of the change
of control to make the required repurchase of new notes. In addition,
restrictions in our senior credit facility prohibit repurchases of the notes
unless a waiver is obtained from the lenders or our senior credit facility is
repaid in full. If we fail to repurchase the new notes following a change of
control, we will be in default under the indenture, which will result in a
cross-default under our senior credit facility. Any future debt which we incur
may also contain restrictions on repayment of the notes. In addition, certain
important corporate events, such as leveraged recapitalizations, that would
increase the level of our indebtedness would not constitute a change of control
under the indenture.
A PUBLIC MARKET FOR THE NEW NOTES MAY NOT DEVELOP.
There can be no assurance that a public market for the new notes will
develop or, if such a market develops, as to the liquidity of the market. If a
market were to develop, the new notes could trade at prices that may be higher
or lower than their principal amount. We do not intend to apply for listing of
the new notes on any securities exchange or for quotation of the new notes on
any automated quotation system. The initial purchaser, Wachovia Capital Markets,
LLC, has previously made a market in the old notes, and we have been advised
that the initial purchaser currently intends to make a market in the new notes,
as permitted by applicable laws and regulations, after consummation of the
exchange offer. The initial purchaser is not obligated, however, to make a
market in the old notes or the new notes, and any market-making activity may be
discontinued at any time without notice at the sole discretion of the initial
purchaser. If an active public market does not develop or continue, the market
price and liquidity of the new notes may be adversely affected.
In addition, the liquidity of the trading market in the new notes, and the
market price quoted for the new notes, may be adversely affected by changes in
the overall market for high-yield securities and by changes in our financial
performance or prospects or in the prospects for companies in our industry
generally. As a result, you cannot be sure that an active trading market will
develop for the new notes.
FEDERAL AND STATE STATUTES ALLOW COURTS, UNDER SPECIFIC CIRCUMSTANCES, TO VOID
GUARANTEES AND REQUIRE NOTEHOLDERS TO RETURN PAYMENTS RECEIVED FROM GUARANTORS.
If a bankruptcy case or lawsuit is initiated by unpaid creditors of any
guarantor, the debt represented by the guarantees entered into by the guarantors
may be reviewed under the Federal bankruptcy law and comparable provisions of
state fraudulent transfer laws. Under these laws, a guarantee could be voided,
or claims in respect of the guarantee could be subordinated to certain
obligations of a guarantor if, among other things, the guarantor, at the time it
entered into the
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guarantee:
o received less than reasonably equivalent value or fair consideration
for entering into the guarantee; and
o either:
o was insolvent or rendered insolvent by reason of entering into
a guarantee; or
o was engaged in a business or transaction for which the
guarantor's remaining assets constituted unreasonably small
capital; or
o intended to incur, or believed that it would incur, debts or
contingent liabilities beyond its ability to pay them as they
become due.
In addition, any payment by a guarantor could be voided and required to be
returned to the guarantor or to a fund for the benefit of the guarantor's
creditors under those circumstances.
If a guarantee of a subsidiary were voided as a fraudulent conveyance or
held unenforceable for any other reason, holders of the new notes would be
solely creditors of our company and creditors of our other subsidiaries that
have validly guaranteed the new notes. The new notes then would be effectively
subordinated to all liabilities of the subsidiary whose guarantee was voided.
The measures of insolvency for purposes of these fraudulent transfer laws
will vary depending upon the law applied in any proceeding to determine whether
a fraudulent transfer has occurred. Generally, however, a guarantor would be
considered insolvent if:
o the sum of its debts, including contingent liabilities, were greater
than the fair saleable value of all of its assets; or
o the present fair saleable value of its assets were less than the
amount that would be required to pay its probable liability on its
existing debts, including contingent liabilities, as they become
absolute and mature; or
o it could not pay its debts or contingent liabilities as they become
due.
If the claims of the holders of the new notes against any subsidiary were
subordinated in favor of other creditors of the subsidiary, the other creditors
would be entitled to be paid in full before any payment could be made on the new
notes. If one or more of the guarantees is voided or subordinated, we cannot
assure you that after providing for all prior claims there would be sufficient
assets remaining to satisfy the claims of the holders of the new notes.
Based upon financial and other information, we believe that the guarantees
are being incurred for proper proposes and in good faith and that we, and our
subsidiaries that are guarantors, on a consolidated basis, are solvent and will
continue to be solvent after this offering is completed, will have sufficient
capital for carrying on our business after the issuance of the new notes and
will
20
be able to pay our debts as they mature. We cannot assure you, however, as to
the standard a court would apply in making these determinations or that a court
would agree with our conclusions in this regard.
RISKS RELATED TO ARMOR HOLDINGS' INDUSTRY
THE PRODUCTS WE SELL ARE INHERENTLY RISKY AND COULD GIVE RISE TO PRODUCT
LIABILITY AND OTHER CLAIMS.
The products that we manufacture are typically used in applications and
situations that involve high levels of risk of personal injury. Failure to use
our products for their intended purposes, failure to use them properly, their
malfunction, or, in some limited circumstances, even correct use of our
products, could result in serious bodily injury or death. Our products include:
body armor designed to protect against ballistic and sharp instrument
penetration; less-lethal products such as less-lethal munitions, pepper sprays,
distraction devices and flameless expulsion grenades; various models of police
batons made of wood, alloy steel, acetate, aluminum and polycarbonate products;
vehicle and hard armoring systems; and police duty gear.
Claims have been made and are pending against certain of our subsidiaries,
involving permanent physical injury and death caused by self-defense sprays and
other munitions intended to be less-lethal. In addition, the manufacture and
sale of certain less-lethal products may be the subject of product liability
claims arising from the design, manufacture or sale of such goods. If these
claims are decided against us and we are found to be liable, we may be required
to pay substantial damages and our insurance costs may increase significantly as
a result. Also, a significant or extended lawsuit, such as a class action, could
also divert significant amounts of management's time and attention. We cannot
assure you that our insurance coverage would be sufficient to cover the payment
of any potential claim. In addition, we cannot assure you that this or any other
insurance coverage will continue to be available or, if available, that we will
be able to obtain it at a reasonable cost. Our cost of obtaining insurance
coverage has risen substantially since September 11, 2001. Any material
uninsured loss could have a material adverse effect on our business, financial
condition and results of operations. In addition, the inability to obtain
product liability coverage would prohibit us from bidding for orders from
certain governmental customers since, at present, many bids from governmental
entities require such coverage, and any such inability would have a material
adverse effect on our business, financial condition and results of operations.
Both private claimants and State Attorneys General have already commenced
legal action against Second Chance Body Armor based upon its Ultima(R) and
Ultimax(R) model vests. Second Chance Body Armor licenses from Simula a certain
patented technology which is used in the body armor it manufactures, but to our
knowledge, no lawsuit has yet been brought against Second Chance Body Armor
based upon this licensed technology, although a letter was received by Simula
from an attorney representing a police officer who was injured while wearing a
Second Chance Body Armor vest alleging potential liability against Simula. In
addition, the U.S. Attorney General has asked the U.S. Department of Justice to
investigate the claims regarding the Zylon(R) vests. As Simula has licensed its
technology to Second Chance Body Armor, it may be impacted by the pending claims
against Second Chance Body Armor and the investigation being conducted by the
21
U.S. Department of Justice. If Simula is included in the claims pending against
Second Chance Body Armor and the investigation being conducted by the U.S.
Department of Justice, we cannot assure you that any judgment, settlement or
resolution against Simula will not have a material adverse effect on Simula's
business, financial condition and results of operations.
WE ARE SUBJECT TO EXTENSIVE GOVERNMENT REGULATION AND OUR FAILURE OR INABILITY
TO COMPLY WITH THESE REGULATIONS COULD MATERIALLY RESTRICT OUR OPERATIONS AND
SUBJECT US TO SUBSTANTIAL PENALTIES.
We are subject to federal licensing requirements with respect to the sale
in foreign countries of certain of our products. In addition, we are obligated
to comply with a variety of federal, state and local regulations governing
certain aspects of our operations and workplace, including regulations
promulgated by, among others, the U.S. Departments of Commerce, State and
Transportation, the U.S. Environmental Protection Agency and the U.S. Bureau of
Alcohol, Tobacco and Firearms. Additionally, the failure to obtain applicable
governmental approval and clearances could adversely affect our ability to
continue to service the government contracts we maintain. Furthermore, we have
material contracts with governmental entities and are subject to rules,
regulations and approvals applicable to government contractors. We are also
subject to routine audits to assure our compliance with these requirements. In
addition, a number of our employees involved with certain of our federal
government contracts are required to obtain specified levels of security
clearances. Our business may suffer if we or our employees are unable to obtain
the security clearances that are needed to perform services contracted for the
Department of Defense, one of our major customers. Our failure to comply with
these contract terms, rules or regulations could expose us to substantial
penalties, including the loss of these contracts and disqualification as a U.S.
government contractor.
Like other companies operating internationally, we are subject to the
Foreign Corrupt Practices Act and other laws which prohibit improper payments to
foreign governments and their officials by U.S. and other business entities. We
operate in countries known to experience endemic corruption. Our extensive
operations in such countries creates the risk of an unauthorized payment by one
of our employees or agents which would be in violation of various laws including
the Foreign Corrupt Practices Act. Violations of the Foreign Corrupt Practices
Act may result in severe criminal penalties which could have a material adverse
effect on our business, financial condition and results of operations.
WE HAVE SIGNIFICANT INTERNATIONAL OPERATIONS AND ASSETS AND ARE THEREFORE
SUBJECT TO ADDITIONAL FINANCIAL AND REGULATORY RISKS.
We sell our products and services in foreign countries and seek to
increase our level of international business activity. Our overseas operations
are subject to various risks, including: U.S.-imposed embargoes of sales to
specific countries (which could prohibit sales of our products there); foreign
import controls (which may be arbitrarily imposed and enforced and which could
interrupt our supplies or prohibit customers from purchasing our products);
exchange rate fluctuations; dividend remittance restrictions; expropriation of
assets; war, civil uprisings and riots; government instability; the necessity of
obtaining government approvals for both new and continuing
22
operations; and legal systems of decrees, laws, taxes, regulations,
interpretations and court decisions that are not always fully developed and that
may be retroactively or arbitrarily applied.
One component of our strategy is to expand our operations into selected
international markets. Military procurement, for example, has traditionally had
a large international base. Countries in which we are actively marketing include
Germany, Canada, France, Italy, the United Kingdom, Norway, Japan, India, Korea
and Australia. We, however, may be unable to execute our business model in these
markets or new markets. Further, foreign providers of competing products and
services may have a substantial advantage over us in attracting consumers and
businesses in their country due to earlier established businesses in that
country, greater knowledge with respect to the cultural differences of consumers
and businesses residing in that country and/or their focus on a single market.
We expect to continue to experience higher costs as a percentage of revenues in
connection with the development and maintenance of international products and
services. In pursuing our international expansion strategy, we face several
additional risks, including:
o foreign laws and regulations, which may vary country by country,
that may impact how we conduct our business;
o higher costs of doing business in foreign countries, including
different employment laws;
o potential adverse tax consequences if taxing authorities in
different jurisdictions worldwide disagree with their interpretation
of various tax laws or their determinations as to the income and
expenses attributable to specific jurisdictions, which could result
in our paying additional taxes, interest and penalties;
o technological differences that vary by marketplace, which we may not
be able to support;
o longer payment cycles and foreign currency fluctuations;
o economic downturns; and
o revenue growth outside of the United States may not continue at the
same rate if it is determined that we have already launched our
products and services in the most significant markets.
We may also be subject to unanticipated income taxes, excise duties,
import taxes, export taxes or other governmental assessments. In addition, a
percentage of the payments to us in our international markets are often in local
currencies. Although most of these currencies are presently convertible into
U.S. dollars, we cannot be sure that convertibility will continue. Even if
currencies are convertible, the rate at which they convert is subject to
substantial fluctuation. Our ability to transfer currencies into or out of local
currencies may be restricted or limited. Any of these events could result in a
loss of business or other unexpected costs which could reduce revenue or profits
and have a material adverse effect on our business, financial condition and
results of operations.
We routinely operate in areas where local government policies regarding
foreign entities and the local tax and legal regimes are often uncertain, poorly
administered and in a state of flux. We cannot, therefore, be certain that we
are in compliance with, or will be protected by, all relevant local laws and
taxes at any given point in time. A subsequent determination that we failed to
comply with relevant local laws and taxes could have a material adverse effect
on our business, financial condition and results of operations.
23
One or more of these factors could adversely effect our future
international operations and, consequently, could have a material adverse effect
on our business, financial condition and results of operation.
RISKS RELATED TO ARMOR HOLDINGS' BUSINESS
MANY OF OUR CUSTOMERS HAVE FLUCTUATING BUDGETS WHICH MAY CAUSE SUBSTANTIAL
FLUCTUATIONS IN OUR RESULTS OF OPERATIONS.
Customers for our products include federal, state, municipal, foreign and
military, law enforcement and other governmental agencies. Government tax
revenues and budgetary constraints, which fluctuate from time to time, can
affect budgetary allocations for these customers. Many domestic and foreign
government agencies have in the past experienced budget deficits that have led
to decreased spending in defense, law enforcement and other military and
security areas. Our results of operations may be subject to substantial
period-to-period fluctuations because of these and other factors affecting
military, law enforcement and other governmental spending. For example, we
attribute part of the decline in our Products Division revenue during the first
quarter of 2001 with the timing of the Bulletproof Vest Partnership Act, which
provides federal matching funds to law enforcement agencies purchasing bullet
resistant vests. We believe that many agencies delayed their purchasing
decisions during the first quarter of 2001 until such federal funds were fully
allocated. A reduction of funding for federal, state, municipal, foreign and
other governmental agencies could have a material adverse effect on sales of our
products and our business, financial condition and results of operations.
THE LOSS OF, OR A SIGNIFICANT REDUCTION IN, U.S. MILITARY BUSINESS WOULD HAVE A
MATERIAL ADVERSE EFFECT ON US.
U.S. military contracts account for a significant portion of the business
of our Aerospace and Defense Group. The U.S. military funds these contracts in
annual increments. These contracts require subsequent authorization and
appropriation that may not occur or that may be greater than or less than the
total amount of the contract. Changes in the U.S. military's budget, spending
allocations, and the timing of such spending could adversely affect our ability
to receive future contracts. None of our contracts with the U.S. military have a
minimum purchase commitment and the U.S. military generally has the right to
cancel its contracts unilaterally without prior notice. Our Aerospace and
Defense Group is the sole-source provider to the U.S. military for up-armoring
of the U.S. military's High Mobility Multi-purpose Wheeled Vehicles ("HMMWV").
Up-Armored HMMWVs, and related programs such as maintenance, spare parts and
engineering services associated with Up-Armored HMMWVs, accounted for
approximately 47% of the sales of the Aerospace and Defense Group in 2003 on a
pro forma basis after giving effect to our acquisition of Simula. The HMMWVs are
manufactured by AM General Corporation under separate U.S. military contracts.
Should production or deliveries of HMMWVs be significantly interrupted, or
should other single source suppliers significantly interrupt deliveries of our
components for up-armoring the HMMWVs, we will not be able to deliver such
up-armoring systems for the HMMWVs to the U.S. military on schedule, which could
have a material adverse effect on our business, financial condition and results
of operations. Our Aerospace and Defense Group also manufactures for the U.S.
military helicopter seating systems, aircraft and land vehicle armor systems,
protective
24
equipment for military personnel and other technologies used to protect soldiers
in a variety of life-threatening or catastrophic situations. The Aerospace and
Defense Group's products are deployed on a wide range of high-profile military
platforms such as the AH-64 Apache and the UH-60 Black Hawk helicopters, the
C-17 Globemaster III Transport Aircraft, the M1117 Guardian Armored Security
Vehicle, the M998 High Mobility Multipurpose Wheeled Vehicle, and body-worn
equipment for personal protection of the U.S. Army, Marine Corps, and Air Force
Special Operations Forces. The loss of, or a significant reduction in, U.S.
military business for our helicopter seating systems, aircraft and land vehicle
armor systems and other protective equipment could have a material adverse
effect on our business, financial condition and results of operations.
WE MAY LOSE MONEY OR GENERATE LESS THAN EXPECTED PROFITS ON OUR FIXED-PRICE
CONTRACTS.
Some of our government contracts provide for a predetermined, fixed price
for the products we make regardless of the costs we incur. Therefore,
fixed-price contracts require us to price our contracts by forecasting our
expenditures. When making proposals for fixed-price contracts, we rely on our
estimates of costs and timing for completing these projects. These estimates
reflect management's judgments regarding our capability to complete projects
efficiently and timely. Our production costs may, however, exceed forecasts due
to unanticipated delays or increased cost of materials, components, labor,
capital equipment or other factors. Therefore, we may incur losses on fixed
price contracts that we had expected to be profitable, or such contracts may be
less profitable than expected, which could have a material adverse effect on our
business, financial condition and results of operations.
OUR BUSINESS IS SUBJECT TO VARIOUS LAWS AND REGULATIONS FAVORING THE U.S.
GOVERNMENT'S CONTRACTUAL POSITION, AND OUR FAILURE TO COMPLY WITH SUCH LAWS AND
REGULATIONS COULD HARM OUR OPERATING RESULTS AND PROSPECTS.
As a contractor to the U.S. government, we must comply with laws and
regulations relating to the formation, administration and performance of the
federal government contracts that affect how we do business with our clients and
may impose added costs on our business. These rules generally favor the U.S.
government's contractual position. For example, these regulations and laws
include provisions that subject contracts we have been awarded to:
o protest or challenge by unsuccessful bidders; and
o unilateral termination, reduction or modification by the government.
The accuracy and appropriateness of certain costs and expenses used to
substantiate our direct and indirect costs for the U.S. government under both
cost-plus and fixed-price contracts are subject to extensive regulation and
audit by the Defense Contract Audit Agency, an arm of the U.S. Department of
Defense. Responding to governmental audits, inquiries or investigations may
involve significant expense and divert management's attention. Our failure to
comply with these or other laws and regulations could result in contract
termination, suspension or debarment from contracting with the federal
government, civil fines and damages and criminal prosecution and penalties, any
of which could have a material adverse effect on our business, financial
condition and results of operations.
25
OUR MARKETS ARE HIGHLY COMPETITIVE AND IF WE ARE UNABLE TO COMPETE EFFECTIVELY,
WE WILL BE ADVERSELY AFFECTED.
The markets in which we operate include a large number of competitors
ranging from small businesses to multinational corporations and are highly
competitive. Competitors who are larger, better financed and better known than
us may compete more effectively than we can. In order to stay competitive in our
industry, we must keep pace with changing technologies and client preferences.
If we are unable to differentiate our services from those of our competitors,
our revenues may decline. In addition, our competitors have established
relationships among themselves or with third parties to increase their ability
to address client needs. As a result, new competitors or alliances among
competitors may emerge and compete more effectively than we can. There is also a
significant industry trend towards consolidation, which may result in the
emergence of companies which are better able to compete against us.
THERE ARE LIMITED SOURCES FOR SOME OF OUR RAW MATERIALS WHICH MAY SIGNIFICANTLY
CURTAIL OUR MANUFACTURING OPERATIONS.
The raw materials that we use in manufacturing ballistic resistant
garments and up-armored vehicles include: SpectraShield, a patented product of
Honeywell, Inc.; Z-Shield, a patented product of Honeywell, Inc.; Zylon, a
patented product of Toyobo Co., Ltd.; Kevlar, a patented product of E.I. du Pont
de Nemours Co., Inc., or DuPont; and Twaron, a patented product of Akzo-Nobel
Fibers, B.V. We purchase these materials in the form of woven cloth from five
independent weaving companies. In the event Du Pont or its licensee in Europe
cease, for any reason, to produce or sell Kevlar to us, we would utilize these
other ballistic resistant materials as a substitute. However, none of
SpectraShield, Twaron, Z-Shield or Zylon is expected to become a complete
substitute for Kevlar in the near future. We enjoy a good relationship with our
suppliers of Kevlar, SpectraShield, Twaron, Z-Shield and Zylon. The use of Zylon
and Z-Shield in the design of ballistic resistant vests is a recent
technological advancement that is subject to continuing development and study.
Toyobo is the only producer of Zylon, and Honeywell is the only producer of
Z-Shield. Should these materials become unavailable for any reason, we would be
unable to replace them with materials of like weight and strength. Thus, if our
supply of any of these materials were materially reduced or cut off or if there
were a material increase in the prices of these materials, our manufacturing
operations could be adversely affected and our costs increased, and our
business, financial condition and results of operations would be materially
adversely affected.
WE MAY BE UNABLE TO COMPLETE OR INTEGRATE ACQUISITIONS EFFECTIVELY, IF AT ALL,
AND AS A RESULT MAY INCUR UNANTICIPATED COSTS OR LIABILITIES OR OPERATIONAL
DIFFICULTIES.
We intend to grow through the acquisition of businesses and assets that
will complement our current businesses. We cannot be certain that we will be
able to identify attractive acquisition targets, obtain financing for
acquisitions on satisfactory terms or successfully acquire identified targets.
Furthermore, we may have to divert our management's attention and our financial
and other resources from other areas of our business. Our inability to implement
our acquisition strategy successfully may hinder the expansion of our business.
Because we depend in part on acquiring new businesses and assets to develop and
offer new products, failure to implement our acquisition strategy may also
adversely affect our ability to offer new products in line with industry trends.
26
We may not be successful in integrating acquired businesses into our
existing operations. Integration may result in unanticipated liabilities or
unforeseen operational difficulties, which may be material, or require a
disproportionate amount of management's attention. Acquisitions may result in us
incurring additional indebtedness or issuing preferred stock or additional
common stock. Competition for acquisition opportunities in the industry may
rise, thereby increasing our cost of making acquisitions or causing us to
refrain from making further acquisitions. In addition, the terms and conditions
of our secured revolving credit facility and the indenture governing our 8 1/4%
Senior Subordinated Notes impose restrictions on us that, among other things,
restrict our ability to make acquisitions.
OUR RESOURCES MAY BE INSUFFICIENT TO MANAGE THE DEMANDS IMPOSED BY OUR GROWTH.
We have rapidly expanded our operations, and this growth has placed
significant demands on our management, administrative, operating and financial
resources. The continued growth of our customer base, the types of services and
products offered and the geographic markets served can be expected to continue
to place a significant strain on our resources. In addition, we cannot easily
identify and hire personnel qualified both in the provision and marketing of our
security services and products. Our future performance and profitability will
depend in large part on our ability to attract and retain additional management
and other key personnel; our ability to implement successful enhancements to our
management, accounting and information technology systems; and our ability to
adapt those systems, as necessary, to respond to growth in our business.
ARMOR HOLDINGS IS DEPENDENT ON INDUSTRY RELATIONSHIPS.
A number of our products are components in our customers' final products.
Accordingly, to gain market acceptance, we must demonstrate that our products
will provide advantages to the manufacturers of final products, including
increasing the safety of their products, providing such manufacturers with
competitive advantages or assisting such manufacturers in complying with
existing or new government regulations affecting their products. There can be no
assurance that our products will be able to achieve any of these advantages for
the products of our customers. Furthermore, even if we are able to demonstrate
such advantages, there can be no assurance that such manufacturers will elect to
incorporate our products into their final products, or if they do, that our
products will be able to meet such customers' manufacturing requirements.
Additionally, there can be no assurance that our relationships with our
manufacturer customers will ultimately lead to volume orders for our products.
The failure of manufacturers to incorporate our products into their final
products could have a material adverse effect on our business, financial
condition and results of operations.
WE MAY BE UNABLE TO PROTECT OUR PROPRIETARY TECHNOLOGY, INCLUDING THE
TECHNOLOGIES WE USE TO FURNISH THE UP-ARMORING OF HMMWVS.
We are dependent upon a variety of methods and techniques that we regard
as proprietary trade secrets. We are also dependent upon a variety of
trademarks, service marks and designs to promote brand name development and
recognition. We rely on a combination of trade secret,
27
copyright, patent, trademark, unfair competition and other intellectual property
laws as well as contractual agreements to protect our rights to such
intellectual property. Due to the difficulty of monitoring unauthorized use of
and access to intellectual property, however, such measures may not provide
adequate protection. It is possible that our competitors may access our
intellectual property and proprietary information and use it to their advantage.
In addition, there can be no assurance that courts will always uphold our
intellectual property rights, or enforce the contractual arrangements that we
have entered into to protect our proprietary technology. Any unenforceability or
misappropriation of our intellectual property could have a material adverse
effect on our business, financial condition and results of operations.
Furthermore, we cannot assure you that any pending patent application or
trademark application made by us will result in an issued patent or registered
trademark, or that, if a patent is issued, it will provide meaningful protection
against competitors or competitor technologies. In addition, if we bring or
become subject to litigation to defend against claimed infringement of our
rights or of the rights of others or to determine the scope and validity of our
intellectual property rights, such litigation could result in substantial costs
and diversion of our resources which could have a material adverse effect on our
business, financial condition and results of operations. Unfavorable results in
such litigation could also result in the loss or compromise of our proprietary
rights, subject us to significant liabilities, require us to seek licenses from
third parties on unfavorable terms, or prevent us from manufacturing or selling
our products, any of which could have a material adverse effect on our business,
financial condition and results of operations.
TECHNOLOGICAL ADVANCES, THE INTRODUCTION OF NEW PRODUCTS, AND NEW DESIGN AND
MANUFACTURING TECHNIQUES COULD ADVERSELY AFFECT OUR OPERATIONS UNLESS WE ARE
ABLE TO ADAPT TO THE RESULTING CHANGE IN CONDITIONS.
Our future success and competitive position depend to a significant extent
upon our proprietary technology. We must make significant investments to
continue to develop and refine our technologies. We will be required to expend
substantial funds for and commit significant resources to the conduct of
continuing research and development activities, the engagement of additional
engineering and other technical personnel, the purchase of advanced design,
production and test equipment, and the enhancement of design and manufacturing
processes and techniques. Our future operating results will depend to a
significant extent on our ability to continue to provide design and
manufacturing services for new products that compare favorably on the basis of
time to introduction, cost and performance with the design and manufacturing
capabilities. The success of new design and manufacturing services depends on
various factors, including utilization of advances in technology, innovative
development of new solutions for customer products, efficient and cost-effective
services, timely completion and delivery of new product solutions and market
acceptance of customers' end products. Because of the complexity of our
products, we may experience delays from time to time in completing the design
and manufacture of new product solutions. In addition, there can be no assurance
that any new product solutions will receive or maintain customer or market
acceptance. If we were unable to design and manufacture solutions for new
products of our customers on a timely and cost-effective basis, such inability
could have a material adverse effect on our business, financial condition and
results of operations.
28
WE MAY BE ADVERSELY AFFECTED BY APPLICABLE ENVIRONMENTAL LAWS AND REGULATIONS.
We are subject to federal, state, local and foreign laws and regulations
governing the protection of the environment and human health, including those
regulating discharges to the air and water, the management of wastes, and the
control of noise and odors. We cannot assure you that we are at all times in
complete compliance with all such requirements. Like all companies in our
industry, we are subject to potentially significant fines or penalties if we
fail to comply with environmental requirements. Environmental requirements are
complex, change frequently, and could become more stringent in the future.
Accordingly, we cannot assure you that these requirements will not change in a
manner that will require material capital or operating expenditures or will
otherwise have a material adverse effect on us in the future. In addition, we
are also subject to environmental laws requiring the investigation and clean-up
of environmental contamination. We may be subject to liability, including
liability for clean-up costs, if contamination is discovered at one of our
current or former facilities, in some circumstances even if such contamination
was caused by a third party such as a prior owner. We also may be subject to
liability if contamination is discovered at a landfill or other location where
we have disposed of wastes, notwithstanding that its historic disposal practices
may have been in accordance with all applicable requirements. We use
Orthochlorabenzalmalononitrile and Chloroacetophenone chemical agents in
connection with our production of tear gas, and these chemicals are hazardous
and could cause environmental damage if not handled and disposed of properly.
Moreover, private parties may bring claims against us based on alleged adverse
health impacts or property damage caused by our operations. The amount of
liability for cleaning up contamination or defending against private party
claims could be material.
29
THE COMPANY
We are a leading manufacturer and provider of specialized security
products, training and support services related to these products, and vehicle
armor systems. Our products and systems are used domestically and
internationally by military, law enforcement, security and corrections
personnel, as well as governmental agencies, multinational corporations and
individuals. We are organized and operated under three business divisions: Armor
Holdings Products, also referred to as our Products Division, Armor Mobile
Security, also referred to as our Mobile Security Division, and Aerospace and
Defense Group.
Products. Our Products Division manufactures and sells a broad range of
high quality security products, equipment and related consumable items, such as
concealable and tactical body armor, hard armor, duty gear, less-lethal
munitions, anti-riot products, police batons, emergency lighting products,
forensic products, firearms accessories and weapon maintenance products. Our
products are marketed under brand names that are well established in the
military and law enforcement communities such as AMERICAN BODY ARMOR(TM),
B-SQUARE(R), BREAK FREE(R), CLP(R), DEFENSE TECHNOLOGY/FEDERAL LABORATORIES(R),
DEF-TEC PRODUCTS(R), DISTRACTION DEVICE(R), FEDERAL LABORATORIES(R), FERRET(R),
FIRST DEFENSE(R), IDENTICATOR(R), IDENTIDRUG(R), IMPAK(TM), LIGHTNING POWDER(R),
MONADNOCK(R), NIK(R), O'GARA-HESS & EISENHARDT ARMORING COMPANY(R), PROTECH(TM),
QUIKSTEP LADDERS(TM), SAFARILAND DESIGN(R), SPEEDFEED(R), and 911EP and
DESIGN(TM). We sell our products through a network of over 350 distributors and
sales agents, including approximately 200 in the United States. Our extensive
distribution capabilities and commitment to customer service and training have
enabled us to become a leading provider of security equipment to law enforcement
agencies.
Mobile Security. Our Mobile Security Division manufactures and installs
ballistic and blast protected armoring systems for privately owned vehicles. We
armor a variety of privately owned commercial vehicles, including limousines,
sedans, sport utility vehicles, commercial trucks and cash-in-transit vehicles,
to protect against varying degrees of ballistic and blast threats. Our customers
in this business include international corporations and high net worth
individuals.
Aerospace and Defense Group. We recently formed our Aerospace and Defense
Group after our acquisition of Simula, which we will be reporting prospectively,
commencing with fiscal year 2004. The Aerospace and Defense Group was formed by
combining Simula's operations with our military and government business that was
previously conducted through our Mobile Security Division. Under the brand name
O'Gara-Hess & Eisenhardt, we are the sole-source provider to the U.S. military
of the armor and blast protection systems for HMMWVs. We are also under contract
with the U.S. Army to provide spare parts, logistics and ongoing field support
services for the currently installed base of approximately 4,415 Up-Armored
HMMWVs. Additionally, the Aerospace and Defense Group has been subcontracted to
develop a ballistic and blast protected armored and sealed truck cab for the
HIMARS, a program recently transitioned by the U.S. Army and U.S. Marine Corps
from developmental to a low rate of initial production, deliveries of which
commenced in 2003. We also supply armor sub-systems for other tactical wheeled
vehicles. In addition, we supply ballistic and blast protected armoring systems
to U.S. federal law enforcement and intelligence agencies and foreign heads of
state. The Aerospace and Defense Group also supplies human safety and survival
systems to the U.S. military, and major aerospace and defense
30
prime contractors. Our core markets are military aviation safety, military
personnel safety, and land and marine safety. Through our Aerospace and Defense
Group, we provide military helicopter seating systems, aircraft and land vehicle
armor systems, protective equipment for military personnel and technologies used
to protect humans in a variety of life-threatening or catastrophic situations.
31
RECENT DEVELOPMENTS
ACQUISITIONS AND DIVESTITURES
Sale of Services Division
On November 26, 2003, we sold our Services Division to management and a
group of private investors led by Granville Baird Capital Partners. We realized
approximately $31.4 million in cash at the closing of the sale, and expect to
receive an additional $2.3 million in cash during the 12 month period following
the closing.
Simula, Inc. Acquisition
On December 9, 2003, we completed our acquisition of Simula, Inc., an
Arizona corporation, pursuant to the Agreement and Plan of Merger, dated as of
August 29, 2003, by and among Armor Holdings, AHI Bulletproof Acquisition Corp.,
a wholly-owned subsidiary of Armor Holdings, and Simula. The consummation of the
merger followed the Special Meeting of Shareholders of Simula held on December
5, 2003, at which the requisite shareholder approval was obtained. In the
merger, we acquired all of the outstanding common stock of Simula and retired a
majority of Simula's outstanding indebtedness for $110.5 million in cash. Of
this amount, approximately $31 million principal amount of 8% debentures will
remain outstanding for approximately 30 days at which time we will repay these
debentures, plus accrued interest, in their entirety. As of the date of this
prospectus, Simula's outstanding 8% debentures have been paid in full. After
payment of 100% of the outstanding indebtedness and transaction expenses, the
merger consideration payable to Simula shareholders at closing pursuant to the
merger agreement was approximately $43.5 million or approximately $3.21 per
share. The source of the funds used in the acquisition was our working capital,
which was derived from proceeds received from our private placement of $150
million aggregate principal amount of 8 1/4% Senior Subordinated Notes due 2013.
Hatch Imports, Inc. Acquisition
On December 16, 2003, we acquired all of the issued and outstanding common
stock of Hatch Imports, Inc. for $7.5 million dollars in cash. Hatch designs,
imports and distributes a variety of specialty gloves and accessories, including
goggles, hoods, riot gear and bags for law enforcement, military, corrections,
medical, safety and other markets.
FORMATION OF THE AEROSPACE AND DEFENSE GROUP
In connection with our acquisition of Simula, we formed our Aerospace and
Defense Group, which we will be reporting prospectively, commencing with fiscal
year 2004, to consolidate our military and government business. The Aerospace
and Defense Group is comprised of the recently acquired Simula business and our
military and government business that was previously conducted through our
Mobile Security Division. For more information regarding the Aerospace and
Defense Group, please see the section entitled "The Company" included in this
prospectus.
32
ZYLON(R) INVESTIGATION
Second Chance Body Armor, Inc., a body armor manufacturer and competitor
to Armor Holdings, has notified its customers of a potential safety issue with
its Ultima(R) and Ultimax(R) models. Second Chance Body Armor has claimed that
Zylon(R) fiber, which is made by Toyobo, a Japanese corporation, and used in the
ballistic fabric construction of those two models, degraded more rapidly than
originally anticipated. Second Chance Body Armor has also stated that the
Zylon(R) degradation problem affects the entire body armor industry, not just
its products. Both private claimants and State Attorneys General have already
commenced legal action against Second Chance Body Armor based upon its Ultima(R)
and Ultimax(R) model vests. Second Chance Body Armor licenses from Simula a
certain patented technology which is used in the body armor it manufactures, but
to our knowledge, no lawsuit has yet been brought against Second Chance Body
Armor based upon this licensed technology, although a letter was received by
Simula from an attorney representing a police officer who was injured while
wearing a Second Chance Body Armor vest alleging potential liability against
Simula.
We use Zylon(R) fiber in a number of concealable body armor models for law
enforcement, but our design and construction are very different. We have been
testing our Zylon(R)-based vests since their 2000 introduction and to date these
tests of our Zylon(R)-based vests show no unanticipated degradation in ballistic
performance. In addition, to our knowledge, no other body armor manufacturer has
reported or experienced similar problems as those cited by Second Chance Body
Armor. Finally, the National Institute of Justice tests and certifies each of
our body armor designs before we begin to produce or sell any particular model.
Following the Second Chance Body Armor assertions, several key law
enforcement associations have raised the issue to the U.S. Department of Justice
and Attorney General's Office. The U.S. Attorney General has asked the U.S.
Department of Justice to investigate the concerns and produce information to
clarify the issues. We support the Attorney General's directive and the
investigation.
As Simula has licensed its technology to Second Chance Body Armor, it may
be impacted by the pending claims against Second Chance Body Armor and the
investigation being conducted by the U.S. Department of Justice.
33
FORWARD LOOKING STATEMENTS
Certain statements we make in this prospectus, and other written or oral
statements by us or our authorized officers on our behalf, may constitute
"forward looking statements" within the meaning of the Federal securities laws.
Forward-looking statements include statements concerning our plans, objectives,
goals, strategies, future events, future revenues or performance, capital
expenditures, financing needs, plans or intentions relating to acquisitions, our
competitive strengths and weaknesses, our business strategy and the trends we
anticipate in the industry and economies in which we operate and other
information that is not historical information. Words or phrases such as
"estimates," "expects," "anticipates," "projects," "plans," "intends,"
"believes" and variations of such words or similar expressions are intended to
identify forward-looking statements. All forward-looking statements, including,
without limitation, our examination of historical operating trends, are based
upon our current expectations and various assumptions. Our expectations, beliefs
and projections are expressed in good faith, and we believe there is a
reasonable basis for them, but we cannot assure you that our expectations,
beliefs and projections will be realized.
Before you invest in the new notes, you should be aware that the
occurrence of the events described in the immediately above section captioned
"Risk Factors" and otherwise discussed elsewhere in this prospectus or in
materials incorporated in this prospectus by reference to our other filings with
the Commission, could have a material adverse affect on our business, financial
condition and results of operation.
The data included in this prospectus regarding markets and ranking,
including the size of certain markets and our position and the position of our
competitors within these markets, are based on independent industry
publications, reports of government agencies or other published industry sources
or our estimates based on management's knowledge and experience in the markets
in which we operate. Our estimates have been based on information provided by
customers, suppliers, trade and business organizations and other contacts in the
markets in which we operate. We believe these estimates to be accurate as of the
date of this prospectus. However, this information may prove to be inaccurate
because of the method by which we obtained some of the data for our estimates or
because this information cannot always be verified with complete certainty due
to the limits on the availability and reliability of raw data, the voluntary
nature of the data gathering process and other limitations and uncertainties
inherent in a survey of market size. As a result, you should be aware that
market, ranking and other similar data included in this prospectus, and
estimates and beliefs based on that data, may not be reliable.
USE OF PROCEEDS
This exchange offer is intended to satisfy our obligations under the
registration rights agreement that we entered into relating to the old notes. We
will not receive any proceeds from the exchange offer. You will receive, in
exchange for old notes tendered by you in the exchange offer, new notes in like
principal amount. The old notes surrendered in exchange for the new notes will
be retired and cancelled and cannot be reissued. Accordingly, the issuance of
the new notes will not result in any increase of our outstanding debt.
34
We received approximately $147.5 million of net proceeds from the sale of
the old notes. We used $15.0 million of the net proceeds to repay all of the
outstanding amounts under our Amended and Restated Credit Agreement, dated as of
August 22, 2001, $110.5 million of the net proceeds to acquire Simula, Inc. and
retire Simula's outstanding indebtedness, and $7.5 million of the net proceeds
to acquire Hatch Imports, Inc. The remainder of the net proceeds from the
offering of the old notes are being used for general working capital purposes.
RATIO OF EARNINGS TO FIXED CHARGES
Our ratio of earnings to fixed charges for the five years ended December
31, 2002 and for the nine months ended September 30, 2003 are set forth below:
----------------------------------------------------------------------
FOR THE NINE
MONTHS ENDED
FOR THE YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------------------------------------
1998 1999 2000 2001 2002 2003
----------------------------------------------------------------------
Ratio of earnings to
fixed charges 27.4 23.8 7.6 5.7 14.9 9.1
======================================================================
The ratios of earnings to fixed charges are calculated as follows:
(income before income taxes and minority interest) + (fixed charges) - (capitalized interest)
--------------------------------------------------------------------------------------------
(fixed charges)
35
CAPITALIZATION
The following table sets forth our cash and cash equivalents and
capitalization as of September 30, 2003 on an actual basis.
This table should be read in conjunction with "Use of Proceeds" and
"Selected Consolidated Historical Financial Data of Armor Holdings, Inc." The
table should also be read in conjunction with our unaudited pro forma condensed
consolidated financial statements and our audited and unaudited financial
statements, including the related notes thereto, included in and incorporated by
reference into this prospectus.
As of September 30, 2003
(Unaudited)
(in thousands)
Cash and cash equivalents $154,766
Debt including current installments
Revolving credit facility (1) --
Other senior debt 5,780
Fair value of interest rate swap 7,976
Senior subordinated notes due 2013 (net of unamortized discount) 147,538
Debt of discontinued operations 6,854
--------
Total debt 168,148
--------
Total stockholders' equity 291,140
--------
Total capitalization $459,288
========
(1) We have the ability to borrow up to $60 million under our secured
revolving credit facility, all of which will be senior debt.
36
SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA
OF ARMOR HOLDINGS, INC.
The following selected consolidated financial data is derived from our
audited consolidated financial statements as of December 31, 2002 and December
31, 2001, and for each of the three years ended December 31, 2000, which are
audited by PricewaterhouseCoopers LLP. The information as of December 31, 2000,
December 31, 1999 and December 31, 1998, and for each of the two years ended
December 31, 1999 was derived from our consolidated financial statements audited
by PricewaterhouseCoopers LLP and subsequently adjusted by management on an
unaudited basis to reflect the presentation required for discontinued operations
as a result of our decision in July of 2002 to sell our Services Division. The
selected consolidated financial information as of, and for each of the nine
months ended September 30, 2003 and September 30, 2002 are derived from our
unaudited consolidated financial statements. The unaudited consolidated
financial statements include all adjustments, consisting of normal recurring
accruals, which we consider necessary for a fair presentation of our financial
position and the results of operations for these periods.
Operating results for the nine months ended September 30, 2003 and the
year ended December 31, 2002 are not necessarily indicative of the results that
may be expected for the entire year ending December 31, 2003 or for any other
future period.
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
-------------------- -----------------------------------------------------------
2003 2002 2002 2001 2000 1999 1998
-------- --------- --------- --------- --------- -------- --------
(unaudited)
(DOLLARS IN THOUSANDS)
INCOME STATEMENT DATA:
Revenues:
Products ..................... $144,140 $ 131,049 $ 179,946 $ 149,868 $ 139,904 $ 96,706 $ 45,644
Mobile Security .............. 108,875 90,717 125,171 47,232 -- -- --
-------- --------- --------- --------- --------- -------- --------
Total Revenues ............... 253,015 221,766 305,117 197,100 139,904 96,706 45,644
Costs and Expenses:
Cost of sales ................ 176,396 152,481 210,745 126,330 85,457 56,304 28,064
Operating expenses ........... 44,505 37,046 49,836 38,659 30,286 21,933 10,760
Amortization (1) ............. 201 213 245 2,142 1,704 1,329 494
Integration and other
non-recurring
charges (3) ............... 4,565 4,476 5,926 3,296 2,588 2,014 --
-------- --------- --------- --------- --------- -------- --------
Operating Income: ............... 27,348 27,550 38,365 26,673 19,869 15,126 6,326
Interest expense (income), net 2,291 669 923 3,864 1,849 137 (274)
Other expense (income), net .. 181 (77) 51 (82) (67) (811) (13)
-------- --------- --------- --------- --------- -------- --------
Income from continuing
operations before provision
for income taxes ............. 24,876 26,958 37,391 22,891 18,087 15,800 6,613
Provision for income taxes ...... 10,044 13,603 16,054 8,207 7,240 6,472 2,674
-------- --------- --------- --------- --------- -------- --------
Income from continuing operations 14,832 13,355 21,337 14,684 10,847 9,328 3,939
-------- --------- --------- --------- --------- -------- --------
Income (loss) from
discontinued operations
before provision
(benefit) for income
taxes (2) .................... 3,593 (17,606) (41,468) (7,066) 8,303 5,399 7,060
Provision (benefit) for income
taxes ........................ 2,610 421 (2,442) (2,510) 2,102 1,531 2,403
-------- --------- --------- --------- --------- -------- --------
Income (loss) from discontinued
operations (2) ............... 983 (18,027) (39,026) (4,556) 6,201 3,868 4,657
-------- --------- --------- --------- --------- -------- --------
Net income (loss) ............... $ 15,815 $ (4,672) $ (17,689) $ 10,128 $ 17,048 $ 13,196 $ 8,596
======== ========= ========= ========= ========= ======== ========
37
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
-------------------- ------------------------------------------------------
2003 2002 2002 2001 2000 1999 1998
-------- --------- --------- -------- -------- -------- --------
(unaudited)
(DOLLARS IN THOUSANDS)
Basic income from continuing
operations per
share ............................. $ 0.52 $ 0.44 $ 0.70 $ 0.61 $ 0.48 $ 0.44 $ 0.24
Diluted income from continuing
operations per share .............. $ 0.52 $ 0.43 $ 0.69 $ 0.59 $ 0.46 $ 0.43 $ 0.23
Basic Earnings per share ............. $ 0.56 $ (0.15) $ (0.58) $ 0.42 $ 0.75 $ 0.63 $ 0.53
Diluted Earnings per share ........... $ 0.56 $ (0.15) $ (0.57) $ 0.41 $ 0.73 $ 0.61 $ 0.50
BALANCE SHEET DATA (AT END OF PERIOD):
Cash and cash equivalents ......... $159,817 $ 21,403 $ 16,551 $ 53,719 $ 7,257 $ 13,246 $ 6,789
Working capital ................... $254,209 $ 114,756 $ 100,591 $142,723 $ 67,937 $ 53,993 $ 24,366
Total assets ...................... $541,393 $ 381,627 $ 367,753 $388,057 $225,957 $178,922 $ 94,353
Long-term obligations ............. $160,046 $ 10,990 $ 5,240 $ 4,640 $ 38,288 $ 2,453 $ 344
Stockholders' equity .............. $291,140 $ 298,592 $ 288,077 $326,019 $166,771 $157,883 $ 75,102
---------
(1) Effective January 1, 2002, we adopted Statement of Financial Accounting
Standard No. 142, "Goodwill and Other Intangible Assets" (SFAS 142).
Amortization of goodwill, including goodwill recorded in past business
combinations, ceased upon adoption of this statement. In addition, this
statement requires that goodwill be tested for impairment at least
annually at the reporting unit level.
(2) As described in Note 2 of our fiscal 2002 audited financial statements, we
recorded an impairment charge of $30.3 million for the Services Division
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. In fiscal 2001, we recorded a pre-tax restructuring charge of
$10.3 million for the Services Division as a result of an approved
restructuring plan to close its U.S. investigations businesses, realign
the Division's organization, eliminate excess facilities and reduce
overhead in our businesses worldwide. Operating results for 1998 through
the first nine months of fiscal 2003 ended September 30, 2003 reflect the
reclassification of the Services Division as discontinued operations.
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.
(3) Includes one-time non-recurring charges and certain non-capitalized
expenses relating to the acquisition and integration of acquired
businesses. Acquisition and integration expenses include but are not
limited to severance, integration of sales, marketing, distribution and
manufacturing operations, as well as relocation and lease termination
expenses, as well as one-time non-recurring charges and direct expenses
associated with acquisition and due diligence efforts for acquisitions not
completed.
38
SELECTED CONSOLIDATED HISTORICAL FINANCIAL
DATA OF SIMULA, INC.
The selected consolidated financial data presented below has been derived
from Simula's historical audited consolidated financial statements for each of
the five years ended December 31, 2002, as adjusted by management on an
unaudited basis to reflect the presentation required for discontinued operations
as a result of Simula's decision to sell its automotive safety business. The
selected consolidated financial data as of and for each of the nine months ended
September 30, 2003 and September 30, 2002 are derived from Simula's unaudited
consolidated financial statements. The unaudited consolidated financial
statements include all adjustments, consisting of normal recurring accruals,
which Simula considers necessary for a fair presentation of its financial
position and the results of operations for these periods. Operating results for
the nine months ended September 30, 2003 and the year ended December 31, 2002
are not necessarily indicative of the results that may be expected for the
entire year ending December 31, 2003 or for any other future period.
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------- ---------------------------------------------------------------
2003 2002 2002 2001 2000 1999 1998
---- ---- ---- ---- ---- ---- ----
(unaudited)
(DOLLARS IN THOUSANDS)
INCOME STATEMENT DATA:
Total revenues ........................... $ 50,615 $ 60,291 $ 75,556 $ 69,937 $ 60,318 $ 98,875 $ 72,652
Costs and expenses:
Cost of sales ...................... 32,228 39,496 48,168 46,550 43,801 84,483 70,339
Administrative expenses ............ 10,892 10,120 14,791 13,956 17,286 21,677 17,306
Research & development ............. 1,722 1,311 1,864 1,549 1,865 -- --
Restructuring & other costs ........ 599 762 322 408 2,156 18,403 --
Operating income (loss) .................. 5,174 8,602 10,411 7,474 (4,790) (25,688) (14,993)
Interest expense, net .............. 8,277 7,738 10,411 10,231 9,803 7,079 4,861
Gain (loss) on early retirement
of debt ........................ -- -- -- (3,815)(1) 1,524(1) (232)(1) --
Other expense (income), net ........ 1,000 -- 81 -- -- -- --
Income (loss) from continuing operations
before income taxes ................ (4,103) 864 (81) (6,572) (13,069) (32,999) (19,854)
Income tax (expense) benefit ............. (17) 402 (37,960) 2,091 3,547 11,619 7,092
Income (loss) before discontinued
operations and extraordinary items . (4,120) 462 (38,041) (4,481) (9,522) (21,380) (12,762)
Income (loss) from discontinued operations (752) (320) 4,006 3,448 4,602 (1,466) (14,947)
Net income (loss) ........................ (4,872) 142 (34,035) (1,033) (4,920) (22,846) (27,709)
Dividends on preferred stock ............. -- -- -- -- 1,083 280 --
Net income (loss) available for common ...
shareholders ....................... $ (4,872) $ 142 $(34,035) $ (1,033) $ (6,003) $ (23,126) $ (27,709)
Basic income (loss) from continuing
operations per share ............... $ (0.32) $ 0.04 $ (2.94) $ (0.36) $ (0.93) $ (2.12) $ (1.29)
Diluted income (loss) from continuing
operations per share ............... $ (0.32) $ 0.04 $ (2.94) $ (0.36) $ (0.93) $ (2.12) $ (1.29)
Basic income (loss) per share ............ $ (0.37) $ 0.01 $ (2.64) $ (0.09) $ (0.52) $ (2.26) $ (2.80)
Diluted income (loss) per share .......... $ (0.37) $ 0.01 $ (2.64) $ (0.08) $ (0.52) $ (2.26) $ (2.80)
BALANCE SHEET DATA (AT END OF PERIOD):
Cash and cash equivalents ................ $ 12 $ 462 $ 212 $ 362 $ 746 $ 5,223 $ 933
Working capital .......................... $(48,879) $ 1,730 $(24,631) $ 4,946 $(11,385) $ 5,012 $ 13,047
Total assets ............................. $ 31,576 $ 90,785 $ 54,879 $ 92,653 $ 85,899 $ 107,340 $ 119,589
Long-term obligations .................... $ 1,764 $ 59,736 $ 33,609 $ 62,540 $ 39,526 $ 53,820 $ 47,244
Stockholders' (deficit) equity ........... $(41,930) $ (2,698) $(38,428) $ (2,640) $ (661) $ 3,375 $ 18,570
-----------
(1) In accordance with Financial Accounting Standards No. 145, the gains or
losses on extinguishment of debt that had been recorded as an
extraordinary item within the historical financial statements totaling
($2,183), $1,109 and ($151) for the years ended December 31, 2001, 2000
and 1999, respectively, have been tax effected and reclassified into
continuing operations.
39
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
The unaudited pro forma condensed consolidated financial statements for
the periods indicated below show the effect of the acquisition of Simula. The
unaudited pro forma condensed consolidated balance sheet presents the financial
position of Armor Holdings at September 30, 2003 giving effect to the
acquisition of Simula as if it had occurred on such date. The unaudited pro
forma condensed consolidated statements of continuing operations for the nine
months ended September 30, 2003 and for the year ended December 31, 2002 give
effect to the acquisition of Simula as if it had occurred on January 1, 2002.
The unaudited pro forma balance sheet as of September 30, 2003 has been
prepared by combining the historical condensed consolidated balance sheet of
Armor Holdings with the historical condensed consolidated balance sheet of
Simula as of September 30, 2003. The unaudited pro forma condensed consolidated
statements of continuing operations for the year ended December 31, 2002 have
been prepared by combining Armor Holdings' historical condensed consolidated
statement of continuing operations for the year ended December 31, 2002 with the
historical condensed consolidated statement of continuing operations of Simula
for the year ended December 31, 2002. The interim unaudited pro forma condensed
consolidated statements of continuing operations for the nine months ended
September 30, 2003 have been prepared by combining Armor Holdings' historical
condensed consolidated statement of continuing operations for the nine months
ended September 30, 2003 with Simula's historical condensed consolidated
statement of continuing operations for the nine months ended September 30, 2003.
Appropriate pro forma adjustments have been applied to the historical accounts.
The unaudited pro forma condensed consolidated financial information is
presented for informational purposes only and it is not necessarily indicative
of the financial position and results of operations that would have been
achieved had the acquisition been completed as of the dates indicated and is not
necessarily indicative of our future financial position or results of
operations.
The acquisition of Simula was structured as a merger, pursuant to which a
wholly-owned subsidiary of Armor Holdings was merged with and into Simula, with
Simula surviving the merger and becoming a wholly-owned subsidiary of Armor
Holdings. The acquisition is accounted for under the purchase method of
accounting with the assets acquired and liabilities assumed recorded at their
estimated fair values. Goodwill is generated to the extent that the merger
consideration, including transaction and closing costs, exceeds the fair value
of net assets acquired. We are in the process of determining the purchase price
allocation, which will allocate the excess of purchase price, including
transaction costs, over the fair value of the tangible and identifiable
intangible assets to be acquired to goodwill. We have not finished this purchase
price allocation. As a result, the final allocation of the excess purchase price
over the fair value of the assets to be acquired could differ from what is
presented herein.
The unaudited pro forma condensed consolidated financial statements should
be read in conjunction with the historical consolidated financial statements of
Armor Holdings and Simula, respectively, including related notes thereto, which
are included or referenced elsewhere in this prospectus.
40
On December 9, 2003, we completed our acquisition of Simula for $110.5
million in cash, subject to adjustment, including adjustments for certain
transaction fees and costs. A portion of the $110.5 million was used to retire a
majority of Simula's outstanding indebtedness. Approximately $31 million
principal amount of 8% debentures will remain outstanding for approximately 30
days at which time we will repay these debentures, plus accrued interest, in
their entirety. As of the date of this prospectus, Simula's outstanding 8%
debentures have been paid in full. After payment of 100% of the outstanding
indebtedness and transaction expenses, the merger consideration paid to Simula's
shareholders at closing pursuant to the merger agreement was approximately $43.5
million.
41
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF
CONTINUING OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2002
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
100% CASH PAID TO SIMULA
SHAREHOLDERS
----------------------------------
HISTORICAL HISTORICAL PRO FORMA
ARMOR SIMULA(1) ADJUSTMENTS PRO FORMA
---------- ---------- ----------- ---------
Revenues
Products $179,946 $ -- $ -- $179,946
Mobile Security 125,171 -- -- 125,171
Simula -- 75,556 (1,152)(2) 74,404
-------- -------- -------- --------
Total revenues 305,117 75,556 (1,152) 379,521
Costs and expenses
Cost of sales 210,745 48,168 2,572(2) 261,485
Operating expenses 50,081 16,977 1,632(3)(4)(5) 68,690
Integration and other
non-recurring charges 5,926 -- -- 5,926
-------- -------- -------- --------
Operating income 38,365 10,411 (5,356) 43,420
Interest expense, net 923 10,411 (3,240)(6) 8,094
Other expense, net 51 81 -- 132
-------- -------- -------- --------
Income (loss) from continuing
operations before provision for
income taxes 37,391 (81) (2,116) 35,194
Provision for income taxes 16,054 37,960 (38,754)(7) 15,260
-------- -------- -------- --------
Income (loss) from continuing operations $ 21,337 $(38,041) $ 36,638 $ 19,934
======== ======== ======== ========
Earnings per common share for continuing operations:
Basic $ 0.70 (8) $ 0.66
Diluted $ 0.69 (8) $ 0.64
Weighted average common shares outstanding:
Basic 30,341 30,341
Diluted 30,957 30,957
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF CONTINUING
OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2002
(1) Simula's condensed consolidated statement of continuing operations as
adjusted for the sale of its automotive safety business is presented for
the year ended December 31, 2002.
(2) Reflects a change of Simula's revenue recognition policy to conform to
accounting policy used by Armor Holdings on long-term contracts from
percentage completion based on the cost incurred basis to Armor Holdings'
policy of percentage completion based on the units completed basis. For
the year ended December 31, 2002, this change in revenue recognition would
have resulted in a decrease in revenues of approximately $1.2 million and
an increase in cost of sales of approximately $2.6 million including
reduction in margin for opening in-process inventory.
42
(3) Reflects a reduction to depreciation expense of $168,000 due to an
increase in the weighted average estimated useful lives of property and
equipment to six years and leasehold improvements to 12 years, which
exceeds the remaining useful life on a historical basis.
(4) Reflects an increase to amortization expense of $3.1 million due to an
increase from purchase accounting in the fair value of identifiable
intangible assets over their estimated useful lives. See Note 5 to the Pro
Forma Condensed Consolidated Balance Sheet.
(5) Reflects a reduction for transactions costs of approximately $1.3 million
related to the costs to sell Simula.
(6) Reflects interest expense of $7.2 million related to the acquisition debt
used to fund the acquisition of Simula, net of the elimination of Simula's
historical interest expense of $10.4 million. If interest rates were to
increase or decrease by 1/8%, pro forma income from continuing operations
would be $19.7 million and $20.1 million, respectively. The acquisition
debt was issued by Armor Holdings in August of 2003 and matures in August
of 2013. The acquisition debt carries a current variable interest rate of
six-month LIBOR, set in arrears, plus a spread ranging from 2.735% to
2.75% as a result of interest rate hedge transactions. Pro forma interest
expense for the acquisition debt was based on historical six-month LIBOR
rates of 2.07%, or 4.82%, for the two-month period ended February 2002,
1.82%, or 4.57%, for the six-month period ended August 2002 and 1.37%, or
4.12%, for the four-month period ended December 31, 2002.
(7) Reflects the adjustment to the provision for taxes by applying Armor
Holdings' statutory tax rate of approximately 37.7% to the pro forma
adjustments and eliminating the provision of $37.9 million that Simula
recognized in 2002, which principally related to providing a valuation
allowance for deferred tax assets resulting from net operating loss
carry-forward deductions.
(8) Basic earnings per common share for continuing operations is computed as
follows: Income from continuing operations divided by basic weighted
average common shares outstanding. Diluted earnings per common share for
continuing operations is computed as follows: Income from continuing
operations divided by diluted weighted average common shares outstanding.
43
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF
CONTINUING OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
100% CASH PAID TO SIMULA
SHAREHOLDERS
----------------------------------
Historical Historical Pro Forma
Armor Simula(1) Adjustments Pro Forma
---------- ---------- ----------- ---------
Revenues
Products $144,140 $ -- $ -- $144,140
Mobile Security 108,875 -- -- 108,875
Simula -- 50,615 8,165(2) 58,780
-------- -------- -------- --------
Total revenues 253,015 50,615 8,165 311,795
Costs and expenses
Cost of sales 176,396 32,228 5,661(2) 214,285
Operating expenses 44,706 12,614 860(3)(4)(5) 58,180
Integration and other non--recurring
charges 4,565 599 -- 5,164
-------- -------- -------- --------
Operating income 27,348 5,174 1,644 34,166
Interest expense, net 2,291 8,277 (4,691)(6) 5,877
Other expense, net 181 1,000 (1,000)(7) 181
-------- -------- -------- --------
Income (loss) from continuing operations
before provision for income taxes 24,876 (4,103) 7,335 28,108
Provision for income taxes 10,044 17 1,256(8) 11,317
-------- -------- -------- --------
Income (loss) from continuing operations $ 14,832 $ (4,120) $ 6,079 $ 16,791
======== ======== ======== ========
Earnings per common share for continuing operations:
Basic $ 0.52 (9) $ 0.60
Diluted $ 0.52 (9) $ 0.59
Weighted average common shares outstanding:
Basic 28,106 28,106
Diluted 28,438 28,438
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF CONTINUING
OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
(1) Simula's condensed consolidated statement of continuing operations as
adjusted for the sale of its automotive safety division is presented for
the nine months ended September 30, 2003.
(2) Reflects a change of Simula's revenue recognition policy to conform to the
accounting policy used by Armor Holdings on long-term contracts from
percentage completion based on the cost incurred basis to Armor Holding's
policy of percentage completion based on the units completed basis. For
the nine-months ended September 30, 2003, this change in revenue
recognition would have resulted in an increase in revenues of
approximately $8.2 million and an increase in cost of sales of
approximately $5.7 million.
44
(3) Reflects a reduction to depreciation expense of $137,000 due to an
increase in the weighted average estimated useful lives of property and
equipment to six years and leasehold improvements to 12 years, which
exceeds the remaining useful life on a historical basis.
(4) Reflects an increase to amortization expense of $2.4 million from purchase
accounting due to an increase in the fair value of identifiable intangible
assets over their estimated useful lives. See Note 5 to the Pro forma
Condensed Consolidated Balance Sheet.
(5) Reflects a reduction for transactions costs of approximately $1.4 million
related to the sale of Simula's automotive safety division and costs to
sell Simula.
(6) Reflects interest expense of $4.9 million (net of $1.3 million previously
recognized in Armor Holding's historical financial statements) related to
the acquisition debt used to fund the acquisition of Simula, net of the
elimination of Simula's allocated interest expense of $8.3 million. If
interest rates were to increase or decrease by 1/8%, pro forma income from
continuing operations would be $16.7 million and $16.9 million,
respectively. The acquisition debt was issued by Armor Holdings in August
of 2003 and matures in August of 2013. The acquisition debt carries a
current variable interest rate of six-month LIBOR, set in arrears, plus a
spread ranging from 2.735% to 2.75% as a result of interest rate hedge
transactions. Pro forma interest expense for the acquisition debt was
based on historical six-month LIBOR rates of 1.37%, or 4.12%, for the
two-month period ended February 2003 and 1.19%, or 3.94%, for the
seven-month period ended August 2003.
(7) Reflects the elimination of the $1.0 million performance fee paid related
to Simula's default on a certain non-monetary financial covenant under
their Senior Secured Note.
(8) Reflects the adjustment to the provision for taxes by applying Armor
Holdings' statutory tax rate of approximately 37.7% to the pro forma
adjustments and to Simula's historical losses.
(9) Basic earnings per common share for continuing operations is computed as
follows: Income from continuing operations divided by basic weighted
average common shares outstanding. Diluted earnings per common share for
continuing operations is computed as follows: Income from continuing
operations divided by diluted weighted average common shares outstanding.
45
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2003
(AMOUNTS IN THOUSANDS)
100% CASH PAID TO SIMULA
SHAREHOLDERS
---------------------------------
HISTORICAL HISTORICAL PRO FORMA
ARMOR SIMULA(1) ADJUSTMENTS PRO FORMA
--------- --------- ----------- ---------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 154,766 $ 12 $ (81,259)(2) $ 73,519
Accounts receivable (net of
allowance for doubtful accounts) 59,215 8,836 -- 68,051
Costs and earned gross profit in
excess of billings 1,088 10,324 (10,324)(3) 1,088
Inventories 60,068 2,491 8,583(3) 71,142
Prepaid expenses and other
current assets 21,321 1,199 (1,036)(7) 21,484
Current assets of discontinued
operations 47,958 -- -- 47,958
--------- --------- --------- ---------
Total Current Assets 344,416 22,862 (84,036) 283,242
Property and Equipment (net of
accumulated depreciation) 49,531 6,151 -- 55,682
Goodwill (net of accumulated
amortization) 98,934 -- 66,323(4) 165,257
Patents, Licenses & Trademarks (net of
accumulated amortization) 7,419 1,388 35,654(5) 44,461
Other Assets 21,048 1,175 (704)(7) 21,519
Long--Term Assets of Discontinued
Operations 20,045 -- -- 20,045
--------- --------- --------- ---------
TOTAL ASSETS $ 541,393 $ 31,576 $ 17,237 $ 590,206
========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long--term
debt $ 765 $ 56,086 (24,898)(8) $ 31,953
Short--term debt 608 3,543 (3,543)(8) 608
Accounts payable 22,013 5,010 -- 27,023
Accrued expenses and other
current liabilities 38,965 7,102 3,892(3)(6) 49,959
Income taxes payable 3,914 -- -- 3,914
Current liabilities of
discontinued operations 23,942 -- -- 23,942
--------- --------- --------- ---------
Total current liabilities 90,207 71,741 (24,549) 137,399
LONG--TERM DEBT, LESS CURRENT
PORTION 159,921 1,765 (144)(8) 161,542
LONG--TERM LIABILITIES OF
DISCONTINUED OPERATIONS 125 -- -- 125
--------- --------- --------- ---------
Total Liabilities 250,253 73,506 (24,693) 299,066
STOCKHOLDERS' EQUITY
Common stock 342 132 (132)(9) 342
Additional paid--in capital 315,148 63,015 (63,015)(9) 315,148
Retained earnings
(accumulated deficit) 49,871 (102,285) 102,285(9) 49,871
Accumulated other
comprehensive loss (1,904) (2,792) 2,792(9) (1,904)
Treasury stock (72,317) -- -- (72,317)
--------- --------- --------- ---------
Total stockholders' equity 291,140 (41,930) 41,930 291,140
--------- --------- --------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 541,393 $ 31,576 $ 17,237 $ 590,206
========= ========= ========= =========
46
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEETS AS OF
SEPTEMBER 30, 2003
(1) Simula's condensed consolidated balance sheet as of September 30, 2003.
(2) The estimated total purchase price is $112.8 million, including $2.3
million of estimated transaction costs for Armor Holdings. The cash
proceeds from the issuance of $147.5 million in debt were used as follows:
Repayment of Simula debt and purchase adjustments $ 31,747
Cash paid for Simula's transaction costs 4,262
Cash paid to Simula's common shareholders 42,950
Armor Holdings' transaction costs 2,300
---------
Total pro-forma adjustment 81,259
8% Senior Subordinated Bonds to be redeemed in January 2004 32,214
Other non-cash purchase price adjustments (673)
---------
Total purchase price $ 112,800
=========
(3) Reflects the adjustment of Simula's historical costs in excess of billings
and inventory resulting from a change in Simula's revenue recognition
policy to conform to the accounting policy used by Armor Holdings on
long-term contracts from percentage completion based on the cost incurred
basis to Armor Holdings' policy of percentage completion on the units
completed basis. This change in revenue recognition results in a decrease
in costs in excess of billings of $10.3 million, increase in inventory of
$8.6 million (includes $630,000 related to the application of purchase
accounting), increase of accrued expenses and other current liabilities of
$3.0 million and a decrease in retained earnings of $4.7 million.
(4) The excess of the amount paid to acquire 100% of Simula, Inc. common stock
over the fair value of the net tangible and identifiable intangible assets
(see note 5) of $66.3 million is reported as goodwill.
(5) Reflects the estimated fair value of identifiable intangible assets
acquired of $35.7 million. These assets consist of $25.2 million in
customer relationships, $8.8 million in technology and $1.7 million in
licensing agreements. We estimate these identifiable intangible asset
categories have weighted average useful lives of 14, 8 and 10 years,
respectively.
(6) Reflects an increase of $915,000 in Simula's pension obligation to adjust
the obligation to the difference between the fair market value of the plan
assets and the projected benefit obligation.
(7) Other long-term assets were reduced by the elimination of Simula's
capitalized debt issuance costs of $704,000 related to the Revolving Line
of Credit, 9.5% Senior Subordinated Notes, and other long-term debt.
(8) Reflects Simula's repayment of $144,000 of outstanding debt under the
Revolving Line of Credit, 9.5% Senior Subordinated Notes, as well as other
long-term debt upon completion of the acquisition.
(9) Reflects the elimination of the historical shareholders' equity of Simula.
47
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
COMPANY OVERVIEW
We are a leading manufacturer and provider of security products, vehicle
armor systems and security risk management 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 company is organized and
operated under three business segments: Armor Holdings Products; Armor Mobile
Security; and ArmorGroup, which is accounted for as a discontinued operation.
CONTINUING OPERATIONS
Armor Holdings Products. Our Armor Holdings Products Division manufactures and
sells a broad range of high quality, branded law enforcement equipment, such as
concealable and tactical body armor, hard armor, duty gear, less-lethal
munitions, anti-riot products, police batons, emergency lighting products,
forensic products, firearms accessories and weapon maintenance products. Our
products are marketed under brand names that are well-known and respected in the
military and law enforcement communities such as American Body Armor(TM),
Safariland(R), B-Square(TM), Break-Free(R), Defense Technology/Federal
Laboratories(TM), MACE(R), PROTECH(TM), NIK(R)Public Safety, Monadnock(TM)
Lifetime Products, Identicator(TM), Lightning Powder(R), SpeedFeed(TM), and
911EP(R). We sell our manufactured products primarily to law enforcement
agencies through a worldwide network of over 350 distributors and sales agents,
including approximately 200 in the United States. Our extensive distribution
capabilities and commitment to customer service and training have enabled us to
become a leading provider of security equipment to law enforcement agencies.
Armor Mobile Security. Our Armor Mobile Security Division manufactures and
installs ballistic and blast protected armoring systems for military vehicles,
commercial vehicles, military aircraft, and missile components. Under the brand
name O'Gara-Hess & Eisenhardt, we are the sole-source provider to the U.S.
military for the supply of armoring and blast protection systems for the High
Mobility Multi-purpose Wheeled Vehicle (the "HMMWV"). We are also under contract
with the U.S. Army to provide systems technical support for the installed base
of approximately 3,500 up-armored HMMWV's. We provide spare parts and
maintenance services for the HMMWV's in use and we expect that our maintenance
services may increase if the U.S. military substantially increases its HMMWV
purchases or substantially increases its use of the current installed base.
Additionally, the Armor Mobile Security Division has been subcontracted to
develop a ballistic and blast protected armored and sealed truck cab for the
High Mobility Artillery Rocket System ("HIMARS"), a U.S. Army and Marine Corps
program recently transitioned from developmental to low rate initial production
with deliveries scheduled in late 2003. The Division also markets armor
sub-systems for other tactical wheeled vehicles. 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.
48
DISCONTINUED OPERATIONS
Services Division. Our Services Division provides a broad range of sophisticated
security risk management solutions to multinational corporations in diverse
industries such as natural resources, financial services and consumer products,
and to governmental and non-governmental agencies such as the U.S. Departments
of State and Defense, the United Nations, United States Agency for International
Development ("USAID") and Britain's Department for International Development.
Our clients typically have personnel and other investments in unstable and often
more risky areas of the world. Through our offices on five continents, we
provide our multinational clients with a diversified portfolio of security
solutions to assist them in mitigating risks to their operations around the
world. Our highly trained, multilingual, and experienced security personnel work
closely with our clients to create and implement solutions to complex security
problems. These services include security planning, advice and management,
security systems integration, intellectual property asset protection, due
diligence investigations and training programs in counterintelligence,
counter-surveillance, advanced driving techniques and ballistics. We believe
that many of our security services, while often representing a small portion of
our clients' overall cost of doing business, are critical to our clients'
success. We believe that this creates a consistent demand for our premium
services at attractive margins.
CRITICAL ACCOUNTING POLICIES
We believe our most critical accounting policies include revenue
recognition, the use of estimates, income taxes and impairment.
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 larger 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.
We believe that our 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 $1,904,000 and $4,169,000 as
of September 30, 2003 and December 31, 2002, respectively, and is
49
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 stock at the grant date or other
measurement date over the amount an employee must pay to acquire the stock. We
have elected to continue to account for our employee stock compensation plans
under APB 25 with pro forma disclosures of net earnings and earnings per share,
as if the fair value based method of accounting defined in SFAS 123 had been
applied. If compensation cost for stock option grants had been determined based
on the fair value on the grant dates for September 30, 2003 and 2002 consistent
with the method prescribed by SFAS 123, our net earnings and earnings per share
would have been adjusted to the pro forma amounts indicated below:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2003 SEPTEMBER 30, 2002 SEPTEMBER 30, 2003 SEPTEMBER 30, 2002
------------------ ------------------ ------------------ ------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income (loss) as reported: $ 6,115 $(14,707) $15,815 $(4,672)
Deduct:Total stock-based
employee compensation expense
determined under fair value based
method for all awards, net of
related tax effects (671) (1,699) (2,985) (3,434)
------- -------- ------- -------
Pro-forma net income (loss) $ 5,444 $(16,406) 12,830 $(8,106)
======= ======== ======= =======
Earnings (loss) per share:
Basic - as reported $ 0.22 $ (0.50) $ 0.56 $ (0.15)
======= ======== ======= =======
Basic - pro-forma $ 0.20 $ (0.55) $ 0.46 $ (0.26)
======= ======== ======= =======
Diluted - as reported $ 0.22 $ (0.49) $ 0.56 $ (0.15)
======= ======== ======= =======
Diluted - pro-forma $ 0.19 $ (0.55) $ 0.45 $ (0.26)
======= ======== ======= =======
50
Estimates. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts in the financial statements and
accompanying notes. Significant estimates inherent in the preparation of the
accompanying consolidated financial statements include periodic testing of the
carrying value of long-lived assets for impairment, valuation allowances for
receivables, inventories and deferred income tax assets, liabilities for
potential litigation claims and settlements; and contract contingencies and
obligations. Actual results could differ from those estimates.
Income taxes. We account for income taxes pursuant to Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes". Under the
asset and liability method specified thereunder, deferred taxes are determined
based on the difference between the financial reporting and tax bases of assets
and liabilities. Deferred tax liabilities are offset by deferred tax assets
relating to net operating loss carryforwards and deductible temporary
differences. Future benefits obtained either from utilization of net operating
loss carryforwards or from the reduction in the income tax asset valuation
allowance existing on September 20, 1993 have been and will be applied to reduce
reorganization value in excess of amounts allocable to identifiable assets. At
December 31, 2002 and 2001, our consolidated foreign subsidiaries have
unremitted earnings of approximately $3.0 million and $1.3 million, respectively
on which Armor Holdings has not recorded a provision for United States Federal
income taxes since these earnings are considered to be permanently reinvested.
Such foreign earnings have been taxed according to the regulations existing in
the countries in which they were earned.
Impairment. Long-lived assets including certain identifiable intangibles, and
the goodwill related to those assets, are reviewed annually for impairment
whenever events or changes in circumstances indicate that the carrying amount of
the asset in question may not be recoverable including, but not limited to, a
deterioration of profits for a business segment that has long-lived assets, and
when other changes occur which might impair recovery of long-lived assets.
Management has reviewed Armor Holdings' long-lived assets and has taken an
impairment charge of $31.2 million to reduce the carrying value of the Services
Division to estimated realizable value. The method used to determine the
existence of an impairment would be discounted operating cash flows estimated
over the remaining useful lives of the related long-lived assets for continuing
operations in accordance with SFAS No. 142, "Goodwill and Other Intangible
Assets." Impairment is measured as the difference between fair value and
unamortized cost at the date impairment is determined.
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 estimated
impairment 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
51
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.
Derivative Instruments and Hedging Activities. We account for derivative
instruments and hedging activities in accordance with Statement of Financial
Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedge
Activities" (SFAS 133) as amended. All derivative instruments are recorded on
the balance sheet at fair value. Changes in the fair value of derivatives are
recorded each period in current earnings or other comprehensive income,
depending on whether a derivative is designated as part of a hedge transaction
and, if it is, depending on the type of hedge transaction. For fair-value hedge
transactions in which we hedge changes in an asset's, liability's, or firm
commitment's fair value, changes in the fair value of the derivative instrument
will generally be offset in the income statement by changes in the hedged item's
fair value. We adopted SFAS 133 in the first quarter of 2001. However, we had no
derivatives to be measured at the time of adoption. We do not hold or issue
interest rate swap agreements or other derivative instruments for trading
purposes.
Changes in the fair value of the interest rate swap agreements offset
changes in the fair value of the fixed rate debt due to changes in the market
interest rate. Accordingly, the other assets on the Condensed Consolidated
Balance Sheets as of September 30, 2003 increased by $8.0 million, which
reflected an increase in the fair value of the interest rate swap agreements.
The corresponding increase in the hedge liability was recorded in long-term
debt. The agreements are deemed to be a perfectly effective fair value hedge and
therefore qualify for the short-cut method of accounting under SFAS 133. As a
result, no ineffectiveness is expected to be recognized in our earnings
associated with the interest rate swap agreements.
NEW ACCOUNTING PRONOUNCEMENTS:
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 141, "Business Combinations." SFAS No. 141 requires that the purchase method
of accounting be used for all business combinations initiated after June 30,
2001. This statement specifies that certain acquired intangible assets in a
business combination be recognized as assets separately from goodwill and that
existing intangible assets and goodwill be evaluated for these new separation
requirements. The adoption of this statement did not have a material impact on
our consolidated financial statements.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 142 changes the accounting for goodwill from an amortization
method to an impairment-only approach. Amortization of goodwill, including
goodwill recorded in past business combinations, ceased upon adoption of this
statement. In addition, this statement requires that goodwill be tested for
impairment at least annually at the reporting unit level. We implemented SFAS
No. 142 on January 1, 2002. In connection with the adoption of SFAS 142, we
completed in the second quarter the transitional goodwill impairment test that
compared the fair value of each reporting unit to its carrying value and
determined that no impairment existed. The goodwill resulting from acquisitions
made by us subsequent to June 30, 2001 was immediately subject to the
non-amortization provisions of SFAS 142. Had we been accounting for goodwill
under SFAS 142
52
for all periods presented, our net income and earnings per share would have been
as follows:
DECEMBER 31,2002 DECEMBER 31, 2001 DECEMBER 31, 2000
---------------- ----------------- -----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Reported net (loss) income $ (17,689) $ 10,128 $ 17,048
Add back goodwill amortization, net of tax -- 3,044 2,943
--------- --------- ---------
Actual/pro forma adjusted net (loss) income $ (17,689) $ 13,172 $ 19,991
========= ========= =========
Basic earnings per share
Reported basic (loss) income per share $ (0.58) $ 0.42 $ 0.75
Goodwill amortization, net of tax -- 0.13 0.13
--------- --------- ---------
Actual/pro forma basic (loss) income per share $ (0.58) $ 0.55 $ 0.88
========= ========= =========
Diluted earnings per share
Reported diluted (loss) income per share $ (0.57) $ 0.41 $ 0.73
Goodwill amortization, net of tax -- 0.12 0.13
--------- --------- ---------
Actual/pro forma diluted (loss) income per share $ (0.57) $ 0.53 $ 0.86
========= ========= =========
In August 2001, the FASB issued Statement of Financial Accounting
Standards No. 143, "Accounting for Asset Retirement Obligations" (SFAS 143).
SFAS 143 establishes accounting standards for recognition and measurement of a
liability for an asset retirement obligation and the associated asset retirement
cost. SFAS 143 requires the recognition of the fair value of a liability for an
asset retirement obligation in the period in which it is incurred if a
reasonable estimate of fair value can be made. If a reasonable estimate of fair
value cannot be made in the period the asset retirement obligation is incurred,
the liability shall be recognized when a reasonable estimate of fair value can
be made. The fair value of a liability for an asset retirement obligation is the
amount at which that liability could be settled in a current transaction between
willing parties, that is, other than in a forced or liquidation transaction.
SFAS 143 is effective for financial statements issued for fiscal years beginning
after June 15, 2002. The provisions of SFAS 143 became effective for us on
January 1, 2003. The effects of adopting this standard will not have a material
effect on us.
In October 2001, the FASB issued Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" (SFAS 144). SFAS 144 establishes a "primary-asset" approach to determine
the cash flow estimation period for a group of assets and liabilities that
represents the unit of accounting for a long-lived asset to be held and used.
SFAS 144 requires that a long-lived asset to be (1) abandoned, (2) exchanged for
a similar productive asset, or (3) distributed to owners in a spin-off be
considered held and used until it is abandoned, exchanged, or distributed. SFAS
144 requires (1) that spin-offs and exchanges of similar productive assets be
recorded at the lower of carrying value or fair value, and that such assets be
classified as held and used until disposed of and (2) that any impairment loss
resulting from a spin-off or exchange of similar productive assets be recognized
upon asset disposition. SFAS 144 provides for total assets and total liabilities
of discontinued business segments to be presented in separate captions in assets
and liabilities and also provides that future losses, if any, of discontinued
business segments shall be reported as incurred. We adopted SFAS 144 effective
53
January 1, 2002. The reclassification of the Services Division to discontinued
operations and subsequent reduction in its carrying value was in accordance with
the provisions of SFAS 144.
In April 2002, the FASB issued Statement of Financial Accounting Standards
No. 145, "Rescission on FASB 4, 44 and 64, Amendment of FASB Statement No. 13
and Technical Corrections" (SFAS 145). Under SFAS 145, gains and losses related
to the extinguishment of debt should no longer be segregated on the income
statement from continuing operations. The provisions of SFAS 145 are effective
for fiscal years beginning after May 15, 2002.
In June 2002, the FASB issued Statement of Financial Accounting Standard
146, "Accounting for Costs Associated with Exit or Disposal Activities" (SFAS
146). SFAS 146 addresses financial accounting and reporting for costs associated
with exit or disposal activities and nullifies Emerging Issues Task Force Issue
No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." SFAS 146 is effective for exit or disposal activities initiated
on or after December 31, 2002. The effects of adopting this standard will not
have a material effect on us.
In December 2002, the FASB issued Statement of Financial Accounting
Standard 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure" (SFAS 148). SFAS 148 provides alternative methods of transition for
a voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, SFAS 148 amends the disclosure requirements
of Statement of Financial Accounting Standard 123, "Accounting for Stock-Based
Compensation" (SFAS 123), to require prominent disclosures in both annual and
interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results. The
disclosures required by SFAS 148 are included in this document.
In November 2002, the FASB issued FASB Interpretation No. 45 Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, an Interpretation of FASB Statements No.
5, 57, and 107 and Rescission of FASB Interpretation No. 34 ("FIN 45"). FIN 45
elaborates on the disclosures to be made by a guarantor in its interim and
annual financial statements about its obligations under certain guarantees that
it has issued. It also clarifies that a guarantor is required to recognize, at
the inception of a guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. The initial recognition and initial
measurement provisions of FIN 45 are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002, irrespective of the
guarantor's fiscal year-end. We adopted the provisions of this Statement on
January 1, 2003, which did not have a significant impact on our consolidated
financial statements.
In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation
of Variable-Interest Entities - an Interpretation of ARB No. 51 ("FIN 46"). FIN
46 addresses consolidation by business enterprises of variable interest
entities, which have one or both of the following characteristics: (1) the
equity investment at risk is not sufficient to permit the entity to finance its
activities without additional subordinated financial support from other parties,
which is provided through other interests that will absorb some or all of the
expected losses of the entity and (2) the
54
equity investors lack one or more of the following essential characteristics of
a controlling financial interest:
o The direct or indirect ability to make decisions about the entity's
activities through voting rights or similar rights
o The obligation to absorb the expected losses of the entity if they occur,
which makes it possible for the entity to finance its activities
o The right to receive the expected residual returns of the entity if they
occur, which is the compensation for the risk of absorbing the expected
losses.
This Interpretation applies immediately to variable interest entities
created after January 31, 2003, and to variable interest entities in which an
enterprise obtains an interest after that date. It applies in the first fiscal
year or interim period beginning after June 15, 2003, to variable interest
entities in which an enterprise holds a variable interest that it acquired
before February 1, 2003. The adoption of FIN 46 did not have a significant
impact on our consolidated financial statements.
In April 2003, the FASB issued Statement of Financial Accounting Standard
No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities" (SFAS 149). SFAS 149 amends and clarifies financial accounting and
reporting for derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities under Statement of
Financial Accounting Standard No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (SFAS 133). SFAS 149 is effective for contracts entered
into or modified and hedging relationships designated after June 30, 2003,
except for the provisions of SFAS 149 that relate to SFAS 133 Implementation
Issues that have been effective for fiscal quarters that began prior to June 15,
2003, which should continue to be applied in accordance with their respective
effective dates. Adoption of this standard had no effect on us.
In May 2003, the FASB issued Statement of Financial Accounting Standard
No. 150, "Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity" (SFAS 150). SFAS 150 establishes standards for how
an issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an issuer
classify a financial instrument that is within its scope as a liability (or an
asset in some circumstances). Many of those instruments were previously
classified as equity. SFAS 150 is effective for financial instruments entered
into or modified after May 31, 2003, and otherwise is effective at the beginning
of the first interim period beginning after June 15, 2003. Adoption of this
standard had no effect on us.
In September 2003, the FASB issued FASB Staff Position No. 146-1,
Determining Whether a One-Time Termination Benefit Offered in Connection with an
Exit or Disposal Activity Is, in Substance, an Enhancement to an Ongoing Benefit
Arrangement. This Staff Position states that in order to be considered an
enhancement to an ongoing benefit arrangement, the additional termination
benefits must represent a revision to the ongoing arrangement that is not
limited to a specified termination event or a specified future period. Otherwise
the additional termination benefits should be considered one-time termination
benefits and accounted for under SFAS 146. The guidance in this Staff Position
is effective for exit or disposal activities initiated in interim or
55
annual reporting periods beginning after September 15, 2003. The adoption of
this Staff Position is not expected to have a material impact on our
consolidated financial statements.
In October 2003, the FASB issued FASB Staff Position No. FIN 46-6,
Effective Date of FASB Interpretation No. 46, Consolidation of Variable Interest
Entities. This Staff Position defers the effective date for applying the
provisions of FIN 46 for interests held by public entities in variable interest
entities or potential variable interest entities created before February 1, 2003
and non-registered investment companies. This adoption of this Staff Position is
not expected to have a material impact on our consolidated financial statements.
Fiscal Quarter Ended September 30, 2003
The following is a discussion of the results of operations and analysis of
financial condition for the three months and nine months ended September 30,
2003 and a comparison to the three months and nine months ended September 30,
2002. 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 and
notes to the consolidated financial statements included in this prospectus.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2002.
Net income (loss). Net income (loss) increased $20.8 million to net income
of $6.1 million for the three months ended September 30, 2003 compared to a net
loss of ($14.7) million for the three months ended September 30, 2002. Net
income for the three months ended September 30, 2003 includes income from
continuing operations of $6.1 million and income from discontinued operations of
$6,000, compared to income from continuing operations of $3.0 million and a loss
from discontinued operations of ($17.7) million for the three months ended
September 30, 2002.
CONTINUING OPERATIONS
Products revenues. Products Division revenues increased $1.7 million, or
3.5%, to $50.8 million in the three months ended September 30, 2003, compared to
$49.0 million in the three months ended September 30, 2002. For the three months
ended September 30, 2003, Products Division revenue increased 2.1% internally,
including year over year changes in acquired businesses, and 1.4% due to the
acquisitions of Evi-Paq, Inc., B-Square, Inc. and 911 Emergency Products, Inc.,
all of which were completed during or subsequent to the third quarter of 2002.
Mobile Security revenues. Mobile Security Division revenues increased $8.6
million, or 27.2%, to $40.1 million in the three months ended September 30,
2003, compared to $31.5 million in the three months ended September 30, 2002.
Mobile Security Division revenues for the three months ended September 30, 2003,
increased $6.3 million due to the acquisition of substantially all of the assets
of Trasco-Bremen on September 24, 2002. Excluding the $6.3 million of 2003
revenue increase relating to Trasco-Bremen, Mobile Security Division revenues
increased $2.3
56
million, or 7.3%, in the three months ended September 30, 2003, compared to the
three months ended September 30, 2002. The majority of the $2.3 million revenue
increase relates to increased sales of up-armored Humvees and armored cars to
the US military and US government.
Cost of sales. Cost of sales increased $6.0 million, or 10.7%, to $62.0
million for the three months ended September 30, 2003 compared to $55.9 million
for the three months ended September 30, 2002. As a percentage of total
revenues, cost of sales decreased to 68.2% of total revenues for the three
months ended September 30, 2003 from 69.5% for the three months ended September
30, 2002.
Gross margins in the Products Division were 36.1% for the three months
ended September 30, 2003, compared to 36.7% for the three-months ended September
30, 2002. The small drop in Products Division gross margins resulted primarily
from a negative change in product mix within our hard armor and less lethal
businesses. Excluding USDS, Inc., our Products Division training subsidiary, the
Products Division gross margins were 38.4%, compared to 39.3% reported in the
same period last year.
Gross margins in the Mobile Security Division were 26.4% in the
three-months ended September 30, 2003, compared to 21.0% for the three-months
ended September 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; and 2) operational efficiencies in our Cincinnati
manufacturing facility as the plant continues to reduce its per vehicle labor
and material costs.
Operating expenses. Operating expenses increased $3.1 million, or 24.3%,
to $16.0 million (17.6% of total revenues) for the three months ended September
30, 2003 compared to $12.9 million (16.0% of total revenues) for the three
months ended September 30, 2002.
Products Division operating expenses increased $0.2 million, or 2.1%, to
$8.2 million (16.1% of Products Division revenues) for the three months ended
September 30, 2003 compared to $8.0 million (16.3% of Products Division
revenues) for the three months ended September 30, 2002. This increase is due
primarily to the incremental operating expenses associated with acquired
businesses completed during or subsequent to the third quarter of 2002.
Mobile Security Division operating expenses increased $925,000, or 28.8%,
to $4.1 million (10.3% of Mobile Security Division revenues) for the three
months ended September 30, 2003, compared to $3.2 million (10.2% of Mobile
Security Division revenues) for the three months ended September 30, 2002.
Excluding the increase in 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 September 30, 2003, increased $0.3
million to $3.5 million (10.5% of Mobile Security Division revenues) versus $3.2
million (10.2% of Mobile Security Division revenues) in the same period in the
prior year.
Corporate operating expenses increased $2.0 million, or 125.2%, to $3.7
million (4.0% of total revenues) for the three months ended September 30, 2003
compared to $1.6 million (2.0% of total revenues) for the three months ended
September 30, 2002. This increase is due primarily to
57
increased insurance costs, increased internal audit costs necessary to comply
with Sarbanes-Oxley requirements, increased legal provisions, and increased
bonus provisions.
Amortization. Amortization expense increased $10,000, or 16.1%, to $72,000
for the three months ended September 30, 2003 compared to $62,000 for the three
months ended September 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 September 30, 2003, totaled
$368,000, compared to $1.4 million in the same period last year. The decrease in
integration and other non-recurring items is primarily related to the
elimination of expense associated with the 2001 acquisitions of O'Gara-Hess &
Eisenhardt and Identicator. The integration and other non-recurring charges for
the three months ended September 30, 2003 primarily related to the integration
of Evi-Paq, B-Square, 911 Emergency Products, and Trasco-Bremen all of which
were completed during or subsequent to the third quarter of 2002.
Operating income. Operating income from continuing operations increased
$2.2 million to $12.5 million for the three months ended September 30, 2003
compared to $10.3 million in the three months ended September 30, 2002 due to
the factors discussed above.
Interest expense, net. Interest expense, net increased $1.1 million, or
330.0%, to $1.5 million for the three months ended September 30, 2003 compared
to $343,000 for the three months ended September 30, 2002. This increase was due
primarily to interest expense associated with the $150 million aggregate
principal amount of 8.25% senior subordinated notes due 2013. On September 2,
2003, we entered into interest rate swap agreements that effectively exchanged
the 8.25% fixed rate for a variable rate of six-month LIBOR (1.18% at September
30, 2003), set in arrears, plus a spread of 2.735% to 2.75%.
Other expense (income), net. Other expense (income), net, was $96,000 for
the three months ended September 30, 2003, compared to other expense (income),
net, of ($13,000) for the three months ended September 30, 2002.
Income from continuing operations before provision for income taxes.
Income from continuing operations before provision for income taxes increased by
$934,000 to $10.9 million for the three months ended September 30, 2003 compared
to $10.0 million for the three months ended September 30, 2002 due to the
reasons discussed above.
Provision for income taxes. Provision for income taxes was $4.8 million
for the three months ended September 30, 2003, compared to $7.0 million for the
three months ended September 30, 2002. The effective tax rate was 44.2% for the
three months ended September 30, 2003, compared to 70.4% for the three months
ended September 30, 2002. Our income tax rate for the full year 2003 is now
estimated at 40.4%. This is an increase from the 37.4% tax rate that was
utilized in the three months ended March 31, 2003, and June 30, 2003.
Accordingly, we had to
58
record an additional tax expense in the three months ended September 30, 2003.
The increase in estimated tax rate was due to, among other things, the
revaluation of certain intellectual property utilized in our discontinued
operations to comply with tax code provisions. The increased tax expense
associated with the revaluation is recorded in continuing operations as required
by generally accepted accounting principles and resulted in an incremental
non-cash tax expense of $635,000, for which foreign tax credits are available to
offset the tax otherwise payable.
Income from continuing operations. Income from continuing operations
increased $3.1 million to $6.1 million for the three months ended September 30,
2003 compared to $3.0 million for the three months ended September 30, 2002 due
to the factors discussed above.
DISCONTINUED OPERATIONS
Services revenues. Services Division revenue increased $2.3 million, or
9.7%, to $26.0 million for the three months ended September 30, 2003 compared to
$23.7 million for the three months ended September 30, 2002. Exclusive of
ArmorGroup Integrated Systems, which we sold on April 17, 2003, revenue
increased $6.2 million, or 31.5% to $26.0 million for the three months ended
September 30, 2003 compared to $19.8 million for the three months ended
September 30, 2002. This increase is due to strong performance primarily in the
Middle East with strong growth coming from Iraq along with ongoing strong
training revenues from the Athens Olympics build up. These are tempered by weak
revenues in mine action business, investigations business and the Latin American
business.
Cost of sales. Cost of sales decreased $1.7 million, or 8.4%, to $18.1
million for the three months ended September 30, 2003 compared to $19.7 million
for the three months ended September 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 $3.5 million, or 24.0% to $18.1
million for the three months ended September 30, 2003 compared to $14.6 million
for the three months ended September 30, 2002.
As a percentage of total revenue, cost of sales decreased to 69.4% of
total revenues for the three months ended September 30, 2003 from 83.1% for the
three months ended September 30, 2002. This decease in cost of sales as a
percentage of total revenue was primarily a result of the proportion of the
revenue growth coming from expatriate intensive security contracts in Iraq and
continued high margin training contracts.
Operating expenses. Operating expenses decreased $3.1 million, or 39.1%,
to $4.9 million (18.8% of Services revenues) for the three months ended
September 30, 2003 compared to $8.0 million (33.8% of Services revenues) for the
three months ended September 30, 2002. This decrease was partly due to the sale
of the ArmorGroup Integrated Systems business. Exclusive of ArmorGroup
Integrated Systems, operating expenses decreased $1.2 million, or 19.9% to $4.9
million for the three months ended September 30, 2003 compared to $6.1 million
for the three months ended September 30, 2002. This decrease was due to reduced
foreign currency expenses and a reduction in salary costs as a result of
restructuring last year.
59
Charge for impairment of long-lived asset. The net charge for impairment
of long-lived asset was $1.3 million for the three months ended September 30,
2003, compared to $11.9 million for the three months ended September 30, 2002.
The $1.3 million net non-recurring charge was recorded to maintain the proper
carrying value of our discontinued operations at $43.4 million as of September
30, 2003, which amount reflects management's continued best estimate of fair
value.
Integration and other non-recurring charges. Integration and other
non-recurring charges decreased $732,000, or 87.6%, to $104,000 for the three
months ended September 30, 2003 compared to $836,000 for the three months ended
September 30, 2002. This decrease is primarily due to severance payments to
certain personnel in the prior year.
Operating income (loss). Operating income was $1.7 million for the three
months ended September 30, 2003, compared to operating loss of ($16.7) million
for the three months ended September 30, 2002 due to the factors discussed
above. Operating loss from the ArmorGroup Integrated Systems business was
($15.0) million for the three months ended September 30, 2002 primarily due to
the $11.9 million charge for impairment of long-lived assets. Excluding the
ArmorGroup Integrated Systems business, the balance of the assets held for sale
generated an operating income of $1.7 million for the three months ended
September 30, 2003 compared to an operating loss of ($1.7) million for the three
months ended September 30, 2002.
Interest expense, net. Interest expense, net, decreased $16,000, or 47.1%,
to $18,000 for the three months ended September 30, 2003 compared to $34,000 for
the three months ended September 30, 2002. This decrease was due to reduced
utilization of the Services Division's line of credit.
Other expense, net. Other expense, net, decreased $236,000, or 92.2%, to
$20,000 for the three months ended September 30, 2003, compared to other
expense, net, of $256,000 for the three months ended September 30, 2002. This
decrease is due to reduced losses on disposal of fixed assets and other asset
write-offs.
Income (loss) from discontinued operations before provision for income
taxes. Income from discontinued operations before provision for income taxes was
$1.7 million for the three months ended September 30, 2003 and a loss of ($17.0)
million for the three months ended September 30, 2002, due to the reasons
discussed above.
Provision for income taxes. Provision for income taxes was $1.7 million
for the three months ended September 30, 2003 compared to a provision of
$639,000 for the three months ended September 30, 2002. The effective tax rate
for the three months ended September 30, 2003 was a provision of 99.6% compared
to a provision of 3.8% for the three months ended September 30, 2002. The
provision of 99.6% for the three months ended September 30, 2003 is due to
unrecognized potential deferred tax assets associated with foreign subsidiaries,
which recorded pretax losses in the three months of 2003. These potential tax
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. The provision for the three months ended September 30, 2003 also
relates to the net impairment charge of $1.3 million, $1.1 million of which was
non-deductible goodwill write-offs.
60
Income (Loss) from discontinued operations. Income from discontinued
operations was $6,000 for the three months ended September 30, 2003 compared to
a loss from discontinued operations of ($17.7) million for the three months
ended September 30, 2002 due to the factors discussed above.
NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2002.
Net income (loss). Net income (loss) increased $20.5 million to net income
of $15.8 million for the nine months ended September 30, 2003 compared to a net
loss of ($4.7) million for the nine months ended September 30, 2002. Net income
for the nine months ended September 30, 2003 includes income from continuing
operations of $14.8 million and income from discontinued operations of $983,000,
compared to income from continuing operations of $13.4 million and a loss from
discontinued operations of ($18.0) million for the nine months ended September
30, 2002.
CONTINUING OPERATIONS
Products revenues. Products Division revenues increased $13.1 million, or
10.0%, to $144.1 million in the nine months ended September 30, 2003, compared
to $131.0 million in the nine months ended September 30, 2002. For the nine
months ended September 30, 2003, Products Division revenue increased 6.2%
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 2002.
Mobile Security revenues. Mobile Security Division revenues increased
$18.2 million, or 20.0% to $108.9 million in the nine months ended September 30,
2003, compared to $90.7 million in the nine months ended September 30, 2002.
Mobile Security Division revenues for the nine months ended September 30, 2003,
increased $15.2 million due to the acquisition of substantially all of the
assets of Trasco-Bremen on September 24, 2002. Excluding the $15.2 million of
2003 revenue increase relating to Trasco-Bremen, Mobile Security Division
revenues increased $3.0 million, or 3.3%, in the nine months ended September 30,
2003, compared to the nine months ended September 30, 2002.
Cost of sales. Cost of sales increased $23.9 million, or 15.7%, to $176.4
million for the nine months ended September 30, 2003 compared to $152.5 million
for the nine months ended September 30, 2002. As a percentage of total revenues,
cost of sales increased to 69.7% of total revenues for the nine months ended
September 30, 2003 from 68.8% for the nine months ended September 30, 2002.
Gross margins in the Products Division were 34.5% for the nine months
ended September 30, 2003, compared to 37.5% for the nine months ended September
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
61
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 manufacturing facility. Excluding our
Products training division subsidiary, the Products Division gross margins were
36.8%, compared to 39.9% reported in the same period last year.
Gross margins in the Mobile Security Division were 24.7% in the nine
months ended September 30, 2003, compared to 22.2% for the nine months ended
September 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 $7.5 million, or 20.1%,
to $44.5 million (17.6% of total revenues) for the nine months ended September
30, 2003 compared to $37.0 million (16.7% of total revenues) for the nine months
ended September 30, 2002.
Products Division operating expenses increased $1.4 million, or 6.0%, to
$24.2 million (16.8% of Products Division revenues) for the nine months ended
September 30, 2003 compared to $22.8 million (17.4% of Products Division
revenues) for the nine months ended September 30, 2002. This increase is due
primarily to the incremental operating expenses associated with acquired
businesses completed during or subsequent to the third quarter of 2002.
Mobile Security Division operating expenses increased $2.4 million, or
25.7%, to $11.6 million (10.7% of Mobile Security Division revenues) for the
nine months ended September 30, 2003, compared to $9.2 million (10.2% of Mobile
Security Division revenues) for the nine months ended September 30, 2002.
Excluding the increase in 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 nine months ended September 30, 2003, increased less
than $0.4 million, 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 $3.7 million, or 74.4%, to $8.7
million (3.4% of total revenues) for the nine months ended September 30, 2003
compared to $5.0 million (2.2% of total revenues) for the nine months ended
September 30, 2002. This increase is due primarily to increased insurance costs,
increased internal audit costs necessary to comply with Sarbanes-Oxley
requirements, increased legal provisions, and increased bonus provisions.
Amortization. Amortization expense decreased $12,000, or 5.6%, to $201,000
for the nine months ended September 30, 2003 compared to $213,000 for the nine
months ended September 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.
62
Integration and other non-recurring charges. Integration and other
non-recurring charges for the nine months ended September 30, 2003, totaled $4.6
million, compared to $4.5 million for the nine months ended September 30, 2002.
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. Excluding
this $3.3 million severance charge, integration and other non-recurring charges
were $1.3 million for the nine months ended September 30, 2003, a decrease of
$3.2 million from the nine months ended September 30, 2002. This decrease was
primarily due to the elimination of expense associated with the 2001
acquisitions of O'Gara-Hess & Eisenhardt and Identicator.
Operating income. Operating income from continuing operations decreased
$202,000 to $27.3 million for the nine months ended September 30, 2003 compared
to $27.6 million in the nine months ended September 30, 2002 due to the factors
discussed above.
Interest expense, net. Interest expense, net increased $1.6 million, or
242.5% to $2.3 million for the nine months ended September 30, 2003 compared to
$669,000 for the nine months ended September 30, 2002. This increase was due
primarily to interest expense associated with the $150 million aggregate
principal amount of 8 1/4% senior subordinated notes due 2013. On September 2,
2003, we entered into interest rate swap agreements that effectively exchanged
the 8 1/4% fixed rate for a variable rate of six-month LIBOR, set in arrears,
plus a spread of 2.735% to 2.75%.
Other expense (income), net. Other expense, net, was $181,000 for the nine
months ended September 30, 2003, compared to other income, net, of ($77,000) for
the nine months ended September 30, 2002.
Income from continuing operations before provision for income taxes.
Income from continuing operations before provision for income taxes decreased by
$2.1 million to $24.9 million for the nine months ended September 30, 2003
compared to $27.0 million for the nine months ended September 30, 2002 due to
the reasons discussed above.
Provision for income taxes. Provision for income taxes was $10.0 million
for the nine months ended September 30, 2003, compared to $13.6 million for the
nine months ended September 30, 2002. The effective tax rate was 40.4% for the
nine months ended September 30, 2003, compared to 50.5% for the nine months
ended September 30, 2002 based on our current expectations of annual income
amounts and jurisdictions in which such amounts are expected to be taxable. The
estimated 2003 income tax rate of 40.4% is higher than the 37.4% estimated
income tax rate that was utilized in the first half of 2003 due to, among other
things, a taxable gain that was realized in the third quarter when certain
intellectual property utilized in our discontinued operations was revalued in
order to comply with tax code provisions. The impact of the incremental tax is
recorded in continuing operations as required by generally accepted accounting
principles, and resulted in an incremental non-cash tax expense, for which
foreign tax credits are available to offset the tax otherwise payable.
Income from continuing operations. Income from continuing operations
increased $1.5 million to $14.8 million for the nine months ended September 30,
2003 compared to $13.4 million for the nine months ended September 30, 2002 due
to the factors discussed above.
63
DISCONTINUED OPERATIONS
Services revenues. Services Division revenue increased $1.5 million, or
2.0%, to $75.7 million for the nine months ended September 30, 2003 compared to
$74.3 million for the nine months ended September 30, 2002. Exclusive of
ArmorGroup Integrated Systems, which we sold on April 17, 2003, revenue
increased $9.5 million, or 15.5% to $71.0 million for the nine months ended
September 30, 2003 compared to $61.5 million for the nine months ended September
30, 2002. This increase is due to strong performance in the Middle East with
equally strong performance by the ArmorGroup 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 a BP
security contract in Colombia in the second quarter of 2002.
Cost of sales. Cost of sales decreased $2.4 million, or 4.3%, to $53.4
million for the nine months ended September 30, 2003 compared to $55.8 million
for the nine months ended September 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 $5.2 million, or 12.1%, to $48.3
million for the nine months ended September 30, 2003 compared to $43.1 million
for the nine months ended September 30, 2002.
As a percentage of total revenue, cost of sales decreased to 70.6% of
total revenues for the nine months ended September 30, 2003 from 75.2% for the
nine months ended September 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 $6.3 million, or 27.8%,
to $16.3 million (21.5% of total revenues) for the nine months ended September
30, 2003 compared to $22.6 million (30.4% of total revenues) for the nine months
ended September 30, 2002. This decrease was primarily due to the sale of the
ArmorGroup Integrated Systems business. Exclusive of ArmorGroup Integrated
Systems, operating expenses decreased $3.1 million, or 16.6%, to $15.8 million
for the nine months ended September 30, 2003 compared to $18.9 million for the
nine months ended September 30, 2002. The nine months ended September 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 less than prior
year, and a reduction in salary costs as result of restructuring taken last
year.
Charge for impairment of long-lived asset. The net charge for impairment
of long-lived asset was $1.3 million for the nine months ended September 30,
2003 compared to $11.9 million for the nine months ended September 30, 2002. The
$1.3 million net non-recurring charge was recorded to maintain the proper
carrying value of our discontinued operations at $43.4 million as of September
30, 2003, which amount reflects management's continued best estimate of fair
value.
64
Integration and other non-recurring charges. Integration and other
non-recurring charges decreased $627,000, or 51.2%, to $598,000 for the nine
months ended September 30, 2003 compared to $1.2 million for the nine months
ended September 30, 2002. This decrease is primarily due to severance payments
to certain personnel in the prior year.
Operating income (loss). Operating income (loss) was $4.1 million for the
nine months ended September 30, 2003, compared to operating loss of ($17.3)
million for the nine months ended September 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 ($15.6) million for the nine months ended
September 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 $5.1 million for the nine months ended September 30, 2003
compared to an operating loss of ($1.7) million for the nine months ended
September 30, 2002.
Interest expense, net. Interest expense, net decreased $56,000, or 44.1%,
to $71,000 for the nine months ended September 30, 2003 compared to $127,000 for
the nine months ended September 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 $472,000 for
the nine months ended September 30, 2003, compared to other expense (income),
net of $200,000 for the nine months ended September 30, 2002. The net increase
in expense was a result of a pre-tax loss of $366,000 on the sale of our
ArmorGroup Integrated System business on April 17, 2003.
Income (loss) from discontinued operations before provision for income
taxes. Income (loss) from discontinued operations before provision for income
taxes was $3.6 million for the nine months ended September 30, 2003 and ($17.6)
million for the nine months ended September 30, 2002, due to the reasons
discussed above.
Provision for income taxes. Provision for income taxes was $2.6 million
for the nine months ended September 30, 2003 compared to a provision of $421,000
for the nine months ended September 30, 2002. The effective tax rate for the
nine months ended September 30, 2003 was a provision of 72.6% compared to a
provision of 2.4% for the nine months ended September 30, 2002. The provision of
72.6% for the nine months ended September 30, 2003, is due to unrecognized
potential deferred tax assets associated with foreign subsidiaries, which
recorded pretax losses in the nine months of 2003. These potential tax 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. The
provision for the nine months ended September 30, 2003 also relates to the net
impairment charge of $1.3 million, $1.1 million of which was non-deductible
goodwill write-offs.
Income (loss) from discontinued operations. Income (loss) from
discontinued operations was $983,000 for the nine months ended September 30,
2003 compared to a loss from discontinued operations of ($18.0) million for the
nine months ended September 30, 2002 due to the factors discussed above.
65
Fiscal Year Ended December 31, 2002
The following is a discussion of the results of operations and analysis of
financial condition for the twelve months ended December 31, 2002 as compared to
the twelve months ended December 31, 2001 and the twelve months ended December
31, 2001 as compared to the twelve months ended December 31, 2000. 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 and notes to the
consolidated financial statements included in this prospectus.
RESULTS OF OPERATIONS
Effective June 30, 2002, we decided to sell the ArmorGroup Services Division
through an organized and formal auction managed by outside advisors. In
accordance with Statement of Accounting Standards 144, Accounting for Impairment
or Disposal of Long-Lived Assets, the assets and liabilities of the Services
Division are classified as held for sale, with its operating results reported as
discontinued operations in our statement of operations for all periods. Our US
based training subsidiary, USDS, Inc. previously reported under the Services
Division but not included for sale has been reclassified to the Products
Division.
The following table sets forth selected statement of operations data as a
percentage of total revenues for the periods indicated:
FISCAL YEAR
2002 2001 2000
---- ---- ----
Revenue from continuing operations
Products 59.0% 76.0% 100.0%
Mobile Security 41.0% 24.0% 0.0%
Total revenues from continuing operations 100.0% 100.0% 100.0%
Cost of sales 69.1% 64.1% 61.1%
Operating expenses 16.3% 19.6% 21.6%
Amortization 0.1% 1.1% 1.2%
Integration and other non-recurring charges 1.9% 1.7% 1.8%
Operating income 12.6% 13.5% 14.2%
Interest expense, net 0.3% 2.0% 1.3%
Other income, net 0.0% 0.0% 0.0%
Income from continuing operations before
provision for income taxes 12.3% 11.6% 12.9%
Provision for income taxes 5.3% 4.2% 5.2%
Income from continuing operations 7.0% 7.5% 7.8%
(Loss) Income from discontinued operations
before provision for income taxes (13.9)% (3.6)% 5.9%
Provision (benefit) for income taxes (1.1)% (1.3)% 1.5%
(Loss) Income from discontinued operations (12.8)% (2.3)% 4.4%
Net (Loss) Income (5.8)% 5.1% 12.2%
66
FISCAL 2002 AS COMPARED TO FISCAL 2001
Net (loss) income. Net income decreased $27.8 million to a net loss of $17.7
million for the year ended December 31, 2002 ("fiscal 2002") compared to net
income of $10.1 million for the year ended December 31, 2001 ("fiscal 2001").
Income from continuing operations and the loss from discontinued operations was
$21.3 million and $39.0 million respectively for fiscal 2002, compared to income
from continuing operations of $14.7 million and a loss from discontinued
operations of $4.6 million for fiscal 2001. The increase in income from
continuing operations relates primarily to the inclusion of the Mobile Security
Division for a full year in 2002 versus four months in 2001.
CONTINUING OPERATIONS
Armor Holdings Products revenues. Our Armor Holdings Products Division revenues
increased $30 million, or 20.1%, to $179.9 million in fiscal 2002, compared to
$149.9 million in fiscal 2001. For fiscal 2002, Products Division revenue
increased 14.4% internally, including year over year changes in acquired
businesses, and 5.7% due to a series of small strategic "tuck-in" acquisitions
including Identicator, Inc. ("Identicator"), Guardian Personal Security
Products, Inc. ("Guardian"), Speedfeed, Inc. ("Speedfeed"), the Foldable
Products Group ("Foldable"), Evi-Paq, Inc. ("Evi-Paq") B-Square, Inc.
("B-Square") and 911 Emergency Products ("911"). Products Division revenues
include $16.8 million and $7.2 million from USDS, Inc., our US based training
company, for the years ended fiscal 2002 and fiscal 2001, respectively. In our
filings prior to June 30, 2002, we reported USDS, Inc. as a part of our Services
Division.
Mobile Security Division revenues. Our Armor Mobile Security Division revenues
increased $77.9 million, or 165.0% to $125.2 million in fiscal 2002, compared to
$47.2 million in fiscal 2001. Revenues for fiscal 2001, included only four
months of operations after the acquisitions of O'Gara-Hess & Eisenhardt Armoring
Company, The O'Gara Company, and O'Gara Security Associates, Inc. in August,
2001. Revenues in fiscal 2002 includes $3.3 million related to the acquisition
of Trasco Bremen in September 2002. Including the eight months of operations
prior to our ownership and excluding all revenue associated with assets that we
either did not purchase or sell, Mobile Security Division revenue increased
17.7% internally from approximately $106.3 million during fiscal 2001.
Cost of sales. Cost of sales increased $84.4 million, or 66.8%, to $210.7
million for fiscal 2002 compared to $126.3 million for fiscal 2001. This
increase was due primarily to the acquisition of the Armor Mobile Security
Division as well as overall revenue growth for fiscal 2002 compared to fiscal
2001. As a percentage of total revenues, cost of sales increased to 69.1% of
total revenues for fiscal 2002 from 64.1% for fiscal 2001. This increase as a
percentage of total revenues was partially due to the full year inclusion in
2002 of the Mobile Security Division, which operates at lower average gross
margins than the Products Division and partially to reduced Products Division
margins as discussed below.
For fiscal 2002, gross margins in the Products Division were 36.4%
compared to 39.3% reported in the same period last year, while the gross margins
in the Mobile Security Division were 23.0% in fiscal 2002, compared to 25.1% for
the four months of the December 31, 2001 fiscal year after the acquisition date.
The Products Division consists of a portfolio of law enforcement
67
products, each of which is manufactured and sold at different margins. In any
given period, the Products Division weighted average gross margins will
fluctuate based upon the relative volume of products sold during the period.
Lower gross margins during fiscal 2002 in the Products Division were partially
attributable to product mix, as well as to short term increases in manufacturing
costs and a raw material supply issues in the division's body armor operations
during the first half of 2002.
During late 2001 and 2002, the Products Division combined its
Jacksonville, Florida based body armor operation into its body armor
manufacturing facility in Ontario, California. During 2002, the Division
experienced difficulty in this combination resulting in capacity constraints and
increased manufacturing costs. We believe that these capacity constraints have
been alleviated and that certain of our body armor manufacturing costs will
decrease during the first half of 2003. However, during this time, we also
experienced interruptions in the supply of Zylon Shield, a certain ballistic
fiber used in our leading concealable ballistic vest. This particular supply
problem was related to the ballistic integrity of the fiber we received and not
the actual availability of the material. Nevertheless, our inability to receive
quality Zylon Shield during this period exacerbated our capacity constraints. As
of December 31, 2002, the Products Division is currently receiving adequate
supplies of Zylon Shield and is currently working to decrease its body armor
manufacturing costs.
The Products Division gross margins also decreased because it realized
higher proportional revenue increases from its training division, which operates
at significantly lower overall gross margins than its manufacturing segment. The
decrease in gross margins in the Mobile Security Division was primarily due to a
less favorable mix of commercial vehicle sales compared to the same period the
prior year, a heavier mix of "lower margin" cash-in-transit vehicles in 2002
compared to 2001, and a larger number of base unit sales included in revenue in
the 2002 period.
Operating expenses. Operating expenses increased $11.2 million, or 28.9%, to
$49.8 million (16.3% of total revenues) for fiscal 2002 compared to $38.7
million (19.6% of total revenues) for fiscal 2001. This increase was primarily
due to the operating expenses associated with the operations of the Mobile
Security Division, acquired in August 2001, which were not included for the full
year ended December 31, 2001. Operating expenses also increased in the Products
Division primarily due to operating expenses associated with acquired companies
and from internal growth of the business. Operating expenses as a percent of
sales decreased because the Mobile Security Division operates with a lower level
of operating expenses as a percentage of sales than does the Products Division.
We expect to see an increase in corporate operating expense during 2003 because
we will incur significant increases in insurance expenses, government affairs
and lobbying efforts, internal audit, information technology and increased legal
and accounting costs associated with legal compliance.
Amortization. Amortization expense decreased $1.9 million, or 88.6%, to $0.2
million for fiscal 2002 compared to $2.1 million for fiscal 2001. This decrease
results from the implementation of SFAS 142, which eliminated goodwill
amortization 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.
68
Integration and other non-recurring charges. Integration and other non-recurring
charges increased $2.6 million, or 79.8%, to $5.9 million for fiscal 2002
compared to $3.3 million in fiscal 2001. These charges relate primarily to the
integration of the Mobile Security Division, as well as other acquisitions
completed in 2001 and 2002. 2002 integration and other non-recurring charges
also included certain expenses related to the integration of our body armor
operations, as well as direct costs and expenses associated with potential
acquisitions that did not close.
Operating income. Operating income from continuing operations increased $11.7
million to $38.4 million for fiscal 2002 compared to $ 26.7 million in fiscal
2001 due to the factors discussed above. USDS, Inc. contributed operating income
that was previously reported as a part of the Services Division of $1.7 million
and $1.2 million for the years ended December 31, 2002 and 2001, respectively.
Interest expense, net. Interest expense, net decreased $2.9 million, or 76.1% to
$0.9 million for fiscal 2002 compared to $3.9 million for fiscal 2001. This
decrease was due primarily to the repayment of long-term debt under our
revolving credit facility with the net proceeds of the secondary common stock
offering completed in December 2001.
Other expense (income), net. Other expense (income), net, was $51,000 for fiscal
2002, compared to ($82,000) for fiscal 2001 due to a gain on sale of fixed
assets during 2001.
Income from continuing operations before provision for income taxes. Income from
continuing operations before provision for income taxes increased by $14.5
million to $37.4 million for fiscal 2002 compared to $22.9 million for fiscal
2001 due to the reasons discussed above.
Provision for income taxes. Provision for income taxes was $16.1 million for
fiscal 2002 compared to $8.2 million for fiscal 2001. The provision for income
taxes for fiscal 2002 included charges of approximately $1.5 million related to
the establishment of valuation allowances for certain foreign deferred tax
assets of our discontinued operations. The effect of these charges was to
increase our effective tax rate for fiscal 2002 to 42.9% compared to 35.9% for
fiscal 2001. Without these charges, our effective tax rate for fiscal 2002 would
have been 39%. The increase in what our effective tax rate would have been
without the tax charges related to our discontinued operations is due primarily
to the higher percentage of income earned in the United States and the impact of
state income taxes on this income. Our expected effective tax rate is not
necessarily indicative of what our actual effective rate will be due to the
changing concentration and mix of income in the various countries in which we
continue to operate.
Income from continuing operations. Income from continuing operations increased
$6.6 million to $21.3 million for fiscal 2002 compared to $14.7 million for
fiscal 2001 due to the factors discussed above.
DISCONTINUED OPERATIONS
Many of the items listed below involve accounting estimates. The loss and
amounts below will be revaluated in the future for any changes which might be
appropriate.
69
Our ArmorGroup Services Division revenues increased $3.3 million, or 3.5%,
to $98.3 million for fiscal 2002 compared to $94.9 million for fiscal 2001. For
fiscal 2002, revenue increased 6.7% due to the acquisition of International
Training, Inc. ("ITI"), which was acquired as part of the acquisition of our
Mobile Security Division and is included in the Services Division from the date
of acquisition. The 3.4% reduction in revenue exclusive of the ITI acquisition
was a result of lower revenues in the Integrated Systems business in the United
States and the Security consulting business both in Latin America and Russia due
to the completion of several large contracts.
Cost of sales. Cost of sales increased $10.8 million, or 16.5%, to $75.8 million
for fiscal 2002 compared to $65 million for fiscal 2001. This increase was due
primarily to the acquisition of ITI. As a percentage of total revenue, cost of
sales increased to 77.1% of total revenues for fiscal 2002 from 68.5% for fiscal
2001. This increase in cost of sales as a percentage of total revenue was
primarily due to the weakness in our Integrated Systems business resulting in
poor margins from increased inventory reserves, the loss of high margin oil
industry security consulting work in Latin America and the scaling down of
business in the Democratic Republic of Congo.
Operating expenses. Operating expenses increased $6.1 million, or 24.9%, to
$30.6 million (31.1% of total revenues) for fiscal 2002 compared to $24.5
million (25.8% of total revenues) for fiscal 2001. This increase was due
primarily to increased accounts receivable reserves, other asset write-downs,
and other charges in the Integrated Systems and Security consulting businesses,
as well as additional operating expenses associated with ITI's operations,
acquired in August 2001.
Amortization. Amortization expense decreased $1.5 million, or 100%, to $0 for
fiscal 2002 compared to $1.5 million for fiscal 2001. This decrease was a result
of the implementation of SFAS 142, which eliminated goodwill amortization for
acquisitions completed after July 1, 2001 and for fiscal years beginning on or
after January 1, 2002.
Charge for impairment of long-lived assets. Charges for impairment of long-lived
assets was $30.3 million for fiscal 2002 compared to $0 for fiscal 2001. The
impairment charge is the result of the $24.2 million reduction in carrying value
of the Services Division to the estimated realizable value as required by SFAS
144.
Restructuring and related charges. In January 2001, our Board of Directors
approved a restructuring plan to close the Services Division's U.S.
investigative businesses, realign the Service Division's organization, eliminate
excess facilities and reduce overhead in its business worldwide. In connection
with this restructuring charge, the Services Division performed a review of its
long-lived assets to identify potential impairments. Pursuant to this
restructuring plan, we a) eliminated 26 employees, primarily from the Services
Division investigative business; b) eliminated an additional 24 employees from
its security consulting business; c) incurred lease and other exit costs as a
result of the closure of the investigative businesses; and d) wrote-down the
value of both tangible and intangible assets as a result of the impairment
review.
As a result of the restructuring plan, we recorded a pre-tax charge of
$10.3 million. At December 31, 2002 we had a restructuring accrual of $270,000
compared to $354,000 at December 31, 2001 relating to lease termination and
other exit costs. This liability has been classified in
70
accrued expenses and other current liabilities on our discontinued operations
balance sheet and will be funded through cash provided by operating activities
and our credit facility.
Integration and other non-recurring charges. Integration and other non-recurring
charges increased $1.8 million, or 238.0%, to $2.6 million for fiscal 2002
compared to $776,000 for fiscal 2001. These charges reflect certain severance
expenses, software write-off costs and other expenses associated with preparing
the division for sale, as well as the expenses associated with integrating ITI
into the Services Division.
Operating loss. Operating losses were $41.9 million for fiscal 2002, compared to
an operating loss of $7.1 million for fiscal 2001 due to the factors discussed
above.
Interest expense, net. Interest expense, net increased $203,000 or 142%, to
$346,000 for fiscal 2002 compared to $143,000 for fiscal 2001. This increase was
due to increased utilization of the Services Division's line of credit.
Other (income) expense, net. Other expense, net, was $99,000 for fiscal 2002,
compared to other income, net of $218,000 for fiscal 2001. The increase expense
in fiscal 2002 was a result of losses on the disposal of fixed assets and other
asset write-offs.
Loss from discontinued operations before provision for income taxes (benefit).
Loss from discontinued operations before provision for income taxes (benefit)
was $41.5 million for fiscal 2002 and $7.1 million for fiscal 2001 due to the
reasons discussed above.
Provision for income taxes (benefit). Income tax benefit was $2.4 million for
fiscal 2002 compared to a benefit of $2.5 million for fiscal 2001. The effective
tax rate for fiscal 2002 was a benefit of 5.9% compared to a benefit of 35.5%
for fiscal 2001. The decrease in percentage benefit is primarily due to the
inclusion in taxable income of certain expenses not deductible for tax purposes,
including a $31.2 million charge for the impairment of long-lived assets.
Loss from discontinued operations. Loss from discontinued operations was $39.0
million for fiscal 2002 compared to a loss from discontinued operations of $4.6
million for fiscal 2001 due to the factors discussed above.
FISCAL 2001 AS COMPARED TO FISCAL 2000
Net (loss) income. Net income decreased $6.9 million to a net income of $10.1
million for fiscal 2001 compared to net income of $17.0 million for the year
ended December 31, 2000 ("fiscal 2000"). Net income for fiscal 2001 includes
income from continuing operations of $14.7 million and a loss from discontinued
operations of $4.6 million, compared to income from continuing operations of
$10.8 million and income from discontinued operations of $6.2 million for fiscal
2000.
71
CONTINUING OPERATIONS
Armor Holdings Products Division Revenues. Armor Holdings Products Division
revenues increased $10 million, or 7.1% to $149.9 million in for fiscal 2001
("fiscal 2001"), compared to $139.9 million for fiscal 2000. Revenue increased
during the year due to the acquisitions completed in fiscal 2000 and additional
fiscal 2001 acquisitions. All of these acquisitions were accounted for as
purchases and accordingly the results of their operations are included only from
the date of acquisition. Products Division revenues include $7.2 million and
$4.6 million from USDS, Inc. for the years ended December 31, 2001 and December
31, 2000, respectively. In our filings prior to June 30, 2002, we reported USDS,
Inc. as a part of the Service Division. Not including these acquisitions, the
Armor Holdings Products Division revenue decreased during fiscal 2001, due in
part to shipping interruptions and order cancellations that resulted from the
September 11 terrorist attacks against the World Trade Center and the Pentagon
and to a slowdown in purchasing during the first quarter of 2001. We attribute a
portion of the first quarter slowdown with the Bulletproof Vest Partnership Act
(the "BVP Money") that provides federal matching funds to law enforcement
agencies purchasing bullet resistant vests. We believe that agencies delayed
their purchasing decisions during the first quarter of 2001 until such time as
the BVP Money was fully allocated.
Mobile Security revenues. Mobile Security Division revenues were $47.2 million,
in fiscal 2001, compared to $0 in fiscal 2000. The Mobile Security Division was
created through the acquisition of O'Gara-Hess & Eisenhardt Armoring Company,
The O'Gara Company, and O'Gara Security Associates, Inc., which was completed on
August 22, 2001, and only included in our financial statements from the date of
acquisition. Revenues for the year ended 2001 included only four months of
operations, from the date of acquisition.
Cost of sales. Cost of sales increased $40.9 million, or 47.8%, to $126.3
million for fiscal 2001 compared to $85.5 million for fiscal 2000. This increase
was due primarily to the acquisition of the Mobile Security Division as well as
overall revenue growth for the fiscal 2001 compared to fiscal 2000. As a
percentage of total revenues, cost of sales increased to 64.1% of total revenues
for fiscal 2001 from 61.1% for fiscal 2000. This increase as a percentage of
total revenues was primarily due to the inclusion of the Mobile Security
Division, which operates at lower average gross margins than the Products
Division.
For fiscal 2001, gross margins in the Products Division were 39.3%
compared to 39.8% reported in fiscal 2000, while the gross margins in the Mobile
Security Division were 25.1% for the four-month stub portion for fiscal 2001.
The decrease in the Products Division gross margins is attributable to the
impact of higher proportional revenue of USDS, Inc., which operates at margins,
which are significantly lower than the gross margins experienced within the
other Products Division companies.
Operating expenses. Operating expenses increased $8.4 million, or 27.6%, to
$38.7 million, or 19.6% of total revenues for fiscal 2001 compared to $30.3
million, or 21.7% of total revenues for fiscal 2000. This increase was primarily
due to the operating expenses associated with the operations of the Mobile
Security Division, acquired in August 2001, which were not included at all for
the year ended December 31, 2000. Operating expenses also increased due to
acquisitions in the
72
Products Division including Monadnock and Lightning Powder, as well as general
internal growth of the business. Operating expenses as a percent of sales
decreased because the Mobile Security Division operates with a lower level of
operating expenses as a percentage of sales than does the Products Division.
Amortization. Amortization expense increased $438,000, or 25.7%, to $2.1 million
for fiscal 2001 compared to $1.7 million for fiscal 2000. Amortization expense
increased during the year due to amortization of intangible assets acquired
during fiscal 2000 through the acquisitions of Monadnock and Lightning Powder.
In accordance with SFAS 142, we did not amortize goodwill from the O'Gara
acquisition, which occurred subsequent to June 30, 2001.
Integration and other non-recurring charges. Integration and other non-recurring
charges increased $.7 million, or 27.4%, to $3.3 million for fiscal 2001
compared to $2.6 million in fiscal 2000.
Fiscal 2001 integration expenses represent costs associated with the
acquisitions and integration of the Mobile Security Division, Monadnock and
Lightning Powder, as well as costs associated with our international tax
minimization program. Fiscal 2000 integration expenses included costs associated
with the acquisitions of Safariland, and Break-Free, as well as, costs
associated with our international tax minimization program and other one time
expenses incurred in the third quarter of 2000.
Operating income. Operating income from continuing operations increased $6.8
million, or 34.2%, to $26.7 million for fiscal 2001 compared to $19.9 million in
fiscal 2000 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 $889,000 for fiscal 2001 and 2000, respectively.
Interest expense, net. Interest expense, net increased $2.0 million, or 109% to
$3.9 million for fiscal 2001 compared to $1.8 million for fiscal 2000. Interest
expense, net increased during fiscal 2001 primarily due to interest on debt
incurred to fund the acquisitions of Monadnock, Lightning Powder and the Mobile
Security Division, which were each funded in part with cash from our revolving
credit facility. Increased borrowings under the revolving credit facility were
offset by lower interest rates on that debt. Interest expense, net includes
interest on and amortization of the fees associated with our debt obligations,
including our revolving credit facility, and the amortization of the discount on
certain long-term liabilities acquired as part of the Safariland acquisition.
Other (income) expense, net. Other income, net, was $82,000 for fiscal 2001,
compared to $67,000 for fiscal 2000.
Income from continuing operations before provision for income taxes. Income from
continuing operations before provision for income taxes increased by $4.8
million to $22.9 million for fiscal 2001 compared to $18.1 million for fiscal
2000 due to the reasons discussed above.
Provision for income taxes. Provision for income taxes was $8.2 million for
fiscal 2001 compared to $7.2 million for fiscal 2000.
73
Income from continuing operations. Income from continuing operations increased
$3.9 million to $14.7 million for fiscal 2001 compared to $10.8 million for
fiscal 2000 due to the factors discussed above.
DISCONTINUED OPERATIONS
ArmorGroup Services Division revenues. Our ArmorGroup Services Division revenues
increased $13.9 million, or 17.1%, to $94.9 million for fiscal 2001 compared to
$81.1 million for fiscal 2000. For fiscal 2001, revenue increased due to the
acquisition of International Training, Inc. ("ITI"), which was acquired as part
of the acquisition of O'Gara and is included in the Services Division from the
date of acquisition.
Cost of sales. Cost of sales increased $13.0 million, or 24.9%, to $65.0 million
for fiscal 2001 compared to $52 million for fiscal 2000. This increase was due
primarily to the acquisition of ITI. As a percentage of total revenue, cost of
sales increased to 68.5% of total revenues for fiscal 2001 from 64.2% for fiscal
2000. Increased cost of sales is directly related to revenue increases
associated with the ITI acquisition and internal revenue growth in our
ArmorGroup Services Division. Increasing cost of sales as a percentage of total
revenue reflects a shift in revenue mix in the ArmorGroup Service Division from
investigations to security services which has lower margins. During 2001,
ArmorGroup abandoned its US Investigations strategy by closing several higher
margin business units while replacing this revenue with growth in lower margin
security consulting service revenue.
Operating expenses. Operating expenses increased $4.4 million, or 22.1%, to
$24.5 million (25.8% of total revenues) for fiscal 2001 compared to $20.1
million (24.7% of total revenues) for fiscal 2000. This increase was due to
additional operating expenses associated with ITI's operations, acquired in
August 2001 as well as internal revenue growth.
Amortization. Amortization expense decreased $206,000, or 11.9%, to $1.5 million
for fiscal 2001 compared to $1.7 million for fiscal 2000. The reduction in
amortization expense resulted from goodwill write-offs contained in our
restructuring charge in the first quarter of 2001. In accordance with SFAS 142,
we did not amortize the goodwill from acquisitions in the Services Division,
which occurred after June 30, 2001.
Restructuring and related charges. In January 2001, our Board of Directors
approved a restructuring plan to close its Services Division's U.S.
investigative businesses, realign the division's organization, eliminate excess
facilities and reduce overhead in its business worldwide. In connection with
this restructuring charge, the Services Division performed a review of its
long-lived assets to identify potential impairments. Pursuant to this
restructuring plan, the Company a) eliminated 26 employees, primarily from its
investigative business; b) eliminated an additional 24 employees from its
security consulting business; c) incurred lease and other exit costs as a result
of the closure of its investigative businesses; and d) wrote-down the value of
both tangible and intangible assets as a result of the impairment review. Most
of the significant actions contemplated by the restructuring plan have been
completed during fiscal 2001.
74
As a result of the restructuring plan, we recorded a pre-tax charge of
$10.3 million. As of December 31, 2001, we had a remaining liability of $354,000
relating to lease termination and other exit costs. This liability has been
classified in accrued expenses and other current liabilities on our consolidated
balance sheet and will be funded through cash provided by operating activities
and our credit facility.
Equity in earnings of investees. Equity in earnings of investee was $87,000 in
fiscal 2000 and relates to our 20% investment in Jardine Securicor Gurkha
Services Limited, a Hong Kong joint venture company ("JSGS"), which we sold
during fiscal 2000.
Integration and other non-recurring charges. Integration and other non-recurring
charges increased $74,000, or 10.5% to $776,000 for fiscal 2001 compared to
$702,000 for fiscal 2000. Fiscal 2001 integration expenses represent costs
associated with the acquisitions and integration of ITI. Fiscal 2000 integration
expenses included costs associated with the acquisitions of OVG/Traquair and
Special Clearance Services and other one time expenses incurred in the third
quarter of 2000.
Operating (loss) income. Operating loss was $7.1 million for fiscal 2001,
compared to operating income of $6.6 million for fiscal 2000 due to the factors
discussed above.
Interest expense (income), net. Interest expense (income), net increased
$96,000, or 204.3%, to $143,000 for fiscal 2001 compared to $47,000 for fiscal
2000. This increase was due to increased utilization of the Services Division's
overdraft line of credit.
Other (income) expense, net. Other income, net decreased $1.5 million, or 87.4%
to $218,000 in fiscal 2001, compared to $1.7 million in fiscal 2000 which
includes a gain related to the sale of our investment in JSGS in fiscal 2000.
(Loss) income from discontinued operations before provision for income taxes
(benefit). Loss from discontinued operations before provision for income taxes
(benefit) was $7.1 million for fiscal 2001 compared to income of $8.3 million
for fiscal 2000 due to the reasons discussed above.
(Benefit) provision for income taxes. (Benefit) provision for income taxes was
($2.5) million for fiscal 2001 compared to $2.1 million for fiscal 2000. The
effective tax rate for fiscal 2001 was 35.5% compared to 25.3% for fiscal 2000.
The decrease in benefit is primarily due to the inclusion in taxable income of
certain expenses not deductible for tax purposes, including an $11.9 million
charge for the impairment of long-lived assets.
(Loss) income from discontinued operations. Loss from discontinued operations
was $4.6 million for fiscal 2001 compared to income from discontinued operations
of $6.2 million for fiscal 2000 due to the factors discussed above.
QUARTERLY RESULTS
Set forth below are certain unaudited quarterly financial data for each of
our last eight quarters and certain such data expressed as a percentage of our
revenue for the respective quarters. The information has been derived from
unaudited financial statements that, in the opinion of
75
management, include all adjustments (consisting only of normal recurring
adjustments) necessary to fairly present such quarterly information in
accordance with generally accepted accounting principles. The operating results
for any quarter are not necessarily indicative of the results to be expected for
any future period.
76
QUARTER ENDED
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Dec 31, Sept 30, Jun 30, Mar 31, Dec 31, Sept 30, Jun 30, Mar 31,
2002 2002 2002 2002 2001 2001 2001 2001
--------------------------------------------------------------------------------------------
Revenues
Products $ 48,897 $ 49,047 $ 43,057 $ 38,945 $ 42,285 $ 39,315 $ 38,100 $ 30,168
Mobile Security 34,454 31,510 28,548 30,659 37,883 9,349 -- --
--------------------------------------------------------------------------------------------
Total Revenue 83,351 80,557 71,605 69,604 80,168 48,664 38,100 30,168
Operating income 10,815 10,337 8,168 9,045 10,590 5,328 7,127 3,628
Interest expense, net 254 343 284 42 1,334 1,102 775 653
Other expense (income), net 128 (13) -- (64) (228) 146 -- --
--------------------------------------------------------------------------------------------
Income from continuing operations 10,433 10,007 7,884 9,067 9,484 4,080 6,352 2,975
before taxes
Provision for income taxes 2,451 7,043 3,060 3,500 2,925 1,607 2,503 1,172
--------------------------------------------------------------------------------------------
Income from continuing operations 7,982 2,964 4,824 5,567 6,559 2,473 3,849 1,803
(Loss) income from discontinuing
operations before taxes (23,862) (17,032) (817) 244 (1,042) 1,058 362 (7,443)
(Benefit) provision for income taxes (2,863) 639 (68) (149) 114 (292) (87) (2,244)
--------------------------------------------------------------------------------------------
(Loss) income from discontinuing
operations (20,999) (17,671) (749) 393 (1,156) 1,350 449 (5,199)
--------------------------------------------------------------------------------------------
Net (loss) income $(13,017) $(14,707) $ 4,075 $ 5,960 $ 5,403 $ 3,823 $ 4,298 $ (3,396)
============================================================================================
Net income/(loss) per common share -
Basic
Income from continuing operations $ 0.27 $ 0.10 $ 0.15 $ 0.18 $ 0.25 $ 0.10 $ 0.17 $ 0.08
Loss from discontinuing operations (0.71) (0.60) (0.02) 0.01 (0.04) 0.06 0.02 (0.23)
--------------------------------------------------------------------------------------------
Basic (loss) earnings per share $ (0.44) $ (0.50) $ 0.13 $ 0.19 $ 0.21 $ 0.16 $ 0.19 $ (0.15)
============================================================================================
Net income/(loss) per common share -
Diluted
Income from continuing operations $ 0.27 $ 0.10 $ 0.15 $ 0.17 $ 0.24 $ 0.10 $ 0.16 $ 0.08
Loss from discontinuing operations (0.71) (0.59) (0.02) 0.02 (0.04) 0.06 0.02 (0.22)
--------------------------------------------------------------------------------------------
Diluted (loss) earnings per share $ (0.44) $ (0.49) $ 0.13 $ 0.19 $ 0.20 $ 0.16 $ 0.18 $ (0.14)
============================================================================================
Weighted average common shares
outstanding
Basic 29,456 29,708 31,193 31,030 26,138 23,645 23,007 22,861
Diluted 29,623 30,037 32,110 31,986 27,206 24,317 23,682 23,650
Revenues
Products 58.7% 60.9% 60.1% 56.0% 52.7% 80.8% 100.0% 100.0%
Mobile Security 41.3% 39.1% 39.9% 44.0% 47.3% 19.2% 0.0% 0.0%
--------------------------------------------------------------------------------------------
Total revenue 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Operating income 13.0% 12.8% 11.4% 13.0% 13.2% 10.9% 18.7% 12.0%
Interest expense, net 0.3% 0.4% 0.4% 0.1% 1.7% 2.3% 2.0% 2.2%
Other expense (income), net 0.2% 0.0% 0.0% (0.1%) (0.3%) 0.3% 0.0% 0.0%
--------------------------------------------------------------------------------------------
Income from continuing operations 12.5% 12.4% 11.0% 13.0% 11.8% 8.4% 16.7% 9.9%
before taxes
Provision for income taxes 2.9% 8.7% 4.3% 5.0% 3.6% 3.3% 6.6% 3.9%
--------------------------------------------------------------------------------------------
Income from continuing operations 9.6% 3.7% 6.7% 8.0% 8.2% 5.1% 10.1% 6.0%
Income from discontinuing operations (28.6%) (21.1%) (1.1%) 0.4% (1.3%) 2.2% 1.0% (24.7%)
before taxes
(Benefit) provision for income taxes (3.4%) 0.8% (0.1%) (0.2%) (0.1%) (0.6%) (0.2%) (7.4%)
--------------------------------------------------------------------------------------------
Loss from discontinuing operations (25.2%) (21.9%) (1.0%) 0.6% (1.4%) 2.8% 1.2% (17.2%)
--------------------------------------------------------------------------------------------
Net income (15.6%) (18.3%) 5.7% 8.6% 6.7% 7.9% 11.3% (11.3%)
============================================================================================
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,
77
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 collateralized 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 September 30, 2003 we were in compliance with all of our negative
and affirmative covenants.
On August 12, 2003, we completed a private placement of $150 million
aggregate principal amount of 8 1/4% Senior Subordinated Notes due 2013 (the
"Notes"). The Notes are guaranteed by all of our domestic subsidiaries, except
USDS, Inc., on a senior subordinated basis. The Notes have been sold to
qualified institutional buyers in reliance on Rule 144A of the Securities Act of
1933 and to non-U.S. persons in reliance on Regulation S under the Securities
Act. The Notes were rated B1/B+ by Moody's Investors' Service and Standard &
Poor's Rating Services, respectively. We intend to use the net proceeds of the
offering to fund future acquisitions, including our pending acquisition of
Simula, Inc., repay a portion of our outstanding debt and for general corporate
and working capital purposes, including the funding of capital expenditures.
On September 2, 2003, we entered into interest rate swap agreements,
designated as a fair value hedge as defined under Statement of Financial
Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedge
Activities," (SFAS 133) with a notional amount totaling $150 million. The
agreements were entered to exchange the fixed interest rate on the Notes for a
variable interest rate equal to six-month LIBOR, set in arrears, plus a spread
ranging from 2.735% to 2.75% fixed semi-annually on the fifteenth of February
and August. The agreements are subject to other terms and conditions common to
transactions of this type. In accordance with SFAS 133, changes in the fair
value of the interest rate swap agreements offset changes in the fair value of
the fixed rate debt due to changes in the market interest rate. Accordingly, the
other assets on the Condensed Consolidated Balance Sheet as of September 30,
2003 increased by $8.0 million, which reflected an increase in the fair value of
the interest rate swap agreements. The corresponding increase in the hedge
liability was recorded in long-term debt. The agreements are deemed to be a
perfectly
78
effective fair value hedge and therefore qualify for the short-cut method of
accounting under SFAS 133. As a result, no ineffectiveness is expected to be
recognized in our earnings associated with the interest rate swap agreements.
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 depending upon market
conditions and other factors, of up to an additional 4.4 million shares. During
the three-months ended September 30, 2003 no additional shares were repurchased.
Through September 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 September 30, 2003, we had 28,147,466
shares of common stock outstanding.
We expect to continue our policy of repurchasing our common stock from
time to time. In addition, our Credit Facility permits us to repurchase shares
of our common stock with no limitation if our ratio of Consolidated Total
Indebtedness to Consolidated EBITDA (as such terms are defined in the Credit
Facility) 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 $230.2 million and $89.0
million as of September 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
$5.6 million through the nine months ended September 30, 2003. Our fiscal 2003
capital expenditures for discontinued operations are expected to be
approximately $4.0 million, of which we have already spent approximately $2.8
million through the nine months ended September 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 the Notes and the sale of discontinued operations, cash on hand and
available borrowings under the Credit Facility 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.
INFLATION
We believe that the relatively moderate rates of inflation in recent years have
not had a significant impact on our revenue or profitability. Historically, we
have been able to offset any inflationary effects by either increasing prices or
improving cost efficiencies.
79
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of our Common Stock as of December 30, 2003, by (i) each person or
entity known to us owning beneficially 5% or more of our Common Stock, (ii) each
of our directors and nominees for directors, (iii) each of our executive
officers and (iv) all directors, nominees for directors and executive officers
as a group. Unless otherwise noted shares are owned directly or indirectly with
sole voting and investment power.
SHARES
------
BENEFICIALLY
------------
NAME AND ADDRESS OWNED(1) PERCENT (1), (16)
---------------- -------- -----------------
T. Rowe Price Associates, Inc. (2) 3,033,700 11.0%
Westfield Capital Management Co. LLC (3) 2,956,000 10.7%
Warren B. Kanders and Kanders Florida Holdings, Inc. (4) 2,515,655 8.8%
Lord Abbett & Co. (5) 1,710,781 6.2%
Wellington Management Company, LLP (6) 1,609,200 5.8%
Burtt R. Ehrlich (7) 146,650 *
Nicholas Sokolow (8) 208,700 *
Thomas W. Strauss (9) 138,500 *
Alair A. Townsend (10) 109,716 *
Deborah Zoullas (11) 16,000 *
Robert R. Schiller (12) 389,339 1.0%
Stephen E. Croskrey (13) 259,116 *
Robert F. Mecredy (14) 18,466 *
All directors, nominees for directors and executive officers as
a group (9 persons) (15) 3,814,086 12.8%
------------------
* Less than 1%
(1) As used in this table, a beneficial owner of a security includes any
person who, directly or indirectly, through contract, arrangement,
understanding, relationship or otherwise has or shares (a) the power
to vote, or direct the voting of, such security or (b) investment
power which includes the power to dispose, or to direct the
disposition of, such security. In addition, a person is deemed to be
the beneficial owner of a security if that person has the right to
acquire beneficial ownership of such security within 60 days.
80
(2) This information has been obtained from the Schedule 13G filed by T.
Rowe Price Associates, Inc. on February 3, 2003. The address of T.
Rowe Price Associates, Inc. is 100 E. Pratt Street, Baltimore,
Maryland 21202.
(3) This information has been obtained from the Schedule 13G filed by
Westfield Capital Management Co. LLC on December 5, 2002. The
address of Westfield Capital Management Co. LLC is One Financial
Center, Boston, MA 02111.
(4) Of such shares, Kanders Florida Holdings, Inc., of which Mr. Kanders
is the sole stockholder and sole director, owns 2,098,395 shares.
Includes options to purchase 412,500 shares of common stock.
Excludes unvested restricted stock awards of 110,447 shares and
vested deferred restricted stock awards of 200,000 shares granted to
Mr. Kanders over which Mr. Kanders does not have voting or
dispositive power and unvested options to purchase 685,000 shares of
common stock. Also includes 4,760 shares held for the benefit of Mr.
Kanders' children.
(5) This information has been obtained from the Schedule 13G filed by
Lord Abbett & Co. on January 30, 2003. The address of Lord, Abbett &
Co. is 90 Hudson Street, Jersey City, New Jersey 07302.
(6) This information has been obtained from Schedule 13G filed by
Wellington Management Company, LLP on February 14, 2003. The amount
reported consists of shares of common stock owned by clients of
Wellington Management. The address of Wellington Management is 75
State Street, Boston, MA 02109.
(7) Includes options to purchase 51,750 shares of common stock. Excludes
unvested options to purchase 6,750 shares of common stock. Also
includes 5,000 shares owned by Mr. Ehrlich's children and 6,500
shares in trust for the benefit of his children, of which Mr.
Ehrlich's spouse is trustee, of which he disclaims beneficial
ownership. Also includes 400 shares owned by Mr. Ehrlich's spouse's
individual retirement account of which Mr. Ehrlich disclaims
beneficial ownership.
(8) Includes options to purchase 127,500 shares of common stock.
Excludes unvested options to purchase 7,500 shares of common stock.
Also includes 60,000 shares owned by S.T. Investors Fund, LLC, a
limited liability company of which Mr. Sokolow is a member, 10,000
shares owned by Mr. Sokolow's profit sharing plan and 11,200 shares
held for the benefit of Mr. Sokolow's children and of which Mr.
Sokolow disclaims beneficial ownership.
(9) Includes options to purchase 126,000 shares of common stock.
Excludes unvested options to purchase 6,000 shares of common stock.
(10) Includes options to purchase 100,000 shares of common stock.
Excludes unvested options to purchase 6,000 shares of common stock.
(11) Includes options to purchase 16,000 shares of common stock. Excludes
unvested options to purchase 26,000 shares of common stock.
(12) Includes options to purchase 275,000 shares of common stock and
8,665 shares of restricted common stock. Excludes deferred
performance stock awards of 150,000 shares and unvested restricted
stock awards of 100,000 shares granted to Mr. Schiller over which
Mr. Schiller does not have voting or dispositive power. Excludes
unvested options to purchase 350,000 shares of common stock.
(13) Includes options to purchase 250,000 shares of common stock.
Excludes unvested options to purchase 100,000 shares of common stock
and unvested restricted stock award of 2,089 shares granted to Mr.
Croskrey over which Mr. Croskrey does not have voting or dispositive
power.
(14) Includes options to purchase 16,666 shares of common stock. Excludes
unvested restricted stock awards of 4,200 shares over which Mr.
Mecredy does not have voting or dispositive power. Excludes unvested
options to acquire 108,334 shares of common stock.
(15) See footnotes (4) and (7-14).
(16) Percent is based on 28,269,145 shares of common stock outstanding as
of December 30, 2003.
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THE EXCHANGE OFFER
PURPOSE OF THE EXCHANGE OFFER
We issued the old notes on August 12, 2003 to Wachovia Capital Markets,
LLC, the initial purchaser, pursuant to a purchase agreement, dated August 6,
2003, among Armor Holdings, the subsidiary guarantors listed on the signature
pages thereto, and the initial purchaser. The initial purchaser subsequently
sold the old notes to "qualified institutional buyers", as defined in Rule 144A
under the Securities Act, in reliance on Rule 144A, and outside the United
States under Regulation S of the Securities Act. As a condition to the sale of
the old notes, we entered into a registration rights agreement with the initial
purchaser on August 12, 2003.
Pursuant to the registration rights agreement, we agreed that we would:
o file a registration statement with the Commission with respect to
the new notes no later than 150 days after the date of initial
issuance of the old notes;
o use our reasonable best efforts to cause the registration statement
to be declared effective by the Commission no later than 195 days
after the date of initial issuance of the old notes;
o consummate the exchange offer no later than 225 days after the date
of initial issuance of the old notes;
o file a shelf registration statement for the resale of the new notes
if we cannot effect an exchange offer or in certain other
circumstances;
o use our reasonable best efforts to cause the shelf registration
statement, if necessary, to be declared effective; and
o use our reasonable best efforts to keep the shelf registration
statement continuously effective for a period of at least two years
subject to certain provisions of the registration rights agreement.
Upon the effectiveness of the registration statement, we will offer the
new notes in exchange for the old notes.
RESALE OF THE NEW NOTES
Based upon an interpretation by the staff of the Commission contained in
no-action letters issued to third parties, we believe that you may exchange old
notes for new notes in the ordinary course of business. For further information
on the Commission's position, see Exxon Capital Holdings Corporation, available
April 13, 1989, Morgan Stanley & Co. Incorporated, available June 5, 1991 and
Shearman & Sterling, available July 2, 1993, and other interpretive letters to
similar effect. You will be allowed to resell new notes to the public without
further registration
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under the Securities Act and without delivering to purchasers of the new notes a
prospectus that satisfies the requirements of Section 10 of the Securities Act
so long as you do not participate, do not intend to participate, and have no
arrangement with any person to participate, in a distribution of the new notes.
However, the foregoing does not apply to you if you are:
o a broker-dealer who receives the new notes directly from us to
resell pursuant to Rule 144A or any other available exemption under
the Securities Act; or
o an "affiliate" of ours within the meaning of Rule 405 under the
Securities Act.
In addition, if:
o you are a broker-dealer; or
o you acquire new notes in the exchange offer for the purpose of
distributing or participating in the distribution of the new notes,
you cannot rely on the position of the staff of the Commission contained in the
no-action letters mentioned above and must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
resale transaction, unless an exemption from registration is otherwise
available.
Each broker-dealer that receives new notes for its own account in exchange
for old notes, which the broker-dealer acquired as a result of market-making
activities or other trading activities, must acknowledge that it will deliver a
prospectus in connection with any resale of the new notes. See "Plan of
Distribution." The letter of transmittal states that by so acknowledging and by
delivering a prospectus, a broker-dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act. A broker-dealer may
use this prospectus, as it may be amended or supplemented from time to time, in
connection with resales of new notes received in exchange for old notes which
the broker-dealer acquired as a result of market-making or other trading
activities.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions described in this prospectus
and in the letter of transmittal, we will accept any and all outstanding old
notes validly tendered and not withdrawn before the expiration date for an equal
amount of new notes which are registered under the Securities Act, subject to
the satisfaction of certain conditions. We will issue $1,000 principal amount of
new notes in exchange for each $1,000 principal amount of outstanding old notes
surrendered pursuant to the exchange offer. You may tender old notes only in
integral multiples of $1,000.
The form and terms of the new notes are the same as the form and terms of
the old notes except that we have registered the new notes under the Securities
Act and, therefore, the new notes will not bear legends restricting their
transfer.
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The new notes will evidence the same debt as the old notes and will be
issued under the same indenture, so the new notes and the old notes will be
treated as a single class of debt securities under the indenture.
As of the date of this prospectus, $150,000,000 in aggregate principal
amount of the old notes is outstanding. Only registered holders of the old
notes, or their legal representative or attorney-in-fact, as reflected on the
records of the trustee under the indenture, may participate in the exchange
offer. We will not set a fixed record date for determining registered holders of
the old notes entitled to participate in the exchange offer.
You do not have any appraisal or dissenters' rights under the indenture in
connection with the exchange offer. We intend to conduct the exchange offer in
accordance with the provisions of the registration rights agreement and the
applicable requirements of the Securities Act, the Exchange Act and the rules
and regulations of the Commission.
We will be deemed to have accepted validly tendered old notes when, as and
if we had given oral or written notice of acceptance to the exchange agent. The
exchange agent will act as your agent for the purposes of receiving the new
notes from us.
If you tender old notes in the exchange offer, you will not be required to
pay brokerage commissions or fees or, subject to the instructions in the letter
of transmittal, transfer taxes with respect to the exchange of outstanding
notes. We will pay all charges and expenses, other than applicable taxes, in
connection with the exchange offer.
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "expiration date" will mean 5:00 p.m., New York City time, on
March 23, 2004, unless we, in our sole discretion, extend the exchange offer, in
which case the term "expiration date" will mean the latest date and time to
which we extend the exchange offer. To extend the exchange offer, we will:
o notify the exchange agent of any extension orally or in writing; and
o notify the registered holders of the old notes by means of a press
release or other public announcement, each before 9:00 a.m., New
York City time, on the next business day after the previously
scheduled expiration date.
We reserve the right, in our reasonable discretion:
o to delay accepting any old notes until such time as the conditions
listed under "-Conditions" are satisfied or waived;
o to extend the exchange offer;
o if any conditions listed below under "-Conditions" are not
satisfied, to terminate the exchange offer by giving oral or written
notice to the exchange agent; or
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o to waive any conditions in any respect, by giving oral or written
notice to the exchange agent.
If we terminate the exchange offer, we will return the old notes deposited
by the holder of the old notes in accordance with the procedures described in
this prospectus under "-Return of Notes."
Any delay in acceptance, extension, or termination will be followed as
soon as practicable by a press release or other public announcement or
post-effective amendment.
If the exchange offer is amended in a manner determined by us to
constitute a material change, we will promptly disclose that amendment by means
of a prospectus supplement or post-effective amendment that will be distributed
to the holders. We will also extend the exchange offer for a period of five to
ten business days, depending upon the significance of the amendment and the
manner of disclosure to the holders, if the exchange offer would otherwise
expire during the five to ten business day period.
INTEREST ON THE NEW NOTES
The new notes will each accrue interest on the same terms as the old
notes. Interest on the notes will accrue at the rate of 8 1/4% per annum and
will be payable semi-annually in arrears on February 15 and August 15,
commencing on February 15, 2004. We will make each interest payment to the
Holders of record on the immediately preceding February 1 and August 1. Old
notes accepted for exchange will not receive accrued interest thereon at the
time of exchange. However, each new note will bear interest from the most recent
date to which interest has been paid on the old notes, or if no interest has
been paid on the old notes or the new notes, from August 12, 2003.
PROCEDURES FOR TENDERING
You may tender old notes in the exchange offer only if you are a
registered holder of old notes. To tender in the exchange offer, you must:
o complete, sign and date the letter of transmittal or a facsimile of
the letter of transmittal;
o have the signatures guaranteed if required by the letter of
transmittal; and
o mail or otherwise deliver the letter of transmittal or the facsimile
of the letter of transmittal to the exchange agent at the address
listed below under "-Exchange Agent" for receipt before the
expiration date.
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In addition, either:
o the exchange agent must receive certificates for the old notes along
with the letter of transmittal into its account at the depositary
pursuant to the procedure for book-entry transfer described below
before the expiration date;
o the exchange agent must receive a timely confirmation of a
book-entry transfer of the old notes, if the procedure is available,
into its account at the depositary pursuant to the procedure for
book-entry transfer described below before the expiration date; or
o you must comply with the guaranteed delivery procedures described
below.
Your tender, if not withdrawn before the expiration date, will constitute
an agreement between you and us in accordance with the terms and subject to the
conditions described in this prospectus and in the letter of transmittal.
The method of delivery of old notes and the letter of transmittal and all
other required documents to the exchange agent is at your election and risk. We
recommend that instead of delivery by mail, you use an overnight or hand
delivery service, properly insured. In all cases, you should allow sufficient
time to assure delivery to the exchange agent before the expiration date. You
should not send letters of transmittal or old notes to us. You may request your
respective brokers, dealers, commercial banks, trust companies or nominees to
effect the transactions described above for you.
If you are a beneficial owner of old notes whose old notes are registered
in the name of a broker, dealer, commercial bank, trust company or other nominee
and you wish to tender your old notes, you should contact the registered holder
promptly and instruct the registered holder to tender on your behalf. If you
wish to tender on your own behalf, before completing and executing the letter of
transmittal and delivering the old notes you must either:
o make appropriate arrangements to register ownership of the old notes
in your name; or
o obtain a properly completed bond power from the registered holder.
The transfer of registered ownership may take considerable time. Unless
the old notes are tendered:
o by a registered holder who has not completed the box entitled
"Special Issuance Instructions" or the box entitled "Special
Delivery Instructions" on the letter of transmittal; or
o for the account of:
o a member firm of a registered national securities exchange or
of the National Association of Securities Dealers, Inc.;
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o a commercial bank or trust company located or having an office
or correspondent in the United States; or
o an "eligible guarantor institution" within the meaning of Rule
17Ad-15 under the Exchange Act that is a member of one of the
recognized signature guarantee programs identified in the
letter of transmittal,
an eligible guarantor institution must guarantee the signatures on a letter of
transmittal or a notice of withdrawal described below under "-Withdrawal of
Tenders".
If the letter of transmittal is signed by a person other than the
registered holder, the old notes must be endorsed or accompanied by a properly
completed bond power, signed by the registered holder as the registered holder's
name appears on the old notes.
If the letter of transmittal or any old notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, they
should so indicate when signing, and unless waived by us, they must submit
evidence satisfactory to us of their authority to so act with the letter of
transmittal.
The exchange agent and the depositary have confirmed that any financial
institution that is a participant in the depositary's system may utilize the
depositary's Automated Tender Offer Program ("ATOP") to tender notes. Holders of
old notes utilizing the ATOP system must transmit to the exchange agent, on or
before the expiration date, a computer-generated message through the ATOP system
that is received by the exchange agent and which forms a part of a confirmation
of book-entry transfer in which you acknowledge and agree to be bound by the
terms of the letter of transmittal.
We will determine in our sole discretion all questions as to the validity,
form, eligibility, including time of receipt, acceptance and withdrawal of
tendered old notes, which determination will be final and binding. We reserve
the absolute right to reject any and all old notes not properly tendered or any
old notes our acceptance of which would, in the opinion of our counsel, be
unlawful. We also reserve the right to waive any defects, irregularities or
conditions of tender as to particular old notes. Our interpretation of the terms
and conditions of the exchange offer, including the instructions in the letter
of transmittal, will be final and binding on all parties. Unless waived, you
must cure any defects or irregularities in connection with tenders of old notes
within the time we determine. Although we intend to notify you of defects or
irregularities with respect to tenders of old notes, neither we, the exchange
agent nor any other person will incur any liability for failure to give you that
notification. Unless waived, we will not deem tenders of old notes to have been
made until you cure the defects or irregularities.
While we have no present plan to acquire any old notes that are not
tendered in the exchange offer or to file a registration statement to permit
resales of any old notes that are not tendered in the exchange offer, we reserve
the right in our sole discretion to purchase or make offers for any old notes
that remain outstanding after the expiration date. We also reserve the right to
terminate the exchange offer, as described below under "-Conditions", and, to
the extent permitted by applicable
87
law, purchase old notes in the open market, in privately negotiated transactions
or otherwise. The terms of any of those purchases or offers could differ from
the terms of the exchange offer.
If you wish to tender old notes in exchange for new notes in the exchange
offer, we will require you to represent that:
o you are not an affiliate of ours;
o you are not a broker-dealer tendering old notes acquired for your
own account directly from us;
o you will acquire any new notes in the ordinary course of your
business; and
o you are not engaged in, and do not intend to engage in, and have no
arrangement or understanding to participate in, a distribution of
the new notes to be issued in the exchange offer.
In addition, in connection with the resale of new notes, any participating
broker-dealer who acquired the old notes for its own account as a result of
market-making or other trading activities must deliver a prospectus meeting the
requirements of the Securities Act. The Commission has taken the position that
participating broker-dealers may fulfill their prospectus delivery requirements
with respect to the new notes, other than a resale of an unsold allotment from
the original sale of the old notes, with the prospectus contained in the
registration statement.
RETURN OF NOTES
If we do not accept any tendered old notes for any reason described in the
terms and conditions of the exchange offer or if you withdraw any tendered old
notes or submit old notes for a greater principal amount than you desire to
exchange, we will return the unaccepted, withdrawn or non-exchanged old notes
without expense to you as promptly as practicable after the expiration or
termination of the exchange offer. In the case of old notes tendered by
book-entry transfer into the exchange agent's account at the depositary pursuant
to the book-entry transfer procedures described below, we will credit the old
notes to an account maintained with the depositary as promptly as practicable.
BOOK-ENTRY TRANSFER
The exchange agent will make a request to establish an account with
respect to the old notes at the depositary for purposes of the exchange offer
within two business days after the date of this prospectus, and any financial
institution that is a participant in the depositary's systems may make
book-entry delivery of old notes by causing the depositary to transfer the old
notes into the exchange agent's account at the depositary in accordance with the
depositary's procedures for transfer. However, although delivery of old notes
may be effected through book-entry transfer at the depositary, you must transmit
and the exchange agent must receive, the letter of transmittal or a facsimile of
the letter of transmittal, with any required signature guarantees and any other
required
88
documents, at the address below under "-Exchange Agent" on or before the
expiration date or pursuant to the guaranteed delivery procedures described
below.
GUARANTEED DELIVERY PROCEDURES
If you wish to tender your old notes, but time will not permit a letter of
transmittal, certificates representing the old notes to be tendered or other
required documents to reach the exchange agent before the expiration date, or if
the procedure for book-entry transfer cannot be completed on or before the
expiration date, you may effect a tender if:
o the tender is made by or through an eligible guarantor institution;
o before the expiration date, the exchange agent receives from the
eligible guarantor institution a properly completed and duly
executed notice of guaranteed delivery, substantially in the form
provided by us, that:
o states the name and address of the holder of the old notes,
the name(s) in which the old notes are registered and the
principal amount of old notes tendered,
o states that the tender is being made by that notice of
guaranteed delivery, and
o guarantees that, within three New York Stock Exchange trading
days after the expiration date, the eligible guarantor
institution will deposit with the exchange agent the letter of
transmittal, together with the certificates representing the
old notes in proper form for transfer or a confirmation of a
book-entry transfer, as the case may be, and any other
documents required by the letter of transmittal; and
o within three New York Stock Exchange trading days after the
expiration date, the exchange agent receives a properly executed
letter of transmittal, as well as the certificates representing all
tendered old notes in proper form for transfer or a book-entry
confirmation, as the case may be, and all other documents required
by the letter of transmittal.
Upon request, the exchange agent will send to you a notice of guaranteed
delivery if you wish to tender your old notes according to the guaranteed
delivery procedures described above.
WITHDRAWAL OF TENDERS
Except as otherwise provided in this prospectus, you may withdraw tenders
of old notes at any time before 5:00 p.m., New York City time, on the expiration
date.
To withdraw a tender of old notes in the exchange offer, the exchange
agent must receive a written or facsimile transmission notice of withdrawal at
its address listed in this prospectus before the expiration date. Any notice of
withdrawal must:
o specify the name of the person who deposited the old notes to be
withdrawn;
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o identify the old notes to be withdrawn, including the principal
amount of the old notes; and
o be signed in the same manner as the original signature on the letter
of transmittal by which the old notes were tendered, including any
required signature guarantees.
We will determine in our sole discretion all questions as to the validity,
form and eligibility of the notices, and our determination will be final and
binding on all parties. We will not deem any properly withdrawn old notes to
have been validly tendered for purposes of the exchange offer, and we will not
issue new notes with respect to those old notes, unless you validly re-tender
the withdrawn old notes. You may re-tender properly withdrawn old notes by
following one of the procedures described above under "-Procedures for
Tendering" at any time before the expiration date.
CONDITIONS
Notwithstanding any other term of the exchange offer, we will not be
required to accept for exchange, or exchange the new notes for, any old notes,
and may terminate the exchange offer as provided in this prospectus before the
acceptance of the old notes, if:
o the exchange offer violates applicable law, rules or regulations or
an applicable interpretation of the staff of the Commission;
o an action or proceeding has been instituted or threatened in any
court or by any governmental agency which might materially impair
our ability to proceed with the exchange offer (the term
"threatened" means a written demand or statement has been made, or a
written notice has been given, that would lead a prudent person to
conclude that such an action or proceeding is likely to be asserted,
commenced, taken, or otherwise pursued in the future); or
o all governmental approvals which we deem necessary for the
completion of the exchange offer have not been obtained.
If we determine in our reasonable discretion that any of these conditions
are not satisfied, we may:
o refuse to accept any old notes and return all tendered old notes to
you;
o extend the exchange offer and retain all old notes tendered before
the exchange offer expires, subject, however, to your rights to
withdraw the old notes; or
o waive the unsatisfied conditions with respect to the exchange offer
and accept all properly tendered old notes that have not been
withdrawn.
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If the waiver constitutes a material change to the exchange offer, we will
promptly disclose the waiver by means of a prospectus supplement that we will
distribute to the registered holders of the old notes.
SHELF REGISTRATION
Pursuant to the registration rights agreement, in the event that:
o we are not permitted to file a registration statement or permitted
to consummate the exchange offer because the exchange offer is not
permitted by applicable law or Commission policy;
o the exchange offer is not consummated within 225 days of the date
the old notes were issued; or
o a holder of old notes so requests under certain circumstances,
we will file with the Commission a shelf registration statement to register for
public resale the old notes held by you if you provide us with the necessary
information for inclusion in the shelf registration statement.
LIQUIDATED DAMAGES
Pursuant to the registration rights agreement, if:
o we do not file the registration statement with the Commission on or
prior to the 150th day following the date of initial issuance of the
old notes;
o we do not cause the registration statement to become effective on or
prior to the 195th day following the date of initial issuance of the
old notes;
o we do not complete the exchange offer on or prior to the 225th day
following the date of initial issuance of the old notes; or
o the Commission shall have issued a stop order suspending the
effectiveness of the registration statement of which this prospectus
is a part or our shelf registration statement, as the case may be,
or proceedings have been initiated with respect to such registration
statement.
with each of the items above constituting a "registration default", we agreed to
pay liquidated damages to the holders, with respect to the first 90-day period
immediately following the occurrence of the first registration default in an
amount equal to 0.5% per annum per $1,000 principal amount of old notes held by
such holder. The amount of the liquidated damages will increase by an additional
0.5% per annum per $1,000 principal amount of old notes with respect to each
subsequent 90-day period until all registration defaults have been cured, up to
a maximum amount of liquidated damages for all registration defaults of 1.0% per
annum per $1,000 principal
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amount of old notes. Following the cure of all registration defaults, the
accrual of liquidated damages will cease.
EXCHANGE AGENT
We have appointed Wachovia Bank, National Association, as exchange agent for the
exchange offer. You should direct questions and requests for assistance,
requests for additional copies of this prospectus or the letter of transmittal
and requests for a notice of guaranteed delivery to the exchange agent addressed
as follows:
By Registered or Certified Mail:
Wachovia Bank, National Association
Corporate Trust Operations
1525 West W. T. Harris Boulevard
Charlotte, North Carolina 28288
Attn.: Marsha Rice
Telephone # (704) 490-7413
Fax # (704) 590-7628
By Hand/Overnight Delivery:
Wachovia Bank, National Association
Corporate Trust Operations
1525 West W.T. Harris Boulevard
Charlotte, North Carolina 28262
Attn.: Marsha Rice
Delivery to an address other than the one stated above or transmission via
a facsimile number other than the one stated above will not constitute a valid
delivery.
FEES AND EXPENSES
We will bear all expenses incident to our or the guarantors' performance
of or compliance with the registration rights agreement, regardless of whether
the registration statement becomes effective, including without limitation:
o all registration and filing fees and expenses (including filings
made by the initial purchaser or holder of notes with the National
Association of Securities Dealers, Inc. (and, if applicable, the
fees and expenses of any "qualified independent underwriter" and its
counsel that may be required by the rules and regulations of the
NASD));
o all fees and expenses for compliance with Federal and state
securities laws;
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o all expenses of printing (including printing certificates for the
new notes to be issued in the exchange offer and printing of
prospectuses), messenger and delivery services and telephone;
o all fees and disbursements of counsel for us, the guarantors and, as
discussed below, the holders of old notes; and
o all fees and disbursements of our and the guarantors' independent
certified public accountants.
We will bear our and the guarantors' internal expenses (including, without
limitation, all salaries and expenses of officers and employees performing legal
or accounting duties), the expenses of any annual audit and the fees and
expenses of any person, including special experts, retained by us or the
guarantors.
In connection with any registration statement required by the registration
rights agreement, we and the guarantors will reimburse the initial purchaser and
the holders of old notes being tendered in the exchange offer and/or resold
pursuant to the "Plan of Distribution" contained in the prospectus or registered
pursuant to a shelf registration statement, as applicable, for the reasonable
fees and disbursements of not more than one counsel.
CONSEQUENCE OF FAILURE TO EXCHANGE
Participation in the exchange offer is voluntary. We urge you to consult
your financial and tax advisors in making your decisions on what action to take.
Old notes that are not exchanged for new notes pursuant to the exchange offer
will remain restricted securities. Accordingly, those old notes may be resold
only:
o to a person whom the seller reasonably believes is a qualified
institutional buyer in a transaction meeting the requirements of
Rule 144A under the Securities Act;
o in a transaction meeting the requirements of Rule 144 under the
Securities Act;
o outside the United States to a foreign person in a transaction
meeting the requirements of Rule 903 or 904 of Regulation S under
the Securities Act;
o in accordance with another exemption from the registration
requirements of the Securities Act and based upon an opinion of
counsel if we so request;
o to us; or
o pursuant to an effective registration statement.
In each case, the old notes may be resold only in accordance with any
applicable blue sky or securities laws of any state of the United States or any
other applicable jurisdiction.
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The foregoing description of the exchange offer contained a summary of
certain provisions of the registration rights agreement, which is incorporated
herein by reference. It does not restate that agreement in its entirety. We urge
you to read the registration rights agreement in its entirety because it, and
not this description, defines your registration rights as holders of the old
notes.
DESCRIPTION OF THE NEW NOTES
The form and terms of the new notes and the old notes are identical in all
material respects, except that the transfer restrictions applicable to the old
notes do not apply to the new notes.
The old notes were, and the new notes will be, issued under an indenture,
dated as of August 12, 2003, as supplemented by the First Supplemental Indenture
dated as of September 30, 2003 and as further supplemented by the Second
Supplemental Indenture dated as of December 9, 2003 (collectively, the
"Indenture"), among Armor Holdings, Inc., the subsidiary guarantors listed as
signatories thereto and the Wachovia Bank, National Association, as trustee (the
"Trustee"). The terms of the new notes include those stated in the Indenture and
those made part of the Indenture by reference to the Trust Indenture Act of
1939, as amended.
The following description is a summary of the material provisions of the
Indenture. It does not restate the agreement in its entirety. We urge you to
read the Indenture because it, and not this description, defines your rights as
holders of the notes. Copies of the Indenture are available as set forth below
under "Where You Can Find More Information." You can find the definitions of
certain terms used in this description under the subheading "--Certain
Definitions." Certain defined terms used in this description but not defined
below under "--Certain Definitions" have the meanings assigned to them in the
Indenture. In this description, the word "Armor Holdings" refers only to Armor
Holdings and not to any of its subsidiaries.
The registered holder of a note will be treated as the owner of it for all
purposes. Only registered holders will have rights under the Indenture.
GENERAL
THE NEW NOTES
The notes will mature on August 15, 2013 and were issued in an aggregate
principal amount of $150,000,000. We may issue additional notes (the "Additional
Notes") from time to time after this offering, subject to the "Incurrence of
Indebtedness and Issuance of Preferred Stock" covenant. The notes and any
Additional Notes subsequently issued under the Indenture would be treated as a
single class for all purposes under the Indenture, including, without
limitation, waivers, amendments, redemptions and offers to purchase. We will
issue Additional Notes in denominations of $1,000 and integral multiples of
$1,000.
Interest on the notes is accruing at the rate of 8.25% per annum from
August 12, 2003 and will be payable semi-annually in arrears on February 15 and
August 15 of each year, commencing on February 15, 2004. We will make each
interest payment to the Holders of record on the immediately preceding February
1 and August 1.
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Interest on the notes will accrue from the date of original issuance or,
if interest has already been paid, from the most recent interest payment date to
which interest has been paid. Interest will be computed on the basis of a
360-day year comprised of twelve 30-day months.
The notes are:
o general unsecured obligations of Armor Holdings;
o subordinated in right of payment to all existing and future Senior
Debt of Armor Holdings;
o pari passu in right of payment with any future senior subordinated
Indebtedness of Armor Holdings; and
o guaranteed by the Subsidiary Guarantors.
THE SUBSIDIARY GUARANTEES
The notes are guaranteed, jointly and severally, by all of the existing
and future Domestic Subsidiaries of Armor Holdings that are Restricted
Subsidiaries, other than USDS, Inc. Each Subsidiary Guarantee of the notes are:
o a general unsecured obligation of the Subsidiary Guarantor;
o subordinated in right of payment to all existing and future Senior
Debt of the Subsidiary Guarantor; and
o pari passu in right of payment with any future senior subordinated
Indebtedness of the Subsidiary Guarantor.
As of the date hereof, all of our domestic subsidiaries, except for USDS,
Inc., will be "Restricted Subsidiaries." However, under the circumstances
described below under the "Designation of Restricted and Unrestricted
Subsidiaries" covenant we will be permitted to designate certain of our
subsidiaries as "Unrestricted Subsidiaries." Any Unrestricted Subsidiaries will
not be subject to any of the restrictive covenants in the Indenture and will not
guarantee the notes.
Each Subsidiary Guarantee will be subordinated to the prior payment in
full in cash of all Senior Debt of that Subsidiary Guarantor. The obligations of
each Subsidiary Guarantor under its Subsidiary Guarantee will be limited as
necessary to prevent that Subsidiary Guarantee from constituting a fraudulent
conveyance under applicable law. See "Risk Factors--Federal and state statutes
allow courts, under specific circumstances, to void guarantees and require
noteholders to return payments received from guarantors."
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METHODS OF RECEIVING PAYMENTS ON THE NOTES
If a Holder has given wire transfer instructions to Armor Holdings, it
will pay all principal, interest and premium and additional interest, if any, on
that Holder's notes in accordance with those instructions. All other payments on
notes will be made at the office or agency of the Paying Agent and Registrar
within New York, New York or Charlotte, North Carolina unless Armor Holdings
elects to make interest payments by check mailed to the Holders at their
addresses set forth in the register of Holders.
PAYING AGENT AND REGISTRAR FOR THE NOTES
The Trustee will initially act as Paying Agent and Registrar. We may
change the Paying Agent or Registrar without prior notice to the Holders, and we
or any of our Subsidiaries may act as Paying Agent or Registrar.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange notes in accordance with the Indenture.
The Registrar and the Trustee may require a Holder, among other things, to
furnish appropriate endorsements and transfer documents and the we may require a
Holder to pay any taxes and fees required by law or permitted by the Indenture.
We are not required to transfer or exchange any note selected for redemption.
Also, we are not required to transfer or exchange any note for a period of 15
days before a selection of notes to be redeemed.
The registered Holder of a note will be treated as the owner of it for all
purposes.
SUBORDINATION
The payment of principal, interest and premium and additional interest, if
any, on (or any other obligations relating to) the notes is subordinated to the
prior payment in full in cash of all of our Senior Debt, including our Senior
Debt incurred after the date of the Indenture.
The holders of our Senior Debt are entitled to receive payment in full in
cash of all Obligations due in respect of our Senior Debt (including interest
after the commencement of any bankruptcy proceeding at the rate specified in our
applicable Senior Debt) before the Holders of notes will be entitled to receive
any payment with respect to (or any other Obligations relating to) the notes or
any distribution of assets or proceeds (except that Holders of notes may receive
and retain Permitted Junior Securities and payments made from the trust
described under "--Legal Defeasance and Covenant Defeasance"), in the event of
any distribution to our creditors in connection with:
(1) our liquidation or dissolution, whether voluntary or involuntary;
(2) our bankruptcy, reorganization, insolvency, receivership or similar
proceeding relating to us or our property, whether voluntary or involuntary;
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(3) any assignment for the benefit of creditors; or
(4) any marshaling of our assets and liabilities.
We also may not make any payment in respect of the notes or any
distribution of assets or proceeds (except in Permitted Junior Securities or
from the trust described under "--Legal Defeasance and Covenant Defeasance") if:
(1) a payment default on our Designated Senior Debt occurs and is
continuing beyond any applicable grace period; or
(2) any other default occurs and is continuing on any series of our
Designated Senior Debt that permits holders of that series of our Designated
Senior Debt to accelerate its maturity and the Trustee receives a notice of
such default (a "Payment Blockage Notice") from us or any agent or
representative with respect to such Designated Senior Debt (a "nonpayment
default").
Payments on the notes may and shall be resumed:
(1) in the case of a payment default on our Designated Senior Debt, upon
the date on which such default is cured or waived; and
(2) in case of a nonpayment default, the earlier of the date on which such
default is cured or waived or 179 days after the date on which the applicable
Payment Blockage Notice is received by the Trustee, unless the maturity of
our Designated Senior Debt has been accelerated.
No new Payment Blockage Notice may be delivered unless and until 360 days
have elapsed since the delivery of the immediately prior Payment Blockage
Notice.
No nonpayment default that existed or was continuing on the date of
delivery of any Payment Blockage Notice to the Trustee shall be, or be made, the
basis for a subsequent Payment Blockage Notice unless such default has been
cured or waived for a period of not less than 90 days.
If the Trustee or any Holder of the notes receives a payment in respect of
the notes (except in Permitted Junior Securities or from the trust described
under "--Legal Defeasance and Covenant Defeasance") when:
(1) the payment is prohibited by these subordination provisions; and
(2) the Trustee or the Holder has actual knowledge that the payment is
prohibited;
the Trustee or the Holder, as the case may be, shall hold the payment in trust
for the benefit of the holders of our Senior Debt and shall deliver notice
thereof to the agent or representative of the holders of Senior Debt. Upon the
proper written request of the agent or representative of the holders of our
Designated Senior Debt, or, if no such Designated Senior Debt exists, the
holders of our Senior Debt, the Trustee or the Holder, as the case may be, shall
deliver the amounts in trust to the holders of our Senior Debt or their proper
representative.
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We must promptly notify holders of our Senior Debt and any agent or
representative with respect to such Senior Debt if payment of the notes is
accelerated because of an Event of Default.
As a result of the subordination provisions described above, in the event
of our bankruptcy, liquidation or reorganization, Holders of notes may recover
less ratably than our creditors who are holders of our Senior Debt. In addition,
because the subordination provisions of the Indenture require that amounts
otherwise payable, or assets distributable, to Holders of the notes in a
bankruptcy or similar proceeding be paid to holders of Senior Debt instead,
Holders of the notes may receive less ratably than our other creditors,
including holders of trade payables in any such proceeding.
Payments under the Subsidiary Guarantee by each Subsidiary Guarantor will
be subordinated to the prior payment in full in cash of all Senior Debt of such
Subsidiary Guarantor, including Senior Debt of such Subsidiary Guarantor
incurred after the date of the Indenture, on the same basis as provided above
with respect to the subordination of payments on the notes by Armor Holdings to
the prior payment in full in cash of Senior Debt of Armor Holdings. See "Risk
Factors--Risks Relating to the New Notes--Your right to receive payments on the
notes is junior to our existing senior indebtedness and possibly all of our
future borrowings. Further, the guarantees of the new notes are junior to all of
the guarantors' existing senior indebtedness and possibly to all their future
borrowings."
"Designated Senior Debt" means:
(1) any Indebtedness outstanding under the Credit Facilities; and
(2) after payment in full of all Obligations under the Credit
Facilities, any other Senior Debt permitted under the Indenture the
principal amount of which is $25.0 million or more and that has been
designated by Armor Holdings as "Designated Senior Debt."
"Permitted Junior Securities" means:
(1) Equity Interests in Armor Holdings or any Subsidiary Guarantor
or any other business entity provided for by a plan of reorganization; or
(2) debt securities of Armor Holdings or any Subsidiary Guarantor or
any other business entity provided for by a plan of reorganization, in
each case, that are subordinated to all Senior Debt and any debt
securities issued in exchange for Senior Debt to substantially the same
extent as, or to a greater extent than, the notes and the Subsidiary
Guarantees are subordinated to Senior Debt under the Indenture.
"Senior Debt" means:
(1) all Indebtedness of Armor Holdings or any Subsidiary Guarantor
outstanding under the Credit Facilities and all Hedging Obligations with
respect thereto;
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(2) any other Indebtedness (including, without limitation, Hedging
Obligations) of Armor Holdings or any Subsidiary Guarantor permitted to be
incurred under the terms of the Indenture, unless the instrument under
which such Indebtedness is incurred expressly provides that it is on a
parity with or subordinated in right of payment to the notes or any
Subsidiary Guarantee; and
(3) all other Obligations with respect to the items listed in the
preceding clauses (1) and (2).
Notwithstanding anything to the contrary in the preceding, Senior Debt
will not include:
(1) any liability for federal, state, local or other taxes owed or
owing by Armor Holdings or any Subsidiary Guarantor;
(2) any Indebtedness of Armor Holdings or any Subsidiary Guarantor
to any Subsidiaries or other Affiliates of Armor Holdings or any
Subsidiary Guarantor or, in the case of Indebtedness of any Subsidiary
Guarantor, to Armor Holdings;
(3) any trade payables;
(4) the portion of any Indebtedness that is incurred in violation of
the Indenture;
(5) any Indebtedness of Armor Holdings or any Subsidiary Guarantor
that, when incurred, was without recourse to Armor Holdings or such
Subsidiary Guarantor;
(6) any repurchase, redemption or other Obligation in respect of
Disqualified Stock or any rights with respect thereto; or
(7) any Indebtedness owed to any employee of Armor Holdings or any
of its Subsidiaries.
OPTIONAL REDEMPTION
Except as provided below, the notes are not redeemable at our option prior
to August 15, 2008. After August 15, 2008, we may redeem all or a part of the
notes, subject to any restriction or other provisions relating thereto contained
in any Senior Debt, upon not less than 30 nor more than 60 days' notice, at the
redemption prices (expressed as percentages of principal amount) set forth below
plus accrued and unpaid interest and additional interest, if any, thereon, to
the applicable redemption date, if redeemed during the twelve-month period
beginning on August 15 of the years
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indicated below:
YEAR PERCENTAGE
---- ----------
2008............................................. 104.125%
2009............................................. 102.750%
2010............................................. 101.375%
2011 and thereafter.............................. 100.000%
Notwithstanding the foregoing, at any time prior to August 15, 2006, we
may redeem up to 35% of the aggregate principal amount of notes issued under the
Indenture, subject to any restriction or other provisions relating thereto
contained in any Senior Debt, at a redemption price of 108.25% of the principal
amount thereof, plus accrued and unpaid interest and additional interest, if
any, to the redemption date, with the net cash proceeds of one or more Public
Equity Offerings; provided that:
(1) at least 65% of the aggregate principal amount of notes originally
issued under the Indenture remains outstanding immediately after the
occurrence of each such redemption (excluding notes held by Armor Holdings
and its Subsidiaries); and
(2) such redemption must occur within 60 days of the date of the closing
of each such Public Equity Offering.
If less than all of the notes are to be redeemed at any time, the Trustee
will select notes for redemption on a pro rata basis, by lot or by such method
as the Trustee shall deem fair and appropriate. The notes may only be redeemed
in integral multiples of $1,000. Notices of redemption shall be mailed by first
class mail at least 30 but not more than 60 days before the redemption date to
each Holder of notes to be redeemed at its registered address. Notices of
redemption may not be conditional.
If any note is to be redeemed in part only, the notice of redemption that
relates to that note shall state the portion of the principal amount thereof
(which must be an integral multiple of $1,000) to be redeemed. A new note in
principal amount equal to the unredeemed portion of the original note will be
issued in the name of the Holder thereof upon cancellation of the original note.
Notes called for redemption become due on the date fixed for redemption. On and
after the redemption date, interest ceases to accrue on notes or portions of
them called for redemption.
The Credit Agreement will contain provisions that prohibit or otherwise
limit Armor Holdings from exercising any such option.
MANDATORY REDEMPTION
We are not required to make mandatory redemption or sinking fund payments
with respect to the notes.
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REPURCHASE AT THE OPTION OF HOLDERS
CHANGE OF CONTROL
If a Change of Control occurs, each Holder of notes will have the right to
require us to repurchase all or any part (equal to $1,000 or an integral
multiple thereof) of that Holder's notes pursuant to a Change of Control Offer
on the terms set forth in the Indenture. In the Change of Control Offer, we will
offer a Change of Control Payment in cash equal to 101% of the aggregate
principal amount of notes repurchased plus accrued and unpaid interest and
additional interest, if any, thereon, to the date of purchase. Within 30 days
following any Change of Control, we will mail a notice to each Holder describing
the transaction or transactions that constitute the Change of Control and
offering to repurchase notes on the Change of Control Payment Date specified in
such notice, which date shall be no earlier than 30 days and no later than 90
days from the date such notice is mailed, pursuant to the procedures required by
the Indenture and described in such notice. We will comply with the requirements
of Rule 14e-1 under the Exchange Act and any other securities laws and
regulations thereunder to the extent such laws and regulations are applicable in
connection with the repurchase of the notes as a result of a Change of Control.
To the extent that the provisions of any securities laws or regulations conflict
with the Change of Control provisions of the Indenture, we will comply with the
applicable securities laws and regulations and will not be deemed to have
breached our obligations under the Change of Control provisions of the Indenture
by virtue of such compliance.
On the Change of Control Payment Date, we will, to the extent lawful:
(1) accept for payment all notes or portions thereof properly tendered
pursuant to the Change of Control Offer;
(2) deposit with the Paying Agent an amount equal to the Change of Control
Payment in respect of all notes or portions thereof so tendered; and
(3) deliver or cause to be delivered to the Trustee the notes so accepted
together with an Officers' Certificate stating the aggregate principal amount
of notes or portions thereof being purchased by us.
The Paying Agent will promptly mail or wire transfer to each Holder of
notes so tendered the Change of Control Payment for such notes, and the Trustee
will promptly authenticate and mail (or cause to be transferred by book entry)
to each Holder a new note equal in principal amount to any unpurchased portion
of the notes surrendered, if any; provided that each such new note will be in a
principal amount of $1,000 or an integral multiple thereof.
Prior to accepting notes for payment as provided in this "Change of
Control" covenant, but in any event within 60 days following a Change of
Control, we will either repay all outstanding Senior Debt or obtain the
requisite consents, if any, under all agreements governing outstanding Senior
Debt to permit the repurchase of notes required by this covenant. We will
publicly announce the results of the Change of Control Offer on or as soon as
practicable after the Change of Control Payment Date.
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The agreements governing our outstanding Designated Senior Debt and
certain of our other outstanding Senior Debt currently prohibit us from
purchasing any notes and also provide that certain change of control events
(including, without limitation, a Change of Control under the Indenture) with
respect to us would constitute a default under these agreements. Any future
credit agreements or other agreements relating to Senior Debt to which we become
a party may contain similar restrictions and provisions. In the event a Change
of Control occurs at a time when we are prohibited from purchasing notes, we
could seek the consent of the holders of such Senior Debt to the purchase of
notes or could attempt to refinance any such Senior Debt that contain such
prohibition. If we do not obtain such a consent or repay such Senior Debt, we
will remain prohibited from purchasing notes. In such case, our failure to
purchase tendered notes would constitute an Event of Default under the Indenture
which would, in turn, constitute a default under such Senior Debt. In any of the
foregoing circumstances, the subordination provisions in the Indenture would
likely prohibit payments to the Holders of notes.
The provisions described above that require us to make a Change of Control
Offer following a Change of Control will be applicable regardless of whether any
other provisions of the Indenture are applicable. This "Change of Control"
covenant will not apply to any Qualifying Services Division Sale. Except as
described above with respect to a Change of Control, the Indenture does not
contain provisions that permit the Holders of the notes to require that we
repurchase or redeem the notes in the event of a takeover, recapitalization or
similar transaction.
We will not be required to make a Change of Control Offer upon a Change of
Control if (i) a third party makes the Change of Control Offer in the manner, at
the times and otherwise in compliance with the requirements set forth in the
Indenture applicable to a Change of Control Offer made by us and purchases all
notes validly tendered and not withdrawn under such Change of Control Offer or
(ii) we effect Legal Defeasance or Covenant Defeasance of the notes under the
Indenture prior to the occurrence of such Change of Control.
The definition of Change of Control includes a phrase relating to the
direct or indirect sale, lease, transfer, conveyance or other disposition of
"all or substantially all" of the properties or assets of Armor Holdings and its
Subsidiaries taken as a whole. Although there is a limited body of case law
interpreting the phrase "substantially all," there is no precise established
definition of the phrase under applicable law. Accordingly, the ability of a
Holder of notes to require us to repurchase such notes as a result of a sale,
lease, transfer, conveyance or other disposition of less than all of our and our
Subsidiaries' assets taken as a whole to another Person or group may be
uncertain.
ASSET SALES
We will not, and will not permit any of our Restricted Subsidiaries to,
consummate an Asset Sale unless:
(1) we (or our Restricted Subsidiary, as the case may be) receive
consideration at the time of such Asset Sale at least equal to the fair
market value of the assets or Equity Interests issued or sold or otherwise
disposed of;
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(2) such fair market value is determined by our Board of Directors
and evidenced by a resolution of our Board of Directors set forth in an
Officers' Certificate delivered to the Trustee; and
(3) at least 75% of the consideration therefor received by us or our
Restricted Subsidiary is in the form of cash, cash equivalents, promissory
notes or Replacement Assets or a combination thereof; provided that, for
purposes of this provision, each of the following shall be deemed to be
cash:
(a) our liabilities (as shown on our or our Restricted
Subsidiary's most recent balance sheet) or the liabilities of any of our
Restricted Subsidiaries (other than contingent liabilities and liabilities that
are by their terms pari passu or subordinated to the notes or any Subsidiary
Guarantee and liabilities that are owed to us or any of our Affiliates) that are
assumed by the transferee of any such assets pursuant to a customary written
novation agreement that releases us or such Restricted Subsidiary from further
liability; and
(b) any securities or other obligations (other than promissory
notes) received by us or any of our Restricted Subsidiaries from such transferee
that are contemporaneously (subject to ordinary settlement periods) converted by
us or such Restricted Subsidiary into cash (to the extent of the cash received
in that conversion).
Within 365 days after the receipt of any Net Proceeds from an Asset Sale,
we may apply an amount equal to such Net Proceeds at our option:
(1) to prepay, repay or repurchase Senior Debt and, if (i) the
Senior Debt repaid is revolving credit Indebtedness and (ii) at the time
of such Asset Sale and at the time of such repayment, we are not permitted
to incur at least $1.00 of additional Indebtedness pursuant to the Fixed
Charge Coverage Ratio test set forth in the first paragraph of the
"Incurrence of Indebtedness and Issuance of Preferred Stock" covenant,
correspondingly reduce commitments with respect thereto; or
(2) to purchase Replacement Assets or to make a capital expenditure
in or that is used or useful in a Permitted Business.
Pending the final application of any such Net Proceeds, we may temporarily
reduce revolving credit borrowings or otherwise invest such Net Proceeds in any
manner that is not prohibited by the Indenture.
Any Net Proceeds from Asset Sales that are not applied or invested as
provided in the preceding paragraph will constitute "Excess Proceeds." Within 30
days after the aggregate amount of Excess Proceeds exceeds $5.0 million, we will
make an Asset Sale Offer to all Holders of notes, and all holders of other
Indebtedness that is pari passu with the notes or any Subsidiary Guarantee
containing provisions similar to those set forth in the Indenture with respect
to offers to purchase with the proceeds of sales of assets, to purchase the
maximum principal amount of notes and such other pari passu Indebtedness that
may be purchased out of the Excess Proceeds. The offer price in any Asset Sale
Offer will be equal to 100% of principal amount plus accrued and unpaid interest
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and additional interest, if any, to the date of purchase, and will be payable in
cash. If any Excess Proceeds remain after consummation of an Asset Sale Offer,
we may use such Excess Proceeds for any purpose not otherwise prohibited by the
Indenture. If the aggregate principal amount of notes and such other pari passu
Indebtedness tendered into such Asset Sale Offer exceeds the amount of Excess
Proceeds, the Trustee shall select the notes and such other pari passu
Indebtedness to be purchased on a pro rata basis based on the principal amount
of notes and such other pari passu Indebtedness tendered. Upon completion of
each Asset Sale Offer, the amount of Excess Proceeds shall be reset at zero.
We will comply with the requirements of Rule 14e-1 under the Exchange Act
and any other securities laws and regulations thereunder to the extent such laws
and regulations are applicable in connection with each repurchase of notes
pursuant to an Asset Sale Offer. To the extent that the provisions of any
securities laws or regulations conflict with the Asset Sales provisions of the
Indenture, we will comply with the applicable securities laws and regulations
and will not be deemed to have breached our obligations under the Asset Sale
provisions of the Indenture by virtue of such compliance.
The agreements governing our outstanding Designated Senior Debt currently
prohibit us from purchasing any notes, and also provides that certain asset sale
events with respect to us would constitute a default under these agreements. Any
future credit agreements or other agreements relating to Senior Debt to which we
become a party may contain similar restrictions and provisions. In the event an
Asset Sale occurs at a time when we are prohibited from purchasing notes, we
could seek the consent of the holders of our Senior Debt to the purchase of
notes or could attempt to refinance any such Senior Debt that contain such
prohibition. If we do not obtain such a consent or repay such Senior Debt, we
will remain prohibited from purchasing notes. In such case, our failure to
purchase tendered notes would constitute an Event of Default under the Indenture
which would, in turn, constitute a default under such Senior Debt. In any of the
foregoing circumstances, the subordination provisions in the Indenture would
likely prohibit payments to the Holders of notes.
CERTAIN COVENANTS
RESTRICTED PAYMENTS
(A) Armor Holdings will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly:
(1) declare or pay any dividend or make any other payment or
distribution on account of its or any of its Restricted
Subsidiaries' Equity Interests (including, without limitation,
any payment in connection with any merger or consolidation
involving Armor Holdings or any of its Restricted
Subsidiaries) or to the direct or indirect holders of its or
any of its Restricted Subsidiaries' Equity Interests in their
capacity as such (other than dividends or distributions
payable in Equity Interests (other than Disqualified Stock) of
Armor Holdings or dividends or distributions payable to Armor
Holdings or a Wholly Owned Restricted Subsidiary of Armor
Holdings);
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(2) purchase, redeem or otherwise acquire or retire for value
(including, without limitation, in connection with any merger
or consolidation involving Armor Holdings) any Equity
Interests of Armor Holdings or any Subsidiary of Armor
Holdings (other than a Wholly Owned Restricted Subsidiary of
Armor Holdings) or any direct or indirect parent of Armor
Holdings;
(3) make any payment on or with respect to, or purchase, redeem,
defease or otherwise acquire or retire for value any
Indebtedness that is subordinated to the notes or any
Subsidiary Guarantee, except a payment of interest or
principal at the Stated Maturity thereof; or
(4) make any Restricted Investment (all such payments and other
actions set forth in clauses (1) through (4) above being
collectively referred to as "Restricted Payments"),
unless, at the time of and after giving effect to such Restricted Payment:
(1) no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence thereof; and
(2) Armor Holdings would, at the time of such Restricted Payment
and after giving pro forma effect thereto as if such
Restricted Payment had been made at the beginning of the
applicable four-quarter period, have been permitted to incur
at least $1.00 of additional Indebtedness pursuant to the
Fixed Charge Coverage Ratio test set forth in the first
paragraph of the covenant described below under the
"Incurrence of Indebtedness and Issuance of Preferred Stock"
covenant; and
(3) such Restricted Payment, together with the aggregate amount of
all other Restricted Payments made by Armor Holdings and its
Restricted Subsidiaries after the date of the Indenture
(excluding Restricted Payments permitted by clauses (2), (3)
and (5) of the next succeeding paragraph (B)), is less than
the sum, without duplication, of:
(a) 50% of Armor Holdings' Consolidated Net Income for the
period (taken as one accounting period) from the
beginning of the first fiscal quarter commencing after
the date of the Indenture to the end of its most
recently ended fiscal quarter for which internal
financial statements are available at the time of such
Restricted Payment (or, if such Consolidated Net Income
for such period is a deficit, less 100% of such
deficit), plus
(b) 100% of the aggregate net cash proceeds received by
Armor Holdings since the date of the Indenture as a
contribution to its common equity capital or from the
issue or sale of Equity Interests of Armor Holdings
(other than Disqualified Stock) or from the issue or
sale of convertible
105
or exchangeable Disqualified Stock or convertible or
exchangeable debt securities of Armor Holdings that have
been converted into or exchanged for such Equity
Interests (other than Equity Interests (or Disqualified
Stock or debt securities) sold to a Subsidiary of Armor
Holdings); plus
(c) to the extent that any Restricted Investment that was
made after the date of the Indenture is sold for cash or
otherwise liquidated or repaid for cash, the lesser of
(i) the cash return of capital with respect to such
Restricted Investment (less the cost of disposition, if
any) and (ii) the initial amount of such Restricted
Investment; plus
(d) $10.0 million.
(B) So long as no Default or Event of Default has occurred and is
continuing at the date of a Restricted Payment or would be caused thereby, the
preceding provisions will not prohibit:
(1) the payment of any dividend within 60 days after the date of
declaration thereof, if at said date of declaration such
payment would have complied with the provisions of the
Indenture;
(2) the redemption, repurchase, retirement, defeasance or other
acquisition of any subordinated Indebtedness of Armor Holdings
or any Subsidiary Guarantor or of any Equity Interests of
Armor Holdings in exchange for, or out of the net cash
proceeds of the substantially concurrent sale (other than to a
Subsidiary of Armor Holdings) of, Equity Interests of Armor
Holdings (other than Disqualified Stock); provided that the
amount of any such net cash proceeds that are utilized for any
such redemption, repurchase, retirement, defeasance or other
acquisition shall be excluded from clause (3) (b) of the
preceding paragraph (A);
(3) the defeasance, redemption, repurchase or other acquisition of
subordinated Indebtedness of Armor Holdings or any Subsidiary
Guarantor with the net cash proceeds from an incurrence of
Permitted Refinancing Indebtedness;
(4) the payment of any dividend by a Restricted Subsidiary of
Armor Holdings to the holders of its common Equity Interests
on a pro rata basis;
(5) Investments acquired as a capital contribution to, or in
exchange for, or out of the net cash proceeds of a
substantially concurrent offering of, Capital Stock (other
than Disqualified Stock) of Armor Holdings; provided that the
amount of any such net cash proceeds that are utilized for any
such acquisition or exchange shall be excluded from clause
(3)(b) of the preceding paragraph (A);
(6) the repurchase of Capital Stock deemed to occur upon the
exercise of options
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or warrants if such Capital Stock represents all or a portion
of the exercise price thereof;
(7) dividends paid on shares of Disqualified Stock of Armor
Holdings issued in accordance with the "Incurrence of
Indebtedness and Issuance of Preferred Stock" covenant;
(8) the repurchase or redemption of shares of Equity Interests
(other than Disqualified Stock) of Armor Holdings or any
Restricted Subsidiary; provided, however, that the aggregate
amount of such repurchases shall not exceed $5.0 million in
any calendar year unless the aggregate amount of such
repurchases in any prior calendar year was less than $5.0
million in which case (x) the difference, up to an aggregate
amount of $5.0 million, may be carried forward and (y) the
aggregate amount of such repurchases in any subsequent
calendar year may not exceed $5.0 million plus the then
remaining balance of such carry forward amount (after giving
effect to all prior repurchases utilizing such carry forward
amount); provided further, however, that such repurchases
shall be excluded from the calculation of the amount of
Restricted Payments; or
(9) Restricted Payments in an aggregate amount not to exceed $25.0
million.
The amount of all Restricted Payments (other than cash) shall be the fair
market value on the date of the Restricted Payment of the asset(s) or securities
proposed to be transferred or issued to or by Armor Holdings or such Subsidiary,
as the case may be, pursuant to the Restricted Payment. The fair market value of
any cash Restricted Payment shall be its face amount and the fair market value
of any assets, securities or other non-cash Restricted Payment that are required
to be valued pursuant to this covenant shall be determined by the Board of
Directors whose resolution with respect thereto shall be delivered to the
Trustee. The Board of Directors' determination must be based upon an opinion or
appraisal issued by an independent accounting, appraisal or investment banking
firm of national standing if the fair market value exceeds $10.0 million,
provided, however that such opinion or appraisal shall not be required for any
repurchase or redemption of shares of Equity Interests of Armor Holdings at
Current Trading Prices. Not later than the date of making any Restricted
Payment, Armor Holdings shall deliver to the Trustee an Officers' Certificate
stating that such Restricted Payment is permitted and setting forth the basis
upon which the calculations required by this "Restricted Payments" covenant were
computed, together with a copy of any fairness opinion or appraisal required by
the Indenture.
INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK
Armor Holdings will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, incur any Indebtedness (including
Acquired Debt), and Armor Holdings will not permit any of its Restricted
Subsidiaries to issue any preferred stock; provided, however, that Armor
Holdings and any Subsidiary Guarantor may incur Indebtedness or issue preferred
stock, if the Fixed Charge Coverage Ratio for its most recently ended four full
fiscal quarters for which internal financial statements are available
immediately preceding the date on which such additional
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Indebtedness is incurred would have been at least 2.00 to 1, determined on a pro
forma basis (including a pro forma application of the net proceeds therefrom),
as if the additional Indebtedness had been incurred or such preferred stock had
been issued at the beginning of such four-quarter period.
So long as no Default or Event of Default shall have occurred and be
continuing as of the date such Indebtedness is incurred (or, as applicable, the
date such preferred stock is issued) or would be caused thereby, the first
paragraph of this covenant will not prohibit the incurrence of any of the
following items of Indebtedness (collectively, "Permitted Debt"):
(1) the incurrence by Armor Holdings or any Subsidiary Guarantor
of Indebtedness under Credit Facilities in an aggregate
principal amount at any one time outstanding (with letters of
credit being deemed to have a principal amount equal to the
maximum potential liability of Armor Holdings and its
Restricted Subsidiaries thereunder) not to exceed $70.0
million, less the aggregate amount of all Net Proceeds of
Asset Sales applied by Armor Holdings or any Restricted
Subsidiary to permanently repay any such Indebtedness (and, in
the case of any revolving credit Indebtedness, to effect a
corresponding commitment reduction thereunder) pursuant to the
"Asset Sales" covenant;
(2) Existing Indebtedness;
(3) the incurrence by Armor Holdings and its Subsidiary Guarantors
of Indebtedness represented by the notes and the related
Subsidiary Guarantees to be issued on the date of the
Indenture and the Exchange Notes and the related Subsidiary
Guarantees to be issued pursuant to the Registration Rights
Agreement and the Indenture;
(4) the incurrence by Armor Holdings or any of its Restricted
Subsidiaries of Indebtedness represented by Capital Lease
Obligations, mortgage financings or purchase money
obligations, in each case, incurred for the purpose of
financing all or any part of the purchase price or cost of
construction or improvement of property, plant or equipment
(whether through the direct purchase of such assets or the
Capital Stock of any Person owning such assets) used in its
business or such Restricted Subsidiary, in an aggregate
principal amount, including all Permitted Refinancing
Indebtedness incurred to refund, refinance or replace any
Indebtedness incurred pursuant to this clause (4), not to
exceed $10.0 million at any time outstanding;
(5) the incurrence by Armor Holdings or any of its Restricted
Subsidiaries of Permitted Refinancing Indebtedness in exchange
for, or the net proceeds of which are used to refund,
refinance or replace Indebtedness (other than intercompany
Indebtedness) that was permitted by the Indenture to be
incurred under the first paragraph of this covenant or clauses
(2), (3), (4), (5) or (8) of this paragraph;
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(6) the incurrence by Armor Holdings or any of its Restricted
Subsidiaries of intercompany Indebtedness owing to and held by
Armor Holdings or any of its Wholly Owned Restricted
Subsidiaries; provided, however, that:
(a) if Armor Holdings or any Subsidiary Guarantor is the
obligor on such Indebtedness, such Indebtedness must be
unsecured and expressly subordinated to the prior
payment in full in cash of all Obligations with respect
to the notes, in the case of Armor Holdings, or the
Subsidiary Guarantee, in the case of a Subsidiary
Guarantor;
(b) (i) any subsequent issuance or transfer of Equity
Interests that results in any such Indebtedness being
held by a Person other than Armor Holdings or its Wholly
Owned Restricted Subsidiary and (ii) any sale or other
transfer of any such Indebtedness to a Person that is
not either Armor Holdings or its Wholly Owned Restricted
Subsidiary, shall be deemed, in each case, to constitute
an incurrence of such Indebtedness by Armor Holdings or
such Restricted Subsidiary, as the case may be, that was
not permitted by this clause (6); and
(c) Indebtedness owed to Armor Holdings or any Subsidiary
Guarantor must be evidenced by an unsubordinated
promissory note, unless the obligor under such
Indebtedness is Armor Holdings or a Subsidiary
Guarantor;
(7) the incurrence by Armor Holdings or any Restricted Subsidiary
of additional Indebtedness in an aggregate principal amount
(or accreted value, as applicable) at any time outstanding,
including all Permitted Refinancing Indebtedness incurred to
refund, refinance or replace any Indebtedness incurred
pursuant to this clause (7), not to exceed $20.0 million;
(8) (i) Indebtedness of Armor Holdings or any of its Restricted
Subsidiaries under agreements providing for indemnification,
adjustment of purchase price or similar obligations, or
Guarantees or letters of credit, surety bonds or performance
bonds securing any obligations of Armor Holdings or any of its
Restricted Subsidiaries pursuant to such agreements, in any
case incurred in connection with the disposition of any
business or assets, so long as the principal amount does not
exceed the gross proceeds actually received by Armor Holdings
or any Restricted Subsidiary in connection with such
disposition, and (ii) Indebtedness of Armor Holdings or any of
its Restricted Subsidiaries represented by letters of credit
for the account of Armor Holdings or such Restricted
Subsidiary, as the case may be, issued in the ordinary course
of Armor Holdings' business or such Restricted Subsidiary,
including, without limitation, in order to provide security
for workers' compensation claims or payment obligations in
connection with self-insurance or similar requirements in the
ordinary course of business and other
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Indebtedness with respect to worker's compensation claims,
self-insurance obligations, performance, surety and similar
bonds and completion guarantees provided by Armor Holdings or
any of its Restricted Subsidiaries in the ordinary course of
business;
(9) Indebtedness of Simula, Inc. incurred and outstanding on the
date it is acquired by Armor Holdings (other than any
Indebtedness incurred (i) to provide all or any portion of the
funds utilized to consummate such acquisition or (ii)
otherwise in connection with, or in contemplation of, such
acquisition); provided, however, that (a) Simula, Inc. is
designated a Restricted Subsidiary and executes and delivers
to the Trustee a supplemental indenture providing for its
Guarantee of the notes on the date on which such acquisition
is consummated, and (b) all such Indebtedness is prepaid,
repaid, redeemed or repurchased within 90 days of such date of
consummation;
(10) the incurrence by Armor Holdings or any of its Restricted
Subsidiaries of Hedging Obligations that are incurred for the
purpose of fixing, swapping or hedging interest rate risk with
respect to any Indebtedness that is permitted by the terms of
this Indenture to be outstanding; and
(11) the accrual of interest, the accretion or amortization of
original issue discount, the payment of interest on any
Indebtedness in the form of additional Indebtedness with the
same terms, and the payment of dividends on Disqualified Stock
in the form of additional shares of the same class of
Disqualified Stock shall not be deemed to be an incurrence of
Indebtedness or an issuance of Disqualified Stock for purposes
of the first paragraph of this covenant; provided, in each
such case, that the amount thereof is included in Armor
Holdings' Fixed Charges as accrued.
For purposes of determining compliance with this "Incurrence of
Indebtedness and Issuance of Preferred Stock" covenant, in the event that any
proposed Indebtedness meets the criteria of more than one of the categories of
Permitted Debt described in clauses (1) through (11) of the preceding paragraph,
or is entitled to be incurred pursuant to the first paragraph of this covenant,
subject to the following sentence, Armor Holdings will be permitted to classify
on the date of its incurrence, and from time to time to reclassify all or a
portion of, such item of Indebtedness in any manner that complies with this
covenant. Indebtedness under the Credit Agreement outstanding on the date on
which notes are first issued under the Indenture shall be deemed to have been
incurred on such date in reliance on the exception provided by clause (1) of the
definition of Permitted Debt and Armor Holdings will not be permitted to
reclassify any Indebtedness incurred pursuant to such clause (1).
Notwithstanding any other provision of this "Incurrence of Indebtedness
and Issuance of Preferred Stock" covenant, the maximum amount of Indebtedness
that may be Incurred pursuant to this "Incurrence of Indebtedness and Issuance
of Preferred Stock" covenant will not be deemed to be exceeded with respect to
any outstanding Indebtedness due solely to the result of fluctuations in the
exchange rates of currencies.
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LIMITATION ON SENIOR SUBORDINATED DEBT
Armor Holdings will not incur any Indebtedness that is subordinate or
junior in right of payment to any of its Senior Debt unless it is pari passu or
subordinate in right of payment to the notes. No Subsidiary Guarantor will incur
any Indebtedness that is subordinate or junior in right of payment to the Senior
Debt of such Subsidiary Guarantor unless it is pari passu or subordinate in
right of payment to such Subsidiary Guarantor's Subsidiary Guarantee.
LIENS
Armor Holdings will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, create, incur, assume or otherwise
cause or suffer to exist or become effective any Lien of any kind securing
Indebtedness (other than Permitted Liens) upon any of its or their property or
assets, now owned or hereafter acquired, unless all payments due under the
Indenture and the notes are secured on an equal and ratable basis with the
obligations so secured until such time as such obligations are no longer secured
by a Lien.
DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED SUBSIDIARIES
Armor Holdings will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, create or permit to exist or become
effective any consensual encumbrance or restriction on the ability of any
Restricted Subsidiary to:
(1) pay dividends or make any other distributions to Armor
Holdings or any of its Restricted Subsidiaries with respect to
its Capital Stock or any other interest or participation in,
or measured by, its profits, or pay any indebtedness owed to
Armor Holdings or any of its Restricted Subsidiaries;
(2) make loans or advances to Armor Holdings or any of its
Restricted Subsidiaries; or
(3) transfer any of its properties or assets to Armor Holdings or
any of its Restricted Subsidiaries.
However, the preceding restrictions will not apply to encumbrances or
restrictions existing under, by reason of or with respect to:
(1) the Credit Agreement, Existing Indebtedness or any other
agreements in effect on the date of the Indenture and any
amendments, modifications, restatements, renewals, extensions,
supplements, refundings, replacements or refinancings thereof,
provided that the encumbrances and restrictions in any such
amendments, modifications, restatements, renewals, extensions,
supplements, refundings, replacement or refinancings are not
materially more restrictive, taken as a whole, than those in
effect on the date of the Indenture;
(2) the Indenture, the notes and the Subsidiary Guarantees;
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(3) applicable law, rule or regulation;
(4) any Person, or the property or assets of such Person, acquired
by Armor Holdings or any of its Restricted Subsidiaries,
existing at the time of such acquisition and not incurred in
connection with or in contemplation of such acquisition, which
encumbrance or restriction is not applicable to any Person or
the properties or assets of any Person, other than the Person,
or the property or assets of such Person, so acquired and any
amendments, modifications, restatements, renewals, extensions,
supplements, refundings, replacements or refinancings thereof,
provided that the encumbrances and restrictions in any such
amendments, modifications, restatements, renewals, extensions,
supplements, refundings, replacement or refinancings are no
more restrictive, taken as a whole, than those in effect on
the date of the acquisition;
(5) in the case of clause (3) of the first paragraph of this
covenant:
(a) that restrict in a customary manner the subletting,
assignment or transfer of any property or asset that is
subject to a lease, license, conveyance or similar
contract,
(b) existing by virtue of any transfer of, agreement to
transfer, option or right with respect to, or Lien on,
any property or assets of Armor Holdings or any
Restricted Subsidiary not otherwise prohibited by the
Indenture, or
(c) arising or agreed to in the ordinary course of business,
not relating to any Indebtedness, and that do not,
individually or in the aggregate, detract from the value
of property or assets of Armor Holdings or any
Restricted Subsidiary in any manner material to Armor
Holdings or any Restricted Subsidiary;
(6) any agreement for the sale or other disposition of all or
substantially all of the Capital Stock of, or property and
assets of, a Restricted Subsidiary pending closing of such
sale or disposition;
(7) Permitted Refinancing Indebtedness, provided that the
restrictions contained in the agreements governing such
Permitted Refinancing Indebtedness are no more restrictive,
taken as a whole, than those contained in the agreements
governing the Indebtedness being refinanced;
(8) contained in the terms of any Indebtedness permitted under the
Indenture or any agreement pursuant to which such Indebtedness
was issued if:
(a) the encumbrance or restriction applies only in the event
of a payment
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default or a default with respect to a financial
covenant contained in such Indebtedness or agreement,
(b) the encumbrance or restriction is not materially more
disadvantageous to the Holders of the notes than is
customary in comparable financings (as determined by
Armor Holdings in good faith), and
(c) Armor Holdings determines in good faith that any such
encumbrance or restriction will not materially affect
its ability to make principal or interest payments on
the notes.
MERGER, CONSOLIDATION OR SALE OF ALL OR SUBSTANTIALLY ALL ASSETS
Armor Holdings will not: (1) consolidate or merge with or into another
Person (whether or not we are the surviving corporation) or (2) directly or
indirectly, sell, assign, transfer, convey, lease or otherwise dispose of all or
substantially all of its properties and assets and its Subsidiaries taken as a
whole, in one or more related transactions, to another Person or Persons,
unless:
(1) either: (a) Armor Holdings is the surviving corporation; or
(b) the Person formed by or surviving any such consolidation
or merger (if other than Armor Holdings) or to which such
sale, assignment, transfer, conveyance or other disposition
shall have been made (i) is a corporation organized and
existing under the laws of the United States, any state
thereof or the District of Columbia and (ii) expressly
assumes, by a supplemental indenture executed and delivered to
the Trustee, in form satisfactory to the Trustee, all of Armor
Holdings' obligations under the notes, the Indenture and the
Registration Rights Agreement;
(2) immediately after giving effect to such transaction, no
Default or Event of Default exists;
(3) immediately after giving effect to such transaction on a pro
forma basis, Armor Holdings or the Person formed by or
surviving any such consolidation or merger (if other than
Armor Holdings), or to which such sale, assignment, transfer,
conveyance or other disposition shall have been made:
(a) will have Consolidated Net Worth immediately after the
transaction equal to or greater than Armor Holdings' Consolidated
Net Worth immediately preceding the transaction; and
(b) will, on the date of such transaction after giving pro
forma effect thereto and any related financing transactions as if
the same had occurred at the beginning of the applicable
four-quarter period, be permitted to incur at least $1.00 of
additional Indebtedness pursuant to the Fixed Charge Coverage Ratio
test set forth in the first paragraph of the covenant described
above under the "Incurrence of Indebtedness and Issuance of
Preferred Stock" covenant;
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(4) each Subsidiary Guarantor, unless such Subsidiary Guarantor is
the Person with which Armor Holdings has entered into a
transaction under this "Consolidation, Merger or Sale of
Assets" covenant, shall have by supplemental indenture to its
Subsidiary Guarantee confirmed that its Subsidiary Guarantee
shall apply to Armor Holdings' obligations or the Surviving
Person in accordance with the notes and the Indenture and its
obligations under the Registration Rights Agreement shall
continue to be in effect; and
(5) Armor Holdings shall have delivered to the Trustee an
Officers' Certificate and an Opinion of Counsel, each stating
that such consolidation, merger, sale, assignment, transfer,
conveyance or lease and such supplemental indenture (if any)
comply with the Indenture.
This "Merger, Consolidation or Sale of All or Substantially All Assets"
covenant will not apply to any Qualifying Services Division Sale or any merger,
consolidation or sale, assignment, transfer, conveyance, lease or other
disposition of assets between or among Armor Holdings and any of its Subsidiary
Guarantors.
For purposes of this covenant, the sale, assignment, transfer, conveyance,
lease or other disposition of all or substantially all of the properties and
assets of one or more of Armor Holdings' Subsidiaries, which properties and
assets, if held by Armor Holdings instead of such Subsidiaries, would constitute
all or substantially all of its properties and assets on a consolidated basis,
shall be deemed to be the transfer of all or substantially all of Armor
Holdings' properties and assets.
Although there is a limited body of case law interpreting the phrase
"substantially all," there is no precise established definition of the phrase
under applicable law. Accordingly, in certain circumstances there may be a
degree of uncertainty as to whether a particular transaction would involve "all
or substantially all" of the property or assets of a Person.
TRANSACTIONS WITH AFFILIATES
Armor Holdings will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, make any payment to, or sell, lease,
transfer or otherwise dispose of any of its or their properties or assets to, or
purchase any property or assets from, or enter into, make, amend, renew or
extend any transaction, contract, agreement, understanding, loan, advance or
Guarantee with, or for the benefit of, any Affiliate (each, an "Affiliate
Transaction"), unless:
(1) such Affiliate Transaction is on terms that are no less
favorable to Armor Holdings or the relevant Restricted Subsidiary than
those that would have been obtained in a comparable transaction by Armor
Holdings or such Restricted Subsidiary at the time of such transaction in
arm's-length dealings with a Person that is not an Affiliate of Armor
Holdings; and
(2) Armor Holdings delivers to the Trustee:
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(a) with respect to any Affiliate Transaction or series of
related Affiliate Transactions involving aggregate consideration in
excess of $2.5 million, a resolution of the Board of Directors set
forth in an Officers' Certificate certifying that such Affiliate
Transaction or series of related Affiliate Transactions complies
with this covenant and that such Affiliate Transaction or series of
related Affiliate Transactions has been approved by a majority of
the disinterested members of the Board of Directors; and
(b) with respect to any Affiliate Transaction or series of
related Affiliate Transactions involving aggregate consideration in
excess of $10.0 million, an opinion as to the fairness to Armor
Holdings or such Restricted Subsidiary of such Affiliate Transaction
or series of related Affiliate Transactions from a financial point
of view issued by an independent accounting, appraisal or investment
banking firm of national standing.
The following items shall not be deemed to be Affiliate Transactions and,
therefore, will not be subject to the provisions of the prior paragraph:
(1) transactions between or among Armor Holdings and/or its
Restricted Subsidiaries;
(2) any issuance of securities, or other payments, awards or grants
in cash, securities or otherwise pursuant to, or the funding of,
employment arrangements, stock options and stock ownership plans and other
reasonable and customary fees, compensation, benefits and indemnities paid
or entered into by Armor Holdings or its Restricted Subsidiaries in the
ordinary course of business consistent with past practices to or with its
officers, directors, employees or consultants and its Restricted
Subsidiaries;
(3) Restricted Payments that are permitted by the provisions of the
Indenture described above under the "Restricted Payments" covenant; and
(4) any sale of Armor Holdings' Equity Interests (other than
Disqualified Stock).
DESIGNATION OF RESTRICTED AND UNRESTRICTED SUBSIDIARIES
Armor Holdings' Board of Directors may designate any Restricted Subsidiary
to be an Unrestricted Subsidiary; provided that:
(1) any Guarantee by Armor Holdings or any Restricted Subsidiary of
any Indebtedness of the Subsidiary being so designated will be deemed to
be an incurrence of Indebtedness by Armor Holdings or such Restricted
Subsidiary (or both, if applicable) at the time of such designation, and
such incurrence of Indebtedness would be permitted under the covenant
described above under the "Incurrence of Indebtedness and Issuance of
Preferred Stock" covenant;
115
(2) the aggregate fair market value of all outstanding Investments
owned by Armor Holdings and its Restricted Subsidiaries in the Subsidiary
being so designated (including any Guarantee by Armor Holdings or any
Restricted Subsidiary of any Indebtedness of such Subsidiary) will be
deemed to be a Restricted Investment made as of the time of such
designation and that such Investment would be permitted under the covenant
described above under the "Restricted Payments" covenant;
(3) such Subsidiary does not own any Equity Interests of, or hold
any Liens on any property of, Armor Holdings or any Restricted Subsidiary;
(4) the Subsidiary being so designated:
(a) is not party to any agreement, contract, arrangement or
understanding with Armor Holdings or any Restricted Subsidiary of
Armor Holdings unless the terms of any such agreement, contract,
arrangement or understanding are no less favorable to Armor Holdings
or such Restricted Subsidiary than those that might be obtained at
the time from Persons who are not Affiliates of Armor Holdings; and
(b) is a Person with respect to which neither Armor Holdings
nor any of its Restricted Subsidiaries has any direct or indirect
obligation (i) to subscribe for additional Equity Interests or (ii)
to maintain or preserve such Person's financial condition or to
cause such Person to achieve any specified levels of operating
results; and
(5) no Default or Event of Default would be in existence following
such designation.
Any designation of a Restricted Subsidiary of Armor Holdings as an
Unrestricted Subsidiary shall be evidenced to the Trustee by filing with the
Trustee a certified copy of the Board Resolution giving effect to such
designation and an Officers' Certificate certifying that such designation
complied with the preceding conditions and was permitted by the Indenture.
The Board of Directors of Armor Holdings may at any time designate any
Unrestricted Subsidiary to be a Restricted Subsidiary; provided that:
(1) such designation shall be deemed to be an incurrence of
Indebtedness by a Restricted Subsidiary of Armor Holdings of any
outstanding Indebtedness of such Unrestricted Subsidiary and such
designation shall only be permitted if such Indebtedness is permitted
under the covenant described under the "Incurrence of Indebtedness and
Issuance of Preferred Stock" covenant, calculated on a pro forma basis as
if such designation had occurred at the beginning of the four-quarter
reference period;
(2) all outstanding Investments owned by such Unrestricted
Subsidiary will be deemed to be made as of the time of such designation
and such Investments shall only be permitted if such Investments would be
permitted under the covenant described above under the "Restricted
Payments" covenant;
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(3) all Liens of such Unrestricted Subsidiary existing at the time
of such designation would be permitted under the "Liens" covenant; and
(4) no Default or Event of Default would be in existence following
such designation.
SALE AND LEASEBACK TRANSACTIONS
Armor Holdings will not, and will not permit any of its Restricted
Subsidiaries to, enter into any sale and leaseback transaction; provided that
Armor Holdings or any Restricted Subsidiary may enter into a sale and leaseback
transaction if:
(1) Armor Holdings or that Restricted Subsidiary, as applicable,
could have incurred Indebtedness in an amount equal to the Attributable
Debt relating to such sale and leaseback transaction under the Fixed
Charge Coverage Ratio test in the first paragraph of the covenant
described above under the "Incurrence of Indebtedness and Issuance of
Preferred Stock" covenant;
(2) the gross cash proceeds of that sale and leaseback transaction
are at least equal to the fair market value, as determined in good faith
by the Board of Directors of Armor Holdings and set forth in an Officers'
Certificate delivered to the Trustee, of the property that is the subject
of that sale and leaseback transaction; and
(3) the transfer of assets in that sale and leaseback transaction is
permitted by, and Armor Holdings applies the proceeds of such transaction
in compliance with, the covenant described above under the "Asset Sales"
covenant.
LIMITATION ON ISSUANCE AND SALE OF EQUITY INTERESTS OF RESTRICTED
SUBSIDIARIES
Armor Holdings will not transfer, convey, sell, lease or otherwise dispose
of, and will not permit any of its Restricted Subsidiaries to issue, transfer,
convey, sell, lease or otherwise dispose of, any Equity Interests in any
Restricted Subsidiary of Armor Holdings to any Person (other than Armor Holdings
or a Wholly Owned Restricted Subsidiary of Armor Holdings or, if necessary,
shares of its Capital Stock constituting directors' qualifying shares or
issuances of shares of Capital Stock of foreign Restricted Subsidiaries to
foreign nationals, to the extent required by applicable law), except:
(1) if, immediately after giving effect to such issuance, transfer,
conveyance, sale, lease or other disposition, such Restricted Subsidiary
would no longer constitute a Restricted Subsidiary and any Investment in
such Person remaining after giving effect to such issuance or sale would
have been permitted to be made under the "Restricted Payments" covenant if
made on the date of such issuance or sale; and
(2) Armor Holdings or such Restricted Subsidiary complies with the
"Asset Sale" covenant.
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LIMITATIONS ON ISSUANCES OF GUARANTEES BY RESTRICTED SUBSIDIARIES
Armor Holdings will not permit any of its Restricted Subsidiaries,
directly or indirectly, to Guarantee or pledge any assets to secure the payment
of any other Indebtedness of Armor Holdings, unless such Restricted Subsidiary
is a Subsidiary Guarantor or simultaneously executes and delivers a supplemental
indenture providing for the Guarantee of the payment of the notes by such
Restricted Subsidiary, which Subsidiary Guarantee shall be senior to or pari
passu with such Subsidiary's Guarantee of or pledge to secure such other
Indebtedness unless such other Indebtedness is Senior Debt, in which case the
Subsidiary Guarantee of the notes may be subordinated to the Guarantee of such
Senior Debt to the same extent as the notes are subordinated to such Senior
Debt.
A Subsidiary Guarantor may not sell or otherwise dispose of all or
substantially all of its assets to, or consolidate with or merge with or into
(whether or not such Subsidiary Guarantor is the surviving Person), another
Person, other than Armor Holdings or another Subsidiary Guarantor, unless:
(1) immediately after giving effect to that transaction, no Default
or Event of Default exists; and
(2) either:
(a) the Person acquiring the property in any such sale or
disposition or the Person formed by or surviving any such
consolidation or merger is a corporation organized or existing under
the laws of the United States, any state thereof or the District of
Columbia and assumes all the obligations of such Subsidiary
Guarantor under the Indenture, its Subsidiary Guarantee and the
Registration Rights Agreement pursuant to a supplemental indenture
satisfactory to the Trustee; or
(b) such sale or other disposition complies with the "Asset
Sale" covenant, including the application of the Net Proceeds
therefrom.
The Subsidiary Guarantee of a Subsidiary Guarantor will be released:
(1) in connection with any sale or other disposition of all of the
capital stock of a Subsidiary Guarantor to a Person that is not (either
before or after giving effect to such transaction) an Affiliate of Armor
Holdings, if the sale or other disposition complies with the "Asset Sale"
covenant;
(2) in connection with the release or discharge of the Guarantee
which resulted in the creation of such Subsidiary Guarantee pursuant to
this covenant, except a discharge or release by, or as a result of, a
payment under such Guarantee;
(3) if Armor Holdings properly designates any Restricted Subsidiary
that is a Subsidiary Guarantor as an Unrestricted Subsidiary; or
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(4) in connection with the liquidation, dissolution or winding up of
a Subsidiary Guarantor.
In addition, each Discontinued Domestic Subsidiary on the date the Notes
are originally issued which thereafter becomes a Subsidiary Guarantor will be
released from its Subsidiary Guarantee upon the sale, transfer or other
disposition of all or substantially all of its assets, unless and until such
Subsidiary Guarantor thereafter becomes part of the continuing operations of
Armor Holdings on a consolidated basis.
BUSINESS ACTIVITIES
Armor Holdings will not, and will not permit any Restricted Subsidiary to,
engage in any business other than Permitted Business, except to such extent as
would not be material to Armor Holdings and its Restricted Subsidiaries taken as
a whole.
PAYMENTS FOR CONSENT
Armor Holdings will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, pay or cause to be paid any
consideration to or for the benefit of any Holder of notes for or as an
inducement to any consent, waiver or amendment of any of the terms or provisions
of the Indenture or the notes unless such consideration is offered to all
Holders of the notes and is paid to all Holders of the notes that consent, waive
or agree to amend in the time frame set forth in the solicitation documents
relating to such consent, waiver or agreement.
REPORTS
Whether or not required by the Commission, so long as any notes are
outstanding, Armor Holdings will furnish to the Holders of notes, within the
time periods specified in the Commission's rules and regulations:
(1) all quarterly and annual financial information that would be
required to be contained in a filing with the Commission on Forms 10-Q and
10-K if Armor Holdings were required to file such Forms, including a
"Management's Discussion and Analysis of Financial Condition and Results
of Operations" and, with respect to the annual information only, a report
on the annual financial statements by Armor Holdings' certified
independent accountants; and
(2) all current reports that would be required to be filed with the
Commission on Form 8-K if Armor Holdings were required to file such
reports.
In addition, whether or not required by the Commission, Armor Holdings
will file a copy of all of the information and reports referred to in clauses
(1) and (2) above with the Commission for public availability within the time
periods specified in the Commission's rules and regulations (unless the
Commission will not accept such a filing) and make such information available to
prospective investors upon request. In addition, Armor Holdings and the
Subsidiary Guarantors have agreed that, for so long as any notes remain
outstanding, they will furnish to the Holders and
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to prospective investors, upon their request, the information required to be
delivered pursuant to Rule 144A(d)(4) under the Securities Act.
EVENTS OF DEFAULT AND REMEDIES
Each of the following is an Event of Default:
(1) default for 30 days in the payment when due of interest
(including any additional interest) on the notes whether or not prohibited
by the subordination provisions of the Indenture;
(2) default in payment when due (whether at maturity, upon
acceleration, redemption or otherwise, including the failure to repurchase
notes tendered pursuant to a Change of Control Offer or an Asset Sale
Offer on the date specified for such payment in the applicable offer to
purchase) of the principal of, or premium, if any, on the notes, whether
or not prohibited by the subordination provisions of the Indenture;
(3) failure (other than a default described in clause (2) above) by
Armor Holdings or any of its Restricted Subsidiaries to comply with the
provisions described under the captions "--Repurchase at the Option of
Holders--Change of Control," "--Repurchase at the Option of Holders--Asset
Sales" or the "Merger, Consolidation or Sale of All or Substantially All
Assets" covenant for 45 days after written notice by the Trustee or
Holders representing 25% or more of the aggregate principal amount of
notes outstanding to comply with such provisions;
(4) failure by Armor Holdings or any of its Restricted Subsidiaries
for 60 days after written notice by the Trustee or Holders representing
25% or more of the aggregate principal amount of notes outstanding to
comply with any of the other agreements in the Indenture;
(5) default under any mortgage, indenture or instrument under which
there may be issued or by which there may be secured or evidenced any
Indebtedness for money borrowed by Armor Holdings or any of its Restricted
Subsidiaries (or the payment of which is Guaranteed by Armor Holdings or
any of its Restricted Subsidiaries) whether such Indebtedness or Guarantee
now exists, or is created after the date of the Indenture, if that
default:
(a) is caused by a failure to pay principal of, or interest or
premium, if any, on such Indebtedness at final maturity thereof; or
(b) results in the acceleration of such Indebtedness prior to
its final maturity, and, in each case, the principal amount of any
such Indebtedness, together with the principal amount of any other
such Indebtedness under which there has been a similar default
aggregates $5.0 million or more unless the obligation of Armor
Holdings or such Restricted Subsidiary to pay such Indebtedness is
being disputed in good faith through proper proceedings and such
proceedings have not been determined against Armor Holdings or such
Restricted Subsidiary;
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(6) failure by Armor Holdings or any of its Restricted Subsidiaries
to pay final judgments aggregating in excess of $5.0 million, which
judgments are not paid, discharged or stayed for a period of 60 days;
(7) except as permitted by the Indenture, any Subsidiary Guarantee
shall be held in any judicial proceeding to be unenforceable or invalid or
shall cease for any reason to be in full force and effect or any
Subsidiary Guarantor, or any Person acting on behalf of any Subsidiary
Guarantor, shall deny or disaffirm its obligations under its Subsidiary
Guarantee; and
(8) certain events of bankruptcy or insolvency with respect to Armor
Holdings or any Significant Subsidiary of Armor Holdings (or any
Subsidiaries that together would constitute a Significant Subsidiary).
In the case of an Event of Default arising from certain events of
bankruptcy or insolvency, with respect to Armor Holdings or any Significant
Subsidiary of Armor Holdings (or any Subsidiaries that together would constitute
a Significant Subsidiary), all outstanding notes will become due and payable
immediately without further action or notice. If any other Event of Default
occurs and is continuing, the Trustee or the Holders of at least 25% in
principal amount of the then outstanding notes may declare all the notes to be
due and payable by notice in writing to Armor Holdings specifying the respective
Event of Default in accordance with the provisions of the Indenture; provided,
however, that so long as any Obligations under any Credit Facilities shall be
outstanding, the acceleration shall not be effective until the earlier of (1) an
acceleration of Indebtedness under such Credit Facilities or (2) five business
days after receipt by Armor Holdings and the agent under such Credit Facilities
of written notice of such declaration of acceleration of the notes.
Holders of the notes may not enforce the Indenture or the notes except as
provided in the Indenture. Subject to certain limitations, Holders of a majority
in principal amount of the then outstanding notes may direct the Trustee in its
exercise of any trust or power. The Trustee may withhold from Holders of the
notes notice of any Default or Event of Default (except a Default or Event of
Default relating to the payment of principal or interest or additional interest)
if it determines that withholding notice is in their interest.
The Holders of a majority in aggregate principal amount of the notes then
outstanding by notice to the Trustee may on behalf of the Holders of all of the
notes waive any existing Default or Event of Default and its consequences under
the Indenture, or rescind an acceleration and its consequences if the rescission
would not conflict with any judgment or decree and if all existing Defaults or
Events of Default (except nonpayment of principal, interest or premium that has
become due solely because of the acceleration) have been cured or waived, in
each case, except a continuing Default or Event of Default in the payment of
interest or additional interest, if any, on, or the principal of, the notes. The
Holders of a majority in principal amount of the then outstanding notes will
have the right to direct the time, method and place of conducting any proceeding
for exercising any remedy available to the Trustee. However, the Trustee may
refuse to follow any direction that conflicts with law or the Indenture, that
may involve the Trustee in personal liability, or that the
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Trustee determines in good faith may be unduly prejudicial to the rights of
Holders of notes not joining in the giving of such direction and may take any
other action it deems proper that is not inconsistent with any such direction
received from Holders of notes. A Holder may not pursue any remedy with respect
to the Indenture or the notes unless:
(1) the Holder gives the Trustee written notice of a continuing
Event of Default;
(2) the Holders of at least 25% in aggregate principal amount of
outstanding notes make a written request to the Trustee to pursue the
remedy;
(3) such Holder or Holders offer the Trustee indemnity satisfactory
to the Trustee against any costs, liability or expense;
(4) the Trustee does not comply with the request within 60 days
after receipt of the request and the offer of indemnity; and
(5) during such 60-day period, the Holders of a majority in
aggregate principal amount of the outstanding notes do not give the
Trustee a direction that is inconsistent with the request.
However, such limitations do not apply to the right of any Holder of a
note to receive payment of the principal of, premium or additional interest, if
any, or interest on, such note or to bring suit for the enforcement of any such
payment, on or after the due date expressed in the notes, which right shall not
be impaired or affected without the consent of the Holder.
In the case of any Event of Default occurring by reason of any willful
action or inaction taken or not taken by or on behalf of Armor Holdings with the
intention of avoiding payment of the premium that Armor Holdings would have had
to pay if Armor Holdings then had elected to redeem the notes pursuant to the
optional redemption provisions of the Indenture, an equivalent premium shall
also become and be immediately due and payable to the extent permitted by law
upon the acceleration of the notes. If an Event of Default occurs during any
time that the notes are outstanding, by reason of any willful action (or
inaction) taken (or not taken) by or on behalf of Armor Holdings with the
intention of avoiding the prohibition on redemption of the notes, then the
premium specified in the Indenture shall also become immediately due and payable
to the extent permitted by law upon the acceleration of the notes.
Armor Holdings is required to deliver to the Trustee annually within 90
days after the end of each fiscal year a statement regarding compliance with the
Indenture. Upon becoming aware of any Default or Event of Default, Armor
Holdings is required to deliver to the Trustee a statement specifying such
Default or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of Armor
Holdings or any Subsidiary Guarantor, as such, shall have any liability for any
obligations of Armor Holdings or the Subsidiary Guarantors under the notes, the
Indenture, the Subsidiary Guarantees or for any claim
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based on, in respect of, or by reason of, such obligations or their creation.
Each Holder of notes by accepting a note waives and releases all such liability.
The waiver and release are part of the consideration for issuance of the notes.
The waiver may not be effective to waive liabilities under the federal
securities laws.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
Armor Holdings may, at its option and at any time, elect to have all of
its obligations discharged with respect to the outstanding notes and all
obligations of the Subsidiary Guarantors discharged with respect to their
Subsidiary Guarantees ("Legal Defeasance") except for:
(1) the rights of Holders of outstanding notes to receive payments
in respect of the principal of, or interest or premium and additional
interest, if any, on such notes when such payments are due from the trust
referred to below;
(2) Armor Holdings obligations with respect to the notes concerning
issuing temporary notes, registration of notes, mutilated, destroyed, lost
or stolen notes and the maintenance of an office or agency for payment and
money for security payments held in trust;
(3) the rights, powers, trusts, duties and immunities of the
Trustee, and Armor Holdings' and the Subsidiary Guarantor's obligations in
connection therewith; and
(4) the Legal Defeasance provisions of the Indenture.
In addition, Armor Holdings may, at its option and at any time, elect to
have the obligations of Armor Holdings and the Subsidiary Guarantors released
with respect to certain covenants that are described in the Indenture ("Covenant
Defeasance") and thereafter any omission to comply with those covenants shall
not constitute a Default or Event of Default with respect to the notes. In the
event Covenant Defeasance occurs, certain events (not including non-payment,
bankruptcy, receivership and insolvency events) described under "Events of
Default" will no longer constitute an Event of Default with respect to the
notes.
In order to exercise either Legal Defeasance or Covenant Defeasance:
(1) Armor Holdings must irrevocably deposit with the Trustee, in
trust, for the benefit of the Holders of the notes, cash in U.S. dollars,
non-callable Government Securities, or a combination thereof, in such
amounts as will be sufficient, in the opinion of a nationally recognized
firm of independent public accountants, to pay the principal of, or
interest and premium and additional interest, if any, on the outstanding
notes on the stated maturity or on the applicable redemption date, as the
case may be, and Armor Holdings must specify whether the notes are being
defeased to maturity or to a particular redemption date;
(2) in the case of Legal Defeasance, Armor Holdings shall have
delivered to the Trustee an Opinion of Counsel reasonably acceptable to
the Trustee confirming that (a) Armor Holdings has received from, or there
has been published by, the Internal Revenue
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Service a ruling or (b) since the date of the Indenture, there has been a
change in the applicable federal income tax law, in either case to the
effect that, and based thereon such Opinion of Counsel shall confirm that,
the Holders of the outstanding notes will not recognize income, gain or
loss for federal income tax purposes as a result of such Legal Defeasance
and will be subject to federal income tax on the same amounts, in the same
manner and at the same times as would have been the case if such Legal
Defeasance had not occurred;
(3) in the case of Covenant Defeasance, Armor Holdings shall have
delivered to the Trustee an Opinion of Counsel reasonably acceptable to
the Trustee confirming that the Holders of the outstanding notes will not
recognize income, gain or loss for federal income tax purposes as a result
of such Covenant Defeasance and will be subject to federal income tax on
the same amounts, in the same manner and at the same times as would have
been the case if such Covenant Defeasance had not occurred;
(4) no Default or Event of Default shall have occurred and be
continuing either: (a) on the date of such deposit; or (b) insofar as
Events of Default from bankruptcy or insolvency events are concerned, at
any time in the period ending on the 123rd day after the date of deposit;
(5) such Legal Defeasance or Covenant Defeasance will not result in
a breach or violation of, or constitute a default under any material
agreement or instrument to which Armor Holdings or any of its Subsidiaries
is a party or by which Armor Holdings or any of its Subsidiaries is bound;
(6) Armor Holdings must have delivered to the Trustee an Opinion of
Counsel to the effect that, (1) assuming no intervening bankruptcy of
Armor Holdings or any Subsidiary Guarantor between the date of deposit and
the 123rd day following the deposit and assuming that no Holder is an
"insider" of Armor Holdings under applicable bankruptcy law, after the
123rd day following the deposit, the trust funds will not be subject to
the effect of Section 547 of the United States Bankruptcy Code or any
applicable state bankruptcy, insolvency, reorganization or similar state
law affecting creditors and (2) the creation of the defeasance trust does
not violate the Investment Company Act of 1940;
(7) Armor Holdings must deliver to the Trustee an Officers'
Certificate stating that the deposit was not made by Armor Holdings with
the intent of preferring the Holders of notes over the other creditors of
Armor Holdings with the intent of defeating, hindering, delaying or
defrauding creditors of Armor Holdings or others;
(8) if the notes are to be redeemed prior to their stated maturity,
Armor Holdings must deliver to the Trustee irrevocable instructions to
redeem all of the notes on the specified redemption date; and
(9) Armor Holdings must deliver to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that all conditions
precedent relating to the Legal Defeasance or the Covenant Defeasance have
been complied with.
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The Credit Agreement will contain provisions that prohibit or otherwise
limit Armor Holdings from exercising any such option.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the Indenture or
the notes may be amended or supplemented with the consent of the Holders of at
least a majority in principal amount of the notes then outstanding (including,
without limitation, consents obtained in connection with a purchase of, or
tender offer or exchange offer for, notes), and any existing default or
compliance with any provision of the Indenture or the notes may be waived with
the consent of the Holders of a majority in principal amount of the then
outstanding notes (including, without limitation, consents obtained in
connection with a purchase of, or tender offer or exchange offer for, notes).
Without the consent of each Holder affected, an amendment or waiver may
not (with respect to any notes held by a non-consenting Holder):
(1) reduce the principal amount of notes whose Holders must consent
to an amendment, supplement or waiver;
(2) reduce the principal of or change the fixed maturity of any note
or alter the provisions, or waive any payment, with respect to the
redemption of the notes;
(3) reduce the rate of or change the time for payment of interest on
any Note;
(4) waive a Default or Event of Default in the payment of principal
of, or interest or premium or additional interest, if any, on the notes
(except a rescission of acceleration of the notes by the Holders of at
least a majority in aggregate principal amount of the notes and a waiver
of the payment default that resulted from such acceleration);
(5) make any note payable in money other than U.S. dollars;
(6) make any change in the provisions of the Indenture relating to
waivers of past Defaults or the rights of Holders of notes to receive
payments of principal of, or interest or premium or additional interest,
if any, on the notes;
(7) release any Subsidiary Guarantor from any of its obligations
under its Subsidiary Guarantee or the Indenture, except in accordance with
the terms of the Indenture;
(8) impair the right to institute suit for the enforcement of any
payment on or with respect to the notes or the Subsidiary Guarantees;
(9) amend, change or modify the obligation of Armor Holdings to make
and consummate an Asset Sale Offer with respect to any Asset Sale in
accordance with the "Repurchase at the Option of Holders--Asset Sales"
covenant or the obligation of Armor Holdings to make and consummate a
Change of Control Offer in the event of a Change of
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Control in accordance with the "Repurchase at the Option of
Holders--Change of Control" covenant, including, in each case, amending,
changing or modifying any definition relating thereto;
(10) except as otherwise permitted under the "Merger, Consolidation
and Sale of All or Substantially All Assets" covenant and the "Limitation
on Issuance of Guarantees by Restricted Subsidiaries" covenant, consent to
the assignment or transfer by Armor Holdings or any Subsidiary Guarantor
of any of their rights or obligations under the Indenture;
(11) amend or modify any of the provisions of the Indenture or the
related definitions affecting the subordination or ranking of the notes or
any Subsidiary Guarantee in any manner adverse to the holders of the notes
or any Subsidiary Guarantee; or
(12) make any change in the preceding amendment and waiver
provisions.
Notwithstanding the preceding, without the consent of any Holder of notes,
Armor Holdings and the Trustee may amend or supplement the Indenture or the
notes:
(1) to cure any ambiguity, defect or inconsistency;
(2) to provide for uncertificated notes in addition to or in place
of certificated notes;
(3) to provide for the assumption of Armor Holdings' or any
Subsidiary Guarantor's obligations to Holders of notes in the case of a
merger or consolidation or sale of all or substantially all of Armor
Holdings' or such Subsidiary Guarantor's assets;
(4) to make any change that would provide any additional rights or
benefits to the Holders of notes or that does not adversely affect the
legal rights under the Indenture of any such Holder;
(5) to comply with requirements of the Commission in order to effect
or maintain the qualification of the Indenture under the Trust Indenture
Act;
(6) comply with the provision described under the "Limitations on
Issuances of Guarantees by Restricted Subsidiaries" covenant;
(7) evidence and provide for the acceptance of appointment by a
successor Trustee;
(8) to provide for the issuance of Additional Notes in accordance
with the limitations set forth in this Indenture as of the date hereof; or
(9) to allow any Subsidiary of Armor Holdings or any of its
Subsidiaries to execute a supplemental indenture to become a Subsidiary
Guarantor or to execute a Subsidiary Guarantee with respect to the notes.
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SATISFACTION AND DISCHARGE
The Indenture will be discharged and will cease to be of further effect as
to all notes issued thereunder, when:
(1) either:
(a) all notes that have been authenticated (except lost,
stolen or destroyed notes that have been replaced or paid and notes
for whose payment money has theretofore been deposited in trust and
thereafter repaid to Armor Holdings) have been delivered to the
Trustee for cancellation; or
(b) all notes that have not been delivered to the Trustee for
cancellation have become due and payable by reason of the making of
a notice of redemption or otherwise or will become due and payable
within one year and Armor Holdings or any Guarantor has irrevocably
deposited or caused to be deposited with the Trustee as trust funds
in trust solely for the benefit of the Holders, cash in U.S.
dollars, non-callable Government Securities, or a combination
thereof, in such amounts as will be sufficient without consideration
of any reinvestment of interest, to pay and discharge the entire
indebtedness on the notes not delivered to the Trustee for
cancellation for principal, premium and additional interest, if any,
and accrued interest to the date of maturity or redemption;
(2) no Default or Event of Default shall have occurred and be
continuing on the date of such deposit or shall occur as a result of such
deposit and such deposit will not result in a breach or violation of, or
constitute a default under, any other instrument to which Armor Holdings
or any Subsidiary Guarantor is a party or by which Armor Holdings or any
Subsidiary Guarantor is bound;
(3) Armor Holdings or any Subsidiary Guarantor has paid or caused to
be paid all sums payable by it under the Indenture; and
(4) Armor Holdings has delivered irrevocable instructions to the
Trustee under the Indenture to apply the deposited money toward the
payment of the notes at maturity or the redemption date, as the case may
be.
In addition, Armor Holdings must deliver an Officers' Certificate and an
Opinion of Counsel to the Trustee stating that all conditions precedent to
satisfaction and discharge have been satisfied.
CONCERNING THE TRUSTEE
If the Trustee becomes a creditor of Armor Holdings or any Subsidiary
Guarantor, the Indenture limits its right to obtain payment of claims in certain
cases, or to realize on certain property received in respect of any such claim
as security or otherwise. The Trustee will be permitted to engage in other
transactions; however, if it acquires any conflicting interest, it must
eliminate such conflict within 90 days, apply to the Commission for permission
to continue or
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resign.
The Indenture provides that in case an Event of Default shall occur and be
continuing, the Trustee will be required, in the exercise of its power, to use
the degree of care of a prudent man in the conduct of his own affairs. Subject
to such provisions, the Trustee will be under no obligation to exercise any of
its rights or powers under the Indenture at the request of any Holder of notes,
unless such Holder shall have offered to the Trustee security and indemnity
satisfactory to it against any loss, liability or expense.
BOOK-ENTRY, DELIVERY AND FORM
The notes are being offered and sold to qualified institutional buyers in
reliance on Rule 144A ("Rule 144A Notes"). Notes also may be offered and sold in
offshore transactions in reliance on Regulation S ("Regulation S Notes"). Except
as set forth below, notes will be issued in registered, global form in minimum
denominations of $1,000 and integral multiples of $1,000 in excess thereof.
Notes will be issued at the closing of this offering only against payment in
immediately available funds.
Rule 144A Notes initially will be represented by one or more notes in
registered, global form without interest coupons (collectively, the "Rule 144A
Global Notes"). Regulation S Notes initially will be represented by one or more
Notes in registered, global form without interest coupons (collectively, the
"Regulation S Global Notes" and, together with the Rule 144A Global Notes, the
"Global Notes"). The Global Notes will be deposited upon issuance with the
Trustee as custodian for The Depository Trust Company ("DTC"), in New York, New
York, and registered in the name of DTC or its nominee, in each case for credit
to an account of a direct or indirect participant in DTC as described below.
Through and including the 40th day after the later of the commencement of this
offering and the closing of this offering (such period through and including
such 40th day, the "Restricted Period"), beneficial interests in the Regulation
S Global Notes must be held solely through the Euroclear Bank S.A./N.A., as
operator of the Euroclear System ("Euroclear") and Clearstream Banking, S.A.
("Clearstream") (as indirect participants in DTC), unless transferred to a
person that takes delivery through a Rule 144A Global Note in accordance with
the certification requirements described below. Beneficial interests in the Rule
144A Global Notes may not be exchanged for beneficial interests in the
Regulation S Global Notes at any time except in the limited circumstances
described below. See "--Exchanges between Regulation S Notes and Rule 144A
Notes."
Except as set forth below, the Global Notes may be transferred, in whole
and not in part, only to another nominee of DTC or to a successor of DTC or its
nominee. Beneficial interests in the Global Notes may not be exchanged for notes
in certificated form except in the limited circumstances described below. See
"--Exchange of Book-Entry Notes for Certificated Notes." Except in the limited
circumstances described below, owners of beneficial interests in the Global
Notes will not be entitled to receive physical delivery of notes in certificated
form.
Rule 144A Notes (including beneficial interests in the Rule 144A Global
Notes) will be subject to certain restrictions on transfer and will bear a
restrictive legend. Regulation S Notes will also bear a restrictive legend. In
addition, transfers of beneficial interests in the Global Notes will
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be subject to the applicable rules and procedures of DTC and its direct or
indirect participants (including, if applicable, those of Euroclear and
Clearstream), which may change from time to time.
DEPOSITARY PROCEDURES
The following description of the operations and procedures of DTC,
Euroclear and Clearstream are provided solely as a matter of convenience. These
operations and procedures are solely within the control of the respective
settlement systems and are subject to changes by them. Armor Holdings takes no
responsibility for these operations and procedures and urges investors to
contact the system or their participants directly to discuss these matters.
DTC has advised Armor Holdings that DTC is a limited-purpose trust company
created to hold securities for its participating organizations (collectively,
the "Participants") and to facilitate the clearance and settlement of
transactions in those securities between Participants through electronic
book-entry changes in accounts of its Participants. The Participants include
securities brokers and dealers (including Wachovia Capital Markets, LLC), banks,
trust companies, clearing corporations and certain other organizations. Access
to DTC's system is also available to other entities such as banks, brokers,
dealers and trust companies that clear through or maintain a custodial
relationship with a Participant, either directly or indirectly (collectively,
the "Indirect Participants"). Persons who are not Participants may beneficially
own securities held by or on behalf of DTC only through the Participants or the
Indirect Participants. The ownership interests in, and transfers of ownership
interests in, each security held by or on behalf of DTC are recorded on the
records of the Participants and Indirect Participants.
DTC has also advised Armor Holdings that, pursuant to procedures
established by it:
(1) upon deposit of the Global Notes, DTC will credit the accounts
of Participants designated by the Wachovia Capital Markets with portions
of the principal amount of the Global Notes; and
(2) ownership of these interests in the Global Notes will be shown
on, and the transfer of ownership thereof will be effected only through,
records maintained by DTC (with respect to the Participants) or by the
Participants and the Indirect Participants (with respect to other owners
of beneficial interest in the Global Notes).
Investors in the Rule 144A Global Notes who are Participants in DTC's
system may hold their interests therein directly through DTC. Investors in the
Rule 144A Global Notes who are not Participants may hold their interests therein
indirectly through organizations (including Euroclear and Clearstream) which are
Participants in such system. Investors in the Regulation S Global Notes must
initially hold their interests therein through Euroclear or Clearstream, if they
are participants in such systems, or indirectly through organizations that are
participants in such systems. After the expiration of the Restricted Period (but
not earlier), investors may also hold interests in the Regulation S Global Notes
through Participants in the DTC system other than Euroclear and Clearstream.
Euroclear and Clearstream will hold interests in the Regulation S Global Notes
on behalf of their participants through customers' securities accounts in their
respective names on the books of their respective depositories, which are Morgan
Guaranty Trust Company of New York,
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Brussels office, as operator of Euroclear, and Citibank, N.A., as operator of
Clearstream. All interests in a Global Note, including those held through
Euroclear or Clearstream, may be subject to the procedures and requirements of
DTC. Those interests held through Euroclear or Clearstream may also be subject
to the procedures and requirements of such systems. The laws of some states
require that certain Persons take physical delivery in definitive form of
securities that they own. Consequently, the ability to transfer beneficial
interests in a Global Note to such Persons will be limited to that extent.
Because DTC can act only on behalf of Participants, which in turn act on behalf
of Indirect Participants, the ability of a Person having beneficial interests in
a Global Note to pledge such interests to Persons that do not participate in the
DTC system, or otherwise take actions in respect of such interests, may be
affected by the lack of a physical certificate evidencing such interests.
EXCEPT AS DESCRIBED BELOW, OWNERS OF INTEREST IN THE GLOBAL NOTES WILL NOT
HAVE NOTES REGISTERED IN THEIR NAMES, WILL NOT RECEIVE PHYSICAL DELIVERY OF
NOTES IN CERTIFICATED FORM AND WILL NOT BE CONSIDERED THE REGISTERED OWNERS OR
"HOLDERS" THEREOF UNDER THE INDENTURE FOR ANY PURPOSE.
Payments in respect of the principal of, and interest and premium and
additional interest, if any, on a Global Note registered in the name of DTC or
its nominee will be payable to DTC in its capacity as the registered Holder
under the Indenture. Under the terms of the Indenture, Armor Holdings and the
Trustee will treat the Persons in whose names the notes, including the Global
Notes, are registered as the owners thereof for the purpose of receiving
payments and for all other purposes. Consequently, neither Armor Holdings, the
Trustee nor any agent of Armor Holdings or the Trustee has or will have any
responsibility or liability for:
(1) any aspect of DTC's records or any Participant's or Indirect
Participant's records relating to or payments made on account of
beneficial ownership interest in the Global Notes or for maintaining,
supervising or reviewing any of DTC's records or any Participant's or
Indirect Participant's records relating to the beneficial ownership
interests in the Global Notes; or
(2) any other matter relating to the actions and practices of DTC or
any of its Participants or Indirect Participants.
DTC has advised Armor Holdings that its current practice, upon receipt of
any payment in respect of securities such as the notes (including principal and
interest), is to credit the accounts of the relevant Participants with the
payment on the payment date unless DTC has reason to believe it will not receive
payment on such payment date. Each relevant Participant is credited with an
amount proportionate to its beneficial ownership of an interest in the principal
amount of the relevant security as shown on the records of DTC. Payments by the
Participants and the Indirect Participants to the beneficial owners of notes
will be governed by standing instructions and customary practices and will be
the responsibility of the Participants or the Indirect Participants and will not
be the responsibility of DTC, the Trustee or Armor Holdings. Neither Armor
Holdings nor the Trustee will be liable for any delay by DTC or any of its
Participants in identifying the beneficial owners of the notes, and Armor
Holdings and the Trustee may conclusively rely on and will be protected in
relying on instructions from DTC or its nominee for all purposes.
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Subject to certain transfer restrictions, transfers between Participants
in DTC will be effected in accordance with DTC's procedures, and will be settled
in same-day funds, and transfers between participants in Euroclear and
Clearstream will be effected in accordance with their respective rules and
operating procedures.
Subject to compliance with the transfer restrictions applicable to the
notes, cross-market transfers between the Participants in DTC, on the one hand,
and Euroclear or Clearstream participants, on the other hand, will be effected
through DTC in accordance with DTC's rules on behalf of Euroclear or
Clearstream, as the case may be, by its respective depositary; however, such
cross-market transactions will require delivery of instructions to Euroclear or
Clearstream, as the case may be, by the counterparty in such system in
accordance with the rules and procedures and within the established deadlines
(Brussels time) of such system. Euroclear or Clearstream, as the case may be,
will, if the transaction meets its settlement requirements, deliver instructions
to its respective depositary to take action to effect final settlement on its
behalf by delivering or receiving interests in the relevant Global Note in DTC,
and making or receiving payment in accordance with normal procedures for
same-day funds settlement applicable to DTC. Euroclear participants and
Clearstream participants may not deliver instructions directly to the
depositaries for Euroclear or Clearstream.
DTC has advised Armor Holdings that it will take any action permitted to
be taken by a Holder of notes only at the direction of one or more Participants
to whose account DTC has credited the interests in the Global Notes and only in
respect of such portion of the aggregate principal amount of the notes as to
which such Participant or Participants has or have given such direction.
However, if there is an Event of Default under the notes, DTC reserves the right
to exchange the Global Notes for legended notes in certificated form, and to
distribute such notes to its Participants.
Although DTC, Euroclear and Clearstream have agreed to the foregoing
procedures to facilitate transfers of interests in the Rule 144A Global Notes
and the Regulation S Global Notes among participants in DTC, Euroclear and
Clearstream, they are under no obligation to perform or to continue to perform
such procedures, and may discontinue such procedures at any time. Neither Armor
Holdings nor the Trustee nor any of their respective agents will have any
responsibility for the performance by DTC, Euroclear or Clearstream or their
respective participants or indirect participants of their respective obligations
under the rules and procedures governing their operations.
EXCHANGE OF GLOBAL NOTES FOR CERTIFICATED NOTES
A Global Note is exchangeable for definitive notes in registered
certificated form ("Certificated Notes") if:
(1) DTC (a) notifies Armor Holdings that it is unwilling or unable
to continue as depositary for the Global Notes and Armor Holdings fails to
appoint a successor depositary or (b) has ceased to be a clearing agency
registered under the Exchange Act;
(2) Armor Holdings, at its option, notifies the Trustee in writing
that it elects to cause
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the issuance of the Certificated Notes; or
(3) there shall have occurred and be continuing a Default or Event
of Default with respect to the notes.
In addition, beneficial interests in a Global Note may be exchanged for
Certificated Notes upon prior written notice given to the Trustee by or on
behalf of DTC in accordance with the Indenture. In all cases, Certificated Notes
delivered in exchange for any Global Note or beneficial interests in Global
Notes will be registered in the names, and issued in any approved denominations,
requested by or on behalf of the depositary (in accordance with its customary
procedures) and will bear the applicable restrictive legend, unless such legend
is not required by applicable law.
EXCHANGE OF CERTIFICATED NOTES FOR GLOBAL NOTES
Certificated Notes may not be exchanged for beneficial interests in any
Global Note unless the transferor first delivers to the Trustee a written
certificate (in the form provided in the Indenture) to the effect that such
transfer will comply with the appropriate transfer restrictions applicable to
such notes.
EXCHANGES BETWEEN REGULATION S NOTES AND RULE 144A NOTES
Prior to the expiration of the Restricted Period, beneficial interests in
the Regulation S Global Note may be exchanged for beneficial interests in the
Rule 144A Global Note only if:
(1) such exchange occurs in connection with a transfer of the notes
pursuant to Rule 144A; and
(2) the transferor first delivers to the Trustee a written
certificate (in the form provided in the Indenture) to the effect that the
notes are being transferred to a Person:
(a) that the transferor reasonably believes to be a qualified
institutional buyer within the meaning of Rule 144A;
(b) purchasing for its own account or the account of a
qualified institutional buyer in a transaction meeting the
requirements of Rule 144A; and
(c) in accordance with all applicable securities laws of the
states of the United States and other jurisdictions.
Beneficial interests in a Rule 144A Global Note may be transferred to a
Person who takes delivery in the form of an interest in the Regulation S Global
Note, whether before or after the expiration of the Restricted Period, only if
the transferor first delivers to the Trustee a written certificate (in the form
provided in the Indenture) to the effect that such transfer is being made in
accordance with Rule 903 or 904 of Regulation S or Rule 144 (if available) and
that, if such transfer occurs prior to the expiration of the Restricted Period,
the interest transferred will be held immediately thereafter through Euroclear
or Clearstream.
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Transfers involving exchanges of beneficial interests between the
Regulation S Global Notes and the Rule 144A Global Notes will be effected in DTC
by means of an instruction originated by the Trustee through the DTC
Deposit/Withdraw at Custodian system. Accordingly, in connection with any such
transfer, appropriate adjustments will be made to reject a decrease in the
principal amount of the Regulation S Global Note and a corresponding increase in
the principal amount of the Rule 144A Global Note or vice versa, as applicable.
Any beneficial interest in one of the Global Notes that is transferred to a
Person who takes delivery in the form of an interest in the other Global Note
will, upon transfer, cease to be an interest in such Global Note and will become
an interest in the other Global Note and, accordingly, will thereafter be
subject to all transfer restrictions and other procedures applicable to
beneficial interest in such other Global Note for so long as it remains such an
interest. The policies and practices of DTC may prohibit transfers of beneficial
interests in the Regulation S Global Note prior to the expiration of the
Restricted Period.
SAME DAY SETTLEMENT AND PAYMENT
Armor Holdings will make payments in respect of the notes represented by
the Global Notes (including principal, premium, if any, interest and additional
interest, if any) by wire transfer of immediately available funds to the
accounts specified by the Global Note Holder. Armor Holdings will make all
payments of principal, interest and premium and additional interest, if any,
with respect to Certificated Notes by wire transfer of immediately available
funds to the accounts specified by the Holders thereof or, if no such account is
specified, by mailing a check to each such Holder's registered address. The
notes represented by the Global Notes are expected to be eligible to trade in
the PORTAL (Trade Mark) Market and to trade in DTC's Same-Day Funds Settlement
System, and any permitted secondary market trading activity in such Notes will,
therefore, be required by DTC to be settled in immediately available funds.
Armor Holdings expects that secondary trading in any Certificated Notes will
also be settled in immediately available funds.
Because of time zone differences, the securities account of a Euroclear or
Clearstream participant purchasing an interest in a Global Note from a
Participant in DTC will be credited, and any such crediting will be reported to
the relevant Euroclear or Clearstream participant, during the securities
settlement processing day (which must be a business day for Euroclear and
Clearstream) immediately following the settlement date of DTC. DTC has advised
Armor Holdings that cash received in Euroclear or Clearstream as a result of
sales of interests in a Global Note by or through a Euroclear or Clearstream
participant to a Participant in DTC will be received with value on the
settlement date of DTC but will be available in the relevant Euroclear or
Clearstream cash account only as of the business day for Euroclear or
Clearstream following DTC's settlement date.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as any
other capitalized terms used herein for which no definition is provided.
"Acquired Debt" means, with respect to any specified Person:
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(1) Indebtedness of any other Person existing at the time such other
Person is merged with or into, or becomes a Subsidiary of, such specified
Person, whether or not such Indebtedness is incurred in connection with,
or in contemplation of, such other Person merging with or into, or
becoming a Subsidiary of, such specified Person; and
(2) Indebtedness secured by a Lien encumbering any asset acquired by
such specified Person.
"Affiliate" of any specified Person means (1) any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person or (2) any executive officer or director of
such specified Person. For purposes of this definition, "control," as used with
respect to any Person, shall mean the possession, directly or indirectly, of the
power to direct or cause the direction of the management or policies of such
Person, whether through the ownership of voting securities, by agreement or
otherwise; provided that beneficial ownership of 10% or more of the Voting Stock
of a Person shall be deemed to be control. For purposes of this definition, the
terms "controlling," "controlled by" and "under common control with" shall have
correlative meanings.
"Asset Sale" means:
(1) the sale, lease, conveyance or other disposition of any assets
or rights; provided that the sale, lease, conveyance or other disposition
of all or substantially all of the assets of Armor Holdings and its
Restricted Subsidiaries taken as a whole will be governed by the
provisions of the Indenture described above under the caption
"--Repurchase at the Option of Holders --Change of Control" and/or the
provisions described above under the caption "--Certain Covenants--
Merger, Consolidation or Sale of All or Substantially All Assets" and not
by the provisions of the covenant described above under the caption
"--Repurchases at the Option of Holders--Asset Sales;" and
(2) the issuance of Equity Interests by any of Armor Holdings'
Restricted Subsidiaries or the sale by Armor Holdings or any Restricted
Subsidiary of Equity Interests in any of its Subsidiaries.
Notwithstanding the preceding, the following items shall be deemed not to
be Asset Sales:
(1) any Qualifying Services Division Sale, provided that Armor
Holdings or any Restricted Subsidiary receives consideration at the time
of such Qualifying Services Division Sale at least equal to the fair
market value of the assets or Equity Interests issued or sold or otherwise
disposed of and such fair market value is determined by Armor Holdings'
Board of Directors and evidenced by a resolution of the Board of Directors
set forth in an Officers' Certificate delivered to the Trustee;
(2) any Qualifying USDS Sale, provided that Armor Holdings or any
Restricted Subsidiary receives consideration at the time of such
Qualifying USDS Sale at least equal to the fair market value of the assets
or Equity Interests issued or sold or otherwise disposed of and such fair
market value is determined by Armor Holdings' Board of Directors and
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evidenced by a resolution of the Board of Directors set forth in an
Officers' Certificate delivered to the Trustee;
(3) any single transaction or series of related transactions that
involves assets having a fair market value of less than $5.0 million;
(4) a transfer of assets between or among Armor Holdings and its
Restricted Subsidiaries;
(5) an issuance of Equity Interests by a Restricted Subsidiary to
Armor Holdings or to another Restricted Subsidiary;
(6) the sale or lease of equipment, inventory, accounts receivable
or other assets in the ordinary course of business;
(7) the sale or other disposition of Cash Equivalents;
(8) a Restricted Payment that is permitted by the covenant described
above under the "Restricted Payments" covenant; and
(9) any sale or disposition of any property or equipment that has
become damaged, worn out, obsolete or otherwise not useful or no longer
used by Armor Holdings in connection with the business of Armor Holdings
or its Restricted Subsidiaries.
"Attributable Debt" in respect of a sale and leaseback transaction means,
at the time of determination, the present value of the obligation of the lessee
for net rental payments during the remaining term of the lease included in such
sale and leaseback transaction, including any period for which such lease has
been extended or may, at the option of the lessor, be extended. Such present
value shall be calculated using a discount rate equal to the rate of interest
implicit in such transaction, determined in accordance with GAAP.
"Beneficial Owner" has the meaning assigned to such term in Rule 13d-3 and
Rule 13d-5 under the Exchange Act, except that in calculating the beneficial
ownership of any particular "person" (as that term is used in Section 13(d)(3)
of the Exchange Act), such "person" shall be deemed to have beneficial ownership
of all securities that such "person" has the right to acquire by conversion or
exercise of other securities, whether such right is currently exercisable or is
exercisable only upon the occurrence of a subsequent condition. The terms
"Beneficially Owns" and "Beneficially Owned" shall have a corresponding meaning.
"Board of Directors" means:
(1) with respect to a corporation, the board of directors of the
corporation;
(2) with respect to a partnership, the board of directors of the
general partner of the partnership; and
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(3) with respect to any other Person, the board or committee of such
Person serving a similar function.
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that would
at that time be required to be capitalized on a balance sheet in accordance with
GAAP.
"Capital Stock" means:
(1) in the case of a corporation, corporate stock;
(2) in the case of an association or business entity, any and all
shares, interests, participations, rights or other equivalents (however
designated) of corporate stock;
(3) in the case of a partnership or limited liability company,
partnership or membership interests (whether general or limited); and
(4) any other interest or participation that confers on a Person the
right to receive a share of the profits and losses of, or distributions of
assets of, the issuing Person.
"Cash Equivalents" means:
(1) United States dollars;
(2) securities issued or directly and fully guaranteed or insured by
the United States government or any agency or instrumentality thereof
(provided that the full faith and credit of the United States is pledged
in support thereof) having maturities of not more than six months from the
date of acquisition;
(3) certificates of deposit and eurodollar time deposits with
maturities of six months or less from the date of acquisition, bankers'
acceptances with maturities not exceeding six months and overnight bank
deposits, in each case, with any domestic commercial bank having capital
and surplus in excess of $500.0 million and a Thomson Bank Watch Rating of
"B" or better;
(4) repurchase obligations with a term of not more than seven days
for underlying securities of the types described in clauses (2) and (3)
above entered into with any financial institution meeting the
qualifications specified in clause (3) above;
(5) commercial paper having the highest rating obtainable from
Moody's Investors Service, Inc. or Standard & Poor's, a division of the
McGraw-Hill Companies, Inc. and in each case maturing within six months
after the date of acquisition; and
(6) money market funds, at least 95% of the assets of which
constitute Cash Equivalents of the kinds described in clauses (1) through
(5) of this definition.
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"Change of Control" means the occurrence of any of the following:
(1) the direct or indirect sale, transfer, conveyance or other
disposition (other than by way of merger or consolidation), in one or a
series of related transactions, of all or substantially all of the
properties or assets of Armor Holdings and its Restricted Subsidiaries,
taken as a whole, to any "person" (as that term is used in Section
13(d)(3) of the Exchange Act);
(2) the adoption of a plan relating to the liquidation or
dissolution of Armor Holdings;
(3) any "person" or "group" (as such terms are used in Sections
13(d) and 14(d) of the Exchange Act) becomes the ultimate Beneficial
Owner, directly or indirectly, of 50% or more of the voting power of the
Voting Stock of Armor Holdings;
(4) the first day on which a majority of the members of the Board of
Directors of Armor Holdings are not Continuing Directors; or
(5) Armor Holdings consolidates with, or merges with or into, any
Person, or any Person consolidates with, or merges with or into Armor
Holdings, in any such event pursuant to a transaction in which any of the
outstanding Voting Stock of Armor Holdings or such other Person is
converted into or exchanged for cash, securities or other property, other
than any such transaction where (A) the Voting Stock of Armor Holdings
outstanding immediately prior to such transaction is converted into or
exchanged for Voting Stock (other than Disqualified Stock) of the
surviving or transferee Person constituting a majority of the outstanding
shares of such Voting Stock of such surviving or transferee Person
(immediately after giving effect to such issuance) and (B) immediately
after such transaction, no "person" or "group" (as such terms are used in
Section 13(d) and 14(d) of the Exchange Act) becomes, directly or
indirectly, the beneficial owner (as defined above) of 50% or more of the
voting power of all classes of Voting Stock of Armor Holdings.
"Consolidated Cash Flow" means, with respect to any specified Person for
any period, the Consolidated Net Income of such Person for such period plus:
(1) provision for taxes based on income or profits of such Person
and its Restricted Subsidiaries for such period, to the extent that such
provision for taxes was deducted in computing such Consolidated Net
Income; plus
(2) Fixed Charges to the extent deducted in computing such
Consolidated Net Income; plus
(3) depreciation, amortization (including amortization of goodwill
and other intangibles but excluding amortization of prepaid cash expenses
that were paid in a prior period) and other non-cash expenses (excluding
any such non-cash expense to the extent that it represents an accrual of
or reserve for cash expenses in any future period or amortization of a
prepaid cash expense that was paid in a prior period) of such Person and
its Subsidiaries
137
for such period to the extent that such depreciation, amortization and
other non-cash expenses were deducted in computing such Consolidated Net
Income; minus
(4) non-cash items increasing such Consolidated Net Income for such
period, other than the accrual of revenue consistent with past practice,
in each case, on a consolidated basis and determined in accordance with
GAAP.
Notwithstanding the preceding, the provision for taxes based on the income
or profits of, and the depreciation and amortization and other non-cash expenses
of, a Restricted Subsidiary of Armor Holdings shall be added to Consolidated Net
Income to compute Consolidated Cash Flow of Armor Holdings only to the extent
that a corresponding amount would be permitted at the date of determination to
be paid as a dividend to Armor Holdings by such Restricted Subsidiary without
prior governmental approval (that has not been obtained), and without direct or
indirect restriction pursuant to the terms of its charter and all agreements,
instruments, judgments, decrees, orders, statutes, rules and governmental
regulations applicable to that Subsidiary or its stockholders.
"Consolidated Net Income" means, with respect to any specified Person for
any period, the aggregate of the Net Income of such Person and its Subsidiaries
for such period, on a consolidated basis, determined in accordance with GAAP;
provided that:
(1) the Consolidated Net Income of Armor Holdings and its
Subsidiaries for any period shall be deemed to exclude any extraordinary
integration costs incurred in connection with acquisitions or divestitures
and other non-recurring charges or costs to the extent such charges or
costs were included in the computation of the Consolidated EBITDA (as
defined in the Credit Agreement) of Armor Holdings for such period for the
purposes of the Credit Agreement;
(2) the Net Income (but not loss) of any Person that is not a
Restricted Subsidiary or that is accounted for by the equity method of
accounting shall be included only to the extent of the amount of dividends
or distributions paid in cash to the specified Person or a Wholly Owned
Restricted Subsidiary thereof;
(3) the Net Income of any Restricted Subsidiary shall be excluded to
the extent that the declaration or payment of dividends or similar
distributions by that Restricted Subsidiary of that Net Income is not at
the date of determination permitted without any prior governmental
approval (that has not been obtained) or, directly or indirectly, by
operation of the terms of its charter or any agreement, instrument,
judgment, decree, order, statute, rule or governmental regulation
applicable to that Restricted Subsidiary or its equityholders;
(4) the Net Income of any Person acquired during the specified
period for any period prior to the date of such acquisition shall be
excluded;
(5) the cumulative effect of a change in accounting principles shall
be excluded; and
(6) the Net Income (but not loss) of any Unrestricted Subsidiary
shall be excluded, whether or not distributed to the specified Person or
one of its Subsidiaries.
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"Consolidated Net Worth" means, with respect to any specified Person
as of any date, the sum of:
(1) the consolidated equity of the common stockholders of such
Person and its consolidated Restricted Subsidiaries as set forth on the
most recently available quarterly or annual consolidated balance sheet of
Armor Holdings and its Restricted Subsidiaries (which shall be as of a
date not more than 90 days prior to the date of computation, and which
shall not take into account Unrestricted Subsidiaries); plus
(2) the respective amounts reported on such Person's balance sheet
as of such date with respect to any series of preferred stock (other than
Disqualified Stock) that by its terms is not entitled to the payment of
dividends unless such dividends may be declared and paid only out of net
earnings in respect of the year of such declaration and payment, but only
to the extent of any cash received by such Person upon issuance of such
preferred stock.
"Consolidated Net Tangible Assets" means the total amount of assets of any
Person on a consolidated basis, including deferred pension costs, after
deducting therefrom (i) all current liabilities (excluding any indebtedness
classified as a current liability), (ii) all goodwill, tradenames, trademarks,
patents, unamortized debt discount and financing costs and all other like
intangible assets and (iii) appropriate adjustments on account of minority
interests of other Persons holding shares of the Subsidiaries of such Person,
all as set forth in the most recent balance sheet of such Person and its
consolidated Subsidiaries (but, in any event, as of a date within 150 days of
the date of determination) and computed in accordance with generally accepted
accounting principles.
"Continuing Directors" means, as of any date of determination, any member
of the Board of Directors of Armor Holdings who:
(1) was a member of such Board of Directors on the date of the
Indenture; or
(2) was nominated for election or elected to such Board of Directors
with the approval of a majority of the Continuing Directors who were
members of such Board at the time of such nomination or election.
"Credit Agreement" means that certain Credit Agreement to be entered into
on or within five days after the date of original issuance of the notes by and
among Armor Holdings, Bank of America, N.A., as Administrative Agent and
Arranger and the other lenders named therein in relation to a $60 million senior
secured revolving credit facility, including any related letters of credit,
notes, Guarantees, collateral documents, instruments and agreements executed in
connection therewith, and in each case, as amended, restated, modified, renewed,
refunded, replaced or refinanced from time to time by one or more credit
facilities, in which case, the credit agreement or similar agreement together
with all other documents and instruments related shall constitute the "Credit
Agreement," whether with the same or different agent and lenders.
"Credit Facilities" means, one or more debt facilities (including, without
limitation, the Credit Agreement (and any hedging arrangements with the lenders
thereunder or Affiliates of such
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lenders, secured by the collateral securing Armor Holdings' Obligations under
the Credit Agreement)) or commercial paper facilities, in each case with banks
or other institutional lenders providing for revolving credit loans, term loans,
receivables financing (including through the sale of receivables to such lenders
or to special purpose entities formed to borrow from such lenders against such
receivables) or letters of credit, in each case, as amended, restated, modified,
renewed, refunded, replaced or refinanced in whole or in part from time to time
by one or more of such facilities, whether with the same or different banks and
lenders.
"Current Trading Price" means, with respect to any shares of Equity
Interests, any sale price (regular way) quoted on the New York Stock Exchange,
or any other national securities exchange or quotation system on which such
Equity Interests are listed or quoted, on the applicable date of purchase,
repurchase or redemption.
"Default" means any event that is, or with the passage of time or the
giving of notice or both would be, an Event of Default.
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible, or for which it is
exchangeable, in each case at the option of the holder thereof), or upon the
happening of any event, matures or is mandatorily redeemable, pursuant to a
sinking fund obligation or otherwise, or redeemable at the option of the holder
thereof, in whole or in part, on or prior to the date that is one year after the
date on which the notes mature. Notwithstanding the preceding sentence, any
Capital Stock that would constitute Disqualified Stock solely because the
holders thereof have the right to require Armor Holdings to repurchase such
Capital Stock upon the occurrence of a change of control or an asset sale shall
not constitute Disqualified Stock if the terms of such Capital Stock provide
that Armor Holdings may not repurchase or redeem any such Capital Stock pursuant
to such provisions unless such repurchase or redemption complies with the
"Restricted Payments" covenant. The term "Disqualified Stock" shall also include
any options, warrants or other rights that are convertible into Disqualified
Stock or that are redeemable at the option of the holder, or required to be
redeemed, on or prior to the date that is one year after the date on which the
notes mature.
"Discontinued Domestic Subsidiary" means any of the following Subsidiaries
of Armor Holdings (i) ArmorGroup North America, Inc., (ii) Armor Group Services,
LLC, (iii) CDR International, Inc., (iv) U.S. Defense Systems, LLC, (v) O'Gara
Security Associates, Inc., (vi) ITI Limited Partnership, (vii) International
Training, Inc., (viii) Network Audit Systems, Inc., (ix) New Technologies Armor,
Inc., (x) The Parvus Company, (xi) Parvus Crisis Management Corporation, and
(xii) The Parvus International Information Company.
"Domestic Subsidiary" means any Subsidiary of Armor Holdings that was
formed under the laws of the United States or any state thereof or the District
of Columbia.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Existing Indebtedness" means the aggregate principal amount of
Indebtedness of Armor
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Holdings and its Subsidiaries (other than Indebtedness under the Credit
Agreement and the notes) in existence on the date of the Indenture, until such
amounts are repaid.
"fair market value" means the price that would be paid in an arm's-length
transaction between an informed and willing seller under no compulsion to sell
and an informed and willing buyer under no compulsion to buy, as determined in
good faith by the Board of Directors, whose determination shall be conclusive if
evidenced by a Board Resolution.
"Fixed Charges" means, with respect to any specified Person for any
period, the sum, without duplication, of:
(1) the consolidated interest expense of such Person and its
Subsidiaries for such period, whether paid or accrued, including, without
limitation, amortization of debt issuance costs and original issue
discount, non-cash interest payments, the interest component of any
deferred payment obligations, the interest component of all payments
associated with Capital Lease Obligations, imputed interest with respect
to Attributable Debt, commissions, discounts and other fees and charges
incurred in respect of letter of credit or bankers' acceptance financings,
and net of the effect of all payments made or received pursuant to Hedging
Obligations; plus
(2) the consolidated interest of such Person and its Restricted
Subsidiaries that was capitalized during such period; plus
(3) any interest expense on Indebtedness of another Person that is
Guaranteed by such Person or one of its Restricted Subsidiaries or secured
by a Lien on assets of such Person or one of its Restricted Subsidiaries,
whether or not such Guarantee or Lien is called upon; plus
(4) the product of (a) all dividends, whether paid or accrued and
whether or not in cash, on any series of Disqualified Stock or preferred
stock of such Person or any of its Restricted Subsidiaries, other than
dividends on Equity Interests payable solely in Equity Interests of Armor
Holdings (other than Disqualified Stock) or to Armor Holdings or a
Restricted Subsidiary of Armor Holdings, times (b) a fraction, the
numerator of which is one and the denominator of which is one minus the
then current combined federal, state and local statutory tax rate of such
Person, expressed as a decimal, in each case, on a consolidated basis and
in accordance with GAAP.
"Fixed Charge Coverage Ratio" means with respect to any specified Person
for any period, the ratio of the Consolidated Cash Flow of such Person for such
period to the Fixed Charges of such Person for such period. In the event that
the specified Person or any of its Subsidiaries incurs, assumes, Guarantees,
repays, repurchases or redeems any Indebtedness or issues, repurchases or
redeems preferred stock subsequent to the commencement of the period for which
the Fixed Charge Coverage Ratio is being calculated and on or prior to the date
on which the event for which the calculation of the Fixed Charge Coverage Ratio
is made (the "Calculation Date"), then the Fixed Charge Coverage Ratio shall be
calculated giving pro forma effect to such incurrence, assumption, Guarantee,
repayment, repurchase or
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redemption of Indebtedness, or such issuance, repurchase or redemption of
preferred stock, and the use of the proceeds therefrom as if the same had
occurred at the beginning of the applicable four-quarter reference period.
In addition, for purposes of calculating the Fixed Charge Coverage Ratio:
(1) acquisitions and dispositions of business entities or property
and assets constituting a division or line of business of any Person that
have been made by the specified Person or any of its Restricted
Subsidiaries, including through mergers or consolidations and including
any related financing transactions, during the four-quarter reference
period or subsequent to such reference period and on or prior to the
Calculation Date shall be given pro forma effect as if they had occurred
on the first day of the four-quarter reference period and Consolidated
Cash Flow for such reference period shall be calculated on a pro forma
basis in accordance with Regulation S-X under the Exchange Act;
(2) the Consolidated Cash Flow attributable to discontinued
operations, as determined in accordance with GAAP shall be excluded;
(3) the Fixed Charges attributable to discontinued operations, as
determined in accordance with GAAP shall be excluded, but only to the
extent that the obligations giving rise to such Fixed Charges will not be
obligations of the specified Person or any of its Subsidiaries following
the Calculation Date; and
(4) consolidated interest expense attributable to interest on any
Indebtedness (whether existing or being incurred) computed on a pro forma
basis and bearing a floating interest rate shall be computed as if the
rate in effect on the Calculation Date (taking into account any interest
rate option, swap, cap or similar agreement applicable to such
Indebtedness if such agreement has a remaining term in excess of 12 months
or, if shorter, at least equal to the remaining term of such Indebtedness)
had been the applicable rate for the entire period.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants, the opinions and pronouncements of
the Public Company Accounting Oversight Board and in the statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as have been approved by a significant segment
of the accounting profession, which are in effect from time to time.
"Guarantee" means a guarantee, other than by endorsement of negotiable
instruments for collection in the ordinary course of business, direct or
indirect, in any manner including, without limitation, by way of a pledge of
assets or through letters of credit or reimbursement agreements in respect
thereof, of all or any part of any Indebtedness. The terms "guarantee" and
"guaranteed" used as a verb shall have a correlative meaning.
"Hedging Obligations" means, with respect to any specified Person, the
obligations of such Person under:
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(1) interest rate swap agreements, interest rate cap agreements,
interest rate collar agreements and other agreements or arrangements
designed to protect such Person against fluctuations in interest rates;
(2) commodity swap agreements, commodity option agreements, forward
contracts and other agreements or arrangements designed to protect such
Person against fluctuations in commodity prices; and
(3) foreign exchange contracts, currency swap agreements and other
agreements or arrangements designed to protect such Person against
fluctuations in foreign currency exchange rates.
"incur" means, with respect to any Indebtedness, to incur, create, issue,
assume, Guarantee or otherwise become directly or indirectly liable for or with
respect to, or become responsible for, the payment of, contingently or
otherwise, such Indebtedness; provided that (1) any Indebtedness of a Person
existing at the time such Person becomes a Restricted Subsidiary will be deemed
to be incurred by such Restricted Subsidiary at the time it becomes a Restricted
Subsidiary and (2) neither the accrual of interest nor the accretion of original
issue discount nor the payment of interest in the form of additional
Indebtedness (to the extent provided for when the Indebtedness on which such
interest is paid was originally issued) shall be considered an incurrence of
Indebtedness.
"Indebtedness" means, with respect to any specified Person, any
indebtedness of such Person, whether or not contingent, in respect of:
(1) borrowed money;
(2) evidenced by bonds, notes, debentures or similar instruments or
letters of credit (or reimbursement agreements in respect thereof), but
excluding obligations with respect to letters of credit (including trade
letters of credit) securing obligations described in clause (5) below
entered into in the ordinary course of business of such Person to the
extent such letters of credit are not drawn upon or, if drawn upon, to the
extent such drawing is reimbursed no later than the third business day
following receipt by such Person of a demand for reimbursement;
(3) banker's acceptances;
(4) Capital Lease Obligations and Attributable Debt;
(5) the balance deferred and unpaid of the purchase price of any
property which purchase price is due more than six months after the date
of placing such property in service or taking delivery and title thereto
or the completion of such services, except any such balance that
constitutes an accrued expense or trade payable;
(6) Hedging Obligations, other than Hedging Obligations that are
incurred for the purpose of protecting Armor Holdings or its Restricted
Subsidiaries against fluctuations in interest rates, commodity prices or
foreign currency exchange rates, and not for speculative
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purposes, and that do not increase the Indebtedness of the obligor
outstanding at any time other than as a result of fluctuations in interest
rates, commodity prices or foreign currency exchange rates or by reason of
fees, indemnities and compensation payable thereunder; or
(7) Disqualified Stock valued at the greater of its voluntary or
involuntary maximum fixed repurchase price plus accrued dividends.
In addition, the term "Indebtedness" includes (x) all Indebtedness of
others secured by a Lien on any asset of the specified Person (whether or not
such Indebtedness is assumed by the specified Person), provided that the amount
of such Indebtedness shall be the lesser of (A) the fair market value of such
asset at such date of determination and (B) the amount of such Indebtedness, and
(y) to the extent not otherwise included, the Guarantee by the specified Person
of any Indebtedness of any other Person. For purposes hereof, the "maximum fixed
repurchase price" of any Disqualified Stock which does not have a fixed
repurchase price shall be calculated in accordance with the terms of such
Disqualified Stock as if such Disqualified Stock were purchased on any date on
which Indebtedness shall be required to be determined pursuant to the Indenture,
and if such price is based upon, or measured by, the fair market value of such
Disqualified Stock, such fair market shall be determined in good faith by the
Board of Directors of the issuer of such Disqualified Stock.
The amount of any Indebtedness outstanding as of any date shall be the
outstanding balance at such date of all unconditional obligations as described
above and, with respect to contingent obligations, the maximum liability upon
the occurrence of the contingency giving rise to the obligation, and shall be:
(1) the accreted value thereof, in the case of any Indebtedness
issued with original issue discount; and
(2) the principal amount thereof, together with any interest thereon
that is more than 30 days past due, in the case of any other Indebtedness;
provided that the obligation to repay money borrowed and set aside at the time
of the incurrence of any Indebtedness in order to pre-fund the payment of the
interest on such Indebtedness shall be deemed not to be "Indebtedness" so long
as such money is held to secure the payment of such interest.
"Investments" means, with respect to any Person, all direct or indirect
investments by such Person in other Persons (including Affiliates) in the forms
of loans or other extensions of credit (including Guarantees or other
arrangements, but excluding advances to customers or suppliers in the ordinary
course of business that are, in conformity with GAAP, recorded as accounts
receivable, prepaid expenses or deposits on the balance sheet of Armor Holdings
or its Restricted Subsidiaries and endorsements for collection or deposit
arising in the ordinary course of business), advances (excluding commission,
travel and similar advances to officers and employees made consistent with past
practices), capital contributions (by means of any transfer of cash or other
property to others or any payment for property or services for the account or
use of others), purchases or other acquisitions for consideration of
Indebtedness, Equity Interests or other securities, together with all
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items that are or would be classified as investments on a balance sheet prepared
in accordance with GAAP.
If Armor Holdings or any Restricted Subsidiary of Armor Holdings sells or
otherwise disposes of any Equity Interests of any direct or indirect Restricted
Subsidiary of Armor Holdings such that, after giving effect to any such sale or
disposition, such Person is no longer a Restricted Subsidiary of Armor Holdings,
Armor Holdings shall be deemed to have made an Investment on the date of any
such sale or disposition equal to the fair market value of the Investment in
such Restricted Subsidiary not sold or disposed of in an amount determined as
provided in the final paragraph of the above "Restricted Payments" covenant. The
acquisition by Armor Holdings or any Restricted Subsidiary of Armor Holdings of
a Person that holds an Investment in a third Person shall be deemed to be an
Investment by Armor Holdings or such Restricted Subsidiary in such third Person
in an amount equal to the fair market value of the Investment held by the
acquired Person in such third Person in an amount determined as provided in the
final paragraph of the "Restricted Payments" covenant.
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law,
including any conditional sale or other title retention agreement, any lease in
the nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement under
the Uniform Commercial Code (or equivalent statutes) of any jurisdiction.
"Net Income" means, with respect to any specified Person, the net income
(loss) of such Person, determined in accordance with GAAP and before any
reduction in respect of preferred stock dividends, excluding, however:
(1) any gain (but not loss), together with any related provision for
taxes on such gain (but not loss), realized in connection with: (a) any
asset sale outside the ordinary course of business; or (b) the disposition
of any securities by such Person or any of its Restricted Subsidiaries or
the extinguishment of any Indebtedness of such Person or any of its
Restricted Subsidiaries; and
(2) any extraordinary gain (but not loss), together with any related
provision for taxes on such extraordinary gain (but not loss).
"Net Proceeds" means the aggregate cash proceeds received by Armor
Holdings or any of its Restricted Subsidiaries in respect of any Asset Sale
(including, without limitation, any cash received upon the sale or other
disposition of any non-cash consideration received in any Asset Sale), net of
the direct costs relating to such Asset Sale, including, without limitation,
legal, accounting and investment banking fees, and sales commissions, and any
relocation expenses incurred as a result thereof, taxes paid or payable as a
result thereof, in each case, after taking into account any available tax
credits or deductions and any tax sharing arrangements, and amounts required to
be applied to the repayment of Indebtedness, secured by a Lien on the asset or
assets that were the subject of such Asset Sale and any reserve for adjustment
in respect of the sale price of such asset or assets established in accordance
with GAAP.
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"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Permitted Business" means any business conducted or proposed to be
conducted (as described in the offering memorandum) by Armor Holdings and its
Restricted Subsidiaries on the date of the Indenture and other businesses
reasonably related or ancillary thereto.
"Permitted Investments" means:
(1) any Investment in Armor Holdings or in a Wholly Owned Restricted
Subsidiary of Armor Holdings (including, without limitation, Guarantees of
Obligations with respect to any Credit Facilities);
(2) any Investment in Cash Equivalents;
(3) any Investment by Armor Holdings or any Restricted Subsidiary of
Armor Holdings in a Person, if as a result of such Investment:
(a) such Person becomes a Wholly Owned Restricted Subsidiary of
Armor Holdings; or
(b) such Person is merged, consolidated or amalgamated with or into,
or transfers or conveys substantially all of its assets to, or is
liquidated into, Armor Holdings or a Wholly Owned Restricted Subsidiary of
Armor Holdings;
(4) any Investment made as a result of the receipt of non-cash
consideration from an Asset Sale that was made pursuant to and in
compliance with the covenant described above under the caption
"--Repurchase at the Option of Holders--Asset Sales";
(5) Investments acquired solely in exchange for the issuance of
Equity Interests (other than Disqualified Stock) of Armor Holdings;
(6) Hedging Obligations that are incurred for the purpose of
protecting Armor Holdings or its Restricted Subsidiaries against
fluctuations in interest rates, commodity prices or foreign currency
exchange rates, and not for speculative purposes, and that do not increase
the Indebtedness of the obligor outstanding at any time other than as a
result of fluctuations in interest rates, commodity prices or foreign
currency exchange rates or by reason of fees, indemnifies and compensation
payable thereunder;
(7) other Investments in any Person that is not an Affiliate of
Armor Holdings (other than a Wholly Owned Restricted Subsidiary of Armor
Holdings) having an aggregate fair market value (measured on the date each
such Investment was made and without giving effect to subsequent changes
in value), when taken together with all other Investments made pursuant to
this clause (7) since the date of the Indenture, not to exceed 5% of Armor
146
Holdings' Consolidated Net Tangible Assets; and
(8) stock, obligations or securities received in satisfaction of
judgments.
"Permitted Liens" means:
(1) Liens on the assets of Armor Holdings and any Subsidiary
Guarantor securing Senior Debt that was permitted by the terms of the
Indenture to be incurred;
(2) Liens in favor of Armor Holdings or any Restricted Subsidiary;
(3) Liens on property of a Person existing at the time such Person
is merged with or into or consolidated with Armor Holdings or any
Restricted Subsidiary of Armor Holdings (or any Lien on the proceeds from
any sale, liquidation or other disposition of such property); provided
that such Liens were in existence prior to the contemplation of such
merger or consolidation and do not extend to any assets other than those
of the Person merged into or consolidated with Armor Holdings or the
Restricted Subsidiary;
(4) Liens on property existing at the time of acquisition thereof by
Armor Holdings or any Restricted Subsidiary of Armor Holdings (or any Lien
on the proceeds from any sale, liquidation or other disposition of such
property), provided that such Liens were in existence prior to the
contemplation of such acquisition and do not extend to any property other
than the property so acquired by Armor Holdings or the Restricted
Subsidiary;
(5) Liens existing on the date of the Indenture;
(6) In addition to all other Permitted Liens, Liens incurred in the
ordinary course of business of Armor Holdings or any Restricted Subsidiary
of Armor Holdings with respect to obligations that do not exceed $5.0
million at any one time outstanding;
(7) Liens to secure Indebtedness (including Capital Lease
Obligations) permitted by clause (4) of the second paragraph of the
covenant entitled "Certain Covenants Incurrence of Indebtedness and
Issuance of Preferred Stock" covering only the assets acquired with such
Indebtedness (or any Lien on the proceeds from any sale, liquidation or
other disposition of such assets);
(8) statutory and common law Liens of landlords and carriers,
warehousemen, mechanics, suppliers, materialmen, repairmen or other
similar Liens arising in the ordinary course of business and with respect
to amounts not yet delinquent or being contested in good faith by
appropriate legal proceedings promptly instituted and diligently conducted
and for which a reserve or other appropriate provision, if any, as shall
be required in conformity with GAAP shall have been made;
(9) Liens upon specific items of inventory or other goods and
proceeds of any Person securing such Person's obligations in respect of
bankers' acceptances issued or created for the account of such Person to
facilitate the purchase, shipment or storage of such inventory
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or other goods;
(10) Liens securing reimbursement obligations with respect to
letters of credit and surety or performance bonds issued in the ordinary
course of business, provided that such letters of credit or surety or
performance bonds do not constitute Indebtedness;
(11) Liens for taxes, assessments or other governmental charges not
yet subject to penalties for non-payment or which are being contested in
good faith by appropriate proceedings provided appropriate reserves
required pursuant to GAAP have been made in respect thereof; and
(12) encumbrances, easements or reservations of, or rights of others
for, licenses, rights of way, sewers, electric lines, telegraph and
telephone lines and other similar purposes, or zoning or other
restrictions as to the use of real properties or liens incidental to the
conduct of the business of such Person or to the ownership of its
properties which do not in the aggregate materially adversely affect the
value of the said properties or materially impair their use in the
operation of the business of such Person.
"Permitted Refinancing Indebtedness" means any Indebtedness of Armor
Holdings or any of its Restricted Subsidiaries issued in exchange for, or the
net proceeds of which are used to extend, refinance, renew, replace, defease or
refund other Indebtedness of Armor Holdings or any of its Restricted
Subsidiaries (other than intercompany Indebtedness); provided that:
(1) the principal amount (or accreted value, if applicable) of such
Permitted Refinancing Indebtedness does not exceed the principal amount
(or accreted value, if applicable) of the Indebtedness so extended,
refinanced, renewed, replaced, defeased or refunded (plus all accrued
interest thereon and the amount of any reasonably determined premium
necessary to accomplish such refinancing and such reasonable expenses
incurred in connection therewith);
(2) such Permitted Refinancing Indebtedness has a final maturity
date later than the final maturity date of, and has a Weighted Average
Life to Maturity equal to or greater than the Weighted Average Life to
Maturity of, the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded;
(3) if the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded is subordinated in right of payment to the
notes or the Subsidiary Guarantees, such Permitted Refinancing
Indebtedness has a final maturity date later than the final maturity date
of, and is subordinated in right of payment to, the notes on terms at
least as favorable to the Holders of notes as those contained in the
documentation governing the Indebtedness being extended, refinanced,
renewed, replaced, defeased or refunded;
(4) if the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded is pari passu in right of payment to the
notes or the Subsidiary Guarantees, such Permitted Refinancing
Indebtedness is pari passu or subordinated in right of payment to the
notes; and
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(5) such Indebtedness is incurred either by Armor Holdings or by the
Restricted Subsidiary who is the obligor on the Indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization, limited
liability company or government or other entity.
"Public Equity Offering" means an offer and sale of Capital Stock (other
than Disqualified Stock) of Armor Holdings pursuant to a registration statement
that has been declared effective by the Commission pursuant to the Securities
Act (other than a registration statement on Form S-8 or otherwise relating to
equity securities issuable under any employee benefit plan of Armor Holdings).
"Qualifying Services Division Sale" means any single transaction or series
of related transactions involving the disposition of any of the Discontinued
Domestic Subsidiaries or any other entities classified as held for sale and
presented separately as discontinued operations in Armor Holdings' audited
financial statements for the year ended and as of December 31, 2002 in
accordance with Financial Accounting Standards No. 144, in the case of each such
entity for so long as such entity is so held for sale and presented separately
as discontinued operations.
"Qualifying USDS Sale" means any single transaction or series of related
transactions involving the disposition of USDS, Inc. and its respective direct
and indirect Subsidiaries as long as the Consolidated Net Income of such
entities are excluded from the Consolidated Net Income of Armor Holdings for the
purposes of the Indenture, provided that a determination by Armor Holdings to
include the Consolidated Net Income of such entities in the Consolidated Net
Income of Armor Holdings for the purposes of the Indenture shall be irrevocable.
"Replacement Assets" means (1) non-current tangible assets that will be
used or useful in a Permitted Business or (2) substantially all the assets of a
Permitted Business or a majority of the Voting Stock of any Person engaged in a
Permitted Business that will become on the date of acquisition thereof a
Restricted Subsidiary.
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Subsidiary" of a Person means any Subsidiary of the referent
Person that is not an Unrestricted Subsidiary.
"sale and leaseback transaction" means, with respect to any Person, any
transaction involving any of the assets or properties of such Person whether now
owned or hereafter acquired, whereby such Person sells or transfers such assets
or properties and then or thereafter leases such assets or properties or any
part thereof or any other assets or properties which such Person intends to use
for substantially the same purpose or purposes as the assets or properties sold
or transferred.
"Significant Subsidiary" means any Restricted Subsidiary that would
constitute a
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"significant subsidiary" within the meaning of Article 1 of Regulation S-X under
the Exchange Act.
"Stated Maturity" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which such payment of
interest or principal was scheduled to be paid in the original documentation
governing such Indebtedness, and shall not include any contingent obligations to
repay, redeem or repurchase any such interest or principal prior to the date
originally scheduled for the payment thereof.
"Subsidiary" means, with respect to any specified Person:
(1) any corporation, association or other business entity of which
more than 50% of the total voting power of shares of Capital Stock
entitled (without regard to the occurrence of any contingency) to vote in
the election of directors, managers or trustees thereof is at the time
owned or controlled, directly or indirectly, by such Person or one or more
of the other Subsidiaries of that Person (or a combination thereof); and
(2) any partnership (a) the sole general partner or the managing
general partner of which is such Person or a Subsidiary of such Person or
(b) the only general partners of which are such Person or one or more
Subsidiaries of such Person (or any combination thereof).
"Subsidiary Guarantee" means the Guarantee by any Subsidiary Guarantor of
Armor Holdings' payment obligations under the notes on a senior subordinated
basis.
"Subsidiary Guarantors" means:
(1) each direct or indirect Domestic Subsidiary of Armor Holdings as
of the Issue Date that is a Restricted Subsidiary, other than USDS, Inc.
and the Discontinued Domestic Subsidiaries; and
(2) after the Issue Date, each Discontinued Domestic Subsidiary and
any other Subsidiary that executes a Subsidiary Guarantee in accordance
with the provisions of the Indenture;
and their respective successors and assigns until released from their
obligations under their Subsidiary Guarantees and the Indenture in accordance
with the terms of the Indenture.
"Unrestricted Subsidiary" means any Subsidiary of Armor Holdings that is
designated by the Board of Directors as an Unrestricted Subsidiary pursuant to a
Board Resolution in compliance with the "Designation of Restricted and
Unrestricted Subsidiaries" covenant and any Subsidiary of such Subsidiary.
"Voting Stock" of any Person as of any date means the Capital Stock of
such Person that is at the time entitled to vote in the election of the Board of
Directors of such Person.
"Weighted Average Life to Maturity" means, when applied to any
Indebtedness at any date,
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the number of years obtained by dividing:
(1) the sum of the products obtained by multiplying (a) the amount
of each then remaining installment, sinking fund, serial maturity or other
required payments of principal, including payment at final maturity, in
respect thereof, by (b) the number of years (calculated to the nearest
one-twelfth) that will elapse between such date and the making of such
payment; by
(2) the then outstanding principal amount of such Indebtedness.
"Wholly Owned Restricted Subsidiary" of any specified Person means a
Restricted Subsidiary of such Person all of the outstanding Capital Stock or
other ownership interests of which (other than directors' qualifying shares or
Investments by foreign nationals mandated by applicable law) shall at the time
be owned by such Person or by one or more Wholly Owned Restricted Subsidiaries
of such Person and one or more Wholly Owned Restricted Subsidiaries of such
Person.
DESCRIPTION OF SENIOR INDEBTEDNESS
On August 12, 2003, we terminated our prior credit facility and entered
into a new secured revolving credit facility with Bank of America, N.A.,
Wachovia Bank, National Association and a syndicate of other financial
institutions arranged by Banc of America Securities LLC. The new 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 new 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 new 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 the date of this
prospectus, we are in compliance with all of our negative and affirmative
covenants.
FEDERAL INCOME TAX CONSIDERATIONS
The following general discussion summarizes the material U.S. Federal
income tax consequences of the exchange, ownership and disposition of the notes.
This discussion only deals
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with persons that hold notes as a capital asset within the meaning of Section
1221 of the Internal Revenue Code of 1986, as amended (the "Code"), and that
purchase the notes for cash at original issue at the initial offering price.
This discussion does not address the U.S. Federal income tax consequences that
may be relevant to a particular holder subject to special treatment under
certain U.S. Federal income tax laws (for example, persons subject to the
alternative minimum tax provisions of the Code). Also, this discussion is not
intended to be wholly applicable to all categories of investors, some of which,
such as dealers in securities or foreign currency, banks, trusts, insurance
companies, tax-exempt organizations (employment, charitable or other), persons
that hold notes as part of a hedging or conversion transaction or a straddle,
persons deemed to sell notes under the constructive sale provisions of the Code,
persons that have a functional currency other than the U.S. dollar and investors
in pass-through entities, may be subject to special rules.
This discussion is based on the Code, the final, temporary and proposed
Treasury regulations promulgated thereunder, administrative pronouncements and
judicial decisions, all as in effect on the date hereof and all of which are
subject to change, possibly with retroactive effect. We have not requested, and
will not request, a ruling from the U.S. Internal Revenue Service (the "IRS")
with respect to any of the U.S. Federal income tax consequences described below.
There can be no assurance that the IRS will not disagree with or challenge any
of the conclusions set forth herein.
Holders of the old notes should consult their own tax advisors concerning
the application of U.S. Federal income tax laws, as well as the laws of any
state, local or foreign taxing jurisdiction, to their particular situations.
U.S. HOLDERS
The following discussion is limited to persons that are U.S. Holders. For
these purposes, "U.S. Holder" means the beneficial owner of a note that for U.S.
Federal income tax purposes is (i) an individual who is a citizen or resident of
the United States, (ii) a corporation or other entity taxable as a corporation
that is created or organized under the laws of the United States or any
political subdivision thereof or therein, (iii) an estate the income of which is
subject to U.S. Federal income tax regardless of its source, (iv) a trust
subject to the primary supervision of a United States court and the control of
one or more U.S. persons or (v) a person whose worldwide income or gain is
otherwise subject to U.S. Federal income tax on a net income basis. If a
partnership or other entity taxable as a partnership holds the notes, the tax
treatment of a partner will generally depend on the status of the partner and
the activities of the partnership. Such partner should consult its tax advisor
as to the tax consequences.
Exchange Offer
The exchange of old notes for the new notes pursuant to the exchange offer
should not constitute a taxable event for U.S. Federal income tax purposes. As a
result:
o a U.S. Holder of notes should not recognize taxable gain or loss as
a result of the exchange of old notes for the new notes pursuant to
the exchange offer;
152
o the holding period of the new notes should include the holding
period of the old notes surrendered in exchange therefor; and
o a U.S. Holder's adjusted tax basis in the new notes should be the
same as such U.S. Holder's adjusted tax basis in the old notes
surrendered in exchange therefor.
Interest
A U.S. Holder must generally include interest on a note in its ordinary
income at the time such interest is received or accrued, in accordance with such
U.S. Holder's method of accounting for U.S. Federal income tax purposes.
Sale, Exchange or Redemption of Notes
Upon the sale, exchange or redemption of a note, a U.S. Holder generally
will recognize taxable gain or loss equal to the difference between (i) the
amount realized on such disposition and (ii) such U.S. Holder's adjusted tax
basis in the note. Notwithstanding the foregoing, any amounts realized in
connection with any sale, exchange or redemption with respect to accrued
interest not previously included in income will be treated as ordinary interest
income. A U.S. Holder's adjusted tax basis in a note generally will equal the
cost of such note less any principal payments received by such holder.
Contingent Payments
In certain circumstances, we may be obligated to pay you amounts in excess
of the stated interest and principal payable on the notes. The obligation to
make such payments, including liquidated damages and redemption premiums payable
in certain circumstances, may implicate the provisions of Treasury regulations
relating to "contingent payment debt instruments". If the notes were deemed to
be contingent payment debt instruments, U.S. Holders might, among other things,
be required to treat any gain recognized on the sale or other disposition of a
note as ordinary income, subject to tax at a maximum Federal rate of 38.6%,
rather than as capital gain which may be subject to tax at a maximum Federal
rate of 20%. The regulations applicable to contingent payment debt instruments
have not been the subject of authoritative interpretation and therefore the
scope of the regulations is not certain. Armor Holdings intends to take the
position that the likelihood that such payments will be made is remote and
therefore the notes are not subject to the rules governing contingent payment
debt instruments. This determination will be binding on a holder unless such
holder explicitly discloses on a statement attached to the holder's timely filed
U.S. Federal income tax return for the taxable year that includes the
acquisition date of the note that such holder's determination is different.
Purchasers of notes are urged to consult their tax advisors regarding the
possible application of the contingent payment debt instrument rules to the
notes.
Information Reporting and Backup Withholding
A U.S. Holder of notes may be subject to backup withholding, currently at
a rate of 30%, but subject to gradual reduction to 28% by year 2006 (the
"Applicable Backup Withholding Rate"), with respect to "reportable payments,"
which includes interest and principal paid on or the gross
153
proceeds of a sale, exchange or redemption of the notes. The payor of any
reportable payments will be required to deduct and withhold the Applicable
Backup Withholding Rate from such payments if (i) the payee fails to establish
that it is entitled to an exemption, (ii) the payee fails to furnish its correct
Taxpayer Identification Number ("TIN") to the payor in the prescribed manner,
(iii) the IRS notifies the payor that the TIN furnished by the payee is
incorrect, (iv) the payee has failed properly to report the receipt of
reportable payments and the IRS has notified the payor that backup withholding
is required or (v) the payee fails to certify under penalties of perjury that
such payee is not subject to backup withholding. If any one of these events
occurs with respect to a U.S. Holder of notes, Armor Holdings or its paying or
other withholding agent will be required to withhold the Applicable Backup
Withholding Rate from any payments of principal and interest on a note.
Any amount withheld from a payment to a U.S. Holder under the backup
withholding rules will be allowed as a refund or credit against such holder's
U.S. Federal income tax liability, so long as the required information is
provided timely to the IRS. Armor Holdings, its paying agent or other
withholding agent generally will report to a U.S. Holder of notes and to the IRS
the amount of any reportable payments made in respect of the notes for each
calendar year and the amount of tax withheld, if any, with respect to such
payments.
NON-U.S. HOLDERS
If you are a "Non-U.S. Holder," as defined below, this section applies to you. A
Non-U.S. Holder means any beneficial owner of a new note that is not a U.S.
Holder. The rules governing the United States Federal income and estate taxation
of a Non-U.S. Holder are complex, and no attempt will be made herein to provide
more than a summary of those rules. Special rules may apply to a Non-U.S. Holder
if such holder is a controlled foreign corporation, passive foreign investment
company or foreign personal holding company and therefore subject to special
treatment under the Code. IF YOU ARE A NON-U.S. HOLDER, YOU SHOULD CONSULT WITH
YOUR OWN TAX ADVISORS TO DETERMINE THE EFFECT ON YOU OF FEDERAL, STATE, LOCAL
AND FOREIGN TAX LAWS WITH REGARD TO AN INVESTMENT IN THE NEW NOTES, INCLUDING
ANY REPORTING REQUIREMENTS.
Interest
Subject to the discussion of backup withholding below, payments of
interest on a note to a Non-U.S. Holder generally will not be subject to U.S.
Federal income or withholding tax, provided that (i) the holder does not
actually or constructively own 10% or more of the total combined voting power of
all classes of stock of Armor Holdings that are entitled to vote, (ii) the
holder is not (a) a controlled foreign corporation that is related to Armor
Holdings through stock ownership or (b) a bank receiving interest on a loan
entered into in the ordinary course of business, (iii) such interest is not
effectively connected with the conduct by the Non-U.S. Holder of a trade or
business within the United States and (iv) Armor Holdings or its paying agent
receives appropriate documentation establishing that the Non-U.S. Holder is not
a U.S. person.
A Non-U.S. Holder that does not qualify for exemption from withholding
under the preceding paragraph generally will be subject to withholding of U.S.
Federal income tax at a 30% rate (or lower applicable treaty rate) on payments
of interest on the notes.
154
If interest on the notes is effectively connected with the conduct by a
Non-U.S. Holder of a trade or business within the United States, such interest
will be subject to U.S. Federal income tax on a net income basis at the rate
applicable to U.S. persons generally (and, with respect to corporate holders,
may also be subject to a 30% branch profits tax). If interest is subject to U.S.
Federal income tax on a net income basis in accordance with these rules, such
payments will not be subject to U.S. withholding tax so long as the relevant
Non-U.S. Holder provides Armor Holdings or its paying agent with the appropriate
documentation.
Sale, Exchange or Redemption of Notes
Subject to the discussion of backup withholding, any gain realized by a
Non-U.S. Holder on the sale, exchange or redemption of a note generally will not
be subject to U.S. Federal income tax, unless (i) such gain is effectively
connected with the conduct by such Non-U.S. Holder of a trade or business within
the United States, (ii) the Non-U.S. Holder is an individual who is present in
the United States for 183 days or more in the taxable year of disposition and
certain other conditions are satisfied or (iii) the Non-U.S. Holder is subject
to tax pursuant to the provisions of U.S. Federal income tax law applicable to
certain expatriates.
Information Reporting and Backup Withholding
Backup withholding and information reporting generally will not apply to
interest payments made to a Non-U.S. Holder in respect of the notes if such
Non-U.S. Holder furnishes Armor Holdings or its paying agent with appropriate
documentation of such holder's non-U.S. status.
The payment of proceeds from a Non-U.S. Holder's disposition of notes to
or through the U.S. office of any broker, domestic or foreign, will be subject
to information reporting and possible backup withholding unless such holder
certifies as to its non-U.S. status under penalties of perjury or otherwise
establishes an exemption, provided that the broker does not have actual
knowledge that such holder is a U.S. person or that the conditions of an
exemption are not, in fact, satisfied. The payment of the proceeds from a
Non-U.S. Holder's disposition of a note to or through a non-U.S. office of
either a U.S. broker or a non-U.S. broker that is a U.S.-related person will be
subject to information reporting, but not backup withholding, unless such broker
has documentary evidence in its files that such Non-U.S. Holder is not a U.S.
person and the broker has no knowledge to the contrary, or the Non-U.S. Holder
establishes an exemption. For this purpose, a "U.S.-related person" is (i) a
controlled foreign corporation for U.S. Federal income tax purposes, (ii) a
foreign person 50% or more of whose gross income from all sources for the
three-year period ending with the close of its taxable year preceding payment
(or for such part of the period that the broker has been in existence) is
derived from activities that are effectively connected with the conduct of a
U.S. trade or business or (iii) a foreign partnership that is either engaged in
the conduct of a trade or business in the U.S. or of which 50% or more of its
income or capital interests are held by U.S. persons. Neither information
reporting nor backup withholding will apply to a payment of the proceeds of a
Non-U.S. Holder's disposition of notes by or through a non-U.S. office of a
non-U.S. broker that is not a U.S.-related person. Copies of any information
returns filed with the IRS may be made available by the IRS, under the
provisions of a specific treaty or agreement, to the taxing authorities of the
country in which the Non-U.S. Holder resides.
155
Any amounts withheld under the backup withholding rules from a payment to
a Non-U.S. Holder will be allowed as a refund or a credit against such Non-U.S.
Holder's U.S. Federal income tax liability, provided that the requisite
procedures are followed.
Prospective purchasers of notes are urged to consult their own tax
advisors with respect to the application to their particular situations of U.S.
Federal income tax laws, as well as the laws of any state, local or foreign
taxing jurisdiction.
PLAN OF DISTRIBUTION
We are not using any underwriters for this exchange offer.
Each broker-dealer that receives new notes for its own account pursuant to
the exchange offer must acknowledge that it will deliver a prospectus in
connection with any resale of these new notes. This prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of new notes received in exchange for old notes where
the old notes were acquired as a result of market-making activities or other
trading activities. We and our subsidiary guarantors have agreed to make this
Prospectus, as amended or supplemented, available to any broker-dealer for use
in connection with any such resale.
We will not receive any proceeds from any sale of new notes by
broker-dealers or any other persons. New notes received by broker-dealers for
their own account pursuant the exchange offer may be sold from time to time in
one or more transactions in the over-the-counter market, in negotiated
transactions, through the writing of options on the new notes, or a combination
of these methods of resale, at market prices prevailing at the time of resale,
at prices related to the prevailing market prices, or negotiated prices. Any
resale of new notes may be made directly to purchasers or to or through brokers
or dealers who may receive compensation in the form of commissions or
concessions from any broker-dealer and/or the purchasers of any new notes. Any
broker-dealer that resells new notes that were received by it for its own
account pursuant to the exchange offer and any broker-dealer that participates
in a distribution of the new notes may be deemed to be an "underwriter" within
the meaning of the Securities Act, and any profit on any of these resales of new
notes or any commissions or concessions received by any of these persons may be
deemed to be underwriting compensation under the Securities Act. The letter of
transmittal states that, by acknowledging that it will deliver and by delivering
a prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
We and our guarantors will use our and their best efforts to keep the
registration statement continuously effective, supplemented and amended to the
extent necessary to ensure that it is available for resales of notes acquired by
broker-dealers for their own accounts as a result of market-making activities or
other trading activities, and to ensure that it conforms with the requirements
of the registration rights agreement, the Securities Act and the policies, rules
and regulations of the Commission, for a period ending on the earlier of
o 180 days from the date on which the exchange offer is consummated;
and
o the date on which all resales of the new notes by the broker-dealers
holding the new
156
notes have been made.
We and our guarantors will provide sufficient copies of the latest version
of this prospectus to broker-dealers promptly upon request at any time during
the 180-day (or shorter as provided in the foregoing sentence) period in order
to facilitate such resales.
We have agreed to pay all expenses incident to the exchange offer,
including the expenses of one counsel for the holders of the old notes, other
than commissions or concessions of any brokers or dealers, and will indemnify
the holders of the old notes, including any broker-dealer, against certain
liabilities, including certain liabilities under the Securities Act.
By its acceptance of the exchange offer, any broker-dealer that receives
new notes pursuant to the exchange offer agrees to notify us before using the
prospectus in connection with the sale or transfer of new notes. The
broker-dealer further acknowledges and agrees that, upon receipt of notice from
us of the happening of any event which makes any statement in the prospectus
untrue in any material respect or which requires the making of any changes in
the prospectus to make the statements in the prospectus not misleading or which
may impose upon us disclosure obligations that may have a material adverse
effect on us, which notice we agree to deliver promptly to the broker-dealer,
the broker-dealer will suspend use of the prospectus until we have notified the
broker-dealer that delivery of the prospectus may resume and have furnished
copies of any amendment or supplement to the prospectus to the broker-dealer.
157
WHERE YOU CAN FIND MORE INFORMATION
We are subject to the informational requirements of the Exchange Act, and
in accordance therewith we are required to file periodic reports, proxy
statements and other information with the Commission. Such reports, proxy
statements and other information filed by us can be inspected and copied at the
public reference facilities maintained by the Commission at 450 Fifth Street,
N.W., Room 1024, Washington, D.C. 20549, as well as the Regional Offices of the
Commission at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661, at the prescribed rates. The Commission also maintains a site on
the World Wide Web that contains reports, proxy and information statements and
other information regarding registrants that file electronically. The address of
such site is http://www.sec.gov. The telephone number of the Commission is
800-SEC-0330. In addition, similar information can be inspected at the New York
Stock Exchange, 20 Broad Street, New York, New York 10005.
With respect to the new notes, this prospectus omits certain information
that is contained in the registration statement on file with the Commission, of
which this prospectus is a part. For further information with respect to us and
our new notes, reference is made to the registration statement, including the
exhibits incorporated therein by reference or filed therewith. Statements herein
contained concerning the provisions of any document are not necessarily complete
and, in each instance, reference is made to the copy of such document filed as
an exhibit or incorporated by reference into the registration statement. The
registration statement and the exhibits may be inspected without charge at the
offices of the Commission or copies thereof obtained at prescribed rates from
the public reference section of the Commission at the addresses set forth above.
You should rely on the information contained in this prospectus and in the
registration statement as well as other information you deem relevant. We have
not authorized anyone to provide you with information different from that
contained in this prospectus. This prospectus is an offer to sell, or a
solicitation of offers to buy, securities only in jurisdictions where offers and
sales are permitted. The information contained in this prospectus is accurate
only as of the date of this prospectus, regardless of the time of delivery of
this prospectus or any sale or exchange of securities, however, we have a duty
to update that information while this prospectus is in use by you where, among
other things, any facts or circumstances arise which, individually or in the
aggregate, represent a fundamental change in the information contained in this
prospectus or any material information with respect to the plan of distribution
was not previously disclosed in the prospectus or there is any material change
to such information in the prospectus. This prospectus does not offer to sell or
solicit any offer to buy any securities other than the new notes to which it
relates, nor does it offer to sell any of these notes in any jurisdiction to any
person to whom it is unlawful to make such offer or solicitation in such
jurisdiction.
EXPERTS
The consolidated financial statements of Armor Holdings and subsidiaries
appearing in its Annual Report (Form 10-K and Form 10-K/A) for the year ended
December 31, 2002, have been audited by PricewaterhouseCoopers LLP, independent
auditors, as set forth in their report thereon included therein and incorporated
herein by reference. Such consolidated financial statements are
158
incorporated herein by reference in reliance upon such report given on the
authority of such firm as experts in accounting and auditing.
The financial statements incorporated in this prospectus by reference from
Simula, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2002,
have been audited by Deloitte & Touche LLP, independent auditors, as stated in
their report, which is incorporated herein by reference, and have been so
incorporated in reliance upon the report of such firm given upon their authority
as experts in accounting and auditing.
LEGAL MATTERS
The validity of the new notes to be issued pursuant to the exchange offer
will be passed upon for us by Kane Kessler, P.C., New York, New York.
159
INDEX TO FINANCIAL STATEMENTS
Page
----
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheet as of September 30, 2003 ....................... F-2
Condensed Consolidated Statements of Operations for the Three and Nine Month Periods
Ended September 30, 2002 and 2003 ................................................... F-4
Condensed Consolidated Statement of Cash Flows for the Nine Months Ended
September 30, 2002 and 2003 ......................................................... F-6
Notes to Unaudited Condensed and Consolidated Financial Statements .................. F-7
AUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Certified Public Accountants .................................. F-31
Consolidated Balance Sheets as of December 31, 2002 and 2001 ........................ F-32
Consolidated Income Statements for the Years Ended December 31, 2002, 2001 and 2000 F-33
Consolidated Statements of Stockholders' Equity and Comprehensive Income for the
Years Ended December 31, 2002, 2001 and 2000 ........................................ F-34
Consolidated Statements of Cash Flow for the Years Ended December 31, 2002, 2001
and 2000 ............................................................................ F-35
Notes to Consolidated Financial Statements .......................................... F-36
F-1
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTER ENDED SEPTEMBER 30, 2003
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
SEPTEMBER 30, 2003 DECEMBER 31, 2002
(UNAUDITED) *
------------------ -----------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 154,766 $ 12,913
Accounts receivable (net of allowance for
doubtful accounts of $1,269 and $1,428) 59,215 58,513
Costs and earned gross profit in excess of billings 1,088 234
Inventories 60,068 62,330
Prepaid expenses and other current assets 21,321 12,212
Current assets of discontinued operations (Note 2) 47,958 28,825
--------- ---------
Total current assets 344,416 175,027
PROPERTY AND EQUIPMENT (net of
accumulated depreciation of $17,243 and
$12,919) 49,531 47,136
GOODWILL (net of accumulated amortization
of $4,024 and $4,024) 98,934 98,736
PATENTS, LICENSES AND TRADEMARKS
(net of accumulated amortization of $2,366 and $2,169) 7,419 7,521
OTHER ASSETS 21,048 9,048
LONG-TERM ASSETS OF DISCONTINUED OPERATIONS (Note 2) 20,045 30,285
--------- ---------
TOTAL ASSETS $ 541,393 $ 367,753
========= =========
* Condensed from audited financial statements.
See notes to condensed consolidated financial statements.
F-2
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET (CONTINUED)
(IN THOUSANDS, EXCEPT FOR SHARE DATA)
SEPTEMBER 30, 2003 DECEMBER 31, 2002
(UNAUDITED) *
------------------ -----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 765 $ 1,813
Short-term debt 608 599
Accounts payable 22,013 23,770
Accrued expenses and other current liabilities 38,965 25,116
Income taxes payable 3,914 5,913
Current liabilities of discontinued operations (Note 2) 23,942 17,225
--------- ---------
Total current liabilities 90,207 74,436
LONG-TERM LIABILITIES:
Long-term debt, less current portion 159,921 5,072
Discontinued operations (Note 2) 125 168
--------- ---------
Total liabilities 250,253 79,676
COMMITMENTS AND CONTINGENCIES
(NOTE 14)
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 5,000,000 shares
authorized; no shares issued and outstanding -- --
Common stock, $.01 par value; 50,000,000 shares
authorized; 34,207,688 and 33,593,977 issued and
28,147,466 and 29,456,692 outstanding at
September 30, 2003 and December 31, 2002,
respectively 342 336
Additional paid-in capital 315,148 307,487
Retained earnings 49,871 34,056
Accumulated other comprehensive loss (1,904) (4,169)
Treasury stock (72,317) (49,633)
--------- ---------
Total stockholders' equity 291,140 288,077
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 541,393 $ 367,753
========= =========
* Condensed from audited financial statements.
See notes to condensed consolidated financial statements.
F-3
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2003 SEPTEMBER 30, 2002 SEPTEMBER 30, 2003 SEPTEMBER 30, 2002
------------------ ------------------ ------------------ ------------------
REVENUES:
Products $ 50,786 $ 49,047 $ 44,140 $ 131,049
Mobile Security 40,096 31,510 108,875 90,717
-------- -------- -------- ---------
Total Revenues 90,882 80,557 253,015 221,766
-------- -------- -------- ---------
COSTS AND EXPENSES:
Cost of sales 61,953 55,947 176,396 152,481
Operating expenses 15,977 12,852 44,505 37,046
Amortization 72 62 201 213
Integration and other non-recurring
charges 368 1,359 4,565 4,476
-------- -------- -------- ---------
OPERATING INCOME 12,512 10,337 27,348 27,550
Interest expense, net 1,475 343 2,291 669
Other expense (income), net 96 (13) 181 (77)
-------- -------- -------- ---------
INCOME FROM CONTINUING OPERATIONS BEFORE PROVISION
FOR INCOME TAXES 10,941 10,007 24,876 26,958
PROVISION FOR INCOME TAXES 4,832 7,043 10,044 13,603
-------- -------- -------- ---------
INCOME FROM CONTINUING OPERATIONS 6,109 2,964 14,832 13,355
-------- -------- -------- ---------
DISCONTINUED OPERATIONS (NOTE 2):
INCOME (LOSS) FROM DISCONTINUED OPERATIONS BEFORE
PROVISION FOR INCOME TAXES 1,679 (17,032) 3,593 (17,606)
PROVISION FOR INCOME TAXES 1,673 639 2,610 421
-------- -------- -------- ---------
INCOME (LOSS) FROM DISCONTINUED OPERATIONS 6 (17,671) 983 (18,027)
-------- -------- -------- ---------
NET INCOME (LOSS) $ 6,115 $(14,707) $ 15,815 $ (4,672)
======== ======== ======== =========
======== ======== ======== =========
NET INCOME (LOSS) PER COMMON SHARE - BASIC
======== ======== ======== =========
INCOME FROM CONTINUING OPERATIONS $ 0.22 $ 0.10 $ 0.52 $ 0.44
======== ======== ======== =========
INCOME (LOSS) FROM DISCONTINUED OPERATIONS 0.00 (0.60) 0.04 (0.59)
======== ======== ======== =========
======== ======== ======== =========
BASIC EARNINGS (LOSS) PER SHARE $ 0.22 $ (0.50) $ 0.56 $ (0.15)
======== ======== ======== =========
See notes to condensed consolidated financial statements.
F-4
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - CONTINUED (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2003 SEPTEMBER 30, 2002 SEPTEMBER 30, 2003 SEPTEMBER 30, 2002
------------------ ------------------ ------------------ ------------------
NET INCOME (LOSS) PER COMMON SHARE - DILUTED
INCOME FROM CONTINUING OPERATIONS $ 0.22 $ 0.10 $ 0.52 $ 0.43
INCOME (LOSS) FROM DISCONTINUED OPERATIONS 0.00 (0.59) 0.04 (0.58)
-------- -------- -------- ---------
DILUTED EARNINGS (LOSS) PER SHARE $ 0.22 $ (0.49) $ 0.56 $ (0.15)
======== ======== ======== =========
WEIGHTED AVERAGE SHARES - BASIC 27,811 29,708 28,106 30,639
======== ======== ======== =========
WEIGHTED AVERAGE SHARES - DILUTED 28,249 30,037 28,438 31,373
======== ======== ======== =========
See notes to condensed consolidated financial statements.
F-5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
ARMOR HOLDINGS, INC. AND SUBSIDIARIES (UNAUDITED)
(IN THOUSANDS)
NINE MONTHS ENDED
----------------------------------------
SEPTEMBER 30, 2003 SEPTEMBER 30, 2002
------------------ ------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Income from continuing operations $ 14,832 $ 13,355
Adjustments to reconcile income from continuing operations to cash used in
operating activities:
Depreciation and amortization 5,380 4,049
Loss on disposal of fixed assets 167 136
Deferred income taxes 3,676 (680)
Non-cash termination charge 2,093 --
Changes in operating assets and liabilities, net of acquisitions:
Increase in accounts receivable (1,556) (3,130)
Decrease (increase) in inventories 2,173 (10,203)
Increase in prepaid expenses and other assets (3,682) (3,569)
Increase (decrease) in accounts payable, accrued
expenses and other current liabilities 11,808 (6,775)
(Decrease) increase in income taxes payable (1,999) 6,345
--------- --------
Net cash provided by (used in) operating activities 32,892 (472)
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (5,645) (4,548)
Purchase of patents and trademarks (99) (45)
Additional consideration for purchased businesses (740) (2,652)
Purchase of businesses, net of cash acquired (5,828) (7,411)
--------- --------
Net cash used in investing activities (12,312) (14,656)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the exercise of stock options 6,588 4,237
Treasury stock purchases (22,684) (26,054)
Cash paid for financing costs (4,020) (326)
Proceeds from the issuance of long-term debt 147,504 --
Repayments of long-term debt (1,399) (591)
Borrowings under line of credit 31,744 27,763
Repayments under line of credit (32,070) (20,701)
--------- --------
Net cash provided by (used in) financing activities 125,663 (15,672)
--------- --------
Effect of exchange rate changes on cash and cash equivalents 478 (872)
Net cash (used in) transferred from discontinued operations (4,868) 767
--------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 141,853 (30,905)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 12,913 47,489
--------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 154,766 $ 16,584
========= ========
CASH AND CASH EQUIVALENTS, END OF PERIOD
CONTINUING OPERATIONS $ 154,766 $ 16,584
DISCONTINUED OPERATIONS 5,051 4,819
--------- --------
$ 159,817 $ 21,403
========= ========
See notes to condensed consolidated financial statements.
F-6
NOTES TO UNAUDITED CONDENSED AND CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
Armor Holdings, Inc. and its wholly-owned subsidiaries (the "Company", "we",
"our", "us") have been prepared in accordance with generally accepted accounting
principles for interim information and the instructions to Form 10-Q and Rule
10-01 of Regulation S-X, and do not include all the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting only of
normal recurring accruals and the elimination of all material intercompany
accounts and transactions) considered necessary by management to present a fair
presentation have been included. The results of operations for the three and
nine-month periods are not necessarily indicative of the results to be expected
for the full year and should be read in conjunction with the consolidated
financial statements and notes thereto included in our Annual Report on Form
10-K for the year ended December 31, 2002. The amounts disclosed in the
footnotes are related to continuing operations unless otherwise indicated.
As discussed in Note 2 and elsewhere in this prospectus, we announced our
intention to sell our ArmorGroup Services Division (the "Services Division"). As
a result, the assets and liabilities of the Services Division have been
classified as assets and liabilities of discontinued operations on our balance
sheet and the results of their operations classified as income from discontinued
operations in the accompanying unaudited condensed consolidated financial
statements.
NOTE 2 - DISCONTINUED OPERATIONS
On July 15, 2002, we announced plans to sell the Services Division and the
retention of Merrill Lynch & Company to assist in the sale. In accordance with
Statement of Financial Accounting Standards No. 144, "Accounting for Impairment
or Disposal of Long-Lived Assets," (SFAS 144) the assets and liabilities of the
Services Division have been classified as held for sale, with its operating
results in the current and prior periods reported in discontinued operations for
the three and nine-month periods ended September 30, 2003 and 2002.
On April 17, 2003, we announced that we had completed the sale of our
ArmorGroup Integrated Systems business through the sale of 100% of the stock of
ArmorGroup Integrated Systems, Inc. and Low Voltage Systems Technologies, Inc.
to Aerwav Integration Systems, Inc. ("AIS"). AIS is a wholly owned subsidiary of
Aerwav Holdings, LLC. As consideration for the integrated systems business, we
received a $4.1 million collateralized note due in two years and a warrant for
approximately 2.5% of AIS. In accordance with SFAS 144, we have recorded a loss
of $366,000 on the sale.
For the three months ended September 30, 2003, net income from
discontinued operations was $6,000 compared to a net loss of $17.7 million in
the comparable period in the prior year. Excluding the ArmorGroup Integrated
Systems business net loss of $13.9 million, the net loss was $3.7 million for
the three-month period ended September 30, 2002.
F-7
NOTES TO UNAUDITED CONDENSED AND CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)
For the nine months ended September 30, 2003, net income from discontinued
operations was $983,000 compared to a net loss of $18.0 million in the
comparable period in the prior year. Excluding the pre-tax loss of $366,000
(after-tax loss of $238,000) on the sale of ArmorGroup Integrated Systems
business, a net loss of $613,000 in the nine-month period ended September 30,
2003 and a net loss of $14.3 million for the nine-month period ended September
30, 2002, net income was $1.8 million and a net loss of $3.7 million for the
nine months ended September 30, 2003 and 2002, respectively.
Based upon our analysis and discussions with our advisors regarding the
estimated realizable value, net of selling costs, of the Services Division, we
reduced its carrying value, and recorded net impairment charges of $30.3 million
in fiscal 2002 and $1.3 million in the three months ended September 30, 2003.
These impairment charges consisted of approximately $6.3 million in estimated
disposal costs and a $35.1 million non-cash goodwill reduction, net of an
expected $10.0 million income tax benefit. The provision for income taxes for
discontinued operations was $1.7 million and $2.6 million for the three and
nine-month periods ended September 30, 2003, respectively. The reduction in the
carrying value of the Services Division is management's best estimate based upon
currently available information, including discussions with our investment
bankers. The actual proceeds from the disposal of our Services Division may
differ materially from our current estimates and could result in either a gain
or a loss upon final disposal. We are actively pursuing a sale of this business.
A summary of the operating results of the discontinued operations for the
three months and nine months ended September 30, 2003 and 2002 is as follows.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2003 SEPTEMBER 30, 2002 SEPTEMBER 30, 2003 SEPTEMBER 30, 2002
------------------ ------------------ ------------------ ------------------
(in thousands) (in thousands)
Revenue $ 26,039 $ 23,747 $ 75,738 $ 74,273
Cost of sales 18,078 19,730 53,447 55,840
Operating expenses 4,882 8,018 16,299 22,582
Charge for impairment of long-
lived assets 11,258 11,905 11,258 11,905
Integration and other non-recurring charges
104 836 598 1,225
-------- -------- -------- ---------
Operating loss (8,283) (16,742) (5,864) (17,279)
Interest expense, net 18 34 71 127
Other expense, net 20 256 472 200
-------- -------- -------- ---------
Loss from discontinued operations before (8,321) (17,032) (6,407) (17,606)
(benefit) provision for income taxes
(Benefit) provision for income taxes (8,327) 639 (7,390) 421
-------- -------- -------- ---------
(Loss) income from discontinued operations $ 6 $(17,671) $ 983 $ (18,027)
======== ======== ======== =========
F-8
NOTES TO UNAUDITED CONDENSED AND CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)
The following is a summary of the assets and liabilities of our discontinued
operations:
SEPTEMBER 30, 2003 DECEMBER 31, 2002
------------------ -----------------
(IN THOUSANDS)
Assets
Cash and cash equivalents $ 5,051 $ 3,638
Accounts receivable, net 19,810 16,228
Other current assets 23,097 8,959
--------- ---------
Total current assets 47,958 28,825
Property and equipment, net 13,588 12,481
Goodwill, net 1,961 12,995
Other assets 4,496 4,809
--------- ---------
Total assets of discontinued operations $ 68,003 $ 59,110
========= =========
Liabilities
Current portion of long-term debt $ 125 $ 186
Short-term debt 6,604 350
Accounts payable 2,115 2,405
Accrued expenses and other current liabilities 15,098 14,284
--------- ---------
Total current liabilities 23,942 17,225
Long-term debt 125 168
--------- ---------
Total liabilities of discontinued operations $ 24,067 $ 17,393
========= =========
F-9
NOTES TO UNAUDITED CONDENSED AND CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 - COMPREHENSIVE INCOME
The components of comprehensive income, net of tax provision (benefit) of
$31,000 and ($26,000) for the three months ended September 30, 2003 and 2002,
respectively, and $255,000 and ($197,000) for the nine months September 30, 2003
and 2002, respectively, are listed below:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2003 SEPTEMBER 30, 2002 SEPTEMBER 30, 2003 SEPTEMBER 30, 2002
------------------ ------------------ ------------------ ------------------
(in thousands) (in thousands)
Net income (loss) $ 6,115 $(14,707) $ 15,815 $ (4,672)
Other comprehensive income (loss):
Foreign currency translations, net
of tax 34 (617) 2,265 (852)
-------- -------- -------- ---------
Comprehensive income (loss): $ 6,149 $(15,324) $ 18,080 $ (5,524)
======== ======== ======== =========
NOTE 4 - INVENTORIES
Inventories are stated at the lower of cost or market using the first-in,
first-out (FIFO) method and are summarized as follows:
SEPTEMBER 30, 2003 DECEMBER 31, 2002
------------------ -----------------
(IN THOUSANDS)
Raw material $ 34,067 $ 30,211
Work-in-process 12,573 15,733
Finished goods 13,428 16,386
--------- ---------
Total inventories $ 60,068 $ 62,330
========= =========
NOTE 5 - ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities are summarized as follows:
SEPTEMBER 30, 2003 DECEMBER 31, 2002
------------------ -----------------
(IN THOUSANDS)
Accrued expenses and other current liabilities $ 25,328 $ 16,988
Deferred consideration for acquisitions 1,310 1,826
Customer deposits 12,327 6,302
--------- ---------
Total accrued expenses and other current liabilities $ 38,965 $ 25,116
========= =========
F-10
NOTES TO UNAUDITED CONDENSED AND CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 - DEBT
SEPTEMBER 30, 2003 DECEMBER 31, 2002
------------------ -----------------
(IN THOUSANDS)
Credit facility (a) $ -- $ --
Senior Subordinated Notes (b) 147,538 --
Ontario Industrial Development Authority Variable Rate
Demand Industrial Development Revenue Bonds, Series
1989 payable in annual installments of $200 to $300, through
August 1, 2014, with interest paid monthly at varying rates 2,600 2,800
Note payable in scheduled installments through 2013, with
interest rate of 5% 1,482 1,582
Economic Development Revenue Bonds, payable in scheduled
installments through September 2016, with a variable interest
rate approximating 85% of the bond equivalent yield
of the 13-week U.S. Treasury bills (not to exceed 12%),
which was 2.75% at December 31, 2002 -- 1,075
Note to former officer payable in monthly principal and interest
installments of $7 through December 31, 2009 with an imputed
interest rate of 9.25% 367 399
Minimum guaranteed royalty to former officer payable in monthly
principal and interest installments of $4 through August 2005,
with an imputed interest rate of 9.2% 85 114
Minimum guaranteed royalty to former officer payable in monthly
principal and interest installments of $36 through April 2005,
with an imputed interest rate of 7.35% 638 915
Plus fair value of interest rate swaps (c) 7,976 --
--------- -------
$ 160,686 $ 6,885
Less current portion (765) (1,813)
--------- -------
Total $ 159,921 $ 5,072
========= =======
(a) Credit Facility - On August 12, 2003, we terminated our existing
credit facility and entered into a new collateralized revolving credit facility
with Bank of America N.A., Wachovia Bank, N.A. and Key Bank, N.A. The new credit
facility is a five-year revolving credit facility and, among other things,
provides for: 1) total maximum borrowings of $60 million; 2) a $25 million
sub-limit for the issuances of standby and commercial letters of credit; 3) a $5
million sub-limit for swing-line loans; and 4) a $5 million sub-limit for
multi-currency borrowings. All borrowings under the new credit facility will
bear interest at either 1) a rate equal to LIBOR, plus an applicable margin
ranging from 1.125% to 1.625%; 2) an alternate base rate which will be the
higher of (a) the Bank of America prime rate and (b) the Federal Funds rate plus
..50%; or 3) with respect to foreign currency loans, a fronted offshore currency
rate, plus an applicable margin ranging from 1.125% to 1.625%, depending on
certain conditions.
(b) Senior Subordinated Notes - On August 12, 2003, we completed a private
placement of $150 million aggregate principal amount of 8.25% senior
subordinated notes due 2013 (the
F-11
NOTES TO UNAUDITED CONDENSED AND CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)
"Notes"). The Notes are guaranteed by all of our domestic subsidiaries, except
USDS, Inc., on a senior subordinated basis (see Note 13). The Notes have been
sold to qualified institutional buyers in reliance on Rule 144A of the
Securities Act of 1933 and to non-U.S. persons in reliance on Regulation S under
the Securities Act of 1933. The Notes were rated B1/B+ by Moody's Investors'
Service and Standard & Poor's Rating Services, respectively. We intend to use
the net proceeds of the offering to fund future acquisitions, including some or
all of the purchase price for our pending acquisition of Simula, Inc., repay a
portion of our outstanding debt and for general corporate and working capital
purposes, including the funding of capital expenditures. Interest on the Notes
is payable semiannually on the fifteenth of February and August of each year.
The Notes were issued at a discount of approximately $2.5 million to investors.
(c) Fair Value of Interest Rate Swaps - On September 2, 2003, we entered
into interest rate swap agreements, designated as a fair value hedge as defined
under Statement of Financial Accounting Standard No. 133, "Accounting for
Derivative Instruments and Hedge Activities," (SFAS 133) with an aggregate
notional amount totaling $150 million. The agreements were entered to exchange
the fixed interest rate on the Notes for a variable interest rate equal to
six-month LIBOR, set in arrears, plus a spread ranging from 2.735% to 2.75%
fixed semi-annually on the fifteenth of February and August. At September 30,
2003, the six-month LIBOR was 1.18%. The agreements are subject to other terms
and conditions common to transactions of this type. In accordance with SFAS 133,
changes in the fair value of the interest rate swap agreements offset changes in
the fair value of the fixed rate debt due to changes in the market interest
rate. The fair value of the interest rate swap agreements was approximately $8.0
million at September 30, 2003. The agreements are deemed to be a perfectly
effective fair value hedge and therefore qualify for the short-cut method of
accounting under SFAS 133. As a result, no ineffectiveness is expected to be
recognized in our earnings associated with the interest rate swap agreements on
the Notes.
NOTE 7 - DERIVATIVE FINANCIAL INSTRUMENTS
We account for derivative instruments in accordance with SFAS 133, which
requires all freestanding and embedded derivative instruments to be measured at
fair value and recognized on the balance sheet as either assets or liabilities.
In addition, all derivative instruments used in hedging relationships must be
designated, reassessed and accounted for as either fair value hedges or cash
flow hedges pursuant to the provisions of SFAS 133.
We hedge the fair value of our Notes using interest rate swaps. We enter
into these derivative contracts to manage fair value changes which could be
caused by our exposure to interest rate changes. On September 2, 2003, we
entered into interest rate swap agreements, designated as fair value hedges as
defined under SFAS 133 with an aggregate notional amount totaling $150 million.
The agreements were entered to exchange the fixed interest rate on the Notes for
a variable interest rate equal to six-month LIBOR, set in arrears, plus a spread
ranging from 2.735% to 2.75% fixed semi-annually on the fifteenth of February
and August. The agreements are subject to other terms and conditions common to
transactions of this type. These fair value hedges qualify for hedge accounting
using the short-cut method since the swap terms match the critical terms of the
Notes. Accordingly, changes in the fair value of the interest rate swap
agreements offset changes in the fair value of the Notes due to changes in the
market interest rate. As a result, no ineffectiveness
F-12
NOTES TO UNAUDITED CONDENSED AND CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)
is expected to be recognized in our earnings associated with the interest rate
swap agreements on the Notes.
The fair values of our interest rate swap agreements are obtained from
dealer quotes and represent the estimated amount we would receive or pay to
terminate the agreement, taking into consideration the difference between the
contract rate of interest and rates currently quoted for agreements of similar
terms and maturities.
NOTE 8 - INFORMATION CONCERNING BUSINESS SEGMENTS AND GEOGRAPHICAL SALES
We are a leading manufacturer and provider of security products, vehicle
armor systems, and security training services. Our products and services are
used by military, law enforcement, security and corrections personnel throughout
the world, as well as governmental agencies, multinational corporations and
non-governmental organizations. Our continuing operations are organized and
operated under two business segments: Armor Holdings Products and Armor Mobile
Security. Our Services Division has been classified as discontinued operations
and is no longer included in this presentation (See Note 2).
Armor Holdings Products. Our Armor Holdings Products Division manufactures
and sells a broad range of high quality equipment marketed under brand names
that are well known and respected in the military and law enforcement
communities. Products manufactured by this division include concealable and
tactical body armor, hard armor, duty gear, less-lethal munitions, anti-riot
products, police batons, emergency lighting products, forensic products,
firearms accessories and weapon maintenance products.
Armor Mobile Security. Our Armor Mobile Security Division manufactures and
installs ballistic and blast protection armoring systems for military vehicles,
commercial vehicles, military aircraft and missile components. Under the brand
name O'Gara-Hess & Eisenhardt ("O'Gara"), we are the sole-source provider to the
U.S. military for the supply of armoring and blast protection systems as well as
maintenance services for the High Mobility Multi-purpose Wheeled Vehicle (HMMWV,
commonly known as the Humvee). Additionally, we have been subcontracted to
develop a ballistically armored and sealed truck cab for the High Mobility
Artillery Rocket System (HIMARS) a program currently in low-rate initial
production for the U.S. Army. We armor a variety of commercial vehicles
including limousines, sedans, sport utility vehicles, commercial trucks and
cash-in-transit vehicles, to protect against varying degrees of ballistic and
blast threats. The Armor Mobile Security Division was created in connection with
our acquisition of O'Gara on August 22, 2001 (the "O'Gara acquisition").
We have invested substantial resources outside of the United States and
plan to continue to do so in the future. The Armor Mobile Security Division has
invested substantial resources in Europe and South America. These operations are
subject to the risk of new and different legal and regulatory requirements in
local jurisdictions, tariffs and trade barriers, potential difficulties in
staffing and 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
F-13
NOTES TO UNAUDITED CONDENSED AND CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)
and social conditions. Governments of many developing countries have exercised
and continue to exercise substantial influence over many aspects of the private
sector. Government actions in the future could have a significant adverse effect
on economic conditions in a developing country or may otherwise have a material
adverse effect on us and our operating companies. We do not have political risk
insurance in the countries in which we currently conduct business. Moreover,
applicable agreements relating to our interests in our operating companies are
frequently governed by foreign law. As a result, in the event of a dispute, it
may be difficult for us to enforce our rights. Accordingly, we may have little
or no recourse upon the occurrence of any of these developments.
Revenues, operating income and total assets for each of our continuing
operating segments are as follows (net of intercompany eliminations):
NINE MONTHS ENDED
SEPTEMBER 30, 2003 SEPTEMBER 30, 2002
------------------ ------------------
(IN THOUSANDS)
Revenues:
Products $ 144,140 $ 131,049
Mobile Security 108,875 90,717
--------- ---------
Total revenues $ 253,015 $ 221,766
========= =========
Operating income (loss):
Products $ 24,619 $ 24,068
Mobile Security 13,491 9,156
Corporate (10,762) (5,674)
--------- ---------
Total operating income $ 27,348 $ 27,550
========= =========
Total assets:
Products $ 177,754 $ 176,951
Mobile Security 115,801 112,136
Corporate 179,835 18,777
--------- ---------
Total assets $ 473,390 $ 307,864
========= =========
F-14
NOTES TO UNAUDITED CONDENSED AND CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)
The following unaudited information with respect to revenues, operating
income from continuing operations (geographic operating income from continuing
operations before amortization expense and integration and other non-recurring
charges) and total assets to principal geographic areas are as follows:
NINE MONTHS ENDED
SEPTEMBER 2003 SEPTEMBER 30, 2002
-------------- ------------------
(IN THOUSANDS)
Revenues:
North America $ 186,754 $ 157,069
South America 10,547 21,983
Africa 1,578 1,344
Europe/Asia 54,136 41,370
--------- ---------
Total revenue $ 253,015 $ 221,766
========= =========
Geographic operating income:
North America $ 24,973 $ 23,928
South America 618 1,690
Africa 377 430
Europe/Asia 6,146 6,191
--------- ---------
Total geographic operating income $ 32,114 $ 32,239
========= =========
Total assets:
North America $ 419,966 $ 258,123
South America 6,301 9,856
Africa -- --
Europe/Asia 47,123 39,885
--------- ---------
Total assets $ 473,390 $ 307,864
========= =========
A reconciliation of consolidated geographic operating income from
continuing operations to consolidated operating income from continuing
operations follows:
NINE MONTHS ENDED
SEPTEMBER 30, 2003 SEPTEMBER 30, 2002
------------------ ------------------
(IN THOUSANDS)
Consolidated geographic operating income $ 32,114 $ 32,239
Amortization (201) (213)
Integration and other non-recurring charges (4,565) (4,476)
--------- ---------
Operating income $ 27,348 $ 27,550
========= =========
F-15
NOTES TO UNAUDITED CONDENSED AND CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)
NOTE 9 - EARNINGS PER SHARE
The following details the numerators and denominators of the basic and
diluted earnings per share computations for net income from continuing
operations:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2003 SEPTEMBER 30, 2002 SEPTEMBER 30, 2003 SEPTEMBER 30, 2002
------------------ ------------------ ------------------ ------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Numerator for basic and diluted earnings per share:
Income from continuing operations $ 6,109 $ 2,964 $14,832 $13,355
------- ------- ------- -------
Denominator for basic earnings per share
weighted average shares outstanding: 27,811 29,708 28,106 30,639
Effect of shares issuable under stock option
and stock grant plans, based on the treasury
stock method 438 329 332 734
------- ------- ------- -------
Denominator for diluted earnings per share-
Adjusted weighted average shares outstanding 28,249 30,037 28,438 31,373
------- ------- ------- -------
Basic earnings per share from continuing
operations $ 0.22 $ 0.10 $ 0.52 $ 0.44
======= ======= ======= =======
Diluted earnings per share from
continuing operations $ 0.22 $ 0.10 $ 0.52 $ 0.43
======= ======= ======= =======
F-16
NOTES TO UNAUDITED CONDENSED AND CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)
NOTE 10 - NEW ACCOUNTING PRONOUNCEMENTS
In November 2002, the FASB issued FASB Interpretation No. 45 Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, an Interpretation of FASB Statements No.
5, 57, and 107 and Rescission of FASB Interpretation No. 34 ("FIN 45"). FIN 45
elaborates on the disclosures to be made by a guarantor in its interim and
annual financial statements about its obligations under certain guarantees that
it has issued. It also clarifies that a guarantor is required to recognize, at
the inception of a guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. The initial recognition and initial
measurement provisions of FIN 45 are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002, irrespective of the
guarantor's fiscal year-end. We adopted the provisions of this Statement on
January 1, 2003, which did not have a significant impact on our consolidated
financial statements.
In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation
of Variable-Interest Entities - an Interpretation of ARB No. 51 ("FIN 46"). FIN
46 addresses consolidation by business enterprises of variable interest
entities, which have one or both of the following characteristics: (1) the
equity investment at risk is not sufficient to permit the entity to finance its
activities without additional subordinated financial support from other parties,
which is provided through other interests that will absorb some or all of the
expected losses of the entity and (2) the equity investors lack one or more of
the following essential characteristics of a controlling financial interest:
o The direct or indirect ability to make decisions about the entity's
activities through voting rights or similar rights
o The obligation to absorb the expected losses of the entity if they occur,
which makes it possible for the entity to finance its activities
o The right to receive the expected residual returns of the entity if they
occur, which is the compensation for the risk of absorbing the expected
losses.
This Interpretation applies immediately to variable interest entities
created after January 31, 2003, and to variable interest entities in which an
enterprise obtains an interest after that date. It applies in the first fiscal
year or interim period beginning after June 15, 2003, to variable interest
entities in which an enterprise holds a variable interest that it acquired
before February 1, 2003. The adoption of FIN 46 did not have a significant
impact on our consolidated financial statements.
F-17
NOTES TO UNAUDITED CONDENSED AND CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)
In April 2003, the FASB issued Statement of Financial Accounting Standard
No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities" (SFAS 149). SFAS 149 amends and clarifies financial accounting and
reporting for derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities under Statement of
Financial Accounting Standard No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (SFAS 133). SFAS 149 is effective for contracts entered
into or modified and hedging relationships designated after June 30, 2003,
except for the provisions of SFAS 149 that relate to SFAS 133 Implementation
Issues that have been effective for fiscal quarters that began prior to June 15,
2003, which should continue to be applied in accordance with their respective
effective dates. Adoption of this standard had no effect on us.
In May 2003, the FASB issued Statement of Financial Accounting Standard
No. 150, "Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity" (SFAS 150). SFAS 150 establishes standards for how
an issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an issuer
classify a financial instrument that is within its scope as a liability (or an
asset in some circumstances). Many of those instruments were previously
classified as equity. SFAS 150 is effective for financial instruments entered
into or modified after May 31, 2003, and otherwise is effective at the beginning
of the first interim period beginning after June 15, 2003. Adoption of this
standard had no effect on us.
In September 2003, the FASB issued FASB Staff Position No. 146-1,
Determining Whether a One-Time Termination Benefit Offered in Connection with an
Exit or Disposal Activity Is, in Substance, an Enhancement to an Ongoing Benefit
Arrangement. This Staff Position states that in order to be considered an
enhancement to an ongoing benefit arrangement, the additional termination
benefits must represent a revision to the ongoing arrangement that is not
limited to a specified termination event or a specified future period. Otherwise
the additional termination benefits should be considered one-time termination
benefits and accounted for under SFAS 146. The guidance in this Staff Position
is effective for exit or disposal activities initiated in interim or annual
reporting periods beginning after September 15, 2003. The adoption of this Staff
Position is not expected to have a material impact on our consolidated financial
statements.
In October 2003, the FASB issued FASB Staff Position No. FIN 46-6,
Effective Date of FASB Interpretation No. 46, Consolidation of Variable Interest
Entities. This Staff Position defers the effective date for applying the
provisions of FIN 46 for interests held by public entities in variable interest
entities or potential variable interest entities created before February 1, 2003
and non-registered investment companies. This adoption of this Staff Position is
not expected to have a material impact on our consolidated financial statements.
F-18
NOTES TO UNAUDITED CONDENSED AND CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)
NOTE 11 - STOCKHOLDERS' EQUITY
Statement of Financial Accounting Standard No. 123, "Accounting for
Stock-Based Compensation" (SFAS 123), as amended by SFAS 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure," establishes a fair value
based method of accounting for stock-based employee compensation plans; however,
it also allows an entity to continue to measure compensation cost for those
plans using the intrinsic value based method of accounting prescribed by
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB 25). Under the fair value based method, compensation cost is
measured at the grant date based on the value of the award and is recognized
over the service period, which is usually the vesting period. Under the
intrinsic value based method, compensation costs is the excess, if any, of the
quoted market price of the stock at the grant date or other measurement date
over the amount an employee must pay to acquire the stock. We have elected to
continue to account for our employee stock compensation plans under APB 25 with
pro forma disclosures of net earnings and earnings per share, as if the fair
value based method of accounting defined in SFAS 123 had been applied. If
compensation cost for stock option grants had been determined based on the fair
value on the grant dates for September 30, 2003 and 2002 consistent with the
method prescribed by SFAS 123, our net earnings and earnings per share would
have been adjusted to the pro forma amounts indicated below:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2003 SEPTEMBER 30, 2002 SEPTEMBER 30, 2003 SEPTEMBER 30, 2002
------------------ ------------------ ------------------ ------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income (loss) as reported: $ 6,115 $(14,707) $ 15,815 $ (4,672)
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects (671) (1,699) (2,985) (3,434)
-------- -------- -------- ---------
Pro-forma net income (loss) $ 5,444 $(16,406) $ 12,830 $ (8,106)
======== ======== ======== =========
Earnings (loss) per share:
Basic - as reported $ 0.22 $ (0.50) $ 0.56 $ (0.15)
======== ======== ======== =========
Basic - pro-forma $ 0.20 $ (0.55) $ 0.46 $ (0.26)
======== ======== ======== =========
Diluted - as reported $ 0.22 $ (0.49) $ 0.56 $ (0.15)
======== ======== ======== =========
Diluted - pro-forma $ 0.19 $ (0.55) $ 0.45 $ (0.26)
======== ======== ======== =========
F-19
NOTES TO UNAUDITED CONDENSED AND CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)
NOTE 12 - LEGAL PROCEEDINGS
On or about March 22, 2002, O'Gara-Hess & Eisenhardt Armoring Company
(OHEAC), one of our subsidiaries, received a civil subpoena from the Department
of Defense (DOD) requesting documents and information concerning various quality
control documentation regarding parts delivered by its subcontractors and
vendors in support of the HMMWV armored at its Fairfield, Ohio facility for the
period October 1, 1999 through May 1, 2001. OHEAC has complied fully with the
subpoena. In early 2003, OHEAC was advised that the Department of Justice (DOJ)
was also investigating separate claims against OHEAC filed by individuals that
involve the same time frame and issues covered by the DOD subpoena. OHEAC has
learned that the DOJ investigation relates to a certain unidentified action
filed under the federal False Claims Act pursuant to which the United States
government may intervene and recover damages. OHEAC has fully responded to, and
cooperated with, the government's questions and investigation. The DOJ has since
notified OHEAC that it has declined to intervene in the case. On September 30,
2003, the action filed under the federal False Claims Act was voluntarily
withdrawn without prejudice.
In October 2002, we were sued in the United States District Court for the
District of Wyoming. The plaintiffs in that lawsuit asserted various state law
tort claims and federal environmental law claims under the Resource Conservation
and Recovery Act and the Clean Air Act stemming from one of our subsidiaries'
Casper, Wyoming tear gas plant. The plaintiffs have not yet quantified their
alleged damages. The plaintiffs filed their suit as a potential class action. On
June 19, 2003, the court denied plaintiff's motion for class certification. The
alleged actions took place over time periods during which we were covered by
different insurance policies. We have notified our insurance carriers of the
suit. Our prior insurance carrier has agreed, under a full reservation of
rights, including with respect to any liability which relates to the time its
policy was in effect, to provide a defense and to address the question of
liability indemnification in the future. Our current insurance carrier has
declined defense and indemnification coverage. While we do not carry specific
environment insurance coverage, we have reserved the right to challenge our
insurance carrier's determination. The case is currently pending, and while we
are contesting the allegations vigorously, we are unable to predict the outcome
of this matter. At this time, we do not believe this matter will have a material
impact on our financial position, operations or liquidity.
Reference is made to Note 10, Commitments and Contingencies, in our Annual
Report on Form 10-K for the year ended December 31, 2002, and Note 10, Legal
Proceedings in our Quarterly Report on Form 10-Q for the quarter ended March 31,
2003 for a description of other legal proceedings.
F-20
NOTES TO UNAUDITED CONDENSED AND CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)
NOTE 13 - GUARANTOR AND NONGUARANTOR FINANCIAL STATEMENTS
On August 12, 2003 we sold $150 million of Senior Subordinated Notes in
private placements pursuant to Rule 144A and Regulation S. The Senior
Subordinated Notes are uncollateralized obligations and rank junior in right of
payment to our existing and future senior debt. The Senior Subordinated Notes
are guaranteed, jointly and severally on a senior uncollateralized basis, by all
of our domestic subsidiaries, except USDS, Inc.
The following consolidated condensed financial information presents the
consolidated condensed balance sheet as of September 30, 2003 and December 31,
2002, the related condensed statements of income for each of the three and nine
month periods ended September 30, 2003 and September 30, 2002 and the related
condensed statements of cash flows for the nine month periods ended September
30, 2003 and September 30, 2002 for:
a) Armor Holdings, Inc., the parent,
b) the guarantor subsidiaries,
c) the nonguarantor subsidiaries, and
d) Armor Holdings, Inc. on a consolidated basis
The information includes elimination entries necessary to consolidate
Armor Holdings, Inc., the parent, with the guarantor and nonguarantor
subsidiaries.
Investments in subsidiaries are accounted for by the parent using the
equity method of accounting. The guarantor and nonguarantor subsidiaries are
presented on a combined basis. The principal elimination entries eliminate
investments in subsidiaries and intercompany balances and transactions. Separate
financial statements for the guarantor and nonguarantor subsidiaries are not
presented because management believes such financial statements would not be
meaningful to investors.
F-21
NOTES TO UNAUDITED CONDENSED AND CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)
ARMOR HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
SEPTEMBER 30, 2003
---------------------------------------------------------------------------
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------------ ------------ ------------ ------------ ------------
(IN THOUSANDS)
ASSETS
Current Assets:
Cash and cash equivalents $ 144,037 $ 2,620 $ 8,109 $ -- $ 154,766
Accounts receivable, net -- 47,925 11,290 -- 59,215
Costs and earned gross profit in excess of
billings -- 1,088 -- -- 1,088
Intercompany receivables 86,614 50,744 5,661 (143,019) --
Inventories -- 45,296 14,772 -- 60,068
Prepaid expenses and other current assets 19,520 12,931 3,271 (14,401) 21,321
Current assets of discontinued operations -- 7,971 39,987 -- 47,958
------------ ------------ ------------ ------------ ------------
Total Current Assets 250,171 168,575 83,090 (157,420) 344,416
Property and equipment, net 2,183 27,742 19,606 -- 49,531
Goodwill, net -- 97,002 1,932 -- 98,934
Patents, licenses and trademarks, net -- 7,233 186 -- 7,419
Other assets 20,903 232 (87) -- 21,048
Long-term assets of discontinued operations -- 7,205 12,840 -- 20,045
Investment in subsidiaries 197,975 10,007 21,734 (229,716) --
------------ ------------ ------------ ------------ ------------
Total Assets $ 471,232 $ 317,996 $ 139,301 $ (387,136) $ 541,393
============ ============ ============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ -- $ 765 $ -- $ -- $ 765
Short-term debt -- -- 608 -- 608
Accounts payable 215 15,988 5,810 -- 22,013
Accrued expenses and other current liabilities 8,335 13,102 17,528 -- 38,965
Income taxes payable 2,604 -- 1,310 -- 3,914
Intercompany payables 13,424 99,192 11,658 (124,274) --
Current liabilities of discontinued operations -- 8,047 34,515 (18,745) 23,942
------------ ------------ ------------ ------------ ------------
Total Current Liabilities 24,578 137,094 71,429 (143,019) 90,207
Long-term debt, less current portion 155,514 4,407 -- -- 159,921
Long-term liabilities of discontinued operations -- 2,778 11,873 (14,401) 125
------------ ------------ ------------ ------------ ------------
Total Liabilities 180,092 144,279 83,302 (157,420) 250,253
Stockholders' Equity:
Preferred stock -- 1,450 -- (1,450) --
Common stock 342 5,523 26,314 (31,837) 342
Additional paid in capital 315,148 71,816 31,615 (103,431) 315,148
Retained earnings (accumulated deficit) 49,871 94,928 (1,930) (92,998) 49,871
Accumulated other comprehensive loss (1,904) -- -- -- (1,904)
Treasury stock (72,317) -- -- -- (72,317)
------------ ------------ ------------ ------------ ------------
Total Stockholders' Equity 291,140 173,717 55,999 (229,716) 291,140
------------ ------------ ------------ ------------ ------------
Total Liabilities and Stockholders' Equity $ 471,232 $ 317,996 $ 139,301 $ (387,136) $ 541,393
============ ============ ============ ============ ============
F-22
NOTES TO UNAUDITED CONDENSED AND CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)
ARMOR HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
DECEMBER 31, 2002
---------------------------------------------------------------------------
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------------ ------------ ------------ ------------ ------------
(IN THOUSANDS)
ASSETS
Current Assets:
Cash and cash equivalents $ 7,152 $ 3,556 $ 2,205 $ -- $ 12,913
Accounts receivable, net -- 44,864 13,649 -- 58,513
Costs and earned gross profit in excess of
billings -- 234 -- -- 234
Intercompany receivables 123,744 33,165 3,800 (160,709) --
Inventories -- 46,591 15,739 -- 62,330
Prepaid expenses and other current assets 12,490 21,999 2,368 (24,645) 12,212
Current assets of discontinued operations -- 10,351 18,474 -- 28,825
------------ ------------ ------------ ------------ ------------
Total Current Assets 143,386 160,760 56,235 (185,354) 175,027
Property and equipment, net 2,456 27,250 17,430 -- 47,136
Goodwill, net -- 96,903 1,833 -- 98,736
Patents, licenses and trademarks, net -- 7,326 195 -- 7,521
Other assets 916 6,872 1,260 -- 9,048
Long-term assets of discontinued operations -- 6,910 23,375 -- 30,285
Investment in subsidiaries 161,805 10,078 -- (171,883) --
------------ ------------ ------------ ------------ ------------
Total Assets $ 308,563 $ 316,099 $ 100,328 $ (357,237) $ 367,753
============ ============ ============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ -- $ 1,813 $ -- $ -- $ 1,813
Short-term debt -- -- 599 -- 599
Accounts payable 828 15,751 7,191 -- 23,770
Accrued expenses and other current liabilities 1,790 11,324 12,002 -- 25,116
Income taxes payable 4,831 (148) 1,230 -- 5,913
Intercompany payables 13,037 115,658 10,434 (139,129) --
Current liabilities of discontinued operations -- 14,267 24,538 (21,580) 17,225
------------ ------------ ------------ ------------ ------------
Total Current Liabilities 20,486 158,665 55,994 (160,709) 74,436
Long-term debt, less current portion -- 5,072 -- -- 5,072
Long-term liabilities of discontinued operations -- 13,022 11,791 (24,645) 168
------------ ------------ ------------ ------------ ------------
Total Liabilities 20,486 176,759 67,785 (185,354) 79,676
Stockholders' Equity:
Preferred stock -- 1,450 -- (1,450) --
Common stock 336 5,681 26,318 (31,999) 336
Additional paid in capital 307,487 73,836 10,016 (83,852) 307,487
Retained earnings (accumulated deficit) 34,056 58,373 (3,791) (54,582) 34,056
Accumulated other comprehensive loss (4,169) -- -- -- (4,169)
Treasury stock (49,633) -- -- -- (49,633)
------------ ------------ ------------ ------------ ------------
Total Stockholders' Equity 288,077 139,340 32,543 (171,883) 288,077
------------ ------------ ------------ ------------ ------------
Total Liabilities and Stockholders' Equity $ 308,563 $ 316,099 $ 100,328 $ (357,237) $ 367,753
============ ============ ============ ============ ============
F-23
NOTES TO UNAUDITED CONDENSED AND CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)
ARMOR HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING INCOME STATEMENTS
THREE MONTHS ENDED SEPTEMBER 30, 2003
---------------------------------------------------------------------------
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------------ ------------ ------------ ------------ ------------
(IN THOUSANDS)
REVENUES:
Products $ -- $ 42,110 $ 8,676 $ -- $ 50,786
Mobile Security -- 24,338 15,758 -- 40,096
------------ ------------ ------------ ------------ ------------
Total revenues -- 66,448 24,434 -- 90,882
------------ ------------ ------------ ------------ ------------
COSTS AND EXPENSES:
Cost of sales -- 42,120 19,833 -- 61,953
Operating expenses 2,661 10,945 2,371 -- 15,977
Amortization -- 69 3 -- 72
Integration and other non-recurring charges 107 261 -- -- 368
Related party management (income) fees (1,859) -- 2,339 (480) --
------------ ------------ ------------ ------------ ------------
OPERATING (LOSS) INCOME (909) 13,053 (112) 480 12,512
Interest expense, net 1,371 59 45 -- 1,475
Other expense (income), net -- 129 (33) -- 96
Equity in (earnings) losses of subsidiaries (7,603) 256 -- 7,347 --
------------ ------------ ------------ ------------ ------------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
PROVISION (BENEFIT) FOR INCOME TAXES 5,323 12,609 (124) (6,867) 10,941
PROVISION (BENEFIT) FOR INCOME TAXES (792) 4,748 876 -- 4,832
------------ ------------ ------------ ------------ ------------
INCOME (LOSS) FROM CONTINUING OPERATIONS 6,115 7,861 (1,000) (6,867) 6,109
DISCONTINUED OPERATIONS:
Income from discontinued operations
before provision for income taxes -- 1,697 462 (480) 1,679
Provision for income taxes -- 702 971 -- 1,673
------------ ------------ ------------ ------------ ------------
Net income (loss) from discontinued operations -- 995 (509) (480) 6
------------ ------------ ------------ ------------ ------------
NET INCOME (LOSS) $ 6,115 $ 8,856 $ (1,509) $ (7,347) $ 6,115
============ ============ ============ ============ ============
F-24
NOTES TO UNAUDITED CONDENSED AND CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)
ARMOR HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING INCOME STATEMENTS
THREE MONTHS ENDED SEPTEMBER 30, 2002
---------------------------------------------------------------------------
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------------ ------------ ------------ ------------ ------------
(IN THOUSANDS)
REVENUES:
Products $ -- $ 41,763 $ 7,284 $ -- $ 49,047
Mobile Security -- 21,282 10,228 -- 31,510
------------ ------------ ------------ ------------ ------------
Total revenues -- 63,045 17,512 -- 80,557
------------ ------------ ------------ ------------ ------------
COSTS AND EXPENSES:
Cost of sales -- 41,269 14,678 -- 55,947
Operating expenses 1,552 9,417 1,883 -- 12,852
Amortization -- 62 -- -- 62
Integration and other non-recurring charges 335 1,024 -- -- 1,359
------------ ------------ ------------ ------------ ------------
OPERATING (LOSS) INCOME (1,887) 11,273 951 -- 10,337
Interest expense, net 230 45 68 -- 343
Other (income) expense, net -- (38) 25 -- (13)
Equity in losses of subsidiaries 9,611 92 -- (9,703) --
Related parting interest income, net -- 122 -- (122) --
------------ ------------ ------------ ------------ ------------
(LOSS) INCOME FROM CONTINUING OPERATIONS
BEFORE PROVISION FOR INCOME TAXES (11,728) 11,052 858 9,825 10,007
PROVISION FOR INCOME TAXES 2,979 3,781 283 -- 7,043
------------ ------------ ------------ ------------ ------------
(LOSS) INCOME FROM CONTINUING OPERATIONS (14,707) 7,271 575 9,825 2,964
------------ ------------ ------------ ------------ ------------
DISCONTINUED OPERATIONS:
Loss from discontinued operations before
provision for income taxes -- (14,361) (2,549) (122) (17,032)
Provision for income taxes -- 29 610 -- 639
------------ ------------ ------------ ------------ ------------
Net loss from discontinued operations -- (14,390) (3,159) (122) (17,671)
------------ ------------ ------------ ------------ ------------
NET LOSS $ (14,707) $ (7,119) $ (2,584) $ 9,703 $ (14,707)
============ ============ ============ ============ ============
F-25
NOTES TO UNAUDITED CONDENSED AND CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)
ARMOR HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING INCOME STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2003
---------------------------------------------------------------------------
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------------ ------------ ------------ ------------ ------------
(IN THOUSANDS)
REVENUES:
Products $ -- $ 117,863 $ 26,277 $ -- $ 144,140
Mobile Security -- 63,110 45,765 -- 108,875
------------ ------------ ------------ ------------ ------------
Total revenues -- 180,973 72,042 -- 253,015
------------ ------------ ------------ ------------ ------------
COSTS AND EXPENSES:
Cost of sales -- 117,278 59,118 -- 176,396
Operating expenses 7,203 29,732 7,570 -- 44,505
Amortization -- 193 8 -- 201
Integration and other non-recurring charges 3,456 1,109 -- -- 4,565
Related party management (income) fees (1,859) -- 2,339 (480) --
------------ ------------ ------------ ------------ ------------
OPERATING (LOSS) INCOME (8,800) 32,661 3,007 -- 27,348
Interest expense, net 1,866 250 175 -- 2,291
Other expense, net -- 131 50 -- 181
Equity in (earnings) losses of subsidiaries (22,688) 419 -- 22,269 --
Related parting interest expense (income), net 16 (16) -- -- --
------------ ------------ ------------ ------------ ------------
INCOME FROM CONTINUING OPERATIONS BEFORE PROVISION
(BENEFIT) FOR INCOME TAXES 12,006 31,877 2,782 (21,789) 24,876
PROVISION (BENEFIT) FOR INCOME TAXES (3,809) 12,011 1,842 -- 10,044
------------ ------------ ------------ ------------ ------------
INCOME FROM CONTINUING OPERATIONS 15,815 19,866 940 (21,789) 14,832
------------ ------------ ------------ ------------ ------------
DISCONTINUED OPERATIONS:
Income from discontinued operations before
provision for income taxes -- 1,480 2,593 (480) 3,593
Provision for income taxes -- 938 1,672 -- 2,610
------------ ------------ ------------ ------------ ------------
Net income from discontinued operations -- 542 921 (480) 983
------------ ------------ ------------ ------------ ------------
NET INCOME $ 15,815 $ 20,408 $ 1,861 $ (22,269) $ 15,815
============ ============ ============ ============ ============
F-26
NOTES TO UNAUDITED CONDENSED AND CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)
ARMOR HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING INCOME STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2002
---------------------------------------------------------------------------
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------------ ------------ ------------ ------------ ------------
(IN THOUSANDS)
REVENUES:
Products $ -- $ 112,437 $ 18,612 $ -- $ 131,049
Mobile Security -- 57,439 33,278 -- 90,717
------------ ------------ ------------ ------------ ------------
Total revenues -- 169,876 51,890 -- 221,766
------------ ------------ ------------ ------------ ------------
COSTS AND EXPENSES:
Cost of sales -- 109,621 42,860 -- 152,481
Operating expenses 4,866 27,073 5,107 -- 37,046
Amortization -- 213 -- -- 213
Integration and other non-recurring charges 687 3,789 -- -- 4,476
Related party income -- -- -- -- --
------------ ------------ ------------ ------------ ------------
OPERATING (LOSS) INCOME (5,553) 29,180 3,923 -- 27,550
Interest expense, net 361 161 147 -- 669
Other income, net (2) (21) (54) -- (77)
Equity in earnings of subsidiaries (2,898) (1,087) -- 3,985 --
Related party interest income, net -- (102) -- 102 --
------------ ------------ ------------ ------------ ------------
(LOSS) INCOME FROM CONTINUING OPERATIONS
BEFORE PROVISION FOR INCOME TAXES (3,014) 30,229 3,830 (4,087) 26,958
PROVISION FOR INCOME TAXES 1,658 10,597 1,348 -- 13,603
------------ ------------ ------------ ------------ ------------
(LOSS) INCOME FROM CONTINUING OPERATIONS (4,672) 19,632 2,482 (4,087) 13,355
------------ ------------ ------------ ------------ ------------
DISCONTINUED OPERATIONS:
Loss from discontinued operations before
income tax (benefit) provision -- (14,015) (3,693) 102 (17,606)
Income tax (benefit) provision -- (722) 1,143 -- 421
------------ ------------ ------------ ------------ ------------
Net loss from discontinued operations -- (13,293) (4,836) 102 (18,027)
------------ ------------ ------------ ------------ ------------
NET (LOSS) INCOME $ (4,672) $ 6,339 $ (2,354) $ (3,985) $ (4,672)
============ ============ ============ ============ ============
F-27
NOTES TO UNAUDITED CONDENSED AND CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)
ARMOR HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2003
------------------------------------------------------------------------
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------------ ------------ ------------ ------------ ------------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Income from continuing operations $ 15,815 $ 19,866 $ 940 $ (21,789) $ 14,832
Adjustments to reconcile income from continuing
operations to cash provided by operating activities
Depreciation and amortization 974 2,972 1,434 -- 5,380
Loss on disposal of fixed assets -- 58 109 -- 167
Deferred income taxes (4,379) 6,428 1,627 -- 3,676
Non-cash termination charge 2,093 -- -- -- 2,093
Changes in operating assets & liabilities, net of
acquisitions:
(Increase) decrease in accounts receivable -- (3,915) 2,359 -- (1,556)
Decrease (increase) in intercompany receivables &
payables 19,723 (19,090) (153) (480) --
Decrease in inventory -- 1,206 967 -- 2,173
(Increase) decrease in prepaid expenses & other
assets (7,347) 4,848 (1,183) -- (3,682)
Increase in accounts payable, accrued expenses
and other current liabilities 5,043 2,620 4,145 -- 11,808
(Decrease) increase in income taxes payable (2,227) 148 80 -- (1,999)
------------ ------------ ------------ ------------ ------------
Net cash provided by operating activities 29,695 15,141 10,325 (22,269) 32,892
------------ ------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (126) (3,330) (2,189) -- (5,645)
Purchase of patents and trademarks -- (99) -- -- (99)
Additional consideration for purchased businesses -- (740) -- -- (740)
Investment in subsidiaries (22,337) 203 (135) 22,269 --
Purchase of businesses, net of cash acquired -- (5,828) -- -- (5,828)
------------ ------------ ------------ ------------ ------------
Net cash used in investing activities (22,463) (9,794) (2,324) 22,269 (12,312)
------------ ------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 6,588 -- -- -- 6,588
Treasury stock repurchases (22,684) -- -- -- (22,684)
Cash paid for financing costs (4,020) -- -- -- (4,020)
Proceeds from the issuance of long-term debt 147,504 -- -- -- 147,504
Repayments of long-term debt -- (1,399) -- -- (1,399)
Borrowings under lines of credit 30,406 168 1,170 -- 31,744
Repayments under lines of credit (30,406) (484) (1,180) -- (32,070)
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in) financing
activities 127,388 (1,715) (10) -- 125,663
------------ ------------ ------------ ------------ ------------
Effect of exchange rate on cash and cash
equivalents 2,265 (186) (1,601) -- 478
Net cash used in discontinued operations -- (4,382) (486) -- (4,868)
------------ ------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 136,885 (936) 5,904 -- 141,853
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 7,152 3,556 2,205 -- 12,913
------------ ------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 144,037 $ 2,620 $ 8,109 $ -- $ 154,766
============ ============ ============ ============ ============
F-28
NOTES TO UNAUDITED CONDENSED AND CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)
ARMOR HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2002
----------------------------------------------------------------------------
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------------ ------------ ------------ ------------ ------------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Income from continuing operations $ (4,672) $ 19,632 $ 2,650 $ (4,255) $ 13,355
Adjustments to reconcile income from continuing
operations to cash used in operating activities
Depreciation and amortization 625 2,764 660 -- 4,049
Loss on disposal of fixed assets -- 37 99 -- 136
Deferred taxes (3,927) 1,592 1,655 -- (680)
Changes in operating assets & liabilities, net of
acquisitions:
(Increase) decrease in accounts receivable -- (5,890) 2,760 -- (3,130)
(Increase) decrease in intercompany receivables &
payables (5,414) 8,148 (3,004) 270 --
Increase in inventory -- (6,692) (3,511) -- (10,203)
Increase in prepaid expenses & other assets (313) (2,898) (358) -- (3,569)
Decrease in accounts payable, accrued expenses
and other current liabilities (1,539) (1,490) (3,746) -- (6,775)
Increase in income taxes payable 4,724 -- 1,621 -- 6,345
------------ ------------ ------------ ------------ ------------
Net cash (used in) provided by operating
activities (10,516) 15,203 (1,174) (3,985) (472)
------------ ------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (70) (3,044) (1,434) -- (4,548)
Purchase of patents and trademarks -- (45) -- -- (45)
Additional consideration for purchased businesses -- (2,652) -- -- (2,652)
Investment in subsidiaries (7,166) (5,540) 8,721 3,985 --
Purchase of businesses, net of cash acquired -- (5,916) (1,495) -- (7,411)
------------ ------------ ------------ ------------ ------------
Net cash (used in) provided by investing
activities (7,236) (17,197) 5,792 3,985 (14,656)
------------ ------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 4,237 -- -- -- 4,237
Treasury stock purchases ((26,054) -- -- -- (26,054)
Cash paid for financing costs (326) -- -- -- (326)
Repayments of long-term debt -- (591) -- -- (591)
Borrowings under lines of credit 27,763 -- -- -- 27,763
Repayments under lines of credit (20,563) -- (138) -- (20,701)
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in) financing
activities (14,943) (591) (138) -- (15,672)
------------ ------------ ------------ ------------ ------------
Effect of exchange rate on cash and cash (851) (385) 364 -- (872)
equivalents
Net cash transferred from (used in) discontinued
operations -- 2,306 (1,539) -- 767
------------ ------------ ------------ ------------ ------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (33,546) (664) 3,305 -- (30,905)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 38,627 5,536 3,326 -- 47,489
------------ ------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 5,081 $ 4,872 $ 6,631 $ -- $ 16,584
============ ============ ============ ============ ============
F-29
NOTES TO UNAUDITED CONDENSED AND CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)
NOTE 14 - COMMITMENTS AND CONTINGENCIES
On September 2, 2003, we entered into a definitive Agreement and Plan of
Merger to acquire Simula, Inc., for $110.5 million, subject to adjustment based
on various factors, payable in cash or, at our option, in a combination of cash
and registered shares of our 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 Agreement
provides for a good faith deposit, 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, the approval of Simula's
stockholders. In connection with the acquisition, we registered approximately
2.3 million shares of common stock on a Form S-4 with the Securities and
Exchange Commission. The registration statement was declared effective on
November 10, 2003. We anticipate completion of the acquisition in the fourth
quarter of 2003.
NOTE 15 - SUBSEQUENT EVENT
On July 26, 2003, we awarded Warren B. Kanders, our Chairman and Chief
Executive Officer, a stock bonus award of 200,000 shares of our common stock in
accordance with his amended employment agreement. On November 4, 2003, we
awarded Robert R. Schiller, our Chief Operating Officer and Chief Financial
Officer, a stock bonus award of 150,000 shares of our common stock in accordance
with his amended employment agreement. On November 11, 2003, our stock price
closed above $20 for the fifth consecutive trading day, which caused the
complete vesting of the stock bonus awards. The complete vesting of the stock
bonus awards results in a charge of $7.3 million, which will be recorded in the
three months ended December 31, 2003. The payment of the stock bonus awards to
Messrs. Kanders and Schiller will be deferred for a period of five years after
November 11, 2003, subject to acceleration under certain circumstances as set
forth in their respective employment agreements, as amended.
F-30
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
AUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Armor Holdings, Inc.:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, stockholders' equity and comprehensive
income, and cash flows present fairly, in all material respects, the financial
position of Armor Holdings, Inc. and its subsidiaries at December 31, 2002 and
2001, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2002 in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As discussed in Note 1 to the consolidated financial statements, effective
January 1, 2002, the Company changed its method of accounting for goodwill
following adoption of Statement of Financial Accounting Standard No. 142
"Goodwill and Other Intangible Assets."
PricewaterhouseCoopers LLP
Jacksonville, Florida
March 30, 2003, except for Note 20 and Note 21,
as to which the date is January 6, 2004.
F-31
ARMOR HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2002 AND DECEMBER 31, 2001
(IN THOUSANDS, EXCEPT FOR SHARE DATA)
DECEMBER 31, 2002 DECEMBER 31, 2001
----------------- -----------------
ASSETS
Current Assets:
Cash and cash equivalents $ 12,913 $ 47,489
Accounts receivable (net of allowance for doubtful accounts of $1,428
And $1,620) 58,513 50,119
Costs and earned gross profit in excess of billings 234 5,451
Inventories 62,330 50,553
Prepaid expenses and other current assets 12,212 8,947
Current assets of discontinued operations (Note 2) 28,825 37,562
--------- ---------
Total current assets 175,027 200,121
Property and equipment (net of accumulated depreciation of $12,919 and $8,096) 47,136 36,704
Goodwill (net of accumulated amortization of $4,024 and $4,024) 98,736 86,808
Patents, licenses and trademarks (net of accumulated amortization of $2,169 and $1,930) 7,521
6,695
Long-term assets of discontinued operations (Note 2) 30,285 51,105
Other assets 9,048 6,624
--------- ---------
Total assets $ 367,753 $ 388,057
========= =========
LIABILITIES AND STOCKHOLDERS'EQUITY
Current liabilities:
Current portion of long-term debt $ 1,813 $ 1,773
Short term debt 599 709
Accounts payable 23,770 21,444
Accrued expenses and other current liabilities 25,116 25,796
Income taxes payable 5,913 --
Current liabilities of discontinued operations (Note 2) 17,225 7,676
--------- ---------
Total current liabilities 74,436 57,398
Long-term debt, less current portion 5,072 4,225
Long-term liabilities of discontinued operations (Note 2) 168 415
--------- ---------
Total liabilities 79,676 62,038
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, 5,000,000 shares authorized; no
shares issued and outstanding -- --
Common stock, $.01 par value; 50,000,000 shares authorized;
33,593,977 and 33,065,904 issued; 29,456,692 and 30,857,019
outstanding at December 31, 2002 and December 31, 2001, respectively 336 331
Additional paid-in capital 307,487 301,995
Retained earnings 34,056 51,745
Accumulated other comprehensive loss (4,169) (4,473)
Treasury stock (49,633) (23,579)
--------- ---------
Total stockholders' equity 288,077 326,019
--------- ---------
Total liabilities and stockholders' equity $ 367,753 $ 388,057
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-32
ARMOR HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
DECEMBER 31, 2002 DECEMBER 31, 2001 DECEMBER 31, 2000
----------------- ----------------- -----------------
REVENUES:
Products $ 179,946 $ 149,868 $ 139,904
Mobile Security 125,171 47,232 --
--------- --------- ---------
Total Revenues 305,117 197,100 139,904
--------- --------- ---------
COSTS AND EXPENSES:
Cost of sales 210,745 126,330 85,457
Operating expenses 49,836 38,659 30,286
Amortization 245 2,142 1,704
Integration and other non-recurring charges 5,926 3,296 2,588
--------- --------- ---------
OPERATING INCOME 38,365 26,673 19,869
Interest expense, net 923 3,864 1,849
Other expense (income), net 51 (82) (67)
--------- --------- ---------
INCOME FROM CONTINUING OPERATIONS
BEFORE PROVISION FOR INCOME TAXES 37,391 22,891 18,087
PROVISION FOR INCOME TAXES 16,054 8,207 7,240
--------- --------- ---------
INCOME FROM CONTINUING OPERATIONS 21,337 14,684 10,847
--------- --------- ---------
DISCONTINUED OPERATIONS (NOTE 2):
(LOSS) INCOME FROM DISCONTINUED OPERATIONS
BEFORE (BENEFIT) PROVISION FOR INCOME TAXES (41,468) (7,066) 8,303
(BENEFIT) PROVISION FOR INCOME TAXES (2,442) (2,510) 2,102
--------- --------- ---------
(LOSS) INCOME FROM DISCONTINUED OPERATIONS (39,026) (4,556) 6,201
--------- --------- ---------
NET (LOSS) INCOME $ (17,689) $ 10,128 $ 17,048
========= ========= =========
NET (LOSS)/INCOME PER COMMON SHARE - BASIC
INCOME FROM CONTINUING OPERATIONS $ 0.70 $ 0.61 $ 0.48
(LOSS) INCOME FROM DISCONTINUED OPERATIONS (1.28) (0.19) 0.27
--------- --------- ---------
BASIC (LOSS) INCOME PER SHARE $ (0.58) $ 0.42 $ 0.75
========= ========= =========
NET (LOSS) INCOME PER COMMON SHARE - DILUTED
INCOME FROM CONTINUING OPERATIONS $ 0.69 $ 0.59 $ 0.46
(LOSS) INCOME FROM DISCONTINUED OPERATIONS (1.26) (0.18) 0.27
--------- --------- ---------
DILUTED (LOSS) INCOME PER SHARE $ (0.57) $ 0.41 $ 0.73
========= ========= =========
WEIGHTED AVERAGE SHARES - BASIC 30,341 23,932 22,630
========= ========= =========
WEIGHTED AVERAGE SHARES - DILUTED 30,957 24,768 23,356
========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-33
ARMOR HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND
COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 2000, 2001 AND 2002
(IN THOUSANDS)
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER
PAR PAID-IN RETAINED COMPREHENSIVE TREASURY
SHARES VALUE CAPITAL EARNINGS LOSS STOCK TOTAL
--------- --------- --------- --------- --------- --------- ---------
Balance, December 31, 1999 24,514 $ 245 $ 145,480 $ 26,615 $ (1,351) $ (13,106) $ 157,883
Exercise of stock options 333 3 1,470 1,473
Tax benefit from exercises of
options 867 867
Issuance of stock for
acquisitions 217 2 2,437 2,439
Repurchase of stock (12,606) (12,606)
---------
Comprehensive income:
Net income 17,048 17,048
Foreign currency translation
adjustments, net of taxes of $179 (333) (333)
---------
Total Comprehensive income 16,715
--------- --------- --------- --------- --------- --------- ---------
Balance, December 31, 2000 25,064 $ 250 $ 150,254 $ 43,663 $ (1,684) $ (25,712) $ 166,771
Exercise of stock options 1,063 11 10,101 10,112
Tax benefit from exercises of
options 3,116 3,116
Issuance of treasury shares for
exercises of options (119) (1) (123) (2,046) 2,856 686
Issuance of common stock 5,765 58 117,969 118,027
Issuance of stock for
acquisitions and additional 20,691
consideration for earnouts 1,293 13 20,678
Repurchase of stock (723) (723)
Comprehensive income:
---------
Net income 10,128 10,128
Foreign currency translation
adjustments,
net of taxes of $713 (2,789) (2,789)
---------
Total Comprehensive income 7,339
--------- --------- --------- --------- --------- --------- ---------
Balance, December 31, 2001 33,066 $ 331 $ 301,995 $ 51,745 $ (4,473) $ (23,579) $ 326,019
Exercise of stock options 528 5 4,135 4,140
Tax benefit from exercises of
options 832 832
Sale of put options 525 525
Repurchase of stock (26,054) (26,054)
Comprehensive income:
---------
Net income (17,689) (17,689)
Foreign currency translation
adjustments,
net of taxes of $364 304 304
---------
Total Comprehensive income (17,385)
--------- --------- --------- --------- --------- --------- ---------
Balance, December 31, 2002 33,594 $ 336 $ 307,487 $ 34,056 $ (4,169) $ (49,633) $ 288,077
========= ========= ========= ========= ========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-34
ARMOR HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(IN THOUSANDS)
YEAR ENDED
-------------------------------------------------------------
DECEMBER 31, 2002 DECEMBER 31, 2001 DECEMBER 31, 2000
-------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Income from continuing operations $ 21,337 $ 14,684 $ 10,847
Adjustments to reconcile income from continuing operations
to cash used in operating activities:
Depreciation and amortization 5,580 5,614 3,462
Loss on disposal of fixed assets 200 191 110
Deferred income taxes 359 (373) 769
Changes in operating assets and liabilities, net of
acquisitions:
Increase in accounts receivable (2,554) (14,880) (3,600)
Increase in inventories (9,381) (3,948) (4,579)
(Increase) decrease in prepaid expenses and (2,246) 1,049 (6,396)
other assets
(Decrease) increase in accounts payable, accrued
expenses and other current liabilities (3,754) 7,181 381
Increase in income taxes payable 6,745 6,667 (2,928)
-------- --------- --------
Net cash provided by (used in) operating activities 16,286 16,185 (1,934)
-------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of patents and trademarks (69) -- (83)
Purchase of property and equipment (5,902) (5,644) (4,063)
Additional consideration for purchased businesses (9,375) (3,270)
Purchases of investments -- -- (1,682)
Proceeds from sale of equity securities -- 843 857
Purchase of businesses, net of cash acquired (8,818) (39,365) (14,220)
-------- --------- --------
Net cash used in investing activities (24,164) (47,436) (19,191)
-------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of common stock -- 117,979 --
Proceeds from the exercise of stock options 4,227 10,160 1,473
Repurchases of treasury stock (26,054) (723) (12,606)
Proceeds from the sale of put options 525 -- --
Proceeds from issuance of treasury shares for the exercise
of stock options -- 686 --
Cash paid for deferred loan costs -- (545) (256)
Cash paid for offering costs (326) -- --
Repayments of long-term debt (730) (676) (1,115)
Repayments of debt assumed in acquisitions -- (1,315) (1,132)
Borrowings under line of credit 32,372 98,286 75,647
Repayments under line of credit (32,447) (130,981) (43,434)
-------- --------- --------
Net cash (used in) provided by financing activities (22,433) 92,871 18,577
Effect of exchange rate changes on cash and (126) (1,459) (333)
cash equivalents
Net cash used in discontinued operations (4,139) (14,336) (2,754)
-------- --------- --------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (34,576) 45,825 (5,635)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 47,489 1,664 7,299
-------- --------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 12,913 $ 47,489 1,664
======== ========= ========
CASH AND CASH EQUIVALENTS, END OF PERIOD
CONTINUING OPERATIONS $ 12,913 $ 47,489 $ 1,664
DISCONTINUED OPERATIONS 3,638 6,230 5,593
-------- --------- --------
$ 16,551 $ 53,719 $ 7,257
======== ========= ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-35
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company and nature of business. Armor Holdings, Inc. is a leading
manufacturer and provider of security products, vehicle armor systems and
security risk management 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. We are organized and operated under three
business segments: Armor Holdings Products; Armor Mobile Security; and
ArmorGroup Services. ArmorGroup Services has been classified as discontinued
operations. The amounts disclosed in the footnotes are related to continuing
operations unless otherwise indicated.
CONTINUING OPERATIONS
Armor Holdings Products. Our Armor Holdings Products Division manufactures and
sells a broad range of high quality, branded law enforcement equipment, such as
concealable and tactical body armor, hard armor, duty gear, less-lethal
munitions, anti-riot products, police batons, emergency lighting products,
forensic products, firearms accessories and weapon maintenance products. Our
products are marketed under brand names that are well-known and respected in the
military and law enforcement communities such as American Body Armor(TM),
Safariland(R), B-Square(TM), Break-Free(R), Defense Technology/Federal
Laboratories(TM), MACE(R), PROTECH(TM), NIK(R)Public Safety, Monadnock(TM)
Lifetime Products, Identicator(TM), Lightning Powder(R), SpeedFeed(TM), and
911EP(R). We sell our manufactured products primarily to law enforcement
agencies through a worldwide network of over 350 distributors and sales agents,
including approximately 200 in the United States. Our extensive distribution
capabilities and commitment to customer service and training have enabled us to
become a leading provider of security equipment to law enforcement agencies.
Armor Mobile Security. Our Armor Mobile Security Division manufactures and
installs ballistic and blast protected armoring systems for military vehicles,
commercial vehicles, military aircraft, and missile components. Under the brand
name O'Gara-Hess & Eisenhardt, we are the sole-source provider to the U.S.
military for the supply of armoring and blast protection systems for the High
Mobility Multi-purpose Wheeled Vehicle (the "HMMWV"). We have also entered into
an agreement to provide systems technical support for HMMWVs. There is currently
an installed base of approximately 4,415 up-armored HMMWVs. We provide spare
parts and maintenance services for the installed HMMWVs and we expect that our
maintenance services may increase if the U.S. military substantially increases
its HMMWV purchases or substantially increases its use of the current installed
base. Additionally, the Armor Mobile Security Division has been subcontracted to
develop a ballistically armored and sealed truck cab for the High Mobility
Artillery Rocket System ("HIMARS"), a program currently in development for the
U.S. Army. The Division also markets armor sub-systems for other tactical
wheeled vehicles. 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.
F-36
DISCONTINUED OPERATIONS
Services Division. Our Services Division provides a broad range of sophisticated
security risk management solutions to multinational corporations in diverse
industries such as natural resources, financial services and consumer products,
and to governmental and non-governmental agencies such as the U.S. Departments
of State and Defense, the United Nations, United States Agency for International
Development ("USAID") and Britain's Department for International Development.
Our clients typically have personnel and other investments in unstable and often
more risky areas of the world. Through our offices on five continents, we
provide our multinational clients with a diversified portfolio of security
solutions to assist them in mitigating risks to their operations around the
world. Our highly trained, multilingual, and experienced security personnel work
closely with our clients to create and implement solutions to complex security
problems. These services include security planning, advice and management,
security systems integration, intellectual property asset protection, due
diligence investigations and training programs in counterintelligence,
counter-surveillance, advanced driving techniques and ballistics. We believe
that many of our security services, while often representing a small portion of
our clients' overall cost of doing business, are critical to our clients'
success. We believe that this creates a consistent demand for our premium
services at attractive margins.
Principles of consolidation. The consolidated financial statements include the
accounts of Armor Holdings and its wholly-owned subsidiaries. In consolidation,
all material inter-company balances and transactions have been eliminated.
Results of operations of companies acquired in transactions accounted for under
the purchase method of accounting are included in the financial statements from
the date of the acquisition.
Cash and cash equivalents. We consider all highly liquid investments purchased
with maturities of three months or less, at date of purchase, to be cash
equivalents.
Concentration of credit risk. Financial instruments that potentially subject to
concentrations of credit risk consist primarily of cash and cash equivalents and
trade accounts receivable. We maintain our cash and cash equivalents with what
we believe to be various high quality banks. Amounts held in individual banks
may periodically exceed, for brief time periods, federally insured amounts. Our
accounts receivable consist of amounts due from customers and distributors
located throughout the world. International product sales generally require cash
in advance or confirmed letters of credit on United States ("U.S.") banks. We
maintain reserves for potential credit losses. As of December 31, 2002 and 2001,
management believes that we have no significant concentrations of credit risk.
Inventories. Inventories are stated at the lower of cost or market determined on
the first-in, first-out ("FIFO") method.
Fair value of financial instruments. The carrying value of cash and cash
equivalents, accounts receivable, other receivables, accounts payable, and short
and long-term debt approximates fair value at December 31, 2002 and 2001.
Property and equipment. Property and equipment are carried at cost less
accumulated depreciation. Upon disposal of property and equipment, the
appropriate accounts are reduced by the related cost
F-37
and accumulated depreciation. The resulting gains and losses are reflected in
consolidated earnings. Depreciation is computed using the straight-line method
over the estimated lives of the related assets as follows:
Buildings and improvements........................... 5 - 39 years
Machinery and equipment.............................. 3 - 7 years
Goodwill. Goodwill represents the excess of the purchase price over the fair
value of the net assets acquired in a purchase business combination. Goodwill
and other intangible assets are stated on the basis of cost. The $46.3 million
in goodwill resulting from acquisitions made by subsequent to June 30, 2001 was
immediately subjected to the non-amortization provisions of SFAS 142. See also
"Impairment and Recent Accounting Pronouncements " which follows.
Patents, licenses and trademarks. Patents, licenses and trademarks were
primarily acquired through acquisitions accounted for by the purchase method of
accounting. Such assets are amortized on a straight-line basis over their
remaining useful lives.
Impairment. Long-lived assets including certain identifiable intangibles, and
the goodwill, are reviewed for annualy impairment or whenever events or changes
in circumstances indicate that the carrying amount of the asset in question may
not be recoverable including, but not limited to, a deterioration of profits for
a business segment that has long-lived assets, and when other changes occur
which might impair recovery of long-lived assets. Management has reviewed our
long-lived assets and has taken an impairment charge of $31.1 million to reduce
the carrying value of the Services Division to estimated realizable value. The
method used to determine the existence of an impairment would be generally by
discounted operating cash flows estimated over the remaining useful lives of the
related long-lived assets or estimated realizable amounts on assets of
discontinued operations. Impairment is measured as the difference between fair
value and unamortized cost at the date impairment is determined.
Research and development. Research and development costs are included in
operating expenses as incurred and for the years ended December 31, 2002, 2001
and 2000, and approximated $2,968,000, $2,353,000 and $2,590,000, respectively.
Estimates. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts in the financial statements and
accompanying notes. Significant estimates inherent in the preparation of the
accompanying consolidated financial statements include the carrying value of
long-lived assets, valuation allowances for receivables, inventories and
deferred income tax assets, liabilities for potential litigation claims and
settlements; and contract contingencies and obligations. Actual results could
differ from those estimates.
Income taxes. We account for income taxes pursuant to Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes". Under the
asset and liability method specified thereunder, deferred taxes are determined
based on the difference between the financial reporting and tax bases of assets
and liabilities. Deferred tax liabilities are offset by deferred tax assets
relating to net operating loss carryforwards and deductible temporary
differences. Future benefits obtained either from utilization of net operating
loss carryforwards or from the reduction in the income tax asset valuation
allowance existing on September 20, 1993 have been and will be
F-38
applied to reduce reorganization value in excess of amounts allocable to
identifiable assets. At December 31, 2002 and 2001, our consolidated foreign
subsidiaries have unremitted earnings of approximately $3.0 million and $1.3
million, respectively on which we have not recorded a provision for United
States Federal income taxes since these earnings are considered to be
permanently reinvested. Such foreign earnings have been taxed according to the
regulations existing in the countries in which they were earned.
Revenue recognition. We record products revenue at the time of shipment. Returns
are minimal and do not materially effect 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.
Advertising. We expense advertising costs as expense in the period in which they
are incurred.
Earnings per share. Basic earnings per share is computed by dividing net income
by the weighted-average number of common shares outstanding. Diluted earnings
per share is computed by dividing net income by the weighted-average number of
common shares outstanding compounding the effects of all potentially dilutive
common stock equivalents, principally options, except in cases where the effect
would be anti-dilutive.
Comprehensive income and foreign currency translation. In accordance with SFAS
No. 130, "Reporting Comprehensive Income", assets and liabilities denominated in
a foreign currency are translated into U.S. dollars at the current rate of
exchange existing at year-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 $4,169,000 and
$4,473,000 for the years ended December 31, 2002 and 2001, 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. SFAS No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123") 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
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." 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
F-39
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 Opinion No. 25 with
pro forma disclosures of net earnings and earnings per share, as if the fair
value based method of accounting defined in SFAS No. 123 had been applied.
If compensation cost for stock option grants had been determined based on
the fair value on the grant dates for 2002, 2001 and 2000 consistent with the
method prescribed by SFAS No. 123, the our net earnings and earnings per share
would have been adjusted to the pro forma amounts indicated below:
2002 2001 2000
-------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income as reported $(17,689) $ 10,128 $ 17,048
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards, net
of related tax effects (5,053) (2,435) (803)
-------- -------- --------
$ 22,742) $ 7,693 $ 16,245
======== ======== ========
Earnings per share:
Basic - as reported $ (0.58) $ 0.42 $ 0.75
======== ======== ========
Basic - pro forma $ (0.75) $ 0.32 $ 0.72
======== ======== ========
Diluted - as reported $ (0.57) $ 0.41 $ 0.73
======== ======== ========
Diluted - pro forma $ (0.74) $ 0.31 $ 0.70
======== ======== ========
Reclassifications. Certain reclassifications have been made to the 2001 and 2000
financial statements in order to conform to the presentation adopted for 2002.
These reclassifications had no effect on net income or retained earnings.
Recent accounting pronouncements. In June 2001, the Financial Accounting
Standards Board (FASB) issued SFAS No. 141, "Business Combinations." SFAS No.
141 requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001. This statement specifies that
certain acquired intangible assets in a business combination be recognized as
assets separately from goodwill and that existing intangible assets and goodwill
be evaluated for these new separation requirements. The adoption of this
statement did not have a material impact on our consolidated financial
statements.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 142 changes the accounting for goodwill from an amortization
method to an impairment-only approach. Amortization of goodwill, including
goodwill recorded in past business combinations, ceased upon adoption of this
statement. In addition, this statement requires that
F-40
goodwill be tested for impairment at least annually at the reporting unit level.
We implemented SFAS No. 142 on January 1, 2002. In connection with the adoption
of SFAS 142, we completed in the second quarter the transitional goodwill
impairment test that compared the fair value of each reporting unit to its
carrying value and determined that no impairment existed. The goodwill resulting
from acquisitions made by us subsequent to June 30, 2001 was immediately subject
to the non-amortization provisions of SFAS 142. Had we been accounting for
goodwill under SFAS 142 for all periods presented, our net income and earnings
per share would have been as follows:
DECEMBER 31, 2002 DECEMBER 31, 2001 DECEMBER 31, 2000
---------------- ----------------- -----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Reported net (loss)income $ (17,689) $ 10,128 $ 17,048
Add back goodwill amortization, net of tax -- 3,044 2,943
--------- --------- ---------
Actual/pro forma adjusted net(loss)income $ (17,689) $ 13,172 $ 19,991
========= ========= =========
Basic earnings per share
Reported basic (loss) income per share $ (0.58) $ 0.42 $ 0.75
Goodwill amortization, net of tax -- 0.13 0.13
--------- --------- ---------
Actual/pro forma basic (loss) income per share $ (0.58) $ 0.55 $ 0.88
========= ========= =========
Diluted earnings per share
Reported diluted (loss) income per share $ (0.57) $ 0.41 $ 0.73
Goodwill amortization, net of tax -- 0.12 0.13
--------- --------- ---------
Actual/pro forma diluted (loss) income per share $ (0.57) $ 0.53 $ 0.86
========= ========= =========
In August 2001, the FASB issued Statement of Financial Accounting
Standards No. 143, "Accounting for Asset Retirement Obligations" (SFAS 143).
SFAS 143 establishes accounting standards for recognition and measurement of a
liability for an asset retirement obligation and the associated asset retirement
cost. SFAS 143 requires the recognition of the fair value of a liability for an
asset retirement obligation in the period in which it is incurred if a
reasonable estimate of fair value can be made. If a reasonable estimate of fair
value cannot be made in the period the asset retirement obligation is incurred,
the liability shall be recognized when a reasonable estimate of fair value can
be made. The fair value of a liability for an asset retirement obligation is the
amount at which that liability could be settled in a current transaction between
willing parties, that is, other than in a forced or liquidation transaction.
SFAS 143 is effective for financial statements issued for fiscal years beginning
after June 15, 2002. The provisions of SFAS 143 will become effective for us on
January 1, 2003. The effects of adopting this standard will not have a material
effect on us.
In October 2001, the FASB issued Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" (SFAS 144). SFAS 144 establishes a "primary-asset" approach to determine
the cash flow estimation period for a group of
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assets and liabilities that represents the unit of accounting for a long-lived
asset to be held and used. SFAS 144 requires that a long-lived asset to be (1)
abandoned, (2) exchanged for a similar productive asset, or (3) distributed to
owners in a spin-off be considered held and used until it is abandoned,
exchanged, or distributed. SFAS 144 requires (1) that spin-offs and exchanges of
similar productive assets to be recorded at the lower of carrying value or fair
value, and that such assets be classified as held and used until disposed of and
(2) that any impairment loss resulting from a spin-off or exchange of similar
productive assets be recognized upon asset disposition. SFAS 144 also states
that the total assets and total liabilities of discontinued business segments
shall be presented in separate captions in assets and liabilities. SFAS 144 also
provides that future losses, if any, of discontinued business segments shall be
reported as incurred. Effective January 1, 2002, we adopted SFAS 144. The
reclassification of the Services division to discontinued operations and
subsequent reduction in its carrying value was a result of our adoption of SFAS
144 (See Note 2).
In April 2002, the FASB issued Statement of Financial Accounting Standards
No. 145, "Recission on FASB 4, 44 and 64, Amendment of FASB Statement No. 13 and
Technical Corrections" (SFAS 145). Under SFAS 145, gains and losses related to
the extinguishment of debt should no longer be segregated on the income
statement from continuing operations. The provisions of SFAS 145 are effective
for fiscal years beginning after May 15, 2002 with early adoption encouraged.
The effects of adopting this standard will not have a material effect on us.
In June 2002, the FASB issued Statement of Financial Accounting Standard
146, "Accounting for Costs Associated with Exit or Disposal Activities" (SFAS
146). SFAS 146 addresses financial accounting and reporting for costs associated
with exit or disposal activities and nullifies Emerging Issues Task Force Issue
No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." SFAS 146 is effective for exit or disposal activities initiated
on or after December 31, 2002. The effects of adopting this standard will not
have a material effect on us.
In December 2002, the FASB issued Statement of Financial Accounting
Standard 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure" (SFAS 148). SFAS 148 provides alternative methods of transition for
a voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, SFAS 148 amends the disclosure requirements
of Statement of Financial Accounting Standard 123, "Accounting for Stock-Based
Compensation" (SFAS 123), to require prominent disclosures in both annual and
interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results. The
disclosure requirements of SFAS 148 are included in this document.
F-42
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 Accounting Standards 144, Accounting for Impairment or Disposal of
Long-Lived Assets, 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 year ended December 31,
2002, 2001 and 2000. 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 the Security consulting business of our
ArmorGroup Services Division, headquartered in London. Separately, on January
16, 2003 we executed an agreement to negotiate exclusively with an undisclosed
party for the sale of the ArmorGroup Integrated Systems business of our
ArmorGroup Services Division. The terms of both transactions and the identities
of both buyers are protected by confidentiality agreements. These two
transactions represent approximately 94% of the net assets of the Services
Division, currently reported as Discontinued Operations.
Both transactions are subject to, among other conditions, ongoing due
diligence and the execution of definitive purchase agreements.
Based upon our analysis and discussions with our advisors regarding the
estimated realizable value of the Services Division, we reduced the carrying
value of the Services Division, and recorded an impairment charge of $30.3
million. 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
estimate based upon all of the best information currently available, including
discussions with its investment bankers. The actual proceeds from the disposal
of our Services Division may differ materially from our current estimates and
therefore could result in either a gain or a loss upon final disposal.
In January 2001, our Services Division was classified as discontinued
operations approved a restructuring plan to close its U.S. investigative
businesses, realign the division's organization, eliminate excess facilities and
reduce overhead in its businesses worldwide. In connection with this
restructuring plan, the division performed a review of its long-lived assets to
identify potential impairments. Pursuant to this restructuring plan, ArmorGroup
i) eliminated 26 employees, primarily from its investigative businesses, ii)
eliminated an additional 24 employees from its security business, iii) incurred
lease and other exit costs as a result of the closure of its investigative
businesses, and iv) wrote-down the value of both tangible and intangible assets
as a result of the impairment review. All of the significant actions
contemplated by the restructuring plan have been completed.
As a result of the restructuring plan, we recorded a pre-tax charge of
$10.3 million. As of December 31, 2002, we had a remaining liability of $270,000
after fiscal year 2002 utilization of
F-43
$84,000 relating to lease termination costs. The remaining liability has been
classified in accrued expenses in and other current liabilities discontinued
operations on the consolidated balance sheet.
The following is a summary of the operating results of the discontinued
operations for the year ended December 31, 2002, 2001 and 2000.
DECEMBER 31, 2002 DECEMBER 31, 2001 DECEMBER 31, 2000
----------------- ----------------- -----------------
(IN THOUSANDS)
Revenue $ 98,263 $ 94,928 $ 81,051
Cost of sales 75,779 65,021 52,042
-------- -------- --------
Gross Profit 22,484 29,907 29,009
Operating expenses 30,588 24,496 20,055
Amortization expenses -- 1,519 1,725
Charge for impairment of long-lived assets 30,296 -- --
Restructuring and related charges -- 10,257 --
Equity in earnings of investees -- -- (87)
Integration and other non-recurring charges 2,623 776 702
-------- -------- --------
Operating (loss) income (41,023) (7,141) 6,614
Interest expense, net 346 143 47
Other expense (income), net 99 (218) (1,736)
-------- -------- --------
(Loss) income from discontinued operations before
provision (benefit) for income taxes (41,468) (7,066) 8,303
(Benefit) provision for income taxes (a) (2,442) (2,510) 2,102
-------- -------- --------
(Loss) income from discontinued operations $(39,026) $ (4,556) $ 6,201
======== ======== ========
======== ======== ========
a) Fiscal 2002 income taxes exclude additional expense of $1,475,000 as per
paragraphs 26 and 27 of SFAS No. 109 included in income from continuing
operations on a consolidated basis. See Note 13.
F-44
The following is a summary of the assets and liabilities of our discontinued
operations:
DECEMBER 31, 2002 DECEMBER 31, 2001
(IN THOUSANDS)
Assets
Cash and cash equivalents $ 3,638 $ 6,230
Accounts receivable, net 16,228 24,040
Other current assets 8,959 7,292
------- -------
Total current assets 28,825 37,562
Property, plant and equipment, net 12,481 9,358
Goodwill, net 12,995 36,865
Other assets 4,809 4,882
------- -------
Total assets of discontinued operations $59,110 $88,667
======= =======
Liabilities
Current portion of long-term debt $ 186 $ 282
Short-term debt 350 681
Accounts payable 2,405 2,692
Accrued expenses and other current liabilities 14,284 4,021
------- -------
Total current liabilities 17,225 7,676
Long-term debt 168 415
------- -------
Total liabilities of discontinued operations
$17,393 $ 8,091
======= =======
3. COMPREHENSIVE INCOME
The components of comprehensive income, net of tax benefits of $364,000,
$713,000 and $179,000 for the years ended December 31, 2002, 2001 and 2000, are
listed below:
DECEMBER 31, 2002 DECEMBER 31, 2001 DECEMBER 31, 2000
----------------- ----------------- -----------------
(IN THOUSANDS)
Net (loss) income $(17,689) $ 10,128 $ 17,048
Other comprehensive loss:
Foreign currency translations, net
of tax 304 (2,789) (333)
-------- -------- --------
Comprehensive (loss) income: $(17,385) $ 7,339 $ 16,715
======== ======== ========
F-45
4. BUSINESS COMBINATIONS
We have completed numerous purchase business combinations for cash and/or
shares of our common stock and assumption of liabilities in certain cases. In
the three years in the period ended December 31, 2002, the following
acquisitions were completed:
TOTAL SHARES VALUE OF
CONSIDERATION ISSUED SHARES
------------------------------------------
(IN THOUSANDS, EXCEPT SHARES ISSUED)
2002
Aggregate 2002 acquisitions (1) $ 8,818 -- --
-- --
Additional purchase price paid/issued for acquisition
earnouts 9,375
---------- ---------- ----------
$ 18,193 -- --
2001
Aggregate 2001 acquisitions (2) $ 59,887 1,224,302 $ 19,604
Additional purchase price paid/issued for acquisition
earnouts 3,904 68,888 1,087
---------- ---------- ----------
$ 63,791 1,293,190 $ 20,691
========== ========== ==========
2000
Aggregate 2000 acquisitions (3) $ 14,220 -- $ --
Additional purchase price paid/issued for acquisition
earnouts 200 14,996 200
---------- ---------- ----------
$ 14,420 14,996 $ 200
========== ========== ==========
(1) Includes Speedfeed, Inc., Foldable Products Group, B-Square, Inc.,
Evi-Paq, Inc., Trasco Bremen and 911 Emergency Products.
(2) Includes O'Gara-Hess & Eisenhardt Companies, Guardian and Identicator.
(3) Includes Breakfree, Inc., Monadnock Lifetime Products and Lightning
Powder.
F-46
Businesses acquired are included in consolidated results including discontinued
operations from the date of acquisition. Pro forma results of the 2002 and 2000
acquisitions are not presented as they would not differ by a material amount
from actual results. The following unaudited pro forma consolidated results are
presented to show the results on a pro forma basis as if the 2001 acquisitions
had been made as of January 1, 2001 and January 1, 2000:
2001 2000
-------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues $370,842 $333,375
Net income $ 6,453 $ 14,325
Basic earnings per share $ 0.26 $ 0.61
Diluted earnings per share $ 0.25 $ 0.59
Weighted average shares - basic 24,579 23,639
Weighted average shares - diluted 25,415 24,365
The changes in the carrying amount of goodwill for the year ended December
31, 2002, are as follows:
PRODUCTS MOBILE SECURITY TOTAL
---------- ----------------- ---------
(IN THOUSANDS)
Balance at January 1, 2001 $52,845 $33,963 $86,808
Goodwill acquired during year 7,298 4,630 11,928
------- ------- -------
Balance at December 31, 2002 $60,143 $38,593 $98,736
======= ======= =======
5. INVENTORIES
The components of inventory as of December 31, 2002 and 2001 are as
follows:
2002 2001
------- -------
(IN THOUSANDS)
Raw materials $30,211 $28,796
Work-in-process 15,733 12,941
Finished goods 16,386 8,816
------- -------
$62,330 $50,553
======= =======
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6. PROPERTY AND EQUIPMENT
Property and equipment as of December 31, 2002 and 2001 are summarized as
follows:
2002 2001
-------- --------
(IN THOUSANDS)
Land $ 5,557 $ 3,571
Buildings and improvements 23,964 16,083
Machinery and equipment 30,534 25,146
-------- --------
Total 60,055 44,800
Accumulated Depreciation (12,919) (8,096)
-------- --------
$ 47,136 $ 36,704
======== ========
Depreciation expense for the years ended December 31, 2002, 2001 and 2000 was
approximately $4,953,000, $3,031,000, and $2,074,000 respectively. In the
statement of operations on continuing operations for the years ended December
31, 2002, 2001 and 2000, depreciation expense has been reduced by $130,000 in
each year for the amortization of the proceeds received under an economic
development grant received from the Department of Housing and Urban Development.
7. ACCRUED EXPENSES AND OTHER CURRENT LIABILTIES
Accrued expenses and other current liabilities as of December 31, 2002 and
2001 are summarized as follows:
2002 2001
-------- --------
(IN THOUSANDS)
Accrued expenses $ 16,988 $ 18,269
Customer Deposits 6,302 7,002
Deferred consideration for acquisitions 1,826 525
-------- --------
$ 25,116 $ 25,796
======== ========
F-48
8. DEBT
2002 2001
------- -------
(IN THOUSANDS)
Credit facility (a) $ -- $ --
Ontario Industrial Development Authority Variable Rate Demand Industrial
Development Revenue Bonds, Series 1989 payable in annual installments of
$200 to $300, through August 1, 2014, with interest paid monthly at 2,800 3,000
varying rates
Note payable in scheduled installments through 2013, with an interest rate of
5% 1,582 --
Economic Development Revenue Bonds, payable in scheduled installments through
September 2016, with a variable interest rate approximating 85% of the bond
equivalent yield of the 13 week U.S. Treasury bills (not to exceed 12%) which
approximated 1.5% and 2.75% at December 31, 2002 and 2001, respectively 1,075 1,150
Note to former officer payable in monthly principal and interest installments of
$7 through December 31, 2009 with an imputed interest rate of 9.25% 399 438
Minimum guaranteed royalty to former officer payable in monthly principal and
interest installments of $4 through August 2005, with an imputed interest rate
of 9.2% 114 152
Minimum guaranteed royalty to former officer payable in monthly principal and
interest installments of $36 through April 2005, with an imputed interest
rate of 7.35% 915 1,258
------- -------
$ 6,885 $ 5,998
Less current portion (1,813) (1,773)
------- -------
$ 5,072 $ 4,225
======= =======
Credit Facility (a) - On August 22, 2001, we entered into an Amended and
Restated Credit Agreement (the "Credit Agreement") with Bank of America,
Canadian Imperial Bank of Commerce, First Union National Bank, SunTrust Bank,
Republic Bank, Keybank National Association, and ING (U.S.) Capital LLC.
Pursuant to the Credit Agreement, the lenders established a $120,000,000 line of
credit for our benefit expiring on February 12, 2004. The Credit Agreement,
among other things, provides for (i) total maximum borrowings of $120,000,000
and (ii) the capability for borrowings in foreign currencies. All borrowings
under the Credit Agreement bear interest at either (i) a base rate, plus an
applicable margin ranging from .000% to .375%, depending on certain conditions,
(ii) a eurodollar rate, plus an applicable margin ranging from 1.125% to 1.875%,
depending on certain conditions, or (iii) with respect to foreign currency
loans, a fronted offshore currency rate, plus an applicable margin ranging from
1.125% to 1.875%, depending on certain conditions. In addition, the Credit
Agreement includes both negative and affirmative
F-49
covenants customary for a credit facility of this nature, such as a limitation
on capital expenditures, foreign indebtedness, minimum fixed charge coverage and
a restriction against paying dividends.
The Credit Agreement also provides that Bank of America will make
swing-line loans to us of up to $5,000,000 for working capital purposes and will
issue letters of credit on our behalf of up to $20,000,000. As of December 31,
2002, we had no outstanding borrowings under our Credit Facility, and Bank of
America had issued $11.4 million in letters of credit on our behalf under the
Credit Agreement. All indebtedness under the Credit Agreement will mature on
February 12, 2004. We had approximately $6.9 million in other long-term debt,
net of current portion, consisting primarily of $3.9 million in industrial
development revenue bonds.
As part of the Credit Agreement, all of our direct and indirect domestic
subsidiaries agreed to guarantee our obligations under the Credit Agreement. The
Credit Agreement is collateralized by (1) a pledge of all of the issued and
outstanding shares of stock of certain domestic subsidiaries of Armor Holdings
pursuant to a pledge agreement and (2) a pledge of 65% of the issued and
outstanding shares of our first tier foreign subsidiaries. The Credit Agreement
includes both negative and affirmative covenants customary for a credit facility
of this nature, such as a limitation on capital expenditures, foreign
indebtedness, minimum fixed charge coverage and a restriction against paying
dividends.
Maturities of long-term debt are as follows:
YEAR ENDED
(IN THOUSANDS)
-----------------
2003 $1,813
2004 917
2005 550
2006 393
2007 443
Thereafter 2,769
-------
$6,885
=======
9. INTEGRATION AND OTHER NON-RECURRING CHARGES
As a result of its acquisition program, we incurred integration and other
non-recurring charges of approximately $5.9 million, $3.3 million and $2.6
million for the years ending December 31, 2002, 2001 and 2000, respectively.
These costs related to the relocation of assets and personnel, severance costs,
systems integration, domestic and international tax restructuring as well as
integrating the sales and marketing functions for the acquired companies.
10. COMMITMENTS AND CONTINGENCIES
Employment contracts. We are party to several employment contracts at year
ending December 31, 2002 with certain members of management. Such contracts are
for varying periods and include
F-50
restrictions on competition after termination. These agreements provide for
salaries, bonuses and other benefits and also specify and delineate the granting
of various stock options.
Legal/litigation matters. In 1997 we terminated several agreements with a Dutch
company, Airmunition International, B.V. (AMI), and with a British company,
Crown Limited (Crown). AMI and Crown started an action against us before the
Netherlands Arbitration Institute in Rotterdam, Holland claiming breach of
contract and unauthorized use of confidential information and seeking damages of
$20.5 Million. The case is currently pending, and while we are contesting the
allegations vigorously, we are unable to predict the outcome of this matter.
Although we do not have insurance coverage for this matter, at this time, we do
not believe this matter will have a material impact on our financial position,
operations or liquidity.
On January 16, 1998, our Services Division ceased operations in Angola.
The cessation of operations in Angola was dictated by that government's decision
to deport all of our expatriate management and supervisors. As a result of the
cessation of operations in Angola, our Services Division became involved in
various disputes with SHRM S.A.("SHRM"), its minority joint venture partner
relating to the Angolan joint venture known as Defense System International
Africa ("DSIA"). On March 6, 1998, SIA (a subsidiary of SHRM) filed a complaint
against Defense Systems France, SA ("DSF") before the Commercial Court of
Nanterre (Tribunal de Commerce de Nanterre) seeking to be paid an amount of
$577,286 corresponding to an alleged debt of DSIA to SIA. On June 27, 2000, the
judge of the Paris Commercial Court ruled SHRM did not provide evidence required
to establish its standing and the proceedings brought by SHRM were cancelled. On
October 3, 2000, a winding up petition was served by DSF against DSIA. On
October 31, 2000, SHRM filed a counterclaim seeking to have this winding up
petition dismissed. On November 28, 2000, SHRM appealed the June 27, 2000
judgment rendered by the Paris Commercial Court, claiming that the Paris
Commercial Court no longer had jurisdiction over the case. On September 18,
2001, the Paris Commercial Court stayed the proceeding pending the outcome of
the appeal. A hearing with the Court of Appeal on the standing of SHRM and on
the merits was held on October 24, 2002. The Commercial Court of Nanterre has
stayed the proceedings before it, pending the decisions of the Court of Appeal
and the Paris Commercial Court. In February 2003, the Court of Appeal ruled
against SHRM and its parent entity, Compass Group, effectively ending all
further proceedings on the merits of Compass'claims. The decision is appealable
by Compass.
In 1999 and prior to our acquisition of OHEAC in 2001, O'Gara-Hess &
Eisenhardt Armoring do Brasil Ltda. (OHE Brazil) was audited by the Brazilian
federal tax authorities and assessed over Ten Million Reals (US$2.8 Million
based on the exchange rate as of December 31, 2002). OHE Brazil has appealed the
tax assessment and the case is pending. To the extent that there may be any
liability, we believe that we are entitled to indemnification from Kroll, Inc.
under the terms of our purchase agreement dated April 20, 2001, despite the
denial by Kroll, Inc. of any such liability, because the events occurred prior
to our purchase of the O'Gara Companies from Kroll, Inc. Additionally, Kroll,
Inc. has provided us with a US$1.5 Million letter of credit until August 21,
2008 in order to collateralize Kroll's indemnification obligation, which is
capped at US$5 Million with respect to this matter. At this time, we do not
believe this matter will have a material impact on our financial position,
operations or liquidity.
F-51
In 1999 and prior to our acquisition of OHEAC in 2001, several of the
former employees of Kroll O'Gara Company de Mexico, S.A. de C.V. (O'Gara
Mexico), a subsidiary of OHEAC, commenced labor claims against O'Gara Mexico
seeking damages for unjustified termination. These cases are still pending
before the labor board in Mexico City. The terminated employees are seeking back
pay and benefits since the date of termination amounting to approximately US
$2,890,998, and accruing at approximately US $50,400 per month. To the extent
that there may be any liability, we believe that we are entitled to
indemnification from Kroll, Inc. under the terms of our purchase agreement dated
April 20, 2001, despite the denial by Kroll, Inc. of any such liability, because
the events occurred prior to our purchase of the O'Gara Companies from Kroll,
Inc. Although we do not have any insurance coverage for this matter, at this
time, we do not believe this matter will have a material impact on our financial
position, operations or liquidity.
In August 2001, Defense Technology Corporation of America ("DTC"), one of
our subsidiaries, received a civil subpoena from the United States Environmental
Protection Agency requesting information pursuant to Section 104(e) of the
Comprehensive Environmental Response, Compensation and Liability Act regarding
the possible impact of the Casper, Wyoming tear gas facility on the environment.
DTC responded to the request, and to date the EPA has not taken any further
action with respect to the matter. At this time, we do not believe this matter
will have a material impact on our financial position, operations or liquidity.
In December 2001, OHE France sold its industrial bodywork business
operated under the name Labbe/Division de O'Gara Hess & Eisenhardt France/
Carrosserie Industriells to SNC Labbe. Subsequent to the sale the Labbe Family
Trust (LFT), owner of the leasehold interest upon which the Carrosserie business
is operated, sued OHE France and SNC Labbe claiming that transfer of the
leasehold was not valid because the LFT had not given its consent to the
transfer as required under the terms of the lease. Further, LFT seeks to have
OHE France, as the sole tenant, maintain and repair the leased building. The
approximate cost of renovating the building is estimated to be between US $3.2
and US $6.4 million based on the exchange rate as of December 31, 2002. The case
is currently pending, and while we are contesting the allegations vigorously, we
are unable to predict the outcome of this matter. Although we do not have any
insurance coverage for this matter, at this time, we do not believe this matter
will have a material impact on our financial position, operations or liquidity.
In December 2001, an action was filed against us in the Regional Court of
Nuremberg, Germany alleging unauthorized use of the trademarks "First Defense"
and "First Defense Aerosol Pepper Projector." The case is currently pending, and
while we are contesting the allegations vigorously, we are unable to predict the
outcome of this matter. Although we do not have any insurance coverage for this
matter, at this time, we do not believe this matter will have a material impact
on our financial position, operations or liquidity.
On or about March 22, 2002, O'Gara-Hess & Eisenhardt Armoring Company
(OHEAC), one of our subsidiaries, received a civil subpoena from the Department
of Defense (DOD) requesting documents and information concerning various quality
control documentation regarding parts delivered by its subcontractors and
vendors in support of the High Mobility Multipurpose Wheeled Vehicles (HMMWV)
armored at its Fairfield, Ohio facility for the period October 1, 1999 through
May 1, 2001. OHEAC has complied fully with the subpoena. In early 2003, OHEAC
was
F-52
advised that the Department of Justice (DOJ) was also investigating separate
claims against OHEAC filed by individuals that involve the same time frame and
issues covered by the DOD subpoena. OHEAC is responding to the government's
questions and expects to meet with the DOJ to discuss the current status of the
investigation and explore closure. Given the stage of these investigations, it
is not possible to predict the outcome of this matter. To the extent that there
may be any liability, we believe that we are entitled to indemnification from
Kroll, Inc. under the terms of our purchase agreement dated April 20, 2001,
despite the denial by Kroll, Inc. of any such liability, because the events
occurred prior to our purchase of the O'Gara Companies from Kroll, Inc. At this
time, we do not believe this matter will have a material impact on our financial
position, operations or liquidity.
In June 2002, O'Gara Hess & Eisenhardt France S.A. (OHE France) received a
tax reassessment from the French tax authorities for the tax years ended on
March 31, 1999, 2000 and 2001 totaling approximately (euro)720,940 (Euro)
(US$755,761 based on the exchange rate as of December 31, 2002). OHE France has
appealed the tax assessment and the case is pending. To the extent that there
may be any liability, we believe that we are entitled to indemnification from
Kroll, Inc. under the terms of our purchase agreement dated April 20, 2001,
despite the denial by Kroll, Inc. of any such liability, because the events
occurred prior to our purchase of the O'Gara Companies from Kroll, Inc. At this
time, we do not believe this matter will have a material impact on our financial
position, operations or liquidity.
On October 18, 2002 we were notified by the Internal Revenue Service that
our tax return for the tax year ended December 31, 2000 had been selected for
examination. Further, on January 30, 2003 we were notified that our tax return
for the tax year ended December 31, 2001 had been selected for examination. The
examinations are currently pending, and at this time we are unable to predict
the outcome of these matters.
In October 2002, we were sued in the United States District Court for the
District of Wyoming. The plaintiffs in that lawsuit asserted various state law
tort claims and federal environmental law claims under the Resource Conservation
and Recovery Act and the Clean Air Act stemming from DTC's Casper, Wyoming tear
gas plant. The plaintiffs have not yet quantified their alleged damages. The
plaintiffs have filed their suit as a potential class action, but have not yet
sought judicial certification of the class. The alleged actions took place over
time periods during which we were covered by different insurance policies. We
have notified our insurance carriers of the suit. Our prior insurance carrier
has agreed, under a full reservation of rights, including with respect to any
liability which relates to the time its policy was in effect, to provide a
defense and to address the question of liability indemnification in the future.
Our current insurance carrier has declined defense and indemnification coverage.
While we do not carry specific environment insurance coverage, we have reserved
the right to challenge our insurance carrier's determination. The case is
currently pending, and while we are contesting the allegations vigorously, we
are unable to predict the outcome of this matter. At this time, we do not
believe this matter will have a material impact on our financial position,
operations or liquidity.
In addition to the above, in the normal course of business, we are
subjected to various types of claims and currently have on-going litigations in
the areas of products liability and general liability. Our products are used in
a wide variety of law enforcement situations and environments.
F-53
Some of our products can cause serious personal or property injury or death if
not carefully and properly used by adequately trained personnel. We believe that
we have adequate insurance coverage for most claims that are incurred in the
normal course of business. In such cases, the effect on our financial statements
is generally limited to the amount of our insurance deductible or self-insured
retention. Our annual insurance premiums and self insurance retention amounts
have risen significantly over the past several years and may continue to do so
to the extent we are unable to purchase insurance coverage. At this time, we do
not believe any such claims or litigations will have a material impact on our
financial position, operations and liquidity.
11. OTHER INCOME
On May 31, 2000, we sold our investment in JSGS which is Jardine Securicor
Gurkha Services Limited for a pre-tax gain of approximately $1.7 million
included in other income.
12. 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 amounts 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) currently in development 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").
F-54
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 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 segments
are as follows:
2002 2001 2000
--------- --------- ---------
(IN THOUSANDS)
Revenues:
Products $ 179,946 $ 149,868 $ 139,904
Mobile Security 125,171 47,232 --
--------- --------- ---------
Total revenues $ 305,117 $ 197,100 $ 139,904
========= ========= =========
Income (loss) from operations:
Products $ 30,978 $ 26,845 $ 27,803
Mobile Security 14,375 6,673 --
Corporate (6,988) (6,845) (7,934)
--------- --------- ---------
Total income from operations $ 38,365 $ 26,673 $ 19,869
========= ========= =========
Total assets:
Products $ 179,367 $ 147,313 $ 129,432
Mobile Security 105,446 102,127 --
Corporate 23,830 49,950 9,596
--------- --------- ---------
Total assets $ 308,643 $ 299,390 $ 139,028
========= ========= =========
F-55
The following financial 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:
2002 2001 2000
--------- --------- ---------
(IN THOUSANDS)
Revenues:
North America $ 225,365 $ 144,981 $ 117,199
South America 19,879 6,449 3,434
Africa 1,219 582 167
Europe/Asia 58,654 45,088 16,078
Other -- -- 3,026
--------- --------- ---------
$ 305,117 $ 197,100 $ 139,904
========= ========= =========
Geographic operating income:
North America $ 34,032 $ 23,290 $ 19,376
South America 1,702 473 982
Africa 428 192 57
Europe/Asia 8,374 8,156 3,019
Other -- -- 727
--------- --------- ---------
$ 44,536 $ 32,111 $ 24,161
========= ========= =========
Total assets:
North America $ 264,767 $ 268,019 $ 132,744
South America 5,456 5,811 --
Africa -- -- --
Europe/Asia 38,420 25,560 6,284
--------- --------- ---------
$ 308,643 $ 299,390 $ 139,028
========= ========= =========
A reconciliation of consolidated geographic operating income from continuing
operations to consolidated operating income from continuing operations follows:
2002 2001 2000
--------- --------- ---------
(IN THOUSANDS)
Consolidated geographic operating
income: $ 44,536 $ 32,111 $ 24,161
Amortization (245) (2,142) (1,704)
Integration and other non-recurring
charges (5,926) (3,296) (2,588)
--------- --------- ---------
Operating income $ 38,365 $ 26,673 $ 19,869
========= ========= =========
F-56
13. INCOME TAXES
Income tax expense (benefit) from continuing operations for the years
ended December 31, 2002, 2001, and 2000 consisted of the following:
2002 2001 2000
-------- ------- ------
(IN THOUSANDS)
Current
Domestic $ 13,306 $ 7,017 $6,239
Foreign 2,389 1,563 232
-------- ------- ------
Total current $ 15,695 $ 8,580 $6,471
-------- ------- ------
Deferred
Domestic $ (25) $ (319) $ 769
Foreign 384 (54) 0
-------- ------- ------
Total deferred $ 359 $ (373) $ 769
-------- ------- ------
Total provision for Income Taxes $ 16,054 $ 8,207 $7,240
-------- ------- ------
Significant components of our net deferred tax asset related to continuing
operations as of December 31, 2002 and 2001 are as follows:
2002 2001
------- -------
(IN THOUSANDS)
Deferred tax assets:
Reserves not currently deductible $ 2,697 $ 1,910
Operating loss carryforwards 1,769 666
Accrued expenses 220 0
Foreign tax credits 2,939 0
Research and development and other credits 206 222
Tax on unremitted foreign earnings 1,255 1,619
------- -------
9,086 4,417
Deferred tax asset valuation allowance (75) (75)
------- -------
Deferred tax asset, net of valuation allowance $ 9,011 $ 4,342
Deferred tax liability:
Goodwill not amortized for financial
statement purposes under SFAS 142 (954) (239)
Property and equipment (475) (318)
------- -------
Net deferred tax asset $ 7,582 $ 3,785
======= =======
Effective with the change in control of Armor Holdings by Kanders Florida
Holdings, Inc. on January 18, 1996, the utilization of the United States portion
of the NOL became restricted to approximately $300,000 per year. As of December
31, 2002, we had U.S. and foreign NOLs of approximately $4.6 million. The U.S.
portion of the net NOLs expire in varying amounts in fiscal years 2006 to 2019.
At December 31, 2002, we also have tax credits of $206,000 subject to certain
F-57
limitations due to the acquisition of Safariland, LTD. We also have
approximately $2.9 million in foreign tax credits expiring in 2006. Certain
deferred tax assets including net operating losses and tax credits could become
limited if there is a change of control as defined in IRC Section 382.
The realization of deferred tax assets may be based on the utilization of
carrybacks to prior taxable periods, the anticipation of future taxable income
and the utilization of tax planning strategies. Management has determined that
it is more likely than not that certain deferred tax assets can be supported by
carrybacks to federal taxable income in the federal carryback period and by
expected future taxable income.
US taxes have not been provided for on unremitted foreign earnings of
approximately $3 million from continuing operations. These earnings are
considered to be permanently reinvested in non-US operations. We are not
permanently reinvested in some jurisdictions and have established a deferred tax
asset of $1,255,000.
Net deferred tax assets described above have been included in the
accompanying consolidated balance sheets as follows:
2002 2001
------ ------
Other current assets $2,697 $1,910
Other assets 4,885 1,875
------ ------
Total deferred tax assets $7,582 $3,785
====== ======
The following reconciles the income tax expense computed at the Federal
statutory income tax rate to the provision for income taxes recorded in the
income statement for the years ended December 31, 2002, 2001 and 2000:
2002 2001 2000
------ ------ ------
Provision for income taxes at statutory federal rate 35.0% 35.0% 35.0%
State and local income taxes, net of Federal benefit 3.8% 3.2% 1.4%
Foreign income taxes .7% (.1%) --
Valuation allowances from discontinued operations 3.8% -- --
Other permanent items (.4%) (2.2%) 3.6%
------ ------ ------
42.9% 35.9% 40.0%
====== ====== ======
14. STOCKHOLDERS' EQUITY
Preferred stock. On July 16, 1996, our shareholders authorized a series of
preferred stock with such rights, privileges and preferences as the Board of
Directors shall from time to time determine. We have not issued any of this
preferred stock.
Stock options and grants. In 1994, we implemented an incentive stock plan and an
outside directors' stock plan. These plans collectively provide for the granting
of options to certain key employees as well as providing for the grant of common
stock to outside directors and to all full time employees. Pursuant to such
plans, 1,050,000 shares of common stock were reserved and made
F-58
available for distribution. The option prices of stock which may be purchased
under the incentive stock plan are not less than the fair market value of common
stock on the dates of the grants.
Effective January 19, 1996, all stock grants awarded under the 1994
incentive stock plan were accelerated and considered fully vested.
In 1996, we implemented an incentive stock plan and an outside directors'
stock plan. These plans collectively provide for the granting of options to
certain key employees and directors. Pursuant to such plans, as amended,
2,200,000 shares of common stock were reserved and made available for
distribution. The option prices of stock which may be purchased under the
incentive stock plan are not less than the fair market value of common stock on
the dates of the grants.
During 1998, we implemented a new non-qualified stock option plan.
Pursuant to the new plan, 725,000 shares of common stock were reserved and made
available for distribution. On January 1, 1999, we distributed all 725,000
shares allocated under the plan. In 1999, we implemented the 1999 Stock
Incentive Plan (the "1999 Plan"). We reserved 2,000,000 shares of its Common
Stock for the 1999 Plan. The 1999 Plan provides for the granting of options to
employees, officers, directors, consultants, independent contractors and
advisors of Armor Holdings. The option prices of stock which may be purchased
under the 1999 Plan are not less than the fair market value of common stock on
the dates of the grants.
During 2002, we implemented two new stock option plans. The 2002 Stock
Incentive Plan, authorizes the issuance of up to 2,700,000 shares of our common
stock upon the exercise of stock options or in connection with the issuance of
restricted stock and stock bonuses. The 2002 Stock Incentive Plan authorizes the
granting of stock options, restricted stock and stock bonuses to employees,
officers, directors and consultants, independent contractors and advisors of
Armor Holdings and its subsidiaries. The 2002 Executive Stock Plan provides for
the grant of a total of 470,000 stock options and stock awards to our key
employees. The terms and provisions of the 2002 Executive Stock Plan are
substantially the same as the 2002 Stock Incentive Plan, except that we may only
grant non-qualified stock options under the 2002 Executive Stock Plan. The 2002
Executive Stock Plan was adopted on March 13, 2002 and all shares available for
grant under the 2002 Executive Stock Plan were granted to our executive officers
on March 13, 2002.
On December 18, 2002, we sold a put option on 500,000 shares to an
institutional counterparty with an exercise price of $13.99 per share and an
expiration date of March 31, 2002 for $525,000. We have a maximum potential
obligation under the put options to purchase 500,000 shares of our common stock
at an exercise price of $13.99 for an aggregate of $7.0 million. Although
certain other events can trigger exercise these put options are generally
exercisable only at maturity on March 31, 2002. We have the right to settle the
put options by cash settlement, physical settlement of the options or by net
share settlement using shares our common stock. In accordance with EITF Issue
No. 00-19, we have recorded the sale of the put options in equity and as such,
changes in fair value of the options have not been recognized in the financial
statements. We may, from time to time, enter into additional put and call option
arrangements.
F-59
Under SFAS 123, the fair value of each option grant is estimated on the
date of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions for the years ended December 31, 2002, 2001 and
2000:
2002 2001 2000
-------- -------- --------
Expected life of option 4 yrs 4 yrs 4 yrs
Dividend yield 0% 0% 0%
Volatility 52.2% 44.7% 30.9%
Risk free interest rate 3.94% 4.52% 5.76%
The increase in volatility from fiscal 2000 to fiscal 2002 is primarily due to
the increase demand for the stock, which drove up the price and increased the
volatility.
The weighted average fair value of options granted during 2002, 2001 and
2000 are as follows:
2002 2001 2000
-------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Fair value of each option granted $ 10.08 $ 6.17 $ 4.79
Total number of options granted 1,895 892 185
Total fair value of all options granted $ 19,098 $ 5,501 $ 886
Outstanding options, consisting of ten-year incentive and non-qualified stock
options, vest and become exercisable over a three-year period from the date of
grant. The outstanding options expire ten years from the date of grant or upon
retirement from Armor Holdings, and are contingent upon continued employment
during the applicable ten-year period.
F-60
A summary of the status of stock option grants as of December 31, 2002 and
changes during the years ending on those dates is presented below:
WEIGHTED
AVERAGE
OPTIONS EXERCISE PRICE
---------- ---------------
Outstanding at December 31, 1999 3,545,258 $ 9.21
Granted 185,000 $14.37
Exercised (333,075) $ 4.57
Forfeited (102,344) $10.98
----------
Outstanding at December 31, 2000 3,294,839 $ 9.91
Granted 892,159 $15.24
Exercised (1,173,227) $ 9.37
Forfeited (29,737) $15.51
----------
Outstanding at December 31, 2001 2,984,034 $11.60
Granted 1,894,660 $22.96
Exercised (507,868) $ 8.41
Forfeited (86,168) $16.75
----------
Outstanding at December 31, 2002 4,284,658 $ 7.81
==========
Options exercisable at December 31, 2002 2,099,307 $ 6.42
==========
The following table summarizes information about stock options outstanding
at December 31, 2002:
12/31/2002 REMAINING
OPTIONS OPTIONS LIFE IN
EXERCISE PRICE RANGE OUTSTANDING EXERCISABLE YEARS
----------- ----------- ----------
0.97 - 3.75 93,357 93,357 3.0
7.50 - 9.94 255,292 255,292 5.0
10.00 - 10.63 141,671 138,337 5.2
11.00 - 11.63 762,844 759,510 5.8
12.00 - 12.03 65,002 58,334 5.2
13.19 - 14.00 309,668 223,668 7.3
14.17 - 14.70 444,492 187,322 8.7
15.05 - 15.90 347,994 94,331 8.8
16.31 - 16.50 62,667 9,000 8.0
17.00 - 17.54 105,170 30,156 8.3
21.75 - 21.75 125,000 -- 9.1
23.09 - 23.93 689,501 225,000 9.2
24.07 - 25.80 882,000 25,000 9.5
----------- -----------
Total 4,284,658 2,099,307
=========== ===========
F-61
Remaining non-exercisable options as of December 31, 2002 become
exercisable as follows:
2003 775,961
2004 991,358
2005 168,032
2006 250,000
Earnings per share. The following details the earnings per share computations on
a basic and diluted basis for the years ended December 31, 2002, 2001 and 2000:
2002 2001 2000
--------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Numerator for basic and diluted earnings per share:
Net (loss) income available to common shareholders $(17,689) $ 10,128 $ 17,048
-------- -------- --------
Denominator:
Basic earnings per share weighted average shares
outstanding
30,341 23,932 22,630
Effect of dilutive securities:
Effect of shares issuable under stock option and stock
grant plans, based on the treasury stock method 616 836 726
-------- -------- --------
Diluted earnings per share
Adjusted weighted-average shares outstanding 30,957 24,768 23,356
-------- -------- --------
Basic earnings per share $ (0.58) $ 0.42 $ 0.75
======== ======== ========
Diluted earnings per share $ (0.57) $ 0.41 $ 0.73
======== ======== ========
15. SUPPLEMENTAL CASH FLOW INFORMATION:
2002 2001 2000
-------- -------- --------
Cash paid during the year for: (IN THOUSANDS)
Interest $ 527 $ 3,878 $ 1,762
======== ======== ========
Income taxes $ 5,753 $ 4,656 $ 7,240
======== ======== ========
2002 2001 2000
-------- -------- --------
Acquisitions of businesses, net of cash acquired: (IN THOUSANDS)
Fair value of assets acquired $ 16,134 $ 57,932 $ 4,807
Goodwill 8,478 37,578 12,336
Liabilities assumed (15,794) (36,541) (2,923)
Stock issued -- (19,604) --
-------- -------- --------
Total cash paid $ 8,818 $ 39,365 $ 14,220
======== ======== ========
Debt assumed in acquisition of property -- -- $ 3,500
Note payable issued for equipment -- -- --
F-62
16. QUARTERLY RESULTS (UNAUDITED)
The following table presents summarized unaudited quarterly results of
operations for Armor Holdings for fiscal 2002 and 2001. We believe all necessary
adjustments have been included in the amounts stated below to present fairly the
following selected information when read in conjunction with the Consolidated
Financial Statements and Notes thereto included elsewhere herein. Future
quarterly operating results may fluctuate depending on a number of factors.
Results of operations for any particular quarter are not necessarily indicative
of results of operations for a full year or any other quarter.
FISCAL 2002
---------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenue $ 69,604 $ 71,605 $ 80,557 $ 83,351
Gross profit $ 21,974 $ 22,701 $ 24,610 $ 25,087
Net income $ 5,960 $ 4,075 $ (14,707) $ (13,017)
Basic earnings per share $ 0.19 $ 0.13 $ (0.50) $ (0.44)
Diluted earnings per share $ 0.19 $ 0.13 $ (0.49) $ (0.44)
FISCAL 2001
---------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenue $ 30,168 $ 38,100 $ 48,664 $ 80,168
Gross profit $ 12,190 $ 15,865 $ 17,227 $ 25,488
Net income $ (3,396) $ 4,298 $ 3,823 $ 5,403
Basic earnings per share $ (0.15) $ 0.19 $ 0.16 $ 0.21
Diluted earnings per share $ (0.14) $ 0.18 $ 0.16 $ 0.20
17. EMPLOYEE BENEFITS PLAN
In October 1997, we formed a 401(k) plan, (the "Plan") which provides for
voluntary contributions by employees and allows for a discretionary contribution
by us in the form of cash. We made contributions of approximately $395,500,
$272,700 and $243,000 to the Plan in 2002, 2001 and 2000 respectively.
18. RELATED PARTY TRANSACTIONS
In fiscal 2000 we subcontracted for certain security guard services with
Alpha, Inc., wholly owned by a shareholder of Armor Holdings, who is also a
director of Gorandel Trading Limited. In fiscal 2000, security guard service
fees of approximately $2,444,000 were paid to Alpha. In August of 2000, we
acquired Alpha. The purchase price was approximately $1.0 million in cash
consisting
F-63
of both a current and deferred portion. In fiscal 2002 and 2001 we paid $100,000
and $400,000 of the deferred portion of the purchase price respectively.
Effective as of January 1, 2002, Kanders & Company, Inc. ("Kanders &
Co."), a corporation controlled by Warren B. Kanders, the Chairman of our Board,
entered into an agreement with us to provide certain investment banking,
financial advisory and related services for a five year term that will expire
December 31, 2006. Kanders & Co. will receive a mutually agreed upon fee on a
transaction by transaction basis during the term of this agreement. The
aggregate fees under this agreement will not exceed $1,575,000 during any
calendar year. We also agreed to reimburse Kanders & Co. for reasonable
out-of-pocket expenses including Kanders & Co.'s expenses for office space, an
executive assistant, furniture and equipment, travel and entertainment,
reasonable fees and disbursements of counsel, and consultants retained by
Kanders & Co. During the fiscal year ended December 31, 2002, we paid Kanders &
Co. $525,000 for investment banking services. We also reimbursed Kanders & Co.
for out-of-pocket expenses in the aggregate amount of $302,000 during the fiscal
year ended December 31, 2002. We also granted Kanders & Co. (i) options to
purchase 35,000 shares of our common stock at an exercise price per share equal
to $23.93, (ii) a restricted stock grant of 10,447 shares of common stock valued
at $15.04 per share and (iii) a restricted stock grant of 100,000 shares of
common stock valued at $15.04 per share. These grants were made during fiscal
2002 in consideration for consulting services provided by Kanders & Co. in
connection with certain transactions during fiscal 2001.
During the fiscal year ended December 31, 2002 we paid our Director
Nicholas Sokolow's law firm Sokolow, Dunaud, Mercadier & Carreras $28,000 for
legal services in connection with various acquisitions.
19. OPERATING LEASES
We are party to certain real estate, equipment and vehicle leases. Several
leases include options for renewal and escalation clauses. In most cases,
management expects that in the normal course of business leases will be renewed
or replaced by other leases. Approximate total future minimum annual lease
payments under all non-cancelable leases of continuing operations are as
follows:
YEAR (IN THOUSANDS)
---------- -----------------
2003 $1,141
2004 840
2005 365
2006 66
2007 51
Thereafter --
------
$2,463
======
F-64
We incurred rent expense of approximately $1,200,000, $765,000 and $394,000
during the years ended December 31, 2002, December 31, 2001 and December 31,
2000.
20. GUARANTOR AND NONGUARANTOR FINANCIAL STATEMENTS
We have entered into an agreement to sell an aggregate of $150 million of
Senior Subordinated Notes in private placements pursuant to Rule 144A. The
Senior Subordinated Notes will be unsecured obligations and will rank junior in
right of payment to our existing and future senior debt. The Senior Subordinated
Notes will be fully guaranteed, jointly and severally on a senior unsecured
basis, by certain domestic subsidiaries.
The following consolidating financial information presents the
consolidating balance sheets as of December 31, 2002 and 2001 and the related
statements of income and cash flows for each of the three years in the period
ended December 31, 2002 for:
a) Armor Holdings, Inc., the parent,
b) the guarantor subsidiaries,
c) the nonguarantor subsidiaries, and
d) Armor Holdings 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.
F-65
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATING BALANCE SHEETS
YEAR ENDED DECEMBER 31, 2002
---------------------------------------------------------------------------
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------------ ------------ ------------ ------------ ------------
(IN THOUSANDS)
ASSETS
Current Assets:
Cash and cash equivalents $ 7,152 $ 3,556 $ 2,205 $ -- $ 12,913
Accounts receivable, net -- 44,864 13,649 -- 58,513
Costs and earned gross profit in excess of
billings -- 234 -- -- 234
Intercompany receivables 123,744 33,165 3,800 (160,709) --
Inventories -- 46,591 15,739 -- 62,330
Prepaid expenses and other current assets 12,490 21,999 2,368 (24,645) 12,212
Current assets of discontinued operations -- 10,351 18,474 -- 28,825
------------ ------------ ------------ ------------ ------------
Total Current Assets 143,386 160,760 56,235 (185,354) 175,027
Property and equipment, net 2,456 27,250 17,430 -- 47,136
Goodwill, net -- 96,903 1,833 -- 98,736
Patents, licenses and trademarks, net -- 7,326 195 -- 7,521
Other assets 916 6,872 1,260 -- 9,048
Long-term assets of discontinued operations -- 6,910 23,375 -- 30,285
Investment in subsidiaries 161,805 10,078 -- (171,883) --
------------ ------------ ------------ ------------ ------------
Total Assets $ 308,563 $ 316,099 $ 100,328 $ (357,237) $ 367,753
============ ============ ============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ -- $ 1,813 $ -- $ -- $ 1,813
Short-term debt -- -- 599 -- 599
Accounts payable 828 15,751 7,191 -- 23,770
Accrued expenses and other current liabilities 1,790 11,324 12,002 -- 25,116
Income taxes payable 4,831 (148) 1,230 -- 5,913
Intercompany payables 13,037 115,658 10,434 (139,129) --
Current liabilities of discontinued operations -- 14,267 24,538 (21,580) 17,225
------------ ------------ ------------ ------------ ------------
Total Current Liabilities 20,486 158,665 55,994 (160,709) 74,436
Long-term debt, less current portion -- 5,072 -- -- 5,072
Long-term liabilities of discontinued operations -- 13,022 11,791 (24,645) 168
------------ ------------ ------------ ------------ ------------
Total Liabilities 20,486 176,759 67,785 (185,354) 79,676
Stockholders' Equity:
Preferred stock -- 1,450 -- (1,450) --
Common stock 336 5,681 26,318 (31,999) 336
Additional paid in capital 307,487 73,836 10,016 (83,852) 307,487
Retained earnings (accumulated deficit) 34,056 58,373 (3,791) (54,582) 34,056
Accumulated other comprehensive loss (4,169) -- -- -- (4,169)
Treasury stock (49,633) -- -- -- (49,633)
------------ ------------ ------------ ------------ ------------
Total Stockholders' Equity 288,077 139,340 32,543 (171,883) 288,077
------------ ------------ ------------ ------------ ------------
Total Liabilities and Stockholders' Equity $ 308,563 $ 316,099 $ 100,328 $ (357,237) $ 367,753
============ ============ ============ ============ ============
F-66
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATING BALANCE SHEETS
YEAR ENDED DECEMBER 31, 2001
---------------------------------------------------------------------------
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------------ ------------ ------------ ------------ ------------
(IN THOUSANDS)
ASSETS
Current Assets:
Cash and cash equivalents $ 38,627 $ 5,536 $ 3,326 $ -- $ 47,489
Accounts receivable, net 5 35,190 14,924 -- 50,119
Costs and earned gross profit in excess of
billings -- 5,451 -- -- 5,451
Intercompany receivables 117,184 8,736 832 (126,752) --
Inventories -- 40,891 9,662 -- 50,553
Prepaid expenses and other current assets 12,891 22,440 1,983 (28,367) 8,947
Current assets of discontinued operations -- 12,022 25,540 -- 37,562
------------ ------------ ------------ ------------ ------------
Total Current Assets 168,707 130,266 56,267 (155,119) 200,121
Property and equipment, net 2,395 28,313 5,996 -- 36,704
Goodwill, net -- 85,594 1,214 -- 86,808
Patents, licenses and trademarks, net -- 6,695 -- -- 6,695
Other assets 1,047 3,802 1,775 -- 6,624
Long-term assets of discontinued operations -- 20,387 33,733 (3,015) 51,105
Investment in subsidiaries 158,459 7,685 -- (166,144) --
------------ ------------ ------------ ------------ ------------
Total Assets $ 330,608 $ 282,742 $ 98,985 $ (324,278) $ 388,057
============ ============ ============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ -- $ 1,773 $ -- $ -- $ 1,773
Short-term debt -- -- 709 -- 709
Accounts payable 613 11,538 9,293 -- 21,444
Accrued expenses and other current liabilities 3,649 14,167 7,980 -- 25,796
Income taxes payable -- -- -- -- --
Intercompany payables 327 97,169 6,908 (104,404) --
Current liabilities of discontinued operations -- 9,228 21,604 (23,156) 7,676
------------ ------------ ------------ ------------ ------------
Total Current Liabilities 4,589 133,875 46,494 (127,560) 57,398
Long-term debt, less current portion -- 4,225 -- -- 4,225
Long-term liabilities of discontinued operations -- 16,128 11,846 (27,559) 415
------------ ------------ ------------ ------------ ------------
Total Liabilities 4,589 154,228 58,340 (155,119) 62,038
Stockholders' Equity:
Preferred stock -- 1,450 -- (1,450) --
Common stock 331 6,119 18,738 (24,857) 331
Additional paid in capital 301,995 72,576 8,507 (81,083) 301,995
Retained earnings 51,745 48,369 13,400 (61,769) 51,745
Accumulated other comprehensive loss (4,473) -- -- -- (4,473)
Treasury stock (23,579) -- -- -- (23,579)
------------ ------------ ------------ ------------ ------------
Total Stockholders' Equity 326,019 128,514 40,645 (169,159) 326,019
------------ ------------ ------------ ------------ ------------
Total Liabilities and Stockholders' Equity $ 330,608 $ 282,742 $ 98,985 $ (324,278) $ 388,057
============ ============ ============ ============ ============
F-67
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATING INCOME STATEMENTS
YEAR ENDED DECEMBER 31, 2002
---------------------------------------------------------------------------
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------------ ------------ ------------ ------------ ------------
(IN THOUSANDS)
REVENUES:
Products $ -- $ 154,466 $ 25,480 $ -- $ 179,946
Mobile Security -- 75,276 49,895 -- 125,171
------------ ------------ ------------ ------------ ------------
Total revenues -- 229,742 75,375 -- 305,117
------------ ------------ ------------ ------------ ------------
COSTS AND EXPENSES:
Cost of sales -- 148,208 62,537 -- 210,745
Operating expenses 6,034 36,161 7,641 -- 49,836
Amortization -- 243 2 -- 245
Integration and other non-recurring charges 800 5,126 -- -- 5,926
Related party management fees (income), net 2,487 (171) (616) (1,700) --
------------ ------------ ------------ ------------ ------------
OPERATING (LOSS) INCOME (9,321) 40,175 5,811 1,700 38,365
Interest expense, net 450 275 198 -- 923
Other (income) expense, net (2) (22) 75 -- 51
Equity in losses (earnings) of subsidiaries 8,237 (1,220) -- (7,017) --
Related party interest income, net -- (239) -- 239 --
------------ ------------ ------------ ------------ ------------
(LOSS) INCOME FROM CONTINUING OPERATIONS BEFORE
PROVISION FOR INCOME TAXES (18,006) 41,381 5,538 8,478 37,391
(BENEFIT) PROVISION FOR INCOME TAXES (317) 14,313 2,058 -- 16,054
------------ ------------ ------------ ------------ ------------
(LOSS) INCOME FROM CONTINUING OPERATIONS (17,689) 27,068 3,480 8,478 21,337
DISCONTINUED OPERATIONS:
LOSS FROM DISCONTINUED OPERATIONS BEFORE
BENEFIT FOR INCOME TAXES -- (17,678) (22,329) (1,461) (41,468)
BENEFIT FOR INCOME TAXES -- (784) (1,658) -- (2,442)
------------ ------------ ------------ ------------ ------------
NET LOSS FROM DISCONTINUED OPERATIONS -- (16,894) (20,671) (1,461) (39,026)
------------ ------------ ------------ ------------ ------------
NET (LOSS) INCOME $ (17,689) $ 10,174 $ (17,191) $ 7,017 $ (17,689)
============ ============ ============ ============ ============
F-68
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATING INCOME STATEMENTS
YEAR ENDED DECEMBER 31, 2001
---------------------------------------------------------------------------
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------------ ------------ ------------ ------------ ------------
(IN THOUSANDS)
REVENUES:
Products $ -- $ 134,006 $ 15,862 $ -- $ 149,868
Mobile Security -- 25,221 22,011 -- 47,232
------------ ------------ ------------ ------------ ------------
Total revenues -- 159,227 37,873 -- 197,100
------------ ------------ ------------ ------------ ------------
COSTS AND EXPENSES:
Cost of sales -- 95,831 30,499 -- 126,330
Operating expenses 5,451 30,418 2,790 -- 38,659
Amortization -- 2,059 83 -- 2,142
Integration and other non-recurring charges 1,205 2,079 12 -- 3,296
Related party management income, net (47) -- (1,112) 1,159 --
------------ ------------ ------------ ------------ ------------
OPERATING (LOSS) INCOME (6,609) 28,840 5,601 (1,159) 26,673
Interest expense, net 3,452 360 52 -- 3,864
Other income, net -- (28) (54) -- (82)
Equity in earnings of subsidiaries (14,269) (1,513) -- 15,782 --
Related party interest income, net -- (1,310) -- 1,310 --
------------ ------------ ------------ ------------ ------------
INCOME FROM CONTINUING OPERATIONS BEFORE
PROVISION FOR INCOME TAXES 4,208 31,331 5,603 (18,251) 22,891
(BENEFIT) PROVISION FOR INCOME TAXES (5,920) 12,215 1,912 -- 8,207
------------ ------------ ------------ ------------ ------------
INCOME FROM CONTINUING OPERATIONS 10,128 19,116 3,691 (18,251) 14,684
DISCONTINUED OPERATIONS:
LOSS FROM DISCONTINUED OPERATIONS BEFORE
(BENEFIT) PROVISION FOR INCOME TAXES -- (4,558) (4,977) 2,469 (7,066)
(BENEFIT) PROVISION FOR INCOME TAXES -- (2,668) 158 -- (2,510)
------------ ------------ ------------ ------------ ------------
NET LOSS FROM DISCONTINUED OPERATIONS -- (1,890) (5,135) 2,469 (4,556)
------------ ------------ ------------ ------------ ------------
NET INCOME (LOSS) $ 10,128 $ 17,226 $ (1,444) $ (15,782) $ 10,128
============ ============ ============ ============ ============
F-69
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATING INCOME STATEMENTS
YEAR ENDED DECEMBER 31, 2000
---------------------------------------------------------------------------
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------------ ------------ ------------ ------------ ------------
(IN THOUSANDS)
REVENUES:
Products $ -- $ 127,697 $ 12,207 $ -- $ 139,904
Mobile Security -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Total revenues -- 127,697 12,207 -- 139,904
------------ ------------ ------------ ------------ ------------
COSTS AND EXPENSES:
Cost of sales -- 75,601 9,856 -- 85,457
Operating expenses 6,496 23,108 682 -- 30,286
Amortization -- 1,616 88 -- 1,704
Integration and other non-recurring charges 1,351 1,237 -- -- 2,588
Related party management (income) fees, net (1,134) 280 (236) 1,090 --
------------ ------------ ------------ ------------ ------------
OPERATING (LOSS) INCOME (6,713) 25,855 1,817 (1,090) 19,869
Interest expense, net 1,753 87 9 -- 1,849
Other (income) expense, net (1,709) 1,642 -- -- (67)
Equity in earnings of subsidiaries (21,226) -- -- 21,226 --
Related party interest income, net -- (1,251) -- 1,251 --
------------ ------------ ------------ ------------ ------------
INCOME FROM CONTINUING OPERATIONS BEFORE
(BENEFIT) PROVISION FOR INCOME TAXES 14,469 25,377 1,808 (23,567) 18,087
(BENEFIT) PROVISION FOR INCOME TAXES (2,579) 9,406 413 -- 7,240
------------ ------------ ------------ ------------ ------------
INCOME (LOSS) FROM CONTINUING OPERATIONS 17,048 15,971 1,395 (23,567) 10,847
DISCONTINUED OPERATIONS:
INCOME FROM DISCONTINUED OPERATIONS BEFORE
PROVISION FOR INCOME TAXES -- 1,763 4,199 2,341 8,303
PROVISION FOR INCOME TAXES -- 1,938 164 -- 2,102
------------ ------------ ------------ ------------ ------------
NET (LOSS) INCOME FROM DISCONTINUED OPERATIONS -- (175) 4,035 2,341 6,201
------------ ------------ ------------ ------------ ------------
NET INCOME $ 17,048 $ 15,796 $ 5,430 $ (21,226) $ 17,048
============ ============ ============ ============ ============
F-70
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2002
------------------------------------------------------------------------
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------------ ------------ ------------ ------------ ------------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
(Loss) income from continuing operations: $ (17,689) $ 27,068 $ 3,480 $ 8,478 $ 21,337
Adjustments to reconcile (loss) income from continuing
operations to cash used in operating activities:
Depreciation and amortization 854 3,583 1,143 -- 5,580
Deferred income taxes (364) 321 402 359
Loss on disposal of fixed assets -- 66 134 -- 200
Changes in operating assets and liabilities, net of
acquisitions:
(Increase) decrease in accounts receivable -- (3,829) 1,275 -- (2,554)
Decrease (increase) in intercompany receivables &
payables 6,151 (5,266) 576 (1,461) --
Increase in inventory -- (5,125) (4,256) -- (9,381)
Decrease (increase) in prepaid expenses and other
assets 492 (2,459) (279) -- (2,246)
(Decrease) increase in accounts payable, accrued
expenses and other current liabilities (1,405) 7,215 (9,564) -- (3,754)
Increase (decrease) in income taxes payable 5,663 (148) 1,230 -- 6,745
------------ ------------ ------------ ------------ ------------
Net cash (used in) provided by operating activities (6,298) 21,426 (5,859) 7,017 16,286
------------ ------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (506) (3,671) (1,725) -- (5,902)
Purchase of patents and trademarks -- (69) -- -- (69)
Additional consideration for purchased businesses -- (9,375) -- -- (9,375)
Investment in subsidiaries (3,347) 1,643 8,721 (7,017) --
Purchase of businesses, net of cash acquired -- (8,818) -- -- (8,818)
------------ ------------ ------------ ------------ ------------
Net cash (used in) provided by investing activities: (3,853) (20,290) 6,996 (7,017) (24,164)
------------ ------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 4,227 -- -- -- 4,227
Proceeds from of sale of put options 525 -- -- -- 525
Cash paid for offering costs (326) -- -- -- (326)
Repurchase of treasury stock (26,054) -- -- -- (26,054)
Repayments of long-term debt -- (620) (110) -- (730)
Borrowings under lines of credit 32,372 -- -- -- 32,372
Repayments under lines of credit (32,372) (75) -- -- (32,447)
------------ ------------ ------------ ------------ ------------
Net cash used in financing activities (21,628) (695) (110) -- (22,433)
------------ ------------ ------------ ------------ ------------
Effect of exchange rate on cash and cash
equivalents 304 342 (772) -- (126)
Net cash used in discontinued operations -- (2,763) (1,376) -- (4,139)
------------ ------------ ------------ ------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS (31,475) (1,980) (1,121) -- (34,576)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 38,627 5,536 3,326 -- 47,489
------------ ------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 7,152 $ 3,556 $ 2,205 $ -- $ 12,913
============ ============ ============ ============ ============
F-71
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2001
------------------------------------------------------------------------
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------------ ------------ ------------ ------------ ------------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Income from continuing operations: $ 10,128 $ 19,116 $ 3,691 $ (18,251) $ 14,684
Adjustments to reconcile income from continuing
operations to cash used in operating activities:
Depreciation and amortization 694 4,578 342 -- 5,614
Deferred income taxes 76 (407) (42) (373)
Loss on disposal of fixed assets -- 21 170 -- 191
Changes in operating assets and liabilities, net of
acquisitions:
Increase in accounts receivable -- (11,880) (3,000) -- (14,880)
(Increase) decrease in intercompany receivables &
payables (67,323) 62,878 1,976 2,469 --
(Increase) decrease in inventory -- (12,044) 8,096 -- (3,948)
Decrease (increase) in prepaid expenses and other
assets 162 (92) 979 -- 1,049
Increase (decrease) in accounts payable, accrued
expenses and other current liabilities 4,632 6,317 (3,768) -- 7,181
Increase (decrease) in income taxes payable 6,667 272 (272) -- 6,667
------------ ------------ ------------ ------------ ------------
Net cash (used in) provided by operating activities (44,964) 68,759 8,172 (15,782) 16,185
------------ ------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (1,140) (3,984) (520) -- (5,644)
Proceeds from sale of equity investment 843 -- -- -- 843
Additional consideration for purchased businesses (1,913) (1,357) -- -- (3,270)
Investment in subsidiaries (6,739) (15,360) 6,317 15,782 --
Purchase of businesses, net of cash acquired -- (39,365) -- -- (39,365)
------------ ------------ ------------ ------------ ------------
Net cash (used in) provided by investing activities: (8,949) (60,066) 5,797 15,782 (47,436)
------------ ------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 10,160 -- -- -- 10,160
Proceeds from of issuance of common stock 117,979 -- -- -- 117,979
Cash paid for offering costs (545) -- -- -- (545)
Repurchase of treasury stock (723) -- -- -- (723)
Proceeds from issuance of treasury shares for
stock options 686 -- -- -- 686
Repayments of long-term debt -- (676) -- -- (676)
Repayments of debt assumed in acquisitions -- (1,315) -- -- (1,315)
Borrowings under lines of credit 98,000 -- 286 -- 98,286
Repayments under lines of credit (130,981) -- -- -- (130,981)
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in) financing activities 94,576 (1,991) 286 -- 92,871
------------ ------------ ------------ ------------ ------------
Effect of exchange rate on cash and cash
equivalents (2,789) 2,703 (1,373) -- (1,459)
Net cash used in discontinued operations -- (3,453) (10,883) -- (14,336)
------------ ------------ ------------ ------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 37,874 5,952 1,999 -- 45,825
ASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 753 (416) 1,327 -- 1,664
------------ ------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 38,627 $ 5,536 $ 3,326 $ -- $ 47,489
============ ============ ============ ============ ============
F-72
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2000
------------------------------------------------------------------------
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------------ ------------ ------------ ------------ ------------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Income from continuing operations: $ 17,048 $ 15,971 $ 1,395 $ (23,567) $ 10,847
Adjustments to reconcile income from continuing
operations to cash used in operating activities:
Depreciation and amortization 211 3,055 196 -- 3,462
Deferred income taxes 64 699 6 769
Loss on disposal of fixed assets -- 110 -- -- 110
Changes in operating assets and liabilities, net
of acquisitions:
Increase in accounts receivable -- (2,361) (1,239) -- (3,600)
Decrease (increase) in intercompany receivables &
payables 7,696 (5,227) (4,810) 2,341 --
Increase in inventory -- (4,208) (371) -- (4,579)
(Increase) decrease in prepaid expenses and
other assets (12,607) 6,271 (60) -- (6,396)
Increase (decrease) in accounts payable, accrued
expenses and other current liabilities 1,570 (3,032) 1,843 -- 381
Increase (decrease) in income taxes payable 335 (3,107) (156) -- (2,928)
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in) operating activities 14,317 8,171 (3,196) (21,226) (1,934)
------------ ------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (570) (3,349) (144) -- (4,063)
Purchase of patents and trademarks -- (83) -- -- (83)
Purchase of investments (1,682) -- -- -- (1,682)
Proceeds from sale of equity investment 857 -- -- -- 857
Investment in subsidiaries (40,628) 19,350 52 21,226 --
Purchase of businesses, net of cash acquired -- (14,220) -- -- (14,220)
------------ ------------ ------------ ------------ ------------
Net cash (used in) provided by investing activities: (42,023) 1,698 (92) 21,226 (19,191)
------------ ------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 1,473 -- -- -- 1,473
Repayment of debt assumed in acquisitions -- (1,132) -- -- (1,132)
Cash paid for offering costs -- (256) -- -- (256)
Repurchase of treasury stock (12,606) -- -- -- (12,606)
Repayments of long-term debt -- (1,115) -- -- (1,115)
Borrowings under lines of credit 68,872 6,775 -- -- 75,647
Repayments under lines of credit (35,891) (7,543) -- -- (43,434)
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in) financing activities 21,848 (3,271) -- -- 18,577
------------ ------------ ------------ ------------ ------------
Effect of exchange rate on cash and cash
equivalents (1,483) 1,283 (133) -- (333)
Net cash (used in) provided by discontinued operations -- (6,965) 4,211 -- (2,754)
------------ ------------ ------------ ------------ ------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (7,341) 916 790 -- (5,635)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 8,094 (1,332) 537 -- 7,299
------------ ------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 753 $ (416) $ 1,327 $ -- $ 1,664
============ ============ ============ ============ ============
F-73
21. SUBSEQUENT EVENTS
On July 26, 2003, we awarded Warren B. Kanders, our Chairman and Chief
Executive Officer, a stock bonus award of 200,000 shares of our common stock in
accordance with his amended employment agreement. On November 4, 2003, we
awarded Robert R. Schiller, our Chief Operating Officer and Chief Financial
Officer, a stock bonus award of 150,000 shares of our common stock in accordance
with his amended employment agreement. On November 11, 2003, our stock price
closed above $20 for the fifth consecutive trading day, which resulted in the
complete vesting of the stock bonus awards and a pre-tax charge to earnings of
$7.3 million, which will be included in forth quarter results. The payment of
the stock bonus awards to Messrs. Kanders and Schiller will be deferred for a
period of five years after November 11, 2003, subject to acceleration under
certain circumstances as set forth in their respective employment agreements, as
amended.
On November 26, 2003, we sold our Services Division, which had been
classified as a discontinued operation, to management and a group of private
investors led by Granville Baird Capital Partners. We realized approximately
$31.4 million in cash at the closing of the sale, and expect to receive an
additional $2.3 million in cash during the 12-month period following the
closing. The sales amount approximates our carrying value after related tax
benefits of $10.0 million.
On December 9, 2003, we completed our $110.5 million acquisition of
Simula, Inc., an Arizona corporation, and acquired all of the outstanding common
stock of Simula and retired a majority of Simula's outstanding indebtedness. Of
this amount, approximately $31 million principal amount of 8% debentures will
remain outstanding for approximately 30 days at which time our plans are to
repay these debentures, plus accrued interest, in their entirety. As of the date
of this prospectus, Simula's outstanding 8% debentures have been paid in full.
After payment of 100% of the outstanding indebtedness and transaction expenses,
the merger consideration payable to Simula shareholders at closing pursuant to
the merger agreement was approximately $43.5 million or approximately $3.21 per
share. The funds used in the acquisition were derived from proceeds of our
recent private placement of $150 million aggregate principal amount of 8 1/4%
Senior Subordinated Notes due 2013.
F-74
--------------------------------------------------------------------------------
ARMOR HOLDINGS, INC.
OFFER TO EXCHANGE $150,000,000 PRINCIPAL AMOUNT OF OUR
8 1/4 % SENIOR SUBORDINATED NOTES DUE 2013,
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
FOR ANY AND ALL OF OUR OUTSTANDING
8 1/4% SENIOR SUBORDINATED NOTES DUE 2013
UNCONDITIONALLY GUARANTEED BY THE SUBSIDIARY
GUARANTORS LISTED ON PAGE 5 OF THIS PROSPECTUS
------------------------
PROSPECTUS
------------------------
FEBRUARY 23, 2004
--------------------------------------------------------------------------------