item 14 exhibits financial statements schedules reports form 8k exhibits following exhibits hereby filed part annual report form 10k exhibit description 21 order confirming debtors third amended restated plan reorganization third amended restated plan reorganization attached thereto incorporated reference exhibit 2 form 8k current report company dated october 1 1993 22 asset purchase agreement dated august 23 1996 company dtc robert l oliver sandra oliver dtcoa filed exhibit 21 form 8k current report company dated october 9 1996 incorporated herein reference 23 agreement plan merger dated july 23 1996 american body armor equipment inc florida corporation company filed exhibit 21 form 8k current report company dated september 3 1996 incorporated herein reference 24 agreement sale purchase whole issued share capital dsl dated april 16 1997 company armor holdings limited natwest ventures nominees limited others martin brayshaw filed exhibit 22 form 8k current report company dated april 22 1997 incorporated herein reference 31 certificate incorporation company filed exhibit 31 form 8k current report company dated september 3 1996 incorporated herein reference 32 certificate merger american body armor equipment inc florida corporation company filed exhibit 32 form 8k current report company dated september 3 1996 incorporated herein reference 33 bylaws company filed exhibit 33 form 8k current report company dated september 3 1996 incorporated herein reference 101 amended restated loan agreement dated march 26 1997 company barnett bank filed exhibit 104 form 8k current report company dated april 22 1997 incorporated herein reference 102 renewal promissory note dated march 26 1997 made company favor barnett bank filed exhibit 105 form 8k current report company dated april 22 1997 incorporated herein reference 103 form amended restated security agreement dated march 26 1997 made company us subsidiaries favor barnett bank filed exhibit 106 form 8k current report company dated april 22 1997 incorporated herein reference 104 pledge agreement dated march 26 1997 made company favor barnett bank filed exhibit 107 form 8k current report company dated april 22 1997 incorporated herein reference 105 form collateral assignment dated march 26 1997 made dtc nik favor barnett bank filed exhibit 108 form 8k current report company dated april 22 1997 incorporated herein reference 106 amendment acceptance credit agreement dated march 26 1997 company barnett bank filed exhibit 109 form 8k current report company dated april 22 1997 incorporated herein reference 107 consent respect guaranty payment dated march 26 1997 dtc nik armor holdings properties inc filed exhibit 1010 form 8k current report company dated april 22 1997 incorporated herein reference 108 form guaranty payment dated november 14 1996 filed exhibit 1011 form 8k current report company dated april 22 1997 incorporated herein reference 109 employment agreement jonathan spiller company dated january 18 1996 filed exhibit 106 form 10ksb fiscal 1995 incorporated herein reference 1010 employment agreement richard bistrong company dated january 18 1996 filed exhibit 108 form 10ksb fiscal 1995 incorporated herein reference 1011 employment agreement robert r schiller company dated july 24 1996 filed exhibit 1013 form 10ksb fiscal 1996 dated march 25 1997 incorporated herein reference 1012 employment agreement j lawrence battle company dated october 29 1997 filed exhibit 101 form 10q quarterly period ended september 27 1997 dated november 11 1997 incorporated herein reference 1013 employment agreement david w watson company dated october 29 1997 filed exhibit 102 form 10q quarterly period ended september 27 1997 dated november 11 1997 incorporated herein reference 1014 service agreement alastair ga morrison company dsl dated april 16 1997 filed exhibit 1016 registration statement 33328879 form s1 company incorporated herein reference 1015 service agreement hon richard n bethell company dsl dated april 16 1997 filed exhibit 1017 registration statement 33328879 form s1 company incorporated herein reference 1016 form escrow agreement dated april 16 1997 company warrantors dsl ashurst morris crisp filed exhibit 102 form 8k current report company dated april 22 1997 incorporated herein reference 1017 form registration rights agreement dated april 16 1997 company vendors dsl filed exhibit 103 form 8k current report company dated april 22 1997 incorporated herein reference 1018 form option 300000 shares common stock dated may 15 1996 granted richmont capital partners lp filed exhibit 1034 registration statement 33328879 form s1 company incorporated herein reference 1019 escrow agreement dated september 30 1996 company dtc robert l oliver sandra oliver dtcoa union bank switzerland new york branch filed exhibit 104 form 8k current report company dated october 9 1996 incorporated herein reference 1020 guaranty agreement dated august 26 1996 robert l oliver sandra oliver benefit company filed exhibit 105 form 8k current report company dated october 9 1996 incorporated herein reference 1021 lockup agreement dated august 23 1996 dtcoa benefit company filed exhibit 106 form 8k current report company dated october 9 1996 incorporated herein reference 1022 authorized distributor agreement dated september 30 1996 among dtc xm corporation fka dtcoa wyoming corporation robert l oliver filed exhibit 107 form 8k current report company dated october 9 1996 incorporated herein reference 1023 form indemnification agreement directors registrant dated september 21 1993 filed exhibit 104 form 10ksb annual report company fiscal year ended december 31 1993 incorporated herein reference 1024 form indemnification agreement officers registrant dated february 28 1994 filed exhibit 105 form 10ksb annual report company fiscal year ended december 31 1993 incorporated herein reference 1026 american body armor equipment inc 1994 incentive stock plan incorporated reference form s8 filed october 10 1994 reg 33018863 1027 armor holdings inc amended restated 1996 stock option plan 1028 armor holdings inc amended restated 1996 nonemployee directors stock option plan incorporated reference companys 1997 definitive proxy statement respect companys 1997 annual meeting stockholders held june 12 1997 filed commission may 27 1997 201 1998 definitive proxy statement filed commission later 120 days end fiscal year ended december 27 1997 incorporated reference 211 subsidiaries company 231 consent deloitte touche llp 232 consent kpmg 271 financial data schedule filed herewith incorporated herein reference exhibit represents management contract exhibit represents compensatory plan b financial statements schedules 1 following financial statements company appear beginning sequential page number included herein independent auditors reportf1 consolidated balance sheetsf3 consolidated income statementsf5 consolidated statements stockholders equityf6 consolidated statements cash flowsf7 notes consolidated financial statementsf8 2 schedules provision made applicable accounting regulations commission omitted applicable required information shown financial statements notes thereto c reports form 8k company file current reports form 8k fourth quarter 1997 independent auditors report board directors stockholders armor holdings inc jacksonville florida audited consolidated balance sheets armor holdings inc subsidiaries company december 27 1997 december 28 1996 related consolidated statements income stockholders equity cash flows three years ended december 27 1997 december 28 1996 december 31 1995 financial statements responsibility companys management responsibility express opinion financial statements based audits consolidated financial statements give retroactive effect merger dsl group limited dsl april 16 1997 accounted pooling interests described note 1 audit financial statements defence systems colombia sa dsc consolidated subsidiary statements reflect total assets 3771000 december 27 1997 total revenues 10766000 year ended also audit financial statements dsl included december 28 1996 consolidated financial statements company statements reflect total assets 20799000 december 28 1996 total revenues 12956000 period ended statements audited auditors whose reports furnished us opinion insofar relates amounts included dsc december 27 1997 financial statements dsl december 28 1996 financial statements based solely upon reports auditors conducted audits accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits reports auditors provide reasonable basis opinion based upon audits reports auditors consolidated financial statements referred present fairly material respects financial position armor holdings inc december 27 1997 december 28 1996 results operations cash flows three years ended december 27 1997 december 28 1996 december 31 1995 conformity generally accepted accounting principles deloitte touche llp deloitte touche llp new york new york march 19 1998 independent auditors report board directors shareholders dsl group limited audited consolidated balance sheet dsl group limited subsidiaries 31 december 1996 related consolidated profit loss account consolidated statement total recognised gains losses reconciliation movements shareholders funds consolidated cash flow statement period 3 june 1996 date incorporation 31 december 1996 none aforementioned financial statements separately presented herein consolidated financial statements responsibility management dsl group limited responsibility express opinion consolidated financial statements based audit conducted audit accordance auditing standards generally accepted united kingdom united states america standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audit provides reasonable basis opinion consolidated financial statements referred present fairly material respects financial position dsl group limited subsidiaries 31 december 1996 results operations cash flows period 3 june 1996 31 december 1996 conformity generally accepted accounting principles united kingdom accounting principles generally accepted united kingdom vary certain significant respects accounting principles generally accepted united states america application accounting principles generally accepted united states would affected profit attributable shareholders period 3 june 1996 31 december 1996 shareholders funds 31 december 1996 extent summarised note 24 consolidated financial statements kpmg chartered accountants registered auditors london england 15 april 1997 armor holdings inc subsidiaries consolidated balance sheets december 27 1997 december 28 1996 thousands except share per share amounts see notes consolidated financial statements armor holdings inc subsidiaries consolidated balance sheets december 27 1997 december 28 1996 thousands except share per share amounts see notes consolidated financial statements armor holdings inc subsidiaries consolidated income statements years ended december 27 1997 december 28 1996 december 31 1995 thousands except share per share amounts see notes consolidated financial statements armor holdings inc subsidiaries consolidated statement stockholders equity years ended december 27 1997 december 28 1996 december 31 1995 thousands restubbed table continued see notes consolidated financial statements continued armor holdings inc subsidiaries consolidated statements cash flow years ended december 27 1997 december 28 1996 december 31 1995 thousands see notes consolidated financial statements armor holdings inc subsidiaries notes consolidated financial statements years ended december 27 1997 december 28 1996 december 31 1995 1 summary significant accounting policies principles consolidation consolidated financial statements include accounts armor holdings inc company subsidiaries american body armor equipment inc delaware corporation aba armor holdings properties inc delaware corporation ahpi nik public safety inc delaware corporation nik defense technology corporation america delaware corporation dtc armor holdings limited corporation incorporated laws england supercraft europe limited corporation organized laws england supercraft material intercompany balances transactions eliminated consolidation organization armor holdings inc company acquired nik assets effective july 1 1996 substantially dtcoa assets september 30 1996 april 7 1997 company acquired outstanding share capital supercraft june 9 1997 company acquired remaining 50 interest gtl previously acquisitions accounted purchase method purchase price assigned assets acquired liabilities assumed based fair value date acquisition pooling interests april 16 1997 company issued 1274217 shares common stock exchange outstanding ordinary shares dsl provides specialized security services high risk volatile environments july 31 1996 dsl acquired share capital dsl holdings limited dsl holdings result dsl recorded net assets acquired july 31 1996 fair value approximately 2800000 also recorded approximately 9600000 goodwill companys combination dsl accounted pooling interests accompanying financial statements restated give effect combined results ahi dsl since inception connection dsl combination company paid 6850000 repayment dsls outstanding credit facility approximately 7480000 outstanding preference shares dsl see notes 6 7 companys business company leading manufacturer security equipment including body armor lesslethal munitions antiriot products company also leading provider security planning advisory management services corporations governmental agencies operating unstable areas world cash equivalents company considers highly liquid investments purchased original maturities three months less cash equivalents concentration credit risk companys accounts receivable consist amounts due customers distributors located throughout world international product sales generally require cash advance confirmed letters credit us banks inventories stated lower cost market determined firstin firstout fifo basis fair value financial instruments carrying values companys various financial instruments reflected accompanying statements financial position approximate estimated fair values december 27 1997 december 28 1996 property equipment property equipment carried cost less accumulated depreciation property equipment acquired prior september 21 1993 recorded estimated fair values result emergence bankruptcy depreciation computed using straightline method based estimated lives 3 315 years goodwill amortized straightline basis twentyfive years periodically reviewed impairment comparing carrying value undiscounted expected future cash flows reorganization value excess amounts allocable identifiable assets amortized otherwise reduced amounts less would recognized straightline basis twentyfive years patents trademarks patents trademarks acquired acquisitions accounted purchase method accounting assets amortized straight line basis remaining lives 10 15 years new accounting standards june 1997 financial accounting standards board fasb issued statement finance accounting standards sfas 130 reporting comprehensive income comprehensive income includes net income several items current accounting standards require recognized outside net income standard requires enterprises display comprehensive income components financial statements classify items comprehensive income nature financial statements display accumulated balances comprehensive income stockholders equity separately retained earnings additional paidin capital sfas 130 effective fiscal years beginning december 15 1997 company intends adopt standard fiscal year beginning december 28 1997 company determined display comprehensive income consolidated statement shareholders equity fiscal year 1998 june 1997 fasb issued sfas 131 disclosures segments enterprise related information replacing sfas 14 amendments standard requires enterprises report certain information operating segments complete set financial statements shareholders report certain enterprisewide information products services activities different geographic areas reliance major customers disclose certain segment information interim financial statements basis determining enterprises operating segments manner financial information used internally enterprises chief operating decision maker sfas 131 effective fiscal years beginning december 15 1997 however early adoption encouraged company elected adopt standard fiscal year 1997 estimates preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates income taxes connection adoption freshstart reporting company adopted sfas 109 accounting income taxes asset liability method specified thereunder deferred taxes determined based difference financial reporting tax bases assets liabilities deferred tax liabilities offset deferred tax assets representing taxeffected cumulative net operating loss carryforwards deductible temporary differences subject applicable limits asset valuation allowance future benefits obtained utilization net operating loss carryforwards reduction income tax asset valuation allowance existing september 20 1993 applied reduce reorganization value excess amounts allocable identifiable assets december 27 1997 companys consolidated foreign subsidiaries unremitted earnings approximately 11 million company recorded provision us federal income taxes since earnings considered permanently invested foreign earnings taxed according regulations existing countries earned revenue recognition company records sales gross amounts received including amounts paid agents commissions company records service revenue service provided contract basis income 1997 includes amounts received agent former employee selling shares companys stock 1995 income includes amounts received settlement noncompetition agreement foreign currency translation accordance statement financial accounting standard 52 foreign currency translation assets liabilities denominated foreign currency translated us dollars current rate exchange existing yearend revenues expenses translated average monthly exchange rates cumulative translation adjustment represents effect translating assets liabilities companys foreign operations approximate loss 353000 229200 years ended december 27 1997 december 28 1996 respectively reclassifications certain reclassifications made 1995 1996 financial statements order conform presentation adopted 1997 2 business combinations dsl group limited april 16 1997 company combined dsl group limited united kingdom corporation dsl transaction accounted pooling interests dsl transaction dsl leading provider specialized security services high risk volatile environments dsl formed june 3 1996 purpose acquiring dsl holdings limited dsl holdings predecessor corporation whose assets included indirect 50 interest gorandel trading limited dsls acquisition dsl holdings completed july 31 1996 consolidated financial statements company fiscal 1997 1996 include results dsl since inception connection dsl transaction company issued 1274217 shares common stock valued time 109 million outstanding ordinary share capital dsl paid 75 million cash outstanding preference shares company also assumed subsequently repaid 69 million plus interest dsls outstanding credit facility defense technology corporation america september 30 1996 whollyowned subsidiary company defense technology corporation america delaware corporation dtc acquired substantially assets dtcoa assets defense technology corporation america wyoming corporation dtcoa dtc manufactures lessthanlethal antiriot products including pepper sprays tear gas distraction devices flameless expulsion grenades specialty impact munitions distributes us foreign law enforcement agencies military company acquired assets paying dtcoa purchase price consisting approximately 838000 cash 270728 shares common stock valued time 20 million subject reduction certain circumstances issuing key bank wyoming key bank made credit facility available dtcoa 358714 shares common stock valued time 265 million return key banks agreement release liens assets dtcoa company also assumed certain specified liabilities dtcoa acquisition dtcoa accounted purchase method accordingly results operations included consolidated financial statements date acquisition nik public safety product line effective july 1 1996 nik public safety inc delaware corporation whollyowned subsidiary company nik acquired nik public safety product line nik product line nik assembles distributes portable narcotic identification kits used identification narcotic substances law enforcement agencies addition nik distributes flexcufregistered trademark restraint specimen collection kits evidence collection kits tamper guard evidence tape company acquired nik product line purchase price consisting 310931 shares common stock valued time 24 million gorandel trading limited june 9 1997 company acquired remaining 50 gorandel trading limited cyprus corporation gtl previously gtl provides specialized security services throughout russia central asia aggregate purchase price transaction approximately 24 million consisting 570000 cash paid closing 600000 cash paid upon satisfaction certain conditions 115176 shares common stock valued time 12 million supercraft europe limited april 7 1997 company acquired supercraft europe limited fka supercraft garments limited united kingdom corporation supercraft european manufacturer military apparel high visibility garments ballistic resistant vests distributes law enforcement military agencies throughout europe middle east asia company acquired supercraft initial total purchase price approximately 26 million consisting approximately 13 million cash subject adjustments ii 875000 cash placed escrow pending final disposition title certain real property title properly transferred company iii certain additional consideration amount exceed 250000 pounds sterling approximately 410000 based 1997 operating results company required pay additional consideration unaudited consolidated results operations company pro forma basis company consummated acquisitions january 1 1996 follows 000s except per share amounts pro forma financial information 3 inventories summarized follows years ended december 27 1997 december 28 1996 4 property plant equipment property plant equipment december 27 1997 december 28 1996 summarized follows depreciation expense 1997 1996 1995 approximately 1079000 388000 148000 respectively 5 accounts payable accrued expenses current liabilities accounts payable accrued expenses current liabilities summarized follows years ended december 27 1997 december 28 1996 6 indebtedness debt 1 proceeds used acquire outstanding shares dsl holdings discussed note 1 borrowings paid full subsequent companys combination dsl capitalized lease obligation company entered revolving working capital credit facility bankers acceptance facility credit facility november 14 1996 barnett bank na provides total borrowings 10000000 maximum availability based upon 50 eligible inventories cap 1000000 work process inventory 6000000 inventory total 85 eligible accounts receivable credit facility amended march 26 1997 increase revolving line credit 20000000 credit facility various covenants among things require company maintain certain financial ratios tangible net worth working capital defined limit companys ability pay dividends common stock encumber transfer assets incur indebtedness merge another corporation company borrowings outstanding credit facility december 27 1997 credit facility expires march 1 1999 7 preference shares dsl 7480000 4400000 shares preference shares par value pounds sterling 001 shares carried 8 dividend cumulative redeemable liquidation value par preference shares voting rights company paid cash 7480000 including accrued interest approximately 382000 purchase shares april 16 1997 8 nonrecurring items approximately 25 million fees expenses associated dsl transaction expensed fiscal 1997 expenses include approximately 11 million professional fees approximately 14 million costs incurred consolidate financial administrative functions companys headquarters jacksonville florida costs substantially paid december 27 1997 9 income taxes income tax expense benefit years ended december 27 1997 december 28 1996 december 31 1995 consisted following components significant components companys net deferred tax asset december 27 1997 december 28 1996 follows company provided valuation allowance 1800000 deferred tax assets recorded december 27 1997 december 28 1996 view among things expiration dates limitations usage net operating loss carryforwards deferred tax assets included assets balance sheet years ended december 27 1997 december 28 1996 following reconciles income tax expense computed federal statutory income tax rate provision income taxes recorded income statement january 1 1996 company income tax net operating loss carryforward nol approximately 4400000 effective change control company kanders florida holdings inc january 18 1996 utilization nol became restricted united states approximately 300000 per year however december 27 1997 companys net operating losses increased approximately 7800000 expire varying amounts fiscal years 2006 2010 increase net operating losses result recording dsl deferred tax assets related fiscal 1997 losses generated united kingdom offset future income 10 operating leases company leases previous manufacturing facilities six year operating lease expiring 1999 option renew company also party various equipment vehicle leases dsl leases london office operating lease expiring 2002 approximate total future minimum annual lease payments arrangements follows company incurred rent expense approximately 454000 net sublease income 35000 330000 161000 years ended december 27 1997 december 28 1996 december 31 1995 respectively 11 commitments contingencies employment contracts company party several employment contracts management contracts varying periods include restrictions competition termination agreements provide salaries bonuses benefits also specify delineate granting various stock options legallitigation matters november 1989 federal trade commission ftc conducted investigation accuracy companys claims body armor sold 1988 1990 complied testing certification procedures promulgated national institute justice november 2 1994 company entered consent order voluntarily settling ftcs charges company engaged false advertising consent order company admitted violations law agreed establish body armor replacement program persons purchased body armor 1988 1990 would identified offered chance buy new replacement body armor reduced price consent order sets forth many detailed requirements governing conduct replacement program retention records avoidance false misleading advertising failure comply requirements could make company liable civil penalties january 4 1995 company filed ftc comprehensive compliance report detailing manner performing obligations imposed upon consent order february 1997 ftc asked additional information company believes ftcs final request information closing case january 30 1997 company commenced action supreme court state new york new york county dtcoa sole stockholder dtcoa president chief executive officer dtcoa collectively defendants claiming defendants breached agreements relating sale dtcoa assets company relief sought company includes monetary damages approximately 515000 plus accruals punitive damages company granted preliminary injuction enjoining defendants unauthorized use defense technology name addition company subsequently granted another preliminary injunction enforcing restrictive covenants contained asset purchase agreement authorized distributor agreement prohibiting defendants competing company april 3 1997 defendants filed court answer counterclaims companys complaint defendants denied companys allegations asserted several affirmative defenses defendants counterclaimed among things breach terms asset purchase agreement authorized distributor agreement entered connection companys acquisition dtcoa assetsthe company believes counterclaims asserted without merit intends vigorously defend counterclaims company dtc among parties named defendants product liability lawsuit claiming damages wrongful death resulting use law enforcement officers lessthanlethal products sold dtcoa companys insurance carrier assumed defense lawsuit company believe time outcome lawsuit wil material adverse effect company 12 stockholders equity preferred stock convertible preferred stock plan reorganization provided filing company restated articles incorporation authorized issuance 1700000 shares 1 stated value 3 convertible preferred stock preferred stock pursuant plan reorganization company issued 1700000 shares preferred stock 1995 1996 company elected convert 242851 1214292 shares respectively preferred stock common stock 077 per share conversion provisions calling issuance common stock fair market value represents 110 aggregate stated value preferred stock subject redemption company authorized series preferred stock rights privileges preferences board directors shall time determine issuance conversion convertible debt april 30 1996 company completed private placement 5 convertible subordinated notes due april 30 2001 notes pursuant 11500000 aggregate principal amounts notes sold company december 18 1996 notes converted 2300000 shares common stock conversion price 500 per share stock options grants 1994 company implemented incentive stock plan outside directors stock plan plans collectively provide granting certain key employees options acquire companys common stock well providing grant common stock outside directors full time employees pursuant plans 1050000 shares common stock reserved made available distribution option prices stock may purchased incentive stock plan less fair market value common stock dates grants effective january 19 1996 stock grants awarded 1994 incentive stock plan accelerated considered fully vested 1996 company implemented new incentive stock plan new outside directors stock plan pursuant new plans 1800000 shares common stock reserved made available distribution effective january 1 1996 company adopted sfas 123 accounting stockbased compensation sfas 123 establishes fair value based method accounting stockbased employee compensation plans however also allows entity continue measure compensation cost plans using intrinsic value based method accounting prescribed accounting principles board apb opinion 25 accounting stock issued employees fair value based method compensation cost measured grant date based value award recognized service period usually vesting period intrinsic value based method compensation cost excess quoted market price stock grant date measurement date amount employee must pay acquire stock company elected continue account employee stock compensation plans apb opinion 25 pro forma disclosures net earnings per share fair value based method accounting defined sfas 123 applied compensation cost stock option grants determined based fair value grant dates 1997 1996 1995 consistent method prescribed sfas 123 companys net earnings diluted earnings per share would adjusted pro forma amounts indicated sfas 123 fair value option grant estimated date grant using blackscholes optionpricing model following weightedaverage assumptions used grants 1997 1996 1995 dividend yield 0 expected volatility 22 33 respectively riskfree interest rates 600 593 546 respectively expected lives 3 years outstanding options consisting tenyear incentive nonqualified stock options vest become exercisable three year period date grant outstanding options expire ten years date grant upon retirement company contingent upon continued employment applicable tenyear period summary status stock option grants december 27 1997 changes years ending dates presented following table summarizes information stock options outstanding december 27 1997 remaining nonexercisable options december 27 1997 become exercisable follows 1998 319671 1999 504665 2000 221663 earnings per share march 1997 fasb issued sfas 128 earnings per share statement establishes standards computing presenting earnings per share eps applies entities publicly held common stock potential common stock statement replaces presentation primary eps fully diluted eps presentation basic eps diluted eps respectively basic eps excludes dilution computed dividing earnings available common stockholders weighted average number common shares outstanding period similar fully diluted eps diluted eps reflects potential dilution securities could share earnings statement effective companys financial statements year ended december 27 1997 following reconciliation numerators denominators basic diluted earnings per share computations net income net income available common stockholders 13 supplemental cash flow information 14 investment unconsolidated subsidiaries december 27 1997 december 28 1996 company investments following companies accounts equity method accounting investments following summarizes significant financial information unconsolidated subsidiaries twelve months ended december 27 1997 nine months ended december 28 1996 15 information concerning business segments geographical sales prior combinations dsl company operated one business segment manufactured products segment includes development manufacture distribution ballistic protective equipment lessthanlethal products narcotic identification evidence equipment products sold international network distributors serve law enforcement communities since dsl combination company operates second business segment security services segment includes devising implementing solutions complex security problems high risk areas dsls services encompass provision detailed threat assessments security planning security training provision training supervision specialist manpower services implementation management fully integrated security systems company invested substantial resources outside united states plans continue future substantially operations services segment conducted emerging markets africa asia south america operations subject risk new different legal regulatory requirements local jurisdictions tariffs trade barriers potential difficulties staffing managing local operations potential imposition restrictions investments potentially adverse tax consequences including imposition increase withholding taxes remittances payments subsidiaries local economic political social conditions governments many developing countries exercised continue exercise substantial influence many aspects private sector government actions future could significant adverse effect economic conditions developing country may otherwise material adverse effect company operating companies company political risk insurance countries currently conducts business moreover applicable agreements relating companys interests operating companies frequently governed foreign law result event dispute may difficult company enforce rights accordingly company may little recourse upon occurrence developments see note 17 revenues income continuing operations identifiable assets companys segments years ended december 27 1997 december 28 1996 follows following unaudited information respect sales principal geographic areas years ended december 27 1997 december 28 1996 december 31 1995 follows 16 quarterly results following table presents summarized unaudited quarterly results operations company fiscal 1997 1996 company believes necessary adjustments included amounts stated present fairly following selected information read conjunction consolidated financial statements notes thereto included elsewhere herein future quarterly operating results may fluctuate depending number factors results operations particular quarter necessarily indicative results operations full year quarter 17 subsequent events january 16 1998 dsl ceased operations country angola cessation operations dsl angola dictated governments decision deport dsls expatriate management supervisors result action dsl believed could longer ensure safety personnel clients angolan operations represented approximately 120 million companys revenues 1997 contribution 10 million allocation dsls corporate overhead charges dsls assets angola approximately 900000 substantially secured dsl dsls clients made temporary alternative arrangements provision ongoing security needs company recorded reserve approximately 500000 potential losses associated dsls withdrawal angola company currently reviewing available alternatives connection cessation dsls operations angola including various disputes minority partner joint venture managed certain angolan business management believe outcome matters material impact financial statements company january 30 1998 company acquired issued outstanding shares capital stock low voltage systems technology inc new jersey corporation lst leading engineered systems distributor specializing supply integration maintenance technical support sophisticated electronic computerdriven security fire alarm systems aggregate purchase price transaction approximately 750000 consisting 562500 cash paid closing 18519 unregistered shares common stock valued time 187500 company also assumed subsequently repaid approximately 204340 stockholder lst full satisfaction loans previously made stockholder lst 18 employee benefit plans october 1997 company implemented 401k plan 401k plan provides voluntary contributions employees allows discretionary contribution company form cash stock company make discretionary contribution 401k plan 1997 dsl operates defined contribution plan united kingdom employees assets plan held separately independently administered fund company contributed approximately 94000 pounds sterling approximately 154000 fiscal 1997 73000 pounds sterling approximately 119000 fiscal 1996 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized armor holdings inc jonathan spiller jonathan spiller president chief executive officer director dated march 26 1998 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated exhibit index following exhibits filed herewith exhibit description 1027 armor holdings inc amended restated 1996 stock option plan 211 subsidiaries company 231 consent deloitte touche llp 232 consent kpmg 271 financial data scheduleitem 14 exhibits financial statements schedules reports form 8k financial statements schedules 1 following financial statements company appear beginning sequential page number included herein independent auditors reports consolidated balance sheets consolidated income statements consolidated statements stockholders equity consolidated statements cash flows notes consolidated financial statements 2 schedules provision made applicable accounting regulations commission omitted applicable required information shown financial statements notes thereto b reports form 8k company filed current report form 8k fourth quarter 1998 reporting change independent accountants form 8k filed october 22 1998 c exhibits following exhibits hereby filed part annual report form 10k exhibit description 21 order confirming debtors third amended restated plan reorganization third amended restated plan reorganization attached thereto incorporated reference exhibit 2 form 8k current report company dated october 1 1993 22 asset purchase agreement dated july 2 1996 company nik iverslee lfc 46 corp filed exhibit 21 form 8k current report company dated july 30 1996 incorporated herein reference 23 asset purchase agreement dated august 23 1996 company dtc robert l oliver sandra oliver dtcoa filed exhibit 21 form 8k current report company dated october 9 1996 incorporated herein reference 24 agreement plan merger dated july 23 1996 american body armor equipment inc florida corporation company filed exhibit 21 form 8k current report company dated september 3 1996 incorporated herein reference 25 share acquisition agreement dated april 7 1997 bodycote ahl company filed exhibit 21 form 8k current report company dated april 22 1997 incorporated herein reference 26 agreement sale purchase whole issued share capital dsl dated april 16 1997 company ahl natwest ventures nominees limited others martin brayshaw filed exhibit 22 form 8k current report company dated april 22 1997 incorporated herein reference 27 share acquisition agreement dated june 9 1997 company strontian holdings limited alphaa limited others filed exhibit 21 form 8k current report company dated june 24 1997 incorporated herein reference 31 certificate incorporation company filed exhibit 31 form 8k current report company dated september 3 1996 incorporated herein reference 32 certificate merger american body armor equipment inc florida corporation company filed exhibit 32 form 8k current report company dated september 3 1996 incorporated herein reference 331 bylaws company filed exhibit 33 form 8k current report company dated september 3 1996 incorporated herein reference 332 amendment bylaws company 101 credit agreement dated february 12 1999 among company cibc nationsbank first union suntrust lenders canadian imperial bank commerce administrative agent nationsbank documentation agent aggregate principal amount 60000000 filed exhibit 51 form 8k current report company dated march 10 1999 incorporated herein reference 102 borrower pledge agreement dated february 12 1999 made company favor canadian imperial bank commerce administrative agent lenders filed exhibit 510 form 8k current report company dated march 10 1999 incorporated herein reference 103 security deed dated february 12 1999 made company favor canadian imperial bank commerce administrative agent lenders filed exhibit 511 form 8k current report company dated march 10 1999 incorporated herein reference 104 subsidiaries guarantee dated february 12 1999 made company favor canadian imperial bank commerce administrative agent lenders filed exhibit 512 form 8k current report company dated march 10 1999 incorporated herein reference 105 amended restated employment agreement jonathan spiller company dated january 1 1999 106 amended restated employment agreement robert r schiller company dated january 1 1999 107 employment agreement stephen e croskrey company dated february 8 1999 108 employment agreement nicholas b winiewicz company dated february 16 1999 109 employment agreement warren b kanders company dated january 1 1999 1010 form registration rights agreement dated april 16 1997 company vendors dsl filed exhibit 103 form 8k current report company dated april 22 1997 incorporated herein reference 1011 form option 300000 shares common stock dated may 15 1996 granted richmont capital partners lp filed exhibit 1034 registration statement 33328879 form s1 company incorporated herein reference 1012 agreement dated april 21 1998 amending option dated may 15 1996 granted richmont capital partners lp 300000 shares common stock 1013 form indemnification agreement directors registrant dated september 21 1993 filed exhibit 104 form 10ksb annual report company fiscal year ended december 31 1993 incorporated herein reference 1014 form indemnification agreement officers registrant dated february 28 1994 filed exhibit 105 form 10ksb annual report company fiscal year ended december 31 1993 incorporated herein reference 1015 american body armor equipment inc 1994 incentive stock plan incorporated reference form s8 filed october 10 1994 reg 33018863 1016 american body armor equipment inc 1994 directors stock plan incorporated reference form s8 filed october 31 1994 reg 33018863 1017 armor holdings inc amended restated 1996 stock option plan incorporated reference companys 1997 definitive proxy statement respect companys 1997 annual meeting stockholders held june 12 1997 filed commission may 27 1997 1018 armor holdings inc amended restated 1996 nonemployee directors stock option plan incorporated reference companys 1997 definitive proxy statement respect companys 1997 annual meeting stockholders held june 12 1997 filed commission may 27 1997 1019 armor holdings inc 1998 stock option plan 1020 lease companys former primary facility located yulee florida dated july 26 1993 effective may 1 1993 filed exhibit 281 form 10ksb annual report company fiscal year ended december 31 1993 incorporated herein reference 1021 agreement dated march 8 1999 company kanders company inc 211 subsidiaries company 231 consent pricewaterhouse coopers llp 232 consent deloitte touche 233 consent deloitte touche llp 234 consent kpmg 271 financial data schedule filed herewith incorporated herein reference exhibit represents management contract exhibit represents compensatory plan report independent accountants stockholders xboard directors armor holdings inc opinion based upon audit report auditors accompanying consolidated balance sheet related consolidated statements income stockholders equity cash flows present fairly material respects financial position armor holdings inc subsidiaries company december 31 1998 results operations cash flows period ended december 31 1998 conformity generally accepted accounting principles consolidated financial statements responsibility companys management responsibility express opinion consolidated financial statements based audit financial statements defense systems colombia sa wholly owned subsidiary statements reflect total assets 4974000 december 31 1998 total revenues 13266000 year ended december 31 1998 statements audited auditors whose report thereon furnished us opinion expressed herein insofar relates amounts included defense systems colombia sa based solely report auditors conducted audit consolidated financial statements accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audit report auditors provide reasonable basis opinion expressed consolidated financial statements company years ended december 28 1996 december 27 1997 audited independent accountants whose report dated march 19 1998 expressed unqualified opinion consolidated financial statements pricewaterhousecoopers llp march 5 1999 deloitte touche llp colombia opinion statutory auditors report messrs shareholders defence systems colombia sa audited balance sheet defence systems colombia sa december 31 1998 related statements income changes shareholders equity changes financial position cash flows year ended financial statements responsibility management company since reflect result efforts among duties surveillance company one auditing expressing opinion thereon financial statements year ended december 31 1997 examined another statutory auditor report march 5 1998 expressed unqualified opinion statements included herewith comparative purposes obtained information required comply duties carry audit accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements reasonably reflect material respects financial position results operations audit includes among procedures examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant accounting estimates made management company presentation financial statements whole believe audit provides reasonable basis opinion financial statements referred taken books attached report present fairly material respects financial position defence systems colombia sa december 31 1998 results operations changes shareholders equity changes financial position cash flows year ended conformity accounting principles generally accepted colombia also inform said year company carried accounting books conformity legal regulations accounting techniques management report operations agreement attached basic financial statements transactions recorded books acts administration conform statutes decisions general assembly shareholders board directors correspondence accounting vouchers minutes books shareholders register properly kept maintained company followed adequate measures internal control preservation custody assets third parties held company luis javier ortiz luis javier ortiz statutory auditor tp 40014t february 8 1999 independent auditors report board directors stockholders armor holdings inc jacksonville florida audited consolidated balance sheet armor holdings inc company december 27 1997 related consolidated statements income stockholders equity cash flows two years ended december 27 1997 december 28 1996 financial statements responsibility companys management responsibility express opinion financial statements based audits consolidated financial statements give retroactive effect merger dsl group limited dsl april 16 1997 accounted pooling interests described note 1 audit financial statements defense systems colombia dsc consolidated subsidiary statements reflect total assets 3771000 december 27 1997 total revenues 10766000 year ended also audit financial statements dsl included december 28 1996 consolidated financial statements company statements reflect total assets 20798000 december 28 1996 total revenues 12956000 year ended statements audited auditors whose reports furnished us opinion insofar relates amounts included dsc december 27 1997 financial statements dsl december 28 1996 financial statements based solely upon reports auditors conducted audits accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits reports auditors provide reasonable basis opinion based upon audits reports auditors consolidated financial statements referred present fairly material respects financial position armor holdings inc december 27 1997 results operations cash flows two years ended december 27 1997 december 28 1996 conformity generally accepted accounting principles deloitte touche llp new york new york march 19 1998 independent auditors report board directors shareholders dsl group limited audited consolidated profit loss account consolidated statement total recognised gains losses reconciliation movements shareholders funds consolidated cash flow statement dsl group limited subsidiaries period 3 june 1996 date incorporation 31 december 1996 none aforementioned financial statements separately presented herein consolidated financial statements responsibility management dsl group limited responsibility express opinion consolidated financial statements based audit conducted audit accordance auditing standards generally accepted united kingdom united states america standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audit provides reasonable basis opinion consolidated financial statements referred present fairly material respects results operations dsl group limited subsidiaries cash flows period 3 june 1996 31 december 1996 conformity generally accepted accounting principles united kingdom accounting principles generally accepted united kingdom vary certain significant respects accounting principles generally accepted united states america application accounting principles generally accepted united states would affected profit attributable shareholders period 3 june 1996 31 december 1996 extent summarised note 24 consolidated financial statements kpmg chartered accountants registered auditors london england 15 april 1997 armor holdings inc subsidiaries consolidated balance sheets december 27 1997 december 31 1998 thousands see notes consolidated financial statements armor holdings inc subsidiaries consolidated balance sheets december 27 1997 december 31 1998 continued thousands except share data see notes consolidated financial statements armor holdings inc subsidiaries consolidated income statements years ended december 28 1996 december 27 1997 december 31 1998 thousands except per share data see notes consolidated financial statements armor holdings inc subsidiaries consolidated statement stockholders equity years ended december 28 1996 december 27 1997 december 31 1998 thousands see notes consolidated financial statements armor holdings inc subsidiaries consolidated statements cash flow years ended december 28 1996 december 27 1997 december 31 1998 thousands see notes consolidated financial statements armor holdings inc subsidiaries notes consolidated financial statements 1 background summary significant accounting policies company nature business armor holdings inc company armor leading global provider security risk management services products multinational corporations governmental agencies law enforcement personnel two operating divisions armor group services armor holdings products armor group services division provides sophisticated security planning risk management electronic security systems integration consulting training services well intellectual property asset protection business intelligence investigative services armor provides services multinational corporations governmental nongovernmental agencies 22 offices 18 countries armor holdings products division manufactures sells broad range high quality branded law enforcement equipment leading market positions several product categories armor competes products include ballistic resistant vests tactical armor police duty gear lessthanlethal munitions antiriot products narcotics identification kits products sold primarily law enforcement agencies worldwide network 500 distributors sales agents including approximately 350 united states armor believes significant opportunities exist grow company extend global infrastructure geographic expansion strategic acquisitions related businesses fragmented security risk management services products industries armor group services division armor group services division provides broad range sophisticated security risk management solutions multinational corporations diverse industries natural resources financial services consumer products governmental nongovernmental agencies us department state united nations world bank clients typically personnel investments unstable often violent areas world armor group services offices five continents armor group services provides multinational clients diversified portfolio security solutions assist mitigate risks operations around world armor group services highly trained multilingual experienced security personnel work closely clients create implement solutions complex security problems services include design implementation risk management plans security systems provision security specialists training security personnel armor group services provides multinational clients specialized investigative services enhanced global network services include intellectual property asset protection related investigative services ranging protecting companies counterfeiting patent infringements product tampering extortion identifying unethical supplier activities addition armor group services provides business intelligence fraud investigation asset tracing recovery services financial services companies law firms entities worldwide armor holdings products division armor holdings products division manufactures sells broad range high quality branded law enforcement equipment ballistic resistant vests tactical armor bomb disposal equipment lessthanlethal munitions antiriot products including tear gas distraction grenades narcotics identification kits custombuilt armored vehicles products marketed brand names wellknown respected law enforcement community american body armor defense technology first defense mace protech nik armor holdings products division sells manufactured products primarily law enforcement agencies worldwide network 500 distributors sales agents including approximately 350 united states extensive distribution capabilities commitment customer service training enabled armor holdings products division become leading provider security equipment law enforcement agencies armor holdings inc subsidiaries notes consolidated financial statements continued 1 background summary significant accounting policies continued april 1997 company combined dsl group limited dsl business planning implementing solutions complex security problems high risk areas dsls services encompass provision detailed threat assessments security planning security training provision training supervision specialist manpower services implementation management fully integrated security systems companys combination dsl provided company cornerstone security services business recent acquisitions company expanded portfolio services company offer customers include business intelligence investigative due diligence intellectual property asset protection alarm monitoring executive protection engineering integration maintenance technical support sophisticated electronic computer driven security fire alarm systems basis presentation accompanying consolidated financial statements give effect combination dsl combination dsl accounted poolingofinterests method accounting see note 2 accordingly accompanying consolidated financial statements retroactively restated company dsl operated one entity since inception principles consolidation consolidated financial statements include accounts company whollyowned subsidiaries consolidation material intercompany balances transactions eliminated results operations companies acquired transactions accounted purchase method accounting included financial statements dates acquisition accounting principles generally accepted colombia vary certain respects accounting principles generally accepted united states america major variance two methods affecting company accounting effects inflation company periodically makes adjustments material differences cash equivalents company considers highly liquid investments purchased original maturities three months less cash equivalents concentration credit risk companys accounts receivable consist amounts due customers distributors located throughout world international product sales generally require cash advance confirmed letters credit us banks inventories stated lower cost market determined firstin firstout fifo method fair value financial instruments carrying values companys various financial instruments reflected accompanying statements financial position approximate estimated fair values december 27 1997 december 31 1998 property equipment property equipment carried cost less accumulated depreciation property equipment acquired prior september 21 1993 recorded estimated fair values result emergence bankruptcy depreciation computed using straightline method estimated lives related assets follows goodwill arises excess purchase price acquired company fair value net assets acquired purchase business combination amortization recorded straightline basis periods twentyfive years armor holdings inc subsidiaries notes consolidated financial statements continued 1 background summary significant accounting policies continued impairment company periodically reviews carrying value assets longlived assets impairments recognized expected undiscounted future cash flows less carrying amount asset reorganization value excess amounts allocable identifiable assets intangible asset amortized otherwise reduced amounts less would recognized straightline basis twentyfive years patents licenses trademarks patents licenses trademarks acquired acquisitions accounted purchase method accounting assets amortized straight line basis remaining lives 10 40 years research development research development costs expensed incurred company incurred approximately 514000 605000 738000 years ended december 28 1996 december 27 1997 december 31 1998 respectively research development costs included operating expenses accompanying consolidated financial statements estimates preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts financial statements accompanying notes actual results could differ estimates income taxes company accounts income taxes pursuant statement financial accounting standards 109 accounting income taxes sfas 109 asset liability method specified thereunder deferred taxes determined based difference financial reporting tax bases assets liabilities deferred tax liabilities offset deferred tax assets representing taxeffected cumulative net operating loss carryforwards deductible temporary differences subject applicable limits asset valuation allowance future benefits obtained utilization net operating loss carryforwards reduction income tax asset valuation allowance existing september 20 1993 applied reduce reorganization value excess amounts allocable identifiable assets december 31 1998 companys consolidated foreign subsidiaries unremitted earnings approximately 3 million company recorded provision united states federal income taxes since earnings considered permanently invested foreign earnings taxed according regulations existing countries earned revenue recognition company records sales gross amounts received including amounts paid agents commissions company records service revenue service provided contract basis income 1997 includes amounts received agent former employee selling shares companys stock owned former employer earnings per share 1997 company adopted statement financial accounting standards 128 earnings per share statement establishes standards computing presenting earnings per share eps applies entities publicly held common stock potential common stock statement replaces presentation primary eps fully diluted eps presentation basic eps diluted eps respectively basic eps excludes dilution computed dividing earnings available common stockholders weighted average number common shares outstanding period similar fully diluted eps diluted eps reflects potential dilution securities could share earnings new accounting standards june 1997 fasb issued sfas 130 reporting comprehensive income comprehensive income includes net income several armor holdings inc subsidiaries notes consolidated financial statements continued 1 background summary significant accounting policies continued items current accounting standards require recognized outside net income standard requires enterprises display comprehensive income components financial statements classify items comprehensive income nature financial statements display accumulated balances comprehensive income stockholders equity separately retained earnings additional paidin capital sfas 130 effective fiscal years beginning december 15 1997 company adopted standard fiscal year beginning december 28 1997 applied standard periods presented foreign currency translation accordance statement financial accounting standard 52 foreign currency translation assets liabilities denominated foreign currency translated us dollars current rate exchange existing yearend revenues expenses translated average monthly exchange rates cumulative translation adjustment net tax represents effect translating assets liabilities companys foreign operations approximately 353000 574000 years ended december 27 1997 december 31 1998 included comprehensive income reclassifications certain reclassifications made 1996 1997 financial statements order conform presentation adopted 1998 reclassifications effect net income retained earnings 2 business combinations nik public safety product line july 15 1996 company acquired effective july 1 1996 certain assets nik public safety product line iverslee corporation nik assets purchase price acquisition 310931 shares nik shares companys common stock valued 2400000 plus 374000 costs incurred related purchase company acquired inventory receivables certain intangibles total purchase price assigned nik assets based fair values acquisition nik assets accounted purchase method accordingly results operations included consolidated financial statements date acquisition defense technology corporation america september 30 1996 company acquired newly formed whollyowned subsidiary substantially assets defense technology corporation america dtcoa purchase price consisted 838025 paid cash issuance 629442 shares total shares companys common stock value 4650000 assumption certain liabilities totaling approximately 2300000 costs 1115000 associated completing transaction total purchase price assigned acquired assets based fair market values order secure obligations dtcoa seller connection transaction 270728 total shares delivered union bank switzerland new york branch ubs escrow agent pursuant escrow agreement dated september 30 1996 one half shares held escrow subject release march 15 1998 remainder subject release june 30 1999 however shares released company upon settlement litigation see note 11 subject letter agreement dated august 16 1996 key bank letter agreement connection dtcoa transaction 358714 total shares key bank shares value 2650000 amount due issued key bank wyoming key bank armor holdings inc subsidiaries notes consolidated financial statements continued 2 business combinations continued consideration release key bank security interest substantially assets dtcoa key bank held security interest pursuant certain financings previously made available dtcoa closing date company advanced key bank 662500 cash initial amount advance amount due also closing date company deposited 1987500 interest bearing certificate deposit cd account key bank deposit account subsequent closing amounts paid key bank account amount due including initial amount advances deposit account would result reduction outstanding balance amount due like amount pursuant key bank letter agreement key bank agreed upon registration key bank shares key bank shares would sold provided company would control sole discretion timing manner amount key bank shares sold connection therewith company agreed ensure key bank realizes net proceeds sales net sale proceeds together advances deposit account initial amount aggregate equal amount due september 30 1997 maturity date acquisition dtcoa accounted purchase method accordingly results operations included consolidated financial statements date acquisition supercraft garments limited april 7 1997 company acquired supercraft garments limited supercraft european manufacturer military apparel high visibility garments ballistic resistant vests distributes law enforcement military agencies throughout europe middle east asia company acquired supercraft total purchase price approximately 26 million acquisition supercraft accounted purchase method accordingly results operations included consolidated financial statements date acquisition dsl group limited april 16 1997 armor issued 1274217 shares common stock exchange outstanding ordinary shares dsl group limited dsl company incorporated june 3 1996 laws england wales dsl provides specialized security services high risk volatile environments july 31 1996 dsl acquired share capital dsl holdings limited dsl holdings result dsl recorded net assets acquired july 31 1996 fair value approximately 2800000 also recorded approximately 9600000 goodwill armors combination dsl accounted pooling interests accompanying financial statements restated give effect combined results armor dsl since inception connection dsl combination armor paid 6850000 repayment dsls outstanding credit facility approximately 7508000 outstanding preference shares dsl see notes 6 7 gorandel trading limited june 9 1997 company acquired remaining 50 gorandel trading limited previously gtl provides specialized security services throughout russia central asia aggregate purchase price transaction approximately 24 million consisting 570000 cash paid closing 300000 cash paid september 30 1997 300000 cash payable subject certain conditions 115176 shares companys common stock valued armor holdings inc subsidiaries notes consolidated financial statements continued 2 business combinations continued 12 million part transaction company agreed make loan 200000 former stockholder gtl subject certain conditions subsequently repaid gtls net revenues 1996 approximately 64 million acquisition gtl accounted purchase method accordingly results operations included consolidated financial statements date acquisition low voltage systems technology inc january 30 1998 company acquired issued outstanding stock low voltage systems technology inc new jersey corporation lst leading engineered systems distributor specializing supply integration maintenance technical support sophisticated electronic computerdriven security fire alarm systems aggregate purchase price transaction approximately 750000 consisting 562500 cash paid closing 18519 unregistered shares companys common stock valued time 187500 company also assumed subsequently repaid approximately 200000 stockholder lst full satisfaction loans previously made stockholder lst acquisition lst accounted purchase method accordingly results operations included consolidated financial statements date acquisition asmara limited april 8 1998 company acquired issued outstanding stock asmara limited based london england hereinafter asmara provides business intelligence investigative due diligence services clients worldwide basis services include personnel investigations due diligence asset tracing litigation intelligence acquisition current aggregate purchase price pounds sterling1825 million purchase price consists pounds sterling1575 million approximately 26 million cash paid closing 36846 unregistered shares companys common stock valued closing pounds sterling250000 approximately 415000 36846 shares restricted sale april 8 2001 part acquisition additional purchase price contingent upon meeting certain agreed targets period could paid fiscal years ending 1998 1999 2000 total aggregate contingent purchase price could pounds sterling15 million based upon results operations 1998 company pay additional purchase price approximately 825000 additional purchase price fiscal 1998 reflected companys balance sheet december 31 1998 acquisition asmara accounted purchase method accordingly results operations included consolidated financial statements date acquisition protech armored products massachusetts inc april 14 1998 company acquired issued outstanding stock protech armored products massachusetts inc pittsfield massachusetts hereinafter protech leading manufacturer hard armor products including ballistic shields bulletproof vests visors personal accessories protech also manufactures protective armor products helicopters automobiles riot control vehicles acquisition accounted purchase current purchase price 16 million purchase price consists 1115 million cash 42592 unregistered shares companys common stock valued closing 485000 part transaction additional purchase price could paid fiscal years ending 1998 1999 2000 totaling aggregate 4 million 50 payable common stock remainder cash payment additional purchase price contingent upon operating performance meeting certain agreed targets period additional purchase price fiscal 1998 totaled approximately 401000 reflected companys balance sheet december 31 1998 shares issued purchase issued armor holdings inc subsidiaries notes consolidated financial statements continued 2 business combinations continued payment earnout restricted sale april 14 2001 acquisition protech accounted purchase method accordingly results operations included consolidated financial statements date acquisition cdr international ltd june 11 1998 company acquired issued outstanding stock cdr international ltd cdr london based investigation firm offices london charlotte los angeles moscow cdr provides full range consulting investigative services specializing worldwide intellectual property asset protection multinational corporations involved manufacturing distribution among things sportswear tobacco spirits pharmaceuticals services range protecting companies counterfeiting patent infringements product tampering extortion identifying unethical supplier activity use child labor cdr also provides training services law enforcement agencies foreign countries acquisition accounted purchase current aggregate purchase price pounds sterling15 million purchase price consists 210460 registered shares companys common stock valued closing pounds sterling15 million approximately 25 million additional purchase price could paid fiscal years ending 1999 2000 2001 totaling aggregate pounds sterling60 million approximately 10 million payment additional purchase price contingent upon operating performance meeting certain agreed targets period additional purchase price paid entirely common stock company total shares companys common stock received closing 70154 shares 40 additional consideration restricted sale period three years date issue 50 additional consideration excess pounds sterling425 million restricted sale 45 6 years acquisition cdr accounted purchase method accordingly results operations included consolidated financial statements date acquisition alarm protection services inc july 15 1998 company acquired outstanding common stock alarm protection services inc aps located kampala uganda aps fully licensed physical security consulting company providing alarm monitoring physical asset executive protection quick response cash transit capabilities aps approximately 900 employees operation uganda since 1993 since 1996 company managed aps management agreement acquisition accounted purchase current aggregate purchase price 1215166 purchase price consisted 734426 cash paid closing 17429 unregistered shares companys common stock valued closing approximately 200000 additional 280740 paid cash outstanding accounts receivable time closing collected based aps meeting certain performance criteria additional purchase price may paid fiscal years 1999 2000 totaling 235000 cash acquisition aps accounted purchase method accordingly results operations included consolidated financial statements date acquisition law enforcement division mace security international july 16 1998 company acquired certain assets law enforcement division mace security international hereinafter msi acquisition includes assets federal laboratories fed labs division exclusive license use mace registered trademark manufacture sale mace registered trademark brand aerosol defensive sprays law enforcement markets worldwide purchase price approximately 46 million cash company holding additional amount 600000 escrow 480000 payable six months closing paid armor holdings inc subsidiaries notes consolidated financial statements continued 2 business combinations continued january 1999 120000 payable twelve months closing acquisition fed labs accounted purchase method accordingly results operations included consolidated financial statements date acquisition following unaudited consolidated results operations company presented pro forma basis acquisitions referenced consummated december 29 1996 years ended december 27 1997 december 31 1998 3 inventories summarized follows years ended december 27 1997 december 31 1998 4 property plant equipment property plant equipment december 27 1997 december 31 1998 summarized follows depreciation expense 1996 1997 1998 approximately 388000 994000 1409000 respectively statement operations fiscal 1998 depreciation expense income statement reduced 131000 amortization proceeds received economic development grant received department housing urban development armor holdings inc subsidiaries notes consolidated financial statements continued 5 accounts payable accrued expenses current liabilities accounts payable accrued expenses current liabilities summarized follows years ended december 27 1997 december 31 1998 6 indebtedness armor holdings inc subsidiaries notes consolidated financial statements continued 6 indebtedness continued company entered revolving working capital credit facility bankers acceptance facility credit facility november 14 1996 nationsbank na fna barnett bank na provides total borrowings 10000000 obligation maximum availability based upon 50 eligible inventories cap 1000000 work process inventory 6000000 inventory total 85 eligible accounts receivable credit agreement amended march 26 1997 increase revolving line credit 20000000 credit facility various covenants among things require company maintain certain financial ratios tangible net worth working capital defined limit companys ability pay dividends common stock encumber transfer assets incur indebtedness merge another corporation company approximately 39 million outstanding credit agreement december 31 1998 credit facility expires march 1 1999 see note 19 companys weighted average borrowing rate credit facility nationsbank na 808 1998 company borrowings credit facility 1997 companys weighted average borrowing rate overdraft facility 768 1997 774 1998 aggregate principal maturities longterm debt capital lease obligations december 31 1998 follows 7 preference shares dsl 7480000 4400000 shares preference shares par value pounds sterling pounds sterling001 shares carry 8 dividend cumulative redeemable liquidation value par preference shares voting rights company paid cash 7508000 including accrued interest approximately 380000 purchase shares april 16 1997 8 nonrecurring items approximately 25 million fees expenses associated dsl pooling transaction expensed fiscal 1997 expenses include approximately 11 million professional fees approximately 14 million costs consolidate financial administrative functions companys headquarters jacksonville costs substantially paid december 27 1997 armor holdings inc subsidiaries notes consolidated financial statements continued 9 income taxes income tax expense benefit years ended december 28 1996 december 27 1997 december 31 1998 consisted following components significant components companys net deferred tax asset december 27 1997 december 31 1998 follows 1997 company maintained valuation allowance 1800000 deferred tax assets view among things expiration dates limitations usage certain net operating loss carryforwards nol december 31 1998 due internal growth company growth acquisition company reevaluated need valuation allowance result company reduced valuation allowance 1650000 corresponding reduction reorganization value excess amounts allocable identifiable assets since deferred tax asset initially established 1993 fresh start reporting reorganization deferred tax assets included assets balance sheet years ended december 27 1997 december 31 1998 armor holdings inc subsidiaries notes consolidated financial statements continued 9 income taxes continued following reconciles income tax expense computed federal statutory income tax rate provision income taxes recorded income statement effective change control company kanders florida holdings inc january 18 1996 utilization united states portion nol became restricted approximately 300000 per year december 31 1998 company net nols approximately 8100000 us portion net nols expire varying amounts fiscal years 2006 2008 10 operating leases company leases previous manufacturing facilities six year operating lease expiring 1999 option renew company also party various equipment vehicle leases dsl leases london office operating lease expiring 2002 approximate total future minimum annual lease payments arrangements follows company incurred rent expense approximately 161000 454000 net sublease income 35000 485000 net sublease income 141000 years ended december 28 1996 december 27 1997 december 31 1998 11 commitments contingencies employment contracts company party several employment contracts management contracts varying periods include restrictions competition termination agreements provide salaries bonuses benefits also specify delineate granting various stock options legallitigation matters november 2 1994 company entered consent order voluntarily settling federal trade commission ftc charges company engaged false advertising consent order company admitted violations law agreed establish body armor replacement program persons purchased body armor 1988 1990 would identified offered chance buy new replacement body armor reduced price consent order sets forth many detailed requirements governing conduct replacement program retention records avoidance false misleading advertising failure comply requirements could make company liable civil penalties company continued administer body armor replacement program established ftc consent order armor holdings inc subsidiaries notes consolidated financial statements continued 11 commitments contingencies continued angolan operations january 16 1998 armor group services division ceased operations country angola cessation operations angola dictated governments decision deport expatriate management supervisors result cessation operations angola armor group services division involved various disputes shrm sa minority joint venture partner relating angolan business shrm alleged result cessation operations suffered damages 5 million lost business company believes likelihood loss possible maximum exposure approximately 500000 march 1999 filed claim 161 million commercial court nanterre france shrm actual punitive damages shrms violation obligations us resulting agreement us settlement 1998 company settled lawsuit previous seller result settlement company received shares common stock previously issued seller held escrow pursuant purchase escrow agreements accordingly company recorded 1788000 treasury stock based fair value companys stock settlement date addition company normal course business subjected claims litigation areas product general liability management believe claims material impact companys financial statements 12 stockholders equity preferred stock convertible preferred stock 1995 1996 company issued 1700000 shares preferred stock company elected convert 242851 1214292 shares respectively preferred stock common stock 077 per share conversion provisions calling issuance common stock fair value represents 110 aggregate stated value preferred stock subject redemption preferred stock july 16 1996 companys shareholders authorized series preferred stock rights privileges preferences board directors shall time determine company issued preferred stock issuance conversion convertible debt april 30 1996 company completed private placement 5 convertible subordinated notes due april 30 2001 notes pursuant 11500000 aggregate principal amounts notes sold company armor holdings inc subsidiaries notes consolidated financial statements continued 12 stockholders equity preferred stock continued december 18 1996 notes converted 2300000 shares common stock conversion price 500 per share stock options grants 1994 company implemented incentive stock plan outside directors stock plan plans collectively provide granting certain key employees options acquire companys common stock well providing grant common stock outside directors full time employees pursuant plans 1050000 shares common stock reserved made available distribution option prices stock may purchased incentive stock plan less fair market value common stock dates grants effective january 19 1996 stock grants awarded 1994 incentive stock plan accelerated considered fully vested 1996 company implemented new incentive stock plan new outside directors stock plan pursuant new plans subsequent amendments 2200000 shares common stock reserved made available distribution 1998 company implemented new nonqualified stock option plan pursuant new plan 725000 shares common stock reserved made available distribution effective january 1 1996 company adopted sfas 123 accounting stockbased compensation sfas 123 sfas 123 establishes fair value based method accounting stockbased employee compensation plans however also allows entity continue measure compensation cost plans using intrinsic value based method accounting prescribed accounting principles board apb opinion 25 accounting stock issued employees fair value based method compensation cost measured grant date based value award recognized service period usually vesting period intrinsic value based method compensation costs excess quoted market price stock grant date measurement date amount employee must pay acquire stock company elected continue account employee stock compensation plans apb opinion 25 pro forma disclosures net earnings per share fair value based method accounting defined sfas 123 applied compensation cost stock option grants determined based fair value grant dates 1998 1997 1996 consistent method prescribed sfas 123 companys net earnings per share would adjusted pro forma amounts indicated sfas 123 fair value option grant estimated date grant using blackscholes optionpricing model following weightedaverage assumptions used grants 1996 1997 1998 dividend yield 0 expected volatility 33 1996 1997 319 1998 riskfree interest rates 593 600 550 1996 1997 1998 respectively expected lives 3 years armor holdings inc subsidiaries notes consolidated financial statements continued 12 stockholders equity preferred stock continued outstanding options consisting tenyear incentive nonqualified stock options vest become exercisable three year period date grant outstanding options expire ten years date grant upon retirement company contingent upon continued employment applicable tenyear period summary status stock option grants december 31 1998 changes years ending dates presented armor holdings inc subsidiaries notes consolidated financial statements continued 12 stockholders equity preferred stock continued following table summarizes information stock options outstanding december 31 1998 remaining nonexercisable options december 31 1998 become exercisable follows armor holdings inc subsidiaries notes consolidated financial statements continued 12 stockholders equity preferred stock continued earnings per share following reconciliation numerators denominators basic diluted earnings per share computations net income net income available common stockholders 13 supplemental cash flow information armor holdings inc subsidiaries notes consolidated financial statements continued 14 investment unconsolidated subsidiaries december 27 1997 december 31 1998 company 20 investment jardine securicor gurkha services limited equity method accounting investments used following summarizes significant financial information unconsolidated subsidiaries twelve months ended december 27 1997 december 31 1998 total revenues net income disclosed 1997 column represents companys 20 share total revenue net income unconsolidated subsidiary whereas 1998 amounts reflect total revenues net income 15 information concerning business segments geographical sales company leading global provider security risk management services products multinational corporations governmental agencies law enforcement personnel two operating divisions armor group services armor holdings products armor group services division provides sophisticated security planning risk management electronic security systems integration consulting training services well intellectual property asset protection business intelligence investigative services armor holdings products division manufactures sells broad range high quality branded law enforcement equipment company invested substantial resources outside united states plans continue future substantially operations services segment conducted emerging markets africa asia south america operations subject risk new different legal regulatory requirements local jurisdictions tariffs trade barriers potential difficulties staffing managing local operations potential imposition restrictions investments potentially adverse tax consequences including imposition increase withholding taxes remittances payments subsidiaries local economic political social conditions governments many developing countries exercised continue exercise substantial influence many aspects private sector government actions future could significant adverse effect economic conditions developing country may otherwise material adverse effect company operating companies company political risk insurance countries currently conducts business moreover applicable agreements relating companys interests operating companies frequently governed foreign law result event dispute may difficult company enforce rights accordingly company may little recourse upon occurrence developments armor holdings inc subsidiaries notes consolidated financial statements continued 15 information concerning business segments geographical sales continued revenues income continuing operations years ended december 28 1996 december 27 1997 december 31 1998 follows following unaudited financial information respect sales principal geographic areas years ended december 28 1996 december 27 1997 december 31 1998 follows armor holdings inc subsidiaries notes consolidated financial statements continued 16 quarterly results following table presents summarized unaudited quarterly results operations company fiscal 1997 1998 company believes necessary adjustments included amounts stated present fairly following selected information read conjunction consolidated financial statements notes thereto included elsewhere herein future quarterly operating results may fluctuate depending number factors results operations particular quarter necessarily indicative results operations full year quarter 17 employee benefit plans october 1997 company formed 401k plan provides voluntary contributions employees allows discretionary contribution company form cash stock company make discretionary contribution plan 1997 1998 18 related party transactions company entered following transactions related parties purchases sales company subcontracts certain security guard services alpha inc wholly owned shareholder company fiscal 1997 1998 security guard service fees approximately 3286000 5204000 respectively paid alpha december 27 1997 december 31 1998 company outstanding payables alpha approximately 377000 341000 respectively liabilities included accounts payable december 31 1998 alpha owed company approximately 291000 included accounts receivable b advances stockholders december 31 1998 company outstanding advance stockholder company balance approximately 17 million advance arose pursuant purchase agreement cdr whereby company advanced stockholder funds future sale underlying shares advance noninterest bearing collateralized assignment shares underlying agreement advance shown balance sheet prepaid expenses current assets stock subsequently sold january 1999 proceeds received company armor holdings inc subsidiaries notes consolidated financial statements continued 18 related party transactions continued c january 1 1999 company entered agreement kanders company inc provide investment banking financial advisory services company specific details services compensation paid kanders co determined parties case basis warren b kanders chairman board company sole stockholder kanders company inc march 1999 company loaned stephen e croskey president companys armor holdings products division 111000 connection relocation jacksonville florida initial 90day grace period loan bear interest prime rate announced time nationsbank na 19 subsequent events february 12 1999 company entered credit agreement cibc inc nationsbank na first union national bank suntrust bank north florida na lenders nationsbank na documentation agent canadian imperial bank commerce administrative agent according terms credit facility several lenders established fiveyear 60000000 line credit company indebtedness credit agreement evidenced 1 five year revolving credit notes 40000000 2 364day revolving credit notes 20000000 convertible end 364 days fouryear term notes borrowings credit facility bear interest either 1 base rate plus applicable margin ranging 125 375 depending certain conditions 2 eurodollar rate plus applicable margin ranging 1375 1625 depending certain conditions addition credit agreement provides nationsbank na shall make swingline loans 5000000 used working capital purposes cibc inc nationsbank na also issue letters credit 5000000 company part credit facility companys direct indirect domestic subsidiaries agreed guarantee companys obligations credit facility pursuant guarantee certain subsidiaries credit facility secured 1 pledge issued outstanding shares stock certain domestic subsidiaries company pursuant pledge agreement 2 pledge 65 issued outstanding shares companys foreign subsidiary armor holdings limited organized laws england wales february 24 1999 company announced signed letter intent acquire outstanding stock safariland ltd inc leading us manufacturer law enforcement equipment based ontario california purchase price approximately 41 million subject certain adjustments consist 37 million cash balance companys stock plus assumption 52 million indebtedness signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized armor holdings inc jonathan spiller jonathan spiller president chief executive officer director dated march 25 1999 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated jonathan spiller warren b kanders jonathan spiller warren b kanders president chief executive chairman board directors officer director march 25 1999 principal executive officer march 25 1999 nicholas winiewicz nicholas sokolow nicholas winiewicz nicholas sokolow chief financial officer director principal accounting officer march 22 1999 march 25 1999 burtt r ehrlich thomas w strauss burtt r ehrlich thomas w strauss director march 25 1999 march 22 1999 richard c bartlett alair townsend richard c bartlett alair townsend director march 22 1999 march 25 1999 exhibit index following exhibits filed herewith exhibit description 332 amendment bylaws company 105 amended restated employment agreement jonathan spiller company dated january 1 1999 106 amended restated employment agreement robert r schiller company dated january 1 1999 107 employment agreement stephen e croskrey company dated february 8 1999 108 employment agreement nicholas b winiewicz company dated february 16 1999 109 employment agreement warren b kanders company dated january 1 1999 1012 agreement dated april 21 1998 amending option dated may 15 1996 granted richmont capital partners lp 300000 shares common stock 1019 armor holdings inc 1998 stock option plan 1021 agreement dated march 8 1999 company kanders company inc 211 subsidiaries company 231 consent pricewaterhousecoopers llp 232 consent deloitte touche 233 consent deloitte touche llp 234 consent kpmg 271 financial data scheduleitem 14 exhibits financial statements schedules reports form 8k 1 financial statements following financial statements company appear beginning sequential page number included herein reports independent certified public accountants consolidated balance sheets consolidated income statements consolidated statements stockholders equity consolidated statements cash flows notes consolidated financial statements 2 financial statement schedules provision made applicable accounting regulations commission omitted applicable required information shown financial statements notes thereto b reports form 8k reports form 8k filed last quarter c exhibits following exhibits hereby filed part annual report form 10k exhibit description 21 order confirming debtors third amended restated plan reorganization third amended restated plan reorganization attached thereto incorporated reference exhibit 2 form 8k current report dated october 1 1993 22 asset purchase agreement dated july 2 1996 company nik iverslee lfc 46 corp filed exhibit 21 form 8k current report dated july 30 1996 incorporated herein reference 23 asset purchase agreement dated august 23 1996 company dtc robert l oliver sandra oliver dtcoa filed exhibit 21 form 8k current report dated october 9 1996 incorporated herein reference 24 agreement plan merger dated july 23 1996 american body armor equipment florida corporation company filed exhibit 21 form 8k current report dated september 3 1996 incorporated herein reference 25 share acquisition agreement dated april 7 1997 bodycote ahl company filed exhibit 21 form 8k current report dated april 22 1997 incorporated herein reference 26 agreement sale purchase whole issued share capital dsl dated april 16 1997 company ahl natwest ventures nominees limited others martin brayshaw filed exhibit 22 form 8k current report dated april 22 1997 incorporated herein reference 27 share acquisition agreement dated june 9 1997 company strontian holdings limited alphaa limited others filed exhibit 21 form 8k current report dated june 24 1997 incorporated herein reference 28 stock purchase agreement among armor holdings inc neale perkins trust scott obrien victoria obrien revocable trust david holmes katherine c holmes revocable trust neale perkins david holmes scott obrien safariland ltd inc dated april 12 1999 filed exhibit 28 amendment 1 registration statement form s3 filed commission april 15 1999 incorporated herein reference 31 certificate incorporation company filed exhibit 31 form 8k current report company dated september 3 1996 incorporated herein reference 32 certificate merger american body armor equipment inc florida corporation company filed exhibit 32 form 8k current report company dated september 3 1996 incorporated herein reference 33 bylaws company filed exhibit 33 form 8k current report company dated september 3 1996 incorporated herein reference 34 amendment bylaws company incorporated reference exhibit 332 form 10k annual report fiscal year ended december 31 1998 98 10k 101 credit agreement credit agreement dated february 12 1999 among company cibc nationsbank first union suntrust lenders canadian imperial bank commerce administrative agent nationsbank documentation agent aggregate principal amount 60000000 filed exhibit 51 form 8k current report company filed commission march 10 1999 incorporated herein reference 102 364day revolving credit note dated february 12 1999 principal amount 4166667 made company favor first union filed exhibit 52 form 8k current report company filed commission march 10 1999 incorporated herein reference 103 364day revolving credit note dated february 12 1999 principal amount 4166667 made company favor suntrust filed exhibit 53 form 8k current report company filed commission march 10 1999 incorporated herein reference 104 364day revolving credit note dated february 12 1999 principal amount 5833333 made company favor nationsbank filed exhibit 54 form 8k current report company filed commission march 10 1999 incorporated herein reference 105 364day revolving credit note dated february 12 1999 principal amount 5833333 made company favor cibc filed exhibit 55 form 8k current report company filed commission march 10 1999 incorporated herein reference 106 five year revolving credit note dated february 12 1999 principal amount 8333333 made company favor first union filed exhibit 56 form 8k current report company filed commission march 10 1999 incorporated herein reference 107 five year revolving credit note dated february 12 1999 principal amount 8333333 made company favor suntrust filed exhibit 57 form 8k current report company filed commission march 10 1999 incorporated herein reference 108 five year revolving credit note dated february 12 1999 principal amount 11666667 made company favor nationsbank filed exhibit 58 form 8k current report company filed commission march 10 1999 incorporated herein reference 109 five year revolving credit note dated february 12 1999 principal amount 11666667 made company favor cibc filed exhibit 59 form 8k current report company filed commission march 10 1999 incorporated herein reference 1010 borrower pledge agreement dated february 12 1999 made company favor canadian imperial bank commerce administrative agent lenders filed exhibit 510 form 8k current report company filed commission march 10 1999 incorporated herein reference 1011 security deed dated february 12 1999 made company favor canadian imperial bank commerce administrative agent lenders filed exhibit 511 form 8k current report company filed commission march 10 1999 incorporated herein reference 1012 subsidiaries guarantee dated february 12 1999 made company favor canadian imperial bank commerce administrative agent lenders filed exhibit 512 form 8k current report company dated march 10 1999 incorporated herein reference 1013 first amendment dated october 26 1999 credit agreement 1014 second amendment dated february 25 2000 credit agreement 1015 amended restated employment agreement jonathan spiller company dated january 1 1999 incorporated reference exhibit 105 98 10k 1016 amended restated employment agreement robert r schiller company dated january 1 1999 incorporated reference exhibit 106 98 10k 1017 employment agreement stephen e croskrey company dated february 8 1999 incorporated reference exhibit 107 98 10k 1018 employment agreement warren b kanders company dated january 1 1999 incorporated reference exhibit 109 98 10k 1019 form registration rights agreement dated april 16 1997 company vendors dsl filed exhibit 103 form 8k current report company dated april 22 1997 incorporated herein reference 1020 form option 300000 shares common stock dated may 15 1996 granted richmont capital partners lp filed exhibit 1034 registration statement 33328879 form s1 company incorporated herein reference 1021 agreement dated april 21 1998 amending option dated may 15 1996 granted richmont capital partners lp 300000 shares common stock incorporated reference exhibit 1033 98 10k 1022 form indemnification agreement directors registrant dated september 21 1993 filed exhibit 104 form 10ksb annual report company fiscal year ended december 31 1993 incorporated herein reference 1023 form indemnification agreement officers registrant dated february 28 1994 filed exhibit 105 form 10ksb annual report company fiscal year ended december 31 1993 incorporated herein reference 1024 american body armor equipment inc 1994 incentive stock plan incorporated reference form s8 filed october 10 1994 reg 33018863 1025 american body armor equipment inc 1994 directors stock plan incorporated reference form s8 filed october 31 1994 reg 33018863 1026 armor holdings inc amended restated 1996 stock option plan incorporated reference companys 1997 definitive proxy statement respect companys 1997 annual meeting stockholders held june 12 1997 filed commission may 27 1997 1027 armor holdings inc amended restated 1996 nonemployee directors stock option plan incorporated reference companys 1997 definitive proxy statement respect companys 1997 annual meeting stockholders held june 12 1997 filed commission may 27 1997 1028 armor holdings inc 1998 stock option plan incorporated reference exhibit 1019 98 10k 1029 armor holdings inc 1999 stock incentive plan incorporated reference appendix companys 1999 definitive proxy statement respect companys 1999 annual meeting stockholders filed commission may 21 1999 1030 lease companys former primary facility located yulee florida dated july 26 1993 effective may 1 1993 filed exhibit 281 form 10ksb annual report company fiscal year ended december 31 1993 incorporated herein reference 1031 agreement dated march 8 1999 company kanders company inc incorporated reference exhibit 1021 98 10k 231 consent pricewaterhousecoopers llp filed herewith incorporated herein reference exhibit represents management contract exhibit represents compensatory plan index consolidated financial statements armor holdings inc report independent certified public accountants consolidated balance sheets consolidated income statements consolidated statements stockholders equity comprehensive income consolidated statements cash flow notes consolidated financial statements report independent certified public accountants board directors stockholders armor holdings inc opinion accompanying consolidated balance sheets related consolidated statements income stockholders equity comprehensive income cash flows present fairly material respects financial position armor holdings inc subsidiaries december 31 2000 1999 results operations cash flows three years period ended december 31 2000 conformity accounting principles generally accepted united states america financial statements responsibility companys management responsibility express opinion financial statements based audits audit 1998 financial statements defence systems colombia sa wholly owned subsidiary statements reflect total revenues 13266000 year ended december 31 1998 statements audited auditors whose report thereon furnished us opinion expressed herein insofar relates amounts included defence systems colombia sa based solely report auditors conducted audits statements accordance auditing standards generally accepted united states america require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion pricewaterhousecoopers llp march 31 2001 jacksonville florida armor holdings inc subsidiaries consolidated balance sheets december 31 1999 december 31 2000 thousands except share data accompanying notes integral part consolidated financial statements armor holdings inc subsidiaries consolidated income statements years ended december 31 1998 1999 2000 thousands except per share data accompanying notes integral part consolidated financial statements armor holdings inc subsidiaries consolidated statements stockholders equity comprehensive income years ended december 31 1998 1999 2000 thousands accompanying notes integral part consolidated financial statements armor holdings inc subsidiaries consolidated statements cash flow years ended december 31 1998 1999 2000 thousands accompanying notes integral part consolidated financial statements armor holdings inc subsidiaries notes consolidated financial statements 1 background summary significant accounting policies company nature business armor holdings inc companyor armor global provider security risk management services products multinational corporations governmental agencies law enforcement personnel two operating divisions armor holdings products armorgroup services armor holdings products division armor holdings products division manufactures sells broad range high quality branded law enforcement equipment ballistic resistant vests tactical armor hard armor less lethal munitions police batons forensic fingerprint evidence collection equipment antiriot products including tear gas distraction grenades narcotics identification kits custombuilt armored vehicles specialty lubricants cleaners preservatives military weapon maintenance systems holsters duty gear products marketed brand names wellknown respected law enforcement community american body armor safariland defense technology federal laboratories macer protech nikr public safety breakfree monadnock lifetime products lightning powder armor holdings products division sells manufactured products primarily law enforcement agencies worldwide network 500 distributors sales agents including approximately 350 united states extensive distribution capabilities commitment customer service training enabled us become leading provider security equipment law enforcement agencies armorgroup services division armorgroup services division provides broad range sophisticated security risk management solutions multinational corporations diverse industries natural resources financial services consumer products governmental nongovernmental agencies us department state united nations world bank clients typically personnel investments unstable often violent areas world armorgroup services offices five continents armorgroup services provides multinational clients diversified portfolio security solutions assist mitigating risks operations around world armorgroup services highly trained multilingual experienced security personnel work closely clients create implement solutions complex security problems services include design implementation risk management plans security systems provision security specialists training security personnel armorgroup services provides multinational clients specialized investigative services enhanced global network services include intellectual property asset protection related investigative services ranging protecting companies counterfeiting patent infringements product tampering extortion identifying unethical supplier activities addition armorgroup services provides business intelligence fraud investigation computer forensic asset tracing recovery services financial services companies law firms entities worldwide armor holdings inc subsidiaries notes consolidated financial statements 1 background summary significant accounting policies continued principles consolidation consolidated financial statements include accounts company whollyowned subsidiaries consolidation material intercompany balances transactions eliminated results operations companies acquired transactions accounted purchase method accounting included financial statements dates acquisition cash equivalents company considers highly liquid investments purchased original maturities three months less cash equivalents concentration credit risk financial instruments potentially subject company concentrations credit risk consist primarily cash equivalents trade accounts receivable company maintains cash equivalents believes various high quality banks amounts held individual banks may periodically exceed brief time periods federally insured amounts companys accounts receivable consist amounts due customers distributors located throughout world international product sales generally require cash advance confirmed letters credit united states us banks company maintains reserves potential credit losses december 31 1999 2000 management believes company significant concentrations credit risk inventories stated lower cost market determined firstin firstout fifo method fair value financial instruments carrying value cash equivalents accounts receivable receivables accounts payable short longterm debt approximates fair value december 31 1999 2000 property equipment property equipment carried cost less accumulated depreciation upon disposal property equipment appropriate accounts reduced related cost accumulated depreciation resulting gains losses reflected consolidated earnings depreciation computed using straightline method estimated lives related assets follows buildings improvements 5 39 years machinery equipment 3 7 years goodwill represents excess purchase price fair value net assets acquired purchase business combination goodwill intangible assets stated basis cost amortized principally straightline basis estimated future periods benefited 20 40 years patents licenses trademarks patents licenses trademarks acquired acquisitions accounted purchase method accounting assets amortized straight line basis remaining lives 10 40 years armor holdings inc subsidiaries notes consolidated financial statements 1 background summary significant accounting policies continued reorganization value excess amounts allocable identifiable assets intangible asset included assets amortized straightline basis twentyfive years net asset december 31 1999 2000 amounted approximately 1511000 1355000 respectively impairment longlived assets including certain identifiable intangibles goodwill related assets reviewed impairment whenever events changes circumstances indicate carrying amount asset question may recoverable including limited deterioration profits business segment longlived assets changes occur might impair recovery longlived assets management reviewed companys longlived assets determined events requiring impairment loss recognition method used determine existence impairment would undiscounted operating cash flows estimated remaining amortization period related longlived assets impairment measured difference fair value unamortized cost date impairment determined research development research development costs included operating expenses incurred years ended december 31 1998 1999 2000 approximated 738000 1559000 2590000 respectively estimates preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts financial statements accompanying notes significant estimates inherent preparation accompanying consolidated financial statements include carrying value longlived assets valuation allowances receivables inventories deferred income tax assets liabilities potential litigation claims settlements contract contingencies obligations actual results could differ estimates income taxes company accounts income taxes pursuant statement financial accounting standards sfas 109 accounting income taxes asset liability method specified thereunder deferred taxes determined based difference financial reporting tax bases assets liabilities deferred tax liabilities offset deferred tax assets relating net operating loss carryforwards deductible temporary differences future benefits obtained utilization net operating loss carryforwards reduction income tax asset valuation allowance existing september 20 1993 applied reduce reorganization value excess amounts allocable identifiable assets december 31 1999 2000 companys consolidated foreign subsidiaries unremitted earnings approximately 6 million 10 million respectively company recorded provision united states federal income taxes since earnings considered permanently invested foreign earnings taxed according regulations existing countries earned revenue recognition company records service revenue service provided contract basis revenues recorded time shipment products performance services revenues service contracts recognized term contract returns minimal materially effect financial statements armor holdings inc subsidiaries notes consolidated financial statements 1 background summary significant accounting policies continued advertising company expenses advertising costs expense period incurred earnings per share basic earnings per share computed dividing net income weightedaverage number common shares outstanding diluted earnings per share computed dividing net income weightedaverage number common shares outstanding compounding effects potentially dilutive common stock equivalents principally options except cases effect would antidilutive comprehensive income foreign currency translation accordance sfas 130 reporting comprehensive income assets liabilities denominated foreign currency translated us dollars current rate exchange existing yearend revenues expenses translated average monthly exchange rates cumulative translation adjustment net tax represents effect translating assets liabilities companys foreign operations recorded reduction equity 1351000 1684000 years ended december 31 1999 2000 respectively classified accumulated comprehensive loss current year change accumulated amount net tax included component comprehensive income reclassifications certain reclassifications made 1998 1999 financial statements order conform presentation adopted 2000 reclassifications effect net income retained earnings aicpa statement position 985 sop 985 company adopted american institute certified public accountants aicpa statement position sop 985 reporting costs startup activities january 1 1999 sop 985 requires expensing startup costs defined preopening preoperating precontract type costs adoption sop 985 material impact consolidated results operations financial position cash flows recent accounting pronouncements fourth quarter 2000 company adopted sec staff accounting bulletin 101 sab 101 revenue recognition reporting requirements sab 101 impact companys consolidated results operations financial position cash flows company adopt sfas 133 accounting derivative instruments hedging activities amended sfas 137 138 january 1 2001 statement establishes accounting reporting standards requiring every derivative instrument including certain derivative instruments embedded contracts recorded balance sheet either asset liability measured fair value sfas 133 requires changes derivatives fair value recognized currently earnings unless specific hedge accounting criteria met company currently derivative instruments accordingly fas 133 amended expected impact companys financial position results operations cash flows armor holdings inc subsidiaries notes consolidated financial statements 1 background summary significant accounting policies continued march 2000 fasb issued fasb interpretation 44 fin 44 accounting certain transactions involving stock compensation interpretation apb opinion 25 fin 44 clarifies application apb opinion 25 among issues clarifies following definition employee purposes applying apb opinion 25 criteria determining whether plan qualifies noncompensatory plan accounting consequence various modifications terms previously fixed stock options awards accounting exchange stock compensation awards business combination adoption fin 44 impact companys financial position results operations cash flows 2 business combinations company completed numerous purchase business combinations cash andor shares companys common stock assumption liabilities certain cases three years period ended december 31 2000 following acquisitions made armor holdings inc subsidiaries notes consolidated financial statements 2 business combinations continued businesses acquired included consolidated results date acquisition pro forma results 2000 acquisitions presented would differ material amount actual results following unaudited pro forma consolidated results presented show results pro forma basis 1998 1999 acquisitions made beginning years acquired also made beginning 1998 1999 acquisitions 1998 1999 thousands except per share data revenues 152275 173973 net income 8235 13321 basic diluted earnings per share 044 059 weighted average shares 18775 22140 3 inventories components inventory december 31 1999 2000 follows 1999 2000 thousands raw materials 8812 13756 workinprocess 1243 1999 finished goods 6397 7920 16452 23675 4 property equipment property equipment december 31 1999 2000 summarized follows 1999 2000 thousands land 1330 3312 buildings improvements 7536 10394 machinery equipment 13780 21030 total 22646 34736 accumulated depreciation 6279 10146 16367 24590 depreciation expense years ended december 31 1998 1999 2000 approximately 1409000 2107000 3162000 respectively statement operations years ended december 31 1998 1999 2000 depreciation expense income statement reduced 131000 130000 respectively amortization proceeds received economic development grant received department housing urban development armor holdings inc subsidiaries notes consolidated financial statements 5 accounts payable accrued expenses current liabilities accounts payable accrued expenses current liabilities december 31 1999 2000 summarized follows 1999 2000 thousands trade payables 5717 4432 accrued expenses 6382 6914 additional purchase price acquisition earnouts 3000 deferred consideration acquisitions 1550 2162 2263 14261 18159 6 debt credit facility february 25 2000 company amended existing credit agreement canadian imperial bank commerce inc cibc bank america na bofa first union national bank first union suntrust bank north florida na suntrust lenders bofa documentation agent cibc administrative agent credit agreement pursuant credit agreement amended several lenders established fiveyear 100000000 line credit facility companys benefit armor holdings inc subsidiaries notes consolidated financial statements 6 debt continued companys indebtedness credit facility evidenced five year three years remaining revolving credit notes 100000000 borrowings credit facility bear interest either 1 base rate plus applicable margin ranging 000 375 depending certain conditions eurodollar rate plus applicable margin ranging 1125 1875 depending certain conditions addition credit facility provides bofa make swing line loans 5000000 available company used company working capital purposes cibc inc bofa also issue letters credit 10000000 company december 31 2000 company 32980770 outstanding line credit approximately 3804000 outstanding letters credit company borrowing outstanding december 31 1999 part credit agreement companys direct indirect domestic subsidiaries agreed guarantee companys obligations credit agreement pursuant guarantee certain subsidiaries credit agreement collateralized 1 pledge issued outstanding shares stock certain domestic subsidiaries company pursuant pledge agreement 2 pledge 65 issued outstanding shares companys foreign subsidiary armor holdings limited organized laws england wales addition company restricted paying dividends maturities longterm debt follows year ended thousands 2001 1072 2002 835 2003 861 2004 33875 2005 362 thereafter 2355 39360 companys subsidiary defense systems limited maintains 2 million overdraft facility variable interest rate requiring monthly interest payments overdraft facility expires march 31 2001 overdraft facility outstanding balance approximately 19 million 12 million years ended december 31 1999 2000 respectively 7 integration nonrecurring items result acquisition program company incurred integration costs approximately 26 million 33 million years ending december 31 1999 2000 respectively costs related relocation assets personnel severance costs systems integration domestic international tax restructuring well integrating sales marketing functions companies acquired period armor holdings inc subsidiaries notes consolidated financial statements 8 commitments contingencies employment contracts company party several employment contracts year ending december 31 2000 certain members management contracts varying periods include restrictions competition termination agreements provide salaries bonuses benefits also specify delineate granting various stock options legallitigation matters january 16 1998 armorgroup services division ceased operations country angola cessation operations angola dictated governments decision deport expatriate management supervisors result cessation operations angola armor group services division involved various disputes shrm sashrm minority joint venture partner relating angolan business march 6 1998 sia subsidiary shrm filed complaint defense systems france sa dsf commercial court nanterre tribunal de commerce de nanterre seeking paid amount 577286 corresponding alleged debt dsia sia june 27 2000 judge paris commercial court ruled shrm provide evidence required establish standing proceedings brought shrm cancelled october 3 2000 winding petition served dsf dsia october 31 2000 shrm filed counterclaim seeking winding petition dismissed november 28 2000 shrm appealed judgement rendered paris commercial court june 27 2000 claiming paris commercial court longer jurisdiction case procedure nanterre commercial court still pending awaiting decision liquidation dsia settlements november 2000 without either admitting denying accusations company settled lawsuit second chance body armor inc lawsuits approximately 20 million including legal costs dispute led second chance body armor lawsuit filed 1994 related allegations trademark infringement purported occurred period 1984 1994 addition company normal course business subjected claims litigation areas product general liability management believes adequate insurance coverage areas product general liability management believe claims material impact companys financial statements 9 investment unconsolidated subsidiaries december 31 1999 company 20 investment jardine securicor gurkha services limited jsgs equity method accounting investments used may 31 2000 company sold investment jsgs pretax gain approximately 17 million included income company recognized equity earnings investee 87000 five months ended may 31 2000 date sale armor holdings inc subsidiaries notes consolidated financial statements 10 information concerning business segments geographical sales company leading global provider security risk management services products multinational corporations governmental agencies law enforcement personnel two operating divisions armorgroup services armor holdings products armorgroup services division provides sophisticated security planning risk management electronic security systems integration consulting training services well intellectual property asset protection business intelligence investigative services armor holdings products division manufactures sells broad range high quality branded law enforcement equipment company invested substantial resources outside united states plans continue future substantially operations services segment conducted emerging markets africa asia south america operations subject risk new different legal regulatory requirements local jurisdictions tariffs trade barriers potential difficulties staffing managing local operations potential imposition restrictions investments potentially adverse tax consequences including imposition increase withholding taxes remittances payments subsidiaries local economic political social conditions governments many developing countries exercised continue exercise substantial influence many aspects private sector government actions future could significant adverse effect economic conditions developing country may otherwise material adverse effect company operating companies company political risk insurance countries currently conducts business moreover applicable agreements relating companys interests operating companies frequently governed foreign law result event dispute may difficult company enforce rights accordingly company may little recourse upon occurrence developments revenues income operations amortization equity earnings integration expenses interest income net total assets segments years ended december 31 1998 1999 2000 follows 1998 1999 2000 thousands revenues services 51563 59958 85612 products 45644 96706 135343 total revenues 97207 156664 220955 income operations services 6695 6894 9842 products 8717 21195 29879 corporate 1758 2836 6606 total income operations 13654 25253 33115 armor holdings inc subsidiaries notes consolidated financial statements 10 information concerning business segments geographical sales continued 1998 1999 2000 thousands total assets services 41531 65134 88361 products 45470 103092 128000 corporate 7352 10696 9596 total assets 94353 178922 225957 following financial information respect sales principal geographic areas years ended december 31 1998 1999 2000 follows 1998 1999 2000 revenues north america 36596 94847 144966 south america 16484 16246 17941 africa 18932 17987 18153 europeasia 24668 27584 36869 527 3026 total revenues 97207 156664 220955 income operations north america 6464 16938 23753 south america 2344 2855 3223 africa 4220 2645 5124 europeasia 502 2815 288 124 727 total income operations 13654 25253 33115 total assets north america 47881 142375 163047 south america 4477 5673 6974 africa 4892 3001 14447 europeasia 37103 27873 41489 total assets 94353 178922 225957 11 income taxes income tax expense benefit years ended december 31 1998 1999 2000 consisted following 1998 1999 2000 thousands current domestic 2638 6059 8270 foreign 2641 1458 782 total current 5279 7517 9052 deferred domestic 107 597 676 foreign 309 111 386 total deferred 202 486 290 total provision income taxes 5077 8003 9342 armor holdings inc subsidiaries notes consolidated financial statements 11 income taxes continued significant components companys net deferred tax asset december 31 1999 2000 follows 1999 2000 thousands deferred tax assets reserves currently deductible 1428 1383 operating loss carryforwards 3063 3263 research development 551 426 5042 5072 deferred tax asset valuation allowance 75 deferred tax asset net valuation allowance 4967 4997 deferred tax liability property equipment 310 630 net deferred tax asset 4657 4367 components giving rise net deferred tax asset described included accompanying consolidated balance sheet december 31 1999 2000 follows 1999 2000 current assets 1306 1620 assets 3351 2747 total deferred tax assets 4657 4367 following reconciles income tax expense computed federal statutory income tax rate provision income taxes recorded income statement years ended december 31 1998 1999 2000 decrease effective tax rate indicated foreign taxes result companys reestimation foreign tax liabilities related us liability result companys execution certain reorganization strategic plans armor holdings inc subsidiaries notes consolidated financial statements 12 stockholders equity continued effective change control company kanders florida holdings inc january 18 1996 utilization united states portion nol became restricted approximately 300000 per year december 31 2000 company us foreign nols approximately 10400000 us portion net nols expire varying amounts fiscal years 2006 2019 december 31 2000 company also tax credits 426000 subject certain limitations due acquisition safariland ltd credits expire varying amounts fiscal years 2019 preferred stock july 16 1996 companys shareholders authorized series preferred stock rights privileges preferences board directors shall time determine company issued preferred stock options grants 1994 company implemented incentive stock plan outside directors stock plan plans collectively provide granting options certain key employees well providing grant common stock outside directors full time employees pursuant plans 1050000 shares common stock reserved made available distribution option prices stock may purchased incentive stock plan less fair market value common stock dates grants effective january 19 1996 stock grants awarded 1994 incentive stock plan accelerated considered fully vested 1996 company implemented incentive stock plan outside directors stock plan plans collectively provide granting options certain key employees directors pursuant plans amended 2200000 shares common stock reserved made available distribution option prices stock may purchased incentive stock plan less fair market value common stock dates grants 1998 company implemented new nonqualified stock option plan pursuant new plan 725000 shares common stock reserved made available distribution january 1 1999 company distributed 725000 shares allocated plan 1999 company implemented 1999 stock incentive plan 1999 plan company reserved 2000000 shares common stock 1999 plan 1999 plan provides granting employees officers directors consultants independent contractors advisors company option prices stock may purchased 1999 plan less fair market value common stock dates grants effective january 1 1996 company adopted sfas 123 accounting stockbased compensation sfas 123 sfas 123 establishes fair value based method accounting stockbased employee compensation plans however also allows entity continue measure compensation cost plans using intrinsic value based method accounting prescribed accounting principles board apb opinion 25 accounting stock issued employees fair value based method compensation cost measured grant date based value award recognized service period usually vesting period intrinsic value based method compensation costs excess quoted market price stock grant date measurement date amount employee must pay acquire stock company elected continue account armor holdings inc subsidiaries notes consolidated financial statements 12 stockholders equity continued employee stock compensation plans apb opinion 25 pro forma disclosures net earnings per share fair value based method accounting defined sfas 123 applied compensation cost stock option grants determined based fair value grant dates 1998 1999 2000 consistent method prescribed sfas 123 companys net earnings per share would adjusted pro forma amounts years ended december 31 1998 1999 2000 indicated sfas 123 fair value option grant estimated date grant using blackscholes optionpricing model following weightedaverage assumptions years ended december 31 1998 1999 2000 weighted average fair value options granted 1998 1999 2000 follows outstanding options consisting tenyear incentive nonqualified stock options vest become exercisable three year period date grant outstanding options expire ten years date grant upon retirement company contingent upon continued employment applicable tenyear period armor holdings inc subsidiaries notes consolidated financial statements 12 stockholders equity continued summary status stock option grants december 31 2000 changes years ending dates presented following table summarizes information stock options outstanding december 31 2000 armor holdings inc subsidiaries notes consolidated financial statements 12 stockholders equity continued remaining nonexercisable options december 31 2000 become exercisable follows 2001 584413 2002 473317 2003 45000 earnings per share following details earnings per share computations basic diluted basis years ended december 31 1998 1999 2000 armor holdings inc subsidiaries notes consolidated financial statements 12 stockholders equity continued 13 supplemental cash flow information 14 quarterly results unaudited following table presents summarized unaudited quarterly results operations company fiscal 1999 2000 company believes necessary adjustments included amounts stated present fairly following selected information read conjunction consolidated financial statements notes thereto included elsewhere herein future quarterly operating results may fluctuate depending number factors results operations particular quarter necessarily indicative results operations full year quarter armor holdings inc subsidiaries notes consolidated financial statements 14 quarterly results unaudited continued 15 employee benefit plans october 1997 company formed 401k plan provides voluntary contributions employees allows discretionary contribution company form cash company made contribution approximately 243000 plan 2000 contributions 1999 1998 16 related party transactions company subcontracts certain security guard services alpha inc wholly owned shareholder company also director gorandel trading limited fiscal 1998 1999 2000 security guard service fees approximately 5204000 3392000 2444000 respectively paid alpha august 2000 purchase price approximately 10 million cash consisting current deferred portion january 1 1999 company entered agreement kanders company inc provide investment banking financial advisory services company specific details services compensation paid kanders co determined parties case basis warren b kanders chairman board company sole stockholder kanders company inc 17 operating leases company party certain real estate equipment vehicle leases several leases include options renewal escalation clauses cases management expects normal course business leases renewed replaced leases approximate total future minimum annual lease payments noncancelable leases follows year thousands 2001 1256 2002 808 2003 613 2004 512 2005 232 thereafter 362 3783 company incurred rent expense approximately 485000 1152000 1523700 years ended december 31 1998 december 31 1999 december 31 2000 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized armor holdings inc jonathan spiller jonathan spiller president chief executive officer director dated march 31 2001 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated jonathan spiller warren b kanders jonathan spiller warren b kanders president chief executive chairman board directors officer director march 31 2001 principal executive officer march 31 2001 robert r schiller nicholas sokolow robert r schiller nicholas sokolow executive vice president director chief financial officer march 31 2001 march 31 2001 burtt r ehrlich thomas w strauss burtt r ehrlich thomas w strauss director march 31 2001 march 31 2001 alair townsend stephen b salzman alair townsend stephen b salzman director march 31 2001 march 31 2001 following exhibits hereby filed part annual report form 10k exhibit description 21 order confirming debtors third amended restated plan reorganization third amended restated plan reorganization attached thereto incorporated reference exhibit 2 form 8k current report dated october 1 1993 22 asset purchase agreement dated july 2 1996 company nik iverslee lfc 46 corp filed exhibit 21 form 8k current report dated july 30 1996 incorporated herein reference 23 asset purchase agreement dated august 23 1996 company dtc robert l oliver sandra oliver dtcoa filed exhibit 21 form 8k current report dated october 9 1996 incorporated herein reference 24 agreement plan merger dated july 23 1996 american body armor equipment florida corporation company filed exhibit 21 form 8k current report dated september 3 1996 incorporated herein reference 25 share acquisition agreement dated april 7 1997 bodycote ahl company filed exhibit 21 form 8k current report dated april 22 1997 incorporated herein reference 26 agreement sale purchase whole issued share capital dsl dated april 16 1997 company ahl natwest ventures nominees limited others martin brayshaw filed exhibit 22 form 8k current report dated april 22 1997 incorporated herein reference 27 share acquisition agreement dated june 9 1997 company strontian holdings limited alphaa limited others filed exhibit 21 form 8k current report dated june 24 1997 incorporated herein reference 28 stock purchase agreement among armor holdings inc neale perkins trust scott obrien victoria obrien revocable trust david holmes katherine c holmes revocable trust neale perkins david holmes scott obrien safariland ltd inc dated april 12 1999 filed exhibit 28 amendment 1 registration statement form s3 filed commission april 15 1999 incorporated herein reference 31 certificate incorporation company filed exhibit 31 form 8k current report company dated september 3 1996 incorporated herein reference 32 certificate merger american body armor equipment inc florida corporation company filed exhibit 32 form 8k current report company dated september 3 1996 incorporated herein reference 33 bylaws company filed exhibit 33 form 8k current report company dated september 3 1996 incorporated herein reference 34 amendment bylaws company incorporated reference exhibit 332 form 10k annual report fiscal year ended december 31 1998 98 10k 101 credit agreement credit agreement dated february 12 1999 among company cibc nationsbank first union suntrust lenders canadian imperial bank commerce administrative agent nationsbank documentation agent aggregate principal amount 60000000 filed exhibit 51 form 8k current report company filed commission march 10 1999 incorporated herein reference 102 364day revolving credit note dated february 12 1999 principal amount 4166667 made company favor first union filed exhibit 52 form 8k current report company filed commission march 10 1999 incorporated herein reference 103 364day revolving credit note dated february 12 1999 principal amount 4166667 made company favor suntrust filed exhibit 53 form 8k current report company filed commission march 10 1999 incorporated herein reference 104 364day revolving credit note dated february 12 1999 principal amount 5833333 made company favor nationsbank filed exhibit 54 form 8k current report company filed commission march 10 1999 incorporated herein reference 105 364day revolving credit note dated february 12 1999 principal amount 5833333 made company favor cibc filed exhibit 55 form 8k current report company filed commission march 10 1999 incorporated herein reference 106 five year revolving credit note dated february 12 1999 principal amount 8333333 made company favor first union filed exhibit 56 form 8k current report company filed commission march 10 1999 incorporated herein reference 107 five year revolving credit note dated february 12 1999 principal amount 8333333 made company favor suntrust filed exhibit 57 form 8k current report company filed commission march 10 1999 incorporated herein reference 108 five year revolving credit note dated february 12 1999 principal amount 11666667 made company favor nationsbank filed exhibit 58 form 8k current report company filed commission march 10 1999 incorporated herein reference 109 five year revolving credit note dated february 12 1999 principal amount 11666667 made company favor cibc filed exhibit 59 form 8k current report company filed commission march 10 1999 incorporated herein reference 1010 borrower pledge agreement dated february 12 1999 made company favor canadian imperial bank commerce administrative agent lenders filed exhibit 510 form 8k current report company filed commission march 10 1999 incorporated herein reference 1011 security deed dated february 12 1999 made company favor canadian imperial bank commerce administrative agent lenders filed exhibit 511 form 8k current report company filed commission march 10 1999 incorporated herein reference 1012 subsidiaries guarantee dated february 12 1999 made company favor canadian imperial bank commerce administrative agent lenders filed exhibit 512 form 8k current report company dated march 10 1999 incorporated herein reference 1013 first amendment dated october 26 1999 credit agreement 1014 second amendment dated february 25 2000 credit agreement 1015 amended restated employment agreement jonathan spiller company dated january 1 1999 incorporated reference exhibit 105 98 10k 1016 amended restated employment agreement robert r schiller company dated january 1 1999 incorporated reference exhibit 106 98 10k 1017 employment agreement stephen e croskrey company dated february 8 1999 incorporated reference exhibit 107 98 10k 1018 employment agreement warren b kanders company dated january 1 1999 incorporated reference exhibit 109 98 10k 1019 form registration rights agreement dated april 16 1997 company vendors dsl filed exhibit 103 form 8k current report company dated april 22 1997 incorporated herein reference 1020 form option 300000 shares common stock dated may 15 1996 granted richmont capital partners lp filed exhibit 1034 registration statement 33328879 form s1 company incorporated herein reference 1021 agreement dated april 21 1998 amending option dated may 15 1996 granted richmont capital partners lp 300000 shares common stock incorporated reference exhibit 1033 98 10k 1022 form indemnification agreement directors registrant dated september 21 1993 filed exhibit 104 form 10ksb annual report company fiscal year ended december 31 1993 incorporated herein reference 1023 form indemnification agreement officers registrant dated february 28 1994 filed exhibit 105 form 10ksb annual report company fiscal year ended december 31 1993 incorporated herein reference 1024 american body armor equipment inc 1994 incentive stock plan incorporated reference form s8 filed october 10 1994 reg 33018863 1025 american body armor equipment inc 1994 directors stock plan incorporated reference form s8 filed october 31 1994 reg 33018863 1026 armor holdings inc amended restated 1996 stock option plan incorporated reference companys 1997 definitive proxy statement respect companys 1997 annual meeting stockholders held june 12 1997 filed commission may 27 1997 1027 armor holdings inc amended restated 1996 nonemployee directors stock option plan incorporated reference companys 1997 definitive proxy statement respect companys 1997 annual meeting stockholders held june 12 1997 filed commission may 27 1997 1028 armor holdings inc 1998 stock option plan incorporated reference exhibit 1019 98 10k 1029 armor holdings inc 1999 stock incentive plan incorporated reference appendix companys 1999 definitive proxy statement respect companys 1999 annual meeting stockholders filed commission may 21 1999 1030 lease companys former primary facility located yulee florida dated july 26 1993 effective may 1 1993 filed exhibit 281 form 10ksb annual report company fiscal year ended december 31 1993 incorporated herein reference 1031 agreement dated march 8 1999 company kanders company inc incorporated reference exhibit 1021 98 10k 231 consent pricewaterhousecoopers llp filed herewith incorporated herein reference exhibit represents management contract exhibit represents compensatory planitem 14 exhibits financial statements schedules reports form 8k 1 financial statements following financial statements company appear beginning sequential page number included herein reports independent certified public accountants consolidated balance sheets consolidated income statements consolidated statements stockholders equity comprehensive income consolidated statements cash flows notes consolidated financial statements 2 financial statement schedules provision made applicable accounting regulations commission omitted applicable required information shown financial statements notes thereto b reports form 8k filed current report form 8k item 5 dated november 26 2001 publish certain financial information c exhibits following exhibits hereby filed part annual report form 10k exhibit description 21 agreement sale purchase whole issued share capital dsl dated april 16 1997 company ahl natwest ventures nominees limited others martin brayshaw filed exhibit 22 form 8k current report dated april 22 1997 incorporated herein reference 22 stock purchase agreement among armor holdings inc neale perkins trust scott obrien victoria obrien revocable trust david holmes katherine c holmes revocable trust neale perkins david holmes scott obrien safariland ltd inc dated april 121999 filed exhibit 28 amendment 1 registration statement form s3 filed commission april 15 1999 incorporated herein reference 23 stock purchase agreement dated april 20 2001 among armor holdings inc bengal acquisition corp krollogara company ogarahess eisenhardt armoring company ogara company ogara security associates inc filed exhibit 21 current report form 8k dated april 20 2001 incorporated herein reference 24 amendment dated august 20 2001 stock purchase agreement dated april 20 2001 among armor holdings inc bengal acquisition corp krollogara company ogarahess eisenhardt armoring company ogara company ogara security associates inc filed exhibit 22 current report form 8k dated august 21 2001 incorporated herein reference 25 amendment dated august 22 2001 stock purchase agreement dated april 20 2001 among armor holdings inc bengal acquisition corp krollogara company ogarahess eisenhardt armoring company ogara company ogara security associates inc filed exhibit 23 current report form 8k dated august 22 2001 incorporated herein reference 31 certificate incorporation company filed exhibit 31to form 8k current report company dated september 31996 incorporated herein reference 32 certificate merger american body armor equipment inc florida corporation company filed exhibit 32 form 8k current report company dated september 31996 incorporated herein reference 33 bylaws company filed exhibit 33 form 8kcurrent report company dated september 3 1996 incorporated herein reference 34 amendment bylaws company incorporated reference exhibit 332 form 10k annual report fiscal year ended december 31 1998 98 10k 101 borrower pledge agreement dated february 12 1999 made company favor canadian imperial bank commerce administrative agent lenders filed exhibit 510 form 8k current report company filed commission march 10 1999 incorporated herein reference 102 security deed dated february 12 1999 made company favor canadian imperial bank commerce administrative agent lenders filed exhibit 511 form 8k current report company filed commission march 10 1999 incorporated herein reference 103 subsidiaries guarantee dated february 12 1999 made company favor canadian imperial bank commerce administrative agent lenders filed exhibit 512 form 8k current report company dated march 10 1999 incorporated herein reference 104 amended restated credit agreement dated august 22 2001 among bank america na canadian imperial bank commerce first union national bank suntrust bank republic bank keybank national association ing us capital llc filed exhibit 101 current report form 8k dated august 22 2001 incorporated herein reference 105 amended restated revolving credit note dated august 22 2001 principal amount 3000000000 made company favor bank america na filed exhibit 102 current report form 8k dated august 22 2001 incorporated herein reference 106 amended restated revolving credit note dated august 22 2001 principal amount 2500000000 made company favor first union national bank filed exhibit 103 current report form 8k dated august 22 2001 incorporated herein reference 107 amended restated revolving credit note dated august 22 2001 principal amount 20000000 made company favor suntrust bank filed exhibit 104 current report form 8k dated august 22 2001 incorporated herein reference 108 amended restated revolving credit note dated august 22 2001 principal amount 15000000 made company favor keybank national association filed exhibit 105 current report form 8k dated august 22 2001 incorporated herein reference 109 amended restated revolving credit note dated august 22 2001 principal amount 15000000 made company favor republic bank filed exhibit 106 current report form 8k dated august 22 2001 incorporated herein reference 1010 amended restated revolving credit note dated august 22 2001 principal amount 15000000 made company favor ing us capital llc filed exhibit 107 current report form 8k dated august 22 2001 incorporated herein reference 1011 amended restated swing line note dated august 22 2001 principal amount 5000000 made company favor bank america na filed exhibit 108 current report form 8k dated august 22 2001 incorporated herein reference 1012 supplement subsidiaries guarantee dated august 22 2001 made bengal acquisition corp ogarahess eisenhardt armoring company ogara company ogara security associates inc international training inc iti limited partnership armor brands inc armor group integrated systems inc armor holdings gp llc armor holdings lp llc breakfree armor corp global support systems inc lightning powder company inc monadnock lifetime products inc delaware corporation nap property managers llc network audit systems inc new technologies armor inc usds inc breakfree inc casco international inc monadnock lifetime products inc new hampshire corporation monadnock police training council inc nap properties ltd safariland government sales inc favor bank america na administrative agent lendersfiled exhibit 109 current report form 8k dated august 22 2001 incorporated herein reference 1013 borrower pledge agreement supplement dated august 22 2001 made company favor bank america na administrative agent lenders 1011 subsidiaries pledge agreement supplement dated august 22 2001 made bengal acquisition corp ogarahess eisenhardt armoring company ogara security associates inc international training inc breakfree armor corp monadnock lifetime products inc delaware corporation armor holdings lp llc armor holdings gp llc armor holdings properties inc nap property managers llc favor bank america na administrative agent lenders filed exhibit 1010 current report form 8k dated august 22 2001 incorporated herein reference 1014 amended restated employment agreement jonathan spiller company dated january 11999 incorporated reference exhibit 105 98 10k 1015 amended restated employment agreement robert r schiller company dated january 1 1999 incorporated reference exhibit 106 98 10k 1016 employment agreement stephen e croskrey company dated february 8 1999 incorporated reference exhibit 107 98 10k 1017 employment agreement warren b kanders company dated january 1 1999 incorporated reference exhibit 109 98 10k 1018 form indemnification agreement directors registrant dated september 21 1993 filed exhibit 104 form 10ksb annual report company fiscal year ended december 31 1993 incorporated herein reference 1019 form indemnification agreement officers registrant dated february 28 1994 filed exhibit 105 form 10ksb annual report company fiscal year ended december 31 1993 incorporated herein reference 1020 american body armor equipment inc 1994 incentive stock plan incorporated reference form s8 filed october 10 1994 reg 33018863 1021 american body armor equipment inc 1994 directors stock plan incorporated reference form s8 filed october 31 1994 reg 33018863 1022 armor holdings inc amended restated 1996 stock option plan incorporated reference companys 1997 definitive proxy statement respect companys 1997 annual meeting stockholders held june 12 1997 filed commission may 27 1997 1023 armor holdings inc amended restated 1996 nonemployee directors stock option plan incorporated reference companys 1997 definitive proxy statement respect companys 1997 annual meeting stockholders held june 12 1997 filed commission may 27 1997 1024 armor holdings inc 1998 stock option plan incorporated reference exhibit 1019 98 10k 1025 armor holdings inc 1999 stock incentive plan incorporated reference appendix companys 1999 definitive proxy statement respect companys 1999 annual meeting stockholders filed commission may 21 1999 231 consent pricewaterhousecoopers llp filed herewith incorporated herein reference exhibit represents management contract exhibit represents compensatory plan index consolidated financial statements armor holdings inc report independent certified public accountants consolidated balance sheets consolidated income statements consolidated statements stockholders equity comprehensive income consolidated statements cash flow notes consolidated financial statements report independent certified public accountants board directors stockholders armor holdings inc opinion accompanying consolidated balance sheets related consolidated statements income stockholders equity comprehensive income cash flows present fairly material respects financial position armor holdings inc subsidiaries december 31 2001 2000 results operations cash flows three years period ended december 31 2001 conformity accounting principles generally accepted united states america financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits statements accordance auditing standards generally accepted united states america require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion pricewaterhousecoopers llp date march 28 2002 jacksonville florida armor holdings inc subsidiaries consolidated balance sheets december 31 2000 december 31 2001 thousands except share data accompanying notes integral part consolidated financial statements armor holdings inc subsidiaries consolidated income statements years ended december 31 1999 2000 2001 thousands except per share data accompanying notes integral part consolidated financial statements armor holdings inc subsidiaries consolidated statements stockholders equity comprehensive income years ended december 31 1999 2000 2001 thousands accompanying notes integral part consolidated financial statements armor holdings inc subsidiaries consolidated statements cash flow years ended december 31 1999 2000 2001 thousands accompanying notes integral part consolidated financial statements armor holdings inc subsidiaries notes consolidated financial statements 1 background summary significant accounting policies company nature business armor holdings inc company armor leading manufacturer provider security products vehicle armor systems security risk management services armors products services used military law enforcement security corrections personnel throughout world well governmental agencies multinational corporations nongovernmental organizations company organized operated three business segments armor holdings products armor mobile security armorgroup services armor holdings products armor holdings products division manufactures sells broad range high quality branded law enforcement equipment tactical armor hard armor duty gear lesslethal munitions antiriot products police batons forensic products weapon maintenance products marketed brand names wellknown respected military law enforcement communities american body armor safariland defense technology federal laboratories mace r protech nik r public safety breakfree monadnock lifetime products identicator lightning powder armor holdings products division sells manufactured products primarily law enforcement agencies worldwide network 500 distributors sales agents including approximately 350 united states extensive distribution capabilities commitment customer service training enabled us become leading provider security equipment law enforcement agencies armor mobile security armor mobile security division manufactures installs ballistic blast protected armoring systems military vehicles commercial vehicles military aircraft missile components brand name ogarahess eisenhardt company solesource provider us military supply armoring blast protection systems high mobility multipurpose wheeled vehicle hmmwv contract expires 2005 armor mobile security also entered agreement provide us military certain maintenance services respect hmmwvs currently installed base approximately 2800 hmmwvs subject maintenance arrangement armor mobile security expects maintenance services may increase us military substantially increases hmmwv purchases substantially increases use current installed base additionally armor mobile security division subcontracted develop ballistically armored sealed truck cab himars program currently development us army also markets armor subsystems tactical wheeled vehicles armor mobile security armors variety commercial vehicles including limousines sedans sport utility vehicles commercial trucks cashintransit vehicles protect varying degrees ballistic blast threats armorgroup services division provides broad range sophisticated security risk management solutions multinational corporations diverse industries natural resources financial services consumer products governmental nongovernmental agencies us departments state defense united nations usaid britains department international development clients typically personnel investments unstable often armor holdings inc subsidiaries notes consolidated financial statements violent areas world armorgroup offices four continents armorgroup provides multinational clients diversified portfolio security solutions assist mitigating risks operations around world armorgroup services highly trained multilingual experienced security personnel work closely clients create implement solutions complex security problems services include security planning advice management security systems integration intellectual property asset protection due diligence investigations training programs counterintelligence countersurveillance advanced driving techniques ballistics armorgroup believes many security services often representing small portion clients overall cost business critical armorgroups clients success armorgroup believes creates consistent demand premium services attractive margins principles consolidation consolidated financial statements include accounts company whollyowned subsidiaries consolidation material intercompany balances transactions eliminated results operations companies acquired transactions accounted purchase method accounting included financial statements date acquisition cash equivalents company considers highly liquid investments purchased maturities three months less date purchase cash equivalents concentration credit risk financial instruments potentially subject company concentrations credit risk consist primarily cash equivalents trade accounts receivable company maintains cash equivalents believes various high quality banks amounts held individual banks may periodically exceed brief time periods federally insured amounts companys accounts receivable consist amounts due customers distributors located throughout world international product sales generally require cash advance confirmed letters credit united states us banks company maintains reserves potential credit losses december 31 2000 2001 management believes company significant concentrations credit risk inventories stated lower cost market determined firstin firstout fifo method fair value financial instruments carrying value cash equivalents accounts receivable receivables accounts payable short longterm debt approximates fair value december 31 2000 2001 property equipment property equipment carried cost less accumulated depreciation upon disposal property equipment appropriate accounts reduced related cost accumulated depreciation resulting gains losses reflected consolidated earnings depreciation computed using straightline method estimated lives related assets follows buildings improvements 5 39 years machinery equipment 3 7 years armor holdings inc subsidiaries notes consolidated financial statements goodwill represents excess purchase price fair value net assets acquired purchase business combination goodwill intangible assets stated basis cost amortized principally straightline basis estimated future periods benefited 20 40 years 376 million goodwill resulting acquisitions made company subsequent june 30 2001 immediately subject nonamortization provisions sfas 142 see also recent accounting pronouncements follows patents licenses trademarks patents licenses trademarks primarily acquired acquisitions accounted purchase method accounting assets amortized straightline basis remaining lives 10 40 years impairment longlived assets including certain identifiable intangibles goodwill related assets reviewed impairment whenever events changes circumstances indicate carrying amount asset question may recoverable including limited deterioration profits business segment longlived assets changes occur might impair recovery longlived assets management reviewed companys longlived assets determined events requiring impairment loss recognition december 31 2001 method used determine existence impairment would undiscounted operating cash flows estimated remaining amortization period related longlived assets impairment measured difference fair value unamortized cost date impairment determined research development research development costs included operating expenses incurred years ended december 31 1999 2000 2001 approximated 1559000 2590000 2353000 respectively estimates preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts financial statements accompanying notes significant estimates inherent preparation accompanying consolidated financial statements include carrying value longlived assets valuation allowances receivables inventories deferred income tax assets liabilities potential litigation claims settlements contract contingencies obligations actual results could differ estimates income taxes company accounts income taxes pursuant statement financial accounting standards sfas 109 accounting income taxes asset liability method specified thereunder deferred taxes determined based difference financial reporting tax bases assets liabilities deferred tax liabilities offset deferred tax assets relating net operating loss carryforwards deductible temporary differences future benefits obtained either utilization net operating loss carryforwards reduction income tax asset valuation allowance existing september 20 1993 applied reduce reorganization value excess amounts allocable identifiable assets december 31 2000 2001 companys consolidated foreign subsidiaries unremitted earnings approximately 10 million 14 million respectively company recorded provision united states federal armor holdings inc subsidiaries notes consolidated financial statements income taxes since earnings considered permanently invested foreign earnings taxed according regulations existing countries earned revenue recognition company records products revenue time shipment returns minimal materially effect financial statements company records revenue mobile security division vehicle shipped except larger commercial contracts typically longer four months length contract delivery hmmwvs us government continues 2005 revenue contracts recognized percentage completion unitsofwork performed method hmmwv units sold us government considered complete onsite department defense officer finishes inspection hmmwv approves delivery contracts loss position entire estimated loss would recognized balance contract time current contracts profitable company records service revenue services provided contract basis revenues service contracts recognized term contract advertising company expenses advertising costs expense period incurred earnings per share basic earnings per share computed dividing net income weightedaverage number common shares outstanding diluted earnings per share computed dividing net income weightedaverage number common shares outstanding compounding effects potentially dilutive common stock equivalents principally options except cases effect would antidilutive comprehensive income foreign currency translation accordance sfas 130 reporting comprehensive income assets liabilities denominated foreign currency translated us dollars current rate exchange existing yearend revenues expenses translated average monthly exchange rates cumulative translation adjustment net tax represents effect translating assets liabilities companys foreign operations recorded reduction equity 1684000 4473000 years ended december 31 2000 2001 respectively classified accumulated comprehensive loss current year change accumulated amount net tax included component comprehensive income reclassifications certain reclassifications made 2000 2001 financial statements order conform presentation adopted 2001 reclassifications effect net income retained earnings armor holdings inc subsidiaries notes consolidated financial statements recent accounting pronouncements june 2001 financial accounting standards board fasb issued sfas 141 business combinations sfas 141 requires purchase method accounting used business combinations initiated june 30 2001 statement specifies certain acquired intangible assets business combination recognized assets separately goodwill existing intangible assets goodwill evaluated new separation requirements company expect statement material impact consolidated financial position results operations june 2001 fasb issued sfas 142 goodwill intangible assets sfas 142 changes accounting goodwill amortization method impairmentonly approach amortization goodwill including goodwill recorded past business combinations cease upon adoption statement addition statement requires goodwill tested impairment least annually reporting unit level company implemented sfas 142 january 1 2002 accordance statement company required complete transitional goodwill impairment test june 30 2002 corporation evaluating yet determined whether adoption statement result impairment goodwill management estimates goodwill indefinite lived intangible asset amortization required previous accounting standards 32 million pretax 20 million aftertax charged income statement 2002 goodwill resulting acquisitions made company subsequent june 30 2001 immediately subject nonamortization provisions sfas 142 august 2001 fasb issued statement financial accounting standards 143 accounting asset retirement obligations sfas 143 sfas 143 establishes accounting standards recognition measurement liability asset retirement obligation associated asset retirement cost sfas 143 requires recognition fair value liability asset retirement obligation period incurred reasonable estimate fair value made reasonable estimate fair value cannot made period asset retirement obligation incurred liability shall recognized reasonable estimate fair value made fair value liability asset retirement obligation amount liability could settled current transaction willing parties forced liquidation transaction sfas 143 effective financial statements issued fiscal years beginning june 15 2002 provisions sfas 143 become effective company january 1 2003 effects adopting standard determined october 2001 fasb issued statement financial accounting standards 144 accounting impairment disposal longlived assets sfas 144 sfas 144 establishes primaryasset approach determine cash flow estimation period group assets liabilities represents unit accounting longlived asset held used sfas 144 requires longlived asset 1 abandoned 2 exchanged similar productive asset 3 distributed owners spinoff considered held used abandoned exchanged distributed sfas 144 requires 1 spinoffs exchanges similar productive assets recorded lower carrying value fair value assets classified held used disposed armor holdings inc subsidiaries notes consolidated financial statements 2 impairment loss resulting spinoff exchange similar productive assets recognized asset disposed provisions sfas 144 come effective company january 1 2002 effects adopting standard determined armor holdings inc subsidiaries notes consolidated financial statements 2 business combinations company completed numerous purchase business combinations cash andor shares companys common stock assumption liabilities certain cases three years period ended december 31 2001 following acquisitions completed 1 includes new technologies inc network audit systems special clearance services ovgtraquair alpha b technisec breakfree inc monadnock lifetime products lightning powder businesses acquired included consolidated results date acquisition pro forma results 2000 acquisitions presented would differ material amount actual results following unaudited pro forma consolidated results presented show results pro forma basis 2001 acquisitions made january 1 2000 january 1 2001 2000 2001 thousands except per share data revenues 333375 370842 net income 14325 6453 basic earnings per share 061 026 diluted earnings per share 059 025 weighted average shares basic 23639 24579 weighted average shares diluted 24365 25415 armor holdings inc subsidiaries notes consolidated financial statements 3 inventories components inventory december 31 2000 2001 follows 2000 2001 thousands raw materials 13756 28796 workinprocess 1999 13136 finished goods 7920 9962 23675 51894 4 property equipment property equipment december 31 2000 2001 summarized follows 2000 2001 thousands land 3312 3995 buildings improvements 10394 17523 machinery equipment 21030 39235 total 34736 60753 accumulated depreciation 10146 14691 24590 46062 depreciation expense years ended december 31 1999 2000 2001 approximately 2107000 3162000 5002000 respectively statement operations years ended december 31 1999 2000 2001 depreciation expense reduced 130000 respectively amortization proceeds received economic development grant received department housing urban development 5 accounts payable accrued expenses current liabilties accounts payable accrued expenses current liabilities december 31 2000 2001 summarized follows 2000 2001 thousands trade payables 4432 24136 accrued expenses 6914 17040 additional purchase price acquisition earnouts 3000 deferred consideration acquisitions 1550 525 customer deposits 7002 2451 5250 18347 53953 armor holdings inc subsidiaries notes consolidated financial statements 6 debt credit facility august 22 2001 entered amended restated credit agreement credit agreement bank america canadian imperial bank commerce first union national bank suntrust bank republic bank keybank national association ing us capital llc pursuant credit agreement lenders established 120000000 line credit benefit expiring february 12 2004 credit agreement among things provides total maximum borrowings 120000000 ii capability borrowings foreign currencies borrowings credit agreement bear interest either base rate plus applicable margin ranging 000 375 depending certain conditions ii eurodollar rate plus applicable margin ranging 1125 1875 depending certain conditions iii respect foreign currency loans fronted offshore currency rate plus applicable margin ranging 1125 1875 depending certain conditions addition credit agreement includes negative affirmative covenants customary credit facility nature limitation capital expenditures foreign indebtedness minimum fixed charge coverage restriction paying dividends armor holdings inc subsidiaries notes consolidated financial statements credit agreement also provides bank america make swingline loans us 5000000 working capital purposes issue letters credit behalf 20000000 december 31 2001 outstanding borrowings credit facility bank america issued 150 million letters credit behalf credit agreement indebtedness credit agreement mature february 12 2004 approximately 46 million longterm debt net current portion consisting primarily 3 million industrial development revenue bonds part credit agreement companys direct indirect domestic subsidiaries agreed guarantee companys obligations credit agreement credit agreement collateralized 1 pledge issued outstanding shares stock certain domestic subsidiaries company pursuant pledge agreement 2 pledge 65 issued outstanding shares companys first tier foreign subsidiaries credit agreement includes negative affirmative covenants customary credit facility nature limitation capital expenditures foreign indebtedness minimum fixed charge coverage restriction paying dividends maturities longterm debt follows year ended thousands 2002 2055 2003 891 2004 923 2005 447 2006 269 thereafter 2110 6695 companys subsidiary defense systems limited maintains 2 million overdraft facility variable interest rate requiring monthly interest payments overdraft facility expires february 28 2002 overdraft facility outstanding balance approximately 12 0 million years ended december 31 2000 2001 respectively 7 integration nonrecurring charges result acquisition program company incurred integration nonrecurring charges approximately 27 million 33 million 41 million years ending december 31 1999 2000 2001 respectively costs related relocation assets personnel severance costs systems integration domestic international tax restructuring well integrating sales marketing functions companies acquired period armor holdings inc subsidiaries notes consolidated financial statements 8 commitments contingencies employment contracts company party several employment contracts year ending december 31 2001 certain members management contracts varying periods include restrictions competition termination agreements provide salaries bonuses benefits also specify delineate granting various stock options legallitigation matters january 16 1998 armorgroup services division ceased operations country angola cessation operations angola dictated governments decision deport expatriate management supervisors result cessation operations angola armor group services division involved various disputes shrm sashrm minority joint venture partner relating angolan business march 6 1998 sia subsidiary shrm filed complaint defense systems france sa dsf commercial court nanterre tribunal de commerce de nanterre seeking paid amount 577286 corresponding alleged debt dsia sia june 27 2000 judge paris commercial court ruled shrm provide evidence required establish standing proceedings brought shrm cancelled october 3 2000 winding petition served dsf dsia october 31 2000 shrm filed counterclaim seeking winding petition dismissed november 28 2000 shrm appealed judgement rendered paris commercial court june 27 2000 claiming paris commercial court longer jurisdiction case september 18 2001 paris commercial court stayed proceeding pending outcome appeal hearing court appeal standing shrm merits scheduled october 24 2002 briefs due september 6 2002 commercial court nanterre stayed proceedings pending decisions court appeal paris commercial court march 22 2002 ogarahess eisenhardt armoring company oheac subsidiary company received subpoena duces tecum civil false claims act subpoena requests documents information period october 1 1999 march 1 2001 state nature investigation allegation wrongdoing oheac complying document request extent may liability believe entitled indemnification kroll inc purchase agreement pursuant acquired oheac settlements november 2000 without either admitting denying accusations company settled lawsuit second chance body armor inc lawsuits approximately 20 million including legal costs dispute led second chance body armor lawsuit filed 1994 related allegations trademark infringement purported occurred period 1984 1994 addition company normal course business subjected claims litigation areas product general liability management believes adequate insurance coverage areas product general liability management believe claims material impact companys financial statements 9 income may 31 2000 company sold investment jsgs jardine securicor gurkha services limited pretax gain approximately 17 million included income armor holdings inc subsidiaries notes consolidated financial statements 10 restructuring charge january 2001 companys armorgroup services division approved restructuring plan close us investigative businesses realign divisions organization eliminate excess facilities reduce overhead businesses worldwide connection restructuring plan division performed review longlived assets identify potential impairments pursuant restructuring plan armorgroup eliminated 26 employees primarily investigative businesses ii eliminated additional 24 employees security business iii incurred lease exit costs result closure investigative businesses iv wrotedown value tangible intangible assets result impairment review significant actions contemplated restructuring plan completed result restructuring plan company recorded pretax charge 103 million december 31 2001 company remaining liability 354000 relating lease termination exit costs fourth quarter utilization reserves employee termination costs 298000 lease related costs 28000 remaining liability classified accrued expenses current liabilities consolidated balance sheet summary restructuring charges remaining accrual follows armor holdings inc subsidiaries notes consolidated financial statements 11 information concerning business segments geographical sales company leading manufacturer provider security products vehicle armor systems security risk management services companys products services used military law enforcement security corrections personnel throughout world well governmental agencies multinational corporations nongovernmental organizations company organized operated three business segments armor holdings products armor mobile security armorgroup armor holdings products armor holdings products division manufactures sells broad range high quality equipment marketed brand names wellknown respected military law enforcement communities products manufactured division include body armor tactical armor hard armor duty gear lesslethal munitions antiriot products police batons forensic products weapon maintenance products armor mobile security armor mobile security division manufactures installs ballistic blast protection armoring systems military vehicles commercial vehicles military aircraft missile components brand name ogarahess eisenhardt company solesource provider us military supply armoring blast protection systems well maintenance services high mobility multipurpose wheeled vehicle hmmwv commonly known humvee additionally company subcontracted develop ballistically armored sealed truck cab high mobility artillery rocket system himars currently development us army company armors variety commercial vehicles including limousines sedans sport utility vehicles commercial trucks cashintransit vehicles protect varying degrees ballistic blast threats armor mobile security division consists spsg less international training inc included armorgroup services division armorgroup services division provides broad range sophisticated security risk management solutions multinational corporations diverse industries natural resources financial services consumer products governmental nongovernmental agencies us departments state defense united nations care international services provided include security planning advice management security systems integration intellectual property asset protection due diligence investigations training programs counterintelligence countersurveillance advanced driving techniques computer forensics ballistics company invested substantial resources outside united states plans continue future significant operations armorgroup services division conducted certain emerging markets africa asia south america armor mobile security division invested substantial resources europe south america operations subject risk new different legal regulatory requirements local jurisdictions tariffs trade barriers potential difficulties staffing managing local operations currency risks potential imposition restrictions investments potentially adverse tax consequences including imposition increase withholding taxes remittances payments subsidiaries local economic armor holdings inc subsidiaries notes consolidated financial statements political social conditions governments many developing countries exercised continue exercise substantial influence many aspects private sector government actions future could significant adverse effect economic conditions developing country may otherwise material adverse effect company operating companies company political risk insurance countries currently conducts business moreover applicable agreements relating companys interests operating companies frequently governed foreign law result event dispute may difficult company enforce rights accordingly company may little recourse upon occurrence developments revenues income loss operations total assets companys segments follows armor holdings inc subsidiaries notes consolidated financial statements following financial information respect revenues operating income amortization expense equity earnings investee restructuring charges integration expenses principal geographic areas years ended december 31 1999 2000 2001 follows reconciliation total consolidated geographic operating income amortization expense equity earnings investee restructuring charges integration expense consolidated operating income follows armor holdings inc subsidiaries notes consolidated financial statements 12 income taxes income tax expense benefit years ended december 31 1999 december 31 2000 2001 consisted following significant components companys net deferred tax asset december 31 2000 2001 follows effective change control company kanders florida holdings inc january 18 1996 utilization united states portion nol became restricted approximately 300000 per year december 31 2001 company us foreign nols approximately 158 million us portion net nols expire varying amounts fiscal years 2006 2019 december 31 2001 company also tax credits 222000 subject certain limitations due acquisition safariland ltd credits expire varying amounts fiscal years 2019 realization deferred tax assets may based utilization carrybacks prior taxable periods anticipation future taxable income utilization tax planning strategies management determined likely deferred tax assets supported carrybacks federal taxable income federal carryback period expected future taxable income us taxes provided unremitted foreign earnings approximately 14 million earnings considered permanently reinvested nonus operations company permanently reinvested jurisdictions established deferred tax asset 1619000 armor holdings inc subsidiaries notes consolidated financial statements net deferred tax assets described included accompanying consolidated balance sheets follows 2000 2001 current assets 1620 2028 assets 2747 6726 total deferred tax assets 4367 8754 following reconciles income tax expense computed federal statutory income tax rate provision income taxes recorded income statement years ended december 31 1999 2000 2001 13 stockholders equity preferred stock july 16 1996 companys shareholders authorized series preferred stock rights privileges preferences board directors shall time determine company issued preferred stock options grants 1994 company implemented incentive stock plan outside directors stock plan plans collectively provide granting options certain key employees well providing grant common stock outside directors full time employees pursuant plans 1050000 shares common stock reserved made available distribution option prices stock may purchased incentive stock plan less fair market value common stock dates grants effective january 19 1996 stock grants awarded 1994 incentive stock plan accelerated considered fully vested 1996 company implemented incentive stock plan outside directors stock plan plans collectively provide granting options certain key employees directors pursuant plans amended 2200000 shares common stock reserved made available distribution option prices stock may purchased incentive stock plan less fair market value common stock dates grants armor holdings inc subsidiaries notes consolidated financial statements 1998 company implemented new nonqualified stock option plan pursuant new plan 725000 shares common stock reserved made available distribution january 1 1999 company distributed 725000 shares allocated plan 1999 company implemented 1999 stock incentive plan 1999 plan company reserved 2000000 shares common stock 1999 plan 1999 plan provides granting options employees officers directors consultants independent contractors advisors company option prices stock may purchased 1999 plan less fair market value common stock dates grants sfas 123 accounting stockbased compensation sfas 123 establishes fair value based method accounting stockbased employee compensation plans however also allows entity continue measure compensation cost plans using intrinsic value based method accounting prescribed accounting principles board apb opinion 25 accounting stock issued employees fair value based method compensation cost measured grant date based value award recognized service period usually vesting period intrinsic value based method compensation costs excess quoted market price stock grant date measurement date amount employee must pay acquire stock company elected continue account employee stock compensation plans apb opinion 25 pro forma disclosures net earnings per share fair value based method accounting defined sfas 123 applied compensation cost stock option grants determined based fair value grant dates 1999 2000 2001 consistent method prescribed sfas 123 companys net earnings per share would adjusted pro forma amounts indicated sfas 123 fair value option grant estimated date grant using blackscholes optionpricing model following weightedaverage assumptions years ended december 31 1999 2000 2001 1999 2000 2001 expected life option 3 yrs 4 yrs 4 yrs dividend yield 0 volatility 358 309 447 risk free interest rate 576 452 armor holdings inc subsidiaries notes consolidated financial statements increase volatility fiscal 2000 fiscal 2001 primarily due increase demand stock drove price increase volatility weighted average fair value options granted 1999 2000 2001 follows outstanding options consisting tenyear incentive nonqualified stock options vest become exercisable threeyear period date grant outstanding options expire ten years date grant upon retirement company contingent upon continued employment applicable tenyear period summary status stock option grants december 31 2001 changes years ending dates presented armor holdings inc subsidiaries notes consolidated financial statements following table summarizes information stock options outstanding december 31 2001 12312001 remaining options life exercise price range outstanding exercisable years 097 375 263595 40 675 994 346769 285141 61 1000 1056 208502 173999 67 1100 1188 803873 634539 68 1200 1285 178868 107200 69 1313 1375 269668 152331 77 1417 1483 399759 78600 95 1505 1550 303500 96 1631 1650 76000 2000 90 1700 1754 133500 3333 93 total 2984034 1700738 remaining nonexercisable options december 31 2001 become exercisable follows 2002 703845 2003 310052 2004 269399 armor holdings inc subsidiaries notes consolidated financial statements earnings per share following details earnings per share computations basic diluted basis years ended december 31 1999 2000 2001 14 supplemental cash flow information armor holdings inc subsidiaries notes consolidated financial statements 15 quarterly results unaudited following table presents summarized unaudited quarterly results operations company fiscal 2000 2001 company believes necessary adjustments included amounts stated present fairly following selected information read conjunction consolidated financial statements notes thereto included elsewhere herein future quarterly operating results may fluctuate depending number factors results operations particular quarter necessarily indicative results operations full year quarter armor holdings inc subsidiaries notes consolidated financial statements 16 employee benefits plan october 1997 company formed 401k plan provides voluntary contributions employees allows discretionary contribution company form cash company made contribution approximately 272700 plan 2001 contributions 2000 243000 contributions 1999 17 related party transactions company subcontracts certain security guard services alpha inc wholly owned shareholder company also director gorandel trading limited fiscal 1999 2000 security guard service fees approximately 3392000 2444000 respectively paid alpha august 2000 company acquired alpha purchase price approximately 10 million cash consisting current deferred portion fiscal 2001 company paid 400000 deferred portion purchase price january 1 1999 company entered agreement kanders company inc provide investment banking financial advisory services company specific details services compensation paid kanders co determined parties case basis warren b kanders chairman board company sole stockholder kanders company inc fiscal 2001 kanders company inc received 750000 investment banking services provided company acquisition ogara hess eisenhardt 18 operating leases company party certain real estate equipment vehicle leases several leases include options renewal escalation clauses cases management expects normal course business leases renewed replaced leases approximate total future minimum annual lease payments noncancelable leases follows year thousands 2002 2252 2003 1439 2004 1117 2005 593 2006 337 thereafter 758 6496 company incurred rent expense approximately 1152000 1523700 2126400 years ended december 31 1999 december 31 2000 december 31 2001 armor holdings inc subsidiaries notes consolidated financial statements signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized armor holdings inc jonathan spiller jonathan spiller president chief executive officer director dated march 29 2002 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated jonathan spiller warren b kanders jonathan spiller warren b kanders president chief executive chairman board directors officer director march 29 2002 principal executive officer march 29 2002 robert r schiller nicholas sokolow robert r schiller nicholas sokolow executive vice president director chief financial officer march 29 2002 march 29 2002 burtt r ehrlich thomas w strauss burtt r ehrlich thomas w strauss director march 29 2002 march 29 2002 alair townsend stephen b salzman alair townsend stephen b salzman director march 29 2002 march 29 2002item 14 controls procedures within 90 days filing report evaluated effectiveness design operation disclosure controls procedures disclosure controls procedures designed ensure information company must disclose reports filed securities exchange act communicated processed timely manner jonathan spiller president chief executive officer robert r schiller executive vice president chief financial officer participated evaluation based evaluation mr spiller mr schiller concluded date evaluation disclosure controls procedures effective except noted next paragraph since date evaluation described significant changes internal controls factors could significantly affect controls fiscal 2002 financial reporting process management consultation independent accountants identified deficiency tax financial reporting process relating reconciliation provisions income taxes discontinued operations tax filings inventory deferred tax assets liabilities constitutes reportable condition standards established american institute certified public accountants believe matter material impact financial statements initiated design development implementation processes controls address deficiency completion extend 2003 part iv item 15nannannannanitem 14 exhibits financial statements schedules reports form 8k financial statements schedules 1 following financial statements company appear beginning sequential page number included herein independent auditors reports consolidated balance sheets consolidated income statements consolidated statements stockholders equity consolidated statements cash flows notes consolidated financial statements 2 schedules provision made applicable accounting regulations commission omitted applicable required information shown financial statements notes thereto b reports form 8k company filed current report form 8k item 5 dated october 21 1999 announcing approval stock repurchase program c exhibits following exhibits hereby filed part annual report form 10k exhibit description 21 order confirming debtors third amended restated plan reorganization third amended restated plan reorganization attached thereto incorporated reference exhibit 2 form 8k current report dated october 1 1993 22 asset purchase agreement dated july 2 1996 company nik iverslee lfc 46 corp filed exhibit 21 form 8k current report dated july 30 1996 incorporated herein reference 23 asset purchase agreement dated august 23 1996 company dtc robert l oliver sandra oliver dtcoa filed exhibit 21 form 8k current report dated october 9 1996 incorporated herein reference 24 agreement plan merger dated july 23 1996 american body armor equipment florida corporation company filed exhibit 21 form 8k current report dated september 3 1996 incorporated herein reference 25 share acquisition agreement dated april 7 1997 bodycote ahl company filed exhibit 21 form 8k current report dated april 22 1997 incorporated herein reference 26 agreement sale purchase whole issued share capital dsl dated april 16 1997 company ahl natwest ventures nominees limited others martin brayshaw filed exhibit 22 form 8k current report dated april 22 1997 incorporated herein reference 27 share acquisition agreement dated june 9 1997 company strontian holdings limited alphaa limited others filed exhibit 21 form 8k current report dated june 24 1997 incorporated herein reference 28 stock purchase agreement among armor holdings inc neale perkins trust scott obrien victoria obrien revocable trust david holmes katherine c holmes revocable trust neale perkins david holmes scott obrien safariland ltd inc dated april 12 1999 filed exhibit 28 amendment 1 registration statement form s3 filed commission april 15 1999 incorporated herein reference 31 certificate incorporation company filed exhibit 31 form 8k current report company dated september 3 1996 incorporated herein reference 32 certificate merger american body armor equipment inc florida corporation company filed exhibit 32 form 8k current report company dated september 3 1996 incorporated herein reference 33 bylaws company filed exhibit 33 form 8k current report company dated september 3 1996 incorporated herein reference 34 amendment bylaws company incorporated reference exhibit 332 form 10k annual report fiscal year ended december 31 1998 98 10k 101 credit agreement dated february 12 1999 among company cibc nationsbank first union suntrust lenders canadian imperial bank commerce administrative agent nationsbank documentation agent aggregate principal amount 60000000 filed exhibit 51 form 8k current report company filed commission march 10 1999 incorporated herein reference 102 364day revolving credit note dated february 12 1999 principal amount 4166667 made company favor first union filed exhibit 52 form 8k current report company filed commission march 10 1999 incorporated herein reference 103 364day revolving credit note dated february 12 1999 principal amount 4166667 made company favor suntrust filed exhibit 53 form 8k current report company filed commission march 10 1999 incorporated herein reference 104 364day revolving credit note dated february 12 1999 principal amount 5833333 made company favor nationsbank filed exhibit 54 form 8k current report company filed commission march 10 1999 incorporated herein reference 105 364day revolving credit note dated february 12 1999 principal amount 5833333 made company favor cibc filed exhibit 55 form 8k current report company filed commission march 10 1999 incorporated herein reference 106 five year revolving credit note dated february 12 1999 principal amount 8333333 made company favor first union filed exhibit 56 form 8k current report company filed commission march 10 1999 incorporated herein reference 107 five year revolving credit note dated february 12 1999 principal amount 8333333 made company favor suntrust filed exhibit 57 form 8k current report company filed commission march 10 1999 incorporated herein reference 108 five year revolving credit note dated february 12 1999 principal amount 11666667 made company favor nationsbank filed exhibit 58 form 8k current report company filed commission march 10 1999 incorporated herein reference 109 five year revolving credit note dated february 12 1999 principal amount 11666667 made company favor cibc filed exhibit 59 form 8k current report company filed commission march 10 1999 incorporated herein reference 1010 borrower pledge agreement dated february 12 1999 made company favor canadian imperial bank commerce administrative agent lenders filed exhibit 510 form 8k current report company filed commission march 10 1999 incorporated herein reference 1011 security deed dated february 12 1999 made company favor canadian imperial bank commerce administrative agent lenders filed exhibit 511 form 8k current report company filed commission march 10 1999 incorporated herein reference 1012 subsidiaries guarantee dated february 12 1999 made company favor canadian imperial bank commerce administrative agent lenders filed exhibit 512 form 8k current report company dated march 10 1999 incorporated herein reference 1013 amended restated employment agreement jonathan spiller company dated january 1 1999 incorporated reference exhibit 105 98 10k 1014 amended restated employment agreement robert r schiller company dated january 1 1999 incorporated reference exhibit 106 98 10k 1015 employment agreement stephen e croskrey company dated february 8 1999 incorporated reference exhibit 107 98 10k 1016 employment agreement nicholas b winiewicz company dated february 16 1999 incorporated reference exhibit 108 98 10k 1017 employment agreement warren b kanders company dated january 1 1999 incorporated reference exhibit 109 98 10k 1018 form registration rights agreement dated april 16 1997 company vendors dsl filed exhibit 103 form 8k current report company dated april 22 1997 incorporated herein reference 1019 form option 300000 shares common stock dated may 15 1996 granted richmont capital partners lp filed exhibit 1034 registration statement 33328879 form s1 company incorporated herein reference 1020 agreement dated april 21 1998 amending option dated may 15 1996 granted richmont capital partners lp 300000 shares common stock incorporated reference exhibit 1033 98 10k 1021 form indemnification agreement directors registrant dated september 21 1993 filed exhibit 104 form 10ksb annual report company fiscal year ended december 31 1993 incorporated herein reference 1022 form indemnification agreement officers registrant dated february 28 1994 filed exhibit 105 form 10ksb annual report company fiscal year ended december 31 1993 incorporated herein reference 1023 american body armor equipment inc 1994 incentive stock plan incorporated reference form s8 filed october 10 1994 reg 33018863 1024 american body armor equipment inc 1994 directors stock plan incorporated reference form s8 filed october 31 1994 reg 33018863 1025 armor holdings inc amended restated 1996 stock option plan incorporated reference companys 1997 definitive proxy statement respect companys 1997 annual meeting stockholders held june 12 1997 filed commission may 27 1997 1026 armor holdings inc amended restated 1996 nonemployee directors stock option plan incorporated reference companys 1997 definitive proxy statement respect companys 1997 annual meeting stockholders held june 12 1997 filed commission may 27 1997 1027 armor holdings inc 1998 stock option plan incorporated reference exhibit 1019 98 10k 1028 armor holdings inc 1999 stock incentive plan incorporated reference appendix companys 1999 definitive proxy statement respect companys 1999 annual meeting stockholders filed commission may 21 1999 1029 lease companys former primary facility located yulee florida dated july 26 1993 effective may 1 1993 filed exhibit 281 form 10ksb annual report company fiscal year ended december 31 1993 incorporated herein reference 1030 agreement dated march 8 1999 company kanders company inc incorporated reference exhibit 1021 98 10k 231 consent pricewaterhousecoopers llp 232 consent deloitte touche 233 consent deloitte touche llp 234 consent kpmg 235 consent ernst young llp 271 financial data schedule filed herewith incorporated herein reference armor holdings inc report independent accountants independent auditors report independent auditors report consolidated balance sheets consolidated income statements consolidated statement stockholders equity consolidated statements cash flow notes consolidated financial statements report independent certified public accountants stockholders board directors armor holdings inc opinion based upon audits report auditors accompanying consolidated balance sheets related consolidated statements income stockholders equity cash flows present fairly material respects financial position armor holdings inc subsidiaries company december 31 1999 1998 results operations cash flows periods ended december 31 1999 1998 conformity accounting principles generally accepted united states consolidated financial statements responsibility companys management responsibility express opinion consolidated financial statements based audits audit 1998 financial statements defence systems colombia sa wholly owned subsidiary statements reflect total assets 4974000 december 31 1998 total revenues 13266000 year ended december 31 1998 statements audited auditors whose report thereon furnished us opinion expressed herein insofar relates amounts included defence systems colombia sa based solely report auditors conducted audits consolidated financial statements accordance auditing standards generally accepted united states require plan perform audit obtain reasonable assurance whether consolidated financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits report auditors provide reasonable basis opinion expressed pricewaterhousecoopers llp march 27 2000 jacksonville florida independent auditors report board directors stockholders armor holdings inc jacksonville florida audited consolidated statements income stockholders equity cash flows year ended december 27 1997 armor holdings inc financial statements responsibility companys management responsibility express opinion financial statements based audit consolidated financial statements give retroactive effect merger dsl group limited dsl april 16 1997 accounted pooling interests described note 1 audit financial statements defense systems colombia dsc consolidated subsidiary statements total revenues 10766000 year ended december 31 1997 statements audited auditors whose reports furnished us opinion insofar relates amounts included dsc december 27 1997 financial statements based solely upon report auditors conducted audit acceptance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audit reports auditors provide reasonable basis opinion based upon audit reports auditors consolidated financial statements referred present fairly material respects results operations cash flows year ended december 27 1997 armor holdings inc conformity generally accepted accounting principles deloitte touche llp new york new york march 19 1999 armor holdings inc subsidiaries consolidated balance sheets december 31 1998 december 31 1999 thousands see notes consolidated financial statements armor holdings inc subsidiaries consolidated balance sheets december 31 1998 december 31 1999 thousands except share data see notes consolidated financial statements armor holdings inc subsidiaries consolidated income statements years ended december 27 1997 december 31 1998 1999 thousands except per share data see notes consolidated financial statements armor holdings inc subsidiaries consolidated statement stockholders equity years ended december 27 1997 december 31 1998 1999 thousands see notes consolidated financial statements armor holdings inc subsidiaries consolidated statements cash flows years ended december 27 1997 december 31 1998 1999 thousands see notes consolidated financial statements armor holdings inc subsidiaries notes consolidated financial statements 1 background summary significant accounting policies company nature business armor holdings inc companyor armor global provider security risk management services products multinational corporations governmental agencies law enforcement personnel two operating divisions armorgroup services armor holdings products armorgroup services division provides sophisticated security planning risk management electronic security systems integration consulting training services intellectual property asset protection business intelligence computer forensics investigative services armor provides services multinational corporations governmental nongovernmental agencies 22 offices 38 countries armor holdings products division manufactures sells broad range high quality branded law enforcement equipment leading market positions several product categories armor competes products include ballistic resistant vests tactical armor duty gear lessthanlethal munitions antiriot products narcotics identification kits products sold primarily law enforcement agencies worldwide network 500 distributors sales agents including approximately 350 united states armorgroup services division armorgroup services division provides broad range sophisticated security risk management solutions multinational corporations diverse industries natural resources financial services consumer products governmental nongovernmental agencies us department state united nations world bank clients typically personnel investments unstable often violent areas world armorgroup services offices five continents armorgroup services provides multinational clients diversified portfolio security solutions assist mitigate risks operations around world armorgroup services highly trained multilingual experienced security personnel work closely clients create implement solutions complex security problems services include design implementation risk management plans security systems provision security specialists training security personnel armorgroup services provides multinational clients specialized investigative services enhanced global network services include intellectual property asset protection related investigative services ranging protecting companies counterfeiting patent infringements product tampering extortion identifying unethical supplier activities addition armorgroup services provides business intelligence fraud investigation computer forensics asset tracing recovery services financial services companies law firms entities worldwide armor holdings products division armor holdings products division manufactures sells broad range high quality branded law enforcement equipment ballistic resistant vests tactical armor duty gear bomb disposal equipment lessthanlethal munitions antiriot products including tear gas distraction grenades narcotics identification kits custombuilt armored vehicles armor holdings inc subsidiaries notes consolidated financial statements continued 1 background summary significant accounting policies continued products marketed brand names wellknown respected law enforcement community american body armor safariland defense technology first defense mace protech nik armor holdings products division sells manufactured products primarily law enforcement agencies worldwide network 500 distributors sales agents including approximately 350 united states extensive distribution capabilities commitment customer service training enabled armor holdings products division become leading provider security equipment law enforcement agencies april 1997 company combined dsl group limited dsl business planning implementing solutions complex security problems high risk areas dsls services encompass provision detailed threat assessments security planning security training provision training supervision specialist manpower services implementation management fully integrated security systems companys combination dsl provided company cornerstone security services business recent acquisitions company expanded portfolio services company offer customers include business intelligence investigative due diligence intellectual property asset protection alarm monitoring executive protection engineering integration maintenance technical support sophisticated electronic computer driven security fire alarm systems combination dsl accounted poolingofinterests method accounting accordingly accompanying 1997 consolidated financial statements retroactively restated company dsl operated one entity since inception principles consolidation consolidated financial statements include accounts company whollyowned subsidiaries consolidation material intercompany balances transactions eliminated results operations companies acquired transactions accounted purchase method accounting included financial statements dates acquisition cash equivalents company considers highly liquid investments purchased original maturities three months less cash equivalents concentration credit risk companys accounts receivable consist amounts due customers distributors located throughout world international product sales generally require cash advance confirmed letters credit united states us banks inventories stated lower cost market determined firstin firstout fifo method fair value financial instruments carrying values companys various financial instruments reflected accompanying statements financial position approximate estimated fair values december 31 1998 december 31 1999 property equipment property equipment carried cost less accumulated depreciation computed using straightline method estimated lives related assets follows buildings improvements 5 39 years machinery equipment 3 7 years goodwill represents excess purchase price fair value net assets acquired purchase business combination goodwill intangible assets stated basis cost amortized principally straightline basis estimated future periods benefited 25 40 years reorganization value excess amounts allocable identifiable assets intangible asset amortized otherwise reduced amounts less would recognized straightline basis twentyfive years patents licenses trademarks patents licenses trademarks acquired acquisitions accounted purchase method accounting assets amortized straight line basis remaining lives 10 40 years impairment company periodically reviews carrying value property equipment goodwill longlived assets impairments recognized estimated undiscounted future cash flows less carrying amount asset research development research development costs expensed incurred company incurred approximately 605000 738000 1559000 years ended december 27 1997 december 31 1998 december 31 1999 respectively research development costs included operating expenses accompanying consolidated financial statements estimates preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect amounts reported financial statements accompanying notes significant estimates inherent preparation accompanying consolidated financial statements include carrying value longlived assets valuation allowances receivables inventories deferred income tax assets liabilities potential litigation claims settlements contract contingencies obligations actual results could differ materially estimates assumptions used income taxes company accounts income taxes pursuant statement financial accounting standards sfas 109 accounting income taxes asset liability method specified thereunder deferred taxes determined based difference financial reporting tax bases assets liabilities deferred tax liabilities offset deferred tax assets representing taxeffected cumulative net operating loss carryforwards deductible temporary differences subject applicable limits asset valuation allowance future benefits obtained utilization net operating loss carryforwards reduction income tax asset valuation allowance existing september 20 1993 applied reduce reorganization value excess amounts allocable identifiable assets december 31 1998 1999 companys consolidated foreign subsidiaries unremitted earnings approximately 3 million 6 million respectively company recorded provision united states federal income taxes since earnings considered permanently invested foreign earnings taxed according regulations existing countries earned revenue recognition company records sales gross amounts received including amounts paid agents commissions company records service revenue service provided contract basis revenues recorded time shipment products performance services revenues service contracts recognized earnings term contract returns minimal materially effect financial statements present values payments due salestype lease contracts recorded revenues cost goods sold charged book value equipment time shipment future interest income deferred recognized related lease term advertising company accounts advertising costs expense period incurred earnings per share company accounts earnings per share eps accordance sfas 128 standard establish standards computing presenting earnings per share eps applies entities publicly held common stock potential common stock standard replace presentation primary eps fully diluted eps presentation basic eps diluted eps respectively basic eps excludes dilution computed dividing earnings available common stockholders weighted average number common shares outstanding period similar fully diluted eps diluted eps reflects potential dilution securities could share earnings foreign currency translation accordance statement financial accounting standard 52 foreign currency translation assets liabilities denominated foreign currency translated us dollars current rate exchange existing yearend revenues expenses translated average monthly exchange rates cumulative translation adjustment net tax represents effect translating assets liabilities companys foreign operations recorded reduction equity 574000 1351000 years ended december 31 1998 december 31 1999 change included comprehensive income comprehensive income company accounts comprehensive income accordance sfas 130 reporting comprehensive income comprehensive income includes net income several items current accounting standards require recognized outside net income standard requires enterprises display comprehensive income components financial statements classify items comprehensive income nature financial statements display accumulated balances comprehensive income stockholders equity separately retained earnings additional paidin capital comprehensive increase follows 1997 1998 1999 net income 3301 9596 13196 foreign currency translation adjustments 124 221 727 comprehensive income 3177 8375 12419 reclassifications certain reclassifications made 1997 1998 financial statements order conform presentation adopted 1999 reclassifications effect net income retained earnings new accounting standardsin december1999 staff securities exchange commission sec issued staff accounting bulletin sab 101 revenue recognition financial statements sab 101 summarizes sec staffs view applying generally accepted accounting principles recognition revenues company evaluated impact reporting requirements sab 101 determined material impact consolidated results operations financial position cash flows adopted american institute certified public accountants aicpa statement position sop 985 reporting costs startup activities january 1 1999 expense costs incurred material impact consolidated financial statements result 2 business combinations supercraft garments limited april 7 1997 company acquired supercraft garments limited supercraft european manufacturer military apparel high visibility garments ballistic resistant vests distributes law enforcement military agencies throughout europe middle east asia company acquired supercraft total purchase price approximately 26 million acquisition supercraft accounted purchase method accordingly results operations included consolidated financial statements date acquisition dsl group limited april 16 1997 pooling interests calculation armor issued 1274217 shares common stock exchange outstanding ordinary shares dsl group limited dsl company incorporated june 3 1996 laws england wales dsl provides specialized security services high risk volatile environments gorandel trading limited june 9 1997 company acquired remaining 50 gorandel trading limited previously gtl provides specialized security services throughout russia central asia aggregate purchase price transaction approximately 24 million consisting 570000 cash paid closing 300000 cash paid september 30 1997 300000 cash payable subject certain conditions 115176 shares companys common stock valued 12 million part transaction company agreed make loan 200000 former stockholder gtl subject certain conditions subsequently repaid acquisition gtl accounted purchase method accordingly results operations included consolidated financial statements date acquisition low voltage systems technology inc january 30 1998 company acquired issued outstanding stock low voltage systems technology inc new jersey corporation lst leading engineered systems distributor specializing supply integration maintenance technical support sophisticated electronic computerdriven security fire alarm systems aggregate purchase price transaction approximately 750000 consisting 562500 cash paid closing 18519 unregistered shares companys common stock valued time 187500 company also assumed subsequently repaid approximately 200000 stockholder lst full satisfaction loans previously made stockholder lst acquisition lst accounted purchase method accordingly results operations included consolidated financial statements date acquisition asmara limited april 8 1998 company acquired issued outstanding stock asmara limited based london england hereinafter asmara provides business intelligence investigative due diligence services clients worldwide basis services include personnel investigations due diligence asset tracing litigation intelligence acquisition current aggregate purchase price pounds sterling 1825 million approximately 3 million purchase price consists pounds sterling 1575 million approximately 26 million cash paid closing 36846 unregistered shares companys common stock valued closing pounds sterling 250000 approximately 415000 36846 shares restricted sale april 8 2001 part acquisition additional purchase price contingent upon meeting certain agreed targets period could paid fiscal years ending 1998 1999 2000 total aggregate contingent purchase price could pounds sterling15 million based upon results operations 1998 company pay additional purchase price approximately 825000 additional purchase price fiscal 1998 reflected companys balance sheet december 31 1998 acquisition asmara accounted purchase method accordingly results operations included consolidated financial statements date acquisition protech armored products massachusetts inc april 14 1998 company acquired issued outstanding stock protech armored products massachusetts inc pittsfield massachusetts hereinafter protech leading manufacturer hard armor products including ballistic shields bulletproof vests visors personal accessories protech also manufactures protective armor products helicopters automobiles riot control vehicles acquisition accounted purchase current purchase price 16 million purchase price consists 1115 million cash 42592 unregistered shares companys common stock valued closing 485000 part transaction additional purchase price could paid fiscal years ending 1998 1999 2000 totaling aggregate 4 million 50 payable common stock remainder cash payment additional purchase price contingent upon operating performance meeting certain agreed targets period additional purchase price fiscal 1998 totaled approximately 401000 reflected companys balance sheet december 31 1998 shares issued purchase issued payment earnout restricted sale april 14 2001 acquisition protech accounted purchase method accordingly results operations included consolidated financial statements date acquisition cdr international ltd june 11 1998 company acquired issued outstanding stock cdr international ltd cdr london based investigation firm offices london charlotte los angeles moscow cdr provides full range consulting investigative services specializing worldwide intellectual property asset protection multinational corporations involved manufacturing distribution among things sportswear tobacco spirits pharmaceuticals services range protecting companies counterfeiting patent infringements product tampering extortion identifying unethical supplier activity use child labor cdr also provides training services law enforcement agencies foreign countries acquisition accounted purchase current aggregate purchase price pounds sterling15 million purchase price consists 210460 registered shares companys common stock valued closing pounds sterling15 million approximately 25 million additional purchase price could paid fiscal years ending 1999 2000 2001 totaling aggregate pounds sterling 60 million approximately 10 million payment additional purchase price contingent upon operating performance meeting certain agreed targets period additional purchase price paid entirely common stock company total shares companys common stock received closing 70154 shares 40 additional consideration restricted sale period three years date issue 50 additional consideration excess pounds sterling 425 million restricted sale 45 6 years acquisition cdr accounted purchase method accordingly results operations included consolidated financial statements date acquisition alarm protection services inc july 15 1998 company acquired outstanding common stock alarm protection services inc aps located kampala uganda aps fully licensed physical security consulting company providing alarm monitoring physical asset executive protection quick response cash transit capabilities aps approximately 900 employees operation uganda since 1993 since 1996 company managed aps management agreement acquisition accounted purchase current aggregate purchase price 1215166 purchase price consisted 734426 cash paid closing 17429 unregistered shares companys common stock valued closing approximately 200000 additional 280740 paid cash outstanding accounts receivable time closing collected based aps meeting certain performance criteria additional purchase price may paid fiscal years 1999 2000 totaling 235000 cash acquisition aps accounted purchase method accordingly results operations included consolidated financial statements date acquisition law enforcement division mace security international july 16 1998 company acquired certain assets law enforcement division mace security international hereinafter msi acquisition includes assets federal laboratories fed labs division exclusive license use mace registered trademark manufacture sale mace registered trademark brand aerosol defensive sprays law enforcement markets worldwide purchase price approximately 46 million cash company holding additional amount 600000 escrow 480000 payable six months closing paid january 1999 120000 payable twelve months closing acquisition fed labs accounted purchase method accordingly results operations included consolidated financial statements date acquisition safariland ltd inc april 12 1999 company acquired outstanding stock safariland ltd inc leading us manufacturer law enforcement military equipment based ontario california purchase price approximately 450 million subject certain adjustments consisting approximately 356 million cash 4 million 300752 shares companys common stock repayment approximately 51 million safarilands indebtedness transaction financed borrowings approximately 392 million transaction accounted purchase parvus company may 4 1999 company acquired outstanding capital stock parvus company washington dc based consulting firm specializing international investigations corporate intelligence security services purchase price approximately 13 million subject adjustments consisting approximately 754000 64876 shares companys common stock repayment approximately 297389 parvus indebtedness approximately 150000 cash aggregate 54449 additional shares may issued seller event certain revenue targets parvus achieved transaction accounted purchase alarm systems holding company fire alarm service corporation june 30 1999 company acquired outstanding capital stock two affiliated security systems integrators alarm systems holding company lyndhurst new jersey ash fire alarm service corporation tampa florida fas ash fas design install service commercial industrial security systems including access control systems burglar fire alarm systems closed circuit television engineered low voltage systems new jersey florida south carolinathe purchase price approximately 127 million consisting 1226021 shares companys common stock following unaudited consolidated results operations company presented pro forma basis acquisitions referenced consummated december 31 1998 years ended december 31 1998 1999 thousands except per share amounts revenues 152275 173973 net income 8235 13321 basic diluted earnings per share 044 059 weighted average shares 18775 22140 3 inventories summarized follows years ended december 31 1998 1999 thousands raw materials 4863 8812 workinprocess 1348 1243 finished goods 2892 6397 9103 16452 4 property plant equipment property plant equipment summarized follows years ended december 31 1998 1999 thousands land 1248 1330 buildings improvements 6352 7536 machinery equipment 8287 13780 construction progress 458 0 total 16345 22646 4172 6279 accumulated depreciation 12173 16367 depreciation expense 1997 1998 1999 approximately 994000 1409000 2107000 respectively statement operations 1998 1999 depreciation expense income statement reduced 131000 130270 respectively amortization proceeds received economic development grant received department housing urban development 5 accounts payable accrued expenses current liabilities accounts payable accrued expenses current liabilities summarized follows years ended december 31 1998 1999 thousands trade payables 3681 5717 accrued expenses 2980 6382 additional purchase price acquisition earnouts 1226 0 deferred conditions acquisitions 835 0 current liabilities 2572 1899 11294 13998 6 indebtedness companys subsidiary defense systems limited maintains 2 million overdraft facility variable interest rate requiring monthly interest payments facility expires march 31 2000 overdraft facility outstanding balance 11 million 19 million years ended december 31 1998 1999 respectively longterm capitalized year ending debt lease thousands 2000 359 167 2001 391 68 2002 422 38 2003 456 19 2004 492 0 thereafter 579 0 2699 292 less amount representing interest obligation capitalized lease 29 2699 263 7 preference shares dsl 7480000 4400000 shares preference shares par value pounds sterling pounds sterling 001 shares carry 8 dividend company paid cash 7508000 including accrued interest approximately 380000 purchase shares april 16 1997 8 merger integration nonrecurring charges approximately 25 million fees expenses associated dsl pooling transaction expensed fiscal 1997 expenses include approximately 11 million professional fees approximately 14 million costs consolidate financial administrative functions companys headquarters jacksonville 1999 company incurred integration costs approximately 26 million relating relocation assets personnel well severance costs integrating companies acquired year 9 income taxes income tax expense benefit years ended december 27 1997 december 31 1998 1999 consisted following 1997 1998 1999 thousands current domestic 1329 2638 6059 foreign 1458 2250 2641 total current 3579 5279 7517 deferred domestic 68 107 597 foreign 1271 309 111 total deferred 1203 202 486 total provision income taxes 2376 5077 8003 significant components companys net deferred tax asset december 31 1998 december 31 1999 follows 1998 1999 thousands deferred tax assets reserves currently deductible 267 1118 operating loss carryforwards 2890 3063 including tax credits 154 551 3311 4732 deferred tax asset valuation allowance 150 75 net deferred tax asset 3161 4657 december 31 1998 due internal growth company growth acquisition company reevaluated need valuation allowance result company reduced valuation allowance 1650000 corresponding reduction reorganization value excess amounts allocable identifiable assets since deferred tax asset initially established 1993 fresh start reporting reorganization 1999 company reduced valuation allowance 75000 deferred tax assets included assets balance sheet years ended december 31 1998 december 31 1999 following reconciles income tax expense computed federal statutory income tax rate provision income taxes recorded income statement 1997 1998 1999 provision income taxes statutory federal rate 340 350 state local income taxes net federal benefit 04 18 16 foreign income taxes 01 15 08 nondeductible items 74 01 040 419 372 378 effective change control company kanders florida holdings inc january 18 1996 utilization united states portion nol became restricted approximately 300000 per year december 31 1999 company net nols approximately 9230000 us portion net nols expire varying amounts fiscal years 2006 2019 company also tax credits 551000 subject certain limitations due acquisition safariland ltd credits expire varying amounts fiscal years 2019 10 operating leases company party various equipment vehicle leases dsl leases london office operating lease expiring 2002 approximate total future minimum annual lease payments arrangements follows year thousands 2000 325 2001 293 2002 230 2003 76 2004 10 thereafter 934 company incurred rent expense approximately 454000 net sublease income 35000 485000 887 net sublease income 141000 years ended december 27 1997 december 31 1998 december 31 1999 11 commitments contingencies employment contracts company party several employment contracts year ending december 31 1999 management contracts varying periods include restrictions competition termination agreements provide salaries bonuses benefits also specify delineate granting various stock options legallitigation matters january 16 1998 armorgroup services division ceased operations country angola cessation operations angola dictated governments decision deport armorgroups expatriate management supervisors result cessation operations angola armorgroup services division involved various disputes shrm sa minority joint venture partner relating angolan business shrm alleged result cessation operations suffered damages 5 million lost business company believes likelihood loss related disputes possible maximum exposure approximately 500000 march 1999 armor filed claim 161 million commercial court nanterre france shrm actual punitive damages shrms violation obligations resulting agreement armor settlement 1998 company settled lawsuit previous seller result settlement company received shares common stock previously issued seller held escrow pursuant purchase escrow agreements accordingly company recorded 1788000 treasury stock based fair value companys stock settlement date addition company normal course business subjected claims litigation areas product general liability management believe claims material impact companys financial statements 12 stockholders equity preferred stock preferred stock july 16 1996 companys shareholders authorized series preferred stock rights privileges preferences board directors shall time determine company issued preferred stock options grants 1994 company implemented incentive stock plan outside directors stock plan plans collectively provide granting certain key employees options acquire companys common stock well providing grant common stock outside directors full time employees pursuant plans 1050000 shares common stock reserved made available distribution option prices stock may purchased incentive stock plan less fair market value common stock dates grants effective january 19 1996 stock grants awarded 1994 incentive stock plan accelerated considered fully vested 1998 company implemented new nonqualified stock option plan pursuant new plan 725000 shares common stock reserved made available distribution january 1 1999 company distributed 725000 shares allocated plan 1999 company implemented 1999 stock incentive plan 1999 plan company reserved 2000000 shares common stock 1999 plan 1999 plan provides granting employees officers directors consultants independent contracts advisors company option prices stock may purchased 1999 plan less fair market value common stock dates grants effective january 1 1996 company adopted sfas 123 accounting stockbased compensation sfas 123 sfas 123 establishes fair value based method accounting stockbased employee compensation plans however also allows entity continue measure compensation cost plans using intrinsic value based method accounting prescribed accounting principles board apb opinion 25 accounting stock issued employees fair value based method compensation cost measured grant date based value award recognized service period usually vesting period intrinsic value based method compensation costs excess quoted market price stock grant date measurement date amount employee must pay acquire stock company elected continue account employee stock compensation plans apb opinion 25 pro forma disclosures net earnings per share fair value based method accounting defined sfas 123 applied compensation cost stock option grants determined based fair value grant dates 1998 1997 1996 consistent method prescribed sfas 123 companys net earnings per share would adjusted pro forma amounts indicated sfas 123 fair value option grant estimated date grant using blackscholes optionpricing model following weightedaverage assumptions used grants 1997 1998 1999 dividend yield 0 expected volatility 33 1997 1998 319 1999 riskfree interest rates 593 600 550 1997 1998 1999 respectively expected lives 3 years outstanding options consisting tenyear incentive nonqualified stock options vest become exercisable three year period date grant outstanding options expire ten years date grant upon retirement company contingent upon continued employment applicable tenyear period summary status stock option grants december 31 1999 changes years ending dates presented weighted average options exercise price outstanding december 28 1996 1825033 388 granted 485000 1036 exercised 217332 097 forfeited 51701 437 569 outstanding december 27 1997 2041000 granted 286450 1032 exercised 148582 111 forfeited 101667 1012 outstanding december 31 1998 2077201 646 granted 1871000 1114 exercised 298277 365 forfeited 104666 954 outstanding december 31 1999 3545258 options exercisable december 31 1999 1466955 weightedaverage fair value options granted 1999 5516720 following table summarizes information stock options outstanding december 31 1999 remaining nonexercisable options december 31 1999 become exercisable follows 2000 580152 2001 575150 2002 230667 earnings per share following reconciliation numerators denominators basic diluted earnings per share computations net income net income available common stockholders 13 supplemental cash flow information 14 investment unconsolidated subsidiaries december 31 1998 december 31 1999 company 20 investment jardine securicor gurkha services limited equity method accounting investments used following summarizes significant financial information unconsolidated subsidiary twelve months ended december 31 1998 december 31 1999 1998 1999 thousands total assets 4098 3211 retained earnings 1212 870 total revenues 24731 18401 net income 3157 726 15 information concerning business segments geographical sales company leading global provider security risk management services products multinational corporations governmental agencies law enforcement personnel two operating divisions armorgroup services armor holdings products armorgroup services division provides sophisticated security planning risk management electronic security systems integration consulting training services well intellectual property asset protection business intelligence investigative services armor holdings products division manufactures sells broad range high quality branded law enforcement equipment company invested substantial resources outside united states plans continue future substantially operations services segment conducted emerging markets africa asia south america operations subject risk new different legal regulatory requirements local jurisdictions tariffs trade barriers potential difficulties staffing managing local operations potential imposition restrictions investments potentially adverse tax consequences including imposition increase withholding taxes remittances payments subsidiaries local economic political social conditions governments many developing countries exercised continue exercise substantial influence many aspects private sector government actions future could significant adverse effect economic conditions developing country may otherwise material adverse effect company operating companies company political risk insurance countries currently conducts business moreover applicable agreements relating companys interests operating companies frequently governed foreign law result event dispute may difficult company enforce rights accordingly company may little recourse upon occurrence developments revenues income operations amortization equity earnings integration expenses interest income net total assets segments years december 27 1997 december 31 1998 1999 follows following unaudited financial information respect sales principal geographic areas years ended december 27 1997 december 31 1998 1999 follows 16 quarterly results following table presents summarized unaudited quarterly results operations company fiscal 1998 1999 company believes necessary adjustments included amounts stated present fairly following selected information read conjunction consolidated financial statements notes thereto included elsewhere herein future quarterly operating results may fluctuate depending number factors results operations particular quarter necessarily indicative results operations full year quarter fiscal 1998 first second third fourth quarter thousands except per share data revenue 19635 22833 26444 28295 gross profit 6034 7007 8604 9111 net income 1774 1835 2326 2661 basic earnings per share 011 014 016 diluted earnings per share 010 011 014 015 17 employee benefit plans october 1997 company formed 401k plan provides voluntary contributions employees allows discretionary contribution company form cash stock company make discretionary contribution plan 1997 1998 1999 18 related party transactions company entered following transactions related parties purchases sales company subcontracts certain security guard services alpha inc wholly owned shareholder company fiscal 1997 1998 1999 security guard service fees approximately 3286000 5204000 3392000 respectively paid alpha december 31 1997 1998 1999 company outstanding payables alpha approximately 377000 341000 94641 respectively liabilities included accounts payable december 31 1999 alpha owed company approximately 117785 included accounts receivable b january 1 1999 company entered agreement kanders company inc provide investment banking financial advisory services company specific details services compensation paid kanders co determined parties case basis warren b kanders chairman board company sole stockholder kanders company inc c march 1999 company loaned stephen e croskey president companys armor holdings products division 111000 connection relocation jacksonville florida initial 90day grace period loan bear interest prime rate announced time nationsbank na loan repaid 1999 19 subsequent events february 25 2000 company amended credit agreement cibc inc nationsbank na first union national bank suntrust bank north florida na lenders nationsbank na documentation agent canadian imperial bank commerce administrative agent according terms amended credit facility several lenders established fiveyear 100000000 line credit company indebtedness credit agreement evidenced 1 five year revolving credit notes 40000000 2 364day revolving credit notes 20000000 convertible end 364 days fouryear term notes borrowings credit facility bear interest either 1 base rate plus applicable margin ranging 125 375 depending certain conditions 2 eurodollar rate plus applicable margin ranging 1375 1625 depending certain conditions addition credit agreement provides nationsbank na shall make swingline loans 5000000 used working capital purposes cibc inc nationsbank na also issue letters credit 5000000 company part credit facility companys direct indirect domestic subsidiaries agreed guarantee companys obligations credit facility pursuant guarantee certain subsidiaries credit facility collateralized 1 pledge issued outstanding shares stock certain domestic subsidiaries company pursuant pledge agreement 2 pledge 65 issued outstanding shares companys foreign subsidiary armor holdings limited organized laws england wales january 2000 company announced acquisition new technologies inc company specializing computer forensics training software development computer evidence consulting transaction accounted purchase march 9 2000 company announced acquisition outstanding capital stock breakfree inc leading manufacturer branded products including specialty lubricants cleaners preservatives military weapon maintenance systems purchase price 238 million cash transaction accounted purchase march 23 2000 company announced acquisition assets special clearance services provider landmine risk reduction services subsaharan africa transaction accounted purchase signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized armor holdings inc jonathan spiller jonathan spiller president chief executive officer director dated march 30 2000 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated sjonathan spiller warren b kanders jonathan spiller warren b kanders president chief executive chairman board directors officer director march 30 2000 principal executive officer march 30 2000 snicholas winiewicz nicholas sokolow nicholas winiewicz nicholas sokolow chief financial officer director principal accounting officer march 30 2000 march 30 2000 sburtt r ehrlich thomas w strauss burtt r ehrlich thomas w strauss director march 25 1999 march 22 1999 srichard c bartlett alair townsend richard c bartlett alair townsend director march 30 2000 march 30 2000 sstephen salzman stephen salzman director march 30 2000 exhibit index following exhibits filed herewith item 7 managements discussion analysis financial condition results operation analysis companys results operations viewed conjunction accompanying financial statements including notes thereto contained item 8item 7 managements discussion analysis financial condition results operations analysis companys results operations viewed conjunction accompanying financial statements including notes thereto contained item 8 annual report form 10k report contains forwardlooking statements within meaning section 27a securities act section 21e exchange act statements predictive nature depend upon refer future events conditions include words expects anticipates intends plans believes estimates could similar expressions forward looking statements although believe statements based upon reasonable assumptions give assurance goals achieved see forward looking statements actual results may differ expressed implied forwardlooking statements respect forwardlooking statements contained report company believes subject number risk factors including inherent unpredictability currency fluctuations competitive actions including pricing ability realize cost reductions operating efficiencies including ability implement headcount reduction programs timely manner unduly disrupt business operations ability identify realize costreduction opportunities general economic business conditions forwardlooking statements report evaluated light important risk factors company overview leading global provider security risk management services products multinational corporations governmental agencies law enforcement personnel two operating divisions armor group services armor holdings products armor group services division provides sophisticated security planning risk management electronic security systems integration consulting training services well intellectual property asset protection business intelligence investigative services provide services multinational corporations governmental nongovernmental agencies 22 offices 18 countries armor holdings products division manufactures sells broad range high quality branded law enforcement equipment leading market position several product categories compete products include ballistic resistant vests tactical armor lessthanlethal munitions antiriot products narcotics identification kits products sold primarily law enforcement agencies worldwide network 500 distributors sales agents including approximately 350 united states believe significant opportunities exist grow company extend global infrastructure geographic expansion strategic acquisitions related businesses fragmented security risk management services products industry acquisitions pursued strategy growth acquisition businesses assets complement existing operations use several criteria evaluate prospective acquisitions including whether business acquired broadens scope services products offer geographic areas serve offers attractive margins accretive earnings offers opportunity enhance profitability improving efficiency operations results operations following table sets forth selected statement operations data us percentage total revenues periods indicated fiscal 1998 compared fiscal 1997 service revenues service revenues increased 31 million 64 516 million fiscal 1998 compared 484 million fiscal 1997 increase primarily due award new contracts armor group services division integration acquisitions completed 1998 increase partially offset reduction 120 million revenue associated termination angolan operation early 1998 product revenues product revenues increased 158 million 528 456 million fiscal 1998 compared 299 million fiscal 1997 increase primarily due internal growth approximately 25 fiscal 1997 acquired companies owned us one year increase resulting integration acquisitions completed 1998 cost sales cost sales increased 90 million 157 665 million fiscal 1998 compared 574 million fiscal 1997 increase primarily due increased revenues fiscal 1998 compared fiscal 1997 percentage total revenues cost sales decreased 684 fiscal 1998 733 fiscal 1997 reflecting greater proportion total revenue generated armor holdings products division fiscal 1998 higher gross margins armor group services division operating expenses operating expenses increased 46 million 371 172 million 176 total revenues fiscal 1998 compared 125 million 159 total revenues fiscal 1997 increase primarily due increased revenues armor holdings products division higher sales marketing expenses revenues armor group services division depreciation amortization depreciation amortization expense increased 200000 182 13 million fiscal 1998 compared 11 million fiscal 1997 increase excludes depreciation expense included cost sales increase primarily due additional amortization intangible assets acquired fiscal 1998 would reflected fiscal 1997 merger integration nonrecurring charges fees expenses associated acquisition dsl component armor group services division accounted pooling interests nonrecurring expenses relating financial administrative restructuring integration dsl armor group services division totaled approximately 25 million fiscal 1997 nonrecurring charges incurred fiscal 1998 equity earnings investees equity earnings investees decreased 33000 44 713000 fiscal 1998 compared 746000 fiscal 1997 equity earnings investees fiscal 1998 comprised 20 investment jardine securicor gurkha services limited jsgs hong kong joint venture company equity earnings investees fiscal 1997 related investment jsgs well dsls original 50 investment gorandel trading limited june 9 1997 100 investment consolidated results operations interest income expense net interest income 625 fiscal 1998 compared interest expense 195 fiscal 1997 increase primarily due interest income earned proceeds 1997 public offering repayment balance approximately 186 million outstanding credit facility time offering completed operating income operating income increased 84 million 1582 136 million fiscal 1998 compared 53 million fiscal 1997 primarily due factors discussed nonoperating income nonoperating income decreased 364000 929 28000 fiscal 1998 compared 392000 fiscal 1997 decrease primarily due fees paid us former employee fiscal 1997 connection role agent sale common stock income taxes income taxes increased 27 million 1137 fiscal 1998 compared 24 million fiscal 1997 based provision 37 provision comprised us federal state statutory rates approximately 36 usbased companies 38 blended effective tax rate foreign operations dividends preference shares connection acquisition dsl unit armor group services division incurred 143000 preference share dividends fiscal 1997 acquired shares underlying dividends april 16 1997 therefore incur dividends shares fiscal 1998 net income applicable common stockholders net income applicable common stockholders increased approximately 54 million 1722 86 million fiscal 1998 compared 32 million fiscal 1997 increase primarily due factors discussed fiscal 1997 compared fiscal 1996 service revenues service revenues increased 355 million 2739 484 million fiscal 1997 compared 130 million fiscal 1996 increase primarily due reflection five months operations fiscal 1996 results dsl operations included august 1 1996 previously stated addition armor group services generated substantial internal growth fiscal 1997 fiscal 1997 revenues also included approximately 120 million related angolan operations ceased january 16 1998 see note 17 consolidated financial statements product revenues product revenues increased 119 million 658 299 million fiscal 1997 compared 180 million fiscal 1996 increase primarily due sales generated dtc nik operations fiscal 1997 well sales generated supercraft date acquisition april 7 1997 december 27 1997 internal growth body armor business cost sales cost sales increased 363 million 1713 574 million fiscal 1997 compared 211 million fiscal 1996 increase primarily due combination dsl 288 million impact direct operating costs fiscal 1997 remaining 75 million increase cost sales attributed increased costs armor holdings products business associated 658 increase revenues percentage total revenues cost sales increased 733 fiscal 1997 compared 684 fiscal 1996 reflecting higher cost sales associated security services business fiscal 1997 also recorded reserves approximately 500000 related cessation operations angola see note 17 consolidated financial statements operating expenses operating expenses increased 56 million 806 125 million 159 total revenues fiscal 1997 compared 69 million 223 total revenues fiscal 1996 increase actual dollar amount operating expenses periods primarily due overhead costs associated dsl dtc nik approximately 800000 selling general administrative costs headquarters jacksonville florida primarily development infrastructure holding company depreciation amortization depreciation amortization expense increased 11 million 1034 fiscal 1997 compared 554000 fiscal 1996 573000 increase approximately 260000 due amortization intangible assets acquired 1996 another approximate 250000 due amortization acquired goodwill dsl acquisition remaining increase due amortization goodwill acquired supercraft gtl acquisitions merger integration nonrecurring charges fees expenses associated completing dsl acquisition expended fiscal 1997 nonrecurring expenses combination certain charges relating financial administrative restructuring consolidation dsl armor holdings totaled approximately 25 million equity earnings investees equity earnings investees amounted approximately 746000 fiscal 1997 compared 320000 1996 equity earnings investees fiscal 1997 relates dsls original 50 investment gtl june 9 1997 date acquired remaining 50 interest owned dsl point 100 investment consolidated results equity also relates dsls 20 investment jsgs 1996 period reflected five months equity earnings results dsl operations included august 1 1996 previously stated interest expense net interest expense net decreased 320000 621 195000 fiscal 1997 compared 515000 fiscal 1996 decrease interest expense primarily due interest income earned proceeds realized 1997 public offering repayment balance approximately 186 million outstanding credit facility time operating income operating income increased 31 million 1468 53 million fiscal 1997 compared 21 million fiscal 1996 management believes additional measurement operating income merger integration nonrecurring charges useful meaningful understanding operating performance however operating income merger integration nonrecurring charges considered alternative either operating income net income indicator operating performance cash flow measurement liquidity operating income merger integration nonrecurring charges 25 million increased 57 million 2656 78 million fiscal 1997 compared 21 million fiscal 1996 increase due combination dsl acquisitions supercraft dtcoa assets nik assets well internal growth within dsl american body armor equipment inc delaware corporation aba nonoperating income nonoperating income increased 390000 392000 fiscal 1997 compared 2000 fiscal 1996 increase resulted primarily due fees paid us former employee fiscal 1997 connection role agent sale common stock income taxes january 1 1996 income tax net operating loss carryforward nol approximately 44 million effective change control kanders florida holdings inc january 18 1996 utilization nol became restricted united states approximately 300000 per year however december 27 1997 net operating losses increased approximately 78 million expire varying amounts fiscal years 2006 2010 increase net operating losses result recording dsl deferred tax assets related fiscal 1997 losses generated united kingdom offset future income taxes totaled 24 million fiscal 1997 compared 12 million fiscal 1996 provision 419 based us federal state statutory rates approximately 35 usbased companies 38 blended effective tax rate foreign operations increased approximately 750000 certain items primarily mergerrelated nonrecurring charges tax deductible accordance statement financial accounting standards 109 accounting income taxes sfas 109 recorded deferred tax asset representing cumulative net operating loss carryforward deductible temporary differences subject applicable limits asset valuation allowance december 27 1997 gross amount deferred tax asset 31 million 18 million offset valuation allowance dividends preference shares connection acquisition dsl unit armor group services division incurred 143000 239000 fiscal 1997 fiscal 1996 respectively preference share dividends accrued dividends well shares underlying dividends acquired us april 16 1997 dsl transaction net income applicable common stockholders net income applicable common stockholders increased 25 million 3583 32 million fiscal 1997 compared 689000 fiscal 1996 increase due effect acquisitions made fiscal 1997 together growth core businesses partially offset nonrecurring charge incurred us fiscal 1997 excluding merger integration nonrecurring charges discussed would earned 033 per diluted share compared actual diluted earnings per share 021 quarterly results set forth certain unaudited quarterly financial data last eight quarters data expressed percentage revenue respective quarters information derived unaudited financial statements opinion management include adjustments consisting normal recurring adjustments necessary fairly present quarterly information accordance generally accepted accounting principles operating results quarter necessarily indicative results expected future period liquidity capital resources historically funded operations cash flow operations debt equity financing including april 1996 private placement 115 million convertible notes november 1996 10 million revolving credit facility barnett bank increased 20 million march 1997 july 1997 public offering 4000000 shares common stock february 12 1999 established fiveyear 60 million line credit march 19 1999 5757951 outstanding 54211749 available credit facility february 12 1999 company entered credit agreement among company borrower cibc inc cibc nationsbank na nationsbank first union national bank first union suntrust bank north florida na suntrust lenders nationsbank documentation agent canadian imperial bank commerce administrative agent credit agreement pursuant credit agreement several lenders established fiveyear 60000000 line credit facility benefit company companys indebtedness credit facility evidenced five year revolving credit notes 40000000 ii 364day revolving credit notes 20000000 convertible companys option end 364 days fouryear term notes borrowings credit facility bear interest either base rate plus applicable margin ranging 125 375 depending certain conditions ii eurodollar rate plus applicable margin ranging 1375 1625 depending certain conditions addition credit facility provides nationsbank make swingline loans 5000000 available company used company working capital purposes cibc inc nationsbank na also issue letters credit 5000000 company part credit facility direct indirect domestic subsidiaries company nik public safety inc nik armor holdings properties inc properties defense technology corporation america dtc low voltage systems technology inc lst federal laboratories inc fli american body armor equipment inc abae protech armored products massachusetts inc protech together nik properties dtc lst fli abae collectively direct domestic subsidiaries us defense systems inc usds cdr international inc cdr together direct domestic subsidiaries usds collectively domestic subsidiaries agreed guarantee companys obligations credit facility pursuant subsidiaries guarantee credit facility secured pledge company issued outstanding shares stock direct domestic subsidiaries pursuant borrower pledge agreement ii pledge company 65 issued outstanding shares foreign subsidiary armor holdings limited organized laws england wales pursuant security deed connection closing credit facility company fully paid existing credit facility barnett bank na obtained release collateral security interests barnett bank na held connection facility december 27 1997 company working capital 319 million reflected net proceeds 194 million paying existing credit facility zero issuance common stock 1997 public offering well cash flow operations december 31 1998 company working capital 244 million company anticipates cash generated operations borrowings credit facility enable company meet liquidity working capital expenditure requirements next 12 months company however may require additional financing pursue strategy growth acquisitions financing required assurances available obtained terms favorable company basis dilutive stockholders companys spending fiscal 1999 capital expenditures approximately 24 million company already spent approximately 426577 expenditures include among things leasehold improvements computer equipment software manufacturing machinery equipment new accounting pronouncements june 1997 financial accounting standards board issued statement financial accounts standards 130 reporting comprehensive income sfas 130 comprehensive income includes net income several items current accounting standards require recognized outside net income standard requires enterprises display comprehensive income components financial statements classify items comprehensive income nature financial statements display accumulated balances comprehensive income stockholders equity separately retained earnings additional paidin capital sfas 130 effective fiscal years beginning december 31 1997 adopted standard fiscal year beginning december 28 1997 inflation believe relatively moderate rates inflation recent years significant impact revenue profitability historically able offset inflationary effects either increasing prices improving cost efficiencies year 2000 compliance many older computer software programs refer years terms final two digits programs may interpret year 2000 mean year 1900 instead corrected programs could cause daterelated transaction failures developed year 2000 initiative address concern project team performed detailed assessment internal computer systems discussed developing implementing plans correct problems may arise result year 2000 expect projects successfully completed 1999 year 2000 status failure could affect many research development production financial administrative communication operations systems critical business identified nonyear 2000 compliant either replaced corrected programming modifications addition separate team looking year 2000 readiness aspects business including customer ordertaking manufacturing raw materials supply plant process equipment goal remedied replaced systems operational second quarter 1999 allow time testing verification process communicating significant vendors major customers suppliers communications providers banks whose systems failures potentially could significant impact operations determine extent vulnerable third parties failure remediate year 2000 issues verify year 2000 readiness testing systems appropriate possible part year 2000 initiative developing business continuity plans areas critical business continuity plans designed mitigate serious disruptions business flow beyond end 1999 operate independent external providers year 2000 compliance major drive contingency planning first half 1999 expectation business groups plans place end second quarter 1999 based current plans efforts date anticipate year 2000 problems material adverse effect business financial condition results operations yet developed contingency plans event year 2000 remediation efforts unsuccessful plan 1999 identified reasonably likely worst case scenario event become year 2000 compliant continue evaluate year 2000 issue attempting address year 2000 deficiencies external internal costs specifically associated modifying internal use software year 2000 compliance expensed incurred date spent 19300 project costs incurred remainder 1999 remedy year 2000 problems estimated approximately 30700 costs include normal system upgrades replacements expect costs relating year 2000 remediation efforts material adverse effect business financial condition results operations expectations subject uncertainties example unsuccessful identifying remedying year 2000 problems critical operations affected inability suppliers major customers continue operations due problem business financial condition results operations could materially adversely effected total costs incur connection year 2000 problems influenced ability successfully identify year 2000 system flaws nature amount programming required fix affected programs related labor andor consulting costs remediation ability third parties business relationships successfully address year 2000 concerns unforeseen factors could material adverse effect business financial condition results operations forward looking statements believe important communicate expectations investors accordingly report contains discussion events results yet occurred realized identify type discussion often termed forwardlooking statements words phrases expects anticipates intends plans believes estimates could execution acquisition strategies expansion product lines increase distribution networks product sales areas among others whose future success may difficult predict read forwardlooking statements carefully discuss future expectations contain projections future results operations financial position state expectations future performance actions current potential new competitors changes technology seasonality business cycles new regulatory requirements factors impact greatly upon strategies expectations outside direct control may events future able accurately predict control cautionary language report provide examples risks uncertainties events may cause actual results differ expectations express forwardlooking statements invest common stock aware occurrence certain events described report could adversely affect business results operations financial position item 7aitem 7 managements discussion analysis financial condition results operations managements discussion analysis financial condition results operations contains forwardlooking statements within meaning section 27a securities act section 21e exchange act statements predictive nature depend upon refer future events conditions include words expects anticipates intends plans believes estimates could similar expressions forward looking statements although believe statements based upon reasonable assumptions give assurance goals achieved see forward looking statements actual results may differ expressed implied forwardlooking statements believe subject number risk factors including inherent unpredictability currency fluctuations competitive actions including pricing ability realize cost reductions operating efficiencies including ability implement headcount reduction programs timely manner unduly disrupt business operations ability identify realize costreduction opportunities general economic business conditions forwardlooking statements report evaluated light important risk factors listed managements discussion analysis financial condition results operations elsewhere annual report form 10k including accompanying financial statements company overview leading global provider security risk management services products multinational corporations governmental agencies law enforcement personnel two operating divisions armorgroup services armor holdings products armorgroup services division provides sophisticated security planning risk management electronic security systems integration consulting training services well intellectual property asset protection business intelligence investigative services provide services multinational corporations governmental nongovernmental agencies offices 38 countries armor holdings products division manufactures sells broad range high quality branded law enforcement equipment leading market position several product categories compete products include ballistic resistant vests tactical armor lesslethal munitions antiriot products police batons forensic fingerprint evidence collection equipment narcotics identification kits products sold primarily law enforcement agencies worldwide network 500 distributors sales agents including approximately 350 united states believe significant opportunities exist grow company extend global infrastructure geographic expansion strategic acquisitions related businesses fragmented security risk management services products industry acquisitions pursued strategy growth acquisition businesses assets complement existing operations use several criteria evaluate prospective acquisitions including whether business acquired broadens scope services products offer geographic areas serve offers attractive operating margins accretive earnings offers opportunity enhance profitability improving efficiency operations results operations following table sets forth selected statement operations data percentage total revenues periods indicated fiscal year 1998 1999 2000 revenue products 47 62 61 services 53 38 39 total revenues 100 interest income expense net 1 0 1 operating income 13 12 provision income taxes 5 4 net income 9 8 ebitda 16 15 16 fiscal 2000 compared fiscal 1999 product revenues product revenues increased 386 million 400 1353 million fiscal 2000 compared 967 million fiscal 1999 increase primarily due strong internal growth including year increases decreases businesses acquired previous year 204 well inclusion full year results safariland 1999 acquisitions breakfree monadnock lightning powder fiscal 2000 acquisitions accounted purchases accordingly results operations included period acquisition service revenues service revenues increased 257 million 428 856 million fiscal 2000 compared 600 million fiscal 1999 increase primarily due strong internal growth including year increases decreases security businesses acquired previous year 236 well inclusion full year results alarm systems holding company fire alarm service corporation fiscal 1999 acquisitions nti nas alpha b ovg scs technisec traquair fiscal 2000 acquisitions accounted purchases accordingly results operations included period acquisition cost sales cost sales increased 431 million 456 1375 million fiscal 2000 compared 944 million fiscal 1999 increase primarily due increased revenues fiscal 2000 compared fiscal 1999 percentage total revenues cost sales increased 622 fiscal 2000 603 fiscal 1999 operating expenses operating expenses increased 133 million 360 503 million fiscal 2000 compared 370 million fiscal 1999 increase primarily due increased revenues products services division well acquisitions completed 2000 percentage sales operating expenses decreased 228 sales fiscal 2000 compared 236 fiscal 1999 amortization expense increased 10 million 392 34 million fiscal 2000 compared 25 million fiscal 1999 increase primarily due additional amortization intangible assets acquired result acquisitions completed fiscal 2000 well full year amortization relating 1999 acquisitions equity earnings investees equity earnings investees decreased 92000 514 87000 fiscal 2000 compared 179000 fiscal 1999 equity earnings investees comprised 20 investment jardine securicor gurkha services limited jsgs hong kong joint venture company sold investment fiscal 2000 see income integration nonrecurring charges integration nonrecurring charges increased 07 million 281 33 million fiscal 2000 compared 26 million fiscal 1999 related integration acquired companies costs include relocation expenses equipment employees severance costs well charges integrating sales marketing efforts operating income operating income increased 61 million 298 265 million compared 204 million fiscal 1999 due reasons discussed interest expense income net interest expense 19 million fiscal 2000 compared net interest income 17000 fiscal 1999 increase primarily due interest debt incurred fund acquisitions make purchases stock repurchase plan income 18 million fiscal 2000 compared 08 million fiscal 1999 increase primarily due gain approximately 17 million recognized sale investment jsgs fiscal 2000 income taxes provision income taxes increased 13 million 167 93 million fiscal 2000 compared 80 million fiscal 1999 provision based companys us federal state statutory income tax rates approximately 37 usbased companies 106 blended effective tax rate foreign operations effective tax rate companys foreign operations necessarily indicative expected future rates due changing concentration mix income various countries company operates effective tax rate 2000 1999 354 378 respectively decrease companys effective tax rate result increased amount income earned jurisdictions whose statutory tax rates united states percentage operating income net income net income increased approximately 39 million 292 170 million fiscal 2000 compared 132 million fiscal 1999 increase primarily due combination acquisitions internal growth factors discussed fiscal 1999 compared fiscal 1998 product revenues product revenues increased 511 million 1119 967 million fiscal 1999 compared 456 million fiscal 1998 increase primarily due acquisition protech fed labs 1998 safariland ltd inc 1999 well strong internal growth acquisitions accounted purchases results operations recorded period company owned service revenues service revenues increased 84 million 163 600 million fiscal 1999 compared 516 million fiscal 1998 increase primarily due acquisitions integration lst asmara cdr aps acquired 1998 parvus alarm systems holding company fire alarm service corporation acquired 1999 acquisitions accounted purchases results operations recorded period company owned cost sales cost sales increased 328 million 532 944 million fiscal 1999 compared 616 million fiscal 1998 increase primarily due increased revenues fiscal 1999 compared fiscal 1998 percentage total revenues cost sales decreased 602 fiscal 1999 634 fiscal 1998 reflecting greater proportion total revenue generated armor holdings products division fiscal 1999 higher gross margins armorgroup services division divisions improved gross margins 1999 lowering costs greater efficiencies concentrating higher margin investigative business services division operating expenses operating expenses increased 151 million 689 370 million 236 total revenues fiscal 1999 compared 219 million 225 total revenues fiscal 1998 increase primarily due increased revenues armor holdings products division higher sales marketing expenses revenues armorgroup services division acquisitions safariland parvus ash fas completed 1999 amortization expense increased 11 million 829 25 million fiscal 1999 compared 13 million fiscal 1998 increase primarily due additional amortization intangible assets acquired result safariland parvus ash fas acquisitions fiscal 1999 would reflected fiscal 1998 equity earnings investees equity earnings investees decreased 534000 749 179000 fiscal 1999 compared 713000 fiscal 1998 decrease earnings primarily due losses incurred jardine securicor gurkha services limited jsgs hong kong joint venture company operations india office subsequently closed merger integration nonrecurring charges merger integration nonrecurring charges increased 26 million 26 million 1999 related integration acquired companies costs include relocation expenses equipment employees severance costs well charges integrating sales marketing efforts company incur charges 1998 operating income operating income increased 74 million 567 204 million fiscal 1999 compared 130 million fiscal 1998 primarily due factors discussed interest expense net interest expense 17000 fiscal 1999 compared net interest income 625000 fiscal 1998 increase primarily due amortization fees associated 60 million bank credit agreement completed february 1999 well interest debt acquired part purchased companies income nonoperating income increased 788000 816000 fiscal 1999 compared 28000 fiscal 1998 primarily due gain sale stock mace security international acquired warrants part acquisition certain assets law enforcement divisions mace security international july 1998 income taxes provision income taxes increased 29 million 576 fiscal 1999 80 million compared 51 million fiscal 1998 provision based companys us federal state statutory income tax rates approximately 39 usbased companies 37 blended effective tax rate foreign operations effective tax rate companys foreign operations necessarily indicative continued tax rates due continually changing concentration income country company operates increase companys effective tax rate result increased amortization goodwill generated safariland parvus ash fas acquisitions tax deductible net income net income increased approximately 46 million 535 132 million fiscal 1999 compared 86 million fiscal 1998 increase primarily due combination acquisitions made year successfully integrated factors discussed quarterly results set forth certain unaudited quarterly financial data last eight quarters data expressed percentage revenue respective quarters information derived unaudited financial statements opinion management include adjustments consisting normal recurring adjustments necessary fairly present quarterly information accordance generally accepted accounting principles operating results quarter necessarily indicative results expected future period quarter ended thousands except per share data liquidity capital resources historically funded operations cash flow operations debt equity financing including may 1999 public offering 635 million common stock february 12 1999 entered credit agreement borrower cibc inc cibc bank america na bofa first union national bank first union suntrust bank north florida na suntrust lenders collectively referred lenders nationsbank documentation agent canadian imperial bank commerce administrative agent credit agreement february 25 2000 amended credit agreement lenders pursuant credit agreement amended lenders established fiveyear 100000000 line credit agreement benefit indebtedness credit agreement evidenced five year three years remaining revolving credit notes 100000000 borrowings credit agreement bear interest either 1 base rate plus applicable margin ranging 000 375 depending certain conditions eurodollar rate plus applicable margin ranging 1125 1875 depending certain conditions addition credit agreement provides bank america make swingline loans 5000000 available us used working capital purposes cibc inc bank america na also issue letters credit 10000000 us march 16 2001 32980770 outstanding credit agreement december 31 2000 working capital 681 million december 31 1999 working capital 543 million reflected proceeds public offering may 1999 anticipate cash generated operations borrowings credit agreement enable us meet liquidity working capital expenditure requirements next 12 months may however require additional financing pursue strategy growth acquisitions financing required assurances available obtained terms favorable us basis dilutive stockholders spending fiscal 2000 capital expenditures 78 million compared 34 million 1999 expenditures include among things leasehold improvements computer equipment software manufacturing machinery equipment recently issued accounting standard company adopt sfas 133 accounting derivative instruments hedging activities amended sfas 137 138 january 1 2001 statement establishes accounting reporting standards requiring every derivative instrument including certain derivative instruments embedded contracts recorded balance sheet either asset liability measured fair value sfas 133 requires changes derivatives fair value recognized currently earnings unless specific hedge accounting criteria met company currently derivative instruments accordingly fas 133 amended expected impact companys financial position results operations cash flows march 2000 fasb issued fasb interpretation 44 fin 44 accounting certain transactions involving stock compensation interpretation apb opinion 25 fin 44 clarifies application apb opinion 25 among issues clarifies following definition employee purposes applying apb opinion 25 criteria determining whether plan qualifies noncompensatory plan accounting consequence various modifications terms previously fixed stock options awards accounting exchange stock compensation awards business combination adoption fin 44 impact companys financial position results operations cash flows recently issued staff accounting bulletin december 1999 securities exchange commission issued staff accounting bulletin 101 sab 101 sab 101 provides guidance recognition presentation disclosure revenue financial statements effective fourth quarter 2000 sab 101 material impact results operations financial position cash flows year ended december 31 2000 forward looking statements believe important communicate expectations investors accordingly report contains discussion events results yet occurred realized identify type discussion often termed forwardlooking statements words phrases expects anticipates intends plans believes estimates could execution acquisition strategies expansion product lines increase distribution networks product sales among others whose future success may difficult predict read forwardlooking statements carefully discuss future expectations contain projections future results operations financial position state expectations future performance actions current potential new competitors changes technology seasonality business cycles new regulatory requirements factors impact greatly upon strategies expectations outside direct control may events future able accurately predict control cautionary language report provide examples risks uncertainties events may cause actual results differ expectations express forwardlooking statements invest common stock aware occurrence certain events described report could adversely affect business results operations financial position inflation believe relatively moderate rates inflation recent years significant impact revenue profitability historically able offset inflationary effects either increasing prices improving cost efficiencies item 7aitem 7 managements discussion analysis financial condition results operations managements discussion analysis financial condition results operations contains forwardlooking statements within meaning section 27a securities act section 21e exchange act statements predictive nature depend upon refer future events conditions include words expects anticipates intends plans believes estimates could similar expressions forward looking statements although believe statements based upon reasonable assumptions give assurance goals achieved see forward looking statements actual results may differ expressed implied forwardlooking statements believe subject number risk factors including inherent unpredictability currency fluctuations competitive actions including pricing ability realize cost reductions operating efficiencies including ability implement headcount reduction programs timely manner unduly disrupt business operations ability identify realize costreduction opportunities general economic business conditions forwardlooking statements report evaluated light important risk factors listed managements discussion analysis financial condition results operations elsewhere annual report form 10k including accompanying financial statements company overview leading manufacturer provider security products vehicle armor systems security risk management services products services used military law enforcement security corrections personnel throughout world well governmental agencies multinational corporations nongovernmental organizations company organized operated three business segments armor holdings products armor mobile security armorgroup armor holdings products armor holdings products division manufactures sells broad range high quality branded law enforcement equipment tactical armor hard armor duty gear lesslethal munitions antiriot products police batons forensic products weapon maintenance products marketed brand names wellknown respected military law enforcement communities american body armor safariland defense technology federal laboratories mace r protech nik r public safety breakfree monadnock lifetime products identicator lightning powder sell manufactured products primarily law enforcement agencies worldwide network 500 distributors sales agents including approximately 350 united states extensive distribution capabilities commitment customer service training enabled us become leading provider security equipment law enforcement agencies armor mobile security armor mobile security division created upon acquisition ogarahess eisenhardt armoring company ogara comopany ogara security associates inc august 22 2001 manufactures installs ballistic blast protected armoring systems military vehicles commercial vehicles military aircraft missile components brand name ogarahess eisenhardt solesource provider us military supply armoring blast protection systems high mobility multipurpose wheeled vehicle hmmwv also entered agreement provide us military certain maintenance services respect hmmwvs currently installed base approximately 2800 uparmored hmmwvs subject maintenance arrangement expect maintenance services may increase us military substantially increases hmmwv purchases substantially increases use current installed base additionally armor mobile security division subcontracted develop ballistically armored sealed truck cab himars program currently development us army also markets armor subsystems tactical wheeled vehicles armor variety commercial vehicles including limousines sedans sport utility vehicles commercial trucks cashintransit vehicles protect varying degrees ballistic blast threats armorgroup services division provides broad range sophisticated security risk management solutions multinational corporations diverse industries natural resources financial services consumer products governmental nongovernmental agencies us departments state defense united nations usaid britains department international development clients typically personnel investments unstable often violent areas world offices five continents provide multinational clients diversified portfolio security solutions assist mitigating risks operations around world highly trained multilingual experienced security personnel work closely clients create implement solutions complex security problems services include security planning advice management security systems integration intellectual property asset protection due diligence investigations training programs counterintelligence countersurveillance advanced driving techniques ballistics believe many security services often representing small portion clients overall cost business critical clients success believe creates consistent demand premium services attractive margins critical accounting policies significant accounting policies described note 1 consolidated financial statements included item 8 form 10k believe critical accounting policies include revenue recognition use estimates income taxes impairment revenue recognition record products revenue time shipment returns minimal materially effect financial statements record revenue mobile security division vehicle shipped except larger commercial contracts typically longer four months length contract delivery hmmwvs us government continues 2005 revenue contracts recognized percentage completion unitsofwork performed method hmmwv units sold us government considered complete onsite department defense officer finishes inspection hmmwv approves delivery contracts loss position entire estimated loss would recognized balance contract time current contracts profitable record service revenue services provided contract basis revenues service contracts recognized term contract estimates preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts financial statements accompanying notes significant estimates inherent preparation accompanying consolidated financial statements include carrying value longlived assets valuation allowances receivables inventories deferred income tax assets liabilities potential litigation claims settlements contract contingencies obligations actual results could differ estimates income taxes account income taxes pursuant statement financial accounting standards sfas 109 accounting income taxes asset liability method specified thereunder deferred taxes determined based difference financial reporting tax bases assets liabilities deferred tax liabilities offset deferred tax assets relating net operating loss carryforwards deductible temporary differences future benefits obtained utilization net operating loss carryforwards reduction income tax asset valuation allowance existing september 20 1993 applied reduce reorganization value excess amounts allocable identifiable assets december 31 2000 2001 companys consolidated foreign subsidiaries unremitted earnings approximately 10 million 14 million respectively company recorded provision united states federal income taxes since earnings considered permanently invested foreign earnings taxed according regulations existing countries earned impairment longlived assets including certain identifiable intangibles goodwill related assets reviewed impairment whenever events changes circumstances indicate carrying amount asset question may recoverable including limited deterioration profits business segment longlived assets changes occur might impair recovery longlived assets management reviewed companys longlived assets determined events requiring impairment loss recognition december 31 2001 method used determine existence impairment would undiscounted operating cash flows estimated remaining amortization period related longlived assets impairment measured difference fair value unamortized cost date impairment determined see recently issued accounting standards page 34 results operations following table sets forth selected statement operations data percentage total revenues periods indicated fiscal 2001 compared fiscal 2000 product revenues armor holdings product division revenue increased 73 million 54 1427 million year ended december 31 2001 fiscal 2001 compared 1353 million year ended december 31 2000 fiscal 2000 revenue increased year due acquisitions completed fiscal 2000 additional fiscal 2001 acquisitions accounted purchases accordingly results operations included date acquisition including acquisitions armor holdings product division revenue decreased 14 fiscal 2001 due part shipping interruptions order cancellations resulted september 11 terrorist attacks world trade center pentagon slowdown purchasing first quarter 2001 company associated first quarter slowdown bulletproof vest partnership act bvp money provides federal matching funds law enforcement agencies purchasing bullet resistant vests company believes agencies delayed purchasing decisions first quarter 2001 time bvp money fully allocated mobile security revenues armor mobile security division revenues totaled 472 million august 22 2001 acquisition date december 31 2001 mobile security division created ogara acqusition service revenues armorgroup service division revenues increased 165 million 193 1021 million fiscal 2001 compared 856 million fiscal 2000 revenue increased 172 internal sources 21 acquisition international training inc iti acquired part ogara acquisition integrated armorgroup services division armorgroup north america cost sales cost sales increased 539 million 392 1914 million fiscal 2001 compared 1375 million fiscal 2000 increased cost sales directly related revenue increases associated ogara acquisition internal revenue growth armorgroup services division percentage total revenues cost sales increased 655 fiscal 2001 622 fiscal 2000 increasing cost sales percentage total revenue reflects acquisition mobile security division operates lower average gross margins well shift revenue mix armorgroup service division investigations security services lower margins 2001 armorgroup abandoned us investigations strategy closing several higher margin business units replacing revenue growth lower margin security service revenue operating expenses operating expenses increased 129 million 255 632 million fiscal 2001 compared 503 million fiscal 2000 increased operating expenses directly related internal revenue growth incremental selling general administrative expenses associated acquisitions monadnock lightning powder ogara acquired subsequent november 2000 percentage total revenue operating expenses decreased 216 fiscal 2001 228 fiscal 2000 due consolidation sales marketing distribution expenses monadnock lightning powder lower overall selling expenses percentage sales ogara amortization expense increased 232000 68 37 million fiscal 2001 compared 34 million fiscal 2000 amortization expense increased year due amortization intangible assets acquired fiscal 2000 acquisitions ovgtraquair monadnock lightning powder offset reduction amortization expense resulting goodwill writeoffs contained companys restructuring charge first quarter 2001 accordance sfas 142 amortizing goodwill ogara acquisition occurred subsequent june 30 2001 equity earnings investees equity earnings investee 87000 fiscal 2000 relates companys 20 investment jardine securicor gurkha services limited hong kong joint venture company jsgs company sold fiscal 2000 restructuring related charges january 2001 companys board directors approved restructuring plan close services divisions us investigative businesses realign divisions organization eliminate excess facilities reduce overhead business worldwide connection restructuring charge services division performed review longlived assets identify potential impairments pursuant restructuring plan company eliminated 26 employees primarily investigative business b eliminated additional 24 employees security consulting business c incurred lease exit costs result closure investigative businesses wrotedown value tangible intangible assets result impairment review significant actions contemplated restructuring plan completed result restructuring plan company recorded pretax charge 103 million december 31 2001 company remaining liability 354000 relating lease termination exit costs liability classified accrued expenses current liabilities companys consolidated balance sheet funded cash provided operating activities companys credit facility integration nonrecurring charges integration nonrecurring charges increased 782000 238 41 million fiscal 2001 compared 33 million fiscal 2000 fiscal 2001 integration expenses represent costs associated acquisitions integration ogara monadnock lightning powder well costs associated company international tax minimization program fiscal 2000 integration expenses included costs associated acquisitions safariland ovgtraquair special clearance services breakfree well costs associated companys international tax minimization program one time expenses incurred third quarter 2000 operating income operating income decreased 70 million 262 195 million fiscal 2001 compared 265 million fiscal 2000 lower operating income fiscal 2001 due primarily companys first quarter restructuring charge addition factors discussed interest expense net interest expense net 40 million fiscal 2001 compared interest expense net 19 million fiscal 2000 interest expense net increased fiscal 2001 primarily due interest debt incurred fund acquisitions monadnock lightning powder ogara funded part cash companys revolving credit facility increased borrowings revolving credit facility offset lower interest rates debt interest expense net includes interest amortization fees associated companys debt obligations including revolving credit facility amortization discount certain longterm liabilities acquired part safariland acquisition income net income net decreased 15 million 834 300000 fiscal 2001 compared 18 million fiscal 2000 decrease due primarily sale investment jsgs fiscal 2000 income provision income taxes income provision income taxes decreased 106 million 400 158 million fiscal 2001 compared 264 million fiscal 2000 lower income provision income taxes fiscal 2001 due primarily first quarter restructuring charge addition factors discussed provision income taxes provision income taxes decreased 36 million 39 57 million fiscal 2001 compared 93 million fiscal 2000 provision based blended us federal state statutory income tax rate approximately 256 usbased companies 2724 blended effective tax rate foreign operations includes income tax benefit 46 million associated investments certain subsidiaries without benefit effective tax rate would increased 418 due increased effect nondeductible expense items lower level income fiscal 2001 overall effective tax rate foreign operations necessarily indicative expected future rates due changing concentration mix income various countries operates effective tax rate 2001 2000 360 354 respectively increase effective tax rate primarily due increased effect nondeductible foreign items lower level foreign income fiscal 2001 net income net income decreased approximately 69 million 406 101 million fiscal 2001 compared 170 million fiscal 2000 decrease primarily due restructuring charge factors discussed fiscal 2000 compared fiscal 1999 product revenues product revenues increased 386 million 400 1353 million fiscal 2000 compared 967 million year ended december 31 1999 fiscal 1999 increase primarily due strong internal growth including year comparisons businesses acquired previous year 204 well inclusion full year results safariland 1999 acquisitions additional acquisitions completed fiscal 2000 acquisitions accounted purchases accordingly results operations included period acquisition service revenues service revenues increased 257 million 428 856 million fiscal 2000 compared 600 million fiscal 1999 increase primarily due strong internal growth including year comparisons security businesses acquired previous year 236 well inclusion full year results fiscal 1999 acquisitions additional fiscal 2000 acquisitions accounted purchases accordingly results operations included period acquisition cost sales cost sales increased 431 million 456 1375 million fiscal 2000 compared 944 million fiscal 1999 increase primarily due increased revenues fiscal 2000 compared fiscal 1999 percentage total revenues cost sales increased 622 fiscal 2000 603 fiscal 1999 operating expenses operating expenses increased 133 million 360 503 million fiscal 2000 compared 370 million fiscal 1999 increase primarily due increased revenues armor holdings products services division well acquisitions completed 2000 percentage sales operating expenses decreased 228 sales fiscal 2000 compared 236 fiscal 1999 amortization expense increased 10 million 392 34 million fiscal 2000 compared 25 million fiscal 1999 increase primarily due additional amortization intangible assets acquired result acquisitions completed fiscal 2000 well full year amortization relating 1999 acquisitions equity earnings investees equity earnings investees decreased 92000 514 87000 fiscal 2000 compared 179000 fiscal 1999 equity earnings investees comprised 20 investment jsgs sold investment fiscal 2000 see income integration nonrecurring charges integration nonrecurring charges increased 07 million 281 33 million fiscal 2000 compared 26 million fiscal 1999 related integration acquired companies costs include relocation expenses equipment employees severance costs well charges integrating sales marketing efforts operating income operating income increased 61 million 298 265 million fiscal 2000 compared 204 million fiscal 1999 due reasons discussed interest expense net interest expense 19 million fiscal 2000 compared net interest expense 17000 fiscal 1999 increase primarily due interest debt incurred fund acquisitions make purchases stock repurchase plan income 18 million fiscal 2000 compared 08 million fiscal 1999 increase primarily due gain approximately 17 million recognized sale investment jsgs fiscal 2000 provision income taxes provision income taxes increased 13 million 167 93 million fiscal 2000 compared 80 million fiscal 1999 provision based us federal state statutory income tax rates approximately 37 usbased companies 106 blended effective tax rate effective tax rate companys foreign operations necessarily indicative expected future rates due changing concentration mix income various countries operate effective tax rate 2000 1999 354 378 respectively decrease effective tax rate result increased amount income earned jurisdictions whose statutory tax rates united states percentage operating income net income net income increased approximately 39 million 292 170 million fiscal 2000 compared 132 million fiscal 1999 increase primarily due combination acquisitions internal growth factors discussed quarterly results set forth certain unaudited quarterly financial data last eight quarters certain data expressed percentage revenue respective quarters information derived unaudited financial statements opinion management include adjustments consisting normal recurring adjustments necessary fairly present quarterly information accordance generally accepted accounting principles operating results quarter necessarily indicative results expected future period liquidity capital resources august 22 2001 entered amended restated credit agreement credit agreement bank america canadian imperial bank commerce first union national bank suntrust bank republic bank keybank national association ing us capital llc pursuant credit agreement lenders established 120000000 line credit benefit expiring february 12 2004 credit agreement among things provides total maximum borrowings 120000000 ii capability borrowings foreign currencies borrowings credit agreement bear interest either base rate plus applicable margin ranging 000 375 depending certain conditions ii eurodollar rate plus applicable margin ranging 1125 1875 depending certain conditions iii respect foreign currency loans fronted offshore currency rate plus applicable margin ranging 1125 1875 depending certain conditions addition credit agreement includes negative affirmative covenants customary credit facility nature limitation capital expenditures foreign indebtedness minimum fixed charge coverage restriction paying dividends credit agreement also provides bank america make swingline loans us 5000000 working capital purposes issue letters credit behalf 20000000 december 31 2001 outstanding borrowings credit facility bank america issued 150 million letters credit behalf credit agreement indebtedness credit agreement mature february 12 2004 approximately 46 million longterm debt net current portion consisting primarily 3 million industrial development revenue bonds october 1999 board directors approved stock repurchase program effective december 31 2001 program repurchased 1848309 shares common stock average price 1067 credit agreement permits us repurchase shares common stock companys ratio consolidated total indebtedness consolidated ebitda rolling twelve month period terms defined credit agreement less 200 1 limitation credit agreement amount stock repurchase december 2001 certain selling stockholders sold shares common stock public offering sold 5765000 shares common stock selling stockholders sold 1250000 shares common stock offering net proceeds offering deducting underwriting discounts commissions approximately 1199 million used net proceeds offering repay indebtedness credit facility working capital general corporate purposes funds used invested money market funds certificates deposits investment grade securities expected used finance future acquisitions working capital general corporate purposes working capital 1427 million 681 million december 31 2001 december 31 2000 respectively anticipate cash generated operations cash hand net proceeds offering borrowings credit agreement enable us meet liquidity working capital expenditure requirements next 12 months may however require additional financing pursue strategy growth acquisitions financing required assurances available obtained terms favorable us basis dilutive stockholders capital expenditures 34 million fiscal year 1999 78 million fiscal year 2000 79 million fiscal year 2001 expenditures include leasehold improvements information technology communications infrastructure equipment software manufacturing machinery equipment recently issued accounting standards june 2001 financial accounting standards board fasb issued sfas 141 business combinations sfas 141 requires purchase method accounting used business combinations initiated june 30 2001 statement specifies certain acquired intangible assets business combination recognized assets separately goodwill existing intangible assets goodwill evaluated new separation requirements expect statement material impact consolidated financial position results operations june 2001 fasb issued sfas 142 goodwill intangible assets sfas 142 changes accounting goodwill amortization method impairmentonly approach amortization goodwill including goodwill recorded past business combinations cease upon adoption statement addition statement requires goodwill tested impairment least annually reporting unit level implemented sfas 142 january 1 2002 accordance statement required complete transitional goodwill impairment test june 30 2002 evaluating yet determined whether adoption statement result impairment goodwill estimate goodwill indefinite lived intangible asset amortization required previous accounting standards 32 million pretax 20 million aftertax charged income statement 2002 goodwill resulting acquisitions made us subsequent june 30 2001 immediately subject nonamortization provisions sfas 142 august 2001 fasb issued statement financial accounting standards 143 accounting asset retirement obligations sfas 143 sfas 143 establishes accounting standards recognition measurement liability asset retirement obligation associated asset retirement cost sfas 143 requires recognition fair value liability asset retirement obligation period incurred reasonable estimate fair value made reasonable estimate fair value cannot made period asset retirement obligation incurred liability shall recognized reasonable estimate fair value made fair value liability asset retirement obligation amount liability could settled current transaction willing parties forced liquidation transaction sfas 143 effective financial statements issued fiscal years beginning june 15 2002 provisions sfas 143 become effective us january 1 2003 effects adopting standard determined october 2001 fasb issued statement financial accounting standards 144 accounting impairment disposal longlived assets sfas 144 sfas 144 establishes primaryasset approach determine cash flow estimation period group assets liabilities represents unit accounting longlived asset held used sfas 144 requires longlived asset 1 abandoned 2 exchanged similar productive asset 3 distributed owners spinoff considered held used abandoned exchanged distributed sfas 144 requires 1 spinoffs exchanges similar productive assets recorded lower carrying value fair value assets classified held used disposed 2 impairment loss resulting spinoff exchange similar productive assets recognized asset disposed provisions sfas 144 come effective us january 1 2002 effects adopting standard determined forward looking statements believe important communicate expectations investors accordingly report contains discussion events results yet occurred realized identify type discussion often termed forwardlooking statements words phrases expects anticipates intends plans believes estimates could execution acquisition strategies expansion product lines increase distribution networks product sales among others whose future success may difficult predict read forwardlooking statements carefully discuss future expectations contain projections future results operations financial position state expectations future performance actions current potential new competitors changes technology seasonality business cycles new regulatory requirements factors impact greatly upon strategies expectations outside direct control may events future able accurately predict control cautionary language report provide examples risks uncertainties events may cause actual results differ expectations express forwardlooking statements invest common stock aware occurrence certain events described report could adversely affect business results operations financial position inflation believe relatively moderate rates inflation recent years significant impact revenue profitability historically able offset inflationary effects either increasing prices improving cost efficiencies item 7aitem 7 managements discussion analysis financial condition results operations managements discussion analysis financial condition results operations contains forwardlooking statements within meaning section 27a securities act section 21e exchange act statements predictive nature depend upon refer future events conditions include words expects anticipates intends plans believes estimates could similar expressions forward looking statements although believe statements based upon reasonable assumptions give assurance goals achieved see forward looking statements actual results may differ expressed implied forwardlooking statements believe subject number risk factors including inherent unpredictability currency fluctuations competitive actions including pricing ability realize cost reductions operating efficiencies including ability implement headcount reduction programs timely manner unduly disrupt business operations ability identify realize costreduction opportunities general economic business conditions ability inability successfully sell services division ability successfully execute changes operations move corporate headquarters certain manufacturing operations without disrupting operations ability obtain supplies raw materials without disruption forwardlooking statements report evaluated light important risk factors listed managements discussion analysis financial condition results operations elsewhere annual report form 10k including accompanying financial statements company overview leading manufacturer provider security products vehicle armor systems security risk management services products services used military law enforcement security corrections personnel throughout world well governmental agencies multinational corporations nongovernmental organizations company organized operated three business segments armor holdings products armor mobile security armorgroup accounted discontinued operation continuing operations armor holdings products armor holdings products division manufactures sells broad range high quality branded law enforcement equipment concealable tactical body armor hard armor duty gear lesslethal munitions antiriot products police batons emergency lighting products forensic products firearms accessories weapon maintenance products marketed brand names wellknown respected military law enforcement communities american body armortm safarilandr bsquaretm breakfreer defense technologyfederal laboratoriestm macer protechtm nikrpublic safety monadnocktm lifetime products identicatortm lightning powderr speedfeedtm 911epr sell manufactured products primarily law enforcement agencies worldwide network 350 distributors sales agents including approximately 200 united states extensive distribution capabilities commitment customer service training enabled us become leading provider security equipment law enforcement agencies armor mobile security armor mobile security division manufactures installs ballistic blast protected armoring systems military vehicles commercial vehicles military aircraft missile components brand name ogarahess eisenhardt solesource provider us military supply armoring blast protection systems high mobility multipurpose wheeled vehicle hmmwv also contract us army provide systems technical support installed base approximately 3500 uparmored hmmwvs provide spare parts maintenance services hmmwvs use expect maintenance services may increase us military substantially increases hmmwv purchases substantially increases use current installed base additionally armor mobile security division subcontracted develop ballistic blast protected armored sealed truck cab high mobility artillery rocket system himars us army marine corps program recently transitioned developmental low rate initial production deliveries scheduled late 2003 division also markets armor subsystems tactical wheeled vehicles armor variety commercial vehicles including limousines sedans sport utility vehicles commercial trucks cashintransit vehicles protect varying degrees ballistic blast threats discontinued operations services division services division provides broad range sophisticated security risk management solutions multinational corporations diverse industries natural resources financial services consumer products governmental nongovernmental agencies us departments state defense united nations united states agency international development usaid britains department international development clients typically personnel investments unstable often risky areas world offices five continents provide multinational clients diversified portfolio security solutions assist mitigating risks operations around world highly trained multilingual experienced security personnel work closely clients create implement solutions complex security problems services include security planning advice management security systems integration intellectual property asset protection due diligence investigations training programs counterintelligence countersurveillance advanced driving techniques ballistics believe many security services often representing small portion clients overall cost business critical clients success believe creates consistent demand premium services attractive margins critical accounting policies significant accounting policies described note 1 consolidated financial statements included item 8 form 10k believe critical accounting policies include revenue recognition use estimates income taxes impairment revenue recognition record products revenue time shipment returns minimal materially affect financial statements record revenue mobile security division vehicle shipped except larger commercial contracts typically longer four months length contract delivery hmmwvs us government continues 2005 revenue larger contracts recognized percentage completion unitsofwork performed method hmmwv units sold us government considered complete onsite department defense officer finishes inspection hmmwv approves delivery contracts loss position entire estimated loss would recognized balance contract time believe current contracts profitable record service revenue services provided contractbycontract basis revenues service contracts recognized term contract estimates preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts financial statements accompanying notes significant estimates inherent preparation accompanying consolidated financial statements include periodic testing carrying value longlived assets impairment valuation allowances receivables inventories deferred income tax assets liabilities potential litigation claims settlements contract contingencies obligations actual results could differ estimates income taxes account income taxes pursuant statement financial accounting standards sfas 109 accounting income taxes asset liability method specified thereunder deferred taxes determined based difference financial reporting tax bases assets liabilities deferred tax liabilities offset deferred tax assets relating net operating loss carryforwards deductible temporary differences future benefits obtained either utilization net operating loss carryforwards reduction income tax asset valuation allowance existing september 20 1993 applied reduce reorganization value excess amounts allocable identifiable assets december 31 2002 2001 consolidated foreign subsidiaries unremitted earnings approximately 30 million 13 million respectively company recorded provision united states federal income taxes since earnings considered permanently reinvested foreign earnings taxed according regulations existing countries earned impairment longlived assets including certain identifiable intangibles goodwill related assets reviewed annually impairment whenever events changes circumstances indicate carrying amount asset question may recoverable including limited deterioration profits business segment longlived assets changes occur might impair recovery longlived assets management reviewed companys longlived assets taken impairment charge 312 million reduce carrying value services division estimated realizable value method used determine existence impairment would discounted operating cash flows estimated remaining useful lives related longlived assets continuing operations accordance sfas 142 goodwill intangible assets impairment measured difference fair value unamortized cost date impairment determined discontinued operations accordance statement financial accounting standards 144 accounting impairment disposal longlived assets sfas 144 component classified held sale reported discontinued operations following conditions met operations cash flows component eliminated ongoing operations entity result disposal transaction b entity significant continuing involvement operations component disposal transaction period component entity either disposed classified held sale income statement current prior periods reports results operations component including estimated impairment gain loss recognized accordance sfas 144 paragraph 37 discontinued operations results discontinued operations less applicable income taxes benefit reported separate component income extraordinary items cumulative effect accounting changes applicable assets liabilities disposal group classified held sale presented separately asset liability sections respectively statement financial position results operations effective june 30 2002 decided sell armorgroup services division organized formal auction managed outside advisors accordance statement accounting standards 144 accounting impairment disposal longlived assets liabilities companys services division classified held sale operating results reported discontinued operations statement operations periods us based training subsidiary usds inc previously reported services division included sale reclassified products division following table sets forth selected statement operations data percentage total revenues periods indicated fiscal year 2002 2001 2000 revenue continuing operations products 590 760 1000 mobile security 410 240 00 total revenues continuing operations 1000 cost sales 691 641 611 operating expenses 163 196 216 amortization 01 11 12 integration nonrecurring charges 19 17 18 operating income 126 135 142 interest expense net 03 20 13 income net 00 income continuing operations provision income taxes 123 116 129 provision income taxes 53 42 52 income continuing operations 70 75 78 loss income discontinued operations provision income taxes 139 36 59 provision benefit income taxes 11 13 15 loss income discontinued operations 128 23 44 net loss income 58 51 122 fiscal 2002 compared fiscal 2001 net loss income net income decreased 278 million net loss 177 million year ended december 31 2002 fiscal 2002 compared net income 101 million year ended december 31 2001 fiscal 2001 income continuing operations loss discontinued operations 213 million 390 million respectively fiscal 2002 compared income continuing operations 147 million loss discontinued operations 46 million fiscal 2001 increase income continuing operations relates primarily inclusion mobile security division full year 2002 versus four months 2001 continuing operations armor holdings products revenues armor holdings products division revenues increased 30 million 201 1799 million fiscal 2002 compared 1499 million fiscal 2001 fiscal 2002 products division revenue increased 144 internally including year changes acquired businesses 57 due series small strategic tuckin acquisitions including identicator inc identicator guardian personal security products inc guardian speedfeed inc speedfeed foldable products group foldable evipaq inc evipaq bsquare inc bsquare 911 emergency products 911 products division revenues include 168 million 72 million usds inc us based training company years ended fiscal 2002 fiscal 2001 respectively filings prior june 30 2002 reported usds inc part services division mobile security division revenues armor mobile security division revenues increased 779 million 1650 1252 million fiscal 2002 compared 472 million fiscal 2001 revenues fiscal 2001 included four months operations acquisitions ogarahess eisenhardt armoring company ogara company ogara security associates inc august 2001 revenues fiscal 2002 includes 33 million related acquisition trasco bremen september 2002 including eight months operations prior ownership excluding revenue associated assets either purchase sold mobile security division revenue increased 177 internally approximately 1063 million fiscal 2001 cost sales cost sales increased 844 million 668 2107 million fiscal 2002 compared 1263 million fiscal 2001 increase due primarily acquisition armor mobile security division well overall revenue growth fiscal 2002 compared fiscal 2001 percentage total revenues cost sales increased 691 total revenues fiscal 2002 641 fiscal 2001 increase percentage total revenues partially due full year inclusion 2002 mobile security division operates lower average gross margins products division partially reduced products division margins discussed fiscal 2002 gross margins products division 364 compared 393 reported period last year gross margins mobile security division 230 fiscal 2002 compared 251 four months december 31 2001 fiscal year acquisition date products division consists portfolio law enforcement products manufactured sold different margins given period products division weighted average gross margins fluctuate based upon relative volume products sold period lower gross margins fiscal 2002 products division partially attributable product mix well short term increases manufacturing costs raw material supply issues divisions body armor operations first half 2002 late 2001 2002 products division combined jacksonville florida based body armor operation body armor manufacturing facility ontario california 2002 division experienced difficulty combination resulting capacity constraints increased manufacturing costs believe capacity constraints alleviated certain body armor manufacturing costs decrease first half 2003 however time also experienced interruptions supply zylon shield certain ballistic fiber used leading concealable ballistic vest particular supply problem related ballistic integrity fiber received actual availability material nevertheless inability receive quality zylon shield period exacerbated capacity constraints december 31 2002 division currently receiving adequate supplies zylon shield currently working decrease body armor manufacturing costs products division gross margins also decreased realized higher proportional revenue increases training division operates significantly lower overall gross margins manufacturing segment decrease gross margins mobile security division primarily due less favorable mix commercial vehicle sales compared period prior year heavier mix lower margin cashintransit vehicles 2002 compared 2001 larger number base unit sales included revenue 2002 period operating expenses operating expenses increased 112 million 289 498 million 163 total revenues fiscal 2002 compared 387 million 196 total revenues fiscal 2001 increase primarily due operating expenses associated operations mobile security division acquired august 2001 included full year ended december 31 2001 operating expenses also increased products division primarily due operating expenses associated acquired companies internal growth business operating expenses percent sales decreased mobile security division operates lower level operating expenses percentage sales products division expect see increase corporate operating expense 2003 incur significant increases insurance expenses government affairs lobbying efforts internal audit information technology increased legal accounting costs associated legal compliance amortization expense decreased 19 million 886 02 million fiscal 2002 compared 21 million fiscal 2001 decrease results implementation sfas 142 eliminated goodwill amortization acquisitions completed july 1 2001 well fiscal years ending january 1 2002 remaining amortization expense related patents trademarks finite lives integration nonrecurring charges integration nonrecurring charges increased 26 million 798 59 million fiscal 2002 compared 33 million fiscal 2001 charges relate primarily integration mobile security division well acquisitions completed 2001 2002 integration nonrecurring charges also included certain expenses related integration body armor operations well direct costs expenses associated potential acquisitions close operating income operating income continuing operations increased 117 million 384 million fiscal 2002 compared 267 million fiscal 2001 due factors discussed usds inc contributed operating income previously reported part services division 17 million 12 million years ended december 31 2002 2001 respectively interest expense net interest expense net decreased 29 million 761 09 million fiscal 2002 compared 39 million fiscal 2001 decrease due primarily repayment longterm debt revolving credit facility net proceeds secondary common stock offering completed december 2001 expense income net expense income net 51000 fiscal 2002 compared 82000 fiscal 2001 due gain sale fixed assets 2001 income continuing operations provision income taxes income continuing operations provision income taxes increased 145 million 374 million fiscal 2002 compared 229 million fiscal 2001 due reasons discussed provision income taxes provision income taxes 161 million fiscal 2002 compared 82 million fiscal 2001 provision income taxes fiscal 2002 included charges approximately 15 million related establishment valuation allowances certain foreign deferred tax assets discontinued operations effect charges increase effective tax rate fiscal 2002 429 compared 359 fiscal 2001 without charges effective tax rate fiscal 2002 would 39 increase effective tax rate would without tax charges related discontinued operations due primarily higher percentage income earned united states impact state income taxes income expected effective tax rate necessarily indicative actual effective rate due changing concentration mix income various countries continue operate income continuing operations income continuing operations increased 66 million 213 million fiscal 2002 compared 147 million fiscal 2001 due factors discussed discontinued operations many items listed involve accounting estimates loss amounts revaluated future changes might appropriate note 2 consolidated financial statements contains comparative information discontinued operations armorgroup services division revenues increased 33 million 35 983 million fiscal 2002 compared 949 million fiscal 2001 fiscal 2002 revenue increased 67 due acquisition international training inc iti acquired part acquisition mobile security division included services division date acquisition 34 reduction revenue exclusive iti acquisition result lower revenues integrated systems business united states security consulting business latin america russia due completion several large contracts cost sales cost sales increased 108 million 165 758 million fiscal 2002 compared 65 million fiscal 2001 increase due primarily acquisition iti percentage total revenue cost sales increased 771 total revenues fiscal 2002 685 fiscal 2001 increase cost sales percentage total revenue primarily due weakness integrated systems business resulting poor margins increased inventory reserves loss high margin oil industry security consulting work latin america scaling business democratic republic congo operating expenses operating expenses increased 61 million 249 306 million 311 total revenues fiscal 2002 compared 245 million 258 total revenues fiscal 2001 increase due primarily increased accounts receivable reserves asset writedowns charges integrated systems security consulting businesses well additional operating expenses associated itis operations acquired august 2001 amortization expense decreased 15 million 100 0 fiscal 2002 compared 15 million fiscal 2001 decrease result implementation sfas 142 eliminated goodwill amortization acquisitions completed july 1 2001 fiscal years beginning january 1 2002 charge impairment longlived assets charges impairment longlived assets 303 million fiscal 2002 compared 0 fiscal 2001 impairment charge result 242 million reduction carrying value services division estimated realizable value required sfas 144 restructuring related charges january 2001 board directors approved restructuring plan close services divisions us investigative businesses realign service divisions organization eliminate excess facilities reduce overhead business worldwide connection restructuring charge services division performed review longlived assets identify potential impairments pursuant restructuring plan eliminated 26 employees primarily services division investigative business b eliminated additional 24 employees security consulting business c incurred lease exit costs result closure investigative businesses wrotedown value tangible intangible assets result impairment review result restructuring plan recorded pretax charge 103 million december 31 2002 restructuring accrual 270000 compared 354000 december 31 2001 relating lease termination exit costs liability classified accrued expenses current liabilities discontinued operations balance sheet funded cash provided operating activities credit facility integration nonrecurring charges integration nonrecurring charges increased 18 million 2380 26 million fiscal 2002 compared 776000 fiscal 2001 charges reflect certain severance expenses software writeoff costs expenses associated preparing division sale well expenses associated integrating iti services division operating loss operating losses 419 million fiscal 2002 compared operating loss 71 million fiscal 2001 due factors discussed interest expense net interest expense net increased 203000 142 346000 fiscal 2002 compared 143000 fiscal 2001 increase due increased utilization services divisions line credit income expense net expense net 99000 fiscal 2002 compared income net 218000 fiscal 2001 increase expense fiscal 2002 result losses disposal fixed assets asset writeoffs loss discontinued operations provision income taxes benefit loss discontinued operations provision income taxes benefit 415 million fiscal 2002 71 million fiscal 2001 due reasons discussed provision income taxes benefit income tax benefit 24 million fiscal 2002 compared benefit 25 million fiscal 2001 effective tax rate fiscal 2002 benefit 59 compared benefit 355 fiscal 2001 decrease percentage benefit primarily due inclusion taxable income certain expenses deductible tax purposes including 312 million charge impairment longlived assets loss discontinued operations loss discontinued operations 390 million fiscal 2002 compared loss discontinued operations 46 million fiscal 2001 due factors discussed fiscal 2001 compared fiscal 2000 net loss income net income decreased 69 million net income 101 million fiscal 2001 compared net income 170 million year ended december 31 2000 fiscal 2000 net income fiscal 2001 includes income continuing operations 147 million loss discontinued operations 46 million compared income continuing operations 108 million income discontinued operations 62 million fiscal 2000 continuing operations armor holdings product division revenues armor holdings product division revenues increased 10 million 71 1499 million fiscal 2001 fiscal 2001 compared 1399 million fiscal 2000 fiscal 2000 revenue increased year due acquisitions completed fiscal 2000 additional fiscal 2001 acquisitions accounted purchases accordingly results operations included date acquisition products division revenues include 72 million 46 million usds inc years ended december 31 2001 december 31 2000 respectively filings prior june 30 2002 reported usds inc part service division including acquisitions armor holdings product division revenue decreased fiscal 2001 due part shipping interruptions order cancellations resulted september 11 terrorist attacks world trade center pentagon slowdown purchasing first quarter 2001 attribute portion first quarter slowdown bulletproof vest partnership act bvp money provides federal matching funds law enforcement agencies purchasing bullet resistant vests believe agencies delayed purchasing decisions first quarter 2001 time bvp money fully allocated mobile security revenues mobile security division revenues 472 million fiscal 2001 compared 0 fiscal 2000 mobile security division created acquisition ogarahess eisenhardt armoring company ogara company ogara security associates inc completed august 22 2001 included financial statements date acquisition revenues year ended 2001 included four months operations date acquisition cost sales cost sales increased 409 million 478 1263 million fiscal 2001 compared 855 million fiscal 2000 increase due primarily acquisition mobile security division well overall revenue growth fiscal 2001 compared fiscal 2000 percentage total revenues cost sales increased 641 total revenues fiscal 2001 611 fiscal 2000 increase percentage total revenues primarily due inclusion mobile security division operates lower average gross margins products division fiscal 2001 gross margins products division 393 compared 398 reported fiscal 2000 gross margins mobile security division 251 fourmonth stub portion fiscal 2001 decrease products division gross margins attributable impact higher proportional revenue usds inc operates margins significantly lower gross margins experienced within products division companies operating expenses operating expenses increased 84 million 276 387 million 196 total revenues fiscal 2001 compared 303 million 217 total revenues fiscal 2000 increase primarily due operating expenses associated operations mobile security division acquired august 2001 included year ended december 31 2000 operating expenses also increased due acquisitions products division including monadnock lightning powder well general internal growth business operating expenses percent sales decreased mobile security division operates lower level operating expenses percentage sales products division amortization expense increased 438000 257 21 million fiscal 2001 compared 17 million fiscal 2000 amortization expense increased year due amortization intangible assets acquired fiscal 2000 acquisitions monadnock lightning powder accordance sfas 142 amortize goodwill ogara acquisition occurred subsequent june 30 2001 integration nonrecurring charges integration nonrecurring charges increased 7 million 274 33 million fiscal 2001 compared 26 million fiscal 2000 fiscal 2001 integration expenses represent costs associated acquisitions integration mobile security division monadnock lightning powder well costs associated international tax minimization program fiscal 2000 integration expenses included costs associated acquisitions safariland breakfree well costs associated international tax minimization program one time expenses incurred third quarter 2000 operating income operating income continuing operations increased 68 million 342 267 million fiscal 2001 compared 199 million fiscal 2000 due factors discussed usds inc contributed operating income previously reported part services division 12 million 889000 fiscal 2001 2000 respectively interest expense net interest expense net increased 20 million 109 39 million fiscal 2001 compared 18 million fiscal 2000 interest expense net increased fiscal 2001 primarily due interest debt incurred fund acquisitions monadnock lightning powder mobile security division funded part cash revolving credit facility increased borrowings revolving credit facility offset lower interest rates debt interest expense net includes interest amortization fees associated debt obligations including revolving credit facility amortization discount certain longterm liabilities acquired part safariland acquisition income expense net income net 82000 fiscal 2001 compared 67000 fiscal 2000 income continuing operations provision income taxes income continuing operations provision income taxes increased 48 million 229 million fiscal 2001 compared 181 million fiscal 2000 due reasons discussed provision income taxes provision income taxes 82 million fiscal 2001 compared 72 million fiscal 2000 income continuing operations income continuing operations increased 39 million 147 million fiscal 2001 compared 108 million fiscal 2000 due factors discussed discontinued operations armorgroup services division revenues armorgroup services division revenues increased 139 million 171 949 million fiscal 2001 compared 811 million fiscal 2000 fiscal 2001 revenue increased due acquisition international training inc iti acquired part acquisition ogara included services division date acquisition cost sales cost sales increased 130 million 249 650 million fiscal 2001 compared 52 million fiscal 2000 increase due primarily acquisition iti percentage total revenue cost sales increased 685 total revenues fiscal 2001 642 fiscal 2000 increased cost sales directly related revenue increases associated iti acquisition internal revenue growth armorgroup services division increasing cost sales percentage total revenue reflects shift revenue mix armorgroup service division investigations security services lower margins 2001 armorgroup abandoned us investigations strategy closing several higher margin business units replacing revenue growth lower margin security consulting service revenue operating expenses operating expenses increased 44 million 221 245 million 258 total revenues fiscal 2001 compared 201 million 247 total revenues fiscal 2000 increase due additional operating expenses associated itis operations acquired august 2001 well internal revenue growth amortization expense decreased 206000 119 15 million fiscal 2001 compared 17 million fiscal 2000 reduction amortization expense resulted goodwill writeoffs contained restructuring charge first quarter 2001 accordance sfas 142 amortize goodwill acquisitions services division occurred june 30 2001 restructuring related charges january 2001 board directors approved restructuring plan close services divisions us investigative businesses realign divisions organization eliminate excess facilities reduce overhead business worldwide connection restructuring charge services division performed review longlived assets identify potential impairments pursuant restructuring plan company eliminated 26 employees primarily investigative business b eliminated additional 24 employees security consulting business c incurred lease exit costs result closure investigative businesses wrotedown value tangible intangible assets result impairment review significant actions contemplated restructuring plan completed fiscal 2001 result restructuring plan recorded pretax charge 103 million december 31 2001 remaining liability 354000 relating lease termination exit costs liability classified accrued expenses current liabilities consolidated balance sheet funded cash provided operating activities credit facility equity earnings investees equity earnings investee 87000 fiscal 2000 relates 20 investment jardine securicor gurkha services limited hong kong joint venture company jsgs sold fiscal 2000 integration nonrecurring charges integration nonrecurring charges increased 74000 105 776000 fiscal 2001 compared 702000 fiscal 2000 fiscal 2001 integration expenses represent costs associated acquisitions integration iti fiscal 2000 integration expenses included costs associated acquisitions ovgtraquair special clearance services one time expenses incurred third quarter 2000 operating loss income operating loss 71 million fiscal 2001 compared operating income 66 million fiscal 2000 due factors discussed interest expense income net interest expense income net increased 96000 2043 143000 fiscal 2001 compared 47000 fiscal 2000 increase due increased utilization services divisions overdraft line credit income expense net income net decreased 15 million 874 218000 fiscal 2001 compared 17 million fiscal 2000 includes gain related sale investment jsgs fiscal 2000 loss income discontinued operations provision income taxes benefit loss discontinued operations provision income taxes benefit 71 million fiscal 2001 compared income 83 million fiscal 2000 due reasons discussed benefit provision income taxes benefit provision income taxes 25 million fiscal 2001 compared 21 million fiscal 2000 effective tax rate fiscal 2001 benefit 355 compared 253 fiscal 2000 decrease benefit primarily due inclusion taxable income certain expenses deductible tax purposes including 119 million charge impairment longlived assets loss income discontinued operations loss discontinued operations 46 million fiscal 2001 compared income discontinued operations 62 million fiscal 2000 due factors discussed quarterly results set forth certain unaudited quarterly financial data last eight quarters certain data expressed percentage revenue respective quarters information derived unaudited financial statements opinion management include adjustments consisting normal recurring adjustments necessary fairly present quarterly information accordance generally accepted accounting principles operating results quarter necessarily indicative results expected future period liquidity capital resources august 22 2001 entered amended restated credit agreement credit agreement bank america canadian imperial bank commerce first union national bank suntrust bank republic bank keybank national association ing us capital llc pursuant credit agreement lenders established 120000000 line credit benefit expiring february 12 2004 credit agreement among things provides total maximum borrowings 120000000 ii capability borrowings foreign currencies borrowings credit agreement bear interest either base rate plus applicable margin ranging 000 375 depending certain conditions ii eurodollar rate plus applicable margin ranging 1125 1875 depending certain conditions iii respect foreign currency loans fronted offshore currency rate plus applicable margin ranging 1125 1875 depending certain conditions addition credit agreement includes negative affirmative covenants customary credit facility nature limitations capital expenditures indebtedness sales assets minimum fixed charge coverage maintenance net worth limitation senior indebtedness capitalization restriction paying dividends december 31 2002 compliance negative affirmative covenants credit agreement also provides bank america make swingline loans us 5000000 working capital purposes issue letters credit behalf 20000000 december 31 2002 outstanding borrowings credit facility bank america issued 114 million letters credit giving us 1086 million availability credit agreement indebtedness credit agreement mature february 12 2004 december 31 2002 approximately 69 million total longterm debt continuing operations consisting 39 million industrial development revenue bonds 30 million longterm liabilities assumed connection acquisitions march 2002 board directors approved stock repurchase program authorizing repurchase maximum 32 million shares common stock february 2003 board directors increased stock repurchase program authorize repurchase time depending upon market conditions factors additional 44 million shares march 10 2003 repurchased 33 million shares common stock repurchase program average price 1242 per share leaving us ability repurchase additional 43 million shares common stock repurchases may made open market privately negotiated transactions otherwise expect continue policy repurchasing common stock time addition credit agreement permits us repurchase shares common stock limitation ratio consolidated total indebtedness consolidated ebtida terms defined credit agreement rolling twelvemonth period less 100 1 ratios greater 100 1 credit agreement limits ability repurchase shares 150 million basket resets 0 time ratio less 10 working capital excluding amounts relating discontinued operations 890 million 1128 million december 31 2002 december 31 2001 respectively fiscal 2002 capital expenditures continuing operations 59 million fiscal 2002 capital expenditures discontinued operations 45 million expenditures include leasehold improvements information technology communications infrastructure equipment software manufacturing machinery equipment anticipate cash generated operations proceeds sale discontinued operations cash hand available borrowings credit agreement enable us meet liquidity working capital expenditure requirements next 12 months may however require additional financing pursue strategy growth acquisitions financing required assurances available obtained terms favorable us basis dilutive stockholders recently issued accounting standards june 2001 financial accounting standards board fasb issued sfas 141 business combinations sfas 141 requires purchase method accounting used business combinations initiated june 30 2001 statement specifies certain acquired intangible assets business combination recognized assets separately goodwill existing intangible assets goodwill evaluated new separation requirements adoption statement material impact consolidated financial statements june 2001 fasb issued sfas 142 goodwill intangible assets sfas 142 changes accounting goodwill amortization method impairmentonly approach amortization goodwill including goodwill recorded past business combinations ceased upon adoption statement addition statement requires goodwill tested impairment least annually reporting unit level implemented sfas 142 january 1 2002 connection adoption sfas 142 completed second quarter transitional goodwill impairment test compared fair value reporting unit carrying value determined impairment existed goodwill resulting acquisitions made us subsequent june 30 2001 immediately subject nonamortization provisions sfas 142 accounting goodwill sfas 142 periods presented net income earnings per share would follows august 2001 fasb issued statement financial accounting standards 143 accounting asset retirement obligations sfas 143 sfas 143 establishes accounting standards recognition measurement liability asset retirement obligation associated asset retirement cost sfas 143 requires recognition fair value liability asset retirement obligation period incurred reasonable estimate fair value made reasonable estimate fair value cannot made period asset retirement obligation incurred liability shall recognized reasonable estimate fair value made fair value liability asset retirement obligation amount liability could settled current transaction willing parties forced liquidation transaction sfas 143 effective financial statements issued fiscal years beginning june 15 2002 provisions sfas 143 became effective us january 1 2003 effects adopting standard material effect us october 2001 fasb issued statement financial accounting standards 144 accounting impairment disposal longlived assets sfas 144 sfas 144 establishes primaryasset approach determine cash flow estimation period group assets liabilities represents unit accounting longlived asset held used sfas 144 requires longlived asset 1 abandoned 2 exchanged similar productive asset 3 distributed owners spinoff considered held used abandoned exchanged distributed sfas 144 requires 1 spinoffs exchanges similar productive assets recorded lower carrying value fair value assets classified held used disposed 2 impairment loss resulting spinoff exchange similar productive assets recognized upon asset disposition sfas 144 provides total assets total liabilities discontinued business segments presented separate captions assets liabilities also provides future losses discontinued business segments shall reported incurred adopted sfas 144 effective january 1 2002 reclassification services division discontinued operations subsequent reduction carrying value accordance provisions sfas 144 april 2002 fasb issued statement financial accounting standards 145 rescission fasb 4 44 64 amendment fasb statement 13 technical corrections sfas 145 sfas 145 gains losses related extinguishment debt longer segregated income statement continuing operations provisions sfas 145 effective fiscal years beginning may 15 2002 june 2002 fasb issued statement financial accounting standard 146 accounting costs associated exit disposal activities sfas 146 sfas 146 addresses financial accounting reporting costs associated exit disposal activities nullifies emerging issues task force issue 943 liability recognition certain employee termination benefits costs exit activity including certain costs incurred restructuring sfas 146 effective exit disposal activities initiated december 31 2002 effects adopting standard material effect us december 2002 fasb issued statement financial accounting standard 148 accounting stockbased compensation transition disclosure sfas 148 sfas 148 provides alternative methods transition voluntary change fair value based method accounting stockbased employee compensation addition sfas 148 amends disclosure requirements statement financial accounting standard 123 accounting stockbased compensation sfas 123 require prominent disclosures annual interim financial statements method accounting stockbased employee compensation effect method used reported results disclosures required sfas 148 included document inflation believe relatively moderate rates inflation recent years significant impact revenue profitability historically able offset inflationary effects either increasing prices improving cost efficiencies item 7aitem 7 managements discussion analysis financial condition results operations managements discussion analysis financial condition results operations contains forwardlooking statements within meaning section 27a securities act 1933 amended section 21e securities exchange act 1934 amended statements predictive nature depend upon refer future events conditions include words expects anticipates intends plans believes estimates could similar expressions forward looking statements although believe statements based upon reasonable assumptions give assurance goals achieved information see forward looking statements contained elsewhere report actual results may differ expressed implied forwardlooking statements believe subject number risk factors including without limitation inherent unpredictability currency fluctuations competitive actions including pricing ability realize cost reductions operating efficiencies including ability implement headcount reduction programs timely manner unduly disrupt business operations ability identify realize costreduction opportunities general economic business conditions ability successfully execute changes operations integration recent future acquisitions move corporate headquarters certain manufacturing operations without disrupting operations ability obtain supplies raw materials without disruption forwardlooking statements report evaluated light important risk factors listed managements discussion analysis financial condition results operations elsewhere annual report form 10k including accompanying financial statements company overview leading manufacturer provider specialized security products training support services related products vehicle armor systems military helicopter seating systems aircraft land vehicle safety systems protective equipment military personnel technologies used protect humans variety lifethreatening catastrophic situations products systems used domestically internationally military law enforcement security corrections personnel well governmental agencies multinational corporations individuals organized operated three business divisions armor holdings products also referred products division armor mobile security also referred mobile security division simula continuing operations products division manufactures sells broad range high quality security products equipment related consumable items concealable tactical body armor hard armor duty gear lesslethal munitions antiriot products police batons emergency lighting products forensic products firearms accessories weapon maintenance products foldable ladders specialty gloves products marketed brand names well established military law enforcement communities american body armortm bsquarer break freer clpr defense technologyfederal laboratoriesr deftec productsr distraction devicer federal laboratoriesr ferretr first defenser identicatorr identidrugr impaktm lightning powderr monadnockr nikr ogarahess eisenhardt armoring companyr protechtm quikstep ladderstm safariland designr speedfeedr 911ep designtm sell products network 350 distributors sales agents including approximately 200 united states extensive distribution capabilities commitment customer service training enabled us become leading provider security equipment law enforcement agencies mobile security mobile security division manufactures installs ballistic blast protected armoring systems privately owned vehicles armor variety privately owned commercial vehicles including limousines sedans sport utility vehicles commercial trucks cashintransit vehicles protect varying degrees ballistic blast threats customers business include international corporations high net worth individuals brand name ogarahess eisenhardt solesource provider us military armor blast protection systems hmmwvs also contract us army provide spare parts logistics ongoing field support services currently installed base approximately 4415 uparmored hmmwvs additionally mobile security division subcontracted develop ballistic blast protected armored sealed truck cab himars program recently transitioned us army us marine corps developmental low rate initial production deliveries commenced 2003 also supply armor subsystems tactical wheeled vehicles addition supply ballistic blast protected armoring systems us federal law enforcement intelligence agencies foreign heads state simula acquired december 9 2003 supplies human safety survival systems us military major aerospace defense prime contractors core markets military aviation safety military personnel safety land marine safety simula provide military helicopter seating systems aircraft land vehicle armor systems protective equipment military personnel technologies used protect humans variety lifethreatening catastrophic situations discontinued operations april 17 2003 announced completed sale armorgroup integrated systems business sale 100 stock armorgroup integrated systems inc low voltage systems technologies inc aerwav integration systems inc ais wholly owned subsidiary aerwav holdings llc consideration integrated systems business received 41 million collateralized note due two years warrant approximately 25 ais recorded loss 366000 sale november 26 2003 announced completed sale armorgroup security service division 33660000 consideration group private investors led granville baird capital partners london england management received 31360000 cash closing scheduled receive another 2300000 end 2004 recorded loss 88 million sale fourth quarter 2003 accordance generally accepted accounting principles unrealized gains losses included equity accumulated comprehensive income loss recognized period related assets liabilities disposed december 31 2003 litigation support services subsidiary remains discontinued operations subsidiary specializes providing computer forensics consulting services training software tools civil litigation market government agencies fortune 500 corporations computer forensics preservation identification extraction documentation computer evidence actively attempting sell business expect sell 2004 critical accounting policies significant accounting policies described note 1 consolidated financial statements included item 8 form 10k believe critical accounting policies include revenue recognition use estimates income taxes impairment revenue recognition record products revenue time shipment returns minimal materially affect financial statements record revenue mobile security division vehicle shipped except larger commercial contracts typically longer four months length contract delivery hmmwvs us government revenue recognized units completed bases completion occurring upon inspection acceptance us government contract continues 2005 revenue larger contracts recognized percentage completion unitsofwork performed method hmmwv units sold us government considered complete onsite department defense officer finishes inspection hmmwv approves delivery contracts loss position entire estimated loss would recognized balance contract time believe current contracts profitable record service revenue services provided contractbycontract basis revenues service contracts recognized term contract estimates preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts financial statements accompanying notes significant estimates inherent preparation accompanying consolidated financial statements include periodic testing carrying value longlived assets impairment valuation allowances receivables inventories deferred income tax assets liabilities potential litigation claims settlements contract contingencies obligations actual results could differ estimates income taxes account income taxes pursuant statement financial accounting standards sfas 109 accounting income taxes asset liability method specified thereunder deferred taxes determined based difference financial reporting tax bases assets liabilities deferred tax liabilities offset deferred tax assets relating net operating loss carryforwards deductible temporary differences future benefits obtained either utilization net operating loss carryforwards reduction income tax asset valuation allowance existing september 20 1993 applied reduce reorganization value excess amounts allocable identifiable assets december 31 2003 2002 consolidated foreign subsidiaries unremitted earnings approximately 90 million 30 million respectively company recorded provision united states federal income taxes since earnings considered permanently reinvested foreign earnings taxed according regulations existing countries earned impairment longlived assets including certain identifiable intangibles goodwill related assets reviewed annually impairment whenever events changes circumstances indicate carrying amount asset question may recoverable including limited deterioration profits business segment longlived assets changes occur might impair recovery longlived assets management reviewed companys longlived assets taken impairment charge 124 million fiscal 2003 303 million fiscal 2002 reduce carrying value services division estimated realizable value method used determine existence impairment would discounted operating cash flows estimated remaining useful lives related longlived assets continuing operations accordance sfas 142 goodwill intangible assets impairment measured difference fair value unamortized cost date impairment determined discontinued operations accordance statement financial accounting standards 144 accounting impairment disposal longlived assets sfas 144 component classified held sale reported discontinued operations following conditions met operations cash flows component eliminated ongoing operations entity result disposal transaction b entity significant continuing involvement operations component disposal transaction period component entity either disposed classified held sale income statement current prior periods reports results operations component including estimated impairment gain loss recognized accordance sfas 144 paragraph 37 discontinued operations results discontinued operations less applicable income taxes benefit reported separate component income extraordinary items cumulative effect accounting changes applicable assets liabilities disposal group classified held sale presented separately asset liability sections respectively statement financial position results operations effective june 30 2002 decided sell armorgroup services division sale completed november 26 2003 organized formal auction managed outside advisors accordance statement accounting standards 144 accounting impairment disposal longlived assets liabilities companys services division classified held sale operating results reported discontinued operations statement operations periods prior sale division us based training subsidiary usds inc previously reported services division included sale reclassified products division following table sets forth selected statement operations data percentage total revenues periods indicated fiscal 2003 compared fiscal 2002 net income loss net income loss increased 286 million 1615 net income 109 million year ended december 31 2003 fiscal 2003 compared net loss 177 million year ended december 31 2002 fiscal 2002 income continuing operations loss discontinued operations 170 million 61 million respectively fiscal 2003 compared income continuing operations loss discontinued operations 213 million 390 million respectively fiscal 2002 decrease income continuing operations relates primarily 73 million noncash nonrecurring charge stock based compensation fourth quarter 2003 33 million including 21 million noncash charge severance charge related termination former chief executive officer second quarter 2003 increase interest expense relating companys 1500 million subordinated debenture issued august 12 2003 increases bonus expense legal accounting fees insurance internal audit expenses continuing operations products division revenues products division revenues increased 191 million 106 1991 million fiscal 2003 compared 1799 million fiscal 2002 fiscal 2003 products division revenue increased 76 internally including yearoveryear changes acquired businesses 30 due acquisitions speedfeed inc foldable products group evipaq inc bsquare inc 911 emergency products inc completed 2002 hatch imports inc completed fourth quarter 2003 products division revenues include 207 million 168 million usds inc us based training company years ended fiscal 2003 fiscal 2002 respectively filings prior june 30 2002 reported usds inc part services division mobile security division revenues mobile security division revenues increased 324 million 259 1575 million fiscal 2003 compared 1252 million fiscal 2002 mobile security division revenues 2003 increased 192 million due acquisition substantially assets trascobremen september 24 2002 excluding 192 million 2003 revenue increase relating trascobremen mobile security division revenue increased 132 million 109 fiscal 2003 compared fiscal 2002 simula revenues simula acquired december 9 2003 generated revenues 85 million fiscal 2003 21day period included fiscal 2003 cost sales cost sales increased 428 million 203 2536 million fiscal 2003 compared 2107 million fiscal 2002 percentage total revenues cost sales increased 694 total revenues fiscal 2003 691 fiscal 2002 increase cost sales percentage revenues primarily due increased mix mobile security division revenues mobile security division generates higher cost sales percentage revenues products division gross margins products division 348 fiscal 2003 compared 364 fiscal 2002 decline product divisions gross margins resulted primarily 1 increase low margin gas mask sales 2 increase lower margin international body armor sales produced overseas armor products international 3 lower production volumes within lesslethal automotive hard armor product lines resulted reduced fixed cost absorption certain labor inefficiencies 4 moving costs labor inefficiencies protech associated relocation manufacturing facility excluding products training division subsidiary products division gross margins 371 compared 387 2002 gross margins mobile security division 254 fiscal 2003 compared 230 fiscal 2002 increase mobile security gross margins primarily attributable 1 favorable manufacturing overhead cost absorption relating increased manufacturing volumes cincinnati manufacturing facility 2 operational efficiencies cincinnati manufacturing facility gross margins simula 258 21day period included fiscal 2003 simulas gross margins negatively impacted purchase accounting wrapup low margin contract 2003 operations necessarily indicative future performance operating expenses operating expenses increased 130 million 260 628 million 172 total revenues fiscal 2003 compared 498 million 163 total revenues fiscal 2002 products division operating expenses increased 18 million 57 331 million 166 products division revenues compared 314 million 174 products division revenues fiscal 2002 increase primarily due incremental operating expenses associated acquired businesses completed subsequent 2002 mobile security division operating expenses increased 48 million 393 171 million 109 mobile security division revenues fiscal 2003 compared 123 million 98 mobile security division revenues fiscal 2002 excluding increase 2003 operating expenses resulting acquisition substantially assets trascobremen september 24 2002 operating expenses fiscal 2003 increased 30 million versus fiscal 2002 increase operating expenses primarily due 1 increased expenses associated startup operations caracas venezuela 2 increased insurance costs 3 net effect weaker us dollar foreign currencies 4 normal wage inflation simula operating expenses 793000 fiscal 2003 corporate operating expenses increased 56 million 899 118 million 32 total revenues fiscal 2003 compared 62 million fiscal 2002 20 total revenues increase due primarily increased bonus expense legal accounting fees insurance internal audit expenses amortization expense increased 244000 996 489000 fiscal 2003 compared 245000 fiscal 2002 sfas 142 adopted january 1 2002 eliminated amortization intangible assets indefinite lives goodwill acquisitions completed july 1 2001 well fiscal years ending january 1 2002 remaining amortization expense related patents trademarks finite lives amortization intangible assets goodwill associated simula inc hatch imports inc acquisitions 2003 integration charges integration charges increased 67 million 1122 126 million fiscal 2003 compared 59 million fiscal 2002 increase integration charges primarily related 73 million noncash charge stockbased compensation performance plan certain key executives 33 million severance charge including 21 million noncash charge related recent departure former chief executive officer excluding charges integration charges 20 million fiscal 2003 decrease 39 million fiscal 2002 decrease primarily due elimination expense associated 2001 acquisitions ogarahess eisenhardt identicator operating income operating income continuing operations decreased 27 million 69 357 million fiscal 2003 compared 384 million fiscal 2002 due factors discussed interest expense net interest expense net increased 31 million 3347 40 million fiscal 2003 compared 923000 fiscal 2002 increase due primarily interest expense associated 150 million aggregate principal amount 825 senior subordinated notes due 2013 issued august 12 2003 september 2 2003 entered interest rate swap agreements effectively exchanged 825 fixed rate variable rate six month libor set arrears plus spread 2735 275 december 31 2003 sixmonth libor rate 122 expense net expense net 508000 fiscal 2003 compared 51000 fiscal 2002 increase related primarily foreign exchange currency losses writedown certain fixed assets income continuing operations provision income taxes income continuing operations provision income taxes decreased 62 million 165 312 million fiscal 2003 compared 374 million fiscal 2002 due reasons discussed provision income taxes provision income taxes continuing operations 142 million fiscal 2003 compared 161 million fiscal 2002 effective income tax rate 455 fiscal 2003 compared 429 fiscal 2002 based annual income amounts jurisdictions amounts taxable 2003 effective income tax rate 455 higher 374 estimated effective income tax rate utilized first half 2003 due among things 1 nontax deductible nature noncash nonrecurring stock based compensation provided certain key executives 2 taxable gain realized second half 2003 certain intellectual property utilized discontinued operations revalued order comply tax code provisions impact incremental tax associated revalued intellectual property recorded continuing operations required generally accepted accounting principles resulted incremental noncash tax expense foreign tax credits available offset tax otherwise payable previously mentioned negative impacts 2003 tax rate partially offset state level tax strategies lowered effective tax rate income continuing operations income continuing operations decreased 43 million 170 million fiscal 2003 compared 213 million fiscal 2002 due factors discussed discontinued operations many items listed involve accounting estimates loss amounts reevaluated future changes might appropriate april 17 2003 announced completed sale armorgroup integrated systems business sale 100 stock armorgroup integrated systems inc low voltage systems technologies inc aerwav integration systems inc ais wholly owned subsidiary aerwav holdings llc consideration integrated systems business received 41 million collateralized note due two years warrant approximately 25 ais recorded loss 366000 sale november 26 2003 announced completed sale armorgroup security service division 33660000 million consideration group private investors led granville baird capital partners london england management received 31360000 million cash closing scheduled receive another 2300000 million end 2004 recorded loss 88 million sale accordance generally accepted accounting principles unrealized gains losses included equity accumulated comprehensive income loss recognized period disposition related assets liabilities large component loss december 31 2003 network technologies inc nti litigation support services subsidiary remains operating subsidiary discontinued operations note 2 consolidated financial statements contains comparative information discontinued operations services revenues services division revenues decreased 31 million 32 951 million fiscal 2003 compared 983 million fiscal 2002 fiscal 2003 reflects revenues armorgroup november 26 2003 revenues armorgroup integrated systems april 17 2003 respective dates sale opposed full year 2002 exclusive armorgroup integrated systems revenue increased 85 million 103 904 million fiscal 2003 compared 820 million fiscal 2002 increase due strong performance primarily middle east strong growth coming iraq along ongoing strong training revenues athens olympics build tempered weak revenues mine action business investigations business latin american business lack full years revenues fiscal 2003 cost sales cost sales decreased 90 million 119 668 million fiscal 2003 compared 758 million fiscal 2002 fiscal 2003 reflects cost sales armorgroup november 26 2003 cost sales armorgroup integrated systems april 17 2003 respective dates sale percentage total revenue discontinued operations cost sales decreased 702 total revenues discontinued operations fiscal 2003 771 fiscal 2002 decrease result sale armorgroup integrated systems business april 2003 comparatively low gross margin exclusive armorgroup integrated systems cost sales increased 39 million 68 616 million fiscal 2003 compared 577 million fiscal 2002 exclusive armorgroup integrated systems cost sales percentage total revenue discontinued operations decreased 682 total revenues discontinued operations fiscal 2003 704 fiscal 2002 decease cost sales percentage total revenue discontinued operations primarily result proportion revenue growth coming expatriate intensive security contracts iraq continued high margin training contracts operating expenses operating expenses decreased 107 million 349 199 million 209 total revenues discontinued operations fiscal 2003 compared 306 million 249 total revenues discontinued operations fiscal 2002 fiscal 2003 reflects operating expenses armorgroup november 26 2003 operating expenses armorgroup integrated systems april 17 2003 respective dates sale exclusive armorgroup integrated systems operating expenses decreased 76 million 281 194 million fiscal 2003 compared 269 million fiscal 2002 decrease due reduced foreign currency expenses reduction salary costs result 2002 restructuring sale armorgroup november 26 2003 charge impairment longlived assets charge impairment longlived assets 215 million fiscal 2003 compared 303 fiscal 2002 fiscal 2003 charge related 124 million reduction carrying value services division estimated realizable value 88 million loss sale armorgroup 366000 loss sale armorgroup integrated systems 2002 charge result 61 million estimated disposal costs 242 million reduction carrying value services division estimated realizable value required sfas 144 integration charges integration charges decreased 18 million 704 776000 fiscal 2003 compared 26 million fiscal 2002 decrease primarily due severance payments certain personnel prior year operating loss operating losses 47 million fiscal 2003 compared operating loss 410 million fiscal 2002 due factors discussed operating loss armorgroup integrated systems business 150 million fiscal 2002 primarily due 119 million charge impairment longlived assets excluding armorgroup integrated systems business balance assets held sale generated operating loss 37 million fiscal 2003 compared operating loss 269 million fiscal 2002 interest expense net interest expense net decreased 330000 954 16000 fiscal 2003 compared 346000 fiscal 2002 decrease due decreased utilization services divisions line credit expense net expense net 479000 fiscal 2003 compared 99000 fiscal 2002 due primarily increase foreign currency fluctuation losses fiscal 2003 loss discontinued operations benefit income taxes loss discontinued operations benefit income taxes 144 million fiscal 2003 415 million fiscal 2002 due reasons discussed benefit income taxes income tax benefit 83 million fiscal 2003 compared 24 million fiscal 2002 effective tax rate fiscal 2003 benefit 574 compared benefit 59 fiscal 2002 income tax benefit 574 fiscal 2003 primarily due taxable loss realized sale armorgroup loss discontinued operations loss discontinued operations 61 million fiscal 2003 compared loss discontinued operations 390 million fiscal 2002 due factors discussed fiscal 2002 compared fiscal 2001 net loss income net income decreased 278 million net loss 177 million fiscal 2002 compared net income 101 million year ended december 31 2001 fiscal 2001 income continuing operations loss discontinued operations 213 million 390 million respectively fiscal 2002 compared income continuing operations 147 million loss discontinued operations 46 million fiscal 2001 increase income continuing operations relates primarily inclusion mobile security division full year 2002 versus four months 2001 continuing operations products revenues products division revenues increased 30 million 201 1799 million fiscal 2002 compared 1499 million fiscal 2001 fiscal 2002 products division revenue increased 144 internally including year changes acquired businesses 57 due series small strategic tuckin acquisitions including identicator inc identicator guardian personal security products inc guardian speedfeed inc speedfeed foldable products group foldable evipaq inc evipaq bsquare inc bsquare 911 emergency products 911 products division revenues include 168 million 72 million usds inc us based training company years ended fiscal 2002 fiscal 2001 respectively filings prior june 30 2002 reported usds inc part services division mobile security division revenues mobile security division revenues increased 779 million 1650 1252 million fiscal 2002 compared 472 million fiscal 2001 revenues fiscal 2001 included four months operations acquisitions ogarahess eisenhardt armoring company ogara company ogara security associates inc august 2001 revenues fiscal 2002 include 33 million related acquisition trasco bremen september 2002 including eight months operations prior ownership excluding revenue associated assets either purchase sold mobile security division revenue increased 177 internally approximately 1063 million fiscal 2001 cost sales cost sales increased 844 million 668 2107 million fiscal 2002 compared 1263 million fiscal 2001 increase due primarily acquisition armor mobile security division well overall revenue growth fiscal 2002 compared fiscal 2001 percentage total revenues cost sales increased 691 total revenues fiscal 2002 641 fiscal 2001 increase percentage total revenues partially due full year inclusion 2002 mobile security division operates lower average gross margins products division partially reduced products division margins discussed fiscal 2002 gross margins products division 364 compared 393 reported period last year gross margins mobile security division 230 fiscal 2002 compared 251 four months december 31 2001 fiscal year acquisition date products division consists portfolio law enforcement products manufactured sold different margins given period products division weighted average gross margins fluctuate based upon relative volume products sold period lower gross margins fiscal 2002 products division partially attributable product mix well short term increases manufacturing costs raw material supply issues divisions body armor operations first half 2002 late 2001 2002 products division combined jacksonville florida based body armor operation body armor manufacturing facility ontario california 2002 division experienced difficulty combination resulting capacity constraints increased manufacturing costs believe capacity constraints alleviated certain body armor manufacturing costs decrease first half 2003 however time also experienced interruptions supply zylon shield certain ballistic fiber used leading concealable ballistic vest particular supply problem related ballistic integrity fiber received actual availability material nevertheless inability receive quality zylon shield period exacerbated capacity constraints december 31 2002 division currently receiving adequate supplies zylon shield currently working decrease body armor manufacturing costs products division gross margins also decreased realized higher proportional revenue increases training division operates significantly lower overall gross margins manufacturing segment decrease gross margins mobile security division primarily due less favorable mix commercial vehicle sales compared period prior year heavier mix lower margin cashintransit vehicles 2002 compared 2001 larger number base unit sales included revenue 2002 period operating expenses operating expenses increased 112 million 289 498 million 163 total revenues fiscal 2002 compared 387 million 196 total revenues fiscal 2001 increase primarily due operating expenses associated operations mobile security division acquired august 2001 included full year ended december 31 2001 operating expenses also increased products division primarily due operating expenses associated acquired companies internal growth business operating expenses percent sales decreased mobile security division operates lower level operating expenses percentage sales products division expect see increase corporate operating expense 2003 incur significant increases insurance expenses government affairs lobbying efforts internal audit information technology increased legal accounting costs associated legal compliance amortization expense decreased 19 million 886 02 million fiscal 2002 compared 21 million fiscal 2001 decrease results implementation sfas 142 eliminated goodwill amortization acquisitions completed july 1 2001 well fiscal years ending january 1 2002 remaining amortization expense related patents trademarks finite lives integration charges integration charges increased 26 million 798 59 million fiscal 2002 compared 33 million fiscal 2001 charges relate primarily integration mobile security division well acquisitions completed 2001 2002 integration charges also included certain expenses related integration body armor operations well direct costs expenses associated potential acquisitions close operating income operating income continuing operations increased 117 million 384 million fiscal 2002 compared 267 million fiscal 2001 due factors discussed usds inc contributed operating income previously reported part services division 17 million 12 million years ended december 31 2002 2001 respectively interest expense net interest expense net decreased 29 million 761 09 million fiscal 2002 compared 39 million fiscal 2001 decrease due primarily repayment longterm debt revolving credit facility net proceeds secondary common stock offering completed december 2001 expense income net expense income net 51000 fiscal 2002 compared 82000 fiscal 2001 due gain sale fixed assets 2001 income continuing operations provision income taxes income continuing operations provision income taxes increased 145 million 374 million fiscal 2002 compared 229 million fiscal 2001 due reasons discussed provision income taxes provision income taxes 161 million fiscal 2002 compared 82 million fiscal 2001 provision income taxes fiscal 2002 included charges approximately 15 million related establishment valuation allowances certain foreign deferred tax assets discontinued operations effect charges increase effective tax rate fiscal 2002 429 compared 359 fiscal 2001 without charges effective tax rate fiscal 2002 would 39 increase effective tax rate would without tax charges related discontinued operations due primarily higher percentage income earned united states impact state income taxes income expected effective tax rate necessarily indicative actual effective rate due changing concentration mix income various countries continue operate income continuing operations income continuing operations increased 66 million 213 million fiscal 2002 compared 147 million fiscal 2001 due factors discussed discontinued operations many items listed involve accounting estimates loss amounts revaluated future changes might appropriate note 2 consolidated financial statements contains comparative information discontinued operations armorgroup services division revenues increased 33 million 35 983 million fiscal 2002 compared 949 million fiscal 2001 fiscal 2002 revenue increased 67 due acquisition international training inc iti acquired part acquisition mobile security division included services division date acquisition 34 reduction revenue exclusive iti acquisition result lower revenues integrated systems business united states security consulting business latin america russia due completion several large contracts cost sales cost sales increased 108 million 165 758 million fiscal 2002 compared 65 million fiscal 2001 increase due primarily acquisition iti percentage total revenue cost sales increased 771 total revenues fiscal 2002 685 fiscal 2001 increase cost sales percentage total revenue primarily due weakness integrated systems business resulting poor margins increased inventory reserves loss high margin oil industry security consulting work latin america scaling business democratic republic congo operating expenses operating expenses increased 61 million 249 306 million 311 total revenues fiscal 2002 compared 245 million 258 total revenues fiscal 2001 increase due primarily increased accounts receivable reserves asset writedowns charges integrated systems security consulting businesses well additional operating expenses associated itis operations acquired august 2001 amortization expense decreased 15 million 100 0 fiscal 2002 compared 15 million fiscal 2001 decrease result implementation sfas 142 eliminated goodwill amortization acquisitions completed july 1 2001 fiscal years beginning january 1 2002 charge impairment longlived assets charges impairment longlived assets 303 million fiscal 2002 compared 0 fiscal 2001 impairment charge result 242 million reduction carrying value services division estimated realizable value required sfas 144 restructuring related charges january 2001 board directors approved restructuring plan close services divisions us investigative businesses realign service divisions organization eliminate excess facilities reduce overhead business worldwide connection restructuring charge services division performed review longlived assets identify potential impairments pursuant restructuring plan eliminated 26 employees primarily services division investigative business b eliminated additional 24 employees security consulting business c incurred lease exit costs result closure investigative businesses wrotedown value tangible intangible assets result impairment review result restructuring plan recorded pretax charge 103 million december 31 2002 restructuring accrual 270000 compared 354000 december 31 2001 relating lease termination exit costs liability classified accrued expenses current liabilities discontinued operations balance sheet funded cash provided operating activities credit facility integration charges integration charges increased 18 million 2380 26 million fiscal 2002 compared 776000 fiscal 2001 charges reflect certain severance expenses software writeoff costs expenses associated preparing division sale well expenses associated integrating iti services division operating loss operating losses 410 million fiscal 2002 compared operating loss 71 million fiscal 2001 due factors discussed interest expense net interest expense net increased 203000 142 346000 fiscal 2002 compared 143000 fiscal 2001 increase due increased utilization services divisions line credit income expense net expense net 99000 fiscal 2002 compared income net 218000 fiscal 2001 increase expense fiscal 2002 result losses disposal fixed assets asset writeoffs loss discontinued operations provision income taxes benefit loss discontinued operations provision income taxes benefit 415 million fiscal 2002 71 million fiscal 2001 due reasons discussed provision income taxes benefit income tax benefit 24 million fiscal 2002 compared benefit 25 million fiscal 2001 effective tax rate fiscal 2002 benefit 59 compared benefit 355 fiscal 2001 decrease percentage benefit primarily due inclusion taxable income certain expenses deductible tax purposes including 312 million charge impairment longlived assets loss discontinued operations loss discontinued operations 390 million fiscal 2002 compared loss discontinued operations 46 million fiscal 2001 due factors discussed quarterly results set forth certain unaudited quarterly financial data last eight quarters certain data expressed percentage revenue respective quarters information derived unaudited financial statements opinion management include adjustments consisting normal recurring adjustments necessary fairly present quarterly information accordance generally accepted accounting principles operating results quarter necessarily indicative results expected future period liquidity capital resources august 12 2003 terminated prior credit facility entered new secured revolving credit facility credit facility bank america na wachovia bank national association syndicate financial institutions arranged bank america securities llc new credit facility consists fiveyear revolving credit facility among things provides total maximum borrowings 60 million ii 25 million sublimit issuances standby commercial letters credit iii 5 million sublimit swingline loans iv 5 million sublimit multicurrency borrowings credit facility bear interest either rate equal libor plus applicable margin ranging 1125 1625 ii alternate base rate higher bank america prime rate b federal funds rate plus 050 iii respect foreign currency loans fronted offshore currency rate plus applicable margin ranging 1125 1625 depending certain conditions credit facility guaranteed certain direct indirect domestic subsidiaries collateralized among things pledge issued outstanding shares stock equity interests certain domestic subsidiaries ii pledge 65 issued outstanding voting shares stock voting equity interests certain direct indirect foreign subsidiaries iii pledge 100 issued outstanding nonvoting shares stock nonvoting equity interests certain direct indirect foreign subsidiaries iv first priority perfected security interest certain domestic assets certain domestic assets certain direct indirect subsidiaries become guarantors obligations new credit facility including among things accounts receivable inventory machinery equipment certain contract rights intellectual property rights general intangibles december 31 2003 compliance negative affirmative covenants august 12 2003 completed private placement 150 million aggregate principal amount 825 senior subordinated notes due 2013 notes guaranteed domestic subsidiaries excluding usds inc senior subordinated basis notes sold qualified institutional investors reliance rule 144a securities act 1933 amended nonus persons reliance regulation securities act 1933 amended notes rated b1b moodys investors service standard poors rating services respectively 2003 used portion funds acquire simula inc hatch imports inc intend use remaining proceeds offering fund acquisitions repay portion outstanding debt general corporate working capital purposes including funding capital expenditures september 2 2003 entered interest rate swap agreements designated fair value hedge defined statement financial accounting standard 133 accounting derivative instruments hedge activities sfas 133 notional amount totaling 150 million agreements entered exchange fixed interest rate notes variable interest rate equal sixmonth libor set arrears plus spread ranging 2735 275 fixed semiannually fifteenth day february august agreements subject terms conditions common transactions type accordance sfas 133 changes fair value interest rate swap agreements offset changes fair value fixed rate debt due changes market interest rate accordingly assets consolidated balance sheets december 31 2003 increased 59 million reflected increase fair value interest rate swap agreements corresponding increase hedge liability recorded longterm debt agreements deemed perfectly effective fair value hedge therefore qualify shortcut method accounting sfas 133 result ineffectiveness expected recognized earnings associated interest rate swap agreements march 2002 board directors approved stock repurchase program authorizing repurchase maximum 32 million shares common stock february 2003 board directors increased stock repurchase program authorize repurchase time depending upon market conditions factors additional 44 million shares march 12 2004 repurchased 38 million shares common stock repurchase program average price 1249 per share leaving us ability repurchase additional 38 million shares common stock repurchases may made open market privately negotiated transactions otherwise december 31 2003 283 million shares common stock outstanding expect continue policy repurchasing common stock time subject restrictions contained credit facility indenture credit facility permits us repurchase shares common stock limitation ratio consolidated total indebtedness consolidated ebtida terms defined credit facility rolling twelvemonth period less 100 1 ratios greater 100 1 credit agreement limits ability repurchase shares 150 million basket resets 0 time ratio less 10 1 working capital excluding amounts relating discontinued operations 1686 million 890 million december 31 2003 december 31 2002 respectively fiscal 2003 capital expenditures continuing operations 87 million fiscal 2003 capital expenditures discontinued operations 31 million expenditures include leasehold improvements information technology communications infrastructure equipment software manufacturing machinery equipment anticipate cash generated operations proceeds sale discontinued operations cash hand available borrowings credit facility enable us meet liquidity working capital expenditure requirements next 12 months may however require additional financing pursue strategy growth acquisitions financing required assurances available obtained terms favorable us basis dilutive stockholders recently issued accounting standards june 2001 fasb issued sfas 142 goodwill intangible assets sfas 142 changes accounting goodwill amortization method impairmentonly approach amortization goodwill including goodwill recorded past business combinations ceased upon adoption statement addition statement requires goodwill tested impairment least annually reporting unit level implemented sfas 142 january 1 2002 connection adoption sfas 142 completed second quarter transitional goodwill impairment test compared fair value reporting unit carrying value determined impairment existed goodwill resulting acquisitions made us subsequent june 30 2001 immediately subject nonamortization provisions sfas 142 accounting goodwill sfas 142 2001 net income earnings per share would follows november 2002 fasb issued fasb interpretation 45 guarantors accounting disclosure requirements guarantees including indirect guarantees indebtedness others interpretation fasb statements 5 57 107 rescission fasb interpretation 34 fin 45 fin 45 elaborates disclosures made guarantor interim annual financial statements obligations certain guarantees issued also clarifies guarantor required recognize inception guarantee liability fair value obligation undertaken issuing guarantee initial recognition initial measurement provisions fin 45 applicable prospective basis guarantees issued modified december 31 2002 irrespective guarantors fiscal yearend adopted provisions statement january 1 2003 significant impact consolidated financial statements january 2003 fasb issued fasb interpretation 46 consolidation variableinterest entities interpretation arb 51 fin 46 fin 46 addresses consolidation business enterprises variable interest entities one following characteristics 1 equity investment risk sufficient permit entity finance activities without additional subordinated financial support parties provided interests absorb expected losses entity 2 equity investors lack one following essential characteristics controlling financial interest direct indirect ability make decisions entitys activities voting rights similar rights obligation absorb expected losses entity occur makes possible entity finance activities right receive expected residual returns entity occur compensation risk absorbing expected losses interpretation applies immediately variable interest entities created january 31 2003 variable interest entities enterprise obtains interest date applies first fiscal year interim period beginning june 15 2003 variable interest entities enterprise holds variable interest acquired february 1 2003 adoption fin 46 significant impact consolidated financial statements december 2003 fasb issued fasb interpretation 46 consolidation variable interest entities revised december 2003 fin 46r provisions fin 46r follows provides condition would preclude enterprise applying scope exception fin 46 certain entities businesses enterprise andor related parties participated significantly design redesign entity apply entity franchisee enterprise shall consolidate governmental organization shall consolidate financing entity established governmental organization unless financing entity governmental organization b used business enterprise manner similar variable interest entity effort circumvent provisions interpretation 46r troubled debt restructuring defined paragraph 2 fasb statement 15 accounting debtors creditors troubled debt restructurings amended shall accounted accordance statement event requires reconsideration whether entity involved variable interest entity whether enterprise variable interest variable interest entity primary beneficiary entity provide enterprise interest entity provisions fin 46 applied december 24 2003 shall apply fin 46 fin 46r entity accordance effective date provisions fin 46r described fin 46r applied later end first reporting period ends march 15 2004 march 31 2004 company however prior required application fin 46r company must apply fin 46 fin 46r entities considered specialpurpose entities later end first reporting period ends december 15 2003 december 31 2003 company interests variable interest entities subject provisions fin 46 fin 46r october 2001 fasb issued statement financial accounting standard 144 accounting impairment disposal longlived assets sfas 144 sfas 144 establishes primaryasset approach determine cash flow estimation period group assets liabilities represents unit accounting longlived asset held used sfas 144 requires longlived asset 1 abandoned 2 exchanged similar productive asset 3 distributed owners spinoff considered held used abandoned exchanged distributed sfas 144 requires 1 spinoffs exchanges similar productive assets recorded lower carrying value fair value assets classified held used disposed 2 impairment loss resulting spinoff exchange similar productive assets recognized upon asset disposition sfas 144 provides total assets total liabilities discontinued business segments presented separate captions assets liabilities also provides future losses discontinued business segments shall reported incurred adopted sfas 144 effective january 1 2002 reclassification services division discontinued operations subsequent reduction carrying value accordance provisions sfas 144 april 2002 fasb issued statement financial accounting standard 145 rescission fasb 4 44 64 amendment fasb statement 13 technical corrections sfas 145 sfas 145 gains losses related extinguishment debt longer segregated income statement continuing operations provisions sfas 145 effective fiscal years beginning may 15 2002 june 2002 fasb issued statement financial accounting standard 146 accounting costs associated exit disposal activities sfas 146 sfas 146 addresses financial accounting reporting costs associated exit disposal activities nullifies emerging issues task force issue 943 liability recognition certain employee termination benefits costs exit activity including certain costs incurred restructuring sfas 146 effective exit disposal activities initiated december 31 2002 effects adopting standard material effect us december 2002 fasb issued statement financial accounting standard 148 accounting stockbased compensation transition disclosure sfas 148 sfas 148 provides alternative methods transition voluntary change fair value based method accounting stockbased employee compensation addition sfas 148 amends disclosure requirements statement financial accounting standard 123 accounting stockbased compensation sfas 123 require prominent disclosure annual interim financial statements method accounting stockbased employee compensation effect method used reported results disclosures required sfas 148 included document april 2003 fasb issued statement financial accounting standard 149 amendment statement 133 derivative instruments hedging activities sfas 149 sfas 149 amends clarifies financial accounting reporting derivative instruments including certain derivative instruments embedded contracts hedging activities statement financial accounting standard 133 accounting derivative instruments hedging activities sfas 133 sfas 149 effective contracts entered modified hedging relationships designated june 30 2003 except provisions sfas 149 relate sfas 133 implementation issues effective fiscal quarters began prior june 15 2003 continue applied accordance respective effective dates adoption standard effect us may 2003 fasb issued statement financial accounting standard 150 accounting certain financial instruments characteristics liabilities equity sfas 150 sfas 150 establishes standards issuer classifies measures certain financial instruments characteristics liabilities equity requires issuer classify financial instrument within scope liability asset circumstances many instruments previously classified equity sfas 150 effective financial instruments entered modified may 31 2003 otherwise effective beginning first interim period beginning june 15 2003 adoption standard effect us may 2003 fasb issued fasb staff position 1461 determining whether onetime termination benefit offered connection exit disposal activity substance enhancement ongoing benefit arrangement staff position states order considered enhancement ongoing benefit arrangement additional termination benefits must represent revision ongoing arrangement limited specified termination event specified future period otherwise additional termination benefits considered onetime termination benefits accounted sfas 146 guidance staff position effective exit disposal activities initiated interim annual reporting periods beginning september 15 2003 adoption staff position expected material impact consolidated financial statements inflation believe relatively moderate rates inflation recent years significant impact revenue profitability historically able offset inflationary effects either increasing prices improving cost efficiencies balance sheet arrangements balance sheet arrangements tabular disclosure contractual obligations following table presents contractual obligations december 31 2003 item 7aitem 7 managements discussion analysis financial condition results operations managements discussion analysis financial condition results operations contains forwardlooking statements within meaning section 27a securities act 1933 amended section 21e securities exchange act 1934 amended statements predictive nature depend upon refer future events conditions include words expects anticipates intends plans believes estimates could similar expressions forward looking statements although believe statements based upon reasonable assumptions give assurance goals achieved information see forward looking statements contained part report actual results may differ expressed implied forwardlooking statements believe subject number risk factors including without limitation inherent unpredictability currency fluctuations competitive actions including pricing ability realize cost reductions operating efficiencies including ability implement headcount reduction programs timely manner unduly disrupt business operations ability identify realize costreduction opportunities general economic business conditions ability successfully execute changes operations integration recent future acquisitions move corporate headquarters certain manufacturing operations without disrupting operations ability obtain supplies raw materials without disruption forwardlooking statements report evaluated light important risk factors listed managements discussion analysis financial condition results operations elsewhere annual report form 10k including accompanying financial statements company overview leading manufacturer provider specialized security products training support services related products vehicle armor systems military helicopter seating systems aircraft land vehicle safety systems protective equipment military personnel technologies used protect humans variety lifethreatening catastrophic situations products systems used domestically internationally military law enforcement security corrections personnel well governmental agencies multinational corporations individuals organized operated three reportable business divisions aerospace defense group armor holdings products also referred products division armor mobile security also referred mobile security division continuing operations effective first quarter 2004 instituted new segment reporting format include three reportable business divisions aerospace defense group armor holdings products also referred products division armor mobile security also referred mobile security division aerospace defense group formed upon completion acquisition simula inc december 9 2003 aerospace defense group also includes military business including armor blast protection systems uparmored hmmwvs military vehicle armor programs previously included mobile security division aerospace defense group also includes sapi plate produced protech subsidiary pittsfield massachusetts previously reported part products division historical results businesses reclassified part aerospace defense group reporting change made better reflect managements approach operating directing businesses certain instances align financial reporting market customer segments aerospace defense aerospace defense group supplies human safety survival systems us military major aerospace defense prime contractors core markets military aviation safety military personnel safety land marine safety brand name ogarahess eisenhardt solesource provider us military armor blast protection systems uparmored hmmwvs also contract us army provide spare parts logistics ongoing field support services currently installed base approximately 8350 uparmored hmmwvs additionally provide blast ballistic protection kits standard hmmwvs installed existing equipment field aerospace defense group subcontracted develop ballistic blast protected armored sealed truck cab himars program recently transitioned us army us marine corps developmental low rate initial production deliveries commenced 2003 continued 2004 also supply armor subsystems tactical wheeled vehicles simula provide military helicopter seating systems helicopter cockpit airbag systems aircraft armor land vehicle armor kits hmmwv hemtt pls het m915 asv body armor protective equipment military personnel emergency bailout parachutes survival ensembles worn military aircrew primary customers products us army us marine corps boeing sikorsky aircraft simulas aviation safety products provided sole source basis us armed forces adopted ceramic body armor key element protective ensemble worn troops iraq afghanistan simula developer specialized product called sapi one largest supplier us forces also supply ceramic body armor protech subsidiary based pittsfield massachusetts specialty defense operations pennsylvania tennessee kentucky supplier military law enforcement customers united states overseas specialty defense manufactures among things molle systems otvs warrior helmets specialty defenses core products made kevlarr heavyduty nylon fabric webbing require special cutting sewing techniques specialty defense currently largest supplier molle systems us army molle system consists modular rucksack removable compartments components fighting load vest removable pockets rifleman pistol squad automatic weapon gunner medic grenadier configurations specialty defense manufactures otvs used sapi plates provide enhanced armor protection us armed forces mines grenades mortar shells artillery fire rifle projectiles specialty defense one three largest suppliers warrior helmets us army specialty defense also manufactures nato pasgt helmets advanced combat vehicle crewman helmet warrior helmet us armys next generation helmet along related liners accessories 2000 us special forces developed new combat helmet called mich took advantage new technologies today us army adopted helmet design standard planning equip soldiers helmet end 2008 products division manufactures sells broad range high quality security products equipment related consumable items concealable tactical body armor hard armor duty gear lesslethal munitions antiriot products police batons emergency lighting products forensic products firearms accessories weapon maintenance products foldable ladders specialty gloves products divisions products marketed brand names well established military law enforcement communities american body armortm xtremer matrixr bsquarer break freer clpr defense technologyfederal laboratoriesr deftec productstm distraction devicer federal laboratoriesr ferretr first defenser identicatorr identidrugr lightning powderr monadnockr nikr protechtm quikstep ladderstm portal ladderstm quickshieldtm safarilandr speedfeedr 911epr odvtm kleenboretm gregoryr bianchir nylokr accumoldr accumold elitetm rangertm peacekeeperr products divisions security products marketed extensive network approximately 260 domestic distributors 200 international distributors sales force approximately 40 representatives specialists brand names well established military law enforcement communities products divisions extensive distribution capabilities commitment customer service training enabled us become leading provider security equipment law enforcement agencies mobile security mobile security division manufactures installs armoring systems commercial vehicles protect varying degrees ballistic blast threats brand names ogarahess eisenhardt armoring companytm armor mobile security france armor mobile security germany impaktm mobile security division armors variety commercial vehicles including limousines sedans sport utility vehicles commercial trucks cashintransit vehicles mobile security divisions customers include us federal law enforcement intelligence agencies foreign heads state multinational corporations well high net worth individuals cashintransit operators discontinued operations july 2 2004 sold security consulting division litigation support services subsidiary new technologies inc nti last remaining business discontinued operations remaining division nti consisting primarily training services included part products division segment management resides business represented last remaining business services division assets liabilities services division classified assets liabilities discontinued operations consolidated balance sheets results operations classified income loss discontinued operations accompanying consolidated statements operations second quarter 2004 recorded impairment charge 14 million integration charges continuing operations reduce carrying value remaining portion nti estimated fair value november 26 2003 announced completed sale armorgroup security service division 33660000 total consideration group private investors led granville baird capital partners london england management received 31360000 cash closing note receivable 2300000 collected full year ended december 31 2004 recorded loss 88 million sale fourth quarter 2003 primarily due unrealized foreign currency translation loss accordance generally accepted accounting principles unrealized foreign currency translation gains losses included equity accumulated comprehensive income loss recognized period related assets liabilities disposed april 17 2003 announced completed sale armorgroup integrated systems business sale 100 stock armorgroup integrated systems inc low voltage systems technologies inc aerwave integrated systems ais wholly owned subsidiary aerwav holdings llc consideration integrated systems business received 41 million collateralized note due april 2005 received 475000 december 31 2004 warrant approximately 25 ais recorded loss 366000 sale second quarter 2003 critical accounting policies significant accounting policies described note 1 consolidated financial statements included item 8 form 10k believe critical accounting policies include revenue recognition allowance doubtful accounts derivative instruments hedging activities goodwill patents licenses trademarks use estimates income taxes impairment discontinued operations comprehensive income foreign currency translation revenue recognition record products revenue time shipment returns minimal materially affect financial statements record aerospace defense group revenue related government contracts results principally fixed price contracts recognized persuasive evidence arrangement exists delivery occurred fee fixed determinable collectibility probable generally conditions met company ships products customers uparmored hmmwv units sold us government considered sold onsite department defense officer finishes inspection uparmored hmmwv approves delivery shipment occurs revenues related nonrefundable license fees payable initiation licensing agreement recognized immediately income received collectibility reasonably assured provided future obligations performance requirements nonrefundable license fees essence prepayment future royalties recognized revenue straightline basis term initial license record revenue aerospace defense group mobile security division vehicle shipped except larger commercial contracts typically longer four months length contract delivery uparmored hmmwvs us government continues 2008 revenue large commercial contracts recognized percentage completion unitsofwork performed method large commercial contracts loss position entire estimated loss would recognized balance contract time current contracts profitable record service revenue services provided contractbycontract basis revenues service contracts recognized term contract allowance doubtful accounts encounter risks associated sales collection associated accounts receivable review accounts receivable aging monthly basis determine provision accounts receivable considered uncollectible order calculate appropriate monthly provision primarily review accounts greater ninety days past due estimate amount uncollectible periodically compare identified credit risks allowance established using historical experience adjusts allowance accordingly derivative instruments hedging activities account derivative instruments hedging activities accordance statement financial accounting standard 133 accounting derivative instruments hedge activities sfas 133 amended derivative instruments recorded balance sheet fair value changes fair value derivatives recorded period current earnings comprehensive income depending whether derivative designated part hedge transaction depending type hedge transaction fairvalue hedge transactions hedge changes assets liabilitys firm commitments fair value changes fair value derivative instrument generally offset income statement changes hedged items fair value adopted sfas 133 first quarter 2001 however derivatives measured time adoption hold issue interest rate swap agreements derivative instruments trading purposes changes fair value interest rate swap agreements offset changes fair value fixed rate debt due changes market interest rate accordingly assets condensed consolidated balance sheet december 31 2004 increased 195000 reflected increase fair value interest rate swap agreements 61 million corresponding increase hedge liability recorded longterm debt agreements deemed perfectly effective fair value hedge therefore qualify shortcut method accounting sfas 133 result ineffectiveness expected recognized earnings associated interest rate swap agreements goodwill represents excess purchase price fair value net assets acquired purchase business combination goodwill intangible assets stated basis cost 2090 million goodwill resulting acquisitions made us subsequent june 30 2001 immediately subjected nonamortization provisions statement financial accounting standards 142 goodwill intangible assets sfas 142 see also impairment recent accounting pronouncements follows purchase method accounting business combinations requires us make use estimates judgments allocate purchase price paid acquisitions fair value net tangible identifiable intangible assets goodwill tested impairment annually possible impairment indicated using fair value based test prescribed sfas 142 performed annual assessment goodwill determined impairment existed june 30 2004 patents licenses trademarks patents licenses trademarks primarily acquired acquisitions accounted purchase method accounting assets amortized straightline basis useful lives see note 5 follows information identified intangibles estimates preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts financial statements accompanying notes significant estimates inherent preparation accompanying consolidated financial statements include carrying value longlived assets valuation allowances receivables inventories deferred income tax assets liabilities potential litigation claims settlements potential liabilities related tax filings ordinary course business contract contingencies obligations actual results could differ estimates income taxes account income taxes pursuant statement financial accounting standards 109 accounting income taxes sfas 109 asset liability method specified thereunder deferred taxes determined based difference financial reporting tax bases assets liabilities deferred tax liabilities offset deferred tax assets relating net operating loss carryforwards tax credit carryforwards deductible temporary differences december 31 2004 2003 certain nonus subsidiaries unremitted earnings approximately 107 million 46 million respectively recorded provision united states federal income taxes since earnings considered permanently reinvested foreign earnings taxed according regulations existing countries earned impairment longlived assets including certain identifiable intangibles goodwill related assets reviewed annually impairment whenever events changes circumstances indicate carrying amount asset question may recoverable including limited deterioration profits business segment longlived assets changes occur might impair recovery longlived assets management reviewed companys longlived assets taken impairment charge 14 million year ended december 31 2004 124 million year ended december 31 2003 303 million year ended december 31 2002 reduce carrying value services division estimated realizable value method used determine existence impairment would discounted operating cash flows estimated remaining useful lives related longlived assets continuing operations accordance statement financial accounting standards 142 goodwill intangible assets sfas 142 impairment measured difference fair value unamortized cost date impairment determined discontinued operations accordance statement financial accounting standards 144 accounting impairment disposal longlived assets sfas 144 component classified held sale reported discontinued operations following conditions met operations cash flows component eliminated ongoing operations entity result disposal transaction b entity significant continuing involvement operations component disposal transaction period component entity either disposed classified held sale income statement current prior periods reports results operations component including estimated impairment gain loss recognized accordance sfas 144 paragraph 37 discontinued operations results discontinued operations less applicable income taxes benefit reported separate component income extraordinary items cumulative effect accounting changes applicable assets liabilities disposal group classified held sale presented separately asset liability sections respectively statement financial position comprehensive income foreign currency translation accordance statement financial accounting standard 130 reporting comprehensive income sfas 130 assets liabilities denominated foreign currency translated us dollars current rate exchange existing yearend revenues expenses translated average monthly exchange rates cumulative translation adjustment net tax represents effect translating assets liabilities foreign operations 6821000 3936000 years ended december 31 2004 2003 respectively classified accumulated comprehensive loss current year change accumulated amount net tax included component comprehensive income stock options grants statement financial accounting standard 123 accounting stockbased compensation sfas 123 establishes fair value based method accounting stockbased employee compensation plans however also allows entity continue measure compensation cost plans using intrinsic value based method accounting prescribed accounting principles board apb opinion 25 accounting stock issued employees fair value based method compensation cost measured grant date based value award recognized service period usually vesting period intrinsic value based method compensation costs excess quoted market price stock grant date measurement date amount employee must pay acquire stock elected continue account employee stock compensation plans apb opinion 25 pro forma disclosures net earnings per share fair value based method accounting defined sfas 123 applied restricted stock awards generally recorded compensation expense vesting periods based market value date grant compensation cost stock option grants determined based fair value grant dates fiscal 2004 2003 2002 consistent method prescribed sfas 123 net earnings per share would adjusted pro forma amounts indicated 2004 2003 2002 thousands except per share data net income loss reported 80539 10886 17689 deduct total stockbased employee compensation expense determined fair value based method awards net related tax effects 6717 4157 5053 add employee compensation expense modification stock option awards included report net income net income taxes 57 506 proforma net income loss 73879 7235 22742 earnings loss per share basic reported 256 039 058 basic pro forma 235 026 075 diluted reported 244 038 057 diluted pro forma 224 025 074 results operations effective june 30 2002 decided sell armorgroup services division sale completed november 26 2003 organized formal auction managed outside advisors accordance sfas 144 assets liabilities companys services division classified held sale operating results reported discontinued operations statement operations periods prior sale division us based training subsidiary cyconics international training services inc formerly known advanced training solutions inc formerly known usds inc previously reported services division included sale reclassified products division following table sets forth selected statement operations data percentage total revenues periods indicated fiscal year 2004 2003 2002 revenue continuing operations aerospace defense 618 251 194 products 255 531 590 mobile security 127 218 216 total revenues continuing operations 1000 cost revenues 729 694 691 cost warranty revision 05 00 operating expenses 102 172 163 amortization 04 01 integration charges 10 34 19 operating income 149 98 126 interest expense net 07 11 03 expense net 02 01 00 income continuing operations provision income taxes 140 85 123 provision income taxes 58 39 53 income continuing operations 82 47 70 loss discontinued operations net income 00 17 128 tax benefit net income loss 82 30 58 fiscal 2004 compared fiscal 2003 net income net income increased 696 million 6398 net income 805 million fiscal 2004 compared net income 109 million fiscal 2003 income continuing operations loss discontinued operations 806 million 38000 respectively fiscal 2004 compared income continuing operations loss discontinued operations 170 million 61 million respectively fiscal 2003 continuing operations aerospace defense group revenues aerospace defense group revenues increased 5137 million 5604 6054 million fiscal 2004 compared 917 million fiscal 2003 aerospace defense group created simula acquired december 9 2003 combined sapi business generated protech subsidiary military business mobile security division includes armor blast protection systems uparmored hmmwvs historical results businesses reclassified aerospace defense group aerospace defense group also includes november 18 2004 acquisition specialty defense fiscal 2004 aerospace defense group revenue increased 2434 internally including yearoveryear changes acquired businesses internal growth primarily due 1 strong demand uparmored hmmwv including spare part revenues 2 increased supplemental armor military vehicles 3 increased sapi plate volume acquired growth function acquisitions simula specialty defense products division revenues products division revenues increased 558 million 288 2498 million fiscal 2004 compared 1940 million fiscal 2003 fiscal 2004 products division revenue increased 197 internally including yearoveryear changes acquired businesses remainder due acquisitions hatch imports inc completed fourth quarter 2003 vector associates inc dba odv inc kleenbore inc completed subsequent 2003 acquisition bianchi december 30 2004 effect revenues products division historical results sapi business products division reclassified aerospace defense group internal growth due strong sales international body armor soft armor hard armor sectors providing protection troops private sector employees within iraq strong military international sales within duty gear sales ballistic reinforced enclosures within energy sector mobile security division revenues mobile security division revenues increased 450 million 566 1245 million fiscal 2004 compared 795 million fiscal 2003 historical results military business mobile security division reclassified aerospace defense group revenue growth mobile security division generated internally primarily result increasing threat terrorism less extent impact weakened us dollar versus euro threat terrorism cause european revenue growth cost revenues cost revenues increased 4606 million 1816 7142 million fiscal 2004 compared 2536 million fiscal 2003 percentage total revenues cost revenues increased 729 total revenues fiscal 2004 694 fiscal 2003 gross margin aerospace defense group 257 fiscal 2004 compared 313 fiscal 2003 decrease aerospace defense group gross margins primarily due reduced selling prices uparmored hmmwv significant changes product mix diversified beyond uparmored hmmwv gross margin products division 336 fiscal 2004 compared 348 fiscal 2003 decline product divisions gross margin resulted primarily product mix certain large lower margin international governmental orders additional inventory provisions excluding products training division subsidiary products division gross margin 352 compared 371 2003 gross margin mobile security division 209 fiscal 2004 compared 194 fiscal 2003 increase mobile security divisions gross margins resulted primarily improved fixedcost absorption benefits associated increased manufacturing volumes richer sales mix highend higher margin vehicles cost warranty revision april 2004 two class action lawsuits filed us florida state court police organizations individual police officers alleging among things bulletresistant soft body armor vests manufactured sold american body armor safariland protechtm brands qualities performance characteristics warranted thereby breaching express warranty implied warranty merchantability implied warranty fitness particular purpose duty warn august 12 2004 reached preliminary settlement respect class action lawsuit filed duval county florida southern states police benevolent association southern states pba fairness hearings held florida circuit court gave final approval settlement november 5 2004 class action lawsuit filed us national association police organizations inc napo lee county florida voluntarily dismissed prejudice november 16 2004 pursuant terms class action settlement southern states pba warranty american body armor xtreme zxr vest nij threat level ii iiia reduced 5 years 2 12 years addition every purchaser xtreme zxr vest option exchange vest either new zxr vest choosing american body armor safariland protechtm product lines plus 10000 transferable rebate coupon applicable towards next purchase vest also made available american body armor website testing data protocols results relating testing vests also continue test zylonrcontaining vests testing demonstrates tested vests fail perform accordance warranties implement exchange program models reasonably comparable basis american body armor xtreme zxr exchange program outlined zylonr fiber made toyobo japanese corporation ballistic fiber widely used entire body armor industry final report duval county court regarding implementation settlement exchange vests ongoing testing filed april 15 2005 also voluntarily cooperating request received december 2004 department justice reviewing entire industrys use zylonr fiber bullet resistant vests stressed vests certified national institute justice never suffered penetration field continue save lives protect officers injury fact neither two resolved class action lawsuits alleged personal injuries kind second chance body armor one competitors bulletresistant market licenses simula certain patented technology used body armor manufactures knowledge lawsuit brought second chance based upon licensed technology although simula may impacted pending suits filed second chance regarding zylonrcontaining vests licensed technology specifically related use zylonr fiber adverse resolution matters however could material adverse effect business financial condition results operations liquidity result recently announced warranty revision product exchange program relating zylonrcontaining vests recorded pretax charge 50 million net 40 million cost reimbursements suppliers includes legal costs associated class action lawsuits liability classified accrued expenses current liabilities condensed consolidated balance sheet funded cash provided operating activities operating expenses operating expenses increased 375 million 597 1003 million 102 total revenues fiscal 2004 compared 628 million 172 total revenues fiscal 2003 aerospace defense group operating expenses increased 175 million 3090 231 million 38 aerospace defense group revenues fiscal 2004 compared 56 million 62 aerospace defense revenues fiscal 2003 primarily due acquisition simula december 9 2003 specialty defense november 18 2004 well additional operating expenses associated increased production uparmored hmmwv supplemental armor military vehicles decrease operating expense percentage revenue due leveraging operating expenses much larger revenue base products division operating expenses increased 118 million 355 449 million 180 products division revenues fiscal 2004 compared 331 million 171 products division revenues fiscal 2003 increase due primarily acquisitions one time settlement charge related early cancellation exclusive distribution agreement increased research development spending higher sales expenses related increased sales volumes higher insurance costs increased bad debt provisions bonus expenses prior year allocated corporate operating expenses mobile security division operating expenses increased 25 million 208 148 million 119 mobile security division revenues fiscal 2004 compared 123 million 154 mobile security division revenues fiscal 2003 increase operating expense primarily due large increase production revenues lesser extent impact weaker us dollar versus euro decrease operating expense percentage revenue due leveraging operating expenses much larger revenue base corporate operating expenses increased 57 million 486 175 million 18 total revenues fiscal 2004 compared 118 million fiscal 2003 32 total revenues increase administrative expenses associated overall growth company increased travel expenses bonus provision sarbanesoxley requirements decrease operating expense percentage revenue due leveraging operating expenses much larger revenue base amortization expense increased 38 million 7701 43 million fiscal 2004 compared 489000 fiscal 2003 primarily due acquisitions simula hatch imports december 2003 odv kleenbore specialty defense fiscal 2004 sfas 142 adopted january 1 2002 eliminated amortization intangible assets indefinite lives goodwill acquisitions completed july 1 2001 well fiscal years ending january 1 2002 remaining amortization expense related patents trademarks finite lives acquired identifiable intangible amortizable assets meet criteria recognition asset apart goodwill statement financial accounting standard 141 business combinations sfas 141 integration charges integration charges decreased 23 million 184 103 million fiscal 2004 compared 126 million fiscal 2003 included integration charges fiscal 2004 charges 1 integration simula hatch imports acquired december 2003 2 integration odv kleen bore specialty defense acquired subsequent fiscal 2003 3 noncash charge 63 million related acceleration performancedbased longterm restricted stock awards granted certain executives 2002 4 impairment charge 14 million reduce carrying value remaining portion nti estimated fair value included integration charges fiscal 2003 noncash charge 73 million stockbased compensation performance plan certain key executives 33 million severance charge including 21 million noncash charge related 2003 departure former chief executive officer operating income operating income continuing operations increased 1100 million 3078 1457 million fiscal 2004 compared 357 million fiscal 2003 due factors discussed interest expense net interest expense net increased 28 million 689 68 million fiscal 2004 compared 40 million fiscal 2003 increase due primarily interest expense associated 300 million aggregate principal amount 2 convertible notes issued october 29 2004 150 million aggregate principal amount 825 notes issued august 12 2003 november 5 2004 goldman sachs co exercised option purchase additional 45 million principal amount 2 convertible notes also contributing increase interest expense september 2 2003 entered interest rate swap agreements effectively exchanged 825 fixed rate 825 notes variable rate six month libor set arrears plus spread 2735 275 december 31 2004 six month libor rate 278 expense net expense net increased 14 million 2829 19 million fiscal 2004 compared 508000 fiscal 2003 increase related primarily noncash asset impairment foreign exchange currency losses loss disposal certain fixed assets partially offset realization gain sale certain equity investments fiscal 2004 fiscal 2003 expense net related primarily foreign exchange currency losses income continuing operations provision income taxes income continuing operations provision income taxes increased 1058 million 3390 1370 million fiscal 2004 compared 312 million fiscal 2003 due reasons discussed provision income taxes provision income taxes continuing operations 564 million fiscal 2004 compared 142 million fiscal 2003 effective income tax rate 412 fiscal 2004 compared 455 fiscal 2003 based annual income amounts jurisdictions amounts taxable decreased tax rate relates primarily prior year income tax charges associated among things 1 nontax deductible nature noncash nonrecurring stock based compensation provided certain key executives less impact effective tax rate 2004 compared 2003 2 taxable gain realized second half 2003 certain intellectual property utilized discontinued operations revalued comply us internal revenue code provisions occur 2004 impact incremental income tax associated revalued intellectual property 2003 recorded continuing operations required generally accepted accounting principles resulted incremental noncash income tax expense foreign tax credits available offset income tax otherwise payable income continuing operations income continuing operations increased 636 million 3738 806 million fiscal 2004 compared 170 million fiscal 2003 due factors discussed discontinued operations previously discussed managements discussion analysis financial condition results operations discontinued operations december 31 2004 note 2 consolidated financial statements contains comparative information discontinued operations services revenues services division revenue decreased 934 million 17 million fiscal 2004 compared 951 million fiscal 2003 exclusive armorgroup integrated systems sold april 17 2003 armorgroup sold november 26 2003 revenue decreased 11 million 382 17 million fiscal 2004 compared 28 million fiscal 2003 primarily due sale security consulting business nti july 2 2004 cost revenues cost revenues decreased 661 million 697000 fiscal 2004 compared 668 million fiscal 2003 exclusive armorgroup integrated systems armorgroup cost revenues decreased 356000 338 697000 fiscal 2004 compared 11 million fiscal 2003 decrease primarily due sale security consulting business nti july 2 2004 operating expenses operating expenses decreased 191 million 821000 474 services revenues fiscal 2004 compared 199 million 209 services revenues fiscal 2003 exclusive armorgroup integrated systems armorgroup operating expenses decreased 41 million 831 821000 fiscal 2004 compared 49 million fiscal 2003 decrease primarily due sale security consulting business nti july 2 2004 accordance generally accepted accounting principles record depreciation amortization longlived assets heldforsale discontinued operations charge impairment longlived assets charge impairment longlived assets zero fiscal 2004 compared 215 million fiscal 2003 charge prior year related reduction carrying value services division estimate realizable value integration charges integration charges decreased zero fiscal 2004 compared 776000 fiscal 2003 excluding armorgroup integrated systems armorgroup integration charges fiscal 2003 operating income loss operating income 215000 fiscal 2004 compared operating loss 139 million fiscal 2003 due factors discussed excluding armorgroup integrated systems armorgroup balance assets held sale generated operating income 215000 fiscal 2004 compared operating loss 10 million fiscal 2003 due reasons discussed interest expense net interest expense net decreased 14000 2000 fiscal 2004 compared 16000 fiscal 2003 primarily due sale armorgroup integrated systems armorgroup interest bearing liabilities discontinued operations repaid expense net expense net decreased 206000 273000 fiscal 2004 compared 479000 fiscal 2003 excluding armorgroup integrated systems armorgroup balance assets held sale generated expense net discontinued operations 273000 fiscal 2004 compared income net 34000 fiscal 2003 due additional accounting fees incurred connection sale armorgroup loss discontinued operations income tax benefit loss discontinued operations income tax benefit 60000 fiscal 2004 compared loss 144 million fiscal 2003 due reasons discussed excluding armorgroup integrated systems armorgroup balance assets held sale generated loss discontinued operations provision income taxes 60000 fiscal 2004 compared loss 957000 fiscal 2003 due reasons discussed income tax benefit income tax benefit 22000 fiscal 2004 compared income tax benefit 83 million fiscal 2003 effective tax rate fiscal 2004 benefit 367 compared benefit 574 fiscal 2003 excluding armorgroup integrated systems armorgroup balance assets held sale benefit 22000 fiscal 2004 compared benefit 40000 fiscal 2003 loss discontinued operations loss discontinued operations 38000 fiscal 2004 compared 61 million fiscal 2003 due factors discussed excluding armorgroup integrated systems armorgroup balance assets held sale generated loss discontinued operations 38000 fiscal 2004 compared loss 957000 fiscal 2003 due reasons discussed fiscal 2003 compared fiscal 2002 net income loss net income loss increased 286 million 1615 net income 109 million year ended december 31 2003 fiscal 2003 compared net loss 177 million year ended december 31 2002 fiscal 2002 income continuing operations loss discontinued operations 170 million 61 million respectively fiscal 2003 compared income continuing operations loss discontinued operations 213 million 390 million respectively fiscal 2002 decrease income continuing operations relates primarily 73 million noncash nonrecurring charge stock based compensation fourth quarter 2003 33 million including 21 million noncash charge severance charge related termination former chief executive officer second quarter 2003 increase interest expense relating 1500 million subordinated debenture issued august 12 2003 increases bonus expense legal accounting fees insurance internal audit expenses continuing operations aerospace defense group revenues aerospace defense group revenues increased 324 million 545 917 million fiscal 2003 compared 593 million fiscal 2002 aerospace defense group created acquisition simula december 9 2003 aerospace defense group also includes military business mobile security division including armor blast protection systems uparmored hmmwvs sapi business generated protech subsidiary historical results businesses reclassified aerospace defense group fiscal 2003 aerospace defense group revenue increased 472 internally including yearoveryear changes acquired businesses acquired growth function acquisitions simula december 9 2003 specialty defense november 18 2004 products division revenues products division revenues increased 140 million 78 1940 million fiscal 2003 compared 1799 million fiscal 2002 fiscal 2003 products division revenue increased 49 internally including yearoveryear changes acquired businesses 29 due acquisitions speedfeed inc foldable products group evipaq inc bsquare inc 911 emergency products inc completed 2002 hatch imports inc completed fourth quarter 2003 products division revenues include 207 million 168 million cyconics international training services inc us based training company years ended fiscal 2003 fiscal 2002 respectively filings prior june 30 2002 reported cyconics international training services inc part services division historical results sapi business products division reclassified aerospace defense group mobile security division revenues mobile security division revenues increased 137 million 208 796 million fiscal 2003 compared 659 million fiscal 2002 mobile security division revenues 2003 increased 192 million due acquisition substantially assets trascobremen september 24 2002 excluding 192 million 2003 revenue increase relating trascobremen mobile security division revenue decreased 55 million 87 fiscal 2003 compared fiscal 2002 historical results military business mobile security division reclassified aerospace defense group cost revenues cost revenues increased 428 million 203 2536 million fiscal 2003 compared 2107 million fiscal 2002 percentage total revenues cost revenues increased 694 total revenues fiscal 2003 691 fiscal 2002 gross margins aerospace defense group 313 fiscal 2003 compared 283 fiscal 2002 increase aerospace defense group gross margins primarily attributable 1 favorable manufacturing overhead cost absorption relating increased manufacturing volumes cincinnati manufacturing facility 2 operational efficiencies cincinnati manufacturing facility improvements slightly offset purchase accounting simula acquisition wrap low margin contract simula acquired december 9 2003 gross margins products division 348 fiscal 2003 compared 364 fiscal 2002 decline product divisions gross margins resulted primarily 1 increase low margin gas mask sales 2 increase lower margin international body armor sales produced overseas armor products international 3 lower production volumes within lesslethal automotive hard armor product lines resulted reduced fixed cost absorption certain labor inefficiencies 4 moving costs labor inefficiencies protech associated relocation manufacturing facility excluding products training division subsidiary products division gross margins 371 compared 387 2002 gross margins mobile security division 194 fiscal 2003 compared 183 fiscal 2002 increase mobile security gross margins primarily attributable 1 favorable manufacturing overhead cost absorption relating increased manufacturing volumes cincinnati manufacturing facility 2 operational efficiencies cincinnati manufacturing facility operating expenses operating expenses increased 130 million 260 628 million 172 total revenues fiscal 2003 compared 498 million 163 total revenues fiscal 2002 aerospace defense group operating expenses increased 19 million 519 56 million 62 aerospace defense group revenues compared 37 million 63 aerospace defense group revenues fiscal 2002 primarily due incremental operating expenses associated acquisition simula december 9 2003 products division operating expenses increased 18 million 57 331 million 166 products division revenues compared 314 million 174 products division revenues fiscal 2002 increase primarily due incremental operating expenses associated acquired businesses completed subsequent 2002 mobile security division operating expenses increased 37 million 431 123 million 154 mobile security division revenues fiscal 2003 compared 86 million 130 mobile security division revenues fiscal 2002 excluding increase 2003 operating expenses resulting acquisition substantially assets trascobremen september 24 2002 operating expenses fiscal 2003 increased 19 million versus fiscal 2002 aside trascobremen acquisition increase operating expenses primarily due 1 increased expenses associated startup operations caracas venezuela 2 increased insurance costs 3 net effect weaker us dollar foreign currencies 4 normal wage inflation corporate operating expenses increased 56 million 899 118 million 32 total revenues fiscal 2003 compared 62 million fiscal 2002 20 total revenues increase due primarily increased bonus expense legal accounting fees insurance internal audit expenses amortization expense increased 244000 996 489000 fiscal 2003 compared 245000 fiscal 2002 sfas 142 adopted january 1 2002 eliminated amortization intangible assets indefinite lives goodwill acquisitions completed july 1 2001 well fiscal years ending january 1 2002 remaining amortization expense related patents trademarks finite lives amortization intangible assets goodwill associated simula hatch imports acquisitions 2003 integration charges integration charges increased 67 million 1122 126 million fiscal 2003 compared 59 million fiscal 2002 increase integration charges primarily related 73 million noncash charge stockbased compensation performance plan certain key executives 33 million severance charge including 21 million noncash charge related recent departure former chief executive officer excluding charges integration charges 20 million fiscal 2003 decrease 39 million fiscal 2002 decrease primarily due elimination expense associated 2001 acquisitions ogarahess eisenhardt identicator operating income operating income continuing operations decreased 27 million 69 357 million fiscal 2003 compared 384 million fiscal 2002 due factors discussed interest expense net interest expense net increased 31 million 3347 40 million fiscal 2003 compared 923000 fiscal 2002 increase due primarily interest expense associated 150 million aggregate principal amount 825 senior subordinated notes due 2013 issued august 12 2003 september 2 2003 entered interest rate swap agreements effectively exchanged 825 fixed rate variable rate six month libor set arrears plus spread 2735 275 december 31 2003 sixmonth libor rate 122 expense net expense net 508000 fiscal 2003 compared 51000 fiscal 2002 increase related primarily foreign exchange currency losses writedown certain fixed assets income continuing operations provision income taxes income continuing operations provision income taxes decreased 62 million 165 312 million fiscal 2003 compared 374 million fiscal 2002 due reasons discussed provision income taxes provision income taxes continuing operations 142 million fiscal 2003 compared 161 million fiscal 2002 effective income tax rate 455 fiscal 2003 compared 429 fiscal 2002 based annual income amounts jurisdictions amounts taxable 2003 effective income tax rate 455 higher 374 estimated effective income tax rate utilized first half 2003 due among things 1 nontax deductible nature noncash nonrecurring stock based compensation provided certain key executives 2 taxable gain realized second half 2003 certain intellectual property utilized discontinued operations revalued order comply tax code provisions impact incremental tax associated revalued intellectual property recorded continuing operations required generally accepted accounting principles resulted incremental noncash tax expense foreign tax credits available offset tax otherwise payable previously mentioned negative impacts 2003 tax rate partially offset state level tax strategies lowered effective tax rate income continuing operations income continuing operations decreased 43 million 170 million fiscal 2003 compared 213 million fiscal 2002 due factors discussed discontinued operations many items listed involve accounting estimates loss amounts reevaluated future changes might appropriate april 17 2003 announced completed sale armorgroup integrated systems business sale 100 stock armorgroup integrated systems inc low voltage systems technologies inc ais wholly owned subsidiary aerwav holdings llc consideration integrated systems business received 41 million collateralized note due april 2005 two years warrant approximately 25 ais recorded loss 366000 sale november 26 2003 announced completed sale armorgroup security service division 337 million consideration group private investors led granville baird capital partners london england management received 314 million cash closing scheduled receive another 23 million end 2004 recorded loss 88 million sale accordance generally accepted accounting principles unrealized gains losses included equity accumulated comprehensive income loss recognized period disposition related assets liabilities large component loss december 31 2003 litigation support services subsidiary remained operating subsidiary discontinued operations note 2 consolidated financial statements contains comparative information discontinued operations services revenues services division revenues decreased 31 million 32 951 million fiscal 2003 compared 983 million fiscal 2002 fiscal 2003 reflects revenues armorgroup november 26 2003 revenues armorgroup integrated systems april 17 2003 respective dates sale opposed full year 2002 exclusive armorgroup integrated systems revenue increased 85 million 103 904 million fiscal 2003 compared 820 million fiscal 2002 increase due strong performance primarily middle east strong growth coming iraq along ongoing strong training revenues athens olympics build increase tempered weak revenues mine action business investigations business latin american business lack full years revenues fiscal 2003 cost revenues cost revenues decreased 90 million 119 668 million fiscal 2003 compared 758 million fiscal 2002 fiscal 2003 reflects cost revenues armorgroup november 26 2003 cost revenues armorgroup integrated systems april 17 2003 respective dates sale percentage total revenue discontinued operations cost revenues decreased 702 total revenues discontinued operations fiscal 2003 771 fiscal 2002 decrease result sale armorgroup integrated systems business april 2003 comparatively low gross margin exclusive armorgroup integrated systems cost revenues increased 39 million 68 616 million fiscal 2003 compared 577 million fiscal 2002 exclusive armorgroup integrated systems cost revenues percentage total revenue discontinued operations decreased 682 total revenues discontinued operations fiscal 2003 704 fiscal 2002 decrease cost revenues percentage total revenue discontinued operations primarily result proportion revenue growth coming expatriate intensive security contracts iraq continued high margin training contracts operating expenses operating expenses decreased 107 million 349 199 million 209 total revenues discontinued operations fiscal 2003 compared 306 million 311 total revenues discontinued operations fiscal 2002 fiscal 2003 reflects operating expenses armorgroup november 26 2003 operating expenses armorgroup integrated systems april 17 2003 respective dates sale exclusive armorgroup integrated systems operating expenses decreased 76 million 281 194 million fiscal 2003 compared 269 million fiscal 2002 decrease due reduced foreign currency expenses reduction salary costs result 2002 restructuring sale armorgroup november 26 2003 accordance generally accepted accounting principles record depreciation amortization longlived assets heldforsale discontinued operations charge impairment longlived assets charge impairment longlived assets 215 million fiscal 2003 compared 303 million fiscal 2002 fiscal 2003 charge related 124 million reduction carrying value services division estimated realizable value 88 million loss sale armorgroup 366000 loss sale armorgroup integrated systems 2002 charge result 61 million estimated disposal costs 242 million reduction carrying value services division estimated realizable value required sfas 144 integration charges integration charges decreased 18 million 704 776000 fiscal 2003 compared 26 million fiscal 2002 decrease primarily due severance payments certain personnel prior year operating loss operating losses 139 million fiscal 2003 compared operating loss 410 million fiscal 2002 due factors discussed operating loss armorgroup integrated systems business 150 million fiscal 2002 primarily due 119 million charge impairment longlived assets excluding armorgroup integrated systems business balance assets held sale generated operating loss 37 million fiscal 2003 compared operating loss 269 million fiscal 2002 interest expense net interest expense net decreased 330000 954 16000 fiscal 2003 compared 346000 fiscal 2002 decrease due decreased utilization services divisions line credit expense net expense net 479000 fiscal 2003 compared 99000 fiscal 2002 due primarily increase foreign currency fluctuation losses fiscal 2003 loss discontinued operations benefit income taxes loss discontinued operations benefit income taxes 144 million fiscal 2003 415 million fiscal 2002 due reasons discussed benefit income taxes income tax benefit 83 million fiscal 2003 compared 24 million fiscal 2002 effective tax rate fiscal 2003 benefit 574 compared benefit 59 fiscal 2002 income tax benefit 574 fiscal 2003 primarily due taxable loss realized sale armorgroup loss discontinued operations loss discontinued operations 61 million fiscal 2003 compared loss discontinued operations 390 million fiscal 2002 due factors discussed quarterly results set forth certain unaudited quarterly financial data last eight quarters certain data expressed percentage revenue respective quarters information derived unaudited financial statements opinion management include adjustments consisting normal recurring adjustments necessary fairly present quarterly information accordance generally accepted accounting principles operating results quarter necessarily indicative results expected future period quarter ended thousands except per share data dec 31 sept 30 jun 30 mar 31 dec 31 sept 30 jun 30 mar 31 2004 2003 revenues aerospace defense 234379 160238 129773 81008 38834 21136 15793 15910 products 65523 64659 65743 53840 50802 49804 49347 44007 mobile security 37646 31906 28188 26780 22521 19942 16519 20557 total revenue 337548 256803 223704 161628 112157 90882 81659 80474 operating income 47356 41735 33976 22648 8381 12512 6010 8826 interest expense net 1591 1400 2057 1728 1721 1475 437 379 expense income net 2066 154 390 115 327 96 16 69 income continuing 43699 40181 32309 20805 6333 10941 5557 8378 operations taxes provision income taxes 17345 16307 14588 8177 4159 4832 2079 3133 income continuing 26354 23874 17721 12628 2174 6109 3478 5245 operations income loss discontinued operations net provision benefit income taxes 100 138 7103 6 1135 158 net income loss 26354 23874 17821 12490 4929 6115 4613 5087 net income loss per common share basic income continuing 078 073 060 044 008 022 013 018 operations loss gain discontinued 000 025 000 004 001 operations basic earnings loss per share 078 073 060 044 017 022 017 net income loss per common share diluted income continuing 074 070 057 042 007 022 013 018 operations loss gain discontinued 000 024 000 004 001 operations diluted earnings loss per 074 070 057 042 017 022 017 share weighted average common shares outstanding basic 33946 32861 29670 28472 28195 27811 27555 28964 diluted 35555 34198 31008 29934 29364 28249 27836 29111 revenues aerospace defense 694 624 580 501 346 233 194 198 products 194 252 294 333 453 548 604 547 mobile security 112 124 126 166 201 219 202 255 total revenue 1000 operating income 140 163 152 140 75 137 73 110 interest expense net 05 09 11 15 16 05 expense income net 06 01 02 01 03 01 00 01 income continuing 129 156 144 129 56 120 68 104 operations taxes provision income taxes 51 64 65 51 37 53 25 39 income continuing 78 93 79 78 19 67 43 65 operations income loss discontinued operations net provision benefit income taxes 00 01 63 00 14 02 net income loss 78 93 80 77 44 67 57 63 liquidity capital resources october 29 2004 completed placement 300 million aggregate principal amount 200 senior subordinated convertible notes due november 1 2024 2 convertible notes november 5 2004 goldman sachs co exercised option purchase additional 45 million principal amount 2 convertible notes 2 convertible notes guaranteed domestic subsidiaries senior subordinated basis see note 21 2 convertible notes initially rated b1b moodys investors service standard poors rating services respectively 2 convertible notes bear interest rate 200 per year payable november 1 may 1 year beginning may 1 2005 ending november 1 2011 2 convertible notes subject accretion principal amount beginning november 1 2011 rate provides holders aggregate annual yield maturity 200 defined agreement 2 convertible notes bear contingent interest sixmonth period beginning november 1 2011 15 basis points paid cash average trading price notes certain levels 2 convertible notes convertible bond holders option initially conversion rate 185151 shares common stock per 1000 principal amount notes equivalent conversion price approximately 5401 per share subject adjustment upon conversion satisfy conversion obligation respect accreted principal amount notes converted cash remaining amount satisfied shares common stock accordance generally accepted accounting principles 2 convertible notes classified short term debt intend use proceeds offering fund acquisitions general corporate working capital purposes including funding capital expenditures funds immediately used invested money market funds investment grade securities needed june 22 2004 stockholders approved amendment certificate incorporation amended increased number shares authorized capital stock 80000000 75000000 shares designated common stock 5000000 shares designated preferred stock june 15 2004 sold 4000000 primary shares common stock price 3750 per share raising 1425 million net proceeds deducting underwriter discounts commissions addition certain directors officers granted underwriters 30day option purchase 600000 shares 30day option expired unexercised july 15 2004 intend use net proceeds offering fund future acquisitions take advantage business development opportunities general corporate working capital purposes including funding capital expenditures september 2 2003 entered interest rate swap agreements designated fair value hedges defined sfas 133 notional amount totaling 150 million agreements entered exchange fixed interest rate 825 notes variable interest rate equal sixmonth libor set arrears plus spread ranging 2735 275 fixed semiannually fifteenth day february august agreements subject terms conditions common transactions type accordance sfas 133 changes fair value interest rate swap agreements offset changes fair value fixed rate debt due changes market interest rate accordingly assets consolidated balance sheet december 31 2004 increased 195000 61 million december 31 2004 59 million december 31 2003 reflected increase fair value interest rate swap agreements corresponding increase hedge liability recorded longterm debt agreements deemed perfectly effective fair value hedge therefore qualify shortcut method accounting sfas 133 result ineffectiveness expected recognized earnings associated interest rate swap agreements august 12 2003 completed private placement 150 million aggregate principal amount 825 notes 825 notes guaranteed almost domestic subsidiaries senior subordinated basis 825 notes sold qualified institutional investors reliance rule 144a securities act 1933 amended nonus persons reliance regulation securities act 1933 amended 825 notes initially rated b1b moodys investors service standard poors rating services respectively used portion funds repay debt acquire simula inc hatch imports inc odv inc kleenbore inc intend use remaining proceeds offering fund acquisitions general corporate working capital purposes including funding capital expenditures march 29 2004 completed registered exchange offer 825 notes exchanged 825 notes new 825 notes registered securities act 1933 amended august 12 2003 concert 825 note offering entered new secured revolving credit facility credit facility bank america na wachovia bank national association syndicate financial institutions arranged bank america securities llc credit facility consists fiveyear revolving credit facility among things provides total maximum borrowings 60 million ii 25 million sublimit issuances standby commercial letters credit iii 5 million sublimit swingline loans iv 5 million sublimit multicurrency borrowings credit facility bear interest either rate equal libor plus applicable margin ranging 1125 1625 ii alternate base rate higher bank america prime rate b federal funds rate plus 050 iii respect foreign currency loans fronted offshore currency rate plus applicable margin ranging 1125 1625 depending certain conditions credit facility guaranteed certain direct indirect domestic subsidiaries collateralized among things pledge issued outstanding shares stock equity interests certain domestic subsidiaries ii pledge 65 issued outstanding voting shares stock voting equity interests certain direct indirect foreign subsidiaries iii pledge 100 issued outstanding nonvoting shares stock nonvoting equity interests certain direct indirect foreign subsidiaries iv first priority perfected security interest certain domestic assets certain domestic assets certain direct indirect subsidiaries become guarantors obligations credit facility including among things accounts receivable inventory machinery equipment certain contract rights intellectual property rights general intangibles january 9 2004 amended credit facility broaden ability make additional openmarket purchases publiclytraded securities subject certain limitations march 29 2004 amended credit facility allow us pay dividends subject certain limitations december 31 2004 compliance negative affirmative covenants contained credit facility indentures governing 825 notes 2 convertible notes march 2002 board directors approved stock repurchase program authorizing repurchase maximum 32 million shares common stock february 2003 board directors increased stock repurchase program authorize repurchase time depending upon market conditions factors additional 44 million shares february 10 2005 repurchased 38 million shares common stock repurchase program average price 1249 per share leaving us ability repurchase additional 38 million shares common stock repurchases may made open market privately negotiated transactions utilizing various hedging mechanisms including among others sale third parties put options companys common stock otherwise december 31 2004 341 million shares common stock outstanding expect continue policy repurchasing common stock time subject restrictions contained credit facility indenture governing 825 notes indenture governing 2 convertible notes credit facility permits us repurchase shares common stock limitation ratio consolidated senior indebtedness consolidated ebitda terms defined credit facility rolling twelvemonth period less 100 1 ratio greater 100 1 credit facility limits ability repurchase shares 150 million basket resets 0 time ratio less 100 1 december 31 2004 ratio 006 1 indentures governing 825 notes 2 convertible notes also permit us repurchase shares common stock subject certain limitations long satisfy conditions repurchase contained therein working capital continuing operations 2896 million 1685 million december 31 2004 december 31 2003 respectively increase working capital largely function increases cash october 2004 2 convertible note offering june 2004 150 equity offering increases inventory 731 million accounts receivable 905 million support growth revenues demand uparmored hmmwv supplemental armor military vehicles sapi plates fiscal 2004 capital expenditures continuing operations 194 million expenditures included additional manufacturing office space manufacturing machinery equipment leasehold improvements information technology communications infrastructure equipment anticipate cash hand cash generated operations available borrowings credit facility enable us meet liquidity working capital expenditure requirements next 12 months may however require additional financing pursue strategy growth acquisitions continuously exploring alternatives financing required assurances available obtained terms favorable us basis dilutive stockholders recently issued accounting standards april 2004 financial accounting standards board fasb issued fasb staff position 1291 disclosure requirements fasb statement 129 disclosure information capital structure relating contingently convertible securities fsp 1291 purpose fsp 1291 interpret disclosure provisions fasb statement 129 apply contingently convertible securities potentially dilutive effects earnings per share guidance fsp 1291 effective april 2004 applies existing newly created securities pronouncement effect us december 16 2004 fasb issued fasb statement 123r sharebased payment fas 123r fas 123r revises fasb statement 123 accounting stockbased compensation fas 123 requires companies expense fair value employee stock options forms stockbased compensation addition revising fas 123 fas 123r supersedes accounting principles board apb opinion 25 accounting stock issued employees apb 25 amends fasb statement 95 statement cash flows fas 123r must adopted later periods beginning june 15 2005 expect incur approximately 3 million expense second half 2005 result adoption fasb statement 123r october 2004 american jobs creation act 2004 ajca signed law december 2004 fasb issued staff position 1091 fsp 1091 application fasb statement 109 accounting income taxes tax deduction qualified production activities provided american jobs creation act 2004 staff position 1092 fsp 109 accounting disclosure guidance foreign earnings repatriation provision within american jobs creation act 2004 fsp 10091 clarifies manufacturers tax deduction provided ajca accounted special deduction accordance sfas 109 tax rate reduction fsp 1092 provides accounting disclosure guidance repatriation certain foreign earnings us taxpayer provided ajca currently uncertainty remains interpret numerous provisions ajca yet position decide whether extent might repatriate foreign earnings yet remitted us expect position make decision implementation later 2005 november 2004 fasb issued sfas 151 sfas 151 inventory costs amendment arb 43 chapter 4 sfas 151 amends guidance accounting research bulleting 43 chapter 4 inventory pricing clarify abnormal amounts idle facility expense freight handling costs wasted material spoilage recognized currentperiod charges sfas 151 effective fiscal years beginning june 15 2005 sfas 151 expected material impact financial statements inflation believe relatively moderate rates inflation recent years significant impact revenue profitability historically able offset inflationary effects either increasing prices improving cost efficiencies balance sheet arrangements september 24 2004 entered offbalance sheet leasing arrangement aircraft company use upon expiration lease september 24 2009 subsidiary company option renew lease fair market value subject approval lessor buy aircraft approximately 100 million return aircraft lessor guarantee pay shortfall sales proceeds third party amount exceed 82 million annual rental expense related agreement approximately 10 million excluding leasing arrangement balance sheet arrangements tabular disclosure contractual obligations following table presents contractual obligations december 31 2004 payment due period contractual obligations thousands less 1 3 5 total 1 year years 5 years longterm debt obligations 157372 621 927 794 155030 operating lease obligations 34239 6711 9490 5625 12413 longterm liabilities 1951 total 193562 7332 12368 6419 167443 item 7aitem 7 managements discussion analysis financial condition results operations managements discussion analysis financial condition results operations contains forwardlooking statements within meaning section 27a securities act 1933 amended section 21e securities exchange act 1934 amended statements predictive nature depend upon refer future events conditions include words expects anticipates intends plans believes estimates could similar expressions forward looking statements although believe statements based upon reasonable assumptions give assurance goals achieved information see forward looking statements contained part report actual results may differ expressed implied forwardlooking statements believe subject number risk factors including without limitation inherent unpredictability currency fluctuations competitive actions including pricing ability realize cost reductions operating efficiencies including ability implement headcount reduction programs timely manner unduly disrupt business operations ability identify realize costreduction opportunities general economic business conditions ability successfully execute changes operations integration recent future acquisitions move certain manufacturing operations without disrupting operations ability obtain supplies raw materials without disruption forwardlooking statements report evaluated light important risk factors listed managements discussion analysis financial condition results operations elsewhere annual report form 10k including accompanying financial statements company overview leading manufacturer provider armored military commercial vehicles armor kits retrofit military vehicles protective security products military law enforcement personnel aircraft armor aircraft safety products survivability equipment used military aviators personnel protection technologies customers include domestic international military law enforcement security corrections personnel government agencies multinational corporations individuals believe success result focusing several core competencies including engineering manufacturing distributing vehicle armoring systems highquality security products human safety survival systems business comprised three reportable business segments aerospace defense group products group mobile security division continuing operations aerospace defense group aerospace defense group supplies human safety survival systems us military major aerospace defense prime contractors core markets land marine aviation safety military personnel protection significant business within aerospace defense group armoring variety light medium heavy wheeled vehicles military also provide spare parts logistical field support services uparmored hmmwvs previously shipped us well blast ballistic protection kits standard hmmwv installed field additionally develop ballistic blast protected armored sealed truck cabs military tactical wheeled vehicles example design develop manufacture armor systems variety military vehicles including platforms hemtt pls het m915 asv fmtv aerospace defense group develops supplies personnel equipment including sapi engineered ceramic body armor helmets protective duty equipment products include among others molle systems otvs advance combat helmets currently largest supplier molle systems us army modular rucksack configured number ways depending needs military mission also manufacture otvs used sapi plates provide enhanced protection bullets mines grenades mortar artillery shells sapi plates adopted us military key element protective equipment worn us troops aerospace defense group develops sells military helicopter seating systems helicopter cockpit airbag systems aircraft armor kits emergency bailout parachutes survival equipment worn military aircrew primary customers products us army us navy us marine corps boeing sikorsky aircraft major us aircraft manufacturers products group products group previously referred armor holdings products division manufactures sells broad range high quality equipment marketed brand names known military law enforcement communities products manufactured group include concealable tactical body armor hard armor duty gear lesslethal munitions antiriot products police batons emergency lighting products forensic products firearms accessories weapon maintenance products foldable ladders backpacks specialty gloves mobile security division mobile security division operating brand name centigontm manufactures services integrates certified armoring systems commercial vehicles protect varying degrees ballistic blast threats global basis armor variety platforms available commercially including custom limousines sedans sport utility vehicles commercial trucks cashintransit vehicles customers business include us federal law enforcement intelligence agencies foreign heads state multinational corporations well high net worth individuals cashintransit operators discontinued operations june 30 2004 litigation support services subsidiary nti last remaining business discontinued operations july 2 2004 sold security consulting division nti remaining division nti consisting primarily training services included part products group segment november 26 2003 announced completed sale armorgroup security service division 337 million consideration group private investors led granville baird capital partners london england management received 314 million cash closing note receivable 23 million collected full fiscal 2004 april 17 2003 announced completed sale armorgroup integrated systems business sale 100 stock armorgroup integrated systems inc low voltage systems technologies inc ais wholly owned subsidiary aerwav holdings llc critical accounting policies significant accounting policies described note 1 consolidated financial statements included item 8 form 10k believe critical accounting policies include following revenue recognition record products revenue time shipment returns minimal materially affect financial statements record aerospace defense group revenue related government contracts results principally fixed price contracts recognized persuasive evidence arrangement exists fee reasonably determinable customer accepted product collectibility probable conditions met substantially cases department defense inspector signs material inspection receiving report indicating acceptance title transfer record revenue remaining aerospace defense group products group mobile security division product shipped except larger commercial contracts typically longer four months length revenue large commercial contracts recognized percentage completion unitsofwork performed method large commercial contracts loss position entire estimated loss would recognized balance contract time current contracts profitable record service revenue services provided contractbycontract basis revenues service contracts recognized term contract allowance doubtful accounts encounter risks associated sales collection associated accounts receivable review accounts receivable aging monthly basis determine provision accounts receivable considered uncollectible periodically compare identified credit risks allowance established using historical experience adjust allowance accordingly derivative instruments hedging activities account derivative instruments hedging activities accordance statement financial accounting standard 133 accounting derivative instruments hedge activities sfas 133 amended derivative instruments recorded balance sheet fair value changes fair value derivatives recorded period current earnings comprehensive income depending whether derivative designated part hedge transaction depending type hedge transaction fairvalue hedge transactions hedge changes assets liabilitys firm commitments fair value changes fair value derivative instrument generally offset income statement changes hedged items fair value put options company stock marked market income statement end period goodwill represents excess purchase price fair value net assets acquired purchase business combination goodwill intangible assets stated basis cost 2209 million goodwill resulting acquisitions made us subsequent june 30 2001 immediately subjected nonamortization provisions statement financial accounting standards 142 goodwill intangible assets sfas 142 see also impairment purchase method accounting business combinations requires us make use estimates judgments allocate purchase price paid acquisitions fair value net tangible identifiable intangible assets acquired liabilities assumed goodwill tested impairment annually possible impairment indicated using fair value based test prescribed sfas 142 performed annual assessment goodwill determined impairment existed june 30 2005 patents licenses trademarks patents licenses trademarks primarily acquired acquisitions accounted purchase method accounting assets amortized straightline basis useful lives certain assets indefinite lives amortized estimates preparation financial statements conformity us gaap requires management make estimates assumptions affect reported amounts financial statements accompanying notes significant estimates inherent preparation accompanying consolidated financial statements include carrying value longlived assets valuation allowances receivables inventories deferred income tax assets liabilities potential litigation claims settlements potential liabilities related tax filings ordinary course business vest exchange program warranty revision accrual defined benefit plan liabilities contract contingencies obligations actual results could differ estimates income taxes account income taxes pursuant statement financial accounting standards 109 accounting income taxes sfas 109 asset liability method specified thereunder deferred taxes determined based difference financial reporting tax bases assets liabilities deferred tax liabilities offset deferred tax assets relating net operating loss carryforwards tax credit carryforwards deductible temporary differences recognition deferred tax assets based managements belief likely tax benefit associated temporary differences operating capital loss carryforwards utilized valuation allowance recorded deferred tax assets likely realization occur impairment longlived assets including certain identifiable intangibles goodwill reviewed annually impairment whenever events changes circumstances indicate carrying amount asset question may recoverable including limited deterioration profits business segment longlived assets changes occur might impair recovery longlived assets method used determine existence impairment would discounted operating cash flows estimated remaining useful lives related longlived asset groups impairment measured difference fair value unamortized cost date impairment determined comprehensive income financial statements foreign subsidiaries measured using local currency functional currency assets liabilities denominated foreign currency translated us dollars current rate exchange existing periodend revenues expenses translated average monthly exchange rates current year change accumulated amount net tax included component comprehensive income accordance statement financial accounting standard 115 accounting certain investments debt equity securities sfas 115 classify investment certain equitybased securities availableforsale unrealized gains losses excluded earnings recorded component comprehensive income loss investment classified assets consolidated balance sheets declines fair value amortized cost basis investment determined temporary charged earnings temporary declines year ended december 31 2005 stock options grants statement financial accounting standard 123 accounting stockbased compensation sfas 123 amended statement financial accounting standard number 148 accounting stockbased compensation transition disclosure sfas 148 establishes fair value based method accounting stockbased employee compensation plans however also allows entity continue measure compensation cost plans using intrinsic value based method accounting prescribed accounting principles board opinion 25 accounting stock issued employees apb 25 fair value based method compensation cost measured grant date based value award recognized service period usually vesting period intrinsic value based method compensation cost excess quoted market price stock grant date measurement date amount employee must pay acquire stock elected continue account employee stock compensation plans apb 25 pro forma disclosures net earnings per share fair value based method accounting defined sfas 123 applied restricted stock awards generally recorded compensation expense using fixed accounting vesting periods based market value date grant except situations provisions agreements allow acceleration vesting upon certain event occurs may result acceleration vesting recognition associated expense compensation cost stock option grants determined based fair value grant dates years ended december 31 2005 2004 2003 consistent method prescribed sfas 123 net earnings per share would adjusted proforma amounts indicated 2005 2004 2003 thousands except per share data net income reported 132510 80539 10886 deduct total stockbased employee compensation expense determined fair value based method awards net related tax effects 37305 6717 4157 add employee compensation expense modification stock option awards included report net income net income taxes 118 57 506 proforma net income 95323 73879 7235 earnings per share basic reported 383 256 039 basic pro forma 275 235 026 diluted reported 370 244 038 diluted pro forma 266 224 025 153 million stockbased employee compensation expense determined fair vale method fiscal 2005 related accelerated vesting certain existing stock options 220 million related certain stock options issued fiscal 2005 december 16 2004 financial accounting standards board fasb issued fasb statement 123 share based payment revised 2004 fas 123r fas 123r revises sfas 123 requires companies expense fair value employee stock options forms stockbased compensation addition revising sfas 123 fas 123r supersedes apb 25 amends fasb statement 95 statement cash flows sfas 95 april 14 2005 securities exchange commission extended compliance date fas 123r first interim first annual reporting period companys fiscal year beginning june 15 2005 required apply expense recognition provisions fas 123r beginning first quarter 2006 expect incur approximately 16 million expense year ended december 31 2006 result adoption fas 123r results operations effective june 30 2002 decided sell armorgroup services division sale completed november 26 2003 organized formal auction managed outside advisors accordance statement financial accounting standards 144 accounting impairment disposal longlived assets sfas 144 operating results services division reported discontinued operations consolidated statements operations periods prior sale division following table sets forth selected consolidated statements operations data percentage total revenues periods indicated fiscal year 2005 2004 2003 revenues aerospace defense 726 618 251 products 189 255 531 mobile security 85 127 218 total revenues 1000 cost revenues 763 729 694 cost vest exchange program warranty revision 12 05 00 selling general administrative expenses 85 102 172 amortization 05 04 01 integration 02 03 06 charges 01 08 29 operating income 132 149 98 interest expense net 04 07 11 income expense net 02 01 income continuing operations provision income taxes 130 140 85 provision income taxes 49 58 39 income continuing operations 81 82 47 loss discontinued operations net income tax benefit 00 17 net income 81 82 30 fiscal 2005 compared fiscal 2004 net income net income increased 520 million 65 1325 million fiscal 2005 compared 805 million fiscal 2004 continuing operations total revenues total revenues increased 6572 million 67 16369 million fiscal 2005 compared 9797 million fiscal 2004 fiscal 2005 total revenue increased 5265 million 54 internally including yearoveryear changes acquired businesses 1307 million 13 due acquisitions internal revenue growth represents yearoveryear increases revenue businesses either owned acquired us periods presented calculation internal revenue growth takes consideration proforma revenue relevant periods acquired entities determining yearoveryear revenue growth aerospace defense group revenues aerospace defense group revenues increased 5832 million 96 11886 million fiscal 2005 compared 6054 million fiscal 2004 fiscal 2005 aerospace defense group revenue increased 5142 million 85 internally including yearoveryear changes acquired businesses 690 million 11 acquisition specialty defense november 2004 otv business second chance acquired july 2005 calculation acquired growth amount current year revenue equal prior year revenue acquisition acquired company internal growth primarily due following factors 1 experienced strong demand uparmored high mobility multipurpose wheeled vehicle uparmored hmmwv commonly known humvee including spare part revenues shipped 6684 m1114 uparmored hmmwvs fiscal 2005 compared 3945 fiscal 2004 69 increase continues new orders current m1114 uparmored hmmwv contract additional orders nextgeneration versions known m1151 m1152 uparmored hmmwvs backlog extends 2006 m1114 m115152 uparmored hmmwv versions believe us militarys plans include procurement replacement military light transport vehicle current status early development stage us militarys current acquisition strategies plan possible production new light medium support vehicles beginning early 2008 assurance replacement hmmwv may selected furthermore reasonable believe hmmwv continue time one primary transport vehicles us military event hmmwv replaced based us military procurement plans anticipated vehicle armoring replacement vehicle would provided vehicle oem inclusion manufacturing process components integrated vehicle additional armor components would provided attachment vehicle later time warranted threat conditions anticipate procurements potential hmmwv replacement models would competitive could awarded multiple armor suppliers based full open competition although anticipate continuation developmental efforts enhancement manufacturing capabilities time certainty obtaining armoring contracts hmmwv replacement vehicles selected us military successful competitive programs cannot determine specific levels effort likely military contracts additional consideration risk factor regarding introduction new vehicle versions tactical wheeled vehicles us militarys recent pronouncements governments preference technical data rights new major end items equipment subsystems including vehicle armoring packages governments intent mitigate risk limitations producibility ensure commonality armor components produced multiple sources may negatively influence future manufacturing content product pricing see risk factor replacement hmmwv us military may affect results operations item 1 part annual report 2 fiscal 2005 revenue addon armor components fielded vehicles including addon armor kits light medium heavy truck fleet operating iraq increased 12 compared fiscal 2004 although may receive additional addon armor kit business future majority armoring fielded trucks completed also believe us militarys tactical wheeled vehicle procurement strategy includes replacement additional production current type medium heavy trucks vehicles also planned receive armor subsystems future 3 sapi plate volume decreased 25 fiscal 2005 compared fiscal 2004 reduction volume result change requirements us military resultant need modify product design make adjustments supply base production deliveries slowed predominantly result inability industrial base meet delivery requirements new enhanced specifications expanding current industrial base investment production capacity qualified new sources supply continued growth sapi plate business dependent upon continued level hostilities iraq afghanistan well us governments requirements improved technology performance sapi plate future revenues may constrained ability procure certain raw materials necessary manufacture sapi plate see risk factor limited sources raw materials may significantly curtail manufacturing operations item 1 part annual report 4 otv units increased 65 fiscal 2005 fiscal 2004 experienced 210 unit growth helmets also molle revenue increased 19 products group revenues products group revenues increased 591 million 24 3089 million fiscal 2005 compared 2498 million fiscal 2004 fiscal 2005 products group revenue decreased 26 million 1 internally including periodoverperiod changes acquired businesses increased 617 million 25 acquisitions bianchi international completed fourth quarter 2004 kleen bore inc completed third quarter 2004 law enforcement business second chance acquired july 2005 internal growth negative due decline sales ballistic reinforced enclosures nuclear power industry large onetime nonrecurring sales ballistic plates 2004 decline less lethal business attributable nonrecurring large government orders excluding acquisition second chance purchased bankruptcy experienced legal financial troubles products group internal revenue growth 2 also growth body armor slowed domestically due 1 industry concerns regarding zylonr nijs decertification zylonr containing body armor 2 impact shortages supply ballistic material expect american body armor safariland body armor revenues rebound recent zylonr decertification end second quarter 2006 expect stabilize second chance revenues position growth fiscal year 2006 mobile security revenues mobile security division revenues increased 149 million 12 1395 million fiscal 2005 compared 1245 million fiscal 2004 primarily due increasing threat terrorism commercial vehicle shipments increased 17 1644 vehicles fiscal 2005 compared 1402 vehicles fiscal 2004 mobile security divisions revenue growth internal cost revenues cost revenues increased 5344 million 75 12486 million fiscal 2005 compared 7142 million fiscal 2004 percentage total revenues cost revenues increased 763 total revenues fiscal 2005 729 fiscal 2004 gross margins aerospace defense group 209 fiscal 2005 compared 257 fiscal 2004 primarily due 1 lower selling prices m1114 uparmored hmmwvs effective mid2004 2 increased mix lower margin armor kits 3 temporary decline gross margins sapi plates due incremental costs incurred design manufacture delivery updated plates gross margins products group 352 fiscal 2005 compared 336 fiscal 2004 improvement gross margins primarily related product mix shift production lower cost manufacturing facilities additional inventory provisions 2004 gross margins mobile security division 227 fiscal 2005 compared 209 fiscal 2004 improvement result improved product mix manufacturing efficiencies cost vest exchange programwarranty revision result voluntary zylonr vest exchange program relating zylonrvests recorded pretax charge 199 million fiscal 2005 charge includes estimated exchange program costs inventory writeoffs december 31 2005 incurred 25 million remaining liability 185 million includes 11 million remaining superseded 2004 warranty revision product exchange program liability classified accrued expenses current liabilities consolidated balance sheet december 31 2005 result fiscal 2004 warranty revision product exchange program relating zylonrcontaining vests recorded net pretax charge 50 million includes legal costs associated class action lawsuits settled 2004 warranty revision product exchange program superseded vest exchange program april 2004 two class action lawsuits filed us florida state court police organizations individual police officers alleging ballisticresistant soft body armor vests containing zylonr manufactured sold american body armortm safarilandr protechr failed meet warranties provided vests november 5 2004 jacksonville florida duval county circuit court gave final approval settlement reached sspba provided purchasers certain zylonrcontaining vest models could exchange vests manufactured company ii company would continue internal usedvest testing program vestchecktm class action suit filed napo ft myers florida lee county voluntarily dismissed prejudice november 16 2004 august 24 2005 united states department justice nij released third nij report third nij report contained among items information testing data zylonr zylonrcontaining vests substantially modified compliance standards ballisticresistant vests implementation nij 2005 interim requirements ballisticresistant body armor result actions nij company halted sales shipment zylonrcontaining vest models effective august 25 2005 immediately established supplemental relief renamed zve program provides either cash voucher option purchased zylonrcontaining vests us august 29 2005 zve program consent sspba given final approval jacksonville florida court october 27 2005 also voluntarily cooperating request documents data received department justice reviewing body armor industrys use zylonr subpoena served general services administration information relating zylonr selling general administrative expenses selling general administrative expenses increased 390 million 39 1393 million 85 total revenues fiscal 2005 compared 1003 million 102 total revenues fiscal 2004 decrease percentage revenues largely function ability achieve scale revenues increased fourth quarter 2004 acquisition specialty defense operates lower selling general administrative expenses percentage revenues products group mobile security division aerospace defense group selling general administrative expenses increased 119 million 52 350 million 29 aerospace defense group revenues fiscal 2005 compared 231 million 38 aerospace defense group revenues fiscal 2004 increase selling general administrative expenses due primarily additional expenses associated result acquisition specialty defense november 2004 increased research development expense increase administrative expenses result increased production m1114 uparmored hmmwv m115152 kits supplemental armor military vehicles decrease selling general administrative expenses percentage revenue due leveraging expenses larger revenue base products group selling general administrative expenses increased 140 million 31 589 million 191 products group revenues fiscal 2005 compared 449 million 180 products group revenues fiscal 2004 increase primarily due impact acquisitions amounted 112 million increase well increased marketing advertising expenses management severance expenses mobile security division selling general administrative expenses increased 16 million 10 164 million 117 mobile security division revenues fiscal 2005 compared 148 million 119 mobile security division revenues fiscal 2004 increase expense primarily due increased research development costs increased selling marketing costs roll centigontm brand name negative impact weaker us dollar converting foreign based expenses us dollars increase expenses percentage revenues due nonrecurring nature rollout costs centigontm brand name additional research development costs corporate general administrative expenses increased 115 million 66 290 million 18 total revenues fiscal 2005 compared 175 million 18 total revenues fiscal 2004 increase administrative expenses associated overall growth company including increased travel expenses bonus expense pension expense accounting fees legal fees hiring costs insurance expenses amortization expense increased 44 million 103 86 million fiscal 2005 compared 43 million fiscal 2004 primarily due amortization certain intangible assets acquired part acquisitions second chance july 2005 bianchi december 2004 specialty defense november 2004 integration expense increased 11 million 43 37 million fiscal 2005 compared 26 million fiscal 2004 integration expense fiscal 2005 primarily included charges integration second chance acquired july 2005 specialty defense bianchi acquired fourth quarter 2004 integration expense fiscal 2004 primarily included charges integration related acquisitions simula hatch imports acquired fourth quarter 2003 charges fiscal 2005 12 million charges fiscal 2004 77 million charges fiscal 2004 charges noncash charge 63 million related acceleration performancebased longterm restricted stock awards granted certain executives 2002 impairment charge 14 million reduce carrying value remaining portion nti estimated fair value operating income operating income increased 699 million 48 2156 million fiscal 2005 compared 1457 million fiscal 2004 due factors discussed interest expense net interest expense net decreased 495000 7 63 million fiscal 2005 compared 68 million fiscal 2004 decrease primarily due increase interest income generated increase investment yield higher interest rates increase investment balances primarily resulting 2 convertible notes offering fourth quarter 2004 positive operating cash flow increase partially offset increase interest expense result issuance 2 convertible notes increase sixmonth libor september 2 2003 entered interest rate swap agreements effectively exchanged 825 fixed rate 825 notes variable rate sixmonth libor 47 december 31 2005 28 december 31 2004 set arrears plus spread 2735 275 income expense net income net 40 million fiscal 2005 relates primarily expiration unexercised 25 million previously announced sale put option contracts company stock well increase fair market value 1 million new put option contracts company stock entered expired unexercised february 2006 59 million income related sale put options company stock fiscal 2005 48 million related expiration 25 million unexercised put options income partially offset noncash asset impairment loss disposal fixed assets losses related foreign currency transactions expense net 19 million fiscal 2004 relates primarily noncash asset impairment loss disposal fixed assets losses related foreign currency fluctuations income provision income taxes income provision income taxes increased 764 million 56 2134 million fiscal 2005 compared 1370 million fiscal 2004 due reasons discussed provision income taxes provision income taxes 809 million fiscal 2005 compared 564 million fiscal 2004 effective tax rate 379 fiscal 2005 compared 412 fiscal 2004 decreased tax rate relates primarily nontaxable fair market gain put options sold company stock fiscal 2005 nontax deductible charge due accelerated vesting performance based longterm restricted stock awards fiscal 2004 net income net income increased 520 million 65 1325 million fiscal 2005 compared 805 million fiscal 2004 due factors discussed fiscal 2004 compared fiscal 2003 net income net income increased 696 million 640 net income 805 million fiscal 2004 compared net income 109 million fiscal 2003 income continuing operations loss discontinued operations 806 million 38000 respectively fiscal 2004 compared income continuing operations loss discontinued operations 170 million 61 million respectively fiscal 2003 continuing operations total revenues total revenues increased 6145 million 168 9797 million fiscal 2004 compared 3652 million fiscal 2003 fiscal 2004 total revenue increased 5153 million 141 internally including yearoveryear changes acquired businesses 992 million 27 due acquisitions internal revenue growth represents yearoveryear increases revenue businesses either owned acquired us periods presented calculation internal revenue growth takes consideration proforma revenue relevant periods acquired entities determining yearoveryear revenue growth aerospace defense group revenues aerospace defense group revenues increased 5137 million 560 6054 million fiscal 2004 compared 917 million fiscal 2003 fiscal 2004 aerospace defense revenue increased 4292 million 468 internally including yearoveryear changes acquired businesses 846 million 92 acquisition specialty defense november 2004 otv business second chance acquired july 2005 calculation acquired growth amount current year revenue equal prior year revenue acquisition acquired company internal growth primarily due following factors 1 experienced strong demand uparmored hmmwv including spare part revenues shipped 3945 uparmored m1114 hmmwvs fiscal year 2004 compared 873 fiscal year 2003 352 increase continues new orders current m1114 uparmored hmmwv contract additional orders nextgeneration versions known m1151 m1152 uparmored hmmwvs backlog extends 2006 m1114 m115152 uparmored hmmwv versions believe us militarys plans include procurement replacement military light transport vehicle current status early development stage current acquisition strategies plan possible production new light medium support vehicles beginning early 2008 assurance replacement hmmwv may selected furthermore reasonable believe hmmwv continue time one primary transport vehicles us military event hmmwv replaced based us military procurement plans anticipated vehicle armoring replacement vehicle would provided vehicle oem inclusion manufacturing process components integrated vehicle additional armor components would provided attachment vehicle later time warranted threat conditions anticipate procurements potential hmmwv replacement models would competitive could awarded multiple armor suppliers based full open competition although anticipate continuation developmental efforts enhancement manufacturing capabilities time certainty obtaining armoring contracts hmmwv replacement vehicles selected us military successful competitive programs cannot determine specific levels effort likely military contracts additional consideration risk factor regarding introduction new vehicle versions tactical wheeled vehicles us militarys recent pronouncements governments preference technical data rights new major end items equipment subsystems including vehicle armoring packages governments intent mitigate risk limitations producibility ensure commonality armor components produced multiple sources may negatively influence future manufacturing content product pricing see risk factor replacement hmmwv us military may affect results operations item 1 part annual report 2 2004 addon armor components fielded vehicles increased significantly including 3000 addonarmor kits medium heavy truck fleet operating iraq 10000 sets ballistic glass army depot hmmwv kits believe vehicle armoring likely play significant role 2006 beyond 3 adjusting simula acquired december 9 2003 sapi plate volume increased 181 fiscal year 2004 pro forma sapi volume fiscal year 2003 actual basis increased sapi plate volume 1924 fiscal year 2004 fiscal year 2003 continued growth sapi plate business dependent upon continued level hostilities iraq afghanistan well us governments requirements improved technology performance sapi plate future revenues may constrained ability procure certain raw materials necessary manufacture sapi plate see risk factor limited sources raw materials may significantly curtail manufacturing operations item 1 part 10k products group revenues products group revenues increased 558 million 29 2498 million fiscal 2004 compared 1940 million fiscal 2003 fiscal 2004 products group revenue increased 412 million 21 internally including yearoveryear changes acquired businesses 146 million 8 acquisitions hatch imports inc completed fourth quarter 2003 vector associates inc dba odv inc kleenbore inc completed subsequent 2003 acquisition bianchi december 30 2004 effect fiscal 2004 revenues products group internal growth due strong sales international body armor soft armor hard armor sectors providing protection troops private sector employees within iraq strong military international sales within duty gear sales ballistic reinforced enclosures within energy sector mobile security division revenues mobile security division revenues increased 450 million 57 1245 million fiscal 2004 compared 795 million fiscal 2003 revenue growth mobile security division generated internally primarily result increasing threat terrorism less extent impact weakened us dollar versus euro threat terrorism cause european revenue growth commercial vehicle shipments increased 25 1402 vehicles fiscal 2004 compared 1125 vehicles fiscal 2003 cost revenues cost revenues increased 4606 million 182 7142 million fiscal 2004 compared 2536 million fiscal 2003 percentage total revenues cost revenues increased 729 total revenues fiscal 2004 694 fiscal 2003 gross margin aerospace defense group 257 fiscal 2004 compared 313 fiscal 2003 decrease aerospace defense group gross margins primarily due reduced selling prices uparmored hmmwv significant changes product mix diversified beyond uparmored hmmwv gross margin products group 336 fiscal 2004 compared 348 fiscal 2003 decline product divisions gross margins resulted primarily product mix certain large lower margin international governmental orders additional inventory provisions excluding products training division subsidiary products group gross margins 352 compared 371 2003 gross margin mobile security division 209 fiscal 2004 compared 194 fiscal 2003 increase mobile security divisions gross margins resulted primarily improved fixedcost absorption benefits associated increased manufacturing volumes richer sales mix highend higher margin vehicles cost vest exchange programwarranty revision april 2004 two class action lawsuits filed us florida state court police organizations individual police officers alleging ballisticresistant soft body armor vests containing zylonr manufactured sold american body armortm safarilandr protechr failed meet warranties provided vests november 5 2004 jacksonville florida duval county circuit court gave final approval settlement reached sspba provided purchasers certain zylonrcontaining vest models could exchange vests manufactured company ii company would continue internal usedvest testing program vestchecktm class action suit filed napo ft myers florida lee county voluntarily dismissed prejudice november 16 2004 result warranty revision product exchange program relating zylonrcontaining vests announced august 12 2004 recorded pretax charge 50 million fiscal 2004 net 40 million cost reimbursements suppliers includes legal costs associated class action lawsuits liability classified accrued expenses current liabilities consolidated balance sheet funded cash provided operating activities see fiscal 2005 compared fiscal 2004 item 7 annual report update regarding zylonr related matters selling general administrative expenses selling general administrative expenses increased 375 million 60 1003 million 102 total revenues fiscal 2004 compared 628 million 172 total revenues fiscal 2003 aerospace defense group selling general administrative expenses increased 175 million 309 231 million 38 aerospace defense group revenues fiscal 2004 compared 56 million 62 aerospace defense revenues fiscal 2003 primarily due acquisition simula december 9 2003 specialty defense november 18 2004 well additional selling general administrative expenses associated increased production uparmored hmmwv supplemental armor military vehicles decrease selling general administrative expense percentage revenue due leveraging selling general administrative expenses much larger revenue base products group selling general administrative expenses increased 118 million 35 449 million 180 products group revenues fiscal 2004 compared 331 million 171 products group revenues fiscal 2003 increase due primarily acquisitions one time settlement charge related early cancellation exclusive distribution agreement increased research development spending higher sales expenses related increased sales volumes higher insurance costs increased bad debt provisions bonus expenses prior year allocated corporate selling general administrative expenses mobile security division selling general administrative expenses increased 25 million 21 148 million 119 mobile security division revenues fiscal 2004 compared 123 million 154 mobile security division revenues fiscal 2003 increase selling general administrative expense primarily due large increase production revenues lesser extent impact weaker us dollar versus euro decrease selling general administrative expense percentage revenue due leveraging selling general administrative expenses much larger revenue base corporate general administrative expenses increased 57 million 49 175 million 18 total revenues fiscal 2004 compared 118 million fiscal 2003 32 total revenues increase administrative expenses associated overall growth company increased travel expenses bonus provision sarbanesoxley requirements decrease general administrative expense percentage revenue due leveraging general administrative expenses much larger revenue base amortization expense increased 38 million 770 43 million fiscal 2004 compared 489000 fiscal 2003 primarily due amortization certain intangible assets acquired part acquisitions simula hatch imports december 2003 odv kleenbore specialty defense fiscal 2004 sfas 142 adopted january 1 2002 eliminated amortization intangible assets indefinite lives goodwill acquisitions completed july 1 2001 well fiscal years ending january 1 2002 remaining amortization expense related patents trademarks finite lives acquired identifiable intangible amortizable assets meet criteria recognition asset apart goodwill statement financial accounting standard 141 business combinations sfas 141 integration increased 05 million 25 26 million fiscal 2004 compared 21 million fiscal 2003 included integration fiscal 2004 primarily charges integration simula hatch imports acquired december 2003 integration odv kleen bore specialty defense acquired subsequent fiscal 2003 included integration fiscal 2003 primarily charges integration entities acquired fiscal 2003 charges decreased 28 million 37 77 million fiscal 2004 compared 105 million fiscal 2003 included charges fiscal 2004 charges noncash charge 63 million related acceleration performancebased longterm restricted stock awards granted certain executives 2002 impairment charge 14 million reduce carrying value remaining portion nti estimated fair value included charges fiscal 2003 noncash charge 73 million stockbased compensation performance plan certain key executives 32 million severance charge including 21 million noncash charge related 2003 departure former chief executive officer operating income operating income continuing operations increased 1100 million 309 1457 million fiscal 2004 compared 357 million fiscal 2003 due factors discussed interest expense net interest expense net increased 28 million 69 68 million fiscal 2004 compared 40 million fiscal 2003 increase due primarily interest expense associated 300 million aggregate principal amount 2 convertible notes issued october 29 2004 150 million aggregate principal amount 825 notes issued august 12 2003 november 5 2004 goldman sachs co exercised option purchase additional 45 million principal amount 2 convertible notes also contributing increase interest expense september 2 2003 entered interest rate swap agreements effectively exchanged 825 fixed rate 825 notes variable rate six month libor set arrears plus spread 2735 275 december 31 2004 six month libor rate 278 expense net expense net increased 14 million 283 19 million fiscal 2004 compared 508000 fiscal 2003 increase related primarily noncash asset impairment foreign exchange currency losses loss disposal certain fixed assets partially offset realization gain sale certain equity investments fiscal 2004 fiscal 2003 expense net related primarily foreign exchange currency losses income continuing operations provision income taxes income continuing operations provision income taxes increased 1058 million 339 1370 million fiscal 2004 compared 312 million fiscal 2003 due reasons discussed provision income taxes provision income taxes continuing operations 564 million fiscal 2004 compared 142 million fiscal 2003 effective income tax rate 412 fiscal 2004 compared 455 fiscal 2003 based annual income amounts jurisdictions amounts taxable decreased tax rate relates primarily prior year income tax charges associated among things 1 nontax deductible nature noncash nonrecurring stock based compensation provided certain key executives less impact effective tax rate 2004 compared 2003 2 taxable gain realized second half 2003 certain intellectual property utilized discontinued operations revalued comply us internal revenue code provisions occur 2004 impact incremental income tax associated revalued intellectual property 2003 recorded continuing operations required us gaap resulted incremental noncash income tax expense foreign tax credits available offset income tax otherwise payable income continuing operations income continuing operations increased 636 million 374 806 million fiscal 2004 compared 170 million fiscal 2003 due factors discussed discontinued operations previously discussed managements discussion analysis financial condition results operations discontinued operations december 31 2004 note 2 consolidated financial statements contain comparative information discontinued operations services revenues services division revenue decreased 934 million 17 million fiscal 2004 compared 951 million fiscal 2003 exclusive armorgroup integrated systems sold april 17 2003 armorgroup sold november 26 2003 revenue decreased 11 million 38 17 million fiscal 2004 compared 28 million fiscal 2003 primarily due sale security consulting business nti july 2 2004 cost revenues cost revenues decreased 661 million 697000 fiscal 2004 compared 668 million fiscal 2003 exclusive armorgroup integrated systems armorgroup cost revenues decreased 356000 34 697000 fiscal 2004 compared 11 million fiscal 2003 decrease primarily due sale security consulting business nti july 2 2004 selling general administrative expenses selling general administrative expenses decreased 191 million 821000 474 services revenues fiscal 2004 compared 199 million 209 services revenues fiscal 2003 exclusive armorgroup integrated systems armorgroup selling general administrative expenses decreased 41 million 831 821000 fiscal 2004 compared 49 million fiscal 2003 decrease primarily due sale security consulting business nti july 2 2004 accordance us gaap record depreciation amortization longlived assets heldforsale discontinued operations charge impairment longlived assets charge impairment longlived assets zero fiscal 2004 compared 215 million fiscal 2003 charge prior year related reduction carrying value services division estimate realizable value integration decreased zero fiscal 2004 compared 776000 fiscal 2003 excluding armorgroup integrated systems armorgroup integration charges fiscal 2003 operating income loss operating income 215000 fiscal 2004 compared operating loss 139 million fiscal 2003 due factors discussed excluding armorgroup integrated systems armorgroup balance assets held sale generated operating income 215000 fiscal 2004 compared operating loss 10 million fiscal 2003 due reasons discussed interest expense net interest expense net decreased 14000 2000 fiscal 2004 compared 16000 fiscal 2003 primarily due sale armorgroup integrated systems armorgroup interest bearing liabilities discontinued operations repaid expense net expense net decreased 206000 273000 fiscal 2004 compared 479000 fiscal 2003 excluding armorgroup integrated systems armorgroup balance assets held sale generated expense net discontinued operations 273000 fiscal 2004 compared income net 34000 fiscal 2003 due additional accounting fees incurred connection sale armorgroup loss discontinued operations income tax benefit loss discontinued operations income tax benefit 60000 fiscal 2004 compared loss 144 million fiscal 2003 due reasons discussed excluding armorgroup integrated systems armorgroup balance assets held sale generated loss discontinued operations provision income taxes 60000 fiscal 2004 compared loss 957000 fiscal 2003 due reasons discussed income tax benefit income tax benefit 22000 fiscal 2004 compared income tax benefit 83 million fiscal 2003 effective tax rate fiscal 2004 benefit 367 compared benefit 574 fiscal 2003 excluding armorgroup integrated systems armorgroup balance assets held sale benefit 22000 fiscal 2004 compared benefit 40000 fiscal 2003 loss discontinued operations loss discontinued operations 38000 fiscal 2004 compared 61 million fiscal 2003 due factors discussed excluding armorgroup integrated systems armorgroup balance assets held sale generated loss discontinued operations 38000 fiscal 2004 compared loss 957000 fiscal 2003 due reasons discussed quarterly results set forth certain unaudited quarterly financial data last eight quarters certain data expressed percentage revenue respective quarters information derived unaudited financial statements opinion management include adjustments consisting normal recurring adjustments necessary fairly present quarterly information accordance us gaap operating results quarter necessarily indicative results expected future period quarter ended thousands except per share data dec 31 sept 30 jun 30 mar 31 dec 31 sept 30 jun 30 mar 31 2005 2004 revenues aerospace defense 332327 339113 256688 260470 234379 160238 129773 81008 products 87604 75911 76805 68558 65523 64659 65743 53840 mobile security 32728 32640 38149 35937 37646 31906 28188 26780 total revenue 452659 447664 371642 364965 337548 256803 223704 161628 operating income 61093 42489 57396 54656 47356 41735 33976 22648 interest expense net 1143 1379 1514 2245 1591 1400 2057 1728 income expense net 685 1370 3093 1123 2066 154 390 115 income continuing operations taxes 60635 42480 58975 51288 43699 40181 32309 20805 provision income taxes 23052 15997 21560 20259 17345 16307 14588 8177 income continuing operations 37583 26483 37415 31029 26354 23874 17721 12628 income loss discontinued operations net provision benefit income taxes 100 138 net income 37583 26483 37415 31029 26354 23874 17821 12490 net income per common share basic income continuing operations 107 076 109 090 078 073 060 044 income loss discontinued operations 000 basic earnings per share 107 076 109 090 078 073 060 044 net income per common share diluted income continuing operations 104 074 105 087 074 070 057 042 income loss gain discontinued operations 000 diluted earnings per share 104 074 105 087 074 070 057 042 weighted average common shares outstanding basic 35045 34714 34480 34509 33946 32861 29670 28472 diluted 36243 35959 35562 35832 35555 34198 31008 29934 revenues aerospace defense 734 757 691 714 694 624 580 501 products 194 170 207 188 194 252 294 333 mobile security 72 73 102 98 112 124 126 166 total revenue 1000 operating income 135 95 154 150 140 163 152 140 interest expense net 03 04 06 05 09 11 income expense net 02 03 08 03 06 01 02 01 income continuing operations taxes 134 95 159 141 129 156 144 129 provision income taxes 51 36 58 56 51 64 65 51 income continuing operations 83 59 101 85 78 93 79 78 income loss discontinued operations net provision benefit income taxes 00 01 net income 83 59 101 85 78 93 80 77 liquidity capital resources march 2002 board directors approved stock repurchase program authorizing repurchase maximum 32 million shares common stock february 2003 board directors increased stock repurchase program authorize repurchase time depending upon market conditions factors additional 44 million shares march 25 2005 board directors increased existing stock repurchase program enable us repurchase time depending upon market conditions factors additional 35 million shares outstanding common stock february 24 2006 repurchased 38 million shares common stock repurchase program average price 1249 per share leaving us ability repurchase additional 73 million shares common stock repurchase shares fiscal 2005 fiscal 2004 repurchases may made open market privately negotiated transactions utilizing various hedging mechanisms including among others sale third parties put options common stock otherwise december 31 2005 353 million shares common stock outstanding fiscal 2005 sold put options various private transactions covering 35 million shares company stock 66 million premiums fiscal 2005 put options covering 25 million shares company stock expired unexercised leaving outstanding put options covering 1 million shares outstanding 28 outstanding shares december 31 2005 weighted average strike price 4000 per share february 2006 outstanding put options covering 1 million shares expired unexercised accordingly recorded additional 07 million income first quarter fiscal 2006 fair values put options company stock obtained counterparties represent estimated amount would receive pay terminate put options taking account consideration received sale put options fiscal 2005 recognized fair value gains 59 million recorded income net 48 million recognized 25 million previously expired unexercised put options expect continue policy repurchasing common stock time subject restrictions contained secured revolving credit facility credit facility bank america na wachovia bank na syndicate financial institutions arranged bank america securities llc indenture governing 8 14 senior subordinated notes due 2013 825 notes indenture governing 200 senior subordinated convertible notes due november 1 2024 2 convertible notes credit facility permits us repurchase shares common stock limitation ratio consolidated senior indebtedness consolidated earnings interest taxes depreciation amortization ebitda terms defined credit facility rolling twelvemonth period less 100 1 ratio greater 100 1 credit facility limits ability repurchase shares 150 million basket resets 0 time ratio less 100 1 december 31 2005 ratio 004 1 indentures governing 825 notes 2 convertible notes also permit us repurchase shares common stock subject certain limitations long satisfy conditions repurchase contained therein june 22 2005 implemented 2005 stock incentive plan 2005 stock incentive plan authorizes issuance 2500000 shares common stock shares common stock granted restricted stock performance stock stockbased awards counted shares authorized one eighttenths 18 shares every one share issued connection award 2005 stock incentive plan authorizes granting stock options restricted stock performance awards stockbased awards employees officers directors consultants independent contractors advisors company subsidiaries accordance 2005 stock incentive plan preexisting stock incentive plans frozen accordingly longer authorized grant awards preexisting plans june 22 2004 stockholders approved amendment certificate incorporation amended increased number shares authorized capital stock 80000000 75000000 shares designated common stock 5000000 shares designated preferred stock june 15 2004 sold 4000000 primary shares common stock price 3750 per share raising 1425 million net proceeds deducting underwriter discounts commissions addition board directors granted underwriters 30day option purchase 600000 shares 30day option expired unexercised july 15 2004 used net proceeds offering primarily fund acquisitions specialty defense bianchi international fourth quarter 2004 october 29 2004 completed placement 2 convertible notes november 5 2004 goldman sachs co exercised option purchase additional 45 million principal amount 2 convertible notes 2 convertible notes provide holders seven year put option guaranteed domestic subsidiaries senior subordinated basis 2 convertible notes initially rated b1b moodys investors service standard poors rating services respectively 2 convertible notes bear interest rate 200 per year payable november 1 may 1 year beginning may 1 2005 ending november 1 2011 2 convertible notes subject accretion principal amount beginning november 1 2011 rate provides holders aggregate annual yield maturity 200 defined agreement 2 convertible notes bear contingent interest sixmonth period beginning november 1 2011 15 basis points paid cash average trading price notes certain levels 2 convertible notes convertible bond holders option time initially conversion rate 185151 shares common stock per 1000 principal amount notes equivalent conversion price approximately 5401 per share subject adjustment upon conversion satisfy conversion obligation respect accreted principal amount notes converted cash remaining amount satisfied shares common stock conversion rate subject adjustment without duplication upon occurrence following events 1 stock dividends common stock 2 issuance rights warrants 3 stock splits combinations 4 distribution indebtedness securities assets 5 cash distributions 6 tender exchange offers 7 repurchases common stock accordance us gaap 2 convertible notes classified short term debt converted time prior maturity used portion proceeds offering fund acquisition second chance july 2005 general corporate working capital purposes including funding capital expenditures funds immediately used invested money market funds investment grade securities needed august 12 2003 completed private placement 150 million aggregate principal amount 825 notes 825 notes guaranteed domestic subsidiaries senior subordinated basis 825 notes sold qualified institutional investors reliance rule 144a securities act 1933 amended nonus persons reliance regulation securities act 1933 amended 2004 completion private placement 825 notes conducted exchange offer pursuant holders privately placed 825 notes exchanged notes 825 notes registered securities act 1933 amended 825 notes initially rated b1b moodys investors service standard poors rating services respectively used portion funds repay debt acquire simula inc hatch imports inc odv inc kleenbore inc used remaining proceeds offering fund acquisitions general corporate working capital purposes including funding capital expenditures march 29 2004 completed registered exchange offer 825 notes exchanged 825 notes new 825 notes registered securities act 1933 amended september 2 2003 entered interest rate swap agreements designated fair value hedges defined sfas 133 notional amount totaling 150 million agreements entered exchange fixed interest rate 825 notes variable interest rate equal sixmonth libor set arrears plus spread ranging 2735 275 fixed semiannually fifteenth day february august agreements subject terms conditions common transactions type accordance sfas 133 changes fair value interest rate swap agreements offset changes fair value fixed rate debt due changes market interest rate accordingly interest rate swaps included assets consolidated balance sheet decreased 46 million december 31 2004 reflected decrease fair value interest rate swap agreements 14 million corresponding decrease hedge liability recorded longterm debt agreements deemed perfectly effective fair value hedge therefore qualify shortcut method accounting sfas 133 result ineffectiveness expected recognized earnings associated interest rate swap agreements august 12 2003 concert 825 note offering entered credit facility credit facility consists fiveyear revolving credit facility among things provides total maximum borrowings 60 million ii 25 million sublimit issuances standby commercial letters credit iii 5 million sublimit swingline loans iv 5 million sublimit multicurrency borrowings credit facility bear interest either rate equal libor plus applicable margin ranging 1125 1625 ii alternate base rate higher bank america prime rate b federal funds rate plus 050 iii respect foreign currency loans fronted offshore currency rate plus applicable margin ranging 1125 1625 depending certain conditions credit facility guaranteed certain direct indirect domestic subsidiaries collateralized among things pledge issued outstanding shares stock equity interests certain domestic subsidiaries ii pledge 65 issued outstanding voting shares stock voting equity interests certain direct indirect foreign subsidiaries iii pledge 100 issued outstanding nonvoting shares stock nonvoting equity interests certain direct indirect foreign subsidiaries iv first priority perfected security interest certain domestic assets certain domestic assets certain direct indirect subsidiaries become guarantors obligations credit facility including among things accounts receivable inventory machinery equipment certain contract rights intellectual property rights general intangibles january 9 2004 amended credit facility broaden ability make additional openmarket purchases publiclytraded securities subject certain limitations march 29 2004 amended credit facility allow us pay dividends subject certain limitations october 19 2004 amended credit facility allow us subtract cash equivalents total indebtedness calculation compliance covenants april 14 2005 amended credit agreement amend definition cash equivalents include auction rate securities held existing bank group july 26 2005 amended credit facility allow advances loans extensions credit investments key suppliers company aggregate amount exceed 15 million time outstanding purpose facilitating sale purchase goods services company addition amendment allows leases dispositions assets 10 consolidated ebitda defined credit facility december 31 2005 530 million availability credit facility excluding 70 million outstanding letters credit december 31 2005 believe material compliance negative affirmative covenants contained credit facility indentures governing 825 notes 2 convertible notes working capital 3872 million 2896 million december 31 2005 december 31 2004 respectively increase working capital largely function increases cash equivalents 506 million accounts receivable 353 million inventory 311 million partially offset increase accounts payable 214 million primarily support growth demand force protection related products us department defense net cash provided operating activities 1349 million fiscal 2005 compared 169 million fiscal 2004 net cash provided operating activities improved due increased net income fiscal 2005 negatively impacted due increases working capital periods net cash used investing activities 1019 million fiscal 2005 compared 1756 million fiscal 2004 decrease primarily due purchase second chance 2005 compared purchases specialty defense bianchi among others 2004 partially offset purchase equitybased securities fiscal 2005 net cash provided financing activities 193 million fiscal 2005 compared 4661 million fiscal 2004 decrease fiscal 2005 primarily due net cash provided financing activities fiscal 2004 including issuance 2 convertible bonds sale 4000000 shares company stock revised 2004 2003 consolidated statements cash flow separately disclose operating investing financing portions cash flows attributable discontinued operations previously reported amounts combined basis fiscal 2005 capital expenditures 156 million expenditures included additional manufacturing office space manufacturing machinery equipment leasehold improvements information technology communications infrastructure equipment fiscal 2006 capital expenditures expected approximately 300 million 340 million february 27 2006 announced signed definitive agreement acquire outstanding stock stewart stevenson services inc svc leading manufacturer military tactical wheeled vehicles including fmtv us armys primary transport platform 35 per share cash merger transaction total value transaction expected approximately 755 million deducting svcs net cash balance 312 million january 31 2006 transaction subject svc shareholder approval expiration termination hartscottrodino waiting period customary conditions transaction expected close mid2006 expect finance transaction available cash proceeds new senior credit facilities february 28 2006 standard poors ratings services affirmed b rating senior subordinated debt also february 28 2006 moodys investors service announced review debt ratings possible downgrade b1 rating senior subordinated debt wake announcement signed definitive agreement acquire outstanding stock svc anticipate cash hand cash generated operations available borrowings credit facility enable us meet liquidity working capital expenditure requirements next 12 months may however require additional financing pursue strategy growth acquisitions including new senior credit facilities associated pending acquisition stewart stevenson services inc continuously exploring alternatives financing required assurances available obtained terms favorable us basis dilutive stockholders recently issued accounting standards december 16 2004 fasb issued fas 123r fas 123r revises sfas 123 requires companies expense fair value employee stock options forms stockbased compensation addition revising sfas 123 fas 123r supersedes apb 25 amends sfas 95 april 14 2005 securities exchange commission extended compliance date fas 123r first interim first annual reporting period companys fiscal year beginning june 15 2005 required apply expense recognition provisions fas 123r beginning first quarter 2006 expect incur approximately 16 million expense year ended december 31 2006 result adoption fas 123r november 2004 fasb issued statement financial accounting standard 151 inventory costs amendment arb 43 chapter 4 sfas 151 sfas 151 amends guidance accounting research bulleting 43 chapter 4 inventory pricing clarify abnormal amounts idle facility expense freight handling costs wasted material spoilage recognized currentperiod charges sfas 151 effective fiscal years beginning june 15 2005 sfas 151 expected material impact financial statements inflation believe relatively moderate rates inflation recent years significant impact revenue profitability historically able offset inflationary effects either increasing prices improving cost efficiencies balance sheet arrangements september 24 2004 entered offbalance sheet leasing arrangement aircraft company use upon expiration lease september 24 2009 subsidiary company option renew lease fair market value subject approval lessor buy aircraft approximately 100 million return aircraft lessor guarantee pay shortfall sales proceeds third party amount exceed 82 million annual rental expense related agreement approximately 10 million excluding leasing arrangement balance sheet arrangements tabular disclosure contractual obligations following table presents contractual obligations december 31 2005 contractual obligations payment due period thousands total less 1 year 1 3 years 3 5 years 5 years longterm debt obligations 152340 430 890 620 150400 operating lease obligations 34948 7401 9048 5126 13373 longterm liabilities 10475 878 658 8939 total 197763 7831 10816 6404 172712 item 7aitem 7 management’s discussion analysis financial condition results operations management’s discussion analysis financial condition results operations contains forwardlooking statements within meaning section 27a securities act 1933 amended section 21e securities exchange act 1934 amended statements predictive nature depend upon refer future events conditions include words ‘‘expects’’ ‘‘anticipates’’ ‘‘intends’’ ‘‘plans’’ ‘‘believes’’ ‘‘estimates’’ ‘‘could be’’ similar expressions forward looking statements although believe statements based upon reasonable assumptions give assurance goals achieved information see ‘‘forward looking statements’’ contained part report actual results may differ expressed implied forwardlooking statements believe subject number risk factors including without limitation inherent unpredictability currency fluctuations competitive actions including pricing ability realize cost reductions operating efficiencies including ability implement headcount reduction programs timely manner unduly disrupt business operations ability identify realize costreduction opportunities general economic business conditions ability successfully execute changes operations integration recent future acquisitions without disrupting operations ability obtain supplies raw materials without disruption forwardlooking statements report evaluated light important risk factors listed management’s discussion analysis financial condition results operations elsewhere annual report form 10k including accompanying consolidated financial statements company overview one three major original equipment manufacturers ‘‘oem’’ tactical wheeled vehicles ‘‘twv’’ leading diversified manufacturer vehicle armoring systems life safety survivability products military law enforcement commercial markets prime aerospace defense contractor number key us military programs also provide broad portfolio branded security products customers include domestic international militaries law enforcement security corrections personnel government agencies multinational corporations individuals may 2006 acquired stewart stevenson services inc ‘‘stewart stevenson’’ positions us leading manufacturer family medium tactical vehicles ‘‘fmtv’’ us military acquisition stewart stevenson also adds 17 billion total backlog 26 billion december 31 2006 enhances future sales visibility business consists three principal segments aerospace defense group products group mobile security division aerospace defense group significant operations within aerospace defense group manufacturing fmtv armoring variety light medium heavy twv military example design develop manufacture ballistic blast protection armoring systems variety military ground vehicles including programs ‘‘uparmored’’ high mobility multipurpose wheeled vehicle ‘‘hmmwv’’ commonly known humvee armored security vehicle ‘‘asv’’ aerospace defense group also supplies life safety survivability systems us military major aerospace defense prime contractors core markets land marine aviation safety military personnel protection aerospace defense group develops supplies personnel equipment including small arms protective inserts ‘‘sapi’’ engineered ceramic body armor helmets shields similar protective duty equipment products include among others modular lightweight loadcarrying equipment ‘‘molle’’ systems outer tactical vests ‘‘otvs’’ advanced combat helmets ‘‘ach’’ currently largest supplier molle systems us army modular rucksack configured number ways depending needs military mission also manufacture otvs used sapi plates provide enhanced protection bullets mines grenades mortar artillery shells sapi plates adopted us military key element protective equipment worn us troops products group products group manufactures sells broad range highquality equipment marketed brand names known military law enforcement communities products manufactured group include concealable tactical body armor hard armor duty gear lesslethal munitions antiriot products police batons handcuffs emergency lighting products forensic products firearms accessories weapon maintenance products foldable ladders backpacks specialty gloves mobile security division mobile security division operating brand name centigontm manufactures services integrates certified armoring systems commercial vehicles designed protect varying degrees ballistic blast threats global basis armor variety programs available commercially including custom limousines sedans sport utility vehicles commercial trucks cashintransit vehicles customers business include us federal law enforcement intelligence diplomatic agencies foreign heads state multinational corporations well high net worth individuals cashintransit operators discontinued operations july 2 2004 sold security consulting division subsidiary new technology armor inc ‘‘nti’’ previously presented discontinued operations remaining division nti consisting primarily training services included part products group segment prior acquisition stewart stevenson completed sale substantially operating assets business power products engineered products segments january 2006 remaining costs related sales time acquisition stewart stevenson considered purchase accounting acquisition critical accounting policies significant accounting policies described note 1 consolidated financial statements included item 15 form 10k believe critical accounting policies include following revenue recognition record aerospace defense group revenue related government contracts results principally fixed price contracts persuasive evidence arrangement exists fee reasonably determinable customer accepted product collectibility probable conditions met substantially cases department defense inspector signs material inspection receiving report indicating acceptance title transfer record revenue remaining aerospace defense group products group mobile security division product shipped except larger commercial contracts typically longer four months length revenue large commercial contracts recognized percentage completion unitsofwork performed method large commercial contracts loss position entire estimated loss would recognized balance contract period end current contracts profitable returns minimal materially affect consolidated financial statements record service revenue services provided contractbycontract basis revenues service contracts recognized term contract commensurate services provided receivables consist amounts billed currently due customers unbilled costs accrued profits primarily related revenues longterm contracts recognized accounting purposes yet billed customers allowance doubtful accounts evaluate collectibility accounts receivable based numerous factors including past transaction history customers creditworthiness estimate periodically adjusted become aware specific customers’ inability meet financial obligations eg bankruptcy filing evidence liquidity problems determine specific balances ultimately uncollectible remove aged trial balance inventories stated lower cost market determined actual cost method pursuant contract provisions agencies us government certain customers title security interest inventories related contracts result advances performancebased payments progress payments advances payments reflected offset related inventory balances derivative instruments hedging activities account derivative instruments hedging activities accordance statement financial accounting standard 133 ‘‘accounting derivative instruments hedge activities’’ ‘‘sfas 133’’ amended derivative instruments recorded balance sheet fair value changes fair value derivatives recorded period current earnings comprehensive income depending whether derivative designated part hedge transaction depending type hedge transaction fairvalue hedge transactions hedge changes asset’s liability’s firm commitment’s fair value changes fair value derivative instrument generally offset income statement changes hedged item’s fair value put options company stock marked market income statement end period goodwill represents excess purchase price fair value net assets acquired purchase business combination goodwill intangible assets stated basis cost 890 million goodwill resulting acquisitions made us subsequent june 30 2001 immediately subjected nonamortization provisions statement financial accounting standards 142 ‘‘goodwill intangible assets’’ ‘‘sfas 142’’ see also ‘‘impairment’’ purchase method accounting business combinations requires us make use estimates judgments allocate purchase price paid acquisitions fair value net tangible identifiable intangible assets acquired liabilities assumed goodwill tested impairment annually possible impairment indicated using fair value based test prescribed sfas 142 performed annual assessment goodwill determined impairment existed june 30 2006 patents licenses trademarks patents licenses trademarks primarily acquired acquisitions accounted purchase method accounting assets amortized straightline basis useful lives certain assets indefinite lives amortized estimates preparation financial statements conformity accounting principles generally accepted united states ‘‘us gaap’’ requires management make estimates assumptions affect reported amounts financial statements accompanying notes significant estimates inherent preparation accompanying consolidated financial statements include carrying value longlived assets valuation allowances receivables inventories deferred income tax assets liabilities potential litigation claims settlements potential liabilities related tax filings ordinary course business vest exchange program warranty revision accrual defined benefit plan liabilities contract contingencies obligations actual results could differ estimates income taxes account income taxes pursuant statement financial accounting standards 109 ‘‘accounting income taxes’’ ‘‘sfas 109’’ asset liability method specified thereunder deferred taxes determined based difference financial reporting tax bases assets liabilities deferred tax liabilities offset deferred tax assets relating net operating loss carryforwards tax credit carryforwards deductible temporary differences recognition deferred tax assets based management’s belief likely tax benefit associated temporary differences operating capital loss carryforwards utilized valuation allowance recorded deferred tax assets likely realization occur impairment longlived assets including certain identifiable intangibles goodwill reviewed annually impairment whenever events changes circumstances indicate carrying amount asset question may recoverable including limited deterioration profits business segment longlived assets changes occur might impair recovery longlived assets method used determine existence impairment would discounted operating cash flows estimated remaining useful lives related longlived asset groups impairment measured difference fair value unamortized cost date impairment determined comprehensive income financial statements foreign subsidiaries measured using local currency functional currency assets liabilities denominated foreign currency translated us dollars current rate exchange existing periodend revenues expenses translated average monthly exchange rates current year change accumulated amount net tax included component comprehensive income accordance statement financial accounting standard 115 ‘‘accounting certain investments debt equity securities’’ ‘‘sfas 115’’ classify investments certain equitybased securities availableforsale unrealized gains losses excluded earnings recorded component comprehensive income loss unrealized holding loss equitybased securities classified availableforsale 9000 2 million december 31 2006 2005 respectively investments classified assets consolidated balance sheets declines fair value amortized cost basis investment determined temporary charged earnings temporary declines years ended december 31 2006 2005 stock options grants recognize cost equity classified sharebased awards straightline basis vesting period award prior january 1 2006 accounted stock option plans recognition measurement provisions accounting principles board opinion 25 ‘‘accounting stock issued employees’’ ‘‘apb 25’’ related interpretations permitted statement financial accounting standards 123 ‘‘accounting stockbased compensation’’ ‘‘sfas 123’’ excluding modification stock option agreements stock optionbased employee compensation cost recognized income statement stock options granted plans exercise price equal greater market value underlying common stock date grant january 1 2006 adopted statement financial accounting standards 123 revised 2004 ‘‘sharebased payments’’ ‘‘fas 123r’’ requiring us recognize expense related fair value stock option awards adopted fair value recognition provisions fas 123r using modified prospective transition method transition method compensation cost recognized 2006 includes compensation cost equity classified sharebased awards granted prior yet vested january 1 2006 based grant date fair value estimated accordance original provisions sfas 123 b compensation cost sharebased payments granted subsequent january 1 2006 based grantdate fair value estimated accordance provisions fas 123r results prior periods restated result adopting fas 123r january 1 2006 income taxes year ended december 31 2006 4 million lower continued account sharebased compensation apb 25 prior adoption fas 123r presented tax benefits deductions resulting exercise stock options operating cash flows statement cash flows beginning january 1 2006 changed cash flow presentation accordance fas 123r requires cash flows resulting tax benefits tax deductions excess compensation cost recognized options windfall tax benefits classified financing cash flows estimated fair value option awards granted january 1 2006 using blackscholes option pricing model expected life options granted management’s estimate represents period time options granted expected outstanding currently pay dividends volatility based historical volatility stock price riskfree interest rate periods within contractual life option based us treasury yield curve effect time grant fair value option grant years ended december 31 2006 2005 2004 estimated date grant following weightedaverage assumptions weighted average fair value options granted years ended december 31 2006 2005 2004 follows outstanding options consisting incentive nonqualified stock options generally vest become exercisable three five year period date grant options granted immediately vested subject lockup provisions disallow recipient selling shares lockup expires generally staggered seven year period outstanding options generally expire seven ten years date grant upon retirement company contingent upon continued employment applicable seven ten year period compensation cost stock option grants determined based fair value grant dates years ended december 31 2005 2004 consistent method prescribed sfas 123 net earnings per share would adjusted proforma amounts indicated 15 million stockbased employee compensation expense determined fair value based method fiscal 2005 related accelerated vesting certain existing stock options 22 million related certain stock options issued fiscal 2005 november 2005 fasb issued fasb staff position ‘‘fsp’’ fas 123r3 transition election related accounting tax effects sharebased payment awards fsp fas 123r3 provides alternative transition method establishing beginning balance pool excess tax benefits available absorb tax deficiencies recognized subsequent adoption fas 123r ‘‘apic pool’’ elected adopt alternative transition method provided fsp fas 123r3 establishing beginning balance apic pool method consists computational component establishes beginning balance apic pool related employee compensation simplified method determine subsequent impact apic pool employee awards fully vested outstanding upon adoption fas 123r results operations following table sets forth selected consolidated statements operations data percentage total revenues periods indicated fiscal 2006 compared fiscal total revenues total revenues increased 724 million 44 24 billion year ended december 31 2006 compared 16 billion year ended december 31 2005 year ended december 31 2006 total revenue increased 15 internally including periodoverperiod changes acquired businesses 29 acquisitions effect foreign currency movements internal revenue growth decline represents periodoverperiod increases decreases acquired companies’ current year revenues since date acquisition anniversary date year subsequent acquisition versus comparable prior year period businesses either owned acquired us periods presented calculation internal revenue growth takes consideration proforma revenue relevant periods acquired entities determining periodoverperiod growth aerospace defense revenues aerospace defense revenues increased 717 million 59 19 billion year ended december 31 2006 compared 12 billion year ended december 31 2005 aerospace defense revenues increased 22 internally including periodoverperiod changes acquired businesses increased 447 million 37 2006 acquisitions notably stewart stevenson may 2006 internal growth primarily due following factors 1 experienced strong demand uparmored hmmwv including spare part revenues shipped 10037 uparmored hmmwvs includes m1114 m115152 models year ended december 31 2006 compared 7188 year ended december 31 2005 40 increase partially offset 20 decrease armor components fielded vehicles including addon armor kits light medium heavy tactical truck fleets compared year ended december 31 2005 2 year ended december 31 2006 shipped 3539 fmtv trucks subsequent may 25 2006 stewart stevenson closing date compares 1551 fmtv trucks shipped stewart stevenson period last year continue increase production meet customer demand 3 sapi plate volume increased result increasing requirements us military ability production base increase capacity ability qualify additional sources supply 4 otv units helmet units molle revenue increased due increase demand spurred continuing conflict middle east products revenues products revenues increased 40 million 14 324 million year ended december 31 2006 compared 284 million year ended december 31 2005 year ended december 31 2006 revenue increased 5 internally including periodoverperiod changes acquired businesses increased 26 million 9 acquisition law enforcement business second chance acquired july 2005 projectina acquired april 2006 hiatts acquired july 2006 internal growth primarily driven strong domestic sales body armor resulting primarily investment expanded sales force also contributing internal growth strong sales within automotive forensics’ product lines overall growth offset part declining international sales body armor iraq mobile security revenues mobile security revenues decreased 33 million 24 106 million year ended december 31 2006 compared 139 million year ended december 31 2005 commercial vehicle shipments decreased 12 1450 vehicles year ended december 31 2006 compared 1644 vehicles year ended december 31 2005 mobile security’s internal revenue decline primarily result model year changes suburban sclass mercedes delayed spending governmental buyers including iraqi government gross margins increased 75 million 19 463 million year ended december 31 2006 compared 388 million year ended december 31 2005 percentage total revenues margins decreased 196 total revenues year ended december 31 2006 237 year ended december 31 2005 gross margins aerospace defense 163 year ended december 31 2006 compared 207 year ended december 31 2005 reduction primarily due acquisition stewart stevenson operates lower gross margins gross margins products 394 year ended december 31 2006 compared 370 year ended december 31 2005 gross margin improvement reflects select selling price increases continued expansion lean manufacturing initiatives increased utilization lowercost manufacturing plants improved outsourcing externally manufactured products gross margins mobile security 190 year ended december 31 2006 compared 227 year ended december 31 2005 decrease margins primarily due decreased overhead absorption caused reduced production throughput well less profitable sales mix costs exchange programwarranty revision result voluntary zylon® vest exchange program relating zylon®vests recorded pretax charge 4 million 20 million years ended december 31 2006 2005 respectively 4 million charge incurred 2006 resulted higher redemption rate estimates existing zylon® vest replacement program 20 million charge incurred 2005 includes originally estimated exchange program costs inventory writeoffs liability classified accrued expenses current liabilities consolidated balance sheet selling general administrative expenses selling general administrative expenses increased 57 million 41 197 million 83 total revenues year ended december 31 2006 compared 139 million 85 total revenues year ended december 31 2005 increase primarily due acquisitions stewart stevenson second chance body armor projectina added 33 million increased selling marketing expenses increased research development expense increased legal related expenses aerospace defense selling general administrative expenses increased 37 million 101 73 million 38 aerospace defense revenues year ended december 31 2006 compared 37 million 30 aerospace defense revenues year ended december 31 2005 increase selling general administrative expenses primarily due acquisition stewart stevenson increased research development expense increased legal related expenses administrative expenses result increased size business expect stewart stevenson’s operating expenses percentage sales decrease next 12 months eliminate overhead associated stewart stevenson’s legacy businesses sold discontinued old public company infrastructure products selling general administrative expenses increased 14 million 25 72 million 221 products revenues year ended december 31 2006 compared 57 million 202 products revenues year ended december 31 2005 increase reflects impact acquisitions amounted 6 million decisions late 2005 expand sales force increase investment sales training marketing mobile security selling general administrative expenses flat 16 million 153 mobile security revenues year ended december 31 2006 compared 16 million 117 mobile security revenues year ended december 31 2005 decreased incentive compensation largely offset global marketing programs launched introduction new brand centigon increase selling general administrative expenses percentage revenues due primarily decrease revenues corporate general administrative expenses increased 7 million 23 36 million 15 total revenues year ended december 31 2006 compared 29 million 18 total revenues year ended december 31 2005 increase general administrative expenses primarily associated increased incentive provisions higher professional fees adoption fas 123r expensing stock options increase general spending amortization expense increased 14 million 161 22 million year ended december 31 2006 compared 9 million year ended december 31 2005 primarily due acquisition stewart stevenson may 2006 amortization expense related patents trademarks finite lives acquired amortizable intangible assets meet criteria recognition asset apart goodwill sfas 141 integration expense decreased 1 million 32 3 million year ended december 31 2006 compared 4 million year ended december 31 2005 included integration fiscal 2006 charges integration second chance projectina stewart stevenson hiatts schroth well professional fees due diligence costs related acquisitions consummated included integration fiscal 2005 charges primarily related kleenbore specialty defense bianchi second chance credits charges credits charges year ended december 31 2006 included 2 million reversal previously recorded expense relating export fine recently settled inconsequential amount charges year ended december 31 2005 1 million operating income operating income increased 24 million 11 239 million year ended december 31 2006 compared 216 million year ended december 31 2005 due factors discussed interest expense net interest expense net increased 24 million 380 30 million year ended december 31 2006 compared 6 million year ended december 31 2005 increase primarily due use majority investment balances acquire stewart stevenson thus reducing related interest income adding additional borrowings new credit facility acquisition addition 2006 wrote 5 million previously capitalized loan costs 2 convertible notes three months ended march 31 2006 average closing prices common stock last ten trading days quarter exceeded conversion price 5401 effectively accelerating first put date first quarter 2006 income net income net increased 1 million 25 5 million year ended december 31 2006 compared 4 million year ended december 31 2005 income net year ended december 31 2006 relates primarily gain sale land legal settlement expiration unexercised 1 million previously announced put option contracts company stock dividends received equity based securities income net year ended december 31 2005 relates primarily increase fair market value previously announced put option contracts net nonoperating asset writeoff income provision income taxes income provision income taxes increased 1 million 04 214 million year ended december 31 2006 compared 213 million year ended december 31 2005 due factors discussed provision income taxes provision income taxes 80 million year ended december 31 2006 compared 81 million year ended december 31 2005 effective tax rate 372 year ended december 31 2006 compared 379 year ended december 31 2005 decreased tax rate relates primarily benefit associated reduction capital loss carryforward valuation allowance related gain sale land reversal previously nondeductible accrual increase us manufacturing tax deduction net income net income increased 2 million 2 135 million year ended december 31 2006 compared 133 million year ended december 31 2005 due factors discussed fiscal 2005 compared fiscal continuing operations total revenues total revenues increased 657 million 67 1637 million fiscal 2005 compared 980 million fiscal 2004 fiscal 2005 total revenue increased 527 million 54 internally including yearoveryear changes acquired businesses 131 million 13 due acquisitions internal revenue growth decline represents periodoverperiod increases decreases acquired companies’ current year revenues since date acquisition anniversary date year subsequent acquisition versus comparable prior year period businesses either owned acquired us periods presented calculation internal revenue growth takes consideration proforma revenue relevant periods acquired entities determining periodoverperiod growth aerospace defense group revenues aerospace defense group revenues increased 587 million 94 1213 million fiscal 2005 compared 626 million fiscal 2004 fiscal 2005 aerospace defense group revenue increased 518 million 83 internally including yearoveryear changes acquired businesses 69 million 11 acquisition specialty defense november 2004 otv business second chance acquired july 2005 calculation acquired growth amount current year revenue equal prior year revenue acquisition acquired company internal growth primarily due following factors 1 experienced strong demand uparmored hmmwv including spare part revenues shipped 6684 m1114 uparmored hmmwvs fiscal 2005 compared 3945 fiscal 2004 69 increase 2 fiscal 2005 revenue addon armor components fielded vehicles including addon armor kits light medium heavy truck fleet operating iraq increased 12 compared fiscal 2004 3 sapi plate volume decreased 25 fiscal 2005 compared fiscal 2004 reduction volume result change requirements us military resultant need modify product design make adjustments supply base production deliveries slowed predominantly result inability industrial base meet delivery requirements new enhanced specifications 4 otv units increased 65 fiscal 2005 fiscal 2004 experienced 210 unit growth helmets also molle revenue increased 19 products group revenues products group revenues increased 56 million 24 284 million fiscal 2005 compared 229 million fiscal 2004 fiscal 2005 products group revenue decreased 6 million 3 internally including periodoverperiod changes acquired businesses increased 62 million 27 acquisitions bianchi international completed fourth quarter 2004 kleen bore inc completed third quarter 2004 law enforcement business second chance acquired july 2005 internal growth negative due decline sales ballistic reinforced enclosures nuclear power industry large onetime nonrecurring sales ballistic plates 2004 decline less lethal business attributable nonrecurring large government orders excluding acquisition second chance purchased bankruptcy experienced legal financial troubles products group internal revenue growth 03 also growth body armor slowed domestically due 1 industry concerns regarding zylon® nij’s decertification zylon® containing body armor 2 impact shortages supply ballistic material mobile security revenues mobile security division revenues increased 15 million 12 140 million fiscal 2005 compared 125 million fiscal 2004 primarily due increasing threat terrorism commercial vehicle shipments increased 17 1644 vehicles fiscal 2005 compared 1402 vehicles fiscal 2004 mobile security division’s revenue growth internal gross margins increased 123 million 46 388 million fiscal 2005 compared 265 million fiscal 2004 percentage total revenues gross margin decreased 237 total revenues fiscal 2005 271 fiscal 2004 gross margins aerospace defense group 207 fiscal 2005 compared 254 fiscal 2004 primarily due 1 lower selling prices m1114 uparmored hmmwvs effective mid2004 2 increased mix lower margin armor kits 3 temporary decline gross margins sapi plates due incremental costs incurred design manufacture delivery updated plates gross margins products group 370 fiscal 2005 compared 352 fiscal 2004 improvement gross margins primarily related product mix shift production lower cost manufacturing facilities additional inventory provisions 2004 gross margins mobile security division 227 fiscal 2005 compared 209 fiscal 2004 improvement result improved product mix manufacturing efficiencies cost vest exchange programwarranty revision result voluntary zylon® vest exchange program relating zylon®vests recorded pretax charge 20 million fiscal 2005 charge includes estimated exchange program costs inventory writeoffs december 31 2005 incurred 3 million remaining liability 19 million includes 1 million remaining superseded 2004 warranty revision product exchange program liability classified accrued expenses current liabilities consolidated balance sheet december 31 2005 result fiscal 2004 warranty revision product exchange program relating zylon®containing vests recorded net pretax charge 5 million includes legal costs associated class action lawsuits settled 2004 warranty revision product exchange program superseded vest exchange program selling general administrative expenses selling general administrative expenses increased 33 million 31 139 million 85 total revenues fiscal 2005 compared 107 million 109 total revenues fiscal 2004 decrease percentage revenues largely function ability achieve scale revenues increased fourth quarter 2004 acquisition specialty defense operates lower selling general administrative expenses percentage revenues products group mobile security division aerospace defense group selling general administrative expenses increased 13 million 53 37 million 30 aerospace defense group revenues fiscal 2005 compared 24 million 38 aerospace defense group revenues fiscal 2004 increase selling general administrative expenses due primarily additional expenses associated result acquisition specialty defense november 2004 increased research development expense increase administrative expenses result increased production m1114 uparmored hmmwv m115152 kits supplemental armor military vehicles decrease selling general administrative expenses percentage revenue due leveraging expenses larger revenue base products group selling general administrative expenses increased 13 million 30 57 million 202 products group revenues fiscal 2005 compared 44 million 193 products group revenues fiscal 2004 increase primarily due impact acquisitions amounted 11 million increase well increased marketing advertising expenses management severance expenses mobile security division selling general administrative expenses increased 2 million 10 16 million 117 mobile security division revenues fiscal 2005 compared 15 million 119 mobile security division revenues fiscal 2004 increase expense primarily due increased research development costs increased selling marketing costs roll centigontm brand name negative impact weaker us dollar converting foreign based expenses us dollars increase expenses percentage revenues due nonrecurring nature rollout costs centigontm brand name additional research development costs corporate general administrative expenses increased 5 million 21 29 million 18 total revenues fiscal 2005 compared 24 million 24 total revenues fiscal 2004 increase administrative expenses associated overall growth company including increased travel expenses bonus expense pension expense accounting fees legal fees hiring costs acceleration performancebased long term restricted stock awards granted certain executives 2002 insurance expenses amortization expense increased 4 million 103 9 million fiscal 2005 compared 4 million fiscal 2004 primarily due amortization certain intangible assets acquired part acquisitions second chance july 2005 bianchi december 2004 specialty defense november 2004 integration expense increased 1 million 43 4 million fiscal 2005 compared 3 million fiscal 2004 integration expense fiscal 2005 primarily included charges integration second chance acquired july 2005 specialty defense bianchi acquired fourth quarter 2004 integration expense fiscal 2004 primarily included charges integration related acquisitions simula hatch imports acquired fourth quarter 2003 charges fiscal 2005 1 million charges fiscal 2004 1 million charges fiscal 2004 included impairment charge 1 million reduce carrying value remaining portion nti estimated fair value operating income operating income increased 70 million 48 216 million fiscal 2005 compared 146 million fiscal 2004 due factors discussed interest expense net interest expense net decreased 495000 7 6 million fiscal 2005 compared 7 million fiscal 2004 decrease primarily due increase interest income generated increase investment yield higher interest rates increase investment balances primarily resulting 2 convertible notes offering fourth quarter 2004 positive operating cash flow increase partially offset increase interest expense result issuance 2 convertible notes increase sixmonth libor september 2 2003 entered interest rate swap agreements effectively exchanged 825 fixed rate 825 notes variable rate sixmonth libor 47 december 31 2005 28 december 31 2004 set arrears plus spread 2735 275 income expense net income net 4 million fiscal 2005 relates primarily expiration unexercised put option contracts common stock previously sold us well increase fair market value 1 million new put option contracts common stock entered expired unexercised february 2006 6 million income related sale put options common stock fiscal 2005 5 million related expiration 25 million unexercised put options income partially offset noncash asset impairment loss disposal fixed assets losses related foreign currency transactions expense net 2 million fiscal 2004 relates primarily noncash asset impairment loss disposal fixed assets losses related foreign currency fluctuations income provision income taxes income provision income taxes increased 76 million 56 213 million fiscal 2005 compared 137 million fiscal 2004 due reasons discussed provision income taxes provision income taxes 81 million fiscal 2005 compared 56 million fiscal 2004 effective tax rate 379 fiscal 2005 compared 412 fiscal 2004 decreased tax rate relates primarily nontaxable fair market gain put options sold company stock fiscal 2005 nontax deductible charge due accelerated vesting performance based longterm restricted stock awards fiscal 2004 net income net income increased 52 million 65 133 million fiscal 2005 compared 81 million fiscal 2004 due factors discussed liquidity capital resources may 25 2006 terminated prior senior secured credit facility entered new senior secured credit facility ‘‘credit facility’’ wachovia bank national association administrative agent bank america na suntrust bank cosyndication agents key bank national association jpmorgan chase bank codocumentation agents lenders party thereto credit facility establishes commitment company provide 825 million aggregate loans financial accommodations consisting five year senior secured revolving credit facility aggregate principal amount 425 million ‘‘revolving facility’’ ii five year senior secured term loan aggregate principal amount 100 million ‘‘term loan’’ iii thirty day senior secured interim term loan aggregate principal amount 300 million ‘‘interim term loan’’ revolving facility term loan interim term loan make ‘‘senior secured facilities’’ revolving facility includes sublimit aggregate amount 75 million letters credit sublimit aggregate 20 million swing line loans december 31 2006 253 million availability credit facility excluding 23 million outstanding letters credit borrowings credit facility bear interest either rate equal libor plus applicable margin ranging 0875 15 depending certain conditions ii alternate base rate higher federal funds rate plus 050 b wachovia prime rate plus additional margin ranging 00 025 depending certain conditions december 31 2006 interest rate borrowings credit facility 662 credit facility guaranteed certain direct indirect domestic subsidiaries secured among things pledge issued outstanding shares stock equity interests certain direct indirect domestic subsidiaries ii 65 issued outstanding shares voting stock voting equity interests certain armor’s direct indirect foreign subsidiaries iii 100 issued outstanding shares nonvoting stock nonvoting equity interests certain direct indirect foreign subsidiaries pursuant pledge agreement delivered connection credit facility ‘‘pledge agreement’’ b first priority perfected security interest certain domestic assets certain domestic assets certain direct indirect domestic subsidiaries pursuant security agreement delivered connection credit facility ‘‘security agreement’’ made customary representations warranties covenants credit agreement pledge agreement security agreement credit facility subject customary rights lenders administrative agent upon occurrence continuance event default including certain circumstances right accelerate payment loans made credit facility right charge default rate interest amounts outstanding credit facility march 2002 board directors approved stock repurchase program authorizing repurchase maximum 32 million shares common stock february 2003 board directors increased stock repurchase program authorize repurchase time depending upon market conditions factors additional 44 million shares march 25 2005 board directors increased existing stock repurchase program enable us repurchase time depending upon market conditions factors additional 35 million shares outstanding common stock february 22 2007 repurchased 38 million shares common stock repurchase program average price 1249 per share leaving us ability repurchase additional 73 million shares common stock repurchase shares fiscal 2006 fiscal 2005 repurchases may made open market privately negotiated transactions utilizing various hedging mechanisms including among others sale third parties put options common stock otherwise december 31 2006 355 million shares common stock outstanding fiscal 2005 sold put options various private transactions covering 35 million shares company stock 7 million premiums fiscal 2005 put options covering 25 million shares company stock expired unexercised leaving outstanding put options covering 1 million shares outstanding 28 outstanding shares december 31 2005 weighted average strike price 4000 per share february 2006 remaining outstanding put options covering 1 million shares expired unexercised accordingly recognized 710000 income net fiscal 2006 fiscal 2005 recognized fair value gains 6 million recorded income net 5 million recognized 25 million previously expired unexercised put options fair values put options company stock obtained counterparties represent estimated amount would received paid terminate put options taking account consideration received sale put options outstanding put options company stock remaining december 31 2006 expect continue policy repurchasing common stock time subject restrictions contained credit facility indenture governing 825 notes indenture governing 2 convertible notes applicable law credit facility permits us repurchase shares common stock limitation pro forma basis term defined credit facility giving effect repurchase total leverage ratio term defined credit facility 425 10 ii senior leverage ratio term defined credit facility 300 10 iii default event default exists would exist credit facility giving effect repurchase december 31 2006 ratios 282 111 respectively existing indentures governing 825 notes 2 convertible notes also permit us repurchase shares common stock subject certain limitations long satisfy conditions repurchase contained therein june 22 2005 implemented 2005 stock incentive plan 2005 stock incentive plan authorizes issuance 2500000 shares common stock shares common stock granted restricted stock performance stock stockbased awards counted shares authorized one eighttenths 18 shares every one share issued connection award 2005 stock incentive plan authorizes granting stock options restricted stock performance awards stockbased awards employees officers directors consultants independent contractors advisors company subsidiaries upon adoption 2005 stock incentive plan agreed grant awards preexisting stock incentive plans june 22 2004 stockholders approved amendment certificate incorporation amended increased number shares authorized capital stock 80000000 75000000 shares designated common stock 5000000 shares designated preferred stock october 29 2004 completed placement 2 convertible notes due november 2024 november 5 2004 goldman sachs co exercised option purchase additional 45 million principal amount 2 convertible notes 2 convertible notes provide holders seven year put option guaranteed domestic subsidiaries senior subordinated basis 2 convertible notes initially rated b1b moody’s investors’ service standard poor’s rating services respectively 2 convertible notes provide interest rate 200 per year payable november 1 may 1 year beginning may 1 2005 ending november 1 2011 2 convertible notes provide accretion principal amount beginning november 1 2011 rate provides holders aggregate annual yield maturity 200 defined agreement 2 convertible notes provide interest sixmonth period beginning november 1 2011 15 basis points paid cash average trading price notes certain levels 2 convertible notes convertible bond holder’s option time initially conversion rate 185151 shares common stock per 1000 principal amount notes equivalent conversion price approximately 5401 per share subject adjustment upon conversion obligated satisfy conversion obligation respect accreted principal amount notes converted cash remaining amount satisfied shares common stock conversion rate subject adjustment without duplication upon occurrence following events 1 stock dividends common stock 2 issuance rights warrants 3 stock splits combinations 4 distribution indebtedness securities assets 5 cash distributions 6 tender exchange offers 7 repurchases common stock accordance us gaap 2 convertible notes classified short term debt converted time prior maturity august 12 2003 completed private placement 150 million aggregate principal amount 825 notes 825 notes guaranteed domestic subsidiaries senior subordinated basis 825 notes sold qualified institutional investors reliance rule 144a securities act 1933 amended nonus persons reliance regulation securities act 1933 amended 2004 completion private placement 825 notes conducted exchange offer pursuant holders privately placed 825 notes exchanged notes 825 notes registered securities act 1933 amended 825 notes initially rated b1b moody’s investors’ service standard poor’s rating services respectively march 29 2004 completed registered exchange offer 825 notes exchanged 825 notes new 825 notes registered securities act 1933 amended september 2 2003 entered interest rate swap agreements designated fair value hedges defined sfas 133 notional amount totaling 150 million agreements entered exchange fixed interest rate 825 notes variable interest rate equal sixmonth libor set arrears plus spread ranging 2735 275 fixed semiannually fifteenth day february august agreements subject terms conditions common transactions type accordance sfas 133 changes fair value interest rate swap agreements offset changes fair value fixed rate debt due changes market interest rate december 31 2005 1 million asset included assets result change fair value 283000 hedge asset december 31 2006 agreements deemed perfectly effective fair value hedge therefore qualify shortcut method accounting sfas 133 result ineffectiveness expected recognized earnings associated interest rate swap agreements december 31 2006 compliance negative affirmative covenants contained credit facility indentures governing 825 notes 2 convertible notes working capital 95 million 387 million december 31 2006 2005 respectively decrease working capital function reduction cash purchase stewart stevenson increase accrued liabilities unearned revenue stewart stevenson addition shortterm classification 344 million convertible notes due november 1 2024 accordance us gaap reduces working capital year ends net cash provided operating activities 139 million fiscal 2006 compared 135 million fiscal 2005 net cash provided operating activities increased result reduction uses working capital net cash used investing activities 825 million fiscal 2006 compared 102 million fiscal 2005 increase primarily due acquisition stewart stevenson increased capital expenditures support revenue growth aerospace defense group net cash provided financing activities 254 million fiscal 2006 compared 19 million fiscal 2005 increase primarily due increased borrowings new senior credit facility capital expenditures fiscal 2006 34 million expenditures included additional manufacturing office space manufacturing machinery equipment leasehold improvements information technology communications infrastructure equipment fiscal 2007 capital expenditures expected approximately 100 120 million anticipate cash hand cash generated operations available borrowings credit facility enable us meet liquidity working capital expenditure requirements next 12 months may however require additional financing pursue strategy growth acquisitions continuously exploring alternatives financing required assurances available obtained terms favorable us basis dilutive stockholders recently issued accounting standards june 2006 fasb issued financial accounting standards board interpretation 48 ‘‘accounting uncertainty income taxes’’ ‘‘ fin 48’’ interpretation fasb statement financial accounting standards 109 ‘‘accounting income taxes’’‘‘sfas 109’’ fin 48 clarifies accounting uncertainty income taxes recognized enterprise’s financial statements accordance sfas 109 interpretation prescribes recognition threshold measurement attribute financial statement recognition measurement tax provision taken expected taken tax return also interpretation provides guidance derecognition classification interest penalties accounting interim periods disclosure transition accounting provisions fin 48 effective company beginning january 1 2007 company currently evaluating effect fin 48 company’s consolidated financial statements september 2006 fasb issued statement financial accounting standards ‘‘sfas’’ 157 ‘‘fair value measurements’’ sfas 157 defines fair value establishes framework measuring fair value generally accepted accounting principles expands disclosures fair value measurements sfas 157 effective fiscal years beginning november 15 2007 interim periods within fiscal years company currently evaluating effect adoption sfas 157 financial position results operations recently adopted standards september 2006 fasb issued sfas 158 ‘‘employers’ accounting defined benefit pension postretirement plans’’ statement effective december 2006 requires employer recognize funded status defined benefit post retirement plan multiemployer plan asset liability statement financial position recognize changes funded status year changes occur comprehensive income statement results changes balance sheet recognition defined benefit plans change measurement plan assets obligations measurement benefit expense statement income accordance statement prior period consolidated financial statements restated see note 19 consolidated financial statements comparison assets liabilities related defined benefit plans company’s 2006 consolidated balance sheet compared recognition 2005 consolidated balance sheet prior rules statement end 2008 must change current october measurement date valuation plan assets projected benefit obligations december fiscal yearend date one noncontributory defined benefit pension plan inflation believe relatively moderate rates inflation recent years significant impact revenue profitability historically able offset inflationary effects either increasing prices improving cost efficiencies balance sheet arrangements september 24 2004 entered offbalance sheet leasing arrangement aircraft company use upon expiration lease september 24 2009 subsidiary company option renew lease fair market value subject approval lessor buy aircraft approximately 10 million return aircraft lessor guarantee pay shortfall sales proceeds third party amount exceed 8 million annual rental expense related agreement approximately 1 million excluding leasing arrangement balance sheet arrangements tabular disclosure contractual obligations following table presents contractual obligations december 31 2006 1 excludes 342 million convertible debt outstanding december 31 2006 see note 9 consolidated financial statements item 7aitem 7 managements discussion analysis financial condition results operations analysis companys results operations viewed conjunction accompanying financial statements including notes thereto contained item 8 annual report form 10k report contains forwardlooking statements within meaning section 27a securities act section 21e exchange act statements predictive nature depend upon refer future events conditions include words expects anticipates intends plans believes estimates could similar expressions forward looking statements although believe statements based upon reasonable assumptions give assurance goals achieved see forward looking statements actual results may differ expressed implied forwardlooking statements respect forwardlooking statements contained report company believes subject number risk factors including inherent unpredictability currency fluctuations competitive actions including pricing ability realize cost reductions operating efficiencies including ability implement headcount reduction programs timely manner unduly disrupt business operations ability identify realize costreduction opportunities general economic business conditions forwardlooking statements report evaluated light important risk factors company overview leading global provider security risk management services products multinational corporations governmental agencies law enforcement personnel two operating divisions armorgroup services armor holdings products armorgroup services division provides sophisticated security planning risk management electronic security systems integration consulting training services well intellectual property asset protection business intelligence investigative services provide services multinational corporations governmental nongovernmental agencies 22 offices 18 countries armor holdings products division manufactures sells broad range high quality branded law enforcement equipment leading market position several product categories compete products include ballistic resistant vests tactical armor lessthanlethal munitions antiriot products narcotics identification kits products sold primarily law enforcement agencies worldwide network 500 distributors sales agents including approximately 350 united states believe significant opportunities exist grow company extend global infrastructure geographic expansion strategic acquisitions related businesses fragmented security risk management services products industry acquisitions pursued strategy growth acquisition businesses assets complement existing operations use several criteria evaluate prospective acquisitions including whether business acquired broadens scope services products offer geographic areas serve offers attractive margins accretive earnings offers opportunity enhance profitability improving efficiency operations results operations following table sets forth selected data statement operations us percentage total revenues periods indicated fiscal year 1997 1998 1999 revenue services 62 53 38 products 38 47 62 total revenues 100 interest income expense net 0 1 0 operating income 7 14 provision income taxes 3 5 net income applicable common stockholders 4 9 8 ebitda 10 16 15 fiscal 1999 compared fiscal 1998 service revenues service revenues increased 84 million 163 600 million fiscal 1999 compared 516 million fiscal 1998 increase primarily due acquisitions integration asmara cdr aps acquired 1998 alarm systems holding company fire alarm service corporation acquired 1999 acquisitions accounted purchases results operations recorded period company owned product revenues product revenues increased 511 million 1119 967 million fiscal 1999 compared 456 million fiscal 1998 increase primarily due acquisition protech fed labs 1998 safariland ltd inc 1999 well strong internal growth acquisitions accounted purchases results operations recorded period company owned cost sales cost sales increased 328 million 532 944 million fiscal 1999 compared 616 million fiscal 1998 increase primarily due increased revenues fiscal 1999 compared fiscal 1998 percentage total revenues cost sales decreased 602 fiscal 1999 634 fiscal 1998 reflecting greater proportion total revenue generated armor holdings products division fiscal 1999 higher gross margins armorgroup services division divisions improved gross margins 1999 lowering costs greater efficiencies concentrating higher margin investigative business services division operating expenses operating expenses increased 151 million 689 370 million 236 total revenues fiscal 1999 compared 219 million 225 total revenues fiscal 1998 increase primarily due increased revenues armor holdings products division higher sales marketing expenses revenues armorgroup services division acquisitions safariland parvus ash fas completed 1999 amortization expense increased 11 million 814 24 million fiscal 1999 compared 13 million fiscal 1998 increase primarily due additional amortization intangible assets acquired result safariland parvus ash fas acquisitions fiscal 1999 would reflected fiscal 1998 equity earnings investees equity earnings investees decreased 534000 749 179000 fiscal 1999 compared 713000 fiscal 1998 decrease primarily due losses incurred jardine securicor gurkha services limited jsgs hong kong joint venture company india office subsequently closed merger integration nonrecurring charges merger integration nonrecurring charges increased 26 million 26 million 1999 related integration acquired companies costs include relocation expenses equipment employees severance costs well charges integrating sales marketing efforts company incur charges 1998 interest expense interest expense 17000 fiscal 1999 compared interest income 653000 fiscal 1998 increase primarily due amortization fees associated 60 million bank credit facility completed february 1999 well interest debt acquired part purchased companies operating income operating income increased 67 million 491 204 million fiscal 1999 compared 136 million fiscal 1998 primarily due factors discussed income nonoperating income increased 788000 28143 816000 fiscal 1999 compared 28000 fiscal 1998 primarily due gain sale stock mace security international acquired warrants received part acquisition certain assets law enforcement divisions mace security international july 1998 income taxes provision income taxes increased 29 million 576 fiscal 1999 80 million compared 51 million fiscal 1998 provision based companys us federal state statutory income tax rates approximately 39 usbased companies 37 blended effective tax rate foreign operations effective tax rate companys foreign operations necessarily indicative continued tax rates due continually changing concentration income country company operates increase companys effective tax rate result increased amortization goodwill generated safariland parvus ash fas acquisitions tax deductible net income net income increased approximately 46 million 535 132 million fiscal 1999 compared 86 million fiscal 1998 increase primarily due combination acquisitions made year successfully integrated factors discussed fiscal 1998 compared fiscal 1997 service revenues service revenues increased 31 million 64 516 million fiscal 1998 compared 484 million fiscal 1997 increase primarily due award new contracts armorgroup services division integration acquisitions completed 1998 increase partially offset reduction 120 million revenue associated termination angolan operation early 1998 product revenues product revenues increased 158 million 528 456 million fiscal 1998 compared 299 million fiscal 1997 increase primarily due internal growth approximately 25 fiscal 1997 acquired companies owned us one year increase resulting integration acquisitions completed 1998 cost sales cost sales increased 42 million 73 616 million fiscal 1998 compared 574 million fiscal 1997 increase primarily due increased revenues fiscal 1998 compared fiscal 1997 percentage total revenues cost sales decreased 634 fiscal 1998 733 fiscal 1997 reflecting greater proportion total revenue generated armor holdings products division fiscal 1998 higher gross margins armorgroup services division operating expenses operating expenses increased 94 million 757 219 million 225 total revenues fiscal 1998 compared 125 million 159 total revenues fiscal 1997 increase primarily due increased revenues armor holdings products division higher sales marketing expenses revenues armorgroup services division amortization expense increased 220000 195 13 million fiscal 1998 compared 11 million fiscal 1997 increase primarily due additional amortization intangible assets acquired fiscal 1998 would reflected fiscal 1997 merger integration nonrecurring charges fees expenses associated acquisition dsl component armorgroup services division accounted pooling interests nonrecurring expenses relating financial administrative restructuring integration dsl armorgroup services division totaled approximately 25 million fiscal 1997 nonrecurring expenses incurred fiscal 1998 equity earnings investees equity earnings investees decreased 33000 44 713000 fiscal 1998 compared 746000 fiscal 1997 equity earnings investees fiscal 1998 comprised 20 investment jardine securicor gurkha services limited jsgs hong kong joint venture company equity earnings investees fiscal 1997 related investment jsgs well dsls original 50 investment gorandel trading limited june 9 1997 100 investment consolidated results operations interest income expense net interest income 625000 fiscal 1998 compared interest expense 195000 fiscal 1997 increase primarily due interest income earned proceeds 1997 public offering repayment balance approximately 186 million outstanding credit facility time offering completed operating income operating income increased 84 million 1582 136 million fiscal 1998 compared 53 million fiscal 1997 primarily due factors discussed income nonoperating income decreased 364000 929 28000 fiscal 1998 compared 392000 fiscal 1997 decrease primarily due fees paid us former employee fiscal 1997 connection role agent sale common stock income taxes income taxes increased 27 million 1137 fiscal 1998 compared 24 million fiscal 1997 based provision 37 provision comprised us federal state statutory rates approximately 36 usbased companies 38 blended effective tax rate foreign operations dividends preference shares connection acquisition dsl unit armorgroup services division incurred 143000 preference share dividends fiscal 1997 acquired shares underlying dividends april 16 1997 therefore incur dividends shares fiscal 1998 net income applicable common stockholders net income applicable common stockholders increased approximately 54 million 1722 86 million fiscal 1998 compared 32 million fiscal 1997 increase primarily due factors discussed quarterly results set forth certain unaudited quarterly financial data last eight quarters data expressed percentage revenue respective quarters information derived unaudited financial statements opinion management include adjustments consisting normal recurring adjustments necessary fairly present quarterly information accordance generally accepted accounting principles operating results quarter necessarily indicative results expected future period liquidity capital resources historically funded operations cash flow operations debt equity financing including may 1999 public offering 635 million common stock february 12 1999 entered credit agreement among company borrower cibc inc cibc nationsbank na nationsbank first union national bank first union suntrust bank north florida na suntrust lenders nationsbank documentation agent canadian imperial bank commerce administrative agent credit agreement february 25 2000 amended credit agreement pursuant credit agreement amended several lenders established fiveyear 100000000 line credit facility benefit indebtedness credit facility evidenced five year revolving credit notes 100000000 borrowings credit facility bear interest either base rate plus applicable margin ranging 000 375 depending certain conditions ii eurodollar rate plus applicable margin ranging 1125 1875 depending certain conditions addition credit facility provides nationsbank make swingline loans 5000000 available company used company working capital purposes cibc inc nationsbank na also issue letters credit 10000000 company march 14 2000 2200000 outstanding 97800000 available credit facility part credit facility direct indirect domestic subsidiaries nik public safety inc nik armor holdings properties inc properties defense technology corporation america dtc low voltage systems technology inc lst federal laboratories inc fli american body armor equipment inc abae protech armored products massachusetts inc protech together nik properties dtc lst fli abae safariland ltd inc sl parvus company pc collectively direct domestic subsidiaries us defense systems inc usds cdr international inc cdr safariland government sales inc slgc parvus international information company piic parvus crisis management corporation pcmc together direct domestic subsidiaries usds collectively domestic subsidiaries agreed guarantee obligations credit facility pursuant subsidiaries guarantee credit facility secured pledge us issued outstanding shares stock direct domestic subsidiaries pursuant borrower pledge agreement ii pledge us 65 issued outstanding shares foreign subsidiary armor holdings limited organized laws england wales pursuant security deed connection closing credit facility fully paid existing credit facility barnett bank na obtained release collateral security interests barnett bank na held connection facility december 31 1998 working capital 244 million december 31 1999 working capital 523 million reflects proceeds public offering may 1999 anticipate cash generated operations borrowings credit facility enable us meet liquidity working capital expenditure requirements next 12 months however may require additional financing pursue strategy growth acquisitions financing required assurances available obtained terms favorable us basis dilutive stockholders companys spending fiscal 1999 capital expenditures 45 million expenditures include among things leasehold improvements computer equipment software manufacturing machinery equipment new accounting pronouncements beginning first quarter 1999 adopted statement position 985 reporting costs startup activities adoption statement materially impact consolidated results financial condition longterm liquidity june 1997 financial accounting standards board issued statement financial accounts standards 130 reporting comprehensive income sfas 130 comprehensive income includes net income several items current accounting standards require recognized outside net income standard requires enterprises display comprehensive income components financial statements classify items comprehensive income nature financial statements display accumulated balances comprehensive income stockholders equity separately retained earnings additional paidin capital sfas 130 effective fiscal years beginning december 31 1997 adopted standard fiscal year beginning december 28 1997 december 1999 staff securities exchange commission sec issued staff accounting bulletin sab 101 revenue recognition financial statements sab 101 summarizes sec staffs view applying generally accepted accounting principles recognition revenues company evaluated impact reporting requirements sab 101 determined material impact consolidated results operations financial position cash flows inflation believe relatively moderate rates inflation recent years significant impact revenue profitability historically able offset inflationary effects either increasing prices improving cost efficiencies year 2000 activities described form 10q quarter ended september 30 1999 developed plans address potential exposures systems related year 2000 since entering year 2000 experienced significant disruptions business aware significant year 2000 related disruptions impacting customers suppliers continue monitor systems operations reasonably assured significant business interruptions occur result year 2000 issues spent total approximately 50000 year 2000 project significant additional expenses expected 2000 forward looking statements believe important communicate expectations investors accordingly report contains discussion events results yet occurred realized identify type discussion often termed forwardlooking statements words phrases expects anticipates intends plans believes estimates could execution acquisition strategies expansion product lines increase distribution networks product sales among others whose future success may difficult predict read forwardlooking statements carefully discuss future expectations contain projections future results operations financial position state expectations future performance actions current potential new competitors changes technology seasonality business cycles new regulatory requirements factors impact greatly upon strategies expectations outside direct control may events future able accurately predict control cautionary language report provide examples risks uncertainties events may cause actual results differ expectations express forwardlooking statements invest common stock aware occurrence certain events described report could adversely affect business results operations financial position item 7a nanitem 7a quantitative qualitative disclosures market risk company result global operating financial activities exposed changes raw material prices interest rates foreign currency exchange rates may adversely affect results operations financial position seeking minimize risks andor costs associated activities company manages exposures changes raw material prices interest rates foreign currency exchange rates regular operating financing activities company utilize financial instruments trading speculative purposes utilize leveraged financial instruments company exposed interest rate risk primarily investments shortterm investments company currently short longterm borrowings outstanding inherent rollover risk marketable securities mature renewed current market rates extent risk quantifiable predictable variability future interest rates business financing requirements however risk loss principal risk related potential reduction future interest income derivative instruments presently used adjust companys interest rate risk profile majority companys business denominated us dollars costs related london headquarters denominated british currency several currencies used company various transactions effect total business minimal company maintains hedge costs paid british currency several customers pay company currency therefore sterling payments made paid sterling bank account thus eliminating foreign currency exchange gains losses risks associated international operations company business numerous countries including emerging markets africa asia south america company invested substantial resources outside united states plans continue future companys international operations subject risk new different legal regulatory requirements local jurisdictions tariffs trade barriers potential difficulties staffing managing local operations potential imposition restrictions investments potentially adverse tax consequences including imposition increase withholding taxes remittances payments subsidiaries local economic political social conditions governments many developing countries exercised continue exercise substantial influence many aspects private sector government actions future could significant adverse effect economic conditions developing country may otherwise material adverse effect company operating companies company political risk insurance countries currently conducts business moreover applicable agreements relating companys interests operating companies frequently governed foreign law result event dispute may difficult company enforce rights accordingly company may little recourse upon occurrence developments item 8item 7a quantitative qualitative disclosures market risk result global operating financial activities exposed changes raw material prices interest rates foreign currency exchange rates may adversely affect results operations financial position seeking minimize risks andor costs associated activities manage exposure changes raw material prices interest rates foreign currency exchange rates regular operating financing activities utilize financial instruments trading speculative purposes utilize leveraged financial instruments derivatives market rate risk following discussion market rate risk involves forwardlooking statements actual results could differ materially projected forwardlooking statements exposed market risk related changes interest rates foreign currency exchange rates equity security price risk use derivative financial instruments speculative trading purposes interest rate risk exposure market rate risk changes interest rates relates primarily borrowings credit agreement shortterm monetary investments borrowings credit agreement variable based upon lenders base rate eurodollar rate assuming current level borrowings hypothetical onepercentage point increase base rate eurodollar rate would increase annual interest expense approximately 330000 market rate risk changes interest rates earned shortterm money market instruments inherent rollover risk shortterm money market instruments mature renewed current market rates extent risk quantifiable predictable variability future interest rates business financing requirements however risk loss principal shortterm money market instruments risk related potential reduction future interest income derivative instruments presently used adjust companys interest rate risk profile use derivative financial instruments hedge interest rate risk foreign currency exchange rate risk majority business denominated us dollars costs associated operations foreign countries require payments local currency partially manage foreign currency risk related payments maintaining operating accounts foreign countries several customers pay us currencies equity security price risk hold small portfolio marketableequity traded securities subject market price volatility equity price fluctuations plus minus 10 would 80000 impact value securities 2000 held securities 1999 risks associated international operations company business numerous countries including emerging markets africa asia south america russia cis company invested substantial resources outside united states plans continue future companys international operations subject risk new different legal regulatory requirements local jurisdictions tariffs trade barriers potential difficulties staffing managing local operations potential imposition restrictions investments potentially adverse tax consequences including imposition increase withholding taxes remittances payments subsidiaries local economic political social conditions governments many developing countries exercised continue exercise substantial influence many aspects private sector government actions future could significant adverse effect economic conditions developing country may otherwise material adverse effect company operating companies company political risk insurance countries currently conducts business periodically analyze need cost associated type policy moreover applicable agreements relating companys interests operating companies frequently governed foreign law result event dispute may difficult company enforce rights accordingly company may little recourse upon occurrence developments item 8item 7a quantitative qualitative disclosures market risk quantitative qualitative disclosures market risk result global operating financial activities exposed changes raw material prices interest rates foreign currency exchange rates may adversely affect results operations financial position seeking minimize risks andor costs associated activities manage exposure changes raw material prices interest rates foreign currency exchange rates regular operating financing activities utilize financial instruments trading speculative purposes utilize leveraged financial instruments derivatives market rate risk following discussion market rate risk involves forwardlooking statements actual results could differ materially projected forwardlooking statements exposed market risk related changes interest rates foreign currency exchange rates equity security price risk use derivative financial instruments speculative trading purposes interest rate risk exposure market rate risk changes interest rates relate primarily borrowings credit facilities shortterm monetary investments december 31 2001 outstanding borrowings credit facility extent time company holds shortterm money market instruments market rate risk changes interest rates instruments extent inherent rollover risk shortterm money market instruments mature renewed current market rates extent risk quantifiable predictable variability future interest rates business financing requirements however risk loss principal shortterm money market instruments risk related potential reduction future interest income derivative instruments presently used adjust interest rate risk profile use derivative financial instruments hedge interest rate risk however future may consider use financial instruments hedge interest rate risk foreign currency exchange rate risk majority business denominated us dollars costs associated operations foreign countries require payments local currency appropriate partially manage foreign currency risk related payments receive payment customers local currencies amounts sufficient meet local currency obligations use derivatives financial instruments hedge foreign currency risk risks associated international operations business numerous countries including emerging markets africa asia south america russia cis invested substantial resources outside united states plan continue future companys international operations subject risk new different legal regulatory requirements local jurisdictions tariffs trade barriers potential difficulties staffing managing local operations potential imposition restrictions investments potentially adverse tax consequences including imposition increase withholding taxes remittances payments subsidiaries local economic political social conditions governments many developing countries exercised continue exercise substantial influence many aspects private sector government actions future could significant adverse effect economic conditions developing country may otherwise material adverse effect us operating companies political risk insurance countries currently conducts business periodically analyze need cost associated type policy moreover applicable agreements relating companys interests operating companies frequently governed foreign law result event dispute may difficult us enforce rights accordingly may little recourse upon occurrence developments item 8item 7a quantitative qualitative disclosures market risk quantitative qualitative disclosures market risk result global operating financial activities exposed changes raw material prices interest rates foreign currency exchange rates may adversely affect results operations financial position seeking minimize risks andor costs associated activities manage exposure changes raw material prices interest rates foreign currency exchange rates regular operating financing activities utilize financial instruments trading speculative purposes utilize leveraged financial instruments derivatives purposes market rate risk following discussion market rate risk involves forwardlooking statements actual results could differ materially projected forwardlooking statements exposed market risk related changes interest rates foreign currency exchange rates equity security price risk use derivative financial instruments hedge risks interest rate risk exposure market rate risk changes interest rates relate primarily borrowings credit facilities shortterm monetary investments extent time hold shortterm money market instruments market rate risk changes interest rates instruments extent inherent rollover risk shortterm money market instruments mature renewed current market rates extent risk quantifiable predictable variability future interest rates business financing requirements however risk loss principal shortterm money market instruments risk related potential reduction future interest income derivative instruments presently used adjust interest rate risk profile use derivative financial instruments hedge interest rate risk however future may consider use financial instruments hedge interest rate risk december 18 2002 sold put option 500000 shares institutional counterparty exercise price 1399 per share expiration date march 31 2003 525000 maximum potential obligation put options purchase 500000 shares common stock exercise price 1399 aggregate 70 million although certain events trigger exercise put options generally excercisable maturity march 31 2003 right settle put options cash settlement physical settlement options net share settlement using shares common stock accordance eitf issue 0019 recorded sale put options equity changes fair value options recognized financial statements may time enter additional put call option arrangements foreign currency exchange rate risk majority business denominated us dollars costs associated operations foreign countries require payments local currency appropriate partially manage foreign currency risk related payments receive payment customers local currencies amounts sufficient meet local currency obligations use derivatives financial instruments hedge foreign currency risk risks associated international operations business operations numerous countries including emerging markets africa asia south america invested substantial resources outside united states plan continue future international operations subject risk new different legal regulatory requirements local jurisdictions tariffs trade barriers potential difficulties staffing managing local operations potential imposition restrictions investments potentially adverse tax consequences including imposition increase withholding taxes remittances payments subsidiaries local economic political social conditions governments many developing countries exercised continue exercise substantial influence many aspects private sector government actions future could significant adverse effect economic conditions developing country may otherwise material adverse effect us operating companies political risk insurance countries currently conducts business periodically analyze need cost associated type policy moreover applicable agreements relating interests operating companies frequently governed foreign law result event dispute may difficult us enforce rights accordingly may little recourse upon occurrence developments item 8item 7a quantitative qualitative disclosures market risk quantitative qualitative disclosures market risk result global operating financial activities exposed changes raw material prices interest rates foreign currency exchange rates may adversely affect results operations financial position seeking minimize risks andor costs associated activities manage exposure changes raw material prices interest rates foreign currency exchange rates regular operating financing activities entered interest rate swap agreements reduce overall interest expense utilize financial instruments trading purposes market rate risk following discussion market rate risk involves forwardlooking statements actual results could differ materially projected forwardlooking statements exposed market risk related changes interest rates foreign currency exchange rates equity security price risk interest rate risk exposure market rate risk changes interest rates relate primarily borrowings 150 million senior subordinated notes credit facilities shortterm monetary investments extent time hold shortterm money market instruments market rate risk changes interest rates instruments extent inherent rollover risk shortterm money market instruments mature renewed current market rates extent risk quantifiable predictable variability future interest rates business financing requirements however risk loss principal shortterm money market instruments risk related potential reduction future interest income september 2 2003 entered interest rate swap agreements effectively exchanged 150 million fixed rate 825 interest rate senior subordinated notes variable rates notional amount 80 million 50 million 20 million sixmonth libor set arrears plus 275 2735 respectively agreement involves receipt fixed rate amounts exchange floating rate interest payments lives agreements without exchange underlying principal amount variable interest rates fixed semiannually fifteenth day february august sixmonth libor rate 117 february 24 2004 maturity dates interest rate swap agreements match underlying debt objective entering interest rate swaps reduce exposure changes fair value senior subordinated notes obtain variable rate financing attractive cost changes sixmonth libor would affect earnings either positively negatively assumed 100 basis point increase sixmonth libor would increase interest obligations interest rate swaps approximately 750000 sixmonth period accordance sfas 133 designated interest rate swap agreements perfectly effective fair value hedges accordingly use shortcut method evaluating effectiveness permitted shortcut method change fair value interest rate swaps reflected earnings equivalent amount reflected change carrying value swaps offset earnings ineffectiveness recorded december 31 2003 recorded fair value interest rate swap agreements 59 million recorded corresponding fair value adjustment 825 senior subordinated notes assets longterm debt sections consolidated balance sheets respectively exposed creditrelated losses event nonperformance counterparties financial instruments however counterparties agreements major financial institutions risk loss due nonperformance considered management minimal hold issue interest rate swap agreements derivative instruments trading purposes foreign currency exchange rate risk majority business denominated us dollars costs associated operations foreign countries require payments local currency appropriate partially manage foreign currency risk related payments receive payment customers local currencies amounts sufficient meet local currency obligations use derivatives financial instruments hedge foreign currency risk risks associated international operations business numerous countries including emerging markets africa asia south america russia former cis invested substantial resources outside united states plan continue future international operations subject risk new different legal regulatory requirements local jurisdictions tariffs trade barriers potential difficulties staffing managing local operations potential imposition restrictions investments potentially adverse tax consequences including imposition increase withholding taxes remittances payments subsidiaries local economic political social conditions governments many developing countries exercised continue exercise substantial influence many aspects private sector government actions future could significant adverse effect economic conditions developing country may otherwise material adverse effect us operating companies political risk insurance countries currently conduct business periodically analyze need cost associated type policy moreover applicable agreements relating interests operating companies frequently governed foreign law result event dispute may difficult us enforce rights accordingly may little recourse upon occurrence developments item 8item 7a quantitative qualitative disclosures market risk quantitative qualitative disclosures market risk result global operating financial activities exposed changes raw material prices interest rates foreign currency exchange rates may adversely affect results operations financial position seeking minimize risks andor costs associated activities manage exposure changes raw material prices interest rates foreign currency exchange rates regular operating financing activities entered interest rate swap agreements reduce overall interest expense utilize financial instruments trading purposes market rate risk following discussion market rate risk involves forwardlooking statements actual results could differ materially projected forwardlooking statements exposed market risk related changes interest rates foreign currency exchange rates equity security price risk interest rate risk exposure market rate risk changes interest rates relate primarily borrowings 825 notes credit facilities shortterm monetary investments extent time hold shortterm money market instruments market rate risk changes interest rates instruments extent inherent rollover risk shortterm money market instruments mature renewed current market rates extent risk quantifiable predictable variability future interest rates business financing requirements however risk loss principal shortterm money market instruments risk related potential reduction future interest income september 2 2003 entered interest rate swap agreements effectively exchanged 150 million fixed rate 825 interest rate senior subordinated notes variable rates notional amount 80 million 50 million 20 million sixmonth libor set arrears plus 275 2735 respectively agreement involves receipt fixed rate amounts exchange floating rate interest payments lives agreements without exchange underlying principal amount variable interest rates fixed semiannually fifteenth day february august sixmonth libor rate 308 february 21 2005 maturity dates interest rate swap agreements match underlying debt objective entering interest rate swaps reduce exposure changes fair value senior subordinated notes obtain variable rate financing attractive cost changes sixmonth libor would affect earnings either positively negatively assumed 100 basis point increase sixmonth libor would increase interest obligations interest rate swaps approximately 750000 sixmonth period accordance sfas 133 designated interest rate swap agreements perfectly effective fair value hedges accordingly use shortcut method evaluating effectiveness permitted shortcut method change fair value interest rate swaps reflected earnings equivalent amount reflected change carrying value swaps offset earnings ineffectiveness recorded december 31 2004 recorded fair value interest rate swap agreements 60 million recorded corresponding fair value adjustment 825 notes assets longterm debt sections consolidated balance sheets respectively exposed creditrelated losses event nonperformance counterparties financial instruments however counterparties agreements major financial institutions risk loss due nonperformance considered management minimal hold issue interest rate swap agreements derivative instruments trading purposes foreign currency exchange rate risk majority business denominated us dollars costs associated operations foreign countries require payments local currency appropriate partially manage foreign currency risk related payments receive payment customers local currencies amounts sufficient meet local currency obligations use derivatives financial instruments hedge foreign currency risk risks associated international operations invested substantial resources outside united states plan continue future armor mobile security division invested substantial resources europe south america operations subject risk new different legal regulatory requirements local jurisdictions tariffs trade barriers potential difficulties staffing managing local operations currency risks potential imposition restrictions investments potentially adverse tax consequences including imposition increase withholding taxes remittances payments subsidiaries local economic political social conditions governments many developing countries exercised continue exercise substantial influence many aspects private sector government actions future could significant adverse effect economic conditions developing country may otherwise material adverse effect us operating companies political risk insurance countries currently conduct business moreover applicable agreements relating interests operating companies frequently governed foreign law result event dispute may difficult us enforce rights accordingly may little recourse upon occurrence developments item 8item 7a quantitative qualitative disclosures market risk quantitative qualitative disclosures market risk result global operating financial activities exposed changes raw material prices interest rates foreign currency exchange rates stock price may adversely affect results operations financial position seeking minimize risks andor costs associated activities manage exposure changes raw material prices interest rates foreign currency exchange rates regular operating financing activities entered interest rate swap agreements reduce overall interest expense market rate risk following discussion market rate risk involves forwardlooking statements actual results could differ materially projected forwardlooking statements exposed market risk related changes interest rates foreign currency exchange rates equity security price risk result sale put option company stock interest rate risk exposure market rate risk changes interest rates relates primarily borrowings 150 million senior subordinated notes credit facilities shortterm monetary investments extent time hold shortterm money market instruments market rate risk changes interest rates instruments extent inherent rollover risk shortterm money market instruments mature renewed current market rates extent risk quantifiable predictable variability future interest rates business financing requirements however remote risk loss principal shortterm money market instruments main risk related potential reduction future interest income september 2 2003 entered interest rate swap agreements effectively exchanged 150 million fixed rate 825 interest senior subordinated notes variable rates notional amount 80 million 50 million 20 million sixmonth libor set arrears plus 275 2735 respectively agreements involve receipt fixed rate amounts exchange floating rate interest payments life agreement without exchange underlying principal amount variable interest rates fixed semiannually fifteenth day february august year maturity sixmonth libor rate 505 march 10 2006 maturity dates interest rate swap agreements match underlying debt objective entering interest rate swaps reduce exposure changes fair value senior subordinated notes obtain variable rate financing attractive cost changes sixmonth libor would affect earnings either positively negatively assumed 100 basis point increase sixmonth libor would increase interest obligations interest rate swaps approximately 15 million twelve month period accordance sfas 133 designated interest rate swap agreements perfectly effective fair value hedges accordingly use shortcut method evaluating effectiveness permitted shortcut method change fair value interest rate swaps reflected earnings equivalent amount reflected change carrying value swaps offset earnings ineffectiveness recorded december 31 2005 recorded fair value interest rate swap agreements 14 million recorded corresponding fair value adjustment 825 notes assets longterm debt sections consolidated balance sheets respectively exposed creditrelated losses event nonperformance counterparties financial instruments however counterparties agreements major financial institutions risk loss due nonperformance considered management minimal hold issue interest rate swap agreements derivative instruments trading purposes foreign currency exchange rate risk majority business denominated us dollars costs associated operations foreign countries require payments local currency appropriate partially manage foreign currency risk related payments receive payment customers local currencies amounts sufficient meet local currency obligations use derivatives financial instruments hedge foreign currency risk marketable security price risk december 31 2005 marketable securities fair value 286 million including unrealized loss 25 million estimated loss fair value resulting hypothetical 10 decrease price would 29 million since securities classified availableforsale adjustments fair value temporary nature reported accumulated comprehensive loss would impact results operations cash flows time securities sold impairment determined temporary nature stock price risk fair values put options company stock obtained counterparties represent estimated amount would receive pay terminate put options taking account consideration received sale put options stock price fluctuates value contracts also fluctuates fiscal 2005 incurred fair value gain 59 million recorded income net 48 million recognized 25 million previously expired unexercised put options february 2006 outstanding put options covering 1 million shares expired unexercised accordingly recorded additional 07 million income first quarter fiscal 2006 risks associated international operations business numerous countries including emerging markets south america invested resources outside united states plan continue future international operations subject risk new different legal regulatory requirements local jurisdictions tariffs trade barriers potential difficulties staffing managing local operations potential imposition restrictions investments potentially adverse tax consequences including imposition increase withholding taxes remittances payments subsidiaries local economic political social conditions governments many developing countries exercised continue exercise substantial influence many aspects private sector government actions future could significant adverse effect economic conditions developing country may otherwise material adverse effect us operating companies political risk insurance countries currently conduct business periodically analyze need cost associated type policy moreover applicable agreements relating interests operating companies frequently governed foreign law result event dispute may difficult us enforce rights accordingly may little recourse upon occurrence developments item 8item 7a quantitative qualitative disclosures market risk quantitative qualitative disclosures market risk result global operating financial activities exposed changes raw material prices interest rates foreign currency exchange rates stock price may adversely affect results operations financial position seeking minimize risks andor costs associated activities manage exposure changes raw material prices interest rates foreign currency exchange rates regular operating financing activities entered interest rate swap agreements reduce overall interest expense market rate risk following discussion market rate risk involves forwardlooking statements actual results could differ materially projected forwardlooking statements information see ‘‘forward looking statements’’ contained part report exposed market risk related changes interest rates foreign currency exchange rates equity security price risk result sale put options company stock interest rate risk exposure market rate risk changes interest rates relates primarily borrowings 150 million senior subordinated notes credit facilities shortterm monetary investments extent time hold shortterm money market instruments market rate risk changes interest rates instruments extent inherent rollover risk shortterm money market instruments mature renewed current market rates extent risk quantifiable predictable variability future interest rates business financing requirements however remote risk loss principal shortterm money market instruments main risk related potential reduction future interest income september 2 2003 entered interest rate swap agreements effectively exchanged 150 million fixed rate 825 interest senior subordinated notes variable rates notional amount 80 million 50 million 20 million sixmonth libor set arrears plus 275 2735 respectively agreements involve receipt fixed rate amounts exchange floating rate interest payments life agreement without exchange underlying principal amount variable interest rates fixed semiannually fifteenth day february august year maturity sixmonth libor rate 538 february 22 2007 maturity dates interest rate swap agreements match underlying debt objective entering interest rate swaps reduce exposure changes fair value senior subordinated notes obtain variable rate financing attractive cost changes sixmonth libor would affect earnings either positively negatively assumed 100 basis point increase sixmonth libor would increase interest obligations interest rate swaps senior credit facility approximately 2 million 3 million respectively twelve month period accordance sfas 133 designated interest rate swap agreements perfectly effective fair value hedges accordingly use shortcut method evaluating effectiveness permitted shortcut method change fair value interest rate swaps reflected earnings equivalent amount reflected change carrying value swaps offset earnings ineffectiveness recorded december 31 2005 1 million hedge asset included assets result change fair value 283000 hedge asset december 31 2006 exposed creditrelated losses event nonperformance counterparties financial instruments however counterparties agreements major financial institutions risk loss due nonperformance considered management minimal hold issue interest rate swap agreements derivative instruments trading purposes foreign currency exchange rate risk majority business denominated us dollars costs associated operations foreign countries require payments local currency appropriate partially manage foreign currency risk related payments receive payment customers local currencies amounts sufficient meet local currency obligations use derivatives financial instruments hedge foreign currency risk risks associated international operations business numerous countries including emerging markets south america invested resources outside united states plan continue future international operations subject risk new different legal regulatory requirements local jurisdictions tariffs trade barriers potential difficulties staffing managing local operations potential imposition restrictions investments potentially adverse tax consequences including imposition increase withholding taxes remittances payments subsidiaries local economic political social conditions governments many developing countries exercised continue exercise substantial influence many aspects private sector government actions future could significant adverse effect economic conditions developing country may otherwise material adverse effect us operating companies political risk insurance countries currently conduct business periodically analyze need cost associated type policy moreover applicable agreements relating interests operating companies frequently governed foreign law result event dispute may difficult us enforce rights accordingly may little recourse upon occurrence developments item 8item 7a quantitative qualitative disclosures market risk company result global operating financial activities exposed changes raw material prices interest rates foreign currency exchange rates may adversely affect results operations financial position seeking minimize risks andor costs associated activities company manages exposures changes raw material prices interest rates foreign currency exchange rates regular operating financing activities company utilize financial instruments leveraged financial instrument trading speculative purposes company exposed interest rate risk primarily investments shortterm investments company currently short longterm borrowings outstanding inherent rollover risk marketable securities mature renewed current market rates extent risk quantifiable predictable variability future interest rates business financing requirements however risk loss principal risk related potential reduction future interest income derivative instruments presently used adjust companys interest rate risk profile majority companys business denominated us dollars costs related london headquarters denominated british currency several currencies used company various transactions effect total business minimal maintaining sterling bank account company able eliminate foreign currency exchange gains losses arising cash paid british currency risks associated international operations company business numerous countries including emerging markets africa asia south america company invested substantial resources outside united states plans continue future companys international operations subject risk new different legal regulatory requirements local jurisdictions tariffs trade barriers potential difficulties staffing managing local operations potential imposition restrictions investments potentially adverse tax consequences including imposition increase withholding taxes remittances payments subsidiaries local economic political social conditions governments many developing countries exercised continue exercise substantial influence many aspects private sector government actions future could significant adverse effect economic conditions developing country may otherwise material adverse effect company operating companies company political risk insurance countries currently conducts business periodically analyze need cost associated type policy moreover applicable agreements relating companys interests operating companies frequently governed foreign law result event dispute may difficult company enforce rights accordingly company may little recourse upon occurrence developments item 8 item 8 financial statements supplementary data response item included item 14 item 9item 8 financial statements supplementary data response item included item 14 item 9item 8 financial statements supplementary data response item incorporated reference consolidated financial statements notes thereto attached hereto beginning page certain selected quarterly financial data set forth item 7 report schedules financial statements may required pursuant applicable accounting regulations commission shown financial statements notes hereto applicable registrant filed within 120 days following close registrants fiscal year item 9item 8 financial statements supplementary data response item incorporated reference consolidated financial statements notes thereto included report beginning page certain selected quarterly financial data included item 7 report item 9item 8 financial statements supplementary data response item incorporated reference consolidated financial statements notes thereto included report beginning page certain selected quarterly financial data included item 7 report item 9item 8 financial statements supplementary data response item incorporated reference consolidated financial statements notes thereto included report beginning page certain selected quarterly financial data included item 7 report item 9item 8 financial statements supplementary data response item incorporated reference consolidated financial statements notes thereto included report beginning page certain selected quarterly financial data included item 7 report managements annual report internal control financial reporting management armor holdings inc together consolidated subsidiaries company responsible establishing maintaining adequate internal control financial reporting companys internal control financial reporting process designed supervision companys principal executive principal financial officers provide reasonable assurance regarding reliability financial reporting preparation firms financial statements external reporting purposes accordance us generally accepted accounting principles end companys 2004 fiscal year management conducted assessment effectiveness companys internal control financial reporting based framework established internal control integrated framework issued committee sponsoring organizations treadway commission coso based assessment management determined companys internal control financial reporting december 31 2004 effective management excluded specialty group inc bianchi international assessment internal control financial reporting december 31 2004 acquired company purchase business combinations 2004 specialty group inc whollyowned subsidiary whose total assets total revenues represent 9 1 respectively related consolidated financial statement amounts year ended december 31 2004 bianchi international whollyowned subsidiary whose total assets total revenues represent 6 0 respectively related consolidated financial statement amounts year ended december 31 2004 internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurances transactions recorded necessary permit preparation financial statements accordance us generally accepted accounting principles receipts expenditures made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition companys assets could material effect financial statements attestation report registered public accounting firm pricewaterhousecoopers llp independent registered certified public accounting firm audited companys consolidated financial statements fiscal year ended december 31 2004 audited assessment effectiveness companys internal control financial reporting december 31 2004 stated report appears page item 9item 8 financial statements supplementary data response item incorporated reference consolidated financial statements notes thereto included report beginning page certain selected quarterly financial data included item 7 report managements annual report internal control financial reporting management armor holdings inc together consolidated subsidiaries company responsible establishing maintaining adequate internal control financial reporting companys internal control financial reporting process designed supervision companys principal executive principal financial officers provide reasonable assurance regarding reliability financial reporting preparation firms financial statements external reporting purposes accordance us gaap end companys 2005 fiscal year management conducted assessment effectiveness companys internal control financial reporting based framework established internal control integrated framework issued committee sponsoring organizations treadway commission coso based assessment management determined companys internal control financial reporting december 31 2005 effective internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurances transactions recorded necessary permit preparation financial statements accordance accounting principles generally accepted united states america receipts expenditures made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition companys assets could material effect financial statements attestation report registered public accounting firm pricewaterhousecoopers llp independent registered certified public accounting firm audited companys consolidated financial statements fiscal year ended december 31 2005 audited assessment effectiveness companys internal control financial reporting december 31 2005 stated report appears page item 9item 8 financial statements supplementary data response item incorporated reference consolidated financial statements notes thereto included report beginning page item 9item 8 financial statements supplementary data response item included item 14 item 9 nannannannanitem 15 exhibits financial statements schedules reports form 8k following financial statements appear sequentially beginning page number included report form 10k financial statement schedules omitted since either required applicable information otherwise included reports independent certified public accountants consolidated balance sheets consolidated income statements consolidated statements stockholders equity comprehensive income consolidated statements cash flows notes consolidated financial statements b reports form 8k reports form 8k filed last quarter period covered report c exhibits following exhibits hereby filed part annual report form 10k exhibit description 21 agreement sale purchase whole issued share capital dsl dated april 16 1997 company ahl natwest ventures nominees limited others martin brayshaw filed exhibit 22 form 8k current report dated april 22 1997 incorporated herein reference 22 stock purchase agreement among armor holdings inc neale perkins trust scott obrien victoria obrien revocable trust david holmes katherine c holmes revocable trust neale perkins david holmes scott obrien safariland ltd inc dated april 121999 filed exhibit 28 amendment 1 registration statement form s3 filed commission april 15 1999 incorporated herein reference 23 stock purchase agreement dated april 20 2001 among armor holdings inc bengal acquisition corp krollogara company ogarahess eisenhardt armoring company ogara company ogara security associates inc filed exhibit 21 current report form 8k dated april 20 2001 incorporated herein reference 24 amendment dated august 20 2001 stock purchase agreement dated april 20 2001 among armor holdings inc bengal acquisition corp krollogara company ogarahess eisenhardt armoring company ogara company ogara security associates inc filed exhibit 22 current report form 8k dated august 21 2001 incorporated herein reference 25 amendment dated august 22 2001 stock purchase agreement dated april 20 2001 among armor holdings inc bengal acquisition corp krollogara company ogarahess eisenhardt armoring company ogara company ogara security associates inc filed exhibit 23 current report form 8k dated august 22 2001 incorporated herein reference 31 certificate incorporation company filed exhibit 31to form 8k current report company dated september 31996 incorporated herein reference 32 certificate merger american body armor equipment inc florida corporation company filed exhibit 32 form 8k current report company dated september 31996 incorporated herein reference 33 bylaws company filed exhibit 33 form 8kcurrent report company dated september 3 1996 incorporated herein reference 34 amendment bylaws company incorporated reference exhibit 332 form 10k annual report fiscal year ended december 31 1998 98 10k 101 borrower pledge agreement dated february 12 1999 made company favor canadian imperial bank commerce administrative agent lenders filed exhibit 510 form 8k current report company filed commission march 10 1999 incorporated herein reference 102 security deed dated february 12 1999 made company favor canadian imperial bank commerce administrative agent lenders filed exhibit 511 form 8k current report company filed commission march 10 1999 incorporated herein reference 103 subsidiaries guarantee dated february 12 1999 made company favor canadian imperial bank commerce administrative agent lenders filed exhibit 512 form 8k current report company dated march 10 1999 incorporated herein reference 104 amended restated credit agreement dated august 22 2001 among bank america na canadian imperial bank commerce first union national bank suntrust bank republic bank keybank national association ing us capital llc filed exhibit 101 current report form 8k dated august 22 2001 incorporated herein reference 105 amended restated revolving credit note dated august 22 2001 principal amount 3000000000 made company favor bank america na filed exhibit 102 current report form 8k dated august 22 2001 incorporated herein reference 106 amended restated revolving credit note dated august 22 2001 principal amount 2500000000 made company favor first union national bank filed exhibit 103 current report form 8k dated august 22 2001 incorporated herein reference 107 amended restated revolving credit note dated august 22 2001 principal amount 20000000 made company favor suntrust bank filed exhibit 104 current report form 8k dated august 22 2001 incorporated herein reference 108 amended restated revolving credit note dated august 22 2001 principal amount 15000000 made company favor keybank national association filed exhibit 105 current report form 8k dated august 22 2001 incorporated herein reference 109 amended restated revolving credit note dated august 22 2001 principal amount 15000000 made company favor republic bank filed exhibit 106 current report form 8k dated august 22 2001 incorporated herein reference 1010 amended restated revolving credit note dated august 22 2001 principal amount 15000000 made company favor ing us capital llc filed exhibit 107 current report form 8k dated august 22 2001 incorporated herein reference 1011 amended restated swing line note dated august 22 2001 principal amount 5000000 made company favor bank america na filed exhibit 108 current report form 8k dated august 22 2001 incorporated herein reference 1012 supplement subsidiaries guarantee dated august 22 2001 made bengal acquisition corp ogarahess eisenhardt armoring company ogara company ogara security associates inc international training inc iti limited partnership armor brands inc armor group integrated systems inc armor holdings gp llc armor holdings lp llc breakfree armor corp global support systems inc lightning powder company inc monadnock lifetime products inc delaware corporation nap property managers llc network audit systems inc new technologies armor inc usds inc breakfree inc casco international inc monadnock lifetime products inc new hampshire corporation monadnock police training council inc nap properties ltd safariland government sales inc favor bank america na administrative agent lendersfiled exhibit 109 current report form 8k dated august 22 2001 incorporated herein reference 1013 borrower pledge agreement supplement dated august 22 2001 made company favor bank america na administrative agent lenders 1011 subsidiaries pledge agreement supplement dated august 22 2001 made bengal acquisition corp ogarahess eisenhardt armoring company ogara security associates inc international training inc breakfree armor corp monadnock lifetime products inc delaware corporation armor holdings lp llc armor holdings gp llc armor holdings properties inc nap property managers llc favor bank america na administrative agent lenders filed exhibit 1010 current report form 8k dated august 22 2001 incorporated herein reference 1014 amendment amended restated credit agreement dated december 9 2002 1015 employment agreement jonathan spiller armor holdings inc dated january 1 2002 incorporated reference exhibit 101 form 10q quarterly report fiscal quarter ended march 31 2002 1016 employment agreement robert r schiller armor holdings inc dated january 1 2002 incorporated reference exhibit 102 form 10q quarterly report fiscal quarter ended march 31 2002 1017 employment agreement stephen e croskrey armor holdings inc dated january 1 2002 incorporated reference exhibit 103 form 10q quarterly report fiscal quarter ended march 31 2002 1018 employment agreement warren b kanders armor holdings inc dated january 1 2002 incorporated reference exhibit 104 form 10q quarterly report fiscal quarter ended march 31 2002 1019 form indemnification agreement directors registrant dated september 21 1993 filed exhibit 104 form 10ksb annual report company fiscal year ended december 31 1993 incorporated herein reference 1020 form indemnification agreement officers registrant dated february 28 1994 filed exhibit 105 form 10ksb annual report company fiscal year ended december 31 1993 incorporated herein reference 1021 american body armor equipment inc 1994 incentive stock plan incorporated reference form s8 filed october 10 1994 reg 33018863 1022 american body armor equipment inc 1994 directors stock plan incorporated reference form s8 filed october 31 1994 reg 33018863 1023 armor holdings inc amended restated 1996 stock option plan incorporated reference companys 1997 definitive proxy statement respect companys 1997 annual meeting stockholders held june 12 1997 filed commission may 27 1997 1024 armor holdings inc amended restated 1996 nonemployee directors stock option plan incorporated reference companys 1997 definitive proxy statement respect companys 1997 annual meeting stockholders held june 12 1997 filed commission may 27 1997 1025 armor holdings inc 1998 stock option plan incorporated reference exhibit 1019 98 10k 1026 armor holdings inc 1999 stock incentive plan incorporated reference appendix companys 1999 definitive proxy statement respect companys 1999 annual meeting stockholders filed commission may 21 1999 1027 armor holdings inc 2002 stock incentive plan incorporated reference appendix 2002 definitive proxy statement respect 2002 annual meeting stockholders filed commission april 30 2002 1028 armor holdings inc 2002 executive stock plan incorporated reference exhibit 106 form 10q quarterly report fiscal quarter ended march 31 2002 1029 consulting agreement kanders company inc armor holdings inc dated january 1 2002 incorporated reference exhibit 105 form 10q quarterly report fiscal quarter ended march 31 2002 1030 amendment 1 armor holdings inc 2002 stock incentive plan 211 subsidiaries registrant 231 consent pricewaterhousecoopers llp 991 certification periodic report section 906 sarbanesoxley act 2002 filed herewith incorporated herein reference exhibit represents management contract exhibit represents compensatory plan index consolidated financial statements armor holdings inc report independent certified public accountants consolidated balance sheets consolidated income statements consolidated statements stockholders equity comprehensive income consolidated statements cash flow notes consolidated financial statements report independent certified public accountants board directors stockholders armor holdings inc opinion accompanying consolidated balance sheets related consolidated statements income stockholders equity comprehensive income cash flows present fairly material respects financial position armor holdings inc subsidiaries december 31 2002 2001 results operations cash flows three years period ended december 31 2002 conformity accounting principles generally accepted united states america financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits statements accordance auditing standards generally accepted united states america require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion discussed note 1 consolidated financial statements effective january 1 2002 company changed method accounting goodwill following adoption statement financial accounting standard 142 goodwill intangible assets pricewaterhousecoopers llp march 30 2003 jacksonville florida armor holdings inc subsidiaries consolidated balance sheets december 31 2002 december 31 2001 thousands except share data accompanying notes integral part consolidated financial statements armor holdings inc subsidiaries consolidated income statements years ended december 31 2002 2001 2000 thousands except per share data accompanying notes integral part consolidated financial statements armor holdings inc subsidiaries consolidated statements stockholders equity comprehensive income years ended december 31 2000 2001 2002 thousands accompanying notes integral part consolidated financial statements armor holdings inc subsidiaries consolidated statements cash flow years ended december 31 2002 2001 2000 thousands accompanying notes integral part consolidated financial statements armor holdings inc subsidiaries notes consolidated financial statements background summary significant accounting policies company nature business armor holdings inc company armor leading manufacturer provider security products vehicle armor systems security risk management services armors products services used military law enforcement security corrections personnel throughout world well governmental agencies multinational corporations nongovernmental organizations company organized operated three business segments armor holdings products armor mobile security armorgroup services armorgroup services classified discontinued operations amounts disclosed footnotes related continuing operations unless otherwise indicated continuing operations armor holdings products armor holdings products division manufactures sells broad range high quality branded law enforcement equipment concealable tactical body armor hard armor duty gear lesslethal munitions antiriot products police batons emergency lighting products forensic products firearms accessories weapon maintenance products marketed brand names wellknown respected military law enforcement communities american body armortm safarilandr bsquaretm breakfreer defense technologyfederal laboratoriestm macer protechtm nikrpublic safety monadnocktm lifetime products identicatortm lightning powderr speedfeedtm 911epr sell manufactured products primarily law enforcement agencies worldwide network 350 distributors sales agents including approximately 200 united states extensive distribution capabilities commitment customer service training enabled us become leading provider security equipment law enforcement agencies armor mobile security armor mobile security division manufactures installs ballistic blast protected armoring systems military vehicles commercial vehicles military aircraft missile components brand name ogarahess eisenhardt solesource provider us military supply armoring blast protection systems high mobility multipurpose wheeled vehicle hmmwv also entered agreement provide systems technical support hmmwvs currently installed base approximately 3500 uparmored hmmwvs provide spare parts maintenance services installed hmmwvs expect maintenance services may increase us military substantially increases hmmwv purchases substantially increases use current installed base additionally armor mobile security division subcontracted develop ballistically armored sealed truck cab high mobility artillery rocket system himars program currently development us army division also markets armor subsystems tactical wheeled vehicles armor variety commercial vehicles including limousines sedans sport utility vehicles commercial trucks cashintransit vehicles protect varying degrees ballistic blast threats discontinued operations services division services division provides broad range sophisticated security risk management solutions multinational corporations diverse industries natural resources financial armor holdings inc subsidiaries notes consolidated financial statements continued services consumer products governmental nongovernmental agencies us departments state defense united nations united states agency international development usaid britains department international development clients typically personnel investments unstable often risky areas world offices five continents provide multinational clients diversified portfolio security solutions assist mitigating risks operations around world highly trained multilingual experienced security personnel work closely clients create implement solutions complex security problems services include security planning advice management security systems integration intellectual property asset protection due diligence investigations training programs counterintelligence countersurveillance advanced driving techniques ballistics believe many security services often representing small portion clients overall cost business critical clients success believe creates consistent demand premium services attractive margins principles consolidation consolidated financial statements include accounts company whollyowned subsidiaries consolidation material intercompany balances transactions eliminated results operations companies acquired transactions accounted purchase method accounting included financial statements date acquisition cash equivalents consider highly liquid investments purchased maturities three months less date purchase cash equivalents concentration credit risk financial instruments potentially subject company concentrations credit risk consist primarily cash equivalents trade accounts receivable company maintains cash equivalents believes various high quality banks amounts held individual banks may periodically exceed brief time periods federally insured amounts accounts receivable consist amounts due customers distributors located throughout world international product sales generally require cash advance confirmed letters credit united states us banks maintain reserves potential credit losses december 31 2002 2001 management believes significant concentrations credit risk inventories stated lower cost market determined firstin firstout fifo method fair value financial instruments carrying value cash equivalents accounts receivable receivables accounts payable short longterm debt approximates fair value december 31 2002 2001 property equipment property equipment carried cost less accumulated depreciation upon disposal property equipment appropriate accounts reduced related cost accumulated depreciation resulting gains losses reflected consolidated earnings depreciation computed using straightline method estimated lives related assets follows buildings improvements 5 39 years machinery equipment 3 7 years armor holdings inc subsidiaries notes consolidated financial statements continued goodwill represents excess purchase price fair value net assets acquired purchase business combination goodwill intangible assets stated basis cost 463 million goodwill resulting acquisitions made company subsequent june 30 2001 immediately subjected nonamortization provisions sfas 142 see also impairment recent accounting pronouncements follows patents licenses trademarks patents licenses trademarks primarily acquired acquisitions accounted purchase method accounting assets amortized straightline basis remaining lives useful lives impairment longlived assets including certain identifiable intangibles goodwill reviewed annually impairment whenever events changes circumstances indicate carrying amount asset question may recoverable including limited deterioration profits business segment longlived assets changes occur might impair recovery longlived assets management reviewed longlived assets taken impairment charge 311 million reduce carrying value services division estimated realizable value method used determine existence impairment would generally discounted operating cash flows estimated remaining useful lives related longlived assets estimated realizable amounts assets discontinued operations impairment measured difference fair value unamortized cost date impairment determined research development research development costs included operating expenses incurred years ended december 31 2002 2001 2000 approximated 2968000 2353000 2590000 respectively estimates preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts financial statements accompanying notes significant estimates inherent preparation accompanying consolidated financial statements include carrying value longlived assets valuation allowances receivables inventories deferred income tax assets liabilities potential litigation claims settlements contract contingencies obligations actual results could differ estimates income taxes account income taxes pursuant statement financial accounting standards sfas 109 accounting income taxes asset liability method specified thereunder deferred taxes determined based difference financial reporting tax bases assets liabilities deferred tax liabilities offset deferred tax assets relating net operating loss carryforwards deductible temporary differences future benefits obtained either utilization net operating loss carryforwards reduction income tax asset valuation allowance existing september 20 1993 applied reduce reorganization value excess amounts allocable identifiable assets december 31 2002 2001 consolidated foreign subsidiaries unremitted earnings approximately 30 million 13 million respectively recorded provision united states federal income taxes since earnings considered permanently reinvested foreign earnings armor holdings inc subsidiaries notes consolidated financial statements continued taxed according regulations existing countries earned revenue recognition record products revenue time shipment returns minimal materially effect financial statements record revenue mobile security division vehicle shipped except larger commercial contracts typically longer four months length contract delivery hmmwvs us government continues 2005 revenue contracts recognized percentage completion unitsofwork performed method hmmwv units sold us government considered complete onsite department defense officer finishes inspection hmmwv approves delivery contracts loss position entire estimated loss would recognized balance contract time current contracts profitable record service revenue services provided contract basis revenues service contracts recognized term contract advertising expense advertising costs expense period incurred earnings per share basic earnings per share computed dividing net income weightedaverage number common shares outstanding diluted earnings per share computed dividing net income weightedaverage number common shares outstanding compounding effects potentially dilutive common stock equivalents principally options except cases effect would antidilutive comprehensive income foreign currency translation accordance sfas 130 reporting comprehensive income assets liabilities denominated foreign currency translated us dollars current rate exchange existing yearend revenues expenses translated average monthly exchange rates cumulative translation adjustment net tax represents effect translating assets liabilities foreign operations recorded reduction equity 4169000 4473000 years ended december 31 2002 2001 respectively classified accumulated comprehensive loss current year change accumulated amount net tax included component comprehensive income stock options grants sfas 123 accounting stockbased compensation sfas 123 establishes fair value based method accounting stockbased employee compensation plans however also allows entity continue measure compensation cost plans using intrinsic value based method accounting prescribed accounting principles board apb opinion 25 accounting stock issued employees fair value based method compensation cost measured grant date based value award recognized service period usually vesting period intrinsic value based method compensation costs excess quoted market price stock grant date measurement date amount employee must pay acquire stock elected continue account employee stock compensation plans apb opinion 25 pro forma disclosures net earnings per share fair value based method accounting defined sfas 123 applied armor holdings inc subsidiaries notes consolidated financial statements continued compensation cost stock option grants determined based fair value grant dates 2002 2001 2000 consistent method prescribed sfas 123 companys net earnings per share would adjusted pro forma amounts indicated reclassifications certain reclassifications made 2001 2000 financial statements order conform presentation adopted 2002 reclassifications effect net income retained earnings recent accounting pronouncements june 2001 financial accounting standards board fasb issued sfas 141 business combinations sfas 141 requires purchase method accounting used business combinations initiated june 30 2001 statement specifies certain acquired intangible assets business combination recognized assets separately goodwill existing intangible assets goodwill evaluated new separation requirements adoption statement material impact consolidated financial statements june 2001 fasb issued sfas 142 goodwill intangible assets sfas 142 changes accounting goodwill amortization method impairmentonly approach amortization goodwill including goodwill recorded past business combinations ceased upon adoption statement addition statement requires goodwill tested impairment least annually reporting unit level implemented sfas 142 january 1 2002 connection adoption sfas 142 completed second quarter transitional goodwill impairment test compared fair value reporting unit carrying value determined impairment existed goodwill resulting acquisitions made us subsequent june 30 2001 immediately subject nonamortization provisions sfas 142 accounting goodwill sfas 142 periods presented net income earnings per share would follows armor holdings inc subsidiaries notes consolidated financial statements continued august 2001 fasb issued statement financial accounting standards 143 accounting asset retirement obligations sfas 143 sfas 143 establishes accounting standards recognition measurement liability asset retirement obligation associated asset retirement cost sfas 143 requires recognition fair value liability asset retirement obligation period incurred reasonable estimate fair value made reasonable estimate fair value cannot made period asset retirement obligation incurred liability shall recognized reasonable estimate fair value made fair value liability asset retirement obligation amount liability could settled current transaction willing parties forced liquidation transaction sfas 143 effective financial statements issued fiscal years beginning june 15 2002 provisions sfas 143 become effective us january 1 2003 effects adopting standard material effect us october 2001 fasb issued statement financial accounting standards 144 accounting impairment disposal longlived assets sfas 144 sfas 144 establishes primaryasset approach determine cash flow estimation period group assets liabilities represents unit accounting longlived asset held used sfas 144 requires longlived asset 1 abandoned 2 exchanged similar productive asset 3 distributed owners spinoff considered held used abandoned exchanged distributed sfas 144 requires 1 spinoffs exchanges similar productive assets recorded lower carrying value fair value assets classified held used disposed 2 impairment loss resulting spinoff exchange similar productive assets recognized upon asset disposition sfas 144 also states total assets total liabilities discontinued business segments shall presented separate captions assets liabilities sfas 144 also provides future losses discontinued business segments shall reported incurred effective january 1 2002 adopted sfas 144 reclassification services division discontinued operations subsequent reduction carrying value result adoption sfas 144 see note 2 armor holdings inc subsidiaries notes consolidated financial statements continued april 2002 fasb issued statement financial accounting standards 145 recission fasb 4 44 64 amendment fasb statement 13 technical corrections sfas 145 sfas 145 gains losses related extinguishment debt longer segregated income statement continuing operations provisions sfas 145 effective fiscal years beginning may 15 2002 early adoption encouraged effects adopting standard material effect us june 2002 fasb issued statement financial accounting standard 146 accounting costs associated exit disposal activities sfas 146 sfas 146 addresses financial accounting reporting costs associated exit disposal activities nullifies emerging issues task force issue 943 liability recognition certain employee termination benefits costs exit activity including certain costs incurred restructuring fas 146 effective exit disposal activities initiated december 31 2002 effects adopting standard material effect us december 2002 fasb issued statement financial accounting standard 148 accounting stockbased compensation transition disclosure sfas 148 sfas 148 provides alternative methods transition voluntary change fair value based method accounting stockbased employee compensation addition sfas 148 amends disclosure requirements statement financial accounting standard 123 accounting stockbased compensation sfas 123 require prominent disclosures annual interim financial statements method accounting stockbased employee compensation effect method used reported results disclosure requirements sfas 148 included document armor holdings inc subsidiaries notes consolidated financial statements continued 2 discontinued operations july 15 2002 announced plans sell services division retention merrill lynch company assist sale accordance statement accounting standards 144 accounting impairment disposal longlived assets liabilities services division classified held sale operating results current prior periods reported discontinued operations year ended december 31 2002 2001 2000 usds inc subsidiary providing certain training services formerly reported part services division included amounts classified assets held sale assets liabilities well operating results usds inc reclassified armor holdings products division management oversight currently resides january 24 2003 executed agreement negotiate exclusively undisclosed party sale security consulting business armorgroup services divisiion headquartered london separately january 16 2003 executed agreement negotiate exclusively undisclosed party sale armorgroup integrated systems business armorgroup services division terms transactions identities buyers protected confidentiality agreements two transactions represent approximately 94 net assets services division currently reported discontinued operations transactions subject among conditions ongoing due diligence execution definitive purchase agreements based upon analysis discussions advisors regarding estimated realizable value services division reduced carrying value services division recorded impairment charge 303 million impairment charge consisted approximately 61 million estimated disposal costs 242 million noncash goodwill reduction carrying value services division managements estimate based upon best information currently available including discussions investment bankers actual proceeds disposal services division may differ materially current estimates therefore could result either gain loss upon final disposal january 2001 services division classified discontinued operations approved restructuring plan close us investigative businesses realign divisions organization eliminate excess facilities reduce overhead businesses worldwide connection restructuring plan division performed review longlived assets identify potential impairments pursuant restructuring plan armorgroup eliminated 26 employees primarily investigative businesses ii eliminated additional 24 employees security business iii incurred lease exit costs result closure investigative businesses iv wrotedown value tangible intangible assets result impairment review significant actions contemplated restructuring plan completed result restructuring plan recorded pretax charge 103 million december 31 2002 remaining liability 270000 fiscal year 2002 utilization 84000 relating lease termination costs remaining liability classified accrued expenses current liabilities discontinued operations consolidated balance sheet armor holdings inc subsidiaries notes consolidated financial statements continued following summary operating results discontinued operations year ended december 31 2002 2001 2000 fiscal 2002 income taxes exclude additional expense 1475000 per paragraphs 26 27 sfas 109 included income continuing operations consolidated basis see note 13 armor holdings inc subsidiaries notes consolidated financial statements continued following summary assets liabilities discontinued operations 3 comprehensive income components comprehensive income net tax benefits 364000 713000 179000 years ended december 31 2002 2001 2000 listed armor holdings inc subsidiaries notes consolidated financial statements continued 4 business combinations completed numerous purchase business combinations cash andor shares common stock assumption liabilities certain cases three years period ended december 31 2002 following acquisitions completed 1 includes speedfeed inc foldable products group bsquare inc evipaq inc trasco bremen 911 emergency products 2 includes ogarahess eisenhardt companies guardian identicator 3 includes breakfree inc monadnock lifetime products lightning powder armor holdings inc subsidiaries notes consolidated financial statements continued businesses acquired included consolidated results including discontinued operations date acquisition pro forma results 2002 2000 acquisitions presented would differ material amount actual results following unaudited pro forma consolidated results presented show results pro forma basis 2001 acquisitions made january 1 2001 january 1 2000 changes carrying amount goodwill year ended december 31 2002 follows products mobile security total thousands balance january 1 2001 52845 33963 86808 goodwill acquired year 7298 4630 11928 balance december 31 2002 60143 38593 98736 5 inventories components inventory december 31 2002 2001 follows 2002 2001 thousands raw materials 30211 28796 workinprocess 15733 12941 finished goods 16386 8816 62330 50553 armor holdings inc subsidiaries notes consolidated financial statements continued 6 property equipment property equipment december 31 2002 2001 summarized follows 2002 2001 thousands land 5557 3571 buildings improvements 23964 16083 machinery equipment 30534 25146 total 60055 44800 accumulated depreciation 12919 8096 47136 36704 depreciation expense years ended december 31 2002 2001 2000 approximately 4953000 3031000 2074000 respectively statement operations continuing operations years ended december 31 2002 2001 2000 depreciation expense reduced 130000 year amortization proceeds received economic development grant received department housing urban development armor holdings inc subsidiaries notes consolidated financial statements continued 7 accrued expenses current liabilties accrued expenses current liabilities december 31 2002 2001 summarized follows 2002 2001 thousands accrued expenses 16988 18269 customer deposits 6302 7002 deferred consideration acquisitions 1826 525 25116 25796 8 debt 2002 2001 thousands credit facility ontario industrial development authority variable rate demand industrial development revenue bonds series 1989 2800 3000 payable annual installments 200 300 august 1 2014 interest paid monthly varying rates note payable scheduled installments 2013 interest rate 5 1582 economic development revenue bonds payable scheduled installments september 2016 variable interest rate approximating 85 bond equivalent yield 13 week us treasury bills exceed 12 approximated 15 275 december 31 2002 2001 respectively 1075 1150 note former officer payable monthly principal interest installments 7 december 31 2009 imputed interest rate 925 399 438 minimum guaranteed royalty former officer payable monthly principal interest installments 4 august 2005 imputed interest rate 92 114 152 minimum guaranteed royalty former officer payable monthly principal interest installments 36 april 2005 imputed interest rate 735 915 1258 6885 5998 less current portion 1813 1773 5072 4225 credit facility august 22 2001 entered amended restated credit agreement credit agreement bank america canadian imperial bank commerce first union national bank suntrust bank republic bank keybank national association ing us capital llc pursuant credit agreement lenders established 120000000 line credit benefit expiring february 12 2004 credit agreement among things provides total maximum borrowings 120000000 ii capability borrowings foreign currencies borrowings credit agreement bear interest either base rate plus applicable margin ranging 000 375 depending certain conditions ii eurodollar rate plus applicable margin ranging 1125 1875 depending certain conditions iii respect armor holdings inc subsidiaries notes consolidated financial statements continued foreign currency loans fronted offshore currency rate plus applicable margin ranging 1125 1875 depending certain conditions addition credit agreement includes negative affirmative covenants customary credit facility nature limitation capital expenditures foreign indebtedness minimum fixed charge coverage restriction paying dividends credit agreement also provides bank america make swingline loans us 5000000 working capital purposes issue letters credit behalf 20000000 december 31 2002 outstanding borrowings credit facility bank america issued 114 million letters credit behalf credit agreement indebtedness credit agreement mature february 12 2004 approximately 69 million longterm debt net current portion consisting primarily 39 million industrial development revenue bonds part credit agreement direct indirect domestic subsidiaries agreed guarantee obligations credit agreement credit agreement collateralized 1 pledge issued outstanding shares stock certain domestic subsidiaries company pursuant pledge agreement 2 pledge 65 issued outstanding shares first tier foreign subsidiaries credit agreement includes negative affirmative covenants customary credit facility nature limitation capital expenditures foreign indebtedness minimum fixed charge coverage restriction paying dividends maturities longterm debt follows year ended thousands 2003 1813 2004 917 2005 550 2006 393 2007 443 thereafter 2769 6885 9 integration nonrecurring charges result acquisition program incurred integration nonrecurring charges approximately 59 million 33 million 26 million years ending december 31 2002 2001 2000 respectively costs related relocation assets personnel severance costs systems integration domestic international tax restructuring well integrating sales marketing functions acquired companies 10 commitments contingencies employment contracts party several employment contracts year ending december 31 2002 certain members management contracts varying periods include restrictions competition termination agreements provide salaries bonuses armor holdings inc subsidiaries notes consolidated financial statements continued benefits also specify delineate granting various stock options legallitigation matters 1997 terminated several agreements dutch company airmunition international bv ami british company crown limited crown ami crown started action us netherlands arbitration institute rotterdam holland claiming breach contract unauthorized use confidential information seeking damages 205 million case currently pending contesting allegations vigorously unable predict outcome matter although insurance coverage matter time believe matter material impact financial position operations liquidity january 16 1998 services division ceased operations angola cessation operations angola dictated governments decision deport expatriate management supervisors result cessation operations angola services division became involved various disputes shrm sashrm minority joint venture partner relating angolan joint venture known defense system international africa dsia march 6 1998 sia subsidiary shrm filed complaint defense systems france sa dsf commercial court nanterre tribunal de commerce de nanterre seeking paid amount 577286 corresponding alleged debt dsia sia june 27 2000 judge paris commercial court ruled shrm provide evidence required establish standing proceedings brought shrm cancelled october 3 2000 winding petition served dsf dsia october 31 2000 shrm filed counterclaim seeking winding petition dismissed november 28 2000 shrm appealed june 27 2000 judgement rendered paris commercial court claiming paris commercial court longer jurisdiction case september 18 2001 paris commercial court stayed proceeding pending outcome appeal hearing court appeal standing shrm merits held october 24 2002 commercial court nanterre stayed proceedings pending decisions court appeal paris commercial court february 2003 court appeal ruled shrm parent entity compass group effectively ending proceedings merits compassclaims decision appealable compass 1999 prior acquisition oheac 2001 ogarahess eisenhardt armoring brasil ltda ohe brazil audited brazilian federal tax authorities assessed ten million reals us28 million based exchange rate december 31 2002 ohe brazil appealed tax assessment case pending extent may liability believe entitled indemnification kroll inc terms purchase agreement dated april 20 2001 despite denial kroll inc liability events occurred prior purchase ogara companies kroll inc additionally kroll inc provided us us15 million letter credit august 21 2008 order collateralize krolls indemnification obligation capped us5 million respect matter time believe matter material impact financial position operations liquidity 1999 prior acquisition oheac 2001 several former employees kroll ogara company de mexico sa de cv ogara mexico subsidiary oheac commenced labor claims ogara mexico seeking damages unjustified termination cases still pending armor holdings inc subsidiaries notes consolidated financial statements continued labor board mexico city terminated employees seeking back pay benefits since date termination amounting approximately us 2890998 accruing approximately us 50400 per month extent may liability believe entitled indemnification kroll inc terms purchase agreement dated april 20 2001 despite denial kroll inc liability events occurred prior purchase ogara companies kroll inc although insurance coverage matter time believe matter material impact financial position operations liquidity august 2001 defense technology corporation america dtc one subsidiaries received civil subpoena united states environmental protection agency requesting information pursuant section 104e comprehensive environmental response compensation liability act regarding possible impact casper wyoming tear gas facility environment dtc responded request date epa taken action respect matter time believe matter material impact financial position operations liquidity december 2001 ohe france sold industrial bodywork business operated name labbedivision de ogara hess eisenhardt france carrosserie industriells snc labbe subsequent sale labbe family trust lft owner leasehold interest upon carrosserie business operated sued ohe france snc labbe claiming transfer leasehold valid lft given consent transfer required terms lease lft seeks ohe france sole tenant maintain repair leased building approximate cost renovating building estimated us 32 us 64 million based exchange rate december 31 2002 case currently pending contesting allegations vigorously unable predict outcome matter although insurance coverage matter time believe matter material impact financial position operations liquidity december 2001 action filed us regional court nuremberg germany alleging unauthorized use trademarks first defense first defense aerosol pepper projector case currently pending contesting allegations vigorously unable predict outcome matter although insurance coverage matter time believe matter material impact financial position operations liquidity march 22 2002 ogarahess eisenhardt armoring company oheac one subsidiaries received civil subpoena department defense dod requesting documents information concerning various quality control documentation regarding parts delivered subcontractors vendors support high mobility multipurpose wheeled vehicles hmmwv armored fairfield ohio facility period october 1 1999 may 1 2001 oheac complied fully subpoena early 2003 oheac advised department justice doj also investigating separate claims oheac filed individuals involve time frame issues covered dod subpoena oheac responding governments questions expects meet doj discuss current status investigation explore closure given stage investigations possible armor holdings inc subsidiaries notes consolidated financial statements continued predict outcome matter extent may liability believe entitled indemnification kroll inc terms purchase agreement dated april 20 2001 despite denial kroll inc liability events occurred prior purchase ogara companies kroll inc time believe matter material impact financial position operations liquidity june 2002 ogara hess eisenhardt france sa ohe france received tax reassessment french tax authorities tax years ended march 31 1999 2000 2001 totaling approximately euro 720940 euro us755761 based exchange rate december 31 2002 ohe france appealed tax assessment case pending extent may liability believe entitled indemnification kroll inc terms purchase agreement dated april 20 2001 despite denial kroll inc liability events occurred prior purchase ogara companies kroll inc time believe matter material impact financial position operations liquidity october 18 2002 notified internal revenue service tax return tax year ended december 31 2000 selected examination january 30 2003 notified tax return tax year ended december 31 2001 selected examination examinations currently pending time unable predict outcome matters october 2002 sued united states district court district wyoming plaintiffs lawsuit asserted various state law tort claims federal environmental law claims resource conservation recovery act clean air act stemming dtcs casper wyoming tear gas plant plaintiffs yet quantified alleged damages plaintiffs filed suit potential class action yet sought judicial certification class alleged actions took place time periods covered different insurance policies notified insurance carriers suit prior insurance carrier agreed full reservation rights including respect liability relates time policy effect provide defense address question liability indemnification future current insurance carrier declined defense indemnification coverage carry specific environment insurance coverage reserved right challenge insurance carriers determination case currently pending contesting allegations vigorously unable predict outcome matter time believe matter material impact financial position operations liquidity addition normal course business subjected various types claims currently ongoing litigations areas products liability general liability products used wide variety law enforcement situations environments products cause serious personal property injury death carefully properly used adequately trained personnel believe adequate insurance coverage claims incurred normal course business cases effect financial statements generally limited amount insurance deductible selfinsured retention annual insurance premiums self insurance retention amounts risen significantly past several years may continue extent able purchase insurance armor holdings inc subsidiaries notes consolidated financial statements continued coverage time believe claims litigations material impact financial position operations liquidity 11 income may 31 2000 sold investment jsgs jardine securicor gurkha services limited pretax gain approximately 17 million included income 12 information concerning business segments geographical sales leading manufacturer provider security products vehicle armor systems security training services products services used military law enforcement security corrections personnel throughout world well governmental agencies multinational corporations nongovernmental organizations continuing operations organized operated two business segments armor holdings products armor mobile security services division classified discontinued operations longer included presentation see note 2 armor holdings products armor holdings products division manufactures sells broad range high quality equipment marketed brand names well known respected military law enforcement communities products manufactured division include concealable tactical body armor hard armor duty gear lesslethal munitions antiriot products police batons emergency lighting products forensic products firearms accessories weapon maintenance products usds inc small subsidiary providing certain training services formerly reported part services division included amounts classified assets held sale discontinued operations reclassified armor holdings products division management oversight currently resides armor mobile security armor mobile security division manufactures installs ballistic blast protection armoring systems military vehicles commercial vehicles military aircraft missile components brand name ogarahess eisenhardt ogara solesource provider us military supply armoring blast protection systems well maintenance services high mobility multipurpose wheeled vehicle hmmwv commonly known humvee additionally subcontracted develop ballistically armored sealed truck cab high mobility artillery rocket system himars currently development us army armor variety commercial vehicles including limousines sedans sport utility vehicles commercial trucks cashintransit vehicles protect varying degrees ballistic blast threats armor mobile security division created connection acquisition ogara august 22 2001 ogara acquisition invested substantial resources outside united states plan continue future armor mobile security division invested substantial resources europe south america operations subject risk new different legal regulatory requirements local jurisdictions tariffs trade barriers potential difficulties staffing managing local operations currency risks potential imposition restrictions investments potentially adverse tax consequences including imposition increase withholding armor holdings inc subsidiaries notes consolidated financial statements continued taxes remittances payments subsidiaries local economic political social conditions governments many developing countries exercised continue exercise substantial influence many aspects private sector government actions future could significant adverse effect economic conditions developing country may otherwise material adverse effect us operating companies political risk insurance countries currently conduct business moreover applicable agreements relating interests operating companies frequently governed foreign law result event dispute may difficult us enforce rights accordingly may little recourse upon occurrence developments armor holdings inc subsidiaries notes consolidated financial statements continued revenues operating income total assets continuing segments follows 2002 2001 2000 thousands revenues products 179946 149868 139904 mobile security 125171 47232 total revenues 305117 197100 139904 income loss operations products 30978 26845 27803 mobile security 14375 6673 corporate 6988 6845 7934 total income operations 38365 26673 19869 total assets products 179367 147313 129432 mobile security 105446 102127 corporate 23830 49950 9596 total assets 308643 299390 139028 armor holdings inc subsidiaries notes consolidated financial statements continued following financial information respect revenues operating income continuing operations geographic operating income continuing operations amortization expense integration nonrecurring charges total assets principal geographic areas follows 2002 2001 2000 thousands revenues north america 225365 144981 117199 south america 19879 6449 3434 africa 1219 582 167 europeasia 58654 45088 16078 3026 305117 197100 139904 geographic operating income north america 34032 23290 19376 south america 1702 473 982 africa 428 192 57 europeasia 8374 8156 3019 727 44536 32111 24161 total assets north america 264767 268019 132744 south america 5456 5811 africa europeasia 38420 25560 6284 308643 299390 139028 reconciliation consolidated geographic operating income continuing operations consolidated operating income continuing operations follows 2002 2001 2000 thousands consolidated geographic operating income 44536 32111 24161 amortization 245 2142 1704 integration nonrecurring charges 5926 3296 2588 operating income 38365 26673 19869 armor holdings inc subsidiaries notes consolidated financial statements continued 13 income taxes income tax expense benefit continuing operations years ended december 31 2002 2001 2000 consisted following significant components net deferred tax asset related continuing operations december 31 2002 2001 follows effective change control company kanders florida holdings inc january 18 1996 utilization united states portion nol became restricted approximately 300000 per year december 31 2002 us foreign nols approximately 46 million us portion net nols expire varying amounts fiscal years 2006 2019 december 31 2002 also tax credits 206000 subject certain limitations due acquisition safariland ltd company also approximately 29 million foreign tax credits expiring 2006 certain deferred tax assets including net operating losses tax credits could become limited change control defined irc section 382 armor holdings inc subsidiaries notes consolidated financial statements continued realization deferred tax assets may based utilization carrybacks prior taxable periods anticipation future taxable income utilization tax planning strategies management determined likely certain deferred tax assets supported carrybacks federal taxable income federal carryback period expected future taxable income us taxes provided unremitted foreign earnings approximately 3 million continuing operations earnings considered permanently reinvested nonus operations permanently reinvested jurisdictions established deferred tax asset 1255000 net deferred tax assets described included accompanying consolidated balance sheets follows 2002 2001 current assets 2697 1910 assets 4885 1875 total deferred tax assets 7582 3785 following reconciles income tax expense computed federal statutory income tax rate provision income taxes recorded income statement years ended december 31 2002 2001 2000 armor holdings inc subsidiaries notes consolidated financial statements continued 14 stockholders equity preferred stock july 16 1996 shareholders authorized series preferred stock rights privileges preferences board directors shall time determine issued preferred stock options grants 1994 implemented incentive stock plan outside directors stock plan plans collectively provide granting options certain key employees well providing grant common stock outside directors full time employees pursuant plans 1050000 shares common stock reserved made available distribution option prices stock may purchased incentive stock plan less fair market value common stock dates grants effective january 19 1996 stock grants awarded 1994 incentive stock plan accelerated considered fully vested 1996 implemented incentive stock plan outside directors stock plan plans collectively provide granting options certain key employees directors pursuant plans amended 2200000 shares common stock reserved made available distribution option prices stock may purchased incentive stock plan less fair market value common stock dates grants 1998 implemented new nonqualified stock option plan pursuant new plan 725000 shares common stock reserved made available distribution january 1 1999 distributed 725000 shares allocated plan 1999 implemented 1999 stock incentive plan 1999 plan reserved 2000000 shares common stock 1999 plan 1999 plan provides granting options employees officers directors consultants independent contractors advisors company option prices stock may purchased 1999 plan less fair market value common stock dates grants 2002 implemented two new stock option plans 2002 stock incentive plan authorizes issuance 2700000 shares common stock upon exercise stock options connection issuance restricted stock bonuses 2002 stock incentive plan authorizes granting stock options restricted stock bonuses employees officers directors consultants independent contractors advisors armor holdings subsidiaries 2002 executive stock plan provides grant total 470000 stock options stock awards key employees terms provisions 2002 executive stock plan substantially 2002 stock incentive plan except may grant nonqualified stock options 2002 executive stock plan 2002 executive stock plan adopted march 13 2002 shares available grant 2002 executive stock plan granted executive officers march 13 2002 december 18 2002 sold put option 500000 shares institutional counterparty exercise price 1399 per share expiration date march 31 2002 525000 maximum potential obligation put options purchase 500000 shares common stock exercise price 1399 aggregate 70 million although certain events trigger exercise put options generally excercisable maturity march 31 2002 right settle put options cash settlement physical settlement armor holdings inc subsidiaries notes consolidated financial statements continued options net share settlement using shares common stock accordance eitf issue 0019 recorded sale put options equity changes fair value options recognized financial statements may time enter additional put call option arrangements sfas 123 fair value option grant estimated date grant using blackscholes optionpricing model following weightedaverage assumptions years ended december 31 2002 2001 2000 2002 2001 2000 expected life option 4 yrs 4 yrs 4 yrs dividend yield 0 volatility 522 447 309 risk free interest rate 394 452 576 increase volatility fiscal 2000 fiscal 2002 primarily due increase demand stock drove price increased volatility weighted average fair value options granted 2002 2001 2000 follows 2002 2001 2000 thousands except per share data fair value option granted 1008 617 479 total number options granted 1895 892 185 total fair value options granted 19098 5501 886 outstanding options consisting tenyear incentive nonqualified stock options vest become exercisable threeyear period date grant outstanding options expire ten years date grant upon retirement company contingent upon continued employment applicable tenyear period armor holdings inc subsidiaries notes consolidated financial statements continued summary status stock option grants december 31 2002 changes years ending dates presented weighted average options exercise price outstanding december 31 1999 3545258 921 granted 185000 1437 exercised 333075 457 forfeited 102344 1098 outstanding december 31 2000 3294839 991 granted 892159 1524 exercised 1173227 937 forfeited 29737 1551 outstanding december 31 2001 2984034 1160 granted 1894660 2296 exercised 507868 841 forfeited 86168 1675 outstanding december 31 2002 4284658 781 options exercisable december 31 2002 2099307 642 armor holdings inc subsidiaries notes consolidated financial statements continued following table summarizes information stock options outstanding december 31 2002 12312002 remaining options life exercise price range outstanding exercisable years 097 375 93357 30 750 994 255292 50 1000 1063 141671 138337 52 1100 1163 762844 759510 58 1200 1203 65002 58334 52 1319 1400 309668 223668 73 1417 1470 444492 187322 87 1505 1590 347994 94331 88 1631 1650 62667 9000 80 1700 1754 105170 30156 83 2175 125000 91 2309 2393 689501 225000 92 2407 2580 882000 25000 95 total 4284658 2099307 remaining nonexercisable options december 31 2002 become exercisable follows 2003 775961 2004 991358 2005 168032 2006 250000 armor holdings inc subsidiaries notes consolidated financial statements continued earnings per share following details earnings per share computations basic diluted basis years ended december 31 2002 2001 2000 15 supplemental cash flow information armor holdings inc subsidiaries notes consolidated financial statements continued 16 quarterly results unaudited following table presents summarized unaudited quarterly results operations company fiscal 2002 2001 believe necessary adjustments included amounts stated present fairly following selected information read conjunction consolidated financial statements notes thereto included elsewhere herein future quarterly operating results may fluctuate depending number factors results operations particular quarter necessarily indicative results operations full year quarter 17 employee benefits plan october 1997 formed 401k plan provides voluntary contributions employees allows discretionary contribution us form cash made contributions approximately 395500 272700 243000 plan 2002 2001 2000 respectively armor holdings inc subsidiaries notes consolidated financial statements continued 18 related party transactions fiscal 2000 subcontracted certain security guard services alpha inc wholly owned shareholder company also director gorandel trading limited fiscal 2000 security guard service fees approximately 2444000 paid alpha august 2000 acquired alpha purchase price approximately 10 million cash consisting current deferred portion fiscal 2002 2001 paid 100000 400000 deferred portion purchase price respectively effective january 1 2002 kanders company inc kanders co corporation controlled warren b kanders chairman board entered agreement us provide certain investment banking financial advisory related services five year term expire december 31 2006 kanders co receive mutually agreed upon fee transaction basis term agreement aggregate fees agreement exceed 1575000 calendar year also agreed reimburse kanders co reasonable outofpocket expenses including kanders cos expenses office space executive assistant furniture equipment travel entertainment reasonable fees disbursements counsel consultants retained kanders co fiscal year ended december 31 2002 paid kanders co 525000 investment banking services also reimbursed kanders co outofpocket expenses aggregate amount 302000 fiscal year ended december 31 2002 also granted kanders co options purchase 35000 shares common stock exercise price per share equal 2393 ii restricted stock grant 10447 shares common stock valued 1504 per share iii restricted stock grant 100000 shares common stock valued 1504 per share grants made fiscal 2002 consideration consulting services provided kanders co connection certain transactions fiscal 2001 fiscal year ended december 31 2002 paid director nicholas sokolows law firm sokolow dunaud mercadier carreras 28000 legal services connection various acquisitions armor holdings inc subsidiaries notes consolidated financial statements continued 19 operating leases party certain real estate equipment vehicle leases several leases include options renewal escalation clauses cases management expects normal course business leases renewed replaced leases approximate total future minimum annual lease payments noncancelable leases continuing operations follows year thousands 2003 1141 2004 840 2005 365 2006 66 2007 51 thereafter 2463 incurred rent expense approximately 1200000 765000 394000 years ended december 31 2002 december 31 2001 december 31 2000 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized armor holdings inc jonathan spiller jonathan spiller president chief executive officer director dated march 31 2003 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated jonathan spiller warren b kanders jonathan spiller warren b kanders president chief executive chairman board directors officer director march 31 2003 principal executive officer march 31 2003 robert r schiller nicholas sokolow robert r schiller nicholas sokolow executive vice president director chief financial officer march 31 2003 march 31 2003 burtt r ehrlich thomas w strauss burtt r ehrlich thomas w strauss director march 31 2003 march 31 2003 alair townsend deborah zoullas alair townsend deborah zoullas director march 31 2003 march 31 2003 certifications jonathan spiller certify 1 reviewed annual report form 10k armor holdings inc 2 based knowledge annual report contain untrue statement material fact omit state material fact necessary make statements made light circumstances statements made misleading respect period covered annual report 3 based knowledge financial statements financial information included annual report fairly present material respects financial condition results operations cash flows registrant periods presented annual report 4 registrants certifying officers responsible establishing maintaining disclosure controls procedures defined exchange act rules 13a14 15d14 registrant designed disclosure controls procedures ensure material information relating registrant including consolidated subsidiaries made known us others within entities particularly period annual report prepared b evaluated effectiveness registrants disclosure controls procedures date within 90 days prior filing date annual report evaluation date c presented annual report conclusions effectiveness disclosure controls procedures based evaluation date 5 registrants certifying officers disclosed based recent evaluation registrants auditors audit committee registrants board directors persons performing equivalent functions significant deficiencies design operation internal controls could adversely affect registrants ability record process summarize report financial data identified registrants auditors material weaknesses internal controls b fraud whether material involves management employees significant role registrants internal controls 6 registrants certifying officers indicated annual report whether significant changes internal controls factors could significantly affect internal controls subsequent date recent evaluation including corrective actions regard significant deficiencies material weaknesses date march 31 2003 jonathan spiller president chief executive officer robert r schiller certify 1 reviewed annual report form 10k armor holdings inc 2 based knowledge annual report contain untrue statement material fact omit state material fact necessary make statements made light circumstances statements made misleading respect period covered annual report 3 based knowledge financial statements financial information included annual report fairly present material respects financial condition results operations cash flows registrant periods presented annual report 4 registrants certifying officers responsible establishing maintaining disclosure controls procedures defined exchange act rules 13a14 15d14 registrant designed disclosure controls procedures ensure material information relating registrant including consolidated subsidiaries made known us others within entities particularly period annual report prepared b evaluated effectiveness registrants disclosure controls procedures date within 90 days prior filing date annual report evaluation date c presented annual report conclusions effectiveness disclosure controls procedures based evaluation date 5 registrants certifying officers disclosed based recent evaluation registrants auditors audit committee registrants board directors persons performing equivalent functions significant deficiencies design operation internal controls could adversely affect registrants ability record process summarize report financial data identified registrants auditors material weaknesses internal controls b fraud whether material involves management employees significant role registrants internal controls 6 registrants certifying officers indicated annual report whether significant changes internal controls factors could significantly affect internal controls subsequent date recent evaluation including corrective actions regard significant deficiencies material weaknesses date march 31 2003 robert schiller executive vice president chief financial officeritem 15 exhibits financial statements schedules reports form 8k following financial statements appear sequentially beginning page number included report form 10k financial statement schedules omitted since either required applicable information otherwise included reports independent certified public accountants consolidated balance sheets consolidated income statements consolidated statements stockholders equity comprehensive income loss consolidated statements cash flows notes consolidated financial statements b reports form 8k quarter ended december 31 2003 filed following current reports form 8k current report form 8k date report november 4 2003 respect items 7 12 filed commission november 5 2003 relating press release announcing earnings threemonth period ended september 30 2003 ii current report form 8k date report november 26 2003 respect items 2 7 filed commission december 11 2003 relating sale services division iii current report form 8k date report december 9 2003 respect items 2 7 filed commission december 23 2003 relating acquisition simula inc c exhibits following exhibits hereby filed part annual report form 10k exhibit description 21 stock purchase agreement dated april 20 2001 among armor holdings inc bengal acquisition corp krollogara company ogarahess eisenhardt armoring company ogara company ogara security associates inc filed exhibit 21 current report form 8k dated april 20 2001 incorporated herein reference 22 amendment dated august 20 2001 stock purchase agreement dated april 20 2001 among armor holdings inc bengal acquisition corp krollogara company ogarahess eisenhardt armoring company ogara company ogara security associates inc filed exhibit 22 current report form 8k dated august 22 2001 incorporated herein reference 23 amendment dated august 21 2001 stock purchase agreement dated april 20 2001 among armor holdings inc bengal acquisition corp krollogara company ogarahess eisenhardt armoring company ogara company ogara security associates inc filed exhibit 23 current report form 8k dated august 23 2001 incorporated herein reference 24 agreement plan merger dated august 29 2003 among armor holdings inc ahi bulletproof acquisition corp simula inc filed appendix registration statement form s4 filed commission september 23 2003 incorporated herein reference 25 purchase sale agreement dated november 26 2003 among armor holdings inc armor group limited partnership armor holdings mobile security llc armorgroup services llc armorgroup international limited filed exhibit 101 current report form 8k dated november 26 2003 incorporated herein reference 26 stock purchase agreement dated december 16 2003 among armor holdings inc safari land ltd inc mary william e hatch revocable trust dated december 22 1998 r j hatch survivors atrust udt dated may 6 1998 lisa hatchsciuto david sciuto robert j hatch william hatch 31 certificate incorporation armor holdings inc filed exhibit 31 current report form 8k dated september 31996 incorporated herein reference 32 certificate merger american body armor equipment inc florida corporation armor holdings inc filed exhibit 32 form 8k current report company dated september 31996 incorporated herein reference 33 bylaws armor holdings inc filed exhibit 33 current report form 8k dated september 3 1996 incorporated herein reference 34 amendment bylaws armor holdings inc incorporated reference exhibit 332 form 10k annual report fiscal year ended december 31 1998 41 indenture dated august 12 2003 among armor holdings subsidiary guarantors listed signatories thereto wachovia bank national association trustee form old note attached exhibit thereto incorporated reference exhibit 102 form 10q quarterly report fiscal quarter ended june 30 2003 42 first supplemental indenture dated september 30 2003 among armor holdings inc subsidiary guarantors listed signatories indenture subsidiaries listed schedule first supplemental indenture wachovia bank national association trustee filed exhibit 42 registration statement form s4 filed commission january 7 2004 incorporated herein reference 43 second supplemental indenture dated december 9 2003 among armor holdings inc subsidiary guarantors listed signatories thereto wachovia bank national association trustee filed exhibit 43 registration statement form s4 filed commission january 7 2004 incorporated herein reference 44 third supplemental indenture dated december 24 2003 among armor holdings inc subsidiary guarantors listed signatories thereto wachovia bank national association trustee filed exhibit 44 registration statement form s4 filed commission january 7 2004 incorporated herein reference 45 registration rights agreement dated august 12 2003 among armor holdings inc subsidiary guarantors listed signatories thereto wachovia capital markets llc incorporated reference exhibit 103 form 10q quarterly report fiscal quarter ended june 30 2003 46 form new 8 14 senior subordinated notes due 2013 filed exhibit 46 registration statement form s4 filed commission january 7 2004 incorporated herein reference 101 purchase agreement dated august 6 2003 among armor holdings inc subsidiary guarantors listed signatories thereto wachovia capital markets llc incorporated reference exhibit 101 form 10q quarterly report fiscal quarter ended june 30 2003 102 credit agreement dated august 12 2003 among armor holdings inc lender time party thereto bank america na administrative agent swing line lender lc issuer wachovia bank national association syndication agent key bank national association documentation agent incorporated reference exhibit 104 form 10q quarterly report fiscal quarter ended june 30 2003 103 subsidiary guaranty agreement dated august 12 2003 certain subsidiaries armor holdings inc identified signature pages thereto additional guarantor may become party guaranty favor bank america na administrative agent incorporated reference exhibit 105 form 10q quarterly report fiscal quarter ended june 30 2003 104 collateral agreement dated august 12 2003 among armor holdings certain subsidiaries identified signature pages thereto additional grantor may become party agreement favor bank america na administrative agent incorporated reference exhibit 106 form 10q quarterly report fiscal quarter ended june 30 2003 105 trademark security agreement dated august 12 2003 entities listed signature pages thereto favor bank america na administrative agent incorporated reference exhibit 107 form 10q quarterly report fiscal quarter ended june 30 2003 106 patent security agreement dated august 12 2003 entities listed signature pages attached thereto favor bank america na administrative agent incorporated reference exhibit 108 form 10q quarterly report fiscal quarter ended june 30 2003 107 promissory note dated august 12 2003 principal amount 15000000 made armor holdings inc favor keybank national association incorporated reference exhibit 109 form 10q quarterly report fiscal quarter ended june 30 2003 108 promissory note dated august 12 2003 principal amount 22500000 made armor holdings inc favor wachovia bank national association incorporated reference exhibit 1010 form 10q quarterly report fiscal quarter ended june 30 2003 109 separation agreement general release dated may 22 2003 armor holdings inc jonathan spiller 1010 employment agreement robert r schiller armor holdings inc dated january 1 2002 incorporated reference exhibit 102 form 10q quarterly report fiscal quarter ended march 31 2002 1011 amendment dated november 4 2003 employment agreement armor holdings inc robert schiller incorporated reference exhibit 102 form 10q quarterly report fiscal quarter ended september 30 2003 1012 employment agreement stephen e croskrey armor holdings inc dated january 1 2002 incorporated reference exhibit 103 form 10q quarterly report fiscal quarter ended march 31 2002 1013 employment agreement warren b kanders armor holdings inc dated january 1 2002 incorporated reference exhibit 104 form 10q quarterly report fiscal quarter ended march 31 2002 1014 letter agreement dated july 26 2003 armor holdings inc warren b kanders filed exhibit 991 current report form 8k dated july 26 2003 incorporated herein reference 1015 amendment 2 dated november 4 2003 employment agreement armor holdings inc warren b kanders incorporated reference exhibit 101 form 10q quarterly report fiscal quarter ended september 30 2003 1016 form indemnification agreement directors armor holdings inc dated september 21 1993 filed exhibit 104 form 10ksb annual report company fiscal year ended december 31 1993 incorporated herein reference 1017 form indemnification agreement officers armor holdings inc dated february 28 1994 filed exhibit 105 form 10ksb annual report company fiscal year ended december 31 1993 incorporated herein reference 1018 american body armor equipment inc 1994 incentive stock plan incorporated reference form s8 filed october 10 1994 reg 33018863 1019 american body armor equipment inc 1994 directors stock plan incorporated reference form s8 filed october 31 1994 reg 33018863 1020 armor holdings inc amended restated 1996 stock option plan incorporated reference 1997 definitive proxy statement respect 1997 annual meeting stockholders held june 12 1997 filed commission may 27 1997 1021 armor holdings inc amended restated 1996 nonemployee directors stock option plan incorporated reference 1997 definitive proxy statement respect 1997 annual meeting stockholders held june 12 1997 filed commission may 27 1997 1022 armor holdings inc 1998 stock option plan incorporated reference exhibit 1019 form 10k annual report fiscal year ended december 31 1998 1023 armor holdings inc 1999 stock incentive plan incorporated reference appendix 1999 definitive proxy statement respect 1999 annual meeting stockholders filed commission may 21 1999 1024 armor holdings inc 2002 stock incentive plan incorporated reference appendix 2002 definitive proxy statement respect 2002 annual meeting stockholders filed commission april 30 2002 1025 amendment 1 armor holdings inc 2002 stock incentive plan filed exhibit 43 registration statement form s8 filed commission january 22 2004 incorporated herein reference 1026 armor holdings inc 2002 executive stock plan incorporated reference exhibit 106 form 10q quarterly report fiscal quarter ended march 31 2002 1027 consulting agreement kanders company inc armor holdings inc dated january 1 2002 incorporated reference exhibit 105 form 10q quarterly report fiscal quarter ended march 31 2002 1028 tax deed dated november 26 2003 among armor holdings inc armorgroup international inc armor group uk limited filed exhibit 102 current report form 8k dated november 26 2003 incorporated herein reference 1029 promissory note made armor holdings limited favor armor holdings inc dated november 26 2003 filed exhibit 103 current report form 8k dated november 26 2003 incorporated herein reference 211 subsidiaries registrant filed exhibit 211 registration statement form s4 filed commission january 7 2004 incorporated herein reference 231 consent pricewaterhousecoopers llp 311 certification principal executive officer required rule 13a14a securities exchange act 1934 312 certification principal financial officer required rule 13a14a securities exchange act 1934 321 certification principal executive officer required rule 13a14b securities exchange act 1934 322 certification principal financial officer required rule 13a14b securities exchange act 1934 filed herewith incorporated herein reference exhibit represents management contract exhibit represents compensatory plan index consolidated financial statements report independent certified public accountants board directors stockholders armor holdings inc opinion accompanying consolidated balance sheets related consolidated statements operations stockholders equity comprehensive income loss cash flows present fairly material respects financial position armor holdings inc subsidiaries company december 31 2003 2002 results operations cash flows three years period ended december 31 2003 conformity accounting principles generally accepted united states america financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits statements accordance auditing standards generally accepted united states america require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion discussed note 1 consolidated financial statements effective january 1 2002 company changed method accounting goodwill following adoption statement financial accounting standard 142 goodwill intangible assets pricewaterhousecoopers llp february 20 2004 armor holdings inc subsidiaries consolidated balance sheets december 31 2003 december 31 2002 thousands except share data armor holdings inc subsidiaries consolidated statements operations years ended december 31 2003 2002 2001 thousands except per share data armor holdings inc subsidiaries consolidated statements stockholders equity comprehensive income loss years ended december 31 2003 2002 2001 thousands armor holdings inc subsidiaries consolidated statements cash flow years ended december 31 2003 2002 2001 thousands armor holdings inc subsidiaries notes consolidated financial statements 1 background summary significant accounting policies company nature business armor holdings inc company armor leading manufacturer provider specialized security products training support services related products vehicle armor systems military helicopter seating systems aircraft land vehicle armor systems protective equipment military personnel technologies used protect humans variety lifethreatening catastrophic situations products vehicle armor systems human safety survival systems used domestically internationally military law enforcement security corrections personnel well governmental agencies multinational corporations individuals organized operated three business divisions armor holdings products also referred products division armor mobile security also referred mobile security division simula acquired december 9 2003 armorgroup services classified discontinued operations amounts disclosed footnotes related continuing operations unless otherwise indicated continuing operations products division manufactures sells broad range high quality security products equipment related consumable items concealable tactical body armor hard armor duty gear lesslethal munitions antiriot products police batons emergency lighting products forensic products firearms accessories weapon maintenance products foldable ladders specialty gloves products marketed brand names well established military law enforcement communities american body armortm bsquarer break freer clpr defense technologyfederal laboratoriesr deftec productsr distraction devicer federal laboratoriesr ferretr first defenser identicatorr identidrugr impaktm lightning powderr monadnockr nikr ogarahess eisenhardt armoring companyr protechtm quikstep ladderstm safariland designr speedfeedr 911ep designtm sell products network 350 distributors sales agents including approximately 200 united states extensive distribution capabilities commitment customer service training enabled us become leading provider security equipment law enforcement agencies mobile security mobile security division manufactures installs ballistic blast protected armoring systems privately owned vehicles armor variety privately owned commercial vehicles including limousines sedans sport utility vehicles commercial trucks cashintransit vehicles protect varying degrees ballistic blast threats customers business include international corporations high net worth individuals brand name ogarahess eisenhardt solesource provider us military armor blast protection systems m1114 uparmored hmmwvs also contract us army provide spare parts logistics ongoing field support services currently installed base approximately 4415 uparmored hmmwvs additionally provide blast ballistic protection kits standard hmmwvs installed existing equipment filed mobile security division also subcontracted develop ballistic blast protected armored sealed truck cab himars program recently transitioned us army us marine corps developmental low rate initial production deliveries commenced 2003 also supply armor subsystems tactical wheeled vehicles addition supply ballistic blast protected armoring systems us federal law enforcement intelligence agencies foreign heads state simula supplies human safety survival systems us military major aerospace defense prime contractors core markets military aviation safety military personnel safety land marine safety simula provide military helicopter seating systems helicopter cockpit airbag systems aircraft land vehicle armor kits body armor protective equipment military personnel emergency bailout parachutes survival ensembles worn military aircrew primary customers products us army us marine corps boeing sikorsky aircraft simulas aviation safety products provided sole source basis us armed forces adopted ceramic body armor key element protective ensemble worn troops iraq afghanistan simula developer specialized product called small arms protective insert sapi largest supplier us forces simula acquired december 9 2003 results included herein since acquisition date armor holdings inc subsidiaries notes consolidated financial statements continued discontinued operations april 17 2003 announced completed sale armorgroup integrated systems business sale 100 stock armorgroup integrated systems inc low voltage systems technologies inc aerwav integration systems inc ais wholly owned subsidiary aerwav holdings llc consideration integrated systems business received 41 million collateralized note due two years warrant approximately 25 ais recorded loss 366000 sale november 26 2003 announced completed sale armorgroup security service division 33660000 consideration group private investors led granville baird capital partners london england management received 31360000 cash closing scheduled receive another 2300000 end 2004 375000 received march 6 2004 recorded loss 88 million sale fourth quarter 2003 accordance generally accepted accounting principles unrealized gains losses included equity accumulated comprehensive income loss recognized period related assets liabilities disposed december 31 2003 litigation support services subsidiary remains operating discontinued operations subsidiary actively attempting sell business expect sell 2004 accounting policies principles consolidation consolidated financial statements include accounts company wholly owned subsidiaries consolidation material intercompany balances transactions eliminated results operations companies acquired transactions accounted purchase method accounting included financial statements date acquisition cash equivalents consider highly liquid investments purchased maturities three months less date purchase cash equivalents restricted cash restricted cash includes 26 million held trust benefit ontario industrial development authority variable rate demand industrial development revenue bonds series 1989 bondholders january 2 2004 restrictions released funds used pay bonds full concentration credit risk financial instruments potentially subject company concentrations credit risk consist primarily cash equivalents trade accounts receivable company maintains cash equivalents believes various high quality banks amounts held individual banks may periodically exceed brief time periods federally insured amounts accounts receivable consist amounts due customers distributors located throughout world international product sales generally require cash advance confirmed letters credit united states us banks maintain reserves potential credit losses december 31 2003 2002 management believes significant concentrations credit risk excluding us military inventories stated lower cost market determined firstin firstout fifo method fair value financial instruments carrying value cash equivalents accounts receivable receivables accounts payable short longterm debt approximates fair value december 31 2003 2002 derivative instruments hedging activities account derivative instruments hedging activities accordance statement financial accounting standard 133 accounting derivative instruments hedge activities sfas 133 amended derivative instruments armor holdings inc subsidiaries notes consolidated financial statements continued recorded balance sheet fair value changes fair value derivatives recorded period current earnings comprehensive income depending whether derivative designated part hedge transaction depending type hedge transaction fairvalue hedge transactions hedge changes assets liabilitys firm commitments fair value changes fair value derivative instrument generally offset income statement changes hedged items fair value adopted sfas 133 first quarter 2001 however derivatives measured time adoption hold issue interest rate swap agreements derivative instruments trading purposes changes fair value interest rate swap agreements offset changes fair value fixed rate debt due changes market interest rate accordingly assets condensed consolidated balance sheet december 31 2003 increased 59 million reflected increase fair value interest rate swap agreements corresponding increase hedge liability recorded longterm debt agreements deemed perfectly effective fair value hedge therefore qualify shortcut method accounting sfas 133 result ineffectiveness expected recognized earnings associated interest rate swap agreements property equipment property equipment carried cost less accumulated depreciation upon disposal property equipment appropriate accounts reduced related cost accumulated depreciation resulting gains losses reflected consolidated earnings depreciation computed using straightline method estimated lives related assets follows buildings improvements 5 39 years machinery equipment 3 7 years goodwill represents excess purchase price fair value net assets acquired purchase business combination goodwill intangible assets stated basis cost 1229 million goodwill resulting acquisitions made company subsequent june 30 2001 immediately subjected nonamortization provisions sfas 142 see also impairment recent accounting pronouncements follows patents licenses trademarks patents licenses trademarks primarily acquired acquisitions accounted purchase method accounting assets amortized straightline basis remaining lives useful lives impairment longlived assets including certain identifiable intangibles goodwill reviewed impairment annually whenever events changes circumstances indicate carrying amount asset question may recoverable including limited deterioration profits business segment longlived assets changes occur might impair recovery longlived assets management reviewed longlived assets taken impairment charges 124 million fiscal 2003 303 million fiscal 2002 reduce carrying value services division estimated realizable value method used determine existence impairment would generally undiscounted operating cash flows estimated remaining useful lives related longlived assets estimated realizable amounts assets discontinued operations impairment measured difference fair value unamortized cost date impairment determined research development engage ongoing engineering research development activities improve reliability performance costeffectiveness existing products also design develop new products ongoing effort anticipate meet customers evolving needs research development costs included operating expenses incurred years ended december 31 2003 2002 2001 approximated 4015000 2968000 2353000 respectively estimates preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts financial statements accompanying notes significant estimates inherent preparation armor holdings inc subsidiaries notes consolidated financial statements continued accompanying consolidated financial statements include carrying value longlived assets valuation allowances receivables inventories deferred income tax assets liabilities potential litigation claims settlements contract contingencies obligations actual results could differ estimates income taxes account income taxes pursuant statement financial accounting standards sfas 109 accounting income taxes asset liability method specified thereunder deferred taxes determined based difference financial reporting tax bases assets liabilities deferred tax liabilities offset deferred tax assets relating net operating loss carryforwards deductible temporary differences future benefits obtained either utilization net operating loss carryforwards reduction income tax asset valuation allowance existing september 20 1993 applied reduce reorganization value excess amounts allocable identifiable assets december 31 2003 2002 consolidated foreign subsidiaries unremitted earnings approximately 90 million 30 million respectively recorded provision united states federal income taxes since earnings considered permanently reinvested foreign earnings taxed according regulations existing countries earned revenue recognition record products revenue time shipment returns minimal materially affect financial statements record revenue mobile security division vehicle shipped except larger commercial contracts typically longer four months length contract delivery uparmored m1114 hmmwvs us government continues 2005 revenue contracts recognized percentage completion unitsofwork performed method m1114 uparmored hmmwv units sold us government considered sold onsite department defense officer finishes inspection m1114 uparmored hmmwv approves delivery contracts loss position entire estimated loss would recognized balance contract time current contracts profitable record simula revenues related government contracts results principally fixed price contracts recognized persuasive evidence arrangement exists delivery occurred fee fixed determinable collectibility probable generally conditions met company ships products customers revenues related nonrefundable license fees payable initiation licensing agreement recognized immediately income received collectibility reasonably assured provided future obligations performance requirements nonrefundable license fees essence prepayment future royalties recognized revenue straightline basis term initial license record service revenue services provided contractbycontract basis revenues service contracts recognized term contract advertising expense advertising costs expense period incurred earnings per share basic earnings per share computed dividing net income weightedaverage number common shares outstanding diluted earnings per share computed dividing net income weightedaverage number common shares outstanding compounding effects potentially dilutive common stock equivalents principally options except cases effect would antidilutive comprehensive income foreign currency translation accordance sfas 130 reporting comprehensive income assets liabilities denominated foreign currency translated us dollars current rate exchange existing yearend revenues expenses translated average monthly exchange rates cumulative translation adjustment net tax represents effect translating assets liabilities foreign operations recorded increase equity 3936000 reduction equity 4169000 years ended december 31 2003 2002 respectively classified accumulated comprehensive loss current year change accumulated amount net tax included component comprehensive income armor holdings inc subsidiaries notes consolidated financial statements continued stock options grants sfas 123 accounting stockbased compensation sfas 123 establishes fair value based method accounting stockbased employee compensation plans however also allows entity continue measure compensation cost plans using intrinsic value based method accounting prescribed accounting principles board apb opinion 25 accounting stock issued employees fair value based method compensation cost measured grant date based value award recognized service period usually vesting period intrinsic value based method compensation costs excess quoted market price stock grant date measurement date amount employee must pay acquire stock elected continue account employee stock compensation plans apb opinion 25 pro forma disclosures net earnings per share fair value based method accounting defined sfas 123 applied compensation cost stock option grants determined based fair value grant dates 2003 2002 2001 consistent method prescribed sfas 123 companys net earnings per share would adjusted pro forma amounts indicated reclassifications certain reclassifications made 2002 2001 financial statements order conform presentation adopted 2003 reclassifications effect net income retained earnings armor holdings inc subsidiaries notes consolidated financial statements continued recent accounting pronouncements june 2001 financial accounting standards board issued sfas 142 goodwill intangible assets sfas 142 changes accounting goodwill amortization method impairmentonly approach amortization goodwill including goodwill recorded past business combinations ceased upon adoption statement addition statement requires goodwill tested impairment least annually reporting unit level implemented sfas 142 january 1 2002 connection adoption sfas 142 completed second quarter 2002 transitional goodwill impairment test compared fair value reporting unit carrying value determined impairment existed goodwill resulting acquisitions made us subsequent june 30 2001 immediately subject nonamortization provisions sfas 142 accounting goodwill sfas 142 2001 net income earnings per share would follows november 2002 fasb issued fasb interpretation 45 guarantors accounting disclosure requirements guarantees including indirect guarantees indebtedness others interpretation fasb statements 5 57 107 rescission fasb interpretation 34 fin 45 fin 45 elaborates disclosures made guarantor interim annual financial statements obligations certain guarantees issued also clarifies guarantor required recognize inception guarantee liability fair value obligation undertaken issuing guarantee initial recognition initial measurement provisions fin 45 applicable prospective basis guarantees issued modified december 31 2002 irrespective guarantors fiscal yearend adopted provisions statement january 1 2003 significant impact consolidated financial statements january 2003 fasb issued fasb interpretation 46 consolidation variableinterest entities interpretation arb 51 fin 46 fin 46 addresses consolidation business enterprises variable interest entities one following characteristics 1 equity investment risk sufficient permit entity finance activities without additional subordinated financial support parties provided interests absorb expected losses entity 2 equity investors lack one following essential characteristics controlling financial interest direct indirect ability make decisions entitys activities voting rights similar rights obligation absorb expected losses entity occur makes possible entity finance activities armor holdings inc subsidiaries notes consolidated financial statements continued right receive expected residual returns entity occur compensation risk absorbing expected losses interpretation applies immediately variable interest entities created january 31 2003 variable interest entities enterprise obtains interest date applies first fiscal year interim period beginning june 15 2003 variable interest entities enterprise holds variable interest acquired february 1 2003 adoption fin 46 significant impact consolidated financial statements december 2003 fasb issued fasb interpretation 46 consolidation variable interest entities revised december 2003 fin 46r provisions fin 46r follows provides condition would preclude enterprise applying scope exception fin 46 certain entities businesses enterprise andor related parties participated significantly design redesign entity apply entity franchisee enterprise shall consolidate governmental organization shall consolidate financing entity established governmental organization unless financing entity governmental organization b used business enterprise manner similar variable interest entity effort circumvent provisions interpretation 46r troubled debt restructuring defined paragraph 2 fasb statement 15 accounting debtors creditors troubled debt restructurings amended shall accounted accordance statement event requires reconsideration whether entity involved variable interest entity whether enterprise variable interest variable interest entity primary beneficiary entity provide enterprise interest entity provisions fin 46 applied december 24 2003 shall apply fin 46 fin 46r entity accordance effective date provisions fin 46r described fin 46r applied later end first reporting period ends march 15 2004 march 31 2004 company however prior required application fin 46r company must apply fin 46 fin 46r entities considered specialpurpose entities later end first reporting period ends december 15 2003 december 31 2003 company interests variable interest entities subject provisions fin 46 fin 46r october 2001 fasb issued statement financial accounting standard 144 accounting impairment disposal longlived assets sfas 144 sfas 144 establishes primaryasset approach determine cash flow estimation period group assets liabilities represents unit accounting longlived asset held used sfas 144 requires longlived asset 1 abandoned 2 exchanged similar productive asset 3 distributed owners spinoff considered held used abandoned exchanged distributed sfas 144 requires 1 spinoffs exchanges similar productive assets recorded lower carrying value fair value assets classified held used disposed 2 impairment loss resulting spinoff exchange similar productive assets recognized upon asset disposition sfas 144 provides total assets total liabilities discontinued business segments presented separate captions assets liabilities also provides future losses discontinued business segments shall reported incurred adopted sfas 144 effective january 1 2002 reclassification services division discontinued operations subsequent reduction carrying value accordance provisions sfas 144 april 2002 fasb issued statement financial accounting standard 145 rescission fasb 4 44 64 amendment fasb statement 13 technical corrections sfas 145 sfas 145 gains losses related extinguishment debt longer segregated income statement continuing operations provisions sfas 145 effective fiscal years beginning may 15 2002 armor holdings inc subsidiaries notes consolidated financial statements continued june 2002 fasb issued statement financial accounting standard 146 accounting costs associated exit disposal activities sfas 146 sfas 146 addresses financial accounting reporting costs associated exit disposal activities nullifies emerging issues task force issue 943 liability recognition certain employee termination benefits costs exit activity including certain costs incurred restructuring sfas 146 effective exit disposal activities initiated december 31 2002 effects adopting standard material effect us december 2002 fasb issued statement financial accounting standard 148 accounting stockbased compensation transition disclosure sfas 148 sfas 148 provides alternative methods transition voluntary change fair value based method accounting stockbased employee compensation addition sfas 148 amends disclosure requirements statement financial accounting standard 123 accounting stockbased compensation sfas 123 require prominent disclosures annual interim financial statements method accounting stockbased employee compensation effect method used reported results disclosures required sfas 148 included document april 2003 fasb issued statement financial accounting standard 149 amendment statement 133 derivative instruments hedging activities sfas 149 sfas 149 amends clarifies financial accounting reporting derivative instruments including certain derivative instruments embedded contracts hedging activities statement financial accounting standard 133 accounting derivative instruments hedging activities sfas 133 sfas 149 effective contracts entered modified hedging relationships designated june 30 2003 except provisions sfas 149 relate sfas 133 implementation issues effective fiscal quarters began prior june 15 2003 continue applied accordance respective effective dates adoption standard effect us may 2003 fasb issued statement financial accounting standard 150 accounting certain financial instruments characteristics liabilities equity sfas 150 sfas 150 establishes standards issuer classifies measures certain financial instruments characteristics liabilities equity requires issuer classify financial instrument within scope liability asset circumstances many instruments previously classified equity sfas 150 effective financial instruments entered modified may 31 2003 otherwise effective beginning first interim period beginning june 15 2003 except mandatorily redeemable financial instruments nonpublic entities adoption standard effect us may 2003 fasb issued fasb staff position 1461 determining whether onetime termination benefit offered connection exit disposal activity substance enhancement ongoing benefit arrangement staff position states order considered enhancement ongoing benefit arrangement additional termination benefits must represent revision ongoing arrangement limited specified termination event specified future period otherwise additional termination benefits considered onetime termination benefits accounted sfas 146 guidance staff position effective exit disposal activities initiated interim annual reporting periods beginning september 15 2003 adoption staff position expected material impact consolidated financial statements 2 discontinued operations january 2001 management approved restructuring plan close us investigative businesses realign divisions organization eliminate excess facilities reduce overhead businesses worldwide connection restructuring plan division performed review longlived assets identify potential impairments pursuant restructuring plan armorgroup eliminated 26 employees primarily investigative businesses ii eliminated additional 24 employees security business iii incurred lease exit costs result closure armor holdings inc subsidiaries notes consolidated financial statements continued investigative businesses iv wrotedown value tangible intangible assets result impairment review significant actions contemplated restructuring plan completed result restructuring plan recorded pretax charge 103 million december 31 2003 remaining liability 140000 fiscal year 2003 utilization 130000 relating lease termination costs remaining liability classified accrued expenses current liabilities discontinued operations consolidated balance sheet july 15 2002 announced plans sell services division retention merrill lynch company assist sale accordance statement accounting standards 144 accounting impairment disposal longlived assets liabilities services division classified held sale operating results current prior periods reported discontinued operations year ended december 31 2003 2002 2001 usds inc subsidiary providing certain training services formerly reported part services division included amounts classified assets held sale assets liabilities well operating results usds inc reclassified products division management oversight currently resides april 17 2003 announced completed sale armorgroup integrated systems business sale 100 stock armorgroup integrated systems inc low voltage systems technologies inc aerwav integration systems inc ais wholly owned subsidiary aerwav holdings llc consideration integrated systems business received 41 million collateralized note due two years warrant approximately 25 ais 375000 balance due paid advance november 2003 accordance sfas 144 recorded loss 366000 sale based upon analysis discussions advisors regarding estimated realizable value net selling costs services division reduced carrying value recorded net impairment charges 124 million 303 million fiscal 2003 2002 respectively 2003 impairment charges consisted noncash goodwill reduction fiscal 2002 impairment charges consisted approximately 61 million estimated disposal costs 242 million noncash goodwill reduction benefit income taxes discontinued operations 83 million 24 million fiscal 2003 2002 respectively reductions carrying value services division managements best estimate based upon information currently available including discussions investment bankers november 26 2003 announced completed sale armorgroup security service division 33660000 total consideration group private investors led granville baird capital partners london england management received 31360000 cash closing scheduled receive another 2300000 end 2004 received 375000 march 6 2004 recorded loss 88 million sale fourth quarter 2003 accordance generally accepted accounting principles unrealized gains losses included equity accumulated comprehensive income loss recognized period related assets liabilities disposed december 31 2003 litigation support services subsidiary remains discontinued operations actual proceeds disposal business may differ materially current estimates therefore could result either gain loss upon final disposal actively attempting sell business expect sell 2004 armor holdings inc subsidiaries notes consolidated financial statements continued following summary operating results discontinued operations years ended december 31 2003 2002 2001 fiscal 2002 income taxes exclude additional expense 1475000 per paragraphs 26 27 sfas 109 included income continuing operations consolidated basis see note 13 following summary assets liabilities discontinued operations armor holdings inc subsidiaries notes consolidated financial statements continued 3 comprehensive income components comprehensive income loss net tax benefits zero 364000 713000 years ended december 31 2003 2002 2001 listed accordance generally accepted accounting principles unrealized gains losses included equity accumulated comprehensive income loss recognized period related assets liabilities disposed 4 business combinations completed numerous purchase business combinations cash andor shares common stock assumption liabilities certain cases three years period ended december 31 2003 following acquisitions completed 1 includes simula inc hatch imports inc 2 includes speedfeed inc foldable products group bsquare inc evipaq inc trasco breman 911 emergency products 3 includes ogarahess eisenhardt companies guardian identicator armor holdings inc subsidiaries notes consolidated financial statements continued december 9 2003 acquired outstanding stock simula approximately 848 million cash including transaction costs simula safety technology company supplies human safety survival systems branches united states military major aerospace defense prime contractors core markets military aviation safety military personnel safety land marine safety simula provider military helicopter seating systems aircraft land vehicle armor systems protective equipment military personnel technologies used protect humans variety lifethreatening catastrophic situations result acquisition expect 1 strengthen position leading midtier defense security industry consolidator increased scale scope 2 increase relevance department defense customers programs 3 diversify business mix adding fixedwing rotorcraft crashworthy seating 4 combine body armor capabilities simula protech one subsidiaries supplementing position sapi market 5 achieve crossselling opportunities leveraging global sales force relationships 6 offer opportunities cost reduction integration savings rationalization operations acquisition accounted purchase business combination accordingly results operations included financial statements december 9 2003 cost acquire simula allocated assets acquired liabilities assumed according estimated fair values time acquisition follows thousands working capital 5027 property equipment 5360 longterm assets 434 assumed note payable 31135 assumed longterm liabilities 1704 customerrelated intangible 25140 technologyrelated intangible 8814 goodwill deductible 72816 84752 customerrelated intangible asset relates acquired customer relationships amortized 14year weightedaverage useful life straightline basis technologyrelated intangible asset relates certain acquired technology amortized eightyear weightedaverage useful life straightline basis 2002 completed acquisitions speedfeed inc foldable products group bsquare inc evipaq inc trasco breman 911 emergency products august 23 2001 completed acquisition security products services group krollogara company including ogarahess eisenhardt subsidiary ogara prime contractor us military supply armoring blast protection hmmwvs armors variety vehicles including limousines sedans sport utility vehicles money transport vehicles protect varying degrees ballistic blast threats armor holdings inc subsidiaries notes consolidated financial statements continued businesses acquired included consolidated results date acquisition pro forma results 2003 acquisition hatch imports inc 2002 acquisitions presented would differ material amount actual results following unaudited pro forma consolidated results presented show results pro forma basis 2003 acquisition simula made january 1 2002 changes carrying amount goodwill year ended december 31 2003 follows armor holdings inc subsidiaries notes consolidated financial statements continued 5 inventories components inventory december 31 2003 2002 follows 6 property equipment property equipment december 31 2003 2002 summarized follows depreciation expense years ended december 31 2003 2002 2001 approximately 5719000 4953000 3031000 respectively statement operations continuing operations years ended december 31 2003 2002 2001 depreciation expense reduced 130000 year amortization proceeds received economic development grant received department housing urban development 7 accrued expenses current liabilities accrued expenses current liabilities december 31 2003 2002 summarized follows armor holdings inc subsidiaries notes consolidated financial statements continued 8 debt credit facility august 12 2003 terminated existing credit facility entered new collateralized revolving credit facility bank america na wachovia bank na key bank na new credit facility fiveyear revolving credit facility among things provides 1 total maximum borrowings 60 million 2 25 million sublimit issuances standby commercial letters credit 3 5 million sublimit swingline loans 4 5 million sublimit multicurrency borrowings new credit facility bear interest either 1 rate equal libor plus applicable margin ranging 1125 1625 2 alternate base rate higher bank america prime rate b federal funds rate plus 050 3 respect foreign currency loans fronted offshore currency rate plus applicable margin ranging 1125 1625 depending certain conditions credit facility guaranteed certain direct indirect domestic subsidiaries collateralized among things pledge issued outstanding shares stock equity interests certain domestic subsidiaries ii pledge 65 issued outstanding voting shares stock voting equity interests certain direct indirect foreign subsidiaries iii pledge 100 issued outstanding nonvoting shares stock nonvoting equity interests certain direct indirect foreign subsidiaries iv first priority perfected security interest certain domestic assets certain domestic assets certain direct indirect subsidiaries become guarantors obligations new credit facility including among things accounts receivable inventory machinery equipment certain contract rights intellectual property rights general intangibles b senior subordinated notes august 12 2003 completed private placement 150 million aggregate principal amount 825 senior subordinated notes due 2013 notes guaranteed domestic subsidiaries except usds inc senior subordinated basis see armor holdings inc subsidiaries notes consolidated financial statements continued note 20 notes sold qualified institutional buyers reliance rule 144a securities act 1933 amended nonus persons reliance regulation securities act 1933 amended notes rated b1b moodys investors service standard poors rating services respectively 2003 used portion funds acquire simula inc hatch imports inc intend use remaining proceeds offering fund acquisitions repay portion outstanding debt general corporate working capital purposes including funding capital expenditures interest notes payable semiannually fifteenth february august year notes issued discount approximately 25 million investors notes may redeemed option whole part prorata basis august 15 2008 certain specified redemption prices plus accrued interest payable redemption date c senior subordinated convertible notes december 9 2003 purchased simula 1997 simula completed public offering 345 million 8 senior subordinated convertible notes 8 notes january 5 2004 8 notes paidinfull balance notes included current portion longterm debt fair value interest rate swaps september 2 2003 entered interest rate swap agreements designated fair value hedge defined statement financial accounting standard 133 accounting derivative instruments hedge activities sfas 133 aggregate notional amount totaling 150 million agreements entered exchange fixed interest rate notes variable interest rate equal sixmonth libor set arrears plus spread ranging 2735 275 fixed semiannually fifteenth day february august december 31 2003 sixmonth libor 122 agreements subject terms conditions common transactions type accordance sfas 133 changes fair value interest rate swap agreements offset changes fair value fixed rate debt due changes market interest rate fair value interest rate swap agreements approximately 59 million december 31 2003 agreements deemed perfectly effective fair value hedge therefore qualify shortcut method accounting sfas 133 result ineffectiveness expected recognized earnings associated interest rate swap agreements notes maturities longterm debt follows 9 derivative financial instruments account derivative instruments accordance sfas 133 requires freestanding embedded derivative instruments measured fair value recognized balance sheet either assets liabilities addition derivative instruments used hedging relationships must designated reassessed accounted either fair value hedges cash flow hedges pursuant provisions sfas 133 hedge fair value notes using interest rate swaps enter derivative contracts manage fair value changes could caused exposure interest rate changes september 2 2003 entered interest rate swap agreements designated fair value hedges defined sfas 133 aggregate notional amount totaling 150 million interest rate armor holdings inc subsidiaries notes consolidated financial statements continued swaps mature august 15 2013 agreements entered exchange fixed interest rate 825 notes variable interest rate equal sixmonth libor set arrears plus spread ranging 2735 275 fixed semiannually fifteenth february august sixmonth libor rate december 31 2003 122 agreements subject terms conditions common transactions type fair value hedges qualify hedge accounting using shortcut method since swap terms match critical terms notes accordingly changes fair value interest rate swap agreements offset changes fair value notes due changes market interest rate result ineffectiveness expected recognized earnings associated interest rate swap agreements notes fair values interest rate swap agreements obtained counterparties represent estimated amount would receive pay terminate agreement taking consideration difference contract rate interest rates currently quoted agreements similar terms maturities 10 integration charges incurred integration charges approximately 126 million 59 million 33 million years ending december 31 2003 2002 2001 respectively charges year ended december 31 2003 includes 73 million noncash charge stockbased compensation performance plan certain key executives 33 million including 21 million noncash charge severance charge related departure former chief executive officer remaining charges relate relocation assets personnel severance costs systems integration domestic international tax restructuring well integrating sales marketing functions acquired companies 11 commitments contingencies employment contracts party several employment contracts december 31 2003 certain members management contracts varying periods include restrictions competition termination agreements provide salaries bonuses benefits also specify delineate granting various stock options legallitigation matters 1997 terminated several agreements dutch company airmunition international bv ami british company crown limited crown ami crown started action us netherlands arbitration institute rotterdam holland claiming breach contract unauthorized use confidential information inducing ami employee leave work us competition plaintiffs inducing breach confidentiality agreements plaintiffs sought damages 205 million april 29 2003 tribunal rendered interim award favor first three counts however reserved opportunity plaintiffs provide proof damages noting damages amicrown may suffered remaining issue would limited based facts march 4 2004 arbitrators found plaintiffs failed offer evidence damages therefore dismissed claims us arbitrators directed amicrown pay us costs unfortunately ami crown filed bankruptcy protection creditors recovery costs doubtful january 16 1998 services division ceased operations angola subsequently became involved various disputes shrm sa shrm minority joint venture partner relating angolan joint venture known defense system international africa dsia march 6 1998 sia subsidiary shrm filed complaint defense systems france sa dsf commercial court nanterre tribunal de commerce de nanterre seeking paid amount 577286 corresponding alleged debt dsia sia october 2002 commercial court nanterre stayed proceedings pending decisions court appeal paris commercial court february 2003 court appeal ruled shrm parent entity compass group effectively ending proceedings merits compass claims compass appealed decision french court cassation reviews matters law armor holdings inc subsidiaries notes consolidated financial statements continued 1999 prior acquisition ogarahess eisenhardt armoring company converted limited liability company known ogarahess eisenhardt armoring company llc oheac 2001 ogarahess eisenhardt armoring de brasil ltda ohe brazil audited brazilian federal tax authorities assessed ten million reals us34 million based exchange rate december 31 2003 ohe brazil appealed tax assessment case pending extent may liability resulting 2001 audit believe entitled indemnification kroll inc terms purchase agreement dated april 20 2001 despite denial kroll inc liability events occurred prior purchase ogara companies kroll inc however extent appeal relating 2001 activity results unfavorable ruling could liable unpaid taxes incurred subsequent acquisition kroll time believe matter material impact financial position operations liquidity 1999 prior acquisition oheac 2001 several former employees kroll ogara company de mexico sa de cv ogara mexico subsidiary oheac commenced labor claims ogara mexico seeking damages unjustified termination cases still pending labor board mexico city terminated employees seeking back pay benefits since date termination amounting approximately us 29 million accruing approximately us 50400 per month extent may liability believe entitled indemnification kroll inc terms purchase agreement dated april 20 2001 despite denial kroll inc liability events occurred prior purchase ogara companies kroll inc although insurance coverage matter time believe matter material impact financial position operations liquidity august 2001 defense technology corporation america dtc one subsidiaries received civil subpoena united states environmental protection agency requesting information pursuant section 104e comprehensive environmental response compensation liability act regarding possible impact casper wyoming tear gas facility environment dtc responded request date epa taken action respect matter time believe matter material impact financial position operations liquidity december 2001 ogarahess eisenhardt france sa ohe france sold industrial bodywork business operated name labbedivision de ogara hess eisenhardt france carrosserie industriells snc labbe subsequent sale labbe family trust lft owner leasehold interest upon carrosserie business operated sued ohe france snc labbe claiming transfer leasehold valid lft given consent transfer required terms lease lft seeks ohe france sole tenant maintain repair leased building approximate cost renovating building estimated us 32 us 64 million based exchange rate december 31 2003 case currently pending contesting allegations vigorously unable predict outcome matter although insurance coverage matter time believe matter material impact financial position operations liquidity march 22 2002 oheac received civil subpoena department defense dod requesting documents information concerning various quality control documentation regarding parts delivered subcontractors vendors support high mobility multipurpose wheeled vehicles hmmwvs armored fairfield ohio facility period october 1 1999 may 1 2001 oheac complied fully subpoena early 2003 oheac advised department justice doj also investigating separate claims oheac filed individuals involve time frame issues covered dod subpoena oheac learned doj investigation relates certain unidentified action filed federal false claims act pursuant united states government may intervene recover damages oheac fully responded cooperated governments questions investigation doj since notified oheac declined intervene case september 30 2003 action filed federal false claims act voluntarily withdrawn without prejudice armor holdings inc subsidiaries notes consolidated financial statements continued october 18 2002 notified internal revenue service tax return tax year ended december 31 2000 selected examination january 30 2003 notified tax return tax year ended december 31 2001 selected examination examinations currently pending time unable predict outcome matters however believe matter material impact financial position operations liquidity october 2002 sued united states district court district wyoming respect one subsidiaries casper wyoming tear gas plant plaintiffs lawsuit asserted various state law tort claims federal environmental law claims resource conservation recovery act clean air act stemming tear gas plant february 2004 agreed plaintiffs settle lawsuit amount money material us plaintiffs agreed dismiss lawsuit prejudice september 2003 second chance body armor inc body armor manufacturer one competitors notified customers potential safety issue ultimar ultimaxr models second chance body armor claimed zylonr fiber made toyobo japanese corporation used ballistic fabric construction ultimar ultimaxr models degraded rapidly originally anticipated second chance body armor also stated zylonr degradation problem affects entire body armor industry products private claimants state attorneys general already commenced legal action second chance body armor based upon ultimar ultimaxr model vests received investigative demands state agencies texas connecticut second chance body armor licenses simula certain patented technology used body armor manufactures knowledge lawsuit yet brought second chance body armor based upon licensed technology although letter received simula attorney representing police officer injured wearing second chance body armor vest alleging potential liability simula addition us attorney general asked us department justice investigate claims regarding use zylonr bulletproof vests use manufacturing certain body armor models law enforcement personnel simula licensed technology second chance body armor may impacted pending claims second chance body armor investigation conducted us department justice simula included claims pending second chance body armor investigation conducted us department justice cannot assure judgment settlement resolution simula material impact simulas financial position operations liquidity national institute justice nij engaged ongoing inquiry investigation bulletresistant vests protocol testing used vests well reliability zylon fibers consulted cooperated fully nij endeavor date nij embarked first phase testing entails vests heavily worn exposed adverse conditions involves ballistic standard applicable new vests although vests tested including experienced level penetration nij specifically warned misuse misinterpretation results emphasizing data produced far preliminary nature applies small sample size therefore possible draw statisticallybased conclusions results nij continue conduct testing analyze issues order determine conclusions reached performance reliability aged vests requested nij provide us testing data intend evaluate review nij results continuing effort assist nij developing uniform standards certification new vests testing used vests nij continues encourage law enforcement officers wear body armor light fact lives 2700 law enforcement officers saved use bulletresistant body armor past 30 years addition normal course business subjected various types claims currently ongoing litigations areas products liability general liability products used wide variety law enforcement situations environments products cause serious personal property injury death carefully properly used adequately trained personnel believe adequate insurance coverage claims incurred normal course business cases effect financial statements generally limited amount insurance deductible selfinsured retention annual insurance premiums self insurance retention amounts risen significantly past several years may continue extent able purchase insurance coverage time believe claims pending litigation material impact financial position operations liquidity armor holdings inc subsidiaries notes consolidated financial statements continued 12 information concerning business segments geographical sales leading manufacturer provider specialized security products training support services related products vehicle armor systems military helicopter seating systems aircraft land vehicle safety systems protective equipment military personnel technologies used protect humans variety lifethreatening catastrophic situations products systems used domestically internationally military law enforcement security corrections personnel well governmental agencies multinational corporations individuals organized operated three business divisions armor holdings products also referred products division armor mobile security also referred mobile security division simula services division classified discontinued operations longer included presentation see note 2 armor holdings products armor holdings products division manufactures sells broad range high quality equipment marketed brand names well known respected military law enforcement communities products manufactured division include concealable tactical body armor hard armor duty gear lesslethal munitions antiriot products police batons emergency lighting products forensic products firearms accessories weapon maintenance products foldable ladders specialty gloves usds inc small subsidiary providing certain training services formerly reported part services division included amounts classified assets held sale discontinued operations reclassified armor holdings products division management oversight currently resides armor mobile security armor mobile security division manufactures installs ballistic blast protection armoring systems military vehicles commercial vehicles military aircraft missile components brand name ogarahess eisenhardt ogara solesource provider us military supply armoring blast protection systems well maintenance services high mobility multipurpose wheeled vehicle hmmwv commonly known humvee additionally subcontracted develop ballistically armored sealed truck cab high mobility artillery rocket system himars currently lowrate initial production us army armor variety commercial vehicles including limousines sedans sport utility vehicles commercial trucks cashintransit vehicles protect varying degrees ballistic blast threats armor mobile security division created connection acquisition ogara august 22 2001 ogara acquisition simula supplies human safety survival systems us military major aerospace defense prime contractors core markets military aviation safety military personnel safety land marine safety simula provide military helicopter seating systems aircraft land vehicle armor systems protective equipment military personnel technologies used protect humans variety lifethreatening catastrophic situations invested substantial resources outside united states plan continue future armor mobile security division invested substantial resources europe south america operations subject risk new different legal regulatory requirements local jurisdictions tariffs trade barriers potential difficulties staffing managing local operations currency risks potential imposition restrictions investments potentially adverse tax consequences including imposition increase withholding taxes remittances payments subsidiaries local economic political social conditions governments many developing countries exercised continue exercise substantial influence many aspects private sector government actions future could significant adverse effect economic conditions developing country may otherwise material adverse effect us operating companies political risk insurance countries currently conduct business moreover applicable agreements relating interests operating companies frequently governed foreign law result event dispute may difficult us enforce rights accordingly may little recourse upon occurrence developments armor holdings inc subsidiaries notes consolidated financial statements continued revenues operating income total assets continuing segments follows armor holdings inc subsidiaries notes consolidated financial statements continued financial information respect revenues operating income continuing operations geographic operating income continuing operations amortization expense integration charges total assets principal geographic areas follows reconciliation consolidated geographic operating income continuing operations consolidated operating income continuing operations follows armor holdings inc subsidiaries notes consolidated financial statements continued 13 income taxes income tax expense benefit continuing operations years ended december 31 2003 2002 2001 consisted following significant components net deferred tax asset related continuing operations december 31 2003 2002 follows recognition deferred tax assets based managements belief likely tax benefit associated temporary differences operating capital loss carryforwards utilized valuation allowance recorded deferred tax assets likely realization occur valuation allowance december 31 2003 consisted 11320000 capital loss carryforward 75000 net operating loss carryforwards december 31 2003 federal state foreign nols providing tax effected benefit 2811000 nols expire varying amounts fiscal years 2006 2022 december 31 2003 also tax credits 150000 subject certain limitations due acquisition safariland ltd also approximately 912000 foreign tax credits expiring 2006 subject periodic review federal foreign state local tax jurisdictions ordinary course business 2002 notified internal revenue service irs certain prior year income tax returns would examined december 31 2003 irs exam concluded believe material impact financial statements armor holdings inc subsidiaries notes consolidated financial statements continued us taxes provided unremitted foreign earnings approximately 90 million continuing operations earnings considered permanently reinvested nonus operations net deferred tax assets described included accompanying consolidated balance sheets follows following reconciles income tax expense computed federal statutory income tax rate provision income taxes recorded income statement years ended december 31 2003 2002 2001 14 stockholders equity preferred stock july 16 1996 stockholders authorized series preferred stock rights privileges preferences board directors shall time determine issued preferred stock options grants 1994 implemented incentive stock plan outside directors stock plan plans collectively provide granting options certain key employees well providing grant common stock outside directors full time employees pursuant plans 1050000 shares common stock reserved made available distribution option prices stock may purchased incentive stock plan less fair market value common stock dates grants effective january 19 1996 stock grants awarded 1994 incentive stock plan accelerated considered fully vested 1996 implemented incentive stock plan outside directors stock plan plans collectively provide granting options certain key employees directors pursuant plans amended 2200000 shares common stock reserved made available distribution option prices stock may purchased incentive stock plan less fair market value common stock dates grants 1998 implemented new nonqualified stock option plan pursuant new plan 725000 shares common stock reserved made available distribution january 1 1999 distributed 725000 shares allocated plan 1999 implemented 1999 stock incentive plan 1999 plan reserved 2000000 shares common stock 1999 plan 1999 plan provides granting options employees officers directors consultants independent contractors advisors company option prices stock may purchased 1999 plan less fair market value common stock dates grants armor holdings inc subsidiaries notes consolidated financial statements continued 2002 implemented two new stock option plans 2002 stock incentive plan authorizes issuance 2700000 shares common stock upon exercise stock options connection issuance restricted stock bonuses 2002 stock incentive plan authorizes granting stock options restricted stock bonuses employees officers directors consultants independent contractors advisors armor holdings subsidiaries 2002 executive stock plan provides grant total 470000 stock options stock awards key employees terms provisions 2002 executive stock plan substantially 2002 stock incentive plan except may grant nonqualified stock options 2002 executive stock plan 2002 executive stock plan adopted march 13 2002 shares available grant 2002 executive stock plan granted executive officers march 13 2002 sfas 123 fair value option grant estimated date grant using blackscholes optionpricing model following weightedaverage assumptions years ended december 31 2003 2002 2001 increase volatility fiscal 2001 fiscal 2003 primarily due increase demand stock drove price increased volatility weighted average fair value options granted 2003 2002 2001 follows outstanding options generally consisting tenyear incentive nonqualified stock options generally vest become exercisable threeyear period date grant outstanding options generally expire ten years date grant upon retirement company contingent upon continued employment applicable tenyear period armor holdings inc subsidiaries notes consolidated financial statements continued summary status stock option grants december 31 2003 changes years ending dates presented following table summarizes information stock options outstanding december 31 2003 armor holdings inc subsidiaries notes consolidated financial statements continued remaining nonexercisable options december 31 2003 become exercisable follows 2004 932642 2005 441522 2006 480340 earnings per share following details earnings per share computations basic diluted basis years ended december 31 2003 2002 2001 15 supplemental cash flow information armor holdings inc subsidiaries notes consolidated financial statements continued 16 quarterly results unaudited following table presents summarized unaudited quarterly results operations company fiscal 2003 2002 believe necessary adjustments included amounts stated present fairly following selected information read conjunction consolidated financial statements notes thereto included elsewhere herein future quarterly operating results may fluctuate depending number factors results operations particular quarter necessarily indicative results operations full year quarter 17 employee benefits plan october 1997 formed 401k plan provides voluntary contributions employees allows discretionary contribution us form cash made contributions approximately 332000 395500 272700 plan 2003 2002 2001 respectively acquired simulas noncontributory defined benefit pension plan pension plan employees december 9 2003 pension plan originally adopted november 1 1980 contributions made pension plan based upon actuarially determined amounts effective july 1 1999 simula froze plan new participants effective december 8 2003 prior acquisition pension plan simula froze pension plan future service participants elected payout supplemental retirement plan simula represents 1067000 net amount recognized amount paid february 25 2004 armor holdings inc subsidiaries notes consolidated financial statements continued pension plans funded status amounts recognized balance sheet december 31 follows armor holdings inc subsidiaries notes consolidated financial statements continued pension plans assets consist money market accounts investments common stocks bonds mutual funds 18 related party transactions effective january 1 2002 kanders company inc kanders co corporation controlled warren b kanders chairman board directors chief executive officer entered agreement us provide certain investment banking financial advisory related services five year term expires december 31 2006 kanders co receive mutually agreed upon fee transactionbytransaction basis term agreement aggregate fees agreement exceed 1575000 calendar year also agreed reimburse kanders co reasonable outofpocket expenses including kanders cos expenses office space executive assistant furniture equipment travel entertainment reasonable fees disbursements counsel consultants retained kanders co april 2003 connection mr kanders appointed chief executive officer armor holdings armor holdings kanders co agreed terminate agreement pursuant kanders co provided certain services armor holdings paid kanders co 143000 investment banking services fiscal 2003 including april 2003 also reimbursed kanders co outofpocket expenses aggregate amount 61000 fiscal year ended december 31 2003 including april 2003 effective january 1 2003 entered transportation services agreement kanders aviation llc entity controlled mr kanders chairman board chief executive officer pursuant terms transportation services agreement upon request kanders aviation may sole discretion provide us airport air transportation services via certain aircraft transportation services agreement remain effect indefinitely terminated written notice either party thereto party thereto term transportation services agreement reimburse kanders aviation amount equal fair market value air transportation services provided kanders aviation us additional expenses incurred kanders aviation connection air transportation services nicholas sokolow one directors member law firm sokolow dunaud mercadier carreras located paris france retained sokolow dunaud mercadier carreras fiscal year ended december 31 2003 may retain sokolow dunaud mercadier carreras fiscal year ending december 31 2004 fiscal year ended december 31 2003 paid sokolow dunaud mercadier carreras 124000 legal services connection various acquisitions 19 operating leases party certain real estate equipment vehicle leases several leases include options renewal escalation clauses cases management expects normal course business leases renewed replaced leases approximate total future minimum annual lease payments noncancelable leases continuing operations follows year thousands 2004 3417 2005 2249 2006 1659 2007 1593 2008 1480 thereafter 9321 19719 incurred rent expense approximately 1467000 1200000 765000 years ended december 31 2003 december 31 2002 december 31 2001 respectively armor holdings inc subsidiaries notes consolidated financial statements continued 20 guarantor nonguarantor financial statements august 12 2003 sold 150 million senior subordinated notes private placements pursuant rule 144a regulation senior subordinated notes uncollateralized obligations rank junior right payment existing future senior debt senior subordinated notes guaranteed jointly severally senior subordinated uncollateralized basis domestic subsidiaries except usds inc following consolidating financial information presents consolidating balance sheets december 31 2003 2002 related statements income cash flows three years period ended december 31 2003 armor holdings inc parent guarantor subsidiaries nonguarantor subsidiaries armor holdings inc consolidated basis information includes elimination entries necessary consolidate armor holdings inc parent guarantor nonguarantor subsidiaries investments subsidiaries accounted parent using equity method accounting guarantor nonguarantor subsidiaries presented combined basis principal elimination entries eliminate investments subsidiaries intercompany balances transactions separate financial statements guarantor nonguarantor subsidiaries presented management believes financial statements would meaningful investors armor holdings inc subsidiaries notes consolidated financial statements continued armor holdings inc subsidiaries consolidating balance sheets armor holdings inc subsidiaries notes consolidated financial statements continued armor holdings inc subsidiaries consolidating balance sheets armor holdings inc subsidiaries notes consolidated financial statements continued armor holdings inc subsidiaries consolidating statements operations armor holdings inc subsidiaries notes consolidated financial statements continued armor holdings inc subsidiaries consolidating statements operations armor holdings inc subsidiaries notes consolidated financial statements continued armor holdings inc subsidiaries consolidating statements operations armor holdings inc subsidiaries notes consolidated financial statements continued armor holdings inc subsidiaries consolidating statements cash flows armor holdings inc subsidiaries notes consolidated financial statements continued armor holdings inc subsidiaries consolidating statements cash flows armor holdings inc subsidiaries notes consolidated financial statements continued armor holdings inc subsidiaries consolidating statements cash flows armor holdings inc subsidiaries notes consolidated financial statements continued 21 subsequent events january 2 2004 ontario industrial development authority variable rate demand industrial development revenue bonds series 1989 paidin full restricted cash 26 million january 5 2004 311 million 8 senior subordinated convertible notes plus accrued interest paidin full february 25 2004 paid 1067000 fully satisfy supplemental retirement plan simula inc acquired december 9 2003 acquisition simula march 5 2004 acquired majority assets assumed certain liabilities vector associates inc dba odv inc leading manufacturer distributor field drug test kits crime scene products purchase price 3289000 including 2739000 cash closing additional 275000 plus interest payable december 31 2004 subject certain adjustments additional 275000 plus interest payable april 30 2005 subject certain adjustments signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized armor holdings inc warren b kanders warren b kanders chairman board directors chief executive officer dated march 12 2004 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated warren b kanders warren b kanders chairman board directors chief executive officer march 12 2004 glenn j heiar nicholas sokolow glenn j heiar nicholas sokolow chief financial officer director march 12 2004 march 12 2004 burtt r ehrlich thomas w strauss burtt r ehrlich thomas w strauss director march 12 2004 march 12 2004 alair townsend deborah zoullas alair townsend deborah zoullas director march 12 2004 march 12 2004item 15 exhibits financial statements schedules following financial statements appear sequentially beginning page number included report form 10k financial statement schedules omitted since either required applicable information otherwise included report independent registered certified public accountants consolidated balance sheets consolidated income statements consolidated statements stockholders equity comprehensive income loss consolidated statements cash flows notes consolidated financial statements b exhibits following exhibits hereby filed part annual report form 10k exhibit description 21 stock purchase agreement dated april 20 2001 among armor holdings inc bengal acquisition corp krollogara company ogarahess eisenhardt armoring company ogara company ogara security associates inc filed exhibit 21 current report form 8k dated april 20 2001 22 amendment dated august 20 2001 stock purchase agreement dated april 20 2001 among armor holdings inc bengal acquisition corp krollogara company ogarahess eisenhardt armoring company ogara company ogara security associates inc filed exhibit 22 current report form 8k dated august 22 2001 23 amendment dated august 21 2001 stock purchase agreement dated april 20 2001 among armor holdings inc bengal acquisition corp krollogara company ogarahess eisenhardt armoring company ogara company ogara security associates inc filed exhibit 23 current report form 8k dated august 23 2001 24 agreement plan merger dated august 29 2003 among armor holdings inc ahi bulletproof acquisition corp simula inc filed appendix registration statement form s4 filed commission september 23 2003 27 agreement plan merger dated september 28 2004 among armor holdings inc specialty acquisition corp specialty group inc joseph f murray jr john p sweeney shareholders agent filed exhibit 21 current report form 8k filed october 4 2004 28 stock purchase agreement dated november 5 2004 among armor holdings products llc jack b corwin trustee jack b corwin revocable trust dated june 26 1992 gary w french trustee gary w carol french revocable trust dated december 31 1999 gary w french trustee french family irrevocable trust dated december 31 1999 bianchi international accucase llc bianchi gunleather leather products co inc armor holdings inc jack b corwin gary w french filed exhibit 21 current report form 8k filed november 12 2004 31 certificate incorporation armor holdings inc filed exhibit 31 current report form 8k dated september 3 1996 32 certificate merger american body armor equipment inc florida corporation armor holdings inc filed exhibit 32 current report form 8k dated september 3 1996 33 certificate amendment certificate incorporation armor holdings inc amended filed exhibit 31 form 10q quarterly report fiscal quarter ended june 30 2004 34 amended restated bylaws armor holdings inc filed exhibit 31 form 10q quarterly report fiscal quarter ended march 31 2004 41 indenture dated august 12 2003 among armor holdings subsidiary guarantors listed signatories thereto wachovia bank national association trustee form old note attached exhibit thereto filed exhibit 102 form 10q quarterly report fiscal quarter ended june 30 2003 42 first supplemental indenture dated september 30 2003 among armor holdings inc subsidiary guarantors listed signatories indenture subsidiaries listed schedule first supplemental indenture wachovia bank national association trustee filed exhibit 42 registration statement form s4 filed commission january 7 2004 43 second supplemental indenture dated december 9 2003 among armor holdings inc subsidiary guarantors listed signatories thereto wachovia bank national association trustee filed exhibit 43 registration statement form s4 filed commission january 7 2004 44 third supplemental indenture dated december 24 2003 among armor holdings inc subsidiary guarantors listed signatories thereto wachovia bank national association trustee filed exhibit 44 registration statement form s4 filed commission january 7 2004 45 fourth supplemental indenture dated march 24 2004 among armor holdings inc subsidiary guarantors listed signatories thereto odv holdings corp wachovia bank national association trustee filed exhibit 41 form 10q quarterly report fiscal quarter ended march 31 2004 46 fifth supplemental indenture dated august 16 2004 among armor holdings inc subsidiary guarantors listed signatories thereto kleen bore inc wachovia bank national association trustee filed exhibit 41 form 10q quarterly report fiscal quarter ended september 30 2004 47 sixth supplemental indenture dated september 24 2004 among armor holdings inc subsidiary guarantors listed signatories thereto armor holdings aircraft llc wachovia bank national association trustee filed exhibit 42 form 10q quarterly report fiscal quarter ended september 30 2004 48 seventh supplemental indenture dated december 29 2004 among armor holdings inc subsidiary guarantors listed signaturies thereto wachovia bank national association trustee 49 registration rights agreement dated august 12 2003 among armor holdings inc subsidiary guarantors listed signatories thereto wachovia capital markets llc filed exhibit 103 form 10q quarterly report fiscal quarter ended june 30 2003 410 form new 8 14 senior subordinated notes due 2013 filed exhibit 46 registration statement form s4 filed commission january 7 2004 411 indenture dated october 29 2004 among armor holdings inc wachovia bank national association trustee filed exhibit 41 current report form 8k filed november 1 2004 412 first supplemental indenture dated october 29 2004 among armor holdings inc subsidiary guarantors named therein wachovia bank national association trustee together form note attached thereto filed exhibit 42 current report form 8k filed november 1 2004 413 second supplemental indenture dated december 29 2004 among armor holdings inc subsidiary guarantors named therein wachovia bank national association trustee 101 purchase agreement dated august 6 2003 among armor holdings inc subsidiary guarantors listed signatories thereto wachovia capital markets llc filed exhibit 101 form 10q quarterly report fiscal quarter ended june 30 2003 102 credit agreement dated august 12 2003 among armor holdings inc lender time party thereto bank america na administrative agent swing line lender lc issuer wachovia bank national association syndication agent key bank national association documentation agent filed exhibit 104 form 10q quarterly report fiscal quarter ended june 30 2003 103 subsidiary guaranty agreement dated august 12 2003 certain subsidiaries armor holdings inc identified signature pages thereto additional guarantor may become party guaranty favor bank america na administrative agent filed exhibit 105 form 10q quarterly report fiscal quarter ended june 30 2003 104 collateral agreement dated august 12 2003 among armor holdings certain subsidiaries identified signature pages thereto additional grantor may become party agreement favor bank america na administrative agent filed exhibit 106 form 10q quarterly report fiscal quarter ended june 30 2003 105 trademark security agreement dated august 12 2003 entities listed signature pages thereto favor bank america na administrative agent filed exhibit 107 form 10q quarterly report fiscal quarter ended june 30 2003 106 patent security agreement dated august 12 2003 entities listed signature pages attached thereto favor bank america na administrative agent filed exhibit 108 form 10q quarterly report fiscal quarter ended june 30 2003 107 promissory note dated august 12 2003 principal amount 15000000 made armor holdings inc favor keybank national association filed exhibit 109 form 10q quarterly report fiscal quarter ended june 30 2003 108 promissory note dated august 12 2003 principal amount 22500000 made armor holdings inc favor wachovia bank national association filed exhibit 1010 form 10q quarterly report fiscal quarter ended june 30 2003 109 first amendment credit agreement dated january 9 2004 among armor holdings inc lenders time party thereto bank america na administrative agent wachovia bank national association syndication agent keybank national association documentation agent filed exhibit 101 form 10q quarterly report fiscal quarter ended march 31 2004 1010 second amendment credit agreement dated march 29 2004 among armor holdings inc lenders time party thereto bank america na administrative agent wachovia bank national association syndication agent keybank national association documentation agent filed exhibit 102 form 10q quarterly report fiscal quarter ended march 31 2004 1011 third amendment credit agreement dated october 19 2004 among armor holdings inc lenders time party thereto bank america na administrative agent wachovia bank national association syndication agent keybank national association documentation agent filed exhibit 101 current report form 8k filed november 1 2004 1012 employment agreement warren b kanders armor holdings inc dated january 1 2002 filed exhibit 104 form 10q quarterly report fiscal quarter ended march 31 2002 1013 letter agreement dated july 26 2003 armor holdings inc warren b kanders filed exhibit 991 current report form 8k dated july 26 2003 1014 amendment 2 dated november 4 2003 employment agreement armor holdings inc warren b kanders filed exhibit 101 form 10q quarterly report fiscal quarter ended september 30 2003 1015 employment agreement armor holdings inc robert r schiller dated january 1 2002 filed exhibit 102 form 10q quarterly report fiscal quarter ended march 31 2002 1016 amendment dated november 4 2003 employment agreement armor holdings inc robert r schiller filed exhibit 102 form 10q quarterly report fiscal quarter ended september 30 2003 1017 form indemnification agreement directors officers armor holdings inc filed exhibit 104 form 10q quarterly report fiscal quarter ended march 31 2004 1018 american body armor equipment inc 1994 incentive stock plan incorporated reference form s8 filed october 10 1994 reg 33018863 1019 american body armor equipment inc 1994 directors stock plan incorporated reference form s8 filed october 31 1994 reg 33018863 1020 armor holdings inc amended restated 1996 stock option plan incorporated reference 1997 definitive proxy statement respect 1997 annual meeting stockholders held june 12 1997 filed commission may 27 1997 1021 armor holdings inc amended restated 1996 nonemployee directors stock option plan incorporated reference 1997 definitive proxy statement respect 1997 annual meeting stockholders held june 12 1997 filed commission may 27 1997 1022 armor holdings inc 1998 stock option plan filed exhibit 1019 form 10k annual report fiscal year ended december 31 1998 1023 armor holdings inc 1999 stock incentive plan filed appendix 1999 definitive proxy statement respect 1999 annual meeting stockholders filed commission may 21 1999 1024 armor holdings inc amended restated 2002 stock incentive plan 1025 armor holdings inc 2002 executive stock plan filed exhibit 106 form 10q quarterly report fiscal quarter ended march 31 2002 1026 transportation services agreement dated december 10 2003 kanders aviation llc armor holdings inc filed exhibit 103 form 10q quarterly report fiscal quarter ended march 31 2004 211 subsidiaries registrant 231 consent pricewaterhousecoopers llp 311 certification principal executive officer required rule 13a14a securities exchange act 1934 312 certification principal financial officer required rule 13a14a securities exchange act 1934 321 certification principal executive officer required rule 13a14b securities exchange act 1934 322 certification principal financial officer required rule 13a14b securities exchange act 1934 filed herewith incorporated herein reference exhibit represents management contract exhibit represents compensatory plan index consolidated financial statements armor holdings inc report independent registered certified public accounting firm consolidated balance sheets consolidated statements operations consolidated statements stockholders equity comprehensive income loss consolidated statements cash flow notes consolidated financial statements report independent registered certified public accounting firm board directors stockholders armor holdings inc completed integrated audit armor holdings incs 2004 consolidated financial statements internal control financial reporting december 31 2004 audits 2003 2002 consolidated financial statements accordance standards public company accounting oversight board united states opinions based audits presented consolidated financial statements opinion consolidated financial statements listed accompanying index present fairly material respects financial position armor holdings inc subsidiaries company december 31 2004 2003 results operations cash flows three years period ended december 31 2004 conformity accounting principles generally accepted united states america financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits statements accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit financial statements includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion internal control financial reporting also opinion managements assessment included managements annual report internal control financial reporting appearing item 9a company maintained effective internal control financial reporting december 31 2004 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission coso fairly stated material respects based criteria furthermore opinion company maintained material respects effective internal control financial reporting december 31 2004 based criteria established internal control integrated framework issued coso companys management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting responsibility express opinions managements assessment effectiveness companys internal control financial reporting based audit conducted audit internal control financial reporting accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit internal control financial reporting includes obtaining understanding internal control financial reporting evaluating managements assessment testing evaluating design operating effectiveness internal control performing procedures consider necessary circumstances believe audit provides reasonable basis opinions companys internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles companys internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition companys assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate described managements annual report internal control financial reporting management excluded specialty group inc bianchi international assessment internal control financial reporting december 31 2004 acquired company purchase business combinations 2004 excluded specialty group inc audit internal control financial reporting specialty group inc whollyowned subsidiary whose total assets total revenues represent 9 1 respectively related consolidated financial statement amounts year ended december 31 2004 also excluded bianchi international audit internal control financial reporting bianchi international whollyowned subsidiary whose total assets total revenues represent 6 0 respectively related consolidated financial statement amounts year ended december 31 2004 pricewaterhousecoopers llp jacksonville florida march 6 2005 armor holdings inc subsidiaries consolidated balance sheets december 31 2004 december 31 2003 thousands except share data december 31 2004 december 31 2003 assets current assets cash equivalents 421209 111850 restricted cash 2600 accounts receivable net allowance doubtful accounts 3077 1673 174559 72635 costs earned gross profit excess billings 893 inventories 176208 80527 prepaid expenses current assets 46935 22032 current assets discontinued operations note 2 753 total current assets 819804 290397 property equipment net accumulated depreciation 27917 19046 77307 57576 goodwill net accumulated amortization 4024 262013 175707 patents licenses trademarks net accumulated amortization 6830 2627 112459 44174 longterm assets discontinued operations note 2 1603 assets 20768 16169 total assets 1292351 585626 liabilities stockholders equity current liabilities current portion longterm debt 621 32107 shortterm debt 343756 498 accounts payable 69601 30304 accrued expenses current liabilities 107247 58218 income taxes payable 9001 current liabilities discontinued operations note 2 626 total current liabilities 530226 121753 longterm debt less current portion 156751 158300 longterm liabilities 1951 8970 deferred income taxes 38227 1238 total liabilities 727155 290261 commitments contingencies note 12 stockholders equity preferred stock 01 par value 5000000 shares authorized shares issued outstanding common stock 01 par value 75000000 shares authorized 40133870 34337034 issued 34073648 28276812 outstanding december 31 2004 december 31 2003 respectively 402 344 additional paidin capital 504809 318460 retained earnings 125481 44942 accumulated comprehensive income 6821 3936 treasury stock 72317 total stockholders equity 565196 295365 total liabilities stockholders equity 1292351 585626 accompanying notes integral part consolidated financial statements armor holdings inc subsidiaries consolidated statements operations years ended december 31 2004 2003 2002 thousands except per share data december 31 2004 december 31 2003 december 31 2002 revenues aerospace defense 605398 91673 59318 products 249765 193960 179946 mobile security 124520 79539 65853 total revenues 979683 365172 305117 costs expenses cost revenues 714192 253586 210745 cost warranty revision 5000 operating expenses 100261 62795 49836 amortization 4255 489 245 integration charges 10260 12573 5926 operating income 145715 35729 38365 interest expense net 6776 4012 923 expense net 1945 508 51 income continuing operations provision income taxes 136994 31209 37391 provision income taxes 56417 14203 16054 income continuing operations 80577 17006 21337 discontinued operations note 2 loss discontinued operations net income tax benefit 38 6120 39026 net income loss 80539 10886 17689 net income loss per common share basic income continuing operations 256 061 070 loss discontinued operations 000 022 128 basic income loss per share 256 039 058 net income loss per common share diluted income continuing operations 244 059 069 loss discontinued operations 000 021 126 diluted income loss per share 244 038 057 weighted average shares basic 31419 28175 30341 weighted average shares diluted 33025 28954 30957 accompanying notes integral part consolidated financial statements armor holdings inc subsidiaries consolidated statements stockholders equity comprehensive income loss years ended december 31 2004 2003 2002 thousands common stock accumulated additional par paidin retained comprehensive treasury shares value capital earnings loss income stock total balance december 31 2001 30857 331 301995 51745 4473 23579 326019 exercise stock options distribution stock awards 528 5 4135 4140 tax benefit exercises options 832 sale put options 525 repurchase stock 1928 26054 comprehensive loss net loss 17689 foreign currency translation adjustments net taxes 364 304 total comprehensive loss 17385 balance december 31 2002 29457 336 307487 34056 4169 49633 288077 exercise stock options distribution stock awards 743 8 9028 9036 tax benefit exercises options 1136 extension stock options related termination former chief executive officer 809 repurchase stock 1923 22684 comprehensive income net income 10886 sale armorgroup 3231 foreign currency translation adjustments 4874 total comprehensive income 18991 balance december 31 2003 28277 344 318460 44942 3936 72317 295365 exercise stock options distribution stock awards 1797 18 40582 40600 tax benefit exercises stock options 4646 issuance common stock 4000 40 141121 141161 comprehensive income net income 80539 foreign currency translation adjustments net taxes 642 2885 total comprehensive income 83424 balance december 31 2004 34074 402 504809 125481 6821 72317 565196 accompanying notes integral part consolidated financial statements armor holdings inc subsidiaries consolidated statements cash flow years ended december 31 2004 2003 2002 thousands year ended december 31 2004 december 31 2003 december 31 2002 cash flows operating activities income continuing operations 80577 17006 21337 adjustments reconcile income continuing operations cash provided operating activities depreciation amortization 15051 7608 5580 loss disposal fixed assets 864 327 200 deferred income taxes 4006 5025 359 noncash termination charge 1408 2093 noncash restricted charges 6294 7266 changes operating assets liabilities net acquisitions increase accounts receivable 90496 995 2554 increase inventories 73106 2501 9381 increase decrease prepaid expenses assets 22075 2381 2246 increase decrease accounts payable accrued expenses current liabilities 74833 17043 3754 increase income taxes payable 17324 361 6745 net cash provided operating activities 14680 50852 16286 cash flows investing activities purchase property equipment 19419 8684 5902 purchase patents trademarks 112 185 69 purchase equity investment 5275 proceeds sale equity investment 5823 purchase shortterm investment securities 286430 143400 4000 proceeds sales shortterm investment securities 286430 143400 4000 collection note receivable 2175 decrease increase restricted cash 2600 sale business net cash disposed 125 31361 additional consideration purchased businesses 33943 1026 9375 purchase businesses net cash acquired 158442 90512 8818 net cash used investing activities 206468 71646 24164 cash flows financing activities proceeds exercise stock options 25192 8471 4227 proceeds issuance common stock 142500 cash paid common stock offering costs 1339 repurchases treasury stock 22684 26054 proceeds sale put options 525 cash paid financing costs 6156 4599 326 borrowings shortterm debt 341550 borrowings longterm debt 148278 repayments longterm debt 3381 1688 730 borrowings line credit 24588 31830 32372 repayments line credit 23049 32098 32447 net cash provided used financing activities 499905 127510 22433 effect exchange rate changes cash equivalents 1959 833 126 net cash used discontinued operations 717 8612 4139 net increase decrease cash equivalents 309359 98937 34576 cash equivalents beginning period 111850 12913 47489 cash equivalents end period 421209 111850 12913 cash equivalents end period continuing operations 421209 111850 12913 discontinued operations 76 3638 421209 111926 16551 accompanying notes integral part consolidated financial statements armor holdings inc subsidiaries notes consolidated financial statements continued 1 background summary significant accounting policies company nature business armor holdings inc whollyowned subsidiaries company us leading manufacturer provider specialized security products training support services related products vehicle armor systems military helicopter seating systems aircraft armor land vehicle armor systems protective equipment military personnel technologies used protect humans variety lifethreatening catastrophic situations products vehicle armor systems human safety survival systems used domestically internationally military law enforcement security corrections personnel well governmental agencies multinational corporations individuals effective first quarter 2004 instituted new segment reporting format include three reportable business divisions aerospace defense group products division mobile security division aerospace defense group formed upon completion acquisition simula inc december 9 2003 aerospace defense group also includes military business including armor blast protection systems uparmoring high mobility multipurpose wheeled vehicles uparmored hmmwv commonly known humvee military vehicle armor programs previously included mobile security division aerospace defense group also includes small arms protection insert sapi plate produced protech subsidiary pittsfield massachusetts previously reported part products division historical results businesses reclassified part aerospace defense group reporting change made better reflect managements approach operating directing businesses certain instances align financial reporting market customer segments prior period segment data restated conform 2004 presentation armorgroup services classified discontinued operations amounts disclosed footnotes related continuing operations unless otherwise indicated continuing operations aerospace defense aerospace defense group supplies human safety survival systems us military major aerospace defense prime contractors core markets military aviation safety military personnel safety land marine safety brand name ogarahess eisenhardt solesource provider us military armor blast protection systems uparmored hmmwvs also contract us army provide spare parts logistics ongoing field support services currently installed base approximately 8350 uparmored hmmwvs additionally provide blast ballistic protection kits standard hmmwvs installed existing equipment field aerospace defense group subcontracted develop ballistic blast protected armored sealed truck cab high mobility artillery rocket system himars program recently transitioned us army us marine corps developmental low rate initial production deliveries commenced 2003 continued 2004 also supply armor subsystems tactical wheeled vehicles simula provide military helicopter seating systems helicopter cockpit airbag systems aircraft armor land vehicle armor kits hmmwv heavy expanded mobility tactical truck hemtt paletized load system pls heavy equipment transporter het m915 armored security vehicle asv body armor protective equipment military personnel emergency bailout parachutes survival ensembles worn military aircrew primary customers products us army us marine corps boeing sikorsky aircraft simulas aviation safety products provided sole source basis us armed forces adopted ceramic body armor key element protective ensemble worn troops iraq afghanistan simula developer specialized product called sapi one largest suppliers us forces also provide ceramic body armor protech subsidiary based pittsfield massachusetts specialty group inc specialty defense operations pennsylvania tennessee kentucky supplier military law enforcement customers united states overseas specialty defense manufactures among things modular lightweight loadcarrying equipment molle systems outer tactical vests otvs warrior helmets specialty defenses core products made kevlarr heavyduty nylon fabric webbing require special cutting sewing techniques specialty defense currently largest supplier molle systems us armor holdings inc subsidiaries notes consolidated financial statements continued army molle system consists modular rucksack removable compartments components fighting load vest removable pockets rifleman pistol squad automatic weapon gunner medic grenadier configurations specialty defense manufactures otvs used sapi plates provide enhanced armor protection us armed forces mines grenades mortar shells artillery fire rifle projectiles specialty defense one three largest suppliers warrior helmets us army specialty defense also manufactures nato pasgt helmets advanced combat vehicle crewman helmet warrior helmet us armys next generation helmet along related liners accessories products division manufactures sells broad range high quality security products equipment related consumable items concealable tactical body armor hard armor duty gear lesslethal munitions antiriot products police batons emergency lighting products forensic products firearms accessories weapon maintenance products foldable ladders backpacks specialty gloves products divisions products marketed brand names well established military law enforcement communities american body armortm xtremer matrixr bsquarer break freer clpr defense technologyfederal laboratoriesr deftec productstm distraction devicer federal laboratoriesr ferretr first defenser identicatorr identidrugr lightning powderr monadnockr nikr protechtm quikstep ladderstm portal ladderstm quickshieldtm safarilandr speedfeedr 911epr designr odvtm kleenboretm gregoryr bianchir nylokr accumoldr accumold elitetm rangertm peacekeeperr products divisions security products marketed extensive network approximately 260 domestic distributors 200 international distributors sales force approximately 40 representatives specialists brand names well established military law enforcement communities mobile security mobile security division manufactures installs armoring systems commercial vehicles protect varying degrees ballistic blast threats brand name ogarahess eisenhardt armoring companytm armor mobile security france armor mobile security germany impaktm mobile security division armors variety commercial vehicles including limousines sedans sport utility vehicles commercial trucks cashintransit vehicles mobile security divisions customers include us federal law enforcement intelligence agencies foreign heads state multinational corporations well high net worth individuals cashintransit operators discontinued operations july 2 2004 sold security consulting division litigation support services subsidiary new technologies armor inc nti last remaining business discontinued operations remaining division nti consisting primarily training services included part products division segment management resides business represented last remaining business services division assets liabilities services division classified assets liabilities discontinued operations consolidated balance sheets results operations classified income loss discontinued operations accompanying consolidated statements operations second quarter 2004 recorded impairment charge 14 million integration charges continuing operations reduce carrying value remaining portion nti estimated fair value november 26 2003 announced completed sale armorgroup security service division 33660000 total consideration group private investors led granville baird capital partners london england management received 31360000 cash closing note receivable 2300000 collected full year ended december 31 2004 recorded loss 88 million sale fourth quarter 2003 primarily due unrealized foreign currency translation loss accordance generally accepted accounting principles unrealized foreign currency translation gains losses included equity accumulated comprehensive income loss recognized period related assets liabilities disposed armor holdings inc subsidiaries notes consolidated financial statements continued april 17 2003 announced completed sale armorgroup integrated systems business sale 100 stock armorgroup integrated systems inc low voltage systems technologies inc aerwav integration services inc ais wholly owned subsidiary aerwav holdings llc consideration integrated systems business received 41 million collateralized note due april 2005 received 475000 december 31 2004 warrant approximately 25 ais recorded loss 366000 sale second quarter 2003 accounting policies principles consolidation consolidated financial statements include accounts company wholly owned subsidiaries consolidation material intercompany balances transactions eliminated results operations companies acquired transactions accounted purchase method accounting included financial statements date acquisition cash equivalents consider highly liquid investments purchased maturities three months less date purchase cash equivalents restricted cash restricted cash december 31 2003 includes 26 million held trust benefit ontario industrial development authority variable rate demand industrial development revenue bonds series 1989 bondholders january 2 2004 restrictions released funds used pay bonds full concentration credit risk financial instruments potentially subject us concentrations credit risk consist primarily cash equivalents trade accounts receivable maintain cash equivalents believe various high quality banks aaa rated securities amounts held individual banks may periodically exceed brief time periods federally insured amounts accounts receivable consist amounts due customers distributors located throughout world international product sales generally require cash advance confirmed letters credit us banks maintain reserves potential credit losses december 31 2004 2003 management believes significant concentrations credit risk excluding us military inventories stated lower cost market determined firstin firstout fifo method fair value financial instruments carrying value cash equivalents accounts receivable receivables accounts payable approximates fair value december 31 2004 2003 fair value debt estimated based quoted market prices see table carrying amount fair value public debt december 31 2004 2003 respectively december 31 2004 december 31 2003 carrying fair carrying fair amount value amount value thousands 825 senior subordinated notes due 2013 147850 168000 147600 161250 200 senior subordinated convertible notes due november 1 2004 341579 396384 489429 564384 147600 161250 armor holdings inc subsidiaries notes consolidated financial statements continued derivative instruments hedging activities account derivative instruments hedging activities accordance statement financial accounting standard 133 accounting derivative instruments hedge activities sfas 133 amended derivative instruments recorded balance sheet fair value changes fair value derivatives recorded period current earnings comprehensive income depending whether derivative designated part hedge transaction depending type hedge transaction fairvalue hedge transactions hedge changes assets liabilitys firm commitments fair value changes fair value derivative instrument generally offset incme statement changes hedged items fair value hold issue interest rate swap agreements derivative instruments trading purposes changes fair value interest rate swap agreements offset changes fair value fixed rate debt due changes market interest rate accordingly noncurrent assets consolidated balance sheet december 31 2004 increased 195000 reflected increase fair value interest rate swap agreements 61 million corresponding increase hedge liability recorded longterm debt agreements deemed perfectly effective fair value hedge therefore qualify shortcut method accounting sfas 133 result ineffectiveness expected recognized earnings associated interest rate swap agreements property equipment property equipment carried cost less accumulated depreciation upon disposal property equipment appropriate accounts reduced related cost accumulated depreciation resulting gains losses reflected consolidated earnings depreciation computed using straightline method estimated lives related assets follows buildings improvements 5 39 years machinery equipment 3 7 years goodwill represents excess purchase price fair value net assets acquired purchase business combination goodwill intangible assets stated basis cost 2090 million goodwill resulting acquisitions made company subsequent june 30 2001 immediately subjected nonamortization provisions statement financial accounting standards 142 goodwill intangible assets sfas 142 see also impairment recent accounting pronouncements follows purchase method accounting business combinations requires us make use estimates judgments allocate purchase price paid acquisitions fair value net tangible identifiable intangible assets goodwill tested impairment annually possible impairment indicated using fair value based test prescribed sfas 142 performed annual assessment goodwill determined impairment existed june 30 2004 patents licenses trademarks patents licenses trademarks primarily acquired acquisitions accounted purchase method accounting assets amortized straightline basis useful lives see note 5 follows information identified intangibles deferred charges deferred charges consist costs related issuance certain financing arrangements amortization deferred charges charged interest expense respective lives applicable financing arrangement deferred charges included assets consolidated balance sheets impairment longlived assets including certain identifiable intangibles goodwill reviewed impairment annually whenever events changes circumstances indicate carrying amount asset question may recoverable including limited deterioration profits business segment longlived assets changes occur might impair recovery longlived assets management reviewed longlived assets taken impairment charges 14 million fiscal 2004 124 million fiscal 2003 303 million fiscal 2002 reduce armor holdings inc subsidiaries notes consolidated financial statements continued carrying value services division estimated realizable value method used determine existence impairment would generally undiscounted operating cash flows estimated remaining useful lives related longlived assets estimated realizable amounts assets discontinued operations impairment measured difference fair value unamortized cost date impairment determined research development view research development efforts critical maintaining leadership position security products vehicle armoring markets continuously evolving threats today demand advancement application stateoftheart technology ensure proper protection customers research development occurs primarily fixedprice costplus government funded contracts well companysponsored efforts seek offer superior quality advanced products systems customers competitive prices achieve objective engage ongoing engineering research development activities improve reliability performance costeffectiveness existing products also design develop new products ongoing effort anticipate meet customers evolving needs employ scientific engineering personnel improve existing product lines develop new products technologies related fields maximize efficiency utilize important relationships outside testing laboratories companies often times key clients research development costs include salaries benefits research development personnel testing certification research development related costs research development costs included operating expenses incurred fiscal 2004 2003 2002 approximated 8866000 4015000 2968000 respectively estimates preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts financial statements accompanying notes significant estimates inherent preparation accompanying consolidated financial statements include carrying value longlived assets valuation allowances receivables inventories deferred income tax assets liabilities potential litigation claims settlements potential liabilities related tax filings ordinary course business contract contingencies obligations actual results could differ estimates income taxes account income taxes pursuant statement financial accounting standards 109 accounting income taxes sfas 109 asset liability method specified thereunder deferred taxes determined based difference financial reporting tax bases assets liabilities deferred tax liabilities offset deferred tax assets relating net operating loss carryforwards tax credit carryforwards deductible temporary differences december 31 2004 2003 certain nonus subsidiaries unremitted earnings approximately 107 million 46 million respectively recorded provision united states federal income taxes since earnings considered permanently reinvested foreign earnings taxed according regulations existing countries earned revenue recognition record products revenue time shipment returns minimal materially affect financial statements record aerospace defense group revenue related government contracts results principally fixed price contracts recognized persuasive evidence arrangement exists delivery occurred fee fixed determinable collectibility probable generally conditions met company ships products customers uparmored hmmwv units sold us government considered sold onsite department defense officer finishes inspection uparmored hmmwv approves delivery shipment occurs revenues related nonrefundable license fees payable initiation licensing agreement recognized immediately income received collectibility reasonably assured provided future obligations performance requirements nonrefundable license fees essence prepayment future royalties recognized revenue straightline basis term initial license record revenue aerospace defense group mobile security division vehicle shipped except larger commercial contracts typically longer four months length armor holdings inc subsidiaries notes consolidated financial statements continued contract delivery uparmored hmmwvs us government continues 2008 revenue large commercial contracts recognized percentage completion unitsofwork performed method large commercial contracts loss position entire estimated loss would recognized balance contract time current contracts profitable record service revenue services provided contractbycontract basis revenues service contracts recognized term contract allowance doubtful accounts encounter risks associated sales collection associated accounts receivable review accounts receivable aging monthly basis determine provision accounts receivable considered uncollectible order calculate appropriate monthly provision primarily review accounts greater ninety days past due estimate amount uncollectible periodically compare identified credit risks allowance established using historical experience adjust allowance accordingly warranty costs generally recorded component cost sales accrued expenses consolidated financial statements amount recognized based historical claims cost experience see note 22 regarding recently announced warranty revision product exchange program zylonrcontaining vests advertising expense advertising costs expense period incurred earnings per share basic earnings per share computed dividing net income weightedaverage number common shares outstanding diluted earnings per share computed dividing net income weightedaverage number common shares outstanding compounding effects potentially dilutive common stock equivalents principally options except cases effect would antidilutive comprehensive income foreign currency translation accordance statement financial accounting standard 130 reporting comprehensive income sfas 130 assets liabilities denominated foreign currency translated us dollars current rate exchange existing yearend revenues expenses translated average monthly exchange rates cumulative translation adjustment net tax represents effect translating assets liabilities foreign operations 6821000 3936000 years ended december 31 2004 2003 respectively classified accumulated comprehensive loss current year change accumulated amount net tax included component comprehensive income stock options grants statement financial accounting standard 123 accounting stockbased compensation sfas 123 establishes fair value based method accounting stockbased employee compensation plans however also allows entity continue measure compensation cost plans using intrinsic value based method accounting prescribed accounting principles board apb opinion 25 accounting stock issued employees fair value based method compensation cost measured grant date based value award recognized service period usually vesting period intrinsic value based method compensation cost excess quoted market price stock grant date measurement date amount employee must pay acquire stock elected continue account employee stock compensation plans apb opinion 25 pro forma disclosures net earnings per share fair value based method accounting defined sfas 123 applied restricted stock awards generally recorded compensation expense vesting periods based market value date grant armor holdings inc subsidiaries notes consolidated financial statements continued compensation cost stock option grants determined based fair value grant dates fiscal 2004 2003 2002 consistent method prescribed sfas 123 net earnings per share would adjusted pro forma amounts indicated 2004 2003 2002 thousands except per share data net income loss reported 80539 10886 17689 deduct total stockbased employee compensation expense determined fair value based method awards net related tax effects 6717 4157 5053 add employee compensation expense modification stock option awards included report net income net income taxes 57 506 proforma net income loss 73879 7235 22742 earnings loss per share basic reported 256 039 058 basic pro forma 235 026 075 diluted reported 244 038 057 diluted pro forma 224 025 074 reclassifications certain reclassifications made 2003 2002 financial statements order conform presentation adopted 2004 reclassifications effect net income retained earnings recent accounting pronouncements april 2004 financial accounting standards board fasb issued fasb staff position 1291 disclosure requirements fasb statement 129 disclosure information capital structure relating contingently convertible securities fsp 1291 purpose fsp 1291 interpret disclosure provisions fasb statement 129 apply contingently convertible securities potentially dilutive effects earnings per share guidance fsp 1291 effective april 2004 applies existing newly created securities pronouncement effect us december 16 2004 fasb issued fasb statement 123r sharebased payment fas 123r fas 123r revises fasb statement 123 accounting stockbased compensation fas 123 requires companies expense fair value employee stock options forms stockbased compensation addition revising fas 123 fas 123r supersedes accounting principles board apb opinion 25 accounting stock issued employees apb 25 amends fasb statement 95 statement cash flows fas 123r must adopted later periods beginning june 15 2005 expect incur approximately 3 million expense second half 2005 result adoption fasb statement 123r october 2004 american jobs creation act 2004 ajca signed law december 2004 fasb issued staff position 1091 fsp 1091 application fasb statement 109 accounting income taxes tax deduction qualified production activities provided american jobs creation act 2004 staff position 1092 fsp 109 accounting disclosure guidance foreign earnings repatriation provision within american jobs creation act 2004 fsp 10091 clarifies manufacturers tax deduction provided ajca accounted special deduction accordance sfas 109 tax rate reduction fsp 1092 provides accounting disclosure guidance repatriation certain foreign earnings us taxpayer provided ajca currently uncertainty remains interpret armor holdings inc subsidiaries notes consolidated financial statements continued numerous provisions ajca yet position decide whether extent might repatriate foreign earnings yet remitted us expect position make decision implementation later 2005 november 2004 fasb issued sfas 151 sfas 151 inventory costs amendment arb 43 chapter 4 sfas 151 amends guidance accounting research bulleting 43 chapter 4 inventory pricing clarify abnormal amounts idle facility expense freight handling costs wasted material spoilage recognized currentperiod charges sfas 151 effective fiscal years beginning june 15 2005 sfas 151 expected material impact financial statements 2 discontinued operations july 2 2004 sold security consulting division litigation support services subsidiary nti last remaining business discontinued operations remaining division nti consisting primarily training services included part products division segment management resides business represented last remaining business armorgroup services division services division assets liabilities services division classified assets liabilities discontinued operations consolidated balance sheets results operations classified income loss discontinued operations accompanying consolidated statements operations second quarter 2004 recorded impairment charge 14 million integration charges continuing operations reduce carrying value remaining portion nti estimated fair value discontinued operations december 31 2004 november 26 2003 announced completed sale armorgroup security service division 33660000 total consideration group private investors led granville baird capital partners london england management received 31360000 cash closing note receivable 2300000 collected full fiscal 2004 recorded loss 88 million sale fourth quarter 2003 accordance generally accepted accounting principles unrealized gains losses included equity accumulated comprehensive income loss recognized period related assets liabilities disposed based upon analysis discussions advisors regarding estimated realizable value net selling costs services division reduced carrying value recorded net impairment charges 14 million 124 million 303 million fiscal 2004 2003 2002 respectively 2003 impairment charges consisted noncash goodwill reduction fiscal 2002 impairment charges consisted approximately 61 million estimated disposal costs 242 million noncash goodwill reduction benefit income taxes discontinued operations 83 million 24 million fiscal 2003 2002 respectively reductions carrying value services division managements best estimate based upon information currently available including discussions investment bankers april 17 2003 announced completed sale armorgroup integrated systems business sale 100 stock armorgroup integrated systems inc low voltage systems technologies inc ais wholly owned subsidiary aerwav holdings llc consideration integrated systems business received 41 million collateralized note due april 2005 warrant approximately 25 ais 475000 balance due paid advance fiscal 2004 accordance sfas 144 recorded loss 366000 sale fiscal 2003 july 15 2002 announced plans sell services division retention merrill lynch company assist sale accordance statement financial accounting standards 144 accounting impairment disposal longlived assets sfas 144 assets liabilities services division classified held sale operating results current prior periods reported discontinued operations fiscal 2004 2003 2002 cyconics international training services inc subsidiary providing certain training services formerly reported part services division included amounts classified assets held sale assets armor holdings inc subsidiaries notes consolidated financial statements continued liabilities well operating results cyconics international training services inc reclassified products division management oversight currently resides january 2001 management approved restructuring plan close us investigative businesses realign divisions organization eliminate excess facilities reduce overhead businesses worldwide connection restructuring plan division performed review longlived assets identify potential impairments pursuant restructuring plan armorgroup eliminated 26 employees primarily investigative businesses ii eliminated additional 24 employees security business iii incurred lease exit costs result closure investigative businesses iv wrotedown value tangible intangible assets result impairment review significant actions contemplated restructuring plan completed result 2001 restructuring plan recorded pretax charge 103 million 2001 december 31 2004 remaining liability fiscal 2004 utilization 140000 relating lease termination costs following summary operating results discontinued operations years ended december 31 2004 2003 2002 december 31 2004 december 31 2003 december 31 2002 thousands revenue 1733 95124 98263 cost revenues 697 66780 75779 gross profit 1036 28344 22484 operating expenses 821 19910 30588 charge impairment longlived assets 21535 30296 integration charges 776 2623 operating income loss 215 13877 41023 interest expense net 2 16 346 expense net 273 479 99 loss discontinued operations income tax benefit 60 14372 41468 income tax benefit 22 8252 2442 loss discontinued operations 38 6120 39026 fiscal 2002 income taxes exclude additional expense 1475000 per paragraphs 26 27 sfas 109 included income continuing operations consolidated basis armor holdings inc subsidiaries notes consolidated financial statements continued following summary assets liabilities discontinued operations december 31 2004 december 31 2003 thousands assets cash equivalents 76 accounts receivable net 549 current assets 128 total current assets 753 property equipment net 1206 goodwill net 356 assets 41 total assets discontinued operations 2356 liabilities current portion longterm debt 125 accounts payable 5 accrued expenses current liabilities 496 total current liabilities 626 total liabilities discontinued operations 626 armor holdings inc subsidiaries notes consolidated financial statements continued 3 comprehensive income components comprehensive income loss net tax expense benefit 642000 zero 364000 years ended december 31 2004 2003 2002 respectively listed december 31 2004 december 31 2003 december 31 2002 thousands net income loss 80539 10886 17689 comprehensive income loss sale armorgroup 3231 foreign currency translations net tax 2885 4874 304 comprehensive income loss 83424 18991 17385 accordance generally accepted accounting principles unrealized gains losses included equity accumulated comprehensive income loss recognized period related assets liabilities disposed 4 business combinations completed numerous purchase business combinations cash andor shares common stock assumption liabilities certain cases three years ended december 31 2004 following acquisitions completed total shares value consideration issued shares thousands except shares issued aggregate 2004 acquisitions net cash 1 158442 additional purchase price paidissued deferred considerationrepayment debt 2 33943 192385 aggregate 2003 acquisitions net cash 3 90512 additional purchase price paidissued acquisition earnouts 1026 91538 aggregate 2002 acquisitions net cash 4 8818 additional purchase price paidissued acquisition earnouts 9375 18193 1 includes vector associates inc dba odv inc kleenbore inc specialty group inc bianchi international 2 includes repayment 311 million simula bonds plus accrued interest thereon january 2004 3 includes simula inc hatch imports inc 4 includes speedfeed inc foldable products group bsquare inc evipaq inc trasco bremen 911 emergency products armor holdings inc subsidiaries notes consolidated financial statements continued described note 1 november 18 2004 acquired outstanding stock specialty defense 92 million cash includes assumption certain outstanding debt result specialty defense acquisition expect 1 strengthen position leading midtier defense security industry consolidator increased scale scope 2 increase relevance department defense customers programs 3 combine specialty defenses high volume manufacturing capacity established reputation leader molle systems otvs warrior helmets existing proprietary technology compete aggressively solicitation vests 4 achieve crossselling opportunities leveraging global sales force relationships 5 offer opportunities cost reduction integration savings rationalization operations december 30 2004 acquired outstanding stock bianchi international bianchi 60 million cash bianchi manufacturer supplier duty concealment holsters belts accessories bianchir brand name used primarily lawenforcement private security military personnel supplier spear rucksack system us special operations forces bianchi also market leader medium large technical internal frame backpacks highend daypacks satchels carrying cases gregoryr brand name bianchi included products division result bianchi acquisition expect 1 strengthen position leading supplier holsters belts accessories 2 achieve crossselling opportunities leveraging global sales force relationships 3 offer opportunities cost reduction integration savings rationalization operations december 9 2003 acquired outstanding stock simula approximately 848 million cash including transaction costs simula safety technology company supplies human safety survival systems branches united states military major aerospace defense prime contractors core markets military aviation safety military personnel safety land marine safety simula provider military helicopter seating systems aircraft land vehicle armor systems protective equipment military personnel technologies used protect humans variety lifethreatening catastrophic situations result simula acquisition expect 1 strengthen position leading midtier defense security industry consolidator increased scale scope 2 increase relevance department defense customers programs 3 diversify business mix adding fixedwing rotorcraft crashworthy seating 4 combine body armor capabilities simula protech one subsidiaries supplementing position sapi market 5 achieve crossselling opportunities leveraging global sales force relationships 6 offer opportunities cost reduction integration savings rationalization operations armor holdings inc subsidiaries notes consolidated financial statements continued acquisitions accounted purchase business combinations accordingly results operations included financial statements acquisition date costs acquire specialty defense bianchi businesses acquired year ended december 31 2004 allocated assets acquired liabilities assumed according estimated fair values time acquisition follows specialty defense bianchi acquisitions total thousands working capital net cash 15801 5604 1213 20192 property equipment 7860 1033 15 8908 longterm assets 541 32 573 assumed notes payable 983 deferred tax liability 14170 13098 27268 customerrelated intangibles 12200 19671 185 32056 technologyrelated intangibles 1900 2777 4677 marketingrelated intangibles 16300 15830 2084 34214 goodwill 50243 28528 7302 86073 89692 60377 8373 158442 customerrelated intangible assets relate acquired customer relationships amortized twelveyear weightedaverage useful life straightline basis technologyrelated intangible asset relates certain acquired patents amortized eightyear weightedaverage useful life straightline basis marketingrelated intangible asset relates acquired trade names trademarks indefinite useful life goodwill acquired acquisitions specialty defense bianchi deductible tax purposes goodwill acquired businesses acquired year ended december 31 2004 tax deductible unaudited pro forma results businesses acquired included consolidated results date acquisition pro forma results 2004 acquisitions vector associates inc dba odv inc kleenbore inc 2003 acquisition hatch imports inc presented would differ material amount actual results following unaudited pro forma consolidated results presented show results pro forma basis 2004 acquisitions specialty defense bianchi 2003 acquisition simula made january 1 2003 2004 2003 thousands except per share data revenues continuing operations 1073978 518016 net income continuing operations 86347 24353 basic earnings per share continuing operations 260 076 diluted earnings per share continuing operations 248 074 weighted average shares basic 33244 32175 weighted average shares diluted 34850 32954 armor holdings inc subsidiaries notes consolidated financial statements continued 5 goodwill identified intangible assets sfas 142 goodwill intangible assets indefinite lives longer amortized tested impairment least annually often indicators impairment arise changes carrying amount goodwill years ended december 31 2004 2003 follows aerospace mobile defense products security total thousands balance december 31 2002 32133 60143 6460 98736 goodwill acquired year 72816 3976 76792 foreign currency translation adjustments 286 107 179 balance december 31 2003 104949 64405 6353 175707 goodwill acquired year 50243 35830 86073 foreign currency translation 879 1057 55 233 adjustments balance december 31 2004 154313 101292 6408 262013 included patents licenses trademarks accompanying consolidated balance sheets following intangible assets december 31 2004 customer relationships technology marketing total gross amount 58454 14711 46124 119289 accumulated amortization 2796 1461 2573 6830 net amount 55658 13250 43551 112459 included marketing approximately 412 million marketingrelated intangible assets indefinite lives anticipate recording amortization expense following future periods year thousands 2005 8158 2006 8157 2007 8157 2008 8155 2009 7466 thereafter 31117 71210 armor holdings inc subsidiaries notes consolidated financial statements continued 6 inventories components inventory december 31 2004 2003 follows 2004 2003 thousands raw materials 97528 40397 workinprocess 51137 25422 finished goods 27543 14708 176208 80527 7 property equipment property equipment december 31 2004 2003 summarized follows 2004 2003 thousands land 6096 5940 buildings improvements 39308 29776 machinery equipment 53947 40906 construction process 5873 total 105224 76622 accumulated depreciation 27917 19046 77307 57576 depreciation expense years ended december 31 2004 2003 2002 approximately 9645000 5719000 4953000 respectively 8 accrued expenses current liabilities accrued expenses current liabilities december 31 2004 2003 summarized follows 2004 2003 thousands accrued expenses 70869 40787 customer deposits 32317 14651 deferred consideration acquisitions 4061 2780 107247 58218 armor holdings inc subsidiaries notes consolidated financial statements continued 9 short long term debt short term debt october 29 2004 completed placement 300 million aggregate principal amount 200 senior subordinated convertible notes due november 1 2024 2 convertible notes november 5 2004 goldman sachs co exercised option purchase additional 45 million principal amount 2 convertible notes december 31 2004 carrying amount 2 convertible notes 3416 million 2 convertible notes guaranteed domestic subsidiaries senior subordinated basis see note 21 2 convertible notes initially rated b1b moodys investors service standard poors rating services respectively 2 convertible notes bear interest rate 200 per year payable november 1 may 1 year beginning may 1 2005 ending november 1 2011 2 convertible notes subject accretion principal amount beginning november 1 2011 rate provides holders aggregate annual yield maturity 200 defined agreement 2 convertible notes bear contingent interest sixmonth period beginning november 1 2011 15 basis points paid cash average trading price notes certain levels 2 convertible notes convertible bond holders option time prior maturity initially conversion rate 185151 shares common stock per 1000 principal amount notes equivalent conversion price approximately 5401 per share subject adjustment upon conversion satisfy conversion obligation respect accreted principal amount notes converted cash remaining amount satisfied shares common stock accordance generally accepted accounting principles 2 convertible notes classified short term debt march 12 2003 entered collateralized revolving credit facility corporacion financiera provide working capital needs colombia facility 2004 expanded collateralized revolving credit facility five additional colombian banks credit facility oneyear revolving credit facility among things provides total maximum borrowings 55 billion colombian pesos us 23 million based exchange rate december 31 2004 borrowings credit facility bears interest rate equal colombian central bank rate based averages 30 day loans plus applicable margin ranging 35 40 credit facility guaranteed us 100000 standby letter credit bank signature notes armor holdings inc subsidiaries notes consolidated financial statements continued long term debt 2004 2003 thousands credit facility 825 senior subordinated notes due 2013 b 147850 147600 senior subordinated convertible notes simula c 31135 ontario industrial development authority variable rate demand industrial development revenue bonds series 1989 paid full january 2004 2600 note payable annual principal interest installments 200 january 2013 interest rate 5 1377 1508 note former officer payable monthly principal interest installments 7 december 2009 imputed interest rate 925 310 359 minimum guaranteed royalty former officer payable monthly principal interest installments 4 august 2005 imputed interest rate 92 31 73 minimum guaranteed royalty former officer payable monthly principal interest installments 36 april 2005 imputed interest rate 735 141 542 note payable monthly principal interest installments 15 may 2008 interest rate 3 642 739 mortgage payable monthly principal interest installments 12 november 2013 interest rate 625 975 plus fair value interest rate swaps 6046 5851 157372 190407 less current portion 621 32107 156751 158300 credit facility august 12 2003 terminated existing credit facility entered new collateralized revolving credit facility bank america na wachovia bank na key bank na new credit facility fiveyear revolving credit facility among things provides 1 total maximum borrowings 60 million 2 25 million sublimit issuances standby commercial letters credit 3 5 million sublimit swingline loans 4 5 million sublimit multicurrency borrowings new credit facility bear interest either 1 rate equal libor plus applicable margin ranging 1125 1625 2 alternate base rate higher bank america prime rate b federal funds rate plus 050 3 respect foreign currency loans fronted offshore currency rate plus applicable margin ranging 1125 1625 depending certain conditions credit facility guaranteed certain direct indirect domestic subsidiaries collateralized among things pledge issued outstanding shares stock equity interests certain domestic subsidiaries ii pledge 65 issued outstanding voting shares stock voting equity interests certain direct indirect foreign subsidiaries iii pledge 100 issued outstanding nonvoting shares stock nonvoting equity interests certain direct indirect foreign subsidiaries iv first priority perfected security interest certain domestic assets certain domestic assets certain direct indirect subsidiaries become guarantors obligations new credit facility including among things accounts receivable inventory machinery equipment certain contract rights intellectual property rights general intangibles january 9 2004 amended credit facility broaden ability make additional openmarket purchases publiclytraded securities subject certain limitations march 29 2004 amended credit facility allow us pay dividends subject certain limitations b 825 senior subordinated notes due 2013 august 12 2003 completed private placement 150 million aggregate principal amount 825 senior subordinated notes due 2013 825 notes 825 notes guaranteed domestic subsidiaries senior subordinated basis see note 21 825 notes sold qualified institutional buyers reliance rule 144a securities act 1933 amended nonus persons reliance regulation securities act 1933 armor holdings inc subsidiaries notes consolidated financial statements continued amended 825 notes rated b1b moodys investors service standard poors rating services respectively 2003 used portion funds acquire simula inc hatch imports inc intend use remaining proceeds offering fund acquisitions repay portion outstanding debt general corporate working capital purposes including funding capital expenditures interest 825 notes payable semiannually fifteenth february august year 825 notes issued discount approximately 25 million investors 825 notes may redeemed option whole part prorata basis august 15 2008 certain specified redemption prices plus accrued interest payable redemption date c senior subordinated convertible notes simula december 9 2003 purchased simula 1997 simula completed public offering 345 million 8 senior subordinated convertible notes january 5 2004 8 senior subordinated convertible notes paidinfull balance notes included current portion longterm debt 2003 fair value interest rate swaps september 2 2003 entered interest rate swap agreements designated fair value hedge defined sfas 133 aggregate notional amount totaling 150 million agreements entered exchange fixed interest rate 825 notes variable interest rate equal sixmonth libor set arrears plus spread ranging 2735 275 fixed semiannually fifteenth day february august december 31 2004 sixmonth libor 278 agreements subject terms conditions common transactions type accordance sfas 133 changes fair value interest rate swap agreements offset changes fair value fixed rate debt due changes market interest rate fair value interest rate swap agreements approximately 60 million december 31 2004 agreements deemed perfectly effective fair value hedge therefore qualify shortcut method accounting sfas 133 result ineffectiveness expected recognized earnings associated interest rate swap agreements 825 notes maturities longterm debt follows year thousands 2005 621 2006 452 2007 475 2008 454 2009 340 thereafter 155030 157372 armor holdings inc subsidiaries notes consolidated financial statements continued 10 derivative financial instruments account derivative instruments accordance sfas 133 requires freestanding embedded derivative instruments measured fair value recognized balance sheet either assets liabilities addition derivative instruments used hedging relationships must designated reassessed accounted either fair value hedges cash flow hedges pursuant provisions sfas 133 hedge fair value 825 notes using interest rate swaps enter derivative contracts manage fair value changes could caused exposure interest rate changes september 2 2003 entered interest rate swap agreements designated fair value hedges defined sfas 133 aggregate notional amount totaling 150 million interest rate swaps mature august 15 2013 agreements entered exchange fixed interest rate 825 notes variable interest rate equal sixmonth libor set arrears plus spread ranging 2735 275 fixed semiannually fifteenth february august sixmonth libor rate december 31 2004 278 agreements subject terms conditions common transactions type fair value hedges qualify hedge accounting using shortcut method since swap terms match critical terms 825 notes accordingly changes fair value interest rate swap agreements offset changes fair value 825 notes due changes market interest rate result ineffectiveness expected recognized earnings associated interest rate swap agreements 825 notes fair values interest rate swap agreements obtained counterparties represent estimated amount would receive pay terminate agreement taking consideration difference contract rate interest rates currently quoted agreements similar terms maturities 11 integration charges incurred integration charges approximately 103 million 126 million 59 million years ending december 31 2004 2003 2002 respectively charges year ended december 31 2004 includes 63 million noncash charge acceleration performancedbased longterm restricted stock awards granted certain executives 2002 impairment charge 14 million reduce carrying value remaining portion nti estimated fair value charges year ended december 31 2003 includes 73 million noncash charge stockbased compensation performance plan certain key executives 33 million including 21 million noncash charge severance charge related departure former chief executive officer remaining charges relate costs potential acquisitions materialize relocation assets personnel severance costs systems integration well integrating sales marketing functions acquired companies armor holdings inc subsidiaries notes consolidated financial statements continued 12 commitments contingencies employment contracts party several employment contracts december 31 2004 certain members management contracts varying periods include restrictions competition termination agreements provide salaries bonuses benefits also specify delineate granting various stock options legallitigation matters january 16 1998 services division ceased operations angola subsequently became involved various disputes shrm sa shrm minority joint venture partner relating angolan joint venture known defense system international africa dsia since march 1998 continue involved various legal proceedings french courts shrm part compass group regarding damages circumstances dsia ceased business angola due decree angolan government expelling employees services division angola kroll inc matters ogarahess eisenhardt armoring de brasil ltda ohe brazil assessed 411 million reals us 155 million based exchange rate december 31 2004 brazilian tax authorities ohe brazil appealed tax assessments cases pending extent may liability resulting assessments believe entitled indemnification kroll inc 78 million terms purchase agreement dated april 20 2001 events question respect 78 million assessments occurred prior purchase ogara companies kroll inc 1999 prior acquisition oheac 2001 several former employees kroll ogara company de mexico sa de cv ogara mexico subsidiary oheac commenced labor claims ogara mexico seeking damages unjustified termination late 2004 principal labor claim settled company approximately 19 million two remaining claims settled approximately 52000 believe entitled indemnification kroll inc respect settlement payments currently engaged discussions kroll inc respect matter december 2001 ogarahess eisenhardt france sa acquired kroll inc ohe france sold industrial bodywork business operated name labbedivision de ogara hess eisenhardt france carrosserie industriells carrosserie snc labbe subsequent sale labbe family trust lft owner leasehold interest upon carrosserie business operated sued ohe france snc labbe claiming transfer leasehold valid lft given consent transfer required terms lease lft sought ohe france sole tenant maintain repair leased building estimated cost us 42 us 83 million based exchange rate december 31 2004 case currently pending contesting allegations vigorously unable predict outcome matter although insurance coverage matter time believe matter material impact financial position operations liquidity armor holdings inc subsidiaries notes consolidated financial statements continued matters involving zylonr fiber april 2004 two class action lawsuits filed us florida state court police organizations individual police officers alleging among things bulletresistant soft body armor vests manufactured sold american body armortm safarilandr protechtm brands qualities performance characteristics warranted thereby breaching express warranty implied warranty merchantability implied warranty fitness particular purpose duty warn august 12 2004 reached preliminary settlement respect class action lawsuit filed duval county florida southern states police benevolent association southern states pba fairness hearings held florida circuit court gave final approval settlement november 5 2004 class action lawsuit filed us national association police organizations inc napo lee county florida voluntarily dismissed prejudice november 16 2004 pursuant terms class action settlement southern states pba warranty american body armortm xtremer zx vest nij threat level ii iiia reduced 5 years 2 12 years addition every purchaser xtremer zx vest option exchange vest either new zx vest choosing american body armortm safarilandr protechtm product lines plus 10000 transferable rebate coupon applicable towards next purchase vest also made available american body armortm website testing data protocols results relating testing vests also continue test zylonrcontaining vests testing demonstrates tested vests fail perform accordance warranties implement exchange program models reasonably comparable basis american body armortm xtremer zx exchange program outlined zylonr fiber made toyobo japanese corporation ballistic fiber widely used entire body armor industry final report duval county court regarding implementation settlement exchange vests ongoing testing filed april 15 2005 also voluntarily cooperating request received december 2004 department justice reviewing entire industrys use zylonr fiber bullet resistant vests stressed vests certified national institute justice never suffered penetration field continue save lives protect officers injury fact neither two resolved class action lawsuits alleged personal injuries kind second chance body armor one competitors bulletresistant market licenses simula certain patented technology used body armor manufactures knowledge lawsuit brought second chance based upon licensed technology although simula may impacted pending suits filed second chance regarding zylonrcontaining vests licensed technology specifically related use zylonr fiber adverse resolution matters however could material adverse effect business financial condition results operations liquidity matters addition normal course business subjected various types claims currently ongoing litigations areas products liability general liability intellectual property products used wide variety law enforcement situations environments products cause serious personal property injury death carefully properly used adequately trained personnel believe adequate insurance coverage claims incurred normal course business cases effect financial statements generally limited amount insurance deductible selfinsured retention annual insurance premiums self insurance retention amounts risen significantly past several years may continue extent able purchase insurance coverage time believe claims pending litigation material impact financial position operations liquidity armor holdings inc subsidiaries notes consolidated financial statements continued 13 information concerning business segments geographical revenues leading manufacturer provider specialized security products training support services related products vehicle armor systems military helicopter seating systems aircraft land vehicle safety systems protective equipment military personnel technologies used protect humans variety lifethreatening catastrophic situations products systems used domestically internationally military law enforcement security corrections personnel well governmental agencies multinational corporations individuals effective first quarter 2004 instituted new segment reporting format include three reportable business divisions aerospace defense group products division mobile security division aerospace defense group formed upon completion acquisition simula inc december 9 2003 results included herein since acquisition date aerospace defense group also includes military business including armor blast protection systems uparmored hmmwvs military vehicle armor programs previously included mobile security division aerospace defense group also includes sapi plate produced protech subsidiary pittsfield massachusetts previously reported part products division historical results businesses reclassified part aerospace defense group reporting change made better reflect managements approach operating directing businesses certain instances align financial reporting market customer segments services division classified discontinued operations longer included presentation see note 2 aerospace defense group aerospace defense group supplies human safety survival systems us military major aerospace defense prime contractors core markets military aviation safety military personnel safety land marine safety brand name ogarahess eisenhardt solesource provider us military armor blast protection systems uparmored hmmwvs also contract us army provide spare parts logistics ongoing field support services currently installed base approximately 8350 uparmored hmmwvs additionally provide blast ballistic protection kits standard hmmwvs installed existing equipment field aerospace defense group subcontracted develop ballistic blast protected armored sealed truck cab himars program recently transitioned us army us marine corps developmental low rate initial production deliveries commenced 2003 continued 2004 also supply armor subsystems tactical wheeled vehicles simula provide military helicopter seating systems helicopter cockpit airbag systems aircraft armor land vehicle armor kits hmmwv hemtt pls het m915 asv body armor protective equipment military personnel emergency bailout parachutes survival ensembles worn military aircrew primary customers products us army us marine corps boeing sikorsky aircraft simulas aviation safety products provided sole source basis us armed forces adopted ceramic body armor key element protective ensemble worn troops iraq afghanistan simula developer specialized product called sapi one largest suppliers us forces specialty defense operations pennsylvania tennessee kentucky supplier military law enforcement customers united states overseas specialty defense manufactures among things molle systems otvs warrior helmets specialty defenses core products made kevlarr heavyduty nylon fabric webbing require special cutting sewing techniques specialty defense currently largest supplier molle systems us army molle system consists modular rucksack removable compartments components fighting load vest removable pockets rifleman pistol squad automatic weapon gunner medic grenadier configurations specialty defense manufactures otvs used sapi plates provide enhanced armor protection us armed forces mines grenades mortar shells artillery fire rifle projectiles specialty defense one three largest suppliers warrior helmets us army specialty defense manufactures nato pasgt helmets advanced combat vehicle crewman helmet warrior helmet us armys next generation helmet along related liners accessories armor holdings inc subsidiaries notes consolidated financial statements continued armor holdings products armor holdings products division manufactures sells broad range high quality equipment marketed brand names well known respected military law enforcement communities products manufactured division include concealable tactical body armor hard armor duty gear lesslethal munitions antiriot products police batons emergency lighting products forensic products firearms accessories weapon maintenance products foldable ladders backpacks specialty gloves cyconics international training services inc small subsidiary providing certain training services formerly reported part services division included amounts classified assets held sale discontinued operations reclassified armor holdings products division management oversight currently resides armor mobile security armor mobile security division manufactures installs armoring systems commercial vehicles protect varying degrees ballistic blast threats armor variety commercial vehicles including limousines sedans sport utility vehicles commercial trucks cashintransit vehicles customers business include us federal law enforcement intelligence agencies foreign heads state multinational corporations well high net worth individuals cashintransit operators invested substantial resources outside united states plan continue future armor mobile security division invested substantial resources europe south america operations subject risk new different legal regulatory requirements local jurisdictions tariffs trade barriers potential difficulties staffing managing local operations currency risks potential imposition restrictions investments potentially adverse tax consequences including imposition increase withholding taxes remittances payments subsidiaries local economic political social conditions governments many developing countries exercised continue exercise substantial influence many aspects private sector government actions future could significant adverse effect economic conditions developing country may otherwise material adverse effect us operating companies political risk insurance countries currently conduct business moreover applicable agreements relating interests operating companies frequently governed foreign law result event dispute may difficult us enforce rights accordingly may little recourse upon occurrence developments corporate division includes corporate management expenses associated managing overall company expenses include compensation benefits corporate management staff legal professional fees administrative general expenses allocated business units armor holdings inc subsidiaries notes consolidated financial statements continued revenues operating income total assets net continuing segments follows 2004 2003 2002 thousands revenues aerospace defense 605398 91673 59318 products 249765 193960 179946 mobile security 124520 79539 65853 total revenues 979683 365172 305117 operating income aerospace defense 127520 22775 12833 products 32719 33054 30978 mobile security 11168 2538 1542 corporate 25692 22638 6988 total operating income 145715 35729 38365 total assets aerospace defense 490754 209834 47746 products 278912 183972 179367 mobile security 103799 63161 57700 corporate 418886 126303 23830 total assets 1292351 583270 308643 armor holdings inc subsidiaries notes consolidated financial statements continued financial information respect revenues based geographic location customer fixed assets net principal geographic areas based actual location principle facility follows 2004 2003 2002 thousands revenues north america 828666 275529 225365 south america 16317 15007 19879 africa 4693 1420 1219 europeasia 130007 73216 58654 979683 365172 305117 total fixed assets net north america 54332 38337 31339 south america 1461 1392 1248 africa europeasia 21514 17847 14549 77307 57576 47136 armor holdings inc subsidiaries notes consolidated financial statements continued 14 income taxes provision income taxes continuing operations years ended december 31 2004 2003 2002 consisted following 2004 2003 2002 thousands current us federal 42552 9347 11123 state 4322 1040 2183 foreign 5537 403 2389 total current 52411 10790 15695 deferred us federal 3328 3274 53 state 989 1268 28 foreign 311 1407 384 total deferred 4006 3413 359 total provision income taxes 56417 14203 16054 significant components net deferred tax liability related continuing operations december 31 2004 2003 follows 2004 2003 thousands deferred tax assets reserves currently deductible 8535 3527 capital loss 9545 11320 operating loss carryforwards 3163 2811 patents trademarks 22 accrued expenses 1931 954 foreign tax credits 1122 912 research development credits 1129 150 25425 19696 deferred tax asset valuation allowance 9620 11395 deferred tax asset net valuation allowance 15805 8301 deferred tax liability goodwill amortized financial statement purposes sfas 142 5924 2418 patents trademarks purchased intangibles 26416 interest convertible debt 1141 property equipment 9541 2970 642 net deferred tax liabilityasset 27859 2913 recognition deferred tax assets based managements belief likely tax benefit associated temporary differences operating capital loss carryforwards utilized valuation allowance recorded deferred tax assets likely realization occur valuation allowance december 31 2004 consisted approximately 9545000 related capital loss carryforwards 75000 related net operating loss carryforwards decrease valuation allowance attributable finalization gains losses tax purposes associated 2003 dispositions certain gains losses realized 2004 armor holdings inc subsidiaries notes consolidated financial statements continued december 31 2004 us federal state foreign net operating losses nols providing tax effected benefit 3163000 nols expire varying amounts fiscal years 2006 2022 december 31 2004 also certain us federal state income tax credits approximately 1100000 subject limitations internal revenue code irc section 383 also approximately 1100000 foreign tax credits expiring 2011 2014 connection acquisitions specialty defense bianchi recorded net deferred tax liabilities approximately 12300000 13100000 respectively relating primarily identifiable intangibles deductible us federal income tax purposes net deferred tax liabilities offset increase goodwill additionally 2004 recorded net deferred tax liability approximately 780000 related finalization purchase accounting december 2003 acquisition hatch offset increase goodwill subject periodic review us federal foreign state local tax jurisdictions ordinary course business 2002 notified internal revenue service irs certain prior year income tax returns would examined october 18 2002 notified internal revenue service tax return tax year ended december 31 2000 selected examination january 30 2003 notified tax return tax year ended december 31 2001 selected examination april 2004 reached agreement irs regarding tax returns years ended december 31 2001 2000 material impact financial position operations liquidity united states income taxes provided certain undistributed earnings nonus subsidiaries approximately 10700000 million continuing operations earnings considered permanently reinvested nonus operations determination deferred us tax liability related earnings practicable october 2004 american jobs creation act 2004 ajca signed law ajca creates limited opportunity 2005 us corporations repatriate unremitted foreign earnings providing 85 percent dividends received deduction certain dividends controlled foreign corporations deduction subject number limitations today uncertainty remains interpret numerous provisions ajca yet position decide whether extent might repatriate foreign earnings yet remitted us expect position make decision implementation later 2005 net deferred tax assets described included accompanying consolidated balance sheets follows 2004 2003 thousands current assets 10368 4151 deferred income taxes 38227 1238 total deferred tax liabilitiesassets 27859 2913 sources income continuing operations income taxes 2004 2003 2002 thousands domestic 123050 25681 34213 foreign 13944 5528 3178 total 136994 31209 37391 armor holdings inc subsidiaries notes consolidated financial statements continued following reconciles provision income taxes computed federal statutory income tax rate provision income taxes recorded consolidated statements operations years ended december 31 2004 2003 2002 2004 2003 2002 provision income taxes statutory federal rate 350 state local income taxes net federal benefit 25 05 38 compensation subject irc section 162m 25 86 foreign income taxes 03 21 07 valuation allowances discontinued operations 38 permanent items 09 03 04 412 455 429 15 stockholders equity preferred stock july 16 1996 stockholders authorized series preferred stock rights privileges preferences board directors shall time determine issued preferred stock options grants june 15 2004 sold 4000000 primary shares common stock price 3750 per share raising 1425 million net proceeds deducting underwriter discounts commissions addition certain directors officers granted underwriters 30day option purchase 600000 shares 30day option expired unexercised july 15 2004 intend use net proceeds offering fund future acquisitions take advantage business development opportunities general corporate working capital purposes including funding capital expenditures funds immediately used invested money market funds certificates deposits investment grade securities needed june 22 2004 stockholders approved amendment certificate incorporation amended increased number shares authorized capital stock 80000000 75000000 shares common stock 5000000 shares preferred stock 2002 implemented two new stock option plans 2002 stock incentive plan authorizes issuance 2700000 shares common stock upon exercise stock options connection issuance restricted stock bonuses june 22 2004 stockholders approved amendment increase 2000000 shares total number shares common stock may awarded 2002 stock incentive plan 2002 stock incentive plan authorizes granting stock options restricted stock bonuses employees officers directors consultants independent contractors advisors armor holdings subsidiaries 2002 executive stock plan provides grant total 470000 stock options stock awards key employees terms provisions 2002 executive stock plan substantially 2002 stock incentive plan except may grant nonqualified stock options 2002 executive stock plan 2002 executive stock plan adopted march 13 2002 shares available grant 2002 executive stock plan granted executive officers march 13 2002 1998 implemented new nonqualified stock option plan pursuant new plan 725000 shares common stock reserved made available distribution january 1 1999 distributed 725000 shares allocated plan 1999 implemented 1999 stock incentive plan 1999 plan reserved 2000000 shares common stock 1999 plan 1999 plan provides granting options employees officers directors consultants independent contractors advisors company option prices stock may purchased 1999 plan less fair market value common stock dates grants armor holdings inc subsidiaries notes consolidated financial statements continued 1996 implemented incentive stock plan outside directors stock plan plans collectively provide granting options certain key employees directors pursuant plans amended 2200000 shares common stock reserved made available distribution option prices stock may purchased incentive stock plan less fair market value common stock dates grants 1994 implemented incentive stock plan outside directors stock plan plans collectively provide granting options certain key employees well providing grant common stock outside directors full time employees pursuant plans 1050000 shares common stock reserved made available distribution option prices stock may purchased incentive stock plan less fair market value common stock dates grants effective january 19 1996 stock grants awarded 1994 incentive stock plan accelerated considered fully vested sfas 123 fair value option grant estimated date grant using blackscholes optionpricing model following weightedaverage assumptions years ended december 31 2004 2003 2002 2004 2003 2002 expected life option 47 yrs 40 yrs 40 yrs dividend yield 0 volatility 500 498 522 risk free interest rate 336 251 394 weighted average fair value options granted 2004 2003 2002 follows 2004 2003 2002 thousands except per share data fair value option granted 1557 621 1008 total number options granted 979 898 1895 total fair value options granted 15243 5576 19098 outstanding options generally consisting tenyear incentive nonqualified stock options generally vest become exercisable three five year period date grant outstanding options generally expire ten years date grant upon retirement company contingent upon continued employment applicable tenyear period armor holdings inc subsidiaries notes consolidated financial statements continued summary status stock option grants december 31 2004 changes years ending dates presented weighted average options exercise price outstanding december 31 2001 2984034 1160 granted 1894660 2296 exercised 507868 841 forfeited 86168 1675 outstanding december 31 2002 4284658 781 granted 898347 1662 exercised 724934 1183 forfeited 567150 2152 outstanding december 31 2003 3890921 1700 granted 979000 3395 exercised 1642195 1536 forfeited 69210 1726 outstanding december 31 2004 3158516 2315 options exercisable december 31 2004 1311698 1832 following table summarizes information stock options outstanding december 31 2004 remaining options life exercise price range outstanding exercisable years 375 781 95182 12 969 1119 70177 44 1319 1398 89712 45708 75 1400 1470 525205 297433 81 1505 1590 180887 127553 69 1700 1712 283597 83597 86 2175 2393 424756 317467 72 2407 2448 485000 231666 75 2507 2890 380000 11665 91 3304 3605 474000 31250 95 3899 4185 150000 99 total 3158516 1311698 armor holdings inc subsidiaries notes consolidated financial statements continued remaining nonexercisable options december 31 2004 become exercisable follows 2005 595311 2006 615670 2007 269830 2008 182999 thereafter 183008 restricted stock bonuses granted following restricted stock bonuses years ended december 31 2004 2003 2002 2004 2003 2002 thousands except share data restricted stock bonus shares granted 70534 416500 328206 weightedaverage fair value per share grant date 3858 1989 1869 compensation cost recognized 9082 10157 732 year ended december 31 2004 recorded 63 million noncash charge acceleration performancedbased longterm restricted stock awards granted certain executives 2002 year ended december 31 2003 recorded 73 million noncash charge stockbased compensation performance plan certain key executives 13 million noncash charge severance charge related departure former chief executive officer earnings per share following details earnings per share computations basic diluted basis years ended december 31 2004 2003 2002 2004 2003 2002 thousands except per share data numerator basic diluted earnings per share net income loss available common shareholders 80539 10886 17689 denominator basic earnings per share weightedaverage shares outstanding 31419 28175 30341 effect dilutive securities effect shares issuable stock option stock grant plans based treasury stock method 1606 779 616 diluted earnings per share adjusted weightedaverage shares outstanding 33025 28954 30957 basic earnings loss per share 256 039 058 diluted earnings loss per share 244 038 057 treasury stock 6060222 shares treasury december 31 2004 2003 armor holdings inc subsidiaries notes consolidated financial statements continued 16 supplemental cash flow information 2004 2003 2002 cash paid year thousands interest 7668 1245 527 income taxes net refunds 36772 7886 5753 2004 2003 2002 acquisitions businesses net cash acquired thousands fair value assets acquired 118120 72132 16134 goodwill 86073 76802 8478 liabilities assumed 45751 58422 15794 stock issued total cash paid net cash acquired 158442 90512 8818 17 quarterly results unaudited following table presents summarized unaudited quarterly results operations company fiscal 2004 2003 believe necessary adjustments included amounts stated present fairly following selected information read conjunction consolidated financial statements notes thereto included elsewhere herein future quarterly operating results may fluctuate depending number factors results operations particular quarter necessarily indicative results operations full year quarter fiscal 2004 first second third fourth quarter thousands except per share data revenue continuing operations 161628 223704 256803 337548 gross profit continuing operations 47560 66458 71346 80127 net income 12490 17821 23874 26354 basic earnings per share 044 060 073 078 diluted earnings per share 042 057 070 074 fiscal 2003 first second third fourth quarter thousands except per share data revenue continuing operations 80474 81659 90882 112157 gross profit continuing operations 23312 24378 28929 34967 net income loss 5087 4613 6115 4929 basic earnings loss per share 017 022 017 diluted earnings loss per share 017 022 017 armor holdings inc subsidiaries notes consolidated financial statements continued 18 employee benefits plan defined contribution plans october 1997 formed 401k plan provides voluntary contributions employees allows discretionary contribution us form cash made contributions approximately 520000 332000 395000 plan 2004 2003 2002 respectively december 9 2003 acquired simula inc simula 401k profit sharing plan provides voluntary contributions employees allows discretionary contribution us form cash made contributions approximately 81000 5000 simulas 401k profit sharing plan 2004 2003 respectively october 25 2004 simulas 401k profit sharing plan combined plan november 18 2004 acquired specialty defense specialty plastics products inc affiliated companies 401k savings plan provides voluntary contributions employees allows discretionary contribution us form cash made contributions approximately 13000 specialty plastics products inc affiliated companies 401k savings plan 2004 december 30 2004 acquired bianchi international bianchi international 401k retirement savings plan provides voluntary contributions employees allows discretionary contribution us form cash made contributions bianchi international 401k retirement savings plan 2004 defined benefit plan acquired simulas noncontributory defined benefit pension plan pension plan employees december 9 2003 pension plan originally adopted november 1 1980 contributions made pension plan based upon actuarially determined amounts effective july 1 1999 simula froze plan new participants effective december 8 2003 prior acquisition pension plan simula froze pension plan future service participants elected payout supplemental retirement plan simula represents 1067000 net amount recognized amount paid february 25 2004 pension plans funded status amounts recognized balance sheet december 31 2004 2003 follows 2004 2003 thousands actuarial present value benefit obligation accumulated benefit obligation 8109 8810 effect projected future compensation increases projected benefit obligation 8109 8810 pension plan assets fair value 6719 6169 contributions measurement date 58 183 unfunded status 1332 2458 unrecognized prior service cost unrecognized loss 324 unrecognized transition liability accrued benefit cost 1008 2458 additional minimum liability accrued benefit liability 1008 2458 intangible asset accumulated comprehensive income adjustments net amount recognized 1008 2458 armor holdings inc subsidiaries notes consolidated financial statements continued reconciliation pension plans projected benefit obligation follows 2004 2003 projected benefit obligation beginning year 8810 8774 service cost interest cost 472 56 actuarial gain 262 benefits paid 1435 20 projected benefit obligation end year 8109 8810 reconciliation fair value plan assets follows 2004 2003 fair value plan assets beginning year 6169 6006 employer contributions 1570 183 actual gain 415 benefits paid 1435 20 fair value plan assets end year 6719 6169 net periodic pension cost includes following 2004 2003 service cost interest cost 472 56 expected return assets 504 transition asset recognition prior service cost net loss recognition net periodic pension income cost 32 56 assumptions december 31 used accounting pension plan follows 2004 2003 discount settlement rate 600 rate increase compensation levels 325 expected longterm rate return plan assets 800 pension plans assets consist money market accounts investments common stocks bonds mutual funds armor holdings inc subsidiaries notes consolidated financial statements continued 19 related party transactions effective january 1 2002 kanders company inc kanders co corporation controlled warren b kanders chairman board directors chief executive officer entered agreement us provide certain investment banking financial advisory related services five year term expire december 31 2006 terms agreement kanders co receive mutually agreed upon fee transactionbytransaction basis term agreement aggregate fees agreement exceed 1575000 calendar year also agreed reimburse kanders co reasonable outofpocket expenses including kanders cos expenses office space executive assistant furniture equipment travel entertainment reasonable fees disbursements counsel consultants retained kanders co april 2003 connection mr kanders appointed chief executive officer company kanders co agreed terminate agreement pursuant kanders co provided certain services company paid kanders co 143000 investment banking services fiscal 2003 including april 2003 continue reimburse kanders co reasonable outofpocket expenses reimbursed kanders co reasonable outofpocket expenses aggregate amount 369000 184000 fiscal years ended december 31 2004 2003 respectively effective january 1 2003 entered transportation services agreement kanders aviation llc entity controlled mr kanders chairman board chief executive officer pursuant terms transportation services agreement upon request kanders aviation may sole discretion provide us airport air transportation services via certain aircraft transportation services agreement remain effect indefinitely terminated written notice either party thereto party thereto term transportation services agreement reimburse kanders aviation amount equal fair market value air transportation services provided kanders aviation us additional expenses incurred kanders aviation connection air transportation services reimbursed kanders aviation 332000 expenses fiscal year ended december 31 2004 nicholas sokolow one directors member law firm sokolow dunaud mercadier carreras located paris france retain sokolow dunaud mercadier carreras fiscal year ended december 31 2004 expect future fiscal year ended december 31 2003 paid sokolow dunaud mercadier carreras 124000 legal services connection various acquisitions armor holdings inc subsidiaries notes consolidated financial statements continued 20 operating leases party certain real estate equipment vehicle leases several leases include options renewal escalation clauses cases management expects normal course business leases renewed replaced leases approximate total future minimum annual lease payments noncancelable leases continuing operations follows year thousands 2005 6711 2006 5174 2007 4316 2008 3074 2009 2551 thereafter 12413 34239 incurred rent expense approximately 5026000 1467000 1200000 years ended december 31 2004 2003 2002 respectively armor holdings inc subsidiaries notes consolidated financial statements continued 21 guarantor nonguarantor financial statements august 12 2003 sold 150 million 825 notes private placements pursuant rule 144a regulation 825 notes uncollateralized obligations rank junior right payment existing future senior debt october 29 2004 completed placement 300 million aggregate principal amount 2 convertible notes november 5 2004 goldman sachs co exercised option purchase additional 45 million principal amount 2 convertible notes 825 notes 2 convertible notes guaranteed jointly severally senior subordinated uncollateralized basis domestic subsidiaries following consolidating financial information presents consolidating balance sheets december 31 2004 2003 related statements operations cash flows three years period ended december 31 2004 armor holdings inc parent guarantor subsidiaries nonguarantor subsidiaries armor holdings inc consolidated basis information includes elimination entries necessary consolidate armor holdings inc parent guarantor nonguarantor subsidiaries investments subsidiaries accounted parent using equity method accounting guarantor nonguarantor subsidiaries presented combined basis principal elimination entries eliminate investments subsidiaries intercompany balances transactions separate financial statements guarantor nonguarantor subsidiaries presented management believes financial statements would meaningful investors armor holdings inc subsidiaries notes consolidated financial statements continued armor holdings inc subsidiaries consolidating balance sheets december 31 2004 guarantor nonguarantor consolidated parent subsidiaries eliminations total thousands assets current assets cash equivalents 388727 21173 11309 421209 accounts receivable net 155229 19330 174559 costs earned gross profit excess billings 893 intercompany receivables 173735 108313 7045 289093 inventories 142362 33846 176208 prepaid expenses current assets 1611 42023 3301 46935 total current assets 564073 469993 74831 289093 819804 property equipment net 5144 47968 24195 77307 goodwill net 259773 2240 262013 patents licenses trademarks net 112288 171 112459 assets 18410 2209 149 20768 investment subsidiaries 592437 12730 605167 total assets 1180064 904961 101586 894260 1292351 liabilities stockholders equity current liabilities current portion longterm debt 457 164 621 shortterm debt 341579 2177 343756 accounts payable 640 58422 10539 69601 accrued expenses current liabilities 11216 73314 22717 107247 income taxes payable 6454 11513 3942 9001 intercompany payables 112741 123466 52886 289093 total current liabilities 459722 267172 92425 289093 530226 longterm debt less current portion 153897 2377 477 156751 longterm liabilities 1951 deferred income taxes 1249 36077 901 38227 total liabilities 614868 307577 93803 289093 727155 stockholders equity preferred stock 1450 common stock 402 3792 7854 11646 402 additional paidin capital 504809 387229 14771 402000 504809 retained earnings accumulated deficit 125481 204913 14842 190071 125481 accumulated comprehensive income 6821 treasury stock 72317 total stockholders equity 565196 597384 7783 605167 565196 total liabilities stockholders equity 1180064 904961 101586 894260 1292351 armor holdings inc subsidiaries notes consolidated financial statements continued armor holdings inc subsidiaries consolidating balance sheets december 31 2003 guarantor nonguarantor consolidated parent subsidiaries eliminations total thousands assets current assets cash equivalents 90764 11084 10002 111850 restricted cash 2600 accounts receivable net 1201 59470 11964 72635 costs earned gross profit excess billings intercompany receivables 60974 2600 38352 101926 inventories 61494 19033 80527 prepaid expenses current assets 20241 1844 2600 2653 22032 current assets discontinued operations 753 total current assets 175780 137245 81951 104579 290397 property equipment net 2122 34853 20601 57576 goodwill net 173640 2067 175707 patents licenses trademarks net 43991 183 44174 longterm assets discontinued operations 1603 assets 14092 1924 153 16169 investment subsidiaries 320034 10038 330072 total assets 512028 403294 104955 434651 585626 liabilities stockholders equity current liabilities current portion longterm debt 31960 147 32107 shortterm debt 498 accounts payable 1584 20941 7779 30304 accrued expenses current liabilities 12403 27113 18702 58218 intercompany payables 44251 47073 9933 101257 current liabilities discontinued operations 35714 37009 669 626 total current liabilities 58238 91373 74068 101926 121753 longterm debt less current portion 153452 4257 591 158300 longterm liabilities 7266 1704 8970 deferred income taxes 2293 2304 1227 1238 longterm liabilities discontinued operations 2653 total liabilities 216663 102291 75886 104579 290261 stockholders equity preferred stock 1450 common stock 344 4143 7854 11997 344 additional paid capital 318460 191781 46095 237876 318460 retained earnings accumulated deficit 44942 103629 24880 78749 44942 accumulated comprehensive income 3936 treasury stock 72317 total stockholders equity 295365 301003 29069 330072 295365 total liabilities stockholders equity 512028 403294 104955 434651 585626 armor holdings inc subsidiaries notes consolidated financial statements continued armor holdings inc subsidiaries consolidating statements operations year ended december 31 2004 guarantor nonguarantor consolidated parent subsidiaries eliminations total thousands revenues aerospace defense 605398 products 204122 45643 249765 mobile security 25531 102224 3235 124520 total revenues 835051 147867 3235 979683 costs expenses cost revenues 599505 117922 3235 714192 cost warranty revision 5000 operating expenses 17455 69122 13684 100261 amortization 4243 12 4255 integration charges 8231 2029 10260 related party management fees income net 15 operating loss income 25686 155167 16234 145715 interest expense net 6511 103 162 6776 expense income net 1917 421 393 1945 equity losses earnings subsidiaries 108631 2691 111322 related party interest expense income net 16 18 2 loss income continuing operations provision income taxes 74501 157352 16463 111322 136994 benefit provision income taxes 6038 56030 6425 56417 loss income continuing operations 80539 101322 10038 111322 80577 discontinued operations net income loss discontinued operations net income tax benefit 38 net income loss 80539 101284 10038 111322 80539 armor holdings inc subsidiaries notes consolidated financial statements continued armor holdings inc subsidiaries consolidating statements operations year ended december 31 2003 guarantor nonguarantor consolidated parent subsidiaries eliminations total thousands revenues aerospace defense 91673 products 157984 35976 193960 mobile security 15029 62853 1657 79539 total revenues 264686 98829 1657 365172 costs expenses cost revenues 172089 79840 1657 253586 operating expenses 11602 40598 10595 62795 amortization 478 11 489 integration charges 10886 1687 12573 related party management fees income net 12823 7598 20421 operating loss income 35311 49834 785 20421 35729 interest expense net 3313 497 202 4012 expense net 117 391 508 equity losses earnings subsidiaries 42600 38790 3810 related party interest expense income net 16 255 239 loss income continuing operations provision income taxes 3960 10685 192 16372 31209 benefit provision income taxes 6926 18399 2730 14203 loss income continuing operations 10886 7714 2538 16372 17006 discontinued operations net income loss discontinued operations net income tax benefit 34882 20820 20182 6120 net income loss 10886 27168 23358 3810 10886 armor holdings inc subsidiaries notes consolidated financial statements continued armor holdings inc subsidiaries consolidating statements operations year ended december 31 2002 guarantor nonguarantor consolidated parent subsidiaries eliminations total thousands revenues aerospace defense 59318 products 154466 25480 179946 mobile security 15958 49895 65853 total revenues 229742 75375 305117 costs expenses cost revenues 148208 62537 210745 operating expenses 6034 36161 7641 49836 amortization 243 2 245 integration charges 800 5126 5926 related party management fees income net 2487 171 616 1700 operating loss income 9321 40175 5811 1700 38365 interest expense net 450 275 198 923 income expense net 2 22 75 51 equity losses earnings subsidiaries 8237 1220 7017 related party interest income net 239 loss income continuing operations provision income taxes 18006 41381 5538 8478 37391 benefit provision income taxes 317 14313 2058 16054 loss income continuing operations 17689 27068 3480 8478 21337 discontinued operations net loss discontinued operations net income tax benefit 16894 20671 1461 39026 net loss income 17689 10174 17191 7017 17689 armor holdings inc subsidiaries notes consolidated financial statements continued armor holdings inc subsidiaries consolidating statements cash flows year ended december 31 2004 guarantor nonguarantor consolidated parent subsidiaries eliminations total thousands cash flows operating activities income continuing operations 80539 101322 10038 111322 80577 adjustments reconcile income continuing operations cash provided used operating activities depreciation amortization 1744 10042 3265 15051 loss disposal fixed assets 446 418 864 deferred income taxes 3025 1299 318 4006 noncash termination charge 1408 noncash restricted stock unit award 6294 changes operating assets liabilities net acquisitions decrease increase accounts receivable 1201 84331 7366 90496 decrease increase intercompany receivables payables 10834 8432 2402 decrease increase inventories 58293 14813 73106 increase prepaid expenses assets 1397 20321 357 22075 decrease increase accounts payable accrued expenses current liabilities 283 68341 6775 74833 increase decrease income taxes payable 17080 3350 3594 17324 net cash provided used operating activities 98777 23587 3638 111322 14680 cash flows investing activities purchase property equipment 3615 10125 5679 19419 purchase patents trademarks 112 purchase equity investment 5275 proceeds sale equity investment 5823 purchase shortterm investment securities 286430 proceeds sales shortterm investment securities 286430 collection note receivable 2175 decrease restricted cash 2600 sale business net cash disposed 125 additional consideration purchased businesses 33943 investment subsidiaries 303721 192399 111322 purchase businesses net cash acquired 158442 net cash used provided investing activities 302561 9550 5679 111322 206468 cash flows financing activities proceeds exercise stock options 25192 proceeds issuance common stock 142500 cash paid common stock offering costs 1339 cash paid financing costs 6156 borrowings shortterm debt 341550 repayments longterm debt 3236 145 3381 borrowings lines credit 22700 5 1883 24588 repayments lines credit 22700 349 23049 net cash used provided financing activities 501747 3231 1389 499905 effect exchange rate cash equivalents 1959 net cash provided used discontinued operations 717 net increase cash equivalents 297963 10089 1307 309359 cash equivalents beginning period 90764 11084 10002 111850 cash equivalents end period 388727 21173 11309 421209 armor holdings inc subsidiaries notes consolidated financial statements continued armor holdings inc subsidiaries consolidating statements cash flows year ended december 31 2003 guarantor nonguarantor consolidated parent subsidiaries eliminations total thousands cash flows operating activities income loss continuing operations 10886 7714 2538 16372 17006 adjustments reconcile income continuing operations cash provided used operating activities depreciation amortization 1326 4270 2012 7608 deferred income taxes 3008 5389 2644 5025 loss disposal fixed assets 68 259 327 noncash termination charge 2093 noncash restricted stock unit award 7266 changes operating assets liabilities net acquisitions increase decrease accounts receivable 2680 1685 995 decrease increase intercompany receivables payables 83092 78887 15977 20182 decrease increase inventories 793 3294 2501 decrease increase prepaid expenses assets 12267 13758 890 2381 increase decrease accounts payable accrued expenses current liabilities 10775 1020 7288 17043 decrease increase income taxes payable 22583 23826 882 361 net cash provided used operating activities 102114 69713 22261 3810 50852 cash flows investing activities purchase property equipment 200 5894 2590 8684 purchase patents trademarks 185 purchase shortterm investment securities 143400 proceeds sales shortterm investment securities 143400 increase restricted cash 2600 additional consideration purchased businesses 1026 investment subsidiaries 85243 45403 36030 3810 sale business net cash disposed 31361 purchase businesses net cash acquired 90512 net cash used provided investing activities 147194 38298 33440 3810 71646 cash flows financing activities proceeds exercise stock options 8471 cash paid financing costs 4599 repurchase treasury stock 22684 borrowings longterm debt 147504 774 148278 repayments longterm debt 1688 borrowings lines credit 30406 1424 31830 repayments lines credit 30406 114 1578 32098 net cash provided used financing activities 128692 1802 620 127510 effect exchange rate cash equivalents 3890 3057 833 net cash provided used discontinued operations 36855 45467 8612 net increase cash equivalents 83612 7528 7797 98937 cash equivalents beginning period 7152 3556 2205 12913 cash equivalents end period 90764 11084 10002 111850 armor holdings inc subsidiaries notes consolidated financial statements continued armor holdings inc subsidiaries consolidating statements cash flows year ended december 31 2002 guarantor nonguarantor consolidated parent subsidiaries eliminations total thousands cash flows operating activities loss income continuing operations 17689 27068 3480 8478 21337 adjustments reconcile loss income continuing operations cash used provided operating activities depreciation amortization 854 3583 1143 5580 deferred income taxes 364 321 402 359 loss disposal fixed assets 66 134 200 changes operating assets liabilities net acquisitions increase decrease accounts receivable 3829 1275 2554 decrease increase intercompany receivables payables 6151 5266 576 1461 increase inventories 5125 4256 9381 decrease increase prepaid expenses assets 492 2459 279 2246 decrease increase accounts payable accrued expenses current liabilities 1405 7215 9564 3754 increase decrease income taxes payable 5663 148 1230 6745 net cash used provided operating activities 6298 21426 5859 7017 16286 cash flows investing activities purchase property equipment 506 3671 1725 5902 purchase patents trademarks 69 purchase shortterm investment securities 4000 proceeds sales shortterm investment securities 4000 additional consideration purchased businesses 9375 investment subsidiaries 3347 1643 8721 7017 purchase businesses net cash acquired 8818 net cash used provided investing activities 3853 20290 6996 7017 24164 cash flows financing activities proceeds exercise stock options 4227 proceeds sale put options 525 cash paid financing costs 326 repurchases treasury stock 26054 repayments longterm debt 620 110 730 borrowings lines credit 32372 repayments lines credit 32372 75 32447 net cash used financing activities 21628 695 110 22433 effect exchange rate cash equivalents 304 342 772 126 net cash used discontinued operations 2763 1376 4139 net increase cash equivalents 31475 1980 1121 34576 cash equivalents beginning period 38627 5536 3326 47489 cash equivalents end period 7152 3556 2205 12913 armor holdings inc subsidiaries notes consolidated financial statements continued 22 warranty revision product exchange program result recently announced warranty revision product exchange program relating zylonrcontaining vests see note 12 recorded pretax charge 50 million net 40 million cost reimbursements suppliers includes legal costs associated class action lawsuits liability classified accrued expenses current liabilities condensed consolidated balance sheet funded cash provided operating activities summary warranty revision product replacement accrual follows warranty revision product replacement accrual thousands beginning balance 5000 incurred costs net reimbursements suppliers 3625 balance december 31 2004 1375 23 concentration revenues approximately 653 revenues ten largest customers year ended december 31 2004 approximately 607 revenues came us military contracts aerospace defense groups ten largest customers accounted approximately 939 aerospace defense group revenues fiscal 2004 products divisions ten largest customers accounted approximately 266 total revenues products division fiscal 2004 mobile security divisions ten largest customers accounted approximately 436 total revenues mobile security division fiscal 2004 military governmental contracts generally awarded periodic sporadic basis aerospace defense group lose uparmored hmmwv contract continues june 2008 financial performance would experience material adverse effect 24 balance sheet arrangements september 24 2004 entered offbalance sheet leasing arrangement aircraft company use upon expiration lease september 24 2009 subsidiary company option renew lease fair market value subject approval lessor buy aircraft approximately 100 million return aircraft lessor guarantee pay shortfall sales proceeds third party amount exceed 82 million annual rental expense related agreement approximately 10 million excluding leasing arrangement balance sheet arrangements signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized armor holdings inc warren b kanders warren b kanders chairman board directors chief executive officer dated march 7 2005 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated warren b kanders warren b kanders chairman board directors chief executive officer march 7 2005 glenn j heiar nicholas sokolow glenn j heiar nicholas sokolow chief financial officer director principal financial officer march 7 2005 principal accounting officer march 7 2005 burtt r ehrlich thomas w strauss burtt r ehrlich thomas w strauss director march 7 2005 march 7 2005 david r haas deborah zoullas david r haas deborah zoullas director march 7 2005 march 7 2005 index exhibits exhibit description 21 stock purchase agreement dated april 20 2001 among armor holdings inc bengal acquisition corp krollogara company ogarahess eisenhardt armoring company ogara company ogara security associates inc filed exhibit 21 current report form 8k dated april 20 2001 22 amendment dated august 20 2001 stock purchase agreement dated april 20 2001 among armor holdings inc bengal acquisition corp krollogara company ogarahess eisenhardt armoring company ogara company ogara security associates inc filed exhibit 22 current report form 8k dated august 22 2001 23 amendment dated august 21 2001 stock purchase agreement dated april 20 2001 among armor holdings inc bengal acquisition corp krollogara company ogarahess eisenhardt armoring company ogara company ogara security associates inc filed exhibit 23 current report form 8k dated august 23 2001 24 agreement plan merger dated august 29 2003 among armor holdings inc ahi bulletproof acquisition corp simula inc filed appendix registration statement form s4 filed commission september 23 2003 27 agreement plan merger dated september 28 2004 among armor holdings inc specialty acquisition corp specialty group inc joseph f murray jr john p sweeney shareholders agent filed exhibit 21 current report form 8k filed october 4 2004 28 stock purchase agreement dated november 5 2004 among armor holdings products llc jack b corwin trustee jack b corwin revocable trust dated june 26 1992 gary w french trustee gary w carol french revocable trust dated december 31 1999 gary w french trustee french family irrevocable trust dated december 31 1999 bianchi international accucase llc bianchi gunleather leather products co inc armor holdings inc jack b corwin gary w french filed exhibit 21 current report form 8k filed november 12 2004 31 certificate incorporation armor holdings inc filed exhibit 31 current report form 8k dated september 3 1996 32 certificate merger american body armor equipment inc florida corporation armor holdings inc filed exhibit 32 current report form 8k dated september 3 1996 33 certificate amendment certificate incorporation armor holdings inc amended filed exhibit 31 form 10q quarterly report fiscal quarter ended june 30 2004 34 amended restated bylaws armor holdings inc filed exhibit 31 form 10q quarterly report fiscal quarter ended march 31 2004 41 indenture dated august 12 2003 among armor holdings subsidiary guarantors listed signatories thereto wachovia bank national association trustee form old note attached exhibit thereto filed exhibit 102 form 10q quarterly report fiscal quarter ended june 30 2003 42 first supplemental indenture dated september 30 2003 among armor holdings inc subsidiary guarantors listed signatories indenture subsidiaries listed schedule first supplemental indenture wachovia bank national association trustee filed exhibit 42 registration statement form s4 filed commission january 7 2004 43 second supplemental indenture dated december 9 2003 among armor holdings inc subsidiary guarantors listed signatories thereto wachovia bank national association trustee filed exhibit 43 registration statement form s4 filed commission january 7 2004 44 third supplemental indenture dated december 24 2003 among armor holdings inc subsidiary guarantors listed signatories thereto wachovia bank national association trustee filed exhibit 44 registration statement form s4 filed commission january 7 2004 45 fourth supplemental indenture dated march 24 2004 among armor holdings inc subsidiary guarantors listed signatories thereto odv holdings corp wachovia bank national association trustee filed exhibit 41 form 10q quarterly report fiscal quarter ended march 31 2004 46 fifth supplemental indenture dated august 16 2004 among armor holdings inc subsidiary guarantors listed signatories thereto kleen bore inc wachovia bank national association trustee filed exhibit 41 form 10q quarterly report fiscal quarter ended september 30 2004 47 sixth supplemental indenture dated september 24 2004 among armor holdings inc subsidiary guarantors listed signatories thereto armor holdings aircraft llc wachovia bank national association trustee filed exhibit 42 form 10q quarterly report fiscal quarter ended september 30 2004 48 seventh supplemental indenture dated december 29 2004 among armor holdings inc subsidiary guarantors listed signaturies thereto wachovia bank national association trustee 49 registration rights agreement dated august 12 2003 among armor holdings inc subsidiary guarantors listed signatories thereto wachovia capital markets llc filed exhibit 103 form 10q quarterly report fiscal quarter ended june 30 2003 410 form new 8 14 senior subordinated notes due 2013 filed exhibit 46 registration statement form s4 filed commission january 7 2004 411 indenture dated october 29 2004 among armor holdings inc wachovia bank national association trustee filed exhibit 41 current report form 8k filed november 1 2004 412 first supplemental indenture dated october 29 2004 among armor holdings inc subsidiary guarantors named therein wachovia bank national association trustee together form note attached thereto filed exhibit 42 current report form 8k filed november 1 2004 413 second supplemental indenture dated december 29 2004 among armor holdings inc subsidiary guarantors named therein wachovia bank national association trustee 101 purchase agreement dated august 6 2003 among armor holdings inc subsidiary guarantors listed signatories thereto wachovia capital markets llc filed exhibit 101 form 10q quarterly report fiscal quarter ended june 30 2003 102 credit agreement dated august 12 2003 among armor holdings inc lender time party thereto bank america na administrative agent swing line lender lc issuer wachovia bank national association syndication agent key bank national association documentation agent filed exhibit 104 form 10q quarterly report fiscal quarter ended june 30 2003 103 subsidiary guaranty agreement dated august 12 2003 certain subsidiaries armor holdings inc identified signature pages thereto additional guarantor may become party guaranty favor bank america na administrative agent filed exhibit 105 form 10q quarterly report fiscal quarter ended june 30 2003 104 collateral agreement dated august 12 2003 among armor holdings certain subsidiaries identified signature pages thereto additional grantor may become party agreement favor bank america na administrative agent filed exhibit 106 form 10q quarterly report fiscal quarter ended june 30 2003 105 trademark security agreement dated august 12 2003 entities listed signature pages thereto favor bank america na administrative agent filed exhibit 107 form 10q quarterly report fiscal quarter ended june 30 2003 106 patent security agreement dated august 12 2003 entities listed signature pages attached thereto favor bank america na administrative agent filed exhibit 108 form 10q quarterly report fiscal quarter ended june 30 2003 107 promissory note dated august 12 2003 principal amount 15000000 made armor holdings inc favor keybank national association filed exhibit 109 form 10q quarterly report fiscal quarter ended june 30 2003 108 promissory note dated august 12 2003 principal amount 22500000 made armor holdings inc favor wachovia bank national association filed exhibit 1010 form 10q quarterly report fiscal quarter ended june 30 2003 109 first amendment credit agreement dated january 9 2004 among armor holdings inc lenders time party thereto bank america na administrative agent wachovia bank national association syndication agent keybank national association documentation agent filed exhibit 101 form 10q quarterly report fiscal quarter ended march 31 2004 1010 second amendment credit agreement dated march 29 2004 among armor holdings inc lenders time party thereto bank america na administrative agent wachovia bank national association syndication agent keybank national association documentation agent filed exhibit 102 form 10q quarterly report fiscal quarter ended march 31 2004 1011 third amendment credit agreement dated october 19 2004 among armor holdings inc lenders time party thereto bank america na administrative agent wachovia bank national association syndication agent keybank national association documentation agent filed exhibit 101 current report form 8k filed november 1 2004 1012 employment agreement warren b kanders armor holdings inc dated january 1 2002 filed exhibit 104 form 10q quarterly report fiscal quarter ended march 31 2002 1013 letter agreement dated july 26 2003 armor holdings inc warren b kanders filed exhibit 991 current report form 8k dated july 26 2003 1014 amendment 2 dated november 4 2003 employment agreement armor holdings inc warren b kanders filed exhibit 101 form 10q quarterly report fiscal quarter ended september 30 2003 1015 employment agreement armor holdings inc robert r schiller dated january 1 2002 filed exhibit 102 form 10q quarterly report fiscal quarter ended march 31 2002 1016 amendment dated november 4 2003 employment agreement armor holdings inc robert r schiller filed exhibit 102 form 10q quarterly report fiscal quarter ended september 30 2003 1017 form indemnification agreement directors officers armor holdings inc filed exhibit 104 form 10q quarterly report fiscal quarter ended march 31 2004 1018 american body armor equipment inc 1994 incentive stock plan incorporated reference form s8 filed october 10 1994 reg 33018863 1019 american body armor equipment inc 1994 directors stock plan incorporated reference form s8 filed october 31 1994 reg 33018863 1020 armor holdings inc amended restated 1996 stock option plan incorporated reference 1997 definitive proxy statement respect 1997 annual meeting stockholders held june 12 1997 filed commission may 27 1997 1021 armor holdings inc amended restated 1996 nonemployee directors stock option plan incorporated reference 1997 definitive proxy statement respect 1997 annual meeting stockholders held june 12 1997 filed commission may 27 1997 1022 armor holdings inc 1998 stock option plan filed exhibit 1019 form 10k annual report fiscal year ended december 31 1998 1023 armor holdings inc 1999 stock incentive plan filed appendix 1999 definitive proxy statement respect 1999 annual meeting stockholders filed commission may 21 1999 1024 armor holdings inc amended restated 2002 stock incentive plan 1025 armor holdings inc 2002 executive stock plan filed exhibit 106 form 10q quarterly report fiscal quarter ended march 31 2002 1026 transportation services agreement dated december 10 2003 kanders aviation llc armor holdings inc filed exhibit 103 form 10q quarterly report fiscal quarter ended march 31 2004 211 subsidiaries registrant 231 consent pricewaterhousecoopers llp 311 certification principal executive officer required rule 13a14a securities exchange act 1934 312 certification principal financial officer required rule 13a14a securities exchange act 1934 321 certification principal executive officer required rule 13a14b securities exchange act 1934 322 certification principal financial officer required rule 13a14b securities exchange act 1934 filed herewith incorporated herein reference exhibit represents management contract exhibit represents compensatory planitem 15 exhibits financial statement schedules following financial statements appear sequentially beginning page number included report form 10k financial statement schedules omitted since either required applicable information otherwise included report independent registered certified public accountants consolidated balance sheets consolidated statements operations consolidated statements stockholders equity comprehensive income loss consolidated statements cash flows notes consolidated financial statements b exhibits following exhibits hereby filed part annual report form 10k exhibit description 21 stock purchase agreement dated april 20 2001 among armor holdings inc bengal acquisition corp krollogara company ogarahess eisenhardt armoring company ogara company ogara security associates inc filed exhibit 21 current report form 8k dated april 20 2001 22 amendment dated august 20 2001 stock purchase agreement dated april 20 2001 among armor holdings inc bengal acquisition corp krollogara company ogarahess eisenhardt armoring company ogara company ogara security associates inc filed exhibit 22 current report form 8k dated august 22 2001 23 amendment dated august 21 2001 stock purchase agreement dated april 20 2001 among armor holdings inc bengal acquisition corp krollogara company ogarahess eisenhardt armoring company ogara company ogara security associates inc filed exhibit 23 current report form 8k dated august 23 2001 24 agreement plan merger dated august 29 2003 among armor holdings inc ahi bulletproof acquisition corp simula inc filed appendix registration statement form s4 filed commission september 23 2003 25 agreement plan merger dated september 28 2004 among armor holdings inc specialty acquisition corp specialty group inc joseph f murray jr john p sweeney shareholders agent filed exhibit 21 current report form 8k filed october 4 2004 26 stock purchase agreement dated november 5 2004 among armor holdings products llc jack b corwin trustee jack b corwin revocable trust dated june 26 1992 gary w french trustee gary w carol french revocable trust dated december 31 1999 gary w french trustee french family irrevocable trust dated december 31 1999 bianchi international accucase llc bianchi gunleather leather products co inc armor holdings inc jack b corwin gary w french filed exhibit 21 current report form 8k filed november 12 2004 27 agreement plan merger dated february 27 2006 among armor holdings inc santana acquisition corp stewart stevenson services inc filed exhibit 21 current report form 8k dated march 3 2006 31 certificate incorporation armor holdings inc filed exhibit 31 current report form 8k dated september 3 1996 32 certificate merger american body armor equipment inc florida corporation armor holdings inc filed exhibit 32 current report form 8k dated september 3 1996 33 certificate amendment certificate incorporation armor holdings inc amended filed exhibit 31 form 10q quarterly report fiscal quarter ended june 30 2004 34 amended restated bylaws armor holdings inc filed exhibit 31 form 10q quarterly report fiscal quarter ended march 31 2004 41 indenture dated august 12 2003 among armor holdings subsidiary guarantors listed signatories thereto wachovia bank national association trustee form old note attached exhibit thereto filed exhibit 102 form 10q quarterly report fiscal quarter ended june 30 2003 42 first supplemental indenture dated september 30 2003 among armor holdings inc subsidiary guarantors listed signatories indenture subsidiaries listed schedule first supplemental indenture wachovia bank national association trustee filed exhibit 42 registration statement form s4 filed commission january 7 2004 43 second supplemental indenture dated december 9 2003 among armor holdings inc subsidiary guarantors listed signatories thereto wachovia bank national association trustee filed exhibit 43 registration statement form s4 filed commission january 7 2004 44 third supplemental indenture dated december 24 2003 among armor holdings inc subsidiary guarantors listed signatories thereto wachovia bank national association trustee filed exhibit 44 registration statement form s4 filed commission january 7 2004 45 fourth supplemental indenture dated march 24 2004 among armor holdings inc subsidiary guarantors listed signatories thereto odv holdings corp wachovia bank national association trustee filed exhibit 41 form 10q quarterly report fiscal quarter ended march 31 2004 46 fifth supplemental indenture dated august 16 2004 among armor holdings inc subsidiary guarantors listed signatories thereto kleen bore inc wachovia bank national association trustee filed exhibit 41 form 10q quarterly report fiscal quarter ended september 30 2004 47 sixth supplemental indenture dated september 24 2004 among armor holdings inc subsidiary guarantors listed signatories thereto armor holdings aircraft llc wachovia bank national association trustee filed exhibit 42 form 10q quarterly report fiscal quarter ended september 30 2004 48 seventh supplemental indenture dated december 29 2004 among armor holdings inc subsidiary guarantors listed signatories thereto wachovia bank national association trustee filed exhibit 48 form 10k annual report fiscal year ended december 31 2004 49 eighth supplemental indenture dated may 25 2005 among armor holdings inc subsidiary guarantors listed signatories thereto wachovia bank national association trustee filed exhibit 42 form 10q quarterly report fiscal quarter ended june 30 2005 410 ninth supplemental indenture dated august 25 2005 among armor holdings inc subsidiary guarantors listed signatories thereto wachovia bank national association trustee filed exhibit 42 form 10q quarterly report fiscal quarter ended september 30 2005 411 registration rights agreement dated august 12 2003 among armor holdings inc subsidiary guarantors listed signatories thereto wachovia capital markets llc filed exhibit 103 form 10q quarterly report fiscal quarter ended june 30 2003 412 form new 8 14 senior subordinated notes due 2013 filed exhibit 46 registration statement form s4 filed commission january 7 2004 413 indenture dated october 29 2004 among armor holdings inc wachovia bank national association trustee filed exhibit 41 current report form 8k filed november 1 2004 414 first supplemental indenture dated october 29 2004 among armor holdings inc subsidiary guarantors named therein wachovia bank national association trustee together form note attached thereto filed exhibit 42 current report form 8k filed november 1 2004 415 second supplemental indenture dated december 29 2004 among armor holdings inc subsidiary guarantors named therein wachovia bank national association trustee filed exhibit 413 form 10k annual report fiscal year ended december 31 2004 416 third supplemental indenture dated may 25 2005 among armor holdings inc subsidiary guarantors named therein wachovia bank national association trustee filed exhibit 41 form 10q quarterly report fiscal quarter ended june 30 2005 417 fourth supplemental indenture dated august 25 2005 among armor holdings inc subsidiary guarantors named therein wachovia bank national association trustee filed exhibit 41 form 10q quarterly report fiscal quarter ended september 30 2005 101 purchase agreement dated august 6 2003 among armor holdings inc subsidiary guarantors listed signatories thereto wachovia capital markets llc filed exhibit 101 form 10q quarterly report fiscal quarter ended june 30 2003 102 credit agreement dated august 12 2003 among armor holdings inc lender time party thereto bank america na administrative agent swing line lender lc issuer wachovia bank national association syndication agent key bank national association documentation agent filed exhibit 104 form 10q quarterly report fiscal quarter ended june 30 2003 103 subsidiary guaranty agreement dated august 12 2003 certain subsidiaries armor holdings inc identified signature pages thereto additional guarantor may become party guaranty favor bank america na administrative agent filed exhibit 105 form 10q quarterly report fiscal quarter ended june 30 2003 104 collateral agreement dated august 12 2003 among armor holdings certain subsidiaries identified signature pages thereto additional grantor may become party agreement favor bank america na administrative agent filed exhibit 106 form 10q quarterly report fiscal quarter ended june 30 2003 105 trademark security agreement dated august 12 2003 entities listed signature pages thereto favor bank america na administrative agent filed exhibit 107 form 10q quarterly report fiscal quarter ended june 30 2003 106 patent security agreement dated august 12 2003 entities listed signature pages attached thereto favor bank america na administrative agent filed exhibit 108 form 10q quarterly report fiscal quarter ended june 30 2003 107 promissory note dated august 12 2003 principal amount 15000000 made armor holdings inc favor keybank national association filed exhibit 109 form 10q quarterly report fiscal quarter ended june 30 2003 108 promissory note dated august 12 2003 principal amount 22500000 made armor holdings inc favor wachovia bank national association filed exhibit 1010 form 10q quarterly report fiscal quarter ended june 30 2003 109 first amendment credit agreement dated january 9 2004 among armor holdings inc lenders time party thereto bank america na administrative agent wachovia bank national association syndication agent keybank national association documentation agent filed exhibit 101 form 10q quarterly report fiscal quarter ended march 31 2004 1010 second amendment credit agreement dated march 29 2004 among armor holdings inc lenders time party thereto bank america na administrative agent wachovia bank national association syndication agent keybank national association documentation agent filed exhibit 102 form 10q quarterly report fiscal quarter ended march 31 2004 1011 third amendment credit agreement dated october 19 2004 among armor holdings inc lenders time party thereto bank america na administrative agent wachovia bank national association syndication agent keybank national association documentation agent filed exhibit 101 current report form 8k filed november 1 2004 1012 fourth amendment credit agreement dated april 14 2005 among armor holdings inc lenders time party thereto bank america na administrative agent wachovia bank national association syndication agent keybank national association documentation agent filed exhibit 109 form 10q quarterly report fiscal quarter ended june 30 2005 1013 fifth amendment credit agreement dated july 26 2005 among armor holdings inc lenders time party thereto bank america na administrative agent wachovia bank national association syndication agent keybank national association documentation agent filed exhibit 1010 form 10q quarterly report fiscal quarter ended june 30 2005 1014 amended restated employment agreement dated january 1 2005 armor holdings inc warren b kanders filed exhibit 101 form 10q quarterly report fiscal quarter ended june 30 2005 1015 amended restated employment agreement dated january 1 2005 armor holdings inc robert r schiller filed exhibit 102 form 10q quarterly report fiscal quarter ended june 30 2005 1016 employment agreement dated may 20 2005 armor holdings inc glenn j heiar filed exhibit 103 form 10q quarterly report fiscal quarter ended june 30 2005 1017 employment agreement dated may 20 2005 armor holdings inc robert f mecredy filed exhibit 104 form 10q quarterly report fiscal quarter ended june 30 2005 1018 noncompetition agreement dated may 20 2005 armor holdings inc scott obrien filed exhibit 106 form 10q quarterly report fiscal quarter ended june 30 2005 1019 employment agreement dated may 20 2005 armor holdings inc scott obrien filed exhibit 105 form 10q quarterly report fiscal quarter ended june 30 2005 1020 form indemnification agreement directors officers armor holdings inc filed exhibit 104 form 10q quarterly report fiscal quarter ended march 31 2004 1021 american body armor equipment inc 1994 incentive stock plan incorporated reference form s8 filed october 10 1994 reg 33018863 1022 american body armor equipment inc 1994 directors stock plan incorporated reference form s8 filed october 31 1994 reg 33018863 1023 armor holdings inc amended restated 1996 stock option plan incorporated reference 1997 definitive proxy statement respect 1997 annual meeting stockholders held june 12 1997 filed commission may 27 1997 1024 armor holdings inc amended restated 1996 nonemployee directors stock option plan incorporated reference 1997 definitive proxy statement respect 1997 annual meeting stockholders held june 12 1997 filed commission may 27 1997 1025 armor holdings inc 1998 stock option plan filed exhibit 1019 form 10k annual report fiscal year ended december 31 1998 1026 armor holdings inc 1999 stock incentive plan filed appendix 1999 definitive proxy statement respect 1999 annual meeting stockholders filed commission may 21 1999 1027 armor holdings inc amended restated 2002 stock incentive plan filed exhibit 1024 form 10k annual report fiscal year ended december 31 2004 1028 armor holdings inc 2002 executive stock plan filed exhibit 106 form 10q quarterly report fiscal quarter ended march 31 2002 1029 armor holdings inc 2005 stock incentive plan filed appendix 2005 definitive proxy statement respect 2005 annual meeting stockholders filed commission may 23 2005 1030 form stock option agreement 2005 stock incentive plan filed exhibit 107 form 10q quarterly report fiscal quarter ended june 30 2005 1031 form stock bonus award agreement 2005 stock incentive plan filed exhibit 108 form 10q quarterly report fiscal quarter ended june 30 2005 1032 armor holdings inc 2005 annual incentive plan filed appendix b 2005 definitive proxy statement respect 2005 annual meeting stockholders filed commission may 23 2005 1033 executive deferred compensation plan armor holdings inc incorporated reference form s8 filed november 30 2005 reg 333130016 1034 amendment 1 executive deferred compensation plan armor holdings inc incorporated reference form s8 filed november 30 2005 reg 333130016 1035 armor holdings inc executive retirement plan dated january 25 2006 1036 transportation services agreement dated december 10 2003 kanders aviation llc armor holdings inc filed exhibit 103 form 10q quarterly report fiscal quarter ended march 31 2004 211 subsidiaries registrant 231 consent pricewaterhousecoopers llp 311 certification principal executive officer required rule 13a14a securities exchange act 1934 312 certification principal financial officer required rule 13a14a securities exchange act 1934 321 certification principal executive officer required rule 13a14b securities exchange act 1934 322 certification principal financial officer required rule 13a14b securities exchange act 1934 filed herewith incorporated herein reference exhibit represents management contract exhibit represents compensatory plan index consolidated financial statements armor holdings inc report independent registered certified public accounting firm consolidated balance sheets consolidated statements operations consolidated statements stockholders equity comprehensive income loss consolidated statements cash flow notes consolidated financial statements report independent registered certified public accounting firm board directors stockholders armor holdings inc completed integrated audits armor holdings incs december 31 2005 2004 consolidated financial statements internal control financial reporting december 31 2005 audit december 31 2003 consolidated financial statements accordance standards public company accounting oversight board united states opinions based audits presented consolidated financial statements opinion consolidated financial statements listed accompanying index present fairly material respects financial position armor holdings inc subsidiaries company december 31 2005 2004 results operations cash flows three years period ended december 31 2005 conformity accounting principles generally accepted united states america financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits statements accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit financial statements includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion internal control financial reporting also opinion managements assessment included managements annual report internal control financial reporting appearing item 8 company maintained effective internal control financial reporting december 31 2005 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission coso fairly stated material respects based criteria furthermore opinion company maintained material respects effective internal control financial reporting december 31 2005 based criteria established internal control integrated framework issued coso companys management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting responsibility express opinions managements assessment effectiveness companys internal control financial reporting based audit conducted audit internal control financial reporting accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit internal control financial reporting includes obtaining understanding internal control financial reporting evaluating managements assessment testing evaluating design operating effectiveness internal control performing procedures consider necessary circumstances believe audit provides reasonable basis opinions companys internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles companys internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition companys assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate pricewaterhousecoopers llp pricewaterhousecoopers llp jacksonville florida march 14 2006 armor holdings inc subsidiaries consolidated balance sheets december 31 2005 december 31 2004 thousands except share data december 31 2005 december 31 2004 assets current assets cash equivalents 471841 421209 accounts receivable net allowance doubtful accounts 6763 3077 211281 174559 costs earned gross profit excess billings 843 893 inventories 210517 176208 prepaid expenses current assets 38087 46935 total current assets 932569 819804 property equipment net accumulated depreciation 37041 27917 79929 77307 goodwill net accumulated amortization 4024 273696 262013 patents licenses trademarks net accumulated amortization 15256 6830 130620 112459 assets 46048 20768 total assets 1462862 1292351 liabilities stockholders equity current liabilities current portion longterm debt 430 621 shortterm debt 344274 343756 accounts payable 90963 69601 accrued expenses current liabilities 100924 107247 income taxes payable 8767 9001 total current liabilities 545358 530226 longterm debt less current portion 151910 156751 longterm liabilities 10475 1951 deferred income taxes 44537 38227 total liabilities 752280 727155 commitments contingencies note 13 stockholders equity preferred stock 01 par value 5000000 shares authorized shares issued outstanding common stock 01 par value 75000000 shares authorized 41347628 40133870 issued 35287406 34073648 outstanding december 31 2005 december 31 2004 respectively 415 402 additional paidin capital 525890 504809 retained earnings 257991 125481 accumulated comprehensive loss income 1397 6821 treasury stock 72317 total stockholders equity 710582 565196 total liabilities stockholders equity 1462862 1292351 accompanying notes integral part consolidated financial statements armor holdings inc subsidiaries consolidated statements operations years ended december 31 2005 2004 2003 thousands except per share data december 31 2005 december 31 2004 december 31 2003 revenues aerospace defense 1188598 605398 91673 products 308878 249765 193960 mobile security 139454 124520 79539 total revenues 1636930 979683 365172 costs expenses cost revenues 1248596 714192 253586 cost vest exchange program warranty revision 19900 5000 selling general administrative expenses 139304 100261 62795 amortization 8627 4255 489 integration 3669 2558 2054 charges 1200 7702 10519 operating income 215634 145715 35729 interest expense net 6281 6776 4012 income expense net 4025 1945 508 income continuing operations provision income taxes 213378 136994 31209 provision income taxes 80868 56417 14203 income continuing operations 132510 80577 17006 discontinued operations note 2 loss discontinued operations net income tax benefit 38 6120 net income 132510 80539 10886 net income per common share basic income continuing operations 383 256 061 loss discontinued operations 000 022 basic income per share 383 256 039 net income per common share diluted income continuing operations 370 244 059 loss discontinued operations 000 021 diluted income per share 370 244 038 weighted average shares basic 34602 31419 28175 weighted average shares diluted 35822 33025 28954 accompanying notes integral part consolidated financial statements armor holdings inc subsidiaries consolidated statements stockholders equity comprehensive income loss years ended december 31 2005 2004 2003 thousands common stock accumulated additional par paidin retained comprehensive treasury shares value capital earnings loss income stock total balance december 31 2002 29457 336 307487 34056 4169 49633 288077 exercise stock options distribution stock awards 743 8 9028 9036 tax benefit exercises options 1136 extension stock options related termination former chief executive officer 809 repurchase stock 1923 22684 comprehensive income net income 10886 sale armorgroup 3231 foreign currency translation adjustments 4874 total comprehensive income 18991 balance december 31 2003 28277 344 318460 44942 3936 72317 295365 exercise stock options distribution stock awards 1797 18 40582 40600 tax benefit exercises stock options 4646 issuance common stock 4000 40 141121 141161 comprehensive income net income 80539 foreign currency translation adjustments net taxes 642 2885 total comprehensive income 83424 balance december 31 2004 34074 402 504809 125481 6821 72317 565196 exercise stock options distribution stock awards 1213 13 16289 16302 tax benefit exercises stock options 4792 comprehensive income net income 132510 foreign currency translation adjustments net taxes 728 5022 minimum pension liability adjustment net taxes 403 712 unrealized loss equity investment 2484 total comprehensive income 124292 balance december 31 2005 35287 415 525890 257991 1397 72317 710582 accompanying notes integral part consolidated financial statements armor holdings inc subsidiaries consolidated statements cash flow years ended december 31 2005 2004 2003 thousands year ended december 31 december 31 december 31 2005 2004 2003 revised see note 17 cash flows operating activities income continuing operations 132510 80577 17006 adjustments reconcile income continuing operations cash provided operating activities depreciation amortization 22408 15051 7608 loss disposal fixed assets 934 864 327 deferred income taxes 3411 4006 5025 noncash termination charge 1408 2093 noncash restricted stock charges 6294 7266 noncash serp expense 2427 fair value gain put options 5905 changes operating assets liabilities net acquisitions increase accounts receivable 35340 90496 995 increase inventories 31135 73106 2501 decrease increase prepaid expenses assets 23541 22075 2381 increase accounts payable accrued expenses current liabilities 24288 77418 17060 increase income taxes payable 4558 17324 361 net cash provided operating activities continuing operations 134875 17265 50869 net cash used operating activities discontinued operations 407 6429 net cash provided operating activities 134875 16858 44440 cash flows investing activities purchase property equipment 15593 19419 8684 purchase patents trademarks 1053 112 185 purchase equity investment 31082 5275 proceeds sale equity investment 5823 purchase shortterm investment securities 754300 286430 143400 proceeds sales shortterm investment securities 754300 286430 143400 collection note receivable 2175 financing lease receivable 1187 decrease increase restricted cash 2600 sale businesses net cash disposed 125 31361 additional cash received sale business 300 additional consideration purchased businesses 6528 2808 1026 purchase businesses net cash acquired 46805 158442 90512 net cash used investing activities continuing operations 101948 175333 71646 net cash used investing activities discontinued operations 263 8227 net cash used investing activities 101948 175596 79873 cash flows financing activities proceeds exercise stock options 18902 25192 8471 proceeds sale put options 6614 proceeds issuance common stock 142500 cash paid common stock offering costs 1339 taxes paid withheld shares restricted stock issuances 5642 2585 17 repurchases treasury stock 22684 cash paid financing costs 6156 4599 borrowings shortterm debt 341550 borrowings longterm debt 148278 repayments longterm debt 585 34516 1688 borrowings line credit 13649 24588 31830 repayments line credit 13635 23049 32098 net cash provided financing activities continuing operations 19303 466185 127493 net cash used financing activities discontinued operations 125 228 net cash provided financing activities 19303 466060 127265 effect exchange rate changes cash equivalents 1598 1961 3543 net increase cash equivalents 50632 309283 95375 cash equivalents beginning period 421209 111926 16551 cash equivalents end period 471841 421209 111926 cash equivalents end period continuing operations 471841 421209 111850 discontinued operations 76 471841 421209 111926 accompanying notes integral part consolidated financial statements armor holdings inc subsidiaries notes consolidated financial statements 1 background summary significant accounting policies company nature business armor holdings inc whollyowned subsidiaries company us leading manufacturer provider armored military commercial vehicles armor kits retrofit military vehicles protective security products military law enforcement personnel aircraft armor aircraft safety products survivability equipment used military aviators personnel protection technologies customers include domestic international military law enforcement security corrections personnel government agencies multinational corporations individuals organized operating three business segments aerospace defense group products group mobile security division armorgroup services division services division classified discontinued operations amounts disclosed footnotes related continuing operations unless otherwise indicated continuing operations aerospace defense group aerospace defense group supplies human safety survival systems us military major aerospace defense prime contractors core markets land marine aviation safety military personnel protection significant business within aerospace defense group armoring variety light medium heavy tactical wheeled vehicles military also provide spare parts logistical field support services uparmored high mobility multipurpose wheeled vehicles hmmwvs commonly known humvee previously shipped us well blast ballistic protection kits standard hmmwv installed field additionally develop ballistic blast protected armored sealed truck cabs military tactical wheeled vehicles example design develop manufacture armor systems variety military vehicles including platforms heavy expanded mobility tactical truck hemtt palletized load system pls heavy equipment transporter het m915 armored security vehicle asv family medium tactical vehicles fmtv aerospace defense group develops supplies personnel equipment including small arms protective inserts sapi engineered ceramic body armor helmets protective duty equipment products include among others modular lightweight loadcarrying equipment molle systems outer tactical vests otvs advance combat helmets currently largest supplier molle systems us army modular rucksack configured number ways depending needs military mission also manufacture otvs used sapi plates provide enhanced protection bullets mines grenades mortar artillery shells sapi plates adopted us military key element protective equipment worn us troops aerospace defense group develops sells military helicopter seating systems helicopter cockpit airbag systems aircraft armor kits emergency bailout parachutes survival equipment worn military aircrew primary customers products us army us navy us marine corps boeing sikorsky aircraft major aircraft manufacturers products group products group previously referred armor holdings products division manufactures sells broad range high quality equipment marketed brand names known military law enforcement communities products manufactured group include concealable tactical body armor hard armor duty gear lesslethal munitions antiriot products police batons emergency lighting products forensic products firearms accessories weapon maintenance products foldable ladders backpacks specialty gloves mobile security division mobile security division operating brand name centigontm manufactures services integrates certified armoring systems commercial vehicles protect varying degrees ballistic blast threats global basis armor variety platforms available commercially including custom limousines sedans sport utility vehicles commercial trucks cashintransit vehicles customers business include us federal law enforcement intelligence diplomatic agencies foreign heads state multinational corporations well high net worth individuals cashintransit operators armor holdings inc subsidiaries notes consolidated financial statements continued discontinued operations june 30 2004 litigation support services subsidiary new technology armor inc nti last remaining business discontinued operations july 2 2004 sold security consulting division nti remaining division nti consisting primarily training services included part products group segment november 26 2003 announced completed sale armorgroup security service division 337 million consideration group private investors led granville baird capital partners london england management received 314 million cash closing note receivable 23 million collected full fiscal 2004 april 17 2003 announced completed sale armorgroup integrated systems business sale 100 stock armorgroup integrated systems inc low voltage systems technologies inc aerwav integration services inc ais wholly owned subsidiary aerwav holdings llc significant accounting policies principles consolidation consolidated financial statements include accounts company wholly owned subsidiaries consolidation intercompany balances transactions eliminated results operations companies acquired transactions accounted purchase method accounting included financial statements date acquisition cash equivalents consider highly liquid investments purchased maturities three months less date purchase cash equivalents concentration credit risk financial instruments potentially subject us concentrations credit risk consist primarily cash equivalents trade accounts receivable maintain cash equivalents believe various high quality banks year make periodic investments aaa rated auction rate securities held banks investments auction rate securities december 31 2005 2004 amounts held individual banks exceed federally insured amounts accounts receivable consist amounts due customers distributors located throughout world international product sales generally require cash advance confirmed letters credit us banks maintain reserves potential credit losses december 31 2005 2004 management believes significant concentrations credit risk excluding us military inventories stated lower cost market determined average cost method armor holdings inc subsidiaries notes consolidated financial statements continued fair value financial instruments carrying value cash equivalents accounts receivable accounts payable approximates fair value december 31 2005 2004 fair value debt estimated based quoted market prices see table carrying amount fair value public debt december 31 2005 2004 respectively december 31 2005 december 31 2004 carrying amount fair value carrying amount fair value thousands 825 senior subordinated notes due 2013 148099 161250 147850 168000 200 senior subordinated convertible notes due november 1 2024 341751 341550 341579 396384 489850 502800 489429 564384 derivative instruments hedging activities account derivative instruments hedging activities accordance statement financial accounting standard 133 accounting derivative instruments hedge activities sfas 133 amended derivative instruments recorded consolidated balance sheets fair value changes fair value derivatives recorded period current earnings comprehensive income depending whether derivative designated part hedge transaction depending type hedge transaction fair value hedge transactions hedge changes assets liabilitys firm commitments fair value changes fair value derivative instrument generally offset income statement changes hedged items fair value put options company stock marked market consolidated statement operations end period property equipment property equipment carried cost less accumulated depreciation upon disposal property equipment appropriate accounts reduced related cost accumulated depreciation resulting gains losses reflected consolidated earnings depreciation computed using straightline method estimated lives related assets follows buildings improvements 5 39 years machinery equipment 3 7 years goodwill represents excess purchase price fair value net assets acquired purchase business combination goodwill intangible assets stated basis cost 2209 million goodwill resulting acquisitions made us subsequent june 30 2001 immediately subjected nonamortization provisions statement financial accounting standards 142 goodwill intangible assets sfas 142 see also impairment purchase method accounting business combinations requires us make use estimates judgments allocate purchase price paid acquisitions fair value net tangible identifiable intangible assets acquired liabilities assumed goodwill tested impairment annually possible impairment indicated using fair value based test prescribed sfas 142 performed annual assessment goodwill determined impairment existed june 30 2005 patents licenses trademarks patents licenses trademarks primarily acquired acquisitions accounted purchase method accounting assets amortized straightline basis useful lives certain assets indefinite lives amortized see note 5 information identified intangible assets armor holdings inc subsidiaries notes consolidated financial statements continued impairment longlived assets including certain identifiable intangibles goodwill reviewed annually impairment whenever events changes circumstances indicate carrying amount asset question may recoverable including limited deterioration profits business segment longlived assets changes occur might impair recovery longlived assets method used determine existence impairment would discounted operating cash flows estimated remaining useful lives related longlived asset groups impairment measured difference fair value unamortized cost date impairment determined management reviewed longlived assets taken impairment charges 14 million fiscal 2004 124 million fiscal 2003 reduce carrying value services division estimated realizable value deferred charges deferred charges consist costs related issuance certain financing arrangements amortization deferred charges charged interest expense respective lives applicable financing arrangement deferred charges included assets consolidated balance sheets research development research development occurs primarily fixedprice costplus government funded contracts well companysponsored efforts research development costs incurred contracts customers expensed incurred reported component cost revenues revenue contracts recognized revenue earned recorded revenue 42 million 75 million 58 million government funded research development fiscal 2005 2004 2003 respectively research development costs include salaries benefits research development personnel testing certification research development related costs research development costs included selling general administrative expenses incurred fiscal 2005 2004 2003 approximated 151 million 89 million 40 million respectively estimates preparation financial statements conformity us gaap requires management make estimates assumptions affect reported amounts financial statements accompanying notes significant estimates inherent preparation accompanying consolidated financial statements include carrying value longlived assets valuation allowances receivables inventories deferred income tax assets liabilities potential litigation claims settlements potential liabilities related tax filings ordinary course business vest exchange program warranty revision accrual defined benefit plan liabilities contract contingencies obligations actual results could differ estimates legal tax contingencies involved legal tax proceedings claims arising time management connection outside advisors periodically assesses liabilities contingencies connection matters based latest information available matters probable loss incurred record loss reasonable estimate loss consolidated financial statements additional information becomes available estimates probable losses adjusted based assessment circumstances believe outcome matters individually aggregate material adverse effect consolidated financial statements income taxes account income taxes pursuant statement financial accounting standards 109 accounting income taxes sfas 109 asset liability method specified thereunder deferred taxes determined based difference financial reporting tax bases assets liabilities deferred tax liabilities offset deferred tax assets relating net operating loss carryforwards tax credit carryforwards deductible temporary differences recognition deferred tax assets based managements belief likely tax benefit associated temporary differences operating capital loss carryforwards utilized valuation allowance recorded deferred tax assets likely realization occur armor holdings inc subsidiaries notes consolidated financial statements continued revenue recognition record products revenue time shipment returns minimal materially affect financial statements record aerospace defense group revenue related government contracts results principally fixed price contracts recognized persuasive evidence arrangement exists fee reasonably determinable customer accepted product collectibility probable conditions met substantially cases department defense inspector signs material inspection receiving report indicating acceptance title transfer record revenue remaining aerospace defense group products group mobile security division product shipped except larger commercial contracts typically longer four months length revenue large commercial contracts recognized percentage completion unitsofwork performed method large commercial contracts loss position entire estimated loss would recognized balance contract time current contracts profitable record service revenue services provided contractbycontract basis revenues service contracts recognized term contract allowance doubtful accounts encounter risks associated sales collection associated accounts receivable review accounts receivable aging monthly basis determine provision accounts receivable considered uncollectible periodically compare identified credit risks allowance established using historical experience adjust allowance accordingly warranty costs generally recorded component cost revenues accrued expenses consolidated financial statements amount recognized based historical claims cost experience see note 23 regarding vest exchange program warranty revision related zylonrcontaining vests advertising expense advertising costs period incurred earnings per share basic earnings per share computed dividing net income weightedaverage number common shares outstanding diluted earnings per share computed dividing net income weightedaverage number common shares outstanding compounding effects potentially dilutive common stock equivalents principally options except cases effect would antidilutive comprehensive income financial statements foreign subsidiaries measured using local currency functional currency assets liabilities denominated foreign currency translated us dollars current rate exchange existing periodend revenues expenses translated average monthly exchange rates accordance statement financial accounting standard 115 accounting certain investments debt equity securities sfas 115 classify investment certain equitybased securities availableforsale unrealized gains losses excluded earnings recorded component comprehensive income loss unrealized holding loss equitybased securities classified availableforsale 25 million december 31 2005 unrealized loss december 31 2004 investment classified assets consolidated balance sheets declines fair value amortized cost basis investment determined temporary charged earnings temporary declines year ended december 31 2005 armor holdings inc subsidiaries notes consolidated financial statements continued stock options grants statement financial accounting standard 123 accounting stockbased compensation sfas 123 amended statement financial accounting standard 148 accounting stockbased compensation transition disclosure sfas 148 establishes fair value based method accounting stockbased employee compensation plans however also allows entity continue measure compensation cost plans using intrinsic value based method accounting prescribed accounting principles board opinion 25 accounting stock issued employees apb 25 fair value based method compensation cost measured grant date based value award recognized service period usually vesting period intrinsic value based method compensation cost excess quoted market price stock grant date measurement date amount employee must pay acquire stock elected continue account employee stock compensation plans apb 25 pro forma disclosures net earnings per share fair value based method accounting defined sfas 123 applied restricted stock awards generally recorded compensation expense using fixed accounting vesting periods based market value date grant except situations provisions agreements allow acceleration vesting upon certain event occurs may result acceleration vesting recognition associated expense compensation cost stock option grants determined based fair value grant dates fiscal 2005 2004 2003 consistent method prescribed sfas 123 net earnings per share would adjusted pro forma amounts indicated 2005 2004 2003 thousands except per share data net income reported 132510 80539 10886 deduct total stockbased employee compensation expense determined fair value based method awards net related tax effects 37305 6717 4157 add employee compensation expense modification stock option awards included report net income net income taxes 118 57 506 proforma net income 95323 73879 7235 earnings per share basic reported 383 256 039 basic pro forma 275 235 026 diluted reported 370 244 038 diluted pro forma 266 224 025 153 million stockbased employee compensation expense determined fair value method fiscal 2005 related accelerated vesting certain existing stock options 220 million related certain stock options issued fiscal 2005 december 16 2004 financial accounting standards board fasb issued fasb statement 123 share based payment revised 2004 fas 123r fas 123r revises sfas 123 requires companies expense fair value employee stock options forms stockbased compensation addition revising sfas 123 fas 123r supersedes apb 25 amends fasb statement 95 statement cash flows sfas 95 april 14 2005 securities exchange commission extended compliance date fas 123r first interim first annual reporting period companys fiscal year beginning june 15 2005 required apply expense recognition provisions fas 123r beginning first quarter 2006 expect incur approximately 16 million expense year ended december 31 2006 result adoption fas 123r armor holdings inc subsidiaries notes consolidated financial statements continued discontinued operations accordance statement financial accounting standards 144 accounting impairment disposal longlived assets sfas 144 component classified held sale reported discontinued operations following conditions met operations cash flows component eliminated ongoing operations entity result disposal transaction b entity significant continuing involvement operations component disposal transaction period component entity either disposed classified held sale income statement current prior periods reports results operations component including estimated impairment gain loss recognized accordance sfas 144 paragraph 37 discontinued operations results discontinued operations less applicable income tax expense benefit reported separate component income extraordinary items cumulative effect accounting changes applicable assets liabilities disposal group classified held sale presented separately asset liability sections respectively statement financial position discontinued operations december 31 2005 2004 see note 2 information related discontinued operations 2003 first half 2004 reclassifications certain reclassifications made 2004 2003 financial statements order conform presentation adopted 2005 reclassifications effect net income retained earnings recent accounting pronouncements december 16 2004 fasb issued fas 123r fas 123r revises sfas 123 requires companies expense fair value employee stock options forms stockbased compensation addition revising sfas 123 fas 123r supersedes apb 25 amends sfas 95 april 14 2005 securities exchange commission extended compliance date fas 123r first interim first annual reporting period companys fiscal year beginning june 15 2005 required apply expense recognition provisions fas 123r beginning first quarter 2006 expect incur approximately 16 million expense year ended december 31 2006 result adoption fas 123r november 2004 fasb issued statement financial accounting standard 151 inventory costs amendment arb 43 chapter 4 sfas 151 sfas 151 amends guidance accounting research bulleting 43 chapter 4 inventory pricing clarify abnormal amounts idle facility expense freight handling costs wasted material spoilage recognized currentperiod charges sfas 151 effective fiscal years beginning june 15 2005 sfas 151 expected material impact financial statements armor holdings inc subsidiaries notes consolidated financial statements continued 2 discontinued operations see note 1 information related discontinued operations following summary operating results discontinued operations years ended december 31 2004 2003 discontinued operations year ended december 31 2005 december 31 2004 december 31 2003 thousands revenue 1733 95124 cost revenues 697 66780 gross profit 1036 28344 selling general administrative expenses 821 19910 charge impairment longlived assets 21535 integration 776 operating income loss 215 13877 interest expense net 2 16 expense net 273 479 loss discontinued operations income tax benefit 60 14372 income tax benefit 22 8252 loss discontinued operations 38 6120 3 accumulated comprehensive loss income components accumulated comprehensive loss income net tax benefit expense 325000 642000 december 31 2005 2004 respectively listed december 31 2005 december 31 2004 thousands foreign currency translations net tax 1799 6821 minimum pension liability adjustment net tax 712 unrealized loss equity investment 2484 accumulated comprehensive loss 1397 6821 income armor holdings inc subsidiaries notes consolidated financial statements continued 4 business combinations completed numerous purchase business combinations cash andor shares common stock assumption liabilities certain cases three years ended december 31 2005 following acquisitions completed total shares value consideration issued shares thousands except shares issued aggregate 2005 acquisitions net cash 1 46992 additional purchase price paidissued deferred consideration 6528 53520 aggregate 2004 acquisitions net cash 2 158442 additional purchase price paidissued deferred considerationrepayment debt 2808 161250 aggregate 2003 acquisitions net cash 3 90512 additional purchase price paidissued acquisition earnouts 1026 91538 1 includes second chance body armor inc optemizecom inc 2 includes vector associates inc dba odv inc kleenbore inc specialty group inc aka specialty defense bianchi international 3 includes simula inc hatch imports inc 2005 acquisitions july 27 2005 acquired substantially domestic assets second chance body armor inc second chance 45 million cash transaction costs second chance included 187000 noncash equity compensation corporate development consultant second chance manufactures concealable tactical body armor law enforcement military markets worldwide second chance law enforcement business included products group military business included aerospace defense group result second chance acquisition expect 1 strengthen position leading supplier body armor law enforcement military markets 2 achieve crossselling opportunities leveraging global sales force relationships 3 offer opportunities cost reduction integration savings rationalization operations armor holdings inc subsidiaries notes consolidated financial statements continued acquisitions accounted purchase business combinations accordingly results operations included financial statements acquisition date costs acquire substantially assets second chance optemizecom inc acquired year ended december 31 2005 allocated assets acquired liabilities assumed according estimated fair values time acquisition follows thousands working capital net cash 7928 property equipment 2677 longterm assets 16 customerrelated intangibles 5160 technologyrelated intangibles 4761 marketingrelated intangibles 18966 goodwill deductible 7484 46992 customerrelated intangible assets relate acquired customer relationships amortized eighteenyear weightedaverage useful life straightline basis technologyrelated intangible assets relate certain acquired patents amortized eightyear weightedaverage useful life straightline basis marketingrelated intangible assets relate acquired trade names trademarks indefinite useful life goodwill acquired acquisitions second chance optemizecom inc deductible tax purposes 2004 acquisitions november 18 2004 acquired outstanding stock specialty defense 92 million cash includes assumption certain outstanding debt result specialty defense acquisition expect 1 strengthen position leading midtier defense security industry consolidator increased scale scope 2 increase relevance department defense customers programs 3 combine specialty defenses high volume manufacturing capacity established reputation leader molle systems otvs warrior helmets existing proprietary technology compete aggressively solicitation vests 4 achieve crossselling opportunities leveraging global sales force relationships 5 offer opportunities cost reduction integration savings rationalization operations december 30 2004 acquired outstanding stock bianchi international inc bianchi 60 million cash bianchi manufacturer supplier duty concealment holsters belts accessories bianchir brand name used primarily lawenforcement private security military personnel supplier spear rucksack system us special operations forces bianchi also market leader medium large technical internal frame backpacks highend daypacks satchels carrying cases gregoryr brand name bianchi included products group result bianchi acquisition expect 1 strengthen position leading supplier holsters belts accessories 2 achieve crossselling opportunities leveraging global sales force relationships 3 offer opportunities cost reduction integration savings rationalization operations armor holdings inc subsidiaries notes consolidated financial statements continued acquisitions accounted purchase business combinations accordingly results operations included financial statements acquisition date costs acquire specialty defense bianchi businesses acquired year ended december 31 2004 allocated assets acquired liabilities assumed according estimated fair values time acquisition follows specialty defense bianchi acquisitions total thousands working capital net cash 15801 5604 1213 20192 property equipment 7860 1033 15 8908 longterm assets 541 32 573 assumed notes payable 983 deferred tax liability 14170 13098 27268 customerrelated intangibles 12200 19671 185 32056 technologyrelated intangibles 1900 2777 4677 marketingrelated intangibles 16300 15830 2084 34214 goodwill 50243 28528 7302 86073 89692 60377 8373 158442 customerrelated intangible assets relate acquired customer relationships amortized twelveyear weightedaverage useful life straightline basis technologyrelated intangible asset relates certain acquired patents amortized eightyear weightedaverage useful life straightline basis marketingrelated intangible asset relates acquired trade names trademarks indefinite useful life goodwill acquired acquisitions specialty defense bianchi deductible tax purposes goodwill acquired businesses acquired year ended december 31 2004 tax deductible 2003 acquisitions december 9 2003 acquired outstanding stock simula approximately 848 million cash including transaction costs simula safety technology company supplies human safety survival systems branches united states military major aerospace defense prime contractors core markets military aviation safety military personnel safety land marine safety simula provider military helicopter seating systems aircraft land vehicle armor systems protective equipment military personnel technologies used protect humans variety lifethreatening catastrophic situations part acquisition simula assumed 8 senior subordinated convertible notes january 2004 paid 311 million repayment notes plus accrued interest thereon result simula acquisition expect 1 strengthen position leading midtier defense security industry consolidator increased scale scope 2 increase relevance department defense customers programs 3 diversify business mix adding fixedwing rotorcraft crashworthy seating 4 combine body armor capabilities simula protech one subsidiaries supplementing position sapi market 5 achieve crossselling opportunities leveraging global sales force relationships 6 offer opportunities cost reduction integration savings rationalization operations armor holdings inc subsidiaries notes consolidated financial statements continued simula acquisition accounted purchase business combination accordingly results operations included financial statements december 9 2003 cost acquire simula allocated assets acquired liabilities assumed according estimated fair values time acquisition follows thousands working capital 5027 property equipment 5360 longterm assets 434 assumed note payable 31135 assumed longterm liabilities 1704 customerrelated intangible 25140 technologyrelated intangible 8814 goodwill deductible 72816 84752 customerrelated intangible asset relates acquired customer relationships amortized 14year weightedaverage useful life straightline basis technologyrelated intangible asset relates certain acquired technology amortized eightyear weightedaverage useful life straightline basis unaudited pro forma results businesses acquired included consolidated results date acquisition pro forma results 2005 acquisition optemizecom inc 2004 acquisitions vector associates inc dba odv inc kleenbore inc 2003 acquisition hatch imports inc presented would differ material amount actual results following unaudited pro forma consolidated results presented show results pro forma basis 2005 acquisition second chance 2004 acquisitions specialty defense bianchi 2003 acquisition simula made january 1 2003 2005 2004 2003 thousands except per share data revenues 1657809 1147430 569245 net income continuing operations 127139 80268 11700 basic earnings per share continuing operations 367 241 036 diluted earnings per share continuing operations 355 230 036 pro forma results negatively impacted acquisition second chance purchased bankruptcy experienced legal financial troubles armor holdings inc subsidiaries notes consolidated financial statements continued 5 goodwill identified intangible assets sfas 142 goodwill intangible assets indefinite lives longer amortized tested impairment least annually often indicators impairment arise changes carrying amount goodwill years ended december 31 2005 2004 follows aerospace mobile defense products security corporate total thousands balance december 31 2003 104949 64405 6353 175707 goodwill acquired year 50243 35830 86073 finalization purchase price allocation 879 925 46 foreign currency translation adjustments 132 55 187 balance december 31 2004 154313 101292 6408 262013 goodwill acquired year 5841 1643 7484 finalization purchase price allocation 1459 2842 150 4451 foreign currency translation adjustments 184 68 252 balance december 31 2005 155772 109791 6490 1643 273696 armor holdings inc subsidiaries notes consolidated financial statements continued purchase price allocations acquisitions bianchi international specialty defense acquired fourth quarter 2004 completed 2005 included patents licenses trademarks accompanying consolidated balance sheets following intangible assets december 31 2005 2004 customer relationships technology marketing total thousands gross amount december 31 2005 60351 20070 65455 145876 accumulated amortization 8769 3608 2879 15256 net amount december 31 2005 51582 16462 62576 130620 gross amount december 31 2004 58454 14711 46124 119289 accumulated amortization 2796 1461 2573 6830 net amount december 31 2004 55658 13250 43551 112459 included marketing approximately 606 million 412 million marketingrelated intangible assets indefinite lives december 31 2005 2004 respectively anticipate recording related amortization expense following future periods year thousands 2006 8852 2007 8852 2008 8820 2009 7635 2010 5291 thereafter 30602 70052 armor holdings inc subsidiaries notes consolidated financial statements continued 6 inventories components inventory december 31 2005 2004 follows 2005 2004 thousands raw materials 127465 97528 workinprocess 48900 51137 finished goods 34152 27543 210517 176208 7 property equipment property equipment december 31 2005 2004 summarized follows 2005 2004 thousands land 5315 6096 buildings improvements 45398 39308 machinery equipment 63978 53947 construction process 2279 5873 total 116970 105224 accumulated depreciation 37041 27917 79929 77307 depreciation expense years ended december 31 2005 2004 2003 approximately 11779000 9645000 5719000 respectively 8 accrued expenses current liabilities accrued expenses current liabilities december 31 2005 2004 summarized follows 2005 2004 thousands accrued expenses 75505 69494 vest exchange program warranty revision accrual see note 23 18511 1375 customer deposits 5837 32317 deferred consideration acquisitions 1071 4061 100924 107247 armor holdings inc subsidiaries notes consolidated financial statements continued 9 short long term debt short term debt 2005 2004 thousands 2 convertible notes 341751 341579 credit facility colombia b 1565 2177 credit facility brazil c 958 344274 343756 october 29 2004 completed placement 300 million aggregate principal amount 200 senior subordinated convertible notes due november 1 2024 2 convertible notes november 5 2004 goldman sachs co exercised option purchase additional 45 million principal amount 2 convertible notes 2 convertible notes guaranteed domestic subsidiaries senior subordinated basis see note 22 2 convertible notes initially rated b1b moodys investors service standard poors rating services respectively 2 convertible notes bear interest rate 200 per year payable november 1 may 1 year beginning may 1 2005 ending november 1 2011 2 convertible notes subject accretion principal amount beginning november 1 2011 rate provides holders aggregate annual yield maturity 200 defined agreement 2 convertible notes bear contingent interest sixmonth period beginning november 1 2011 15 basis points paid cash average trading price notes certain levels 2 convertible notes convertible bond holders option time prior maturity initially conversion rate 185151 shares common stock per 1000 principal amount notes equivalent conversion price approximately 5401 per share subject adjustment upon conversion satisfy conversion obligation respect accreted principal amount notes converted cash remaining amount satisfied shares common stock conversion rate subject adjustment without duplication upon occurrence following events 1 stock dividends common stock 2 issuance rights warrants 3 stock splits combinations 4 distribution indebtedness securities assets 5 cash distributions 6 tender exchange offers 7 repurchases common stock accordance us gaap 2 convertible notes classified short term debt converted time prior maturity b march 12 2003 entered collateralized revolving credit facility corporacion financiera provide working capital needs colombia facility 2004 expanded collateralized revolving credit facility four additional colombian banks colombian credit facility oneyear revolving credit facility among things provides total maximum borrowings 6 billion colombian pesos us 26 million based exchange rate december 31 2005 borrowings credit facility bear interest rate equal colombian central bank rate based averages 30 day loans plus applicable margin ranging 35 40 colombian credit facility guaranteed us 100000 standby letter credit bank signature notes c february 2005 entered collateralized revolving credit facility itau sa provide working capital funds brazilian facility brazilian credit facility runs march 2006 among things provides total maximum borrowings 33 million brazilian reals us 14 million based exchange rate december 31 2005 borrowings brazilian credit facility bear interest rate equal 5 per annum brazilian credit facility guaranteed stand letter credit itau sa bank signature notes guaranteed parent company armor holdings inc subsidiaries notes consolidated financial statements continued long term debt 2005 2004 thousands credit facility 825 senior subordinated notes due 2013 b 148099 147850 note payable annual principal interest installments 200 january 2013 interest rate 5 1252 1377 note former officer payable monthly principal interest installments 7 december 2009 imputed interest rate 925 256 310 note payable monthly principal interest installments 13 september 2008 interest rate 3 415 642 mortgage payable monthly principal interest installments 12 november 2013 interest rate 625 891 975 minimum guaranteed royalty former officer payable monthly principal interest installments 4 august 2005 imputed interest rate 92 31 minimum guaranteed royalty former officer payable monthly principal interest installments 36 april 2005 imputed interest rate 735 141 plus fair value interest rate swaps c 1427 6046 152340 157372 less current portion 430 621 151910 156751 credit facility august 12 2003 terminated existing credit facility entered new collateralized revolving credit facility bank america na wachovia bank na key bank na new credit facility fiveyear revolving credit facility among things provides 1 total maximum borrowings 60 million 2 25 million sublimit issuances standby commercial letters credit 3 5 million sublimit swingline loans 4 5 million sublimit multicurrency borrowings new credit facility bear interest either 1 rate equal libor plus applicable margin ranging 1125 1625 2 alternate base rate higher bank america prime rate b federal funds rate plus 050 3 respect foreign currency loans fronted offshore currency rate plus applicable margin ranging 1125 1625 depending certain conditions credit facility guaranteed certain direct indirect domestic subsidiaries collateralized among things pledge issued outstanding shares stock equity interests certain domestic subsidiaries ii pledge 65 issued outstanding voting shares stock voting equity interests certain direct indirect foreign subsidiaries iii pledge 100 issued outstanding nonvoting shares stock nonvoting equity interests certain direct indirect foreign subsidiaries iv first priority perfected security interest certain domestic assets certain domestic assets certain direct indirect subsidiaries become guarantors obligations new credit facility including among things accounts receivable inventory machinery equipment certain contract rights intellectual property rights general intangibles january 9 2004 amended credit facility broaden ability make additional openmarket purchases publiclytraded securities subject certain limitations march 29 2004 amended credit facility allow us pay dividends subject certain limitations october 19 2004 amended credit facility allow us subtract cash equivalents total indebtedness calculation compliance covenants april 14 2005 amended credit agreement amend definition cash equivalents include auction rate securities held existing bank group july 26 2005 amended credit facility allow advances loans extensions credit investments key suppliers company aggregate amount exceed 15 million time outstanding purpose facilitating sale purchase goods services company addition amendment allows leases dispositions assets 10 consolidated earnings interest taxes depreciation amortization ebitda defined credit facility december 31 2005 530 million availability credit facility excluding 70 million outstanding letters credit armor holdings inc subsidiaries notes consolidated financial statements continued b 825 senior subordinated notes due 2013 august 12 2003 completed private placement 150 million aggregate principal amount 825 senior subordinated notes due 2013 825 notes 825 notes guaranteed domestic subsidiaries senior subordinated basis see note 22 825 notes sold qualified institutional buyers reliance rule 144a securities act 1933 amended nonus persons reliance regulation securities act 1933 amended 2004 completion private placement 825 notes conducted exchange offer pursuant holders privately placed 825 notes exchanged notes 825 notes registered securities act 1933 amended 825 notes rated b1b moodys investors service standard poors rating services respectively 2003 used portion funds acquire simula inc hatch imports inc used remaining proceeds offering fund acquisitions repay portion outstanding debt general corporate working capital purposes including funding capital expenditures interest 825 notes payable semiannually fifteenth february august year 825 notes issued discount approximately 25 million investors 825 notes may redeemed option whole part prorata basis august 15 2008 certain specified redemption prices plus accrued interest payable redemption date c fair value interest rate swaps september 2 2003 entered interest rate swap agreements designated fair value hedge defined sfas 133 aggregate notional amount totaling 150 million agreements entered exchange fixed interest rate 825 notes variable interest rate equal sixmonth libor set arrears plus spread ranging 2735 275 fixed semiannually fifteenth day february august december 31 2005 sixmonth libor 47 agreements subject terms conditions common transactions type accordance sfas 133 changes fair value interest rate swap agreements offset changes fair value fixed rate debt due changes market interest rate fair value interest rate swap agreements approximately 14 million december 31 2005 agreements deemed perfectly effective fair value hedge therefore qualify shortcut method accounting sfas 133 result ineffectiveness expected recognized earnings associated interest rate swap agreements 825 notes maturities longterm debt follows year thousands 2006 430 2007 453 2008 437 2009 338 2010 282 thereafter 150400 152340 armor holdings inc subsidiaries notes consolidated financial statements continued 10 derivative financial instruments account derivative instruments accordance statement financial accounting standards 133 accounting derivative instruments hedging activities amended statement financial accounting standards 138 accounting certain derivative instruments certain hedging activities amendment sfas 133 statement financial accounting standards 149 amendment sfas 133 derivative instruments hedging activities collectively sfas 133 sfas 133 requires freestanding embedded derivative instruments measured fair value recognized consolidated balance sheet either assets liabilities addition derivative instruments used hedging relationships must designated reassessed accounted either fair value hedges cash flow hedges pursuant provisions sfas 133 october 29 2004 completed placement 2 convertible notes november 5 2004 goldman sachs co exercised option purchase additional 45 million principal amount 2 convertible notes 2 convertible notes bear interest rate 200 per year payable november 1 may 1 year beginning may 1 2005 ending november 1 2011 2 convertible notes subject accretion principal amount beginning november 1 2011 rate provides holders aggregate annual yield maturity 200 defined agreement 2 convertible notes bear contingent interest sixmonth period beginning november 1 2011 15 basis points paid cash average trading price notes certain levels defined sfas 133 accounting derivative instruments hedge activities contingent interest feature 2 convertible notes embedded derivative considered clearly closely related host contract fair value bifurcated derivative december 31 2005 december 31 2004 immaterial financial position hedge fair value 825 notes using interest rate swaps enter derivative contracts manage fair value changes could caused exposure interest rate changes september 2 2003 entered interest rate swap agreements designated fair value hedges defined sfas 133 aggregate notional amount totaling 150 million agreements entered exchange fixed interest rate 825 notes variable interest rate equal sixmonth libor 47 december 31 2005 set arrears plus spread ranging 2735 275 fixed semiannually fifteenth february august year maturity agreements subject terms conditions common transactions type fair value hedges qualify hedge accounting using shortcut method since swap terms match critical terms 825 notes accordingly changes fair value interest rate swap agreements offset changes fair value 825 notes due changes market interest rate result ineffectiveness expected recognized earnings associated interest rate swap agreements 825 notes fair value interest rate swap agreements approximately 14 million 60 million december 31 2005 december 31 2004 respectively included assets longterm debt accompanying consolidated balance sheets fair values interest rate swap agreements obtained counterparties represent estimated amount would receive pay terminate agreement taking consideration difference contract rate interest rates currently quoted agreements similar terms maturities armor holdings inc subsidiaries notes consolidated financial statements continued 11 integration incurred integration expenses approximately 37 million 26 million 21 million years ending december 31 2005 2004 2003 respectively integration expenses include costs related integrating new acquisitions costs associated unsuccessful acquisitions integration expenses fiscal 2005 related primarily integration second chance acquired july 2005 specialty defense bianchi acquired fourth quarter 2004 integration expenses fiscal 2004 related primarily integration simula hatch acquired fourth quarter 2003 integration expenses fiscal 2003 related primarily entities acquired fiscal 2002 including trasco bremen 911 emergency products foldable products group bsquare inc speedfeed inc evipaq inc 12 charges incurred charges approximately 12 million 77 million 105 million years ending december 31 2005 2004 2003 respectively charges fiscal 2004 includes charges noncash charge 63 million related acceleration performancebased longterm restricted stock awards granted certain executives 2002 due achievement reaching certain ebitda defined targets charges fiscal 2004 also includes impairment charge 14 million reduce carrying value remaining portion nti estimated fair value charges fiscal 2003 includes noncash charge 73 million stockbased compensation performance plan certain key executives 350000 shares common stock november 11 2003 stock price closed 20 fifth consecutive trading day caused complete vesting stock bonus awards charges fiscal 2003 also includes 32 million severance charge including 21 million noncash charge related 2003 departure former chief executive officer 13 commitments contingencies employment contracts party several employment contracts december 31 2005 certain members management contracts varying periods include restrictions competition termination agreements provide salaries bonuses benefits also specify delineate granting various stock options legallitigation matters january 16 1998 services division ceased operations angola subsequently became involved various disputes shrm sa shrm minority joint venture partner relating angolan joint venture known defense system international africa dsia since march 1998 continue involved various legal proceedings french courts shrm part compass group regarding damages circumstances dsia ceased business angola due decree angolan government expelling employees services division angola based consultation legal counsel possible loss estimate related case cannot reasonably made accrual recorded kroll inc matters ogarahess eisenhardt armoring brasil ltda ohe brazil previously assessed 411 million reals us 176 million based exchange rate december 31 2005 plus interest penalties brazilian tax authorities ohe brazil appealed tax assessments cases pending believe accrual necessary extent may liability resulting assessments believe entitled indemnification kroll inc 78 million terms purchase agreement dated april 20 2001 events question respect 78 million assessments occurred prior purchase ogara companies kroll inc 1999 prior acquisition oheac 2001 several former employees kroll ogara company de mexico sa de cv ogara mexico subsidiary oheac commenced labor claims ogara mexico seeking damages unjustified termination late 2004 principal labor claim settled us approximately 22 million two remaining claims settled armor holdings inc subsidiaries notes consolidated financial statements continued approximately 52000 kroll inc indemnified us subject 500000 deductible respect settlement payments december 2001 ogarahess eisenhardt france sa acquired kroll inc ohe france august 2001 sold industrial bodywork business operated name labbedivision de ogara hess eisenhardt france carrosserie industriells carrosserie snc labbe subsequent sale labbe family trust lft owner leasehold interest upon carrosserie business operated sued ohe france snc labbe claiming transfer leasehold valid lft given consent transfer required terms lease lft sought ohe france sole tenant maintain repair leased building estimated cost us 37 us 73 million based exchange rate december 31 2005 case currently pending contesting allegations vigorously unable predict outcome matter amount accrued although insurance coverage matter time believe matter material impact financial position operations liquidity zylonr april 2004 two class action lawsuits filed us florida state court police organizations individual police officers alleging ballisticresistant soft body armor vests containing zylonr manufactured sold american body armortm safarilandr protechr failed meet warranties provided vests november 5 2004 jacksonville florida duval county circuit court gave final approval settlement reached southern states police benevolent association sspba provided purchasers certain zylonrcontaining vest models could exchange vests manufactured company ii company would continue internal usedvest testing program vestchecktm class action suit filed national association police organizations inc napo ft myers florida lee county voluntarily dismissed prejudice november 16 2004 august 24 2005 united states department justice national institute justice nij released third status report attorney general body armor safety initiative testing activities third nij report third nij report contained among items information testing data zylonr zylonrcontaining vests substantially modified compliance standards ballisticresistant vests implementation nij 2005 interim requirements ballisticresistant body armor result actions nij company halted sales shipment zylonrcontaining vest models effective august 25 2005 immediately established supplemental relief renamed zylonr vest exchange zve program provides either cash voucher option purchased zylonrcontaining vests us august 29 2005 zve program consent sspba given final approval jacksonville florida court october 27 2005 see also note 23 information regarding estimated cost zve program also voluntarily cooperating request documents data received department justice reviewing body armor industrys use zylonr subpoena served general services administration information relating zylonr matters addition normal course business result previous acquisitions subjected various types claims currently ongoing litigation areas product liability general liability intellectual property products used wide variety law enforcement situations environments products cause serious personal property injury death carefully properly used adequately trained personnel believe adequate insurance coverage claims incurred normal course business cases effect financial statements generally limited amount insurance deductible selfinsured retention annual insurance premiums self insurance retention amounts risen significantly past several years may continue extent able purchase insurance coverage time believe claims pending litigation material impact financial position operations liquidity armor holdings inc subsidiaries notes consolidated financial statements continued invested substantial resources outside united states plan continue future mobile security division invested substantial resources europe south america operations subject risk new different legal regulatory requirements local jurisdictions tariffs trade barriers potential difficulties staffing managing local operations currency risks potential imposition restrictions investments potentially adverse tax consequences including imposition increase withholding taxes remittances payments subsidiaries local economic political social conditions governments many developing countries exercised continue exercise substantial influence many aspects private sector government actions future could significant adverse effect economic conditions developing country may otherwise material adverse effect us operating companies political risk insurance countries currently conduct business moreover applicable agreements relating interests operating companies frequently governed foreign law result event dispute may difficult us enforce rights accordingly may little recourse upon occurrence developments 14 information concerning business segments geographical revenues management internal reporting purposes organized business three segments aerospace defense group products group mobile security division described note 1 aerospace defense group supplies human safety survival systems us military major aerospace defense prime contractors products group previously referred armor holdings products division manufactures sells broad range high quality equipment marketed brand names known military law enforcement communities mobile security division operating brand name centigontm manufactures services integrates certified armoring systems commercial vehicles protect varying degrees ballistic blast threats global basis corporate costs include corporate management expenses associated managing overall company expenses include compensation benefits corporate management staff legal professional fees administrative general expenses allocated business units corporate assets primarily include cash equivalents held corporate entities property equipment related corporate facility certain information technology costs assets related deferred compensation plan costs related issuance debt including 2 convertible notes 825 notes credit facility revenues operating income total assets net continuing segments follows 2005 2004 2003 thousands revenues aerospace defense 1188598 605398 91673 products 308878 249765 193960 mobile security 139454 124520 79539 total revenues 1636930 979683 365172 operating income aerospace defense 206194 127520 22775 products 25005 32719 33054 mobile security 14066 11168 2538 corporate 29631 25692 22638 total operating income 215634 145715 35729 products group operating income fiscal 2005 includes pretax charge 199 million cost zve products group operating income fiscal 2004 includes pretax charge 50 million cost warranty revision program see notes 13 23 armor holdings inc subsidiaries notes consolidated financial statements continued 2005 2004 2003 thousands total assets aerospace defense 543188 490754 209834 products 350885 278912 183972 mobile security 87866 103799 63161 corporate 480923 418886 126303 total assets 1462862 1292351 583270 financial information respect revenues based geographic location customer property equipment net principal geographic areas based actual location principle facility follows 2005 2004 2003 thousands revenues united states america 1452098 778052 236037 north america excluding united states america 10404 50614 39492 south america 21995 16317 15007 africa 14400 4693 1420 europeasia 138033 130007 73216 total revenues 1636930 979683 365172 total property equipment net north america 60573 54332 38337 south america 1419 1461 1392 europeasia 17937 21514 17847 total property equipment net 79929 77307 57576 15 income taxes provision income taxes continuing operations years ended december 31 2005 2004 2003 consisted following 2005 2004 2003 thousands current us federal 71062 42552 9347 state 8148 4322 1040 foreign 5069 5537 403 total current 84279 52411 10790 deferred us federal 3164 3328 3274 state 296 989 1268 foreign 49 311 1407 total deferred 3411 4006 3413 total provision income taxes 80868 56417 14203 armor holdings inc subsidiaries notes consolidated financial statements continued significant components net deferred tax liability december 31 2005 2004 follows 2005 2004 thousands deferred tax assets reserves currently deductible 20404 8535 capital loss 11469 9545 operating loss carryforwards 2851 3163 accrued expenses 3140 1931 foreign tax credits 729 1122 research development credits 959 1129 97 39649 25425 deferred tax asset valuation allowance 12569 9620 deferred tax asset net valuation allowance 27080 15805 deferred tax liability goodwill amortized financial statement purposes sfas 142 10734 5924 patents trademarks purchased intangibles 23969 26416 interest 2 convertible notes 7732 1141 property equipment 7800 9541 642 net deferred tax liability 23155 27859 recognition deferred tax assets based managements belief likely tax benefit associated temporary differences operating capital loss carryforwards utilized valuation allowance recorded deferred tax assets likely realization occur valuation allowance december 31 2005 consisted approximately 115 million related capital loss carryforwards approximately 10 million related net operating loss tax credit carryforwards increase valuation allowance primarily attributable certain capital losses realized 2005 unrealized holding loss equitybased securities offset accumulated comprehensive income finalization purchase accounting related various acquisitions december 31 2005 us federal state foreign net operating losses nols providing tax effected benefit 28 million nols expire varying amounts fiscal years 2011 2024 december 31 2005 also certain state income tax credits approximately 10 million subject limitations internal revenue code irc section 383 also approximately 07 million foreign tax credits expiring 2015 connection acquisitions specialty defense bianchi recorded net deferred tax liabilities approximately 123 million 131 million respectively relating primarily identifiable intangibles deductible us federal income tax purposes net deferred tax liabilities offset increase goodwill additionally 2004 recorded net deferred tax liability approximately 780000 related finalization purchase accounting december 2003 acquisition hatch offset increase goodwill april 2004 reached agreement internal revenue service irs regarding tax returns years ended december 31 2001 2000 material impact financial position operations liquidity february 9 2006 notified irs tax returns taxable years ended december 31 2003 2004 selected examination expect examination material impact financial position operations liquidity armor holdings inc subsidiaries notes consolidated financial statements continued united states income taxes provided certain undistributed earnings nonus subsidiaries approximately 141 million earnings considered permanently reinvested nonus operations determination us tax liability related earnings practicable net deferred tax liabilities described included accompanying consolidated balance sheets follows 2005 2004 thousands current assets 21382 10368 deferred income taxes 44537 38227 total net deferred tax liabilities 23155 27859 sources income continuing operations income taxes 2005 2004 2003 thousands domestic 200683 123050 25681 foreign 12695 13944 5528 total 213378 136994 31209 following reconciles provision income taxes computed federal statutory income tax rate provision income taxes recorded consolidated statements operations years ended december 31 2005 2004 2003 2005 2004 2003 provision income taxes statutory federal rate 350 state local income taxes net federal benefit 24 25 05 compensation subject irc section 162m 00 25 86 foreign income taxes 03 21 permanent items 02 09 03 379 412 455 armor holdings inc subsidiaries notes consolidated financial statements continued 16 stockholders equity preferred stock july 16 1996 stockholders authorized series preferred stock rights privileges preferences board directors shall time determine issued preferred stock common stock june 15 2004 sold 4000000 primary shares common stock price 3750 per share raising 1425 million net proceeds deducting underwriter discounts commissions addition board directors granted underwriters 30day option purchase 600000 shares 30day option expired unexercised july 15 2004 used net proceeds offering primarily fund acquisitions specialty defense bianchi international fourth quarter 2004 june 22 2004 stockholders approved amendment certificate incorporation amended increased number shares authorized capital stock 80000000 75000000 shares common stock 5000000 shares preferred stock treasury stock 6060222 shares treasury december 31 2005 2004 stock options grants june 22 2005 implemented 2005 stock incentive plan 2005 stock incentive plan authorizes issuance 2500000 shares common stock shares common stock granted restricted stock performance stock stockbased awards counted shares authorized one eighttenths 18 shares every one share issued connection award 2005 stock incentive plan authorizes granting stock options restricted stock performance awards stockbased awards employees officers directors consultants independent contractors advisors company subsidiaries accordance 2005 stock incentive plan preexisting stock incentive plans described frozen accordingly longer authorized grant awards preexisting plans 2002 implemented two new stock option plans 2002 stock incentive plan authorizes issuance 2700000 shares common stock upon exercise stock options connection issuance restricted stock bonuses june 22 2004 stockholders approved amendment increase 2000000 shares total number shares common stock may awarded 2002 stock incentive plan 2002 stock incentive plan authorizes granting stock options restricted stock bonuses employees officers directors consultants independent contractors advisors company subsidiaries 2002 executive stock plan provides grant total 470000 stock options stock awards key employees terms provisions 2002 executive stock plan substantially 2002 stock incentive plan except may grant nonqualified stock options 2002 executive stock plan 2002 executive stock plan adopted march 13 2002 shares available grant 2002 executive stock plan granted executive officers march 13 2002 1999 implemented 1999 stock incentive plan reserved 2000000 shares common stock 1999 stock incentive plan 1999 stock incentive plan provides granting options employees officers directors consultants independent contractors advisors company option prices stock may purchased 1999 stock incentive plan less fair market value common stock dates grants 1998 implemented new nonqualified stock option plan pursuant new plan 725000 shares common stock reserved made available distribution january 1 1999 distributed 725000 shares allocated plan 1996 implemented incentive stock plan outside directors stock plan plans collectively provide granting options certain key employees directors pursuant plans amended 2200000 shares common stock reserved made available distribution option prices stock may purchased incentive stock plan less fair market value common stock dates grants armor holdings inc subsidiaries notes consolidated financial statements continued 1994 implemented incentive stock plan outside directors stock plan plans collectively provide granting options certain key employees well providing grant common stock outside directors full time employees pursuant plans 1050000 shares common stock reserved made available distribution option prices stock may purchased incentive stock plan less fair market value common stock dates grants effective january 19 1996 stock grants awarded 1994 incentive stock plan accelerated considered fully vested sfas 123 fair value option grant estimated date grant using blackscholes optionpricing model following weightedaverage assumptions years ended december 31 2005 2004 2003 2005 2004 2003 expected life option 52 yrs 47 yrs 40 yrs dividend yield 0 volatility 485 500 498 risk free interest rate 403 336 251 weighted average fair value options granted 2005 2004 2003 follows 2005 2004 2003 thousands except per share data fair value option granted 1923 1557 621 total number options granted 1728 979 898 total fair value options granted 33229 15243 5576 outstanding options generally consisting tenyear sevenyear incentive nonqualified stock options generally vest become exercisable three five year period date grant options granted immediately vested subject lockup provisions disallow recipient selling shares lockup expires generally seven year period outstanding options generally expire ten seven years date grant upon retirement company respectively contingent upon continued employment applicable tenyear sevenyear period armor holdings inc subsidiaries notes consolidated financial statements continued summary status stock option grants december 31 2005 changes three years ending december 31 2005 presented weighted average options exercise price outstanding december 31 2002 4284658 781 granted 898347 1662 exercised 724934 1183 forfeited 567150 2152 outstanding december 31 2003 3890921 1700 granted 979000 3395 exercised 1642195 1536 forfeited 69210 1726 outstanding december 31 2004 3158516 2315 granted 1727500 4054 exercised 975189 1961 forfeited 100270 3915 outstanding december 31 2005 3810557 3151 options exercisable december 31 2005 3631651 3146 following table summarizes information stock options outstanding december 31 2005 remaining options life exercise price range outstanding exercisable years 750 1119 79767 26 1319 1398 59797 46961 61 1400 1455 446048 438547 66 1505 1712 280344 72 2309 2326 54301 61 2407 2507 269300 265966 65 2569 2890 370000 364999 81 3304 3605 466500 321266 86 3790 3899 938000 92 3920 4593 846500 841500 83 total 3810557 3631651 80 remaining nonexercisable options december 31 2005 become exercisable follows 2006 50770 2007 44933 2008 41599 2009 41604 thereafter armor holdings inc subsidiaries notes consolidated financial statements continued restricted stock bonuses granted following restricted stock bonuses years ended december 31 2005 2004 2003 2005 2004 2003 thousands except share data restricted stock bonus shares granted 59116 70534 416500 weightedaverage fair value per share grant date 4318 3858 1989 compensation cost recognized 559 9082 10157 year ended december 31 2004 recorded 63 million noncash charge acceleration performancebased longterm restricted stock awards granted certain executives 2002 year ended december 31 2003 recorded 73 million noncash charge stockbased compensation performance plan certain key executives 13 million noncash charge severance charge related departure former chief executive officer earnings per share following details earnings per share computations basic diluted basis years ended december 31 2005 2004 2003 2005 2004 2003 thousands except per share data numerator basic diluted earnings per share net income available common shareholders 132510 80539 10886 denominator basic earnings per share weightedaverage shares outstanding 34602 31419 28175 effect dilutive securities effect shares issuable stock option stock grant plans based treasury stock method 1220 1606 779 diluted earnings per share adjusted weightedaverage shares outstanding 35822 33025 28954 basic earnings per share 383 256 039 diluted earnings per share 370 244 038 described note 1 required apply expense recognition provisions fas 123r beginning first quarter 2006 expect incur approximately 16 million expense year ended december 31 2006 result adoption fas 123r contingent shares dilutive effect shares issuable stock award plans include 649000 stock options awarded antidilutive december 31 2005 addition certain executives entitled receive performance stock bonus awards 450000 shares common stock time january 1 2005 december 31 2007 certain conditions met defined employment agreements discretion able settle performance stock bonus awards cash 2 convertible notes include net share settlement conversion option cash settlement par amount result requires us use treasury stock method calculate dilutive effect 2 convertible notes effect diluted share count years ended december 31 2005 2004 armor holdings inc subsidiaries notes consolidated financial statements continued 17 supplemental cash flow information revised 2004 2003 consolidated statements cash flow separately disclose operating investing financing portions cash flows attributable discontinued operations previously reported amounts combined basis 2005 2004 2003 thousands cash paid year interest 17438 7668 1245 income taxes net refunds 79290 36772 7886 2005 2004 2003 thousands acquisitions businesses net cash acquired fair value assets acquired 41186 118120 72132 goodwill 7297 86073 76802 liabilities assumed 1678 45751 58422 stock issued total cash paid net cash acquired 46805 158442 90512 18 quarterly results unaudited following table presents summarized unaudited quarterly results operations company fiscal 2005 2004 believe necessary adjustments included amounts stated present fairly following selected information read conjunction consolidated financial statements notes thereto included elsewhere herein future quarterly operating results may fluctuate depending number factors results operations particular quarter necessarily indicative results operations full year quarter fiscal 2005 first second third fourth quarter thousands except per share data revenues 364965 371642 447664 452659 gross profit 91310 95802 80026 101296 net income 31029 37415 26483 37583 basic earnings per share 090 109 076 107 diluted earnings per share 087 105 074 104 gross profit third fourth quarter 2005 includes 194 million 500000 respectively related zylonr vest exchange program fiscal 2004 first second third fourth quarter thousands except per share data revenues 161628 223704 256803 337548 gross profit b 47560 66458 66346 80127 net income 12490 17821 23874 26354 basic earnings per share 044 060 073 078 diluted earnings per share 042 057 070 074 b gross profit third quarter 2004 includes 50 million related zylonr warranty revision program armor holdings inc subsidiaries notes consolidated financial statements continued 19 employee benefit plans defined contribution plans october 1997 formed 401k plan provides voluntary contributions employees allows discretionary contribution us form cash made contributions approximately 25 million 520000 332000 plan 2005 2004 2003 respectively december 9 2003 acquired simula inc simula 401k profit sharing plan provides voluntary contributions employees allows discretionary contribution us form cash made contributions approximately 81000 5000 simulas 401k profit sharing plan 2004 2003 respectively october 25 2004 simulas 401k profit sharing plan combined plan november 18 2004 acquired specialty defense specialty plastics products inc affiliated companies 401k savings plan provides voluntary contributions employees allows discretionary contribution us form cash made contributions approximately 22000 13000 specialty plastics products inc affiliated companies 401k savings plan 2005 2004 respectively february 1 2005 specialty plastics products inc affiliated companies 401k savings plan combined plan december 30 2004 acquired bianchi international bianchi international 401k retirement savings plan provides voluntary contributions employees allows discretionary contribution us form cash made contributions 193000 0 bianchi international 401k retirement savings plan 2005 2004 respectively january 1 2006 bianchi international 401k retirement savings plan combined plan defined benefit plans january 25 2006 formally adopted supplemental nonqualified defined benefit pension plan referred armor holdings inc executive retirement plan serp provides supplemental retirement benefits employees company subsidiaries employed job level senior vice president higher selected compensation committee board directors participation normal form payment normal retirement age 62 serp late retirement monthly annuity payment participants lifetime based 2 participants final average pay multiplied year service company defined serp participant receive credit preacquisition service company business acquired company subsidiaries participant may granted additional years credited service discretion compensation committee alternate forms payment including various forms annuity single sum distribution available serp reduced benefits may paid case early retirement preretirement death early retirement serp earlier attaining age 60 ii attaining age 55 completing 10 years service company participant eligible deferred vested benefit upon attaining ten years credited service preretirement death benefit payable vested participant dies retirement acquired simulas noncontributory defined benefit pension plan pension plan employees december 9 2003 pension plan originally adopted november 1 1980 contributions made pension plan based upon actuarially determined amounts effective july 1 1999 simula froze plan new participants effective december 8 2003 prior acquisition pension plan simula froze pension plan future service participants elected payout supplemental retirement plan simula representing 11 million net amount recognized february 25 2004 armor holdings inc subsidiaries notes consolidated financial statements continued funded status amounts recognized balance sheet december 31 2005 2004 defined benefit plans follows 2005 2004 thousands actuarial present value benefit obligation accumulated benefit obligation 16400 8109 effect projected future compensation increases 2528 projected benefit obligation 18928 8109 pension plan assets fair value 7258 6719 contributions measurement date 70 58 unfunded status 11600 1332 unrecognized prior service cost 7901 unrecognized net actuarial loss 1115 324 unrecognized transition asset 466 net amount recognized 3050 1008 reconciliation projected benefit obligation follows 2005 2004 thousands projected benefit obligation beginning year 8109 8810 plan amendment adopting serp effective january 1 2005 8529 service cost 1329 interest cost 944 472 actuarial loss 327 262 benefits paid 310 1435 projected benefit obligation end year 18928 8109 reconciliation fair value plan assets follows 2005 2004 thousands fair value plan assets beginning year 6719 6169 employer contributions 309 1570 actual gain 540 415 benefits paid 310 1435 fair value plan assets end year 7258 6719 armor holdings inc subsidiaries notes consolidated financial statements continued net periodic pension cost includes following 2005 2004 2003 thousands service cost 1329 interest cost 944 472 56 expected return assets 539 504 transition asset recognition prior service cost 629 net loss recognition net periodic pension cost income 2363 32 56 amounts recognized consolidated balance sheets consist following 2005 2004 thousands assets 4906 pension liability 9071 1008 accumulated comprehensive loss 1115 net amount recognized 3050 1008 weightedaverage asset allocations asset category follows serp plan currently unfunded 2005 2004 equity securities 75 72 debt securities 23 22 2 6 total 100 investment strategy invest pension plans assets diversified portfolio domestic international equity fixed income cash equivalents provide longterm growth plan assets strategy resulting allocation pension plan assets selection independent investment managers reviewed periodically expect contribute approximately 275000 pension plan fiscal 2006 following benefit payments reflect expected future service appropriate expected paid year thousands 2006 297 2007 323 2008 1143 2009 475 2010 520 20112015 6051 8809 armor holdings inc subsidiaries notes consolidated financial statements continued assumptions used determine benefit obligations 2005 2004 discount settlement rate 550 600 rate increase compensation levels 500 325 expected longterm rate return plan assets 800 assumptions used determine net periodic pension costs 2005 2004 2003 discount settlement rate 550600 600 rate increase compensation levels 325500 325 expected longterm rate return plan assets 800 assumptions table reviewed december 31 2005 found relevant based current yields high quality fixed income investments maturities corresponding expected duration benefit obligations use measurement date october 31 employee benefit plans 20 related party transactions effective january 1 2002 kanders company inc kanders co corporation controlled warren b kanders chairman board directors chief executive officer entered agreement us provide certain investment banking financial advisory related services five year term expire december 31 2006 terms agreement kanders co receive mutually agreed upon fee transactionbytransaction basis term agreement aggregate fees agreement exceed 1575000 calendar year also agreed reimburse kanders co outofpocket expenses including kanders cos expenses office space executive assistant furniture equipment travel entertainment fees disbursements counsel consultants retained kanders co april 2003 connection mr kanders appointed chief executive officer company kanders co agreed terminate agreement pursuant kanders co provided certain services company paid kanders co 143000 investment banking services fiscal 2003 including april 2003 continue reimburse kanders co outofpocket expenses mr kanders role chief executive officer reimbursed kanders co outofpocket expenses aggregate amount 259000 369000 184000 fiscal years ended december 31 2005 2004 2003 respectively effective january 1 2003 entered transportation services agreement kanders aviation llc entity controlled mr kanders chairman board chief executive officer pursuant terms transportation services agreement upon request kanders aviation may sole discretion provide us airport air transportation services via certain aircraft transportation services agreement remain effect indefinitely terminated written notice either party thereto party thereto term transportation services agreement reimburse kanders aviation services provided kanders aviation us additional expenses incurred kanders aviation connection air transportation services reimbursed kanders aviation 332000 expenses fiscal year ended december 31 2004 services provided us agreement 2005 related expense fiscal year ended december 31 2005 nicholas sokolow one directors member law firm sokolow dunaud mercadier carreras located paris france retain sokolow dunaud mercadier carreras fiscal years ended december 31 2005 2004 expect future fiscal year ended december 31 2003 paid sokolow dunaud mercadier carreras 124000 legal services connection various acquisitions armor holdings inc subsidiaries notes consolidated financial statements continued 21 operating leases party certain real estate air craft equipment vehicle leases several leases include options renewal escalation clauses cases management expects normal course business leases renewed replaced leases approximate total future minimum annual lease payments noncancelable leases follows year thousands 2006 7401 2007 5427 2008 3621 2009 3044 2010 2082 thereafter 13373 34948 incurred rent expense approximately 75 million 50 million 15 million years ended december 31 2005 2004 2003 respectively 22 guarantor nonguarantor financial statements august 12 2003 sold 150 million 825 notes private placements pursuant rule 144a regulation 825 notes uncollateralized obligations rank junior right payment existing future senior debt october 29 2004 completed placement 300 million aggregate principal amount 2 convertible notes november 5 2004 goldman sachs co exercised option purchase additional 45 million principal amount 2 convertible notes 825 notes 2 convertible notes fully unconditionally guaranteed jointly severally senior subordinated uncollateralized basis domestic subsidiaries subsidiary guarantors direct indirect 100 owned subsidiary parent following consolidating financial information presents consolidating balance sheets december 31 2005 december 31 2004 related consolidating statements operations year ended december 31 2005 2004 2003 related consolidating statements cash flows years ended december 31 2005 2004 2003 armor holdings inc parent guarantor subsidiaries nonguarantor subsidiaries armor holdings inc consolidated basis information includes elimination entries necessary consolidate armor holdings inc parent guarantor nonguarantor subsidiaries investments subsidiaries accounted parent using equity method accounting guarantor nonguarantor subsidiaries presented combined basis principal elimination entries eliminate investments subsidiaries intercompany balances transactions separate financial statements guarantor nonguarantor subsidiaries presented management believes financial statements would meaningful investors armor holdings inc subsidiaries notes consolidated financial statements continued armor holdings inc subsidiaries consolidating balance sheets december 31 2005 guarantor nonguarantor consolidated parent subsidiaries eliminations total thousands assets current assets cash equivalents 423961 23879 24001 471841 accounts receivable net 190740 20541 211281 costs earned gross profit excess billings 843 intercompany receivables 101956 109177 39170 250303 inventories 185032 25485 210517 prepaid expenses current assets 2316 32806 2965 38087 total current assets 528233 542477 112162 250303 932569 property equipment net 2052 57326 20551 79929 goodwill net 271708 1988 273696 patents licenses trademarks net 130216 404 130620 assets 15221 2089 28738 46048 investment subsidiaries 795098 117776 912874 total assets 1340604 1121592 163843 1163177 1462862 liabilities stockholders equity current liabilities current portion longterm debt 283 147 430 shortterm debt 341752 2522 344274 accounts payable 607 80300 10056 90963 accrued expenses current liabilities 16660 65346 18918 100924 income taxes payable 5105 12257 1615 8767 intercompany payables 115076 22682 112545 250303 total current liabilities 468990 180868 145803 250303 545358 longterm debt less current portion 149528 2115 267 151910 longterm liabilities 7333 3142 10475 deferred income taxes 4171 39390 976 44537 total liabilities 630022 225515 147046 250303 752280 stockholders equity preferred stock 1450 common stock 415 3193 7852 11045 415 additional paidin capital 525890 533682 14778 548460 525890 retained earnings accumulated deficit 257991 357752 5833 351919 257991 accumulated comprehensive loss 1397 treasury stock 72317 total stockholders equity 710582 896077 16797 912874 710582 total liabilities stockholders equity 1340604 1121592 163843 1163177 1462862 armor holdings inc subsidiaries notes consolidated financial statements continued armor holdings inc subsidiaries consolidating balance sheets december 31 2004 guarantor nonguarantor consolidated parent subsidiaries eliminations total thousands assets current assets cash equivalents 388727 21173 11309 421209 accounts receivable net 155229 19330 174559 costs earned gross profit excess billings 893 intercompany receivables 173735 108313 7045 289093 inventories 142362 33846 176208 prepaid expenses current assets 1611 42023 3301 46935 total current assets 564073 469993 74831 289093 819804 property equipment net 5144 47968 24195 77307 goodwill net 259773 2240 262013 patents licenses trademarks net 112288 171 112459 assets 18410 2209 149 20768 investment subsidiaries 592437 12730 605167 total assets 1180064 904961 101586 894260 1292351 liabilities stockholders equity current liabilities current portion longterm debt 457 164 621 shortterm debt 341579 2177 343756 accounts payable 640 58422 10539 69601 accrued expenses current liabilities 11216 73314 22717 107247 income taxes payable 6454 11513 3942 9001 intercompany payables 112741 123466 52886 289093 total current liabilities 459722 267172 92425 289093 530226 longterm debt less current portion 153897 2377 477 156751 longterm liabilities 1951 deferred income taxes 1249 36077 901 38227 total liabilities 614868 307577 93803 289093 727155 stockholders equity preferred stock 1450 common stock 402 3792 7854 11646 402 additional paid capital 504809 387229 14771 402000 504809 retained earnings accumulated deficit 125481 204913 14842 190071 125481 accumulated comprehensive income 6821 treasury stock 72317 total stockholders equity 565196 597384 7783 605167 565196 total liabilities stockholders equity 1180064 904961 101586 894260 1292351 armor holdings inc subsidiaries notes consolidated financial statements continued armor holdings inc subsidiaries consolidating statements operations year ended december 31 2005 guarantor nonguarantor consolidated parent subsidiaries eliminations total thousands revenues aerospace defense 1199262 10664 1188598 products 253862 55016 308878 mobile security 40302 99485 333 139454 total revenues 1493426 154501 10997 1636930 costs expenses cost revenues 1137457 122136 10997 1248596 cost vest exchange program warranty revision 19900 selling general administrative expenses 28852 94644 15808 139304 amortization 8621 6 8627 integration 625 3044 3669 charges 1200 operating loss income 29477 229760 15351 215634 interest expense income net 6254 393 420 6281 income net 3962 49 14 4025 equity earnings losses subsidiaries 157015 4833 161848 related party interest expense income net 16 19 3 income continuing operations benefit provision income taxes 125230 235054 14942 161848 213378 benefit provision income taxes 7280 81889 6259 80868 net income 132510 153165 8683 161848 132510 armor holdings inc subsidiaries notes consolidated financial statements continued armor holdings inc subsidiaries consolidating statements operations year ended december 31 2004 guarantor nonguarantor consolidated parent subsidiaries eliminations total thousands revenues aerospace defense 605398 products 204122 45643 249765 mobile security 25531 102224 3235 124520 total revenues 835051 147867 3235 979683 costs expenses cost revenues 599505 117922 3235 714192 cost vest exchange program warranty revision 5000 selling general administrative expenses 17455 69122 13684 100261 amortization 4243 12 4255 integration 529 2029 2558 charges 7702 related party management fees income net 15 operating loss income 25686 155167 16234 145715 interest expense net 6511 103 162 6776 expense income net 1917 421 393 1945 equity earnings subsidiaries 108631 2691 111322 related party interest expense income net 16 18 2 income continuing operations benefit provision income taxes 74501 157352 16463 111322 136994 benefit provision income taxes 6038 56030 6425 56417 income continuing operations 80539 101322 10038 111322 80577 discontinued operations loss discontinued operations net income tax benefit 38 net income 80539 101284 10038 111322 80539 armor holdings inc subsidiaries notes consolidated financial statements continued armor holdings inc subsidiaries consolidating statements operations year ended december 31 2003 guarantor nonguarantor consolidated parent subsidiaries eliminations total thousands revenues aerospace defense 91673 products 157984 35976 193960 mobile security 15029 62853 1657 79539 total revenues 264686 98829 1657 365172 costs expenses cost revenues 172089 79840 1657 253586 selling general administrative expenses 11602 40598 10595 62795 amortization 478 11 489 integration 367 1687 2054 charges 10519 related party management fees income net 12823 7598 20421 operating loss income 35311 49834 785 20421 35729 interest expense net 3313 497 202 4012 expense net 117 391 508 equity losses earnings subsidiaries 42600 38790 3810 related party interest expense income net 16 255 239 income continuing operations benefit provision income taxes 3960 10685 192 16372 31209 benefit provision income taxes 6926 18399 2730 14203 income loss continuing operations 10886 7714 2538 16372 17006 discontinued operations net income loss discontinued operations net income tax benefit 34882 20820 20182 6120 net income loss 10886 27168 23358 3810 10886 armor holdings inc subsidiaries notes consolidated financial statements continued armor holdings inc subsidiaries consolidating statements cash flows year ended december 31 2005 guarantor nonguarantor consolidated parent subsidiaries eliminations total thousands cash flows operating activities income operations 132510 153165 8683 161848 132510 adjustments reconcile income operations cash provided operating activities depreciation amortization 2694 16960 2754 22408 loss disposal fixed assets 52 402 480 934 deferred income taxes 4265 7588 88 3411 fair value gain put options 5905 noncash serp expense 2427 changes operating assets liabilities net acquisitions increase accounts receivable 32335 3005 35340 decrease increase intercompany receivables payables 71573 107672 36099 increase decrease inventories 36805 5670 31135 decrease prepaid expenses assets 642 22391 508 23541 increase decrease accounts payable accrued expenses current liabilities 7904 17306 922 24288 increase decrease income taxes payable 6141 744 2327 4558 net cash provided operating activities 222303 26568 47852 161848 134875 cash flows investing activities purchase property equipment 2195 11292 2106 15593 purchase patents trademarks 814 239 1053 purchase equity investment 31082 purchase shortterm investment securities 754300 proceeds sales shortterm investment securities 754300 financing lease receivable 1187 additional cash received sale business 300 additional consideration purchased businesses 826 5702 6528 investment subsidiaries 202661 40813 161848 purchase businesses net cash acquired 1261 45544 46805 net cash used investing activities 206943 23426 33427 161848 101948 cash flows financing activities proceeds exercise stock options 18902 proceeds sale put options 6614 taxes paid withheld shares restricted stock issuances 5642 repayments longterm debt 436 149 585 borrowings lines credit 6973 6676 13649 repayments lines credit 6973 6662 13635 net cash provided used financing activities 19874 436 135 19303 effect exchange rate cash equivalents 1598 net increase cash equivalents 35234 2706 12692 50632 cash equivalents beginning period 388727 21173 11309 421209 cash equivalents end period 423961 23879 24001 471841 armor holdings inc subsidiaries notes consolidated financial statements continued armor holdings inc subsidiaries consolidating statements cash flows year ended december 31 2004 guarantor nonguarantor consolidated parent subsidiaries eliminations total thousands revised see note 17 cash flows operating activities income continuing operations 80539 101322 10038 111322 80577 adjustments reconcile income continuing operations cash provided operating activities depreciation amortization 1744 10042 3265 15051 loss disposal fixed assets 446 418 864 deferred income taxes 3025 1299 318 4006 noncash termination charge 1408 noncash restricted stock unit award 6294 changes operating assets liabilities net acquisitions decrease increase accounts receivable 1201 84331 7366 90496 increase decrease intercompany receivables payables 10834 8432 2402 increase inventories 58293 14813 73106 increase prepaid expenses assets 1397 20321 357 22075 increase accounts payable accrued expenses current liabilities 2302 68341 6775 77418 increase decrease income taxes payable 17080 3350 3594 17324 net cash provided operating activities continuing operations 101362 23587 3638 111322 17265 net cash used operating activities discontinued operations 407 net cash provided operating activities 101362 23180 3638 111322 16858 cash flows investing activities purchase property equipment 3615 10125 5679 19419 purchase patents trademarks 112 purchase equity investment 5275 proceeds sale equity investment 5823 purchase shortterm investment securities 286430 proceeds sales shortterm investment securities 286430 collection note receivable 2175 decrease restricted cash 2600 sale business net cash disposed 125 additional consideration purchased businesses 2808 investment subsidiaries 303721 192399 111322 purchase businesses net cash acquired 158442 net cash used provided investing activities continuing operations 302561 21585 5679 111322 175333 net cash used investing activities discontinued operations 263 net cash used provided investing activities 302561 21322 5679 111322 175596 cash flows financing activities proceeds exercise stock options 25192 proceeds issuance common stock 142500 cash paid common stock offering costs 1339 taxes paid withheld shares restricted stock issuances 2585 cash paid financing costs 6156 borrowings shortterm debt 341550 repayments longterm debt 34371 145 34516 borrowings lines credit 22700 5 1883 24588 repayments lines credit 22700 349 23049 net cash provided used financing activities continuing operations 499162 34366 1389 466185 net cash used financing activities discontinued operations 125 net cash provided used financing activities 499162 34491 1389 466060 effect exchange rate cash equivalents 1961 net increase cash equivalents 297963 10011 1309 309283 cash equivalents beginning period 90764 11160 10002 111926 cash equivalents end period 388727 21171 11311 421209 armor holdings inc subsidiaries notes consolidated financial statements continued armor holdings inc subsidiaries consolidating statements cash flows year ended december 31 2003 guarantor nonguarantor consolidated parent subsidiaries eliminations total thousands revised see note 17 cash flows operating activities income loss continuing operations 10886 7714 2538 16372 17006 adjustments reconcile income loss continuing operations cash provided used operating activities depreciation amortization 1326 4270 2012 7608 deferred income taxes 3008 5389 2644 5025 loss disposal fixed assets 68 259 327 noncash termination charge 2093 noncash restricted stock unit award 7266 changes operating assets liabilities net acquisitions increase decrease accounts receivable 2680 1685 995 decrease increase intercompany receivables payables 83092 41667 21243 20182 decrease increase inventories 793 3294 2501 decrease increase prepaid expenses assets 12267 13758 890 2381 increase decrease accounts payable accrued expenses current liabilities 10792 1020 7288 17060 decrease increase income taxes payable 22583 23826 882 361 net cash provided used operating activities continuing operations 102131 32493 14959 3810 50869 net cash provided used operating activities discontinued operations 3369 9798 6429 net cash provided used operating activities 102131 29124 24757 3810 44440 cash flows investing activities purchase property equipment 200 5894 2590 8684 purchase patents trademarks 185 purchase shortterm investment securities 143400 proceeds sales shortterm investment securities 143400 increase restricted cash 2600 additional consideration purchased businesses 1026 investment subsidiaries 85243 45403 36030 3810 sale businesses net cash disposed 31361 purchase businesses net cash acquired 90512 net cash used provided investing activities continuing operations 147194 38298 33440 3810 71646 net cash used investing activities discontinued operations 2469 5758 8227 net cash used provided investing activities 147194 35829 27682 3810 79873 cash flows financing activities proceeds exercise stock options 8471 taxes paid withheld shares restricted stock issuances 17 cash paid financing costs 4599 repurchase treasury stock 22684 borrowings longterm debt 147504 774 148278 repayments longterm debt 1688 borrowings lines credit 30406 1424 31830 repayments lines credit 30406 114 1578 32098 net cash provided used financing activities continuing operations 128675 1802 620 127493 net cash used financing activities discontinued operations 125 103 228 net cash provided used financing activities 128675 1927 517 127265 effect exchange rate cash equivalents 3543 net increase cash equivalents 83612 4778 6985 95375 cash equivalents beginning period 7152 6382 3017 16551 cash equivalents end period 90764 11160 10002 111926 armor holdings inc subsidiaries notes consolidated financial statements continued 23 vest exchange programwarranty revision discussed note 13 result voluntary zylonr vest supplemental relief renamed zve program relating zylonr containing vests recorded pretax charge 199 million year ended december 31 2005 net remaining 11 million liability previously announced exchange program announced third quarter 2004 december 31 2005 incurred 25 million remaining liability 185 million includes 11 million carryover superseded 2004 warranty revision product exchange program liability classified accrued expenses current liabilities accompanying consolidated balance sheet december 31 2005 zylonr vest exchange program thousands program cost 17391 inventory writeoffs 3624 total cost zve 21015 reversal accrual 2004 exchange program 1115 net cost zve 19900 costs estimated based expected cost incurred zve physical replacement compensation qualifying vests surrendered program including administrative costs may form cash expected cost replacement products inventory writeoffs represents cost existing onhand unusable zylonr inventory charge based upon various estimates differences actual return rates program costs could result material adjustments recorded charge 24 concentration revenues approximately 757 653 383 consolidated revenues ten largest customers years ended december 31 2005 2004 2003 respectively largest customer us federal government accounted approximately 593 578 266 consolidated revenues years ended december 31 2005 2004 2003 respectively approximately 727 607 210 consolidated revenues came direct indirect us military contracts years ended december 31 2005 2004 2003 respectively aerospace defense groups ten largest customers accounted approximately 983 939 923 segment revenues years ended december 31 2005 2004 2003 respectively aerospace defense groups largest customer us federal government accounted approximately 793 871 799 segments revenue years ended december 31 2005 2004 2003 respectively products groups ten largest customers accounted approximately 253 266 292 segment revenues products division years ended december 31 2005 2004 2003 respectively product divisions largest customer us federal government accounted approximately 90 122 107 segments revenue years ended december 31 2005 2004 2003 respectively mobile security divisions ten largest customers accounted approximately 526 436 288 segment revenues years ended december 31 2005 2004 2003 respectively mobile securitys largest customer accounted approximately 125 116 segment revenue years ended december 31 2005 2004 customers accounted 10 mobile security revenue 2003 military governmental contracts generally awarded periodic sporadic basis aerospace defense group lose uparmored hmmwv related contracts financial performance would experience material adverse effect armor holdings inc subsidiaries notes consolidated financial statements continued 25 balance sheet arrangements september 24 2004 entered offbalance sheet leasing arrangement aircraft company use upon expiration lease september 24 2009 subsidiary company option renew lease fair market value subject approval lessor buy aircraft approximately 100 million return aircraft lessor guarantee pay shortfall sales proceeds third party amount exceed 82 million annual rental expense related agreement approximately 10 million excluding leasing arrangement balance sheet arrangements 26 put option transactions account put option transactions company stock accordance statement financial accounting standards 150 accounting certain financial instruments characteristics liabilities equity sfas 150 sfas 150 requires put options measured fair value recognized balance sheet liabilities year ended december 31 2005 sold put options company stock various private transactions covering 35 million shares company stock 66 million premiums year ended december 31 2005 put options covering 25 million shares expired unexercised leaving outstanding put options covering 1 million shares outstanding 28 outstanding shares december 31 2005 weighted average strike price 4000 per share february 2006 outstanding put options covering 1 million shares expired unexercised accordingly recorded additional 07 million income first quarter fiscal 2006 fair values put options company stock obtained counterparties represent estimated amount would receive pay terminate put options taking account consideration received sale put options fiscal 2005 recognized fair value gains 59 million recorded income net 48 million recognized 25 million previously expired put options 27 interest expense net interest expense net comprised following 2005 2004 2003 thousands interest expense 20541 10535 4800 interest income 14260 3759 788 interest expense net 6281 6776 4012 28 assets comprised following 2005 2004 thousands fair value availableforsale securities 28597 deferred charges 8871 11494 pension asset 4906 fair value interest rate swaps 1427 6046 2247 3228 total assets 46048 20768 armor holdings inc subsidiaries notes consolidated financial statements continued 29 subsequent event february 27 2006 announced signed definitive agreement acquire outstanding stock stewart stevenson services inc svc leading manufacturer military tactical wheeled vehicles including family medium tactical vehicles fmtv us armys primary transport platform 35 per share cash merger transaction total value transaction expected approximately 755 million deducting svcs net cash balance 312 million january 31 2006 transaction subject svc shareholder approval expiration termination hartscottrodino waiting period customary conditions transaction expected close mid2006 expect finance transaction available cash proceeds new senior credit facilities signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized armor holdings inc warren b kanders warren b kanders chairman board directors chief executive officer dated march 14 2006 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated warren b kanders robert r schiller warren b kanders robert r schiller chairman board directors president chief operating officer chief executive officer march 14 2006 march 14 2006 glenn j heiar nicholas sokolow glenn j heiar nicholas sokolow chief financial officer director principal financial officer march 14 2006 principal accounting officer march 14 2006 burtt r ehrlich thomas w strauss burtt r ehrlich thomas w strauss director march 14 2006 march 14 2006 david r haas deborah zoullas david r haas deborah zoullas director march 14 2006 march 14 2006 exhibit index exhibit description 21 stock purchase agreement dated april 20 2001 among armor holdings inc bengal acquisition corp krollogara company ogarahess eisenhardt armoring company ogara company ogara security associates inc filed exhibit 21 current report form 8k dated april 20 2001 22 amendment dated august 20 2001 stock purchase agreement dated april 20 2001 among armor holdings inc bengal acquisition corp krollogara company ogarahess eisenhardt armoring company ogara company ogara security associates inc filed exhibit 22 current report form 8k dated august 22 2001 23 amendment dated august 21 2001 stock purchase agreement dated april 20 2001 among armor holdings inc bengal acquisition corp krollogara company ogarahess eisenhardt armoring company ogara company ogara security associates inc filed exhibit 23 current report form 8k dated august 23 2001 24 agreement plan merger dated august 29 2003 among armor holdings inc ahi bulletproof acquisition corp simula inc filed appendix registration statement form s4 filed commission september 23 2003 25 agreement plan merger dated september 28 2004 among armor holdings inc specialty acquisition corp specialty group inc joseph f murray jr john p sweeney shareholders agent filed exhibit 21 current report form 8k filed october 4 2004 26 stock purchase agreement dated november 5 2004 among armor holdings products llc jack b corwin trustee jack b corwin revocable trust dated june 26 1992 gary w french trustee gary w carol french revocable trust dated december 31 1999 gary w french trustee french family irrevocable trust dated december 31 1999 bianchi international accucase llc bianchi gunleather leather products co inc armor holdings inc jack b corwin gary w french filed exhibit 21 current report form 8k filed november 12 2004 27 agreement plan merger dated february 27 2006 among armor holdings inc santana acquisition corp stewart stevenson services inc filed exhibit 21 current report form 8k dated march 3 2006 31 certificate incorporation armor holdings inc filed exhibit 31 current report form 8k dated september 3 1996 32 certificate merger american body armor equipment inc florida corporation armor holdings inc filed exhibit 32 current report form 8k dated september 3 1996 33 certificate amendment certificate incorporation armor holdings inc amended filed exhibit 31 form 10q quarterly report fiscal quarter ended june 30 2004 34 amended restated bylaws armor holdings inc filed exhibit 31 form 10q quarterly report fiscal quarter ended march 31 2004 41 indenture dated august 12 2003 among armor holdings subsidiary guarantors listed signatories thereto wachovia bank national association trustee form old note attached exhibit thereto filed exhibit 102 form 10q quarterly report fiscal quarter ended june 30 2003 42 first supplemental indenture dated september 30 2003 among armor holdings inc subsidiary guarantors listed signatories indenture subsidiaries listed schedule first supplemental indenture wachovia bank national association trustee filed exhibit 42 registration statement form s4 filed commission january 7 2004 43 second supplemental indenture dated december 9 2003 among armor holdings inc subsidiary guarantors listed signatories thereto wachovia bank national association trustee filed exhibit 43 registration statement form s4 filed commission january 7 2004 44 third supplemental indenture dated december 24 2003 among armor holdings inc subsidiary guarantors listed signatories thereto wachovia bank national association trustee filed exhibit 44 registration statement form s4 filed commission january 7 2004 45 fourth supplemental indenture dated march 24 2004 among armor holdings inc subsidiary guarantors listed signatories thereto odv holdings corp wachovia bank national association trustee filed exhibit 41 form 10q quarterly report fiscal quarter ended march 31 2004 46 fifth supplemental indenture dated august 16 2004 among armor holdings inc subsidiary guarantors listed signatories thereto kleen bore inc wachovia bank national association trustee filed exhibit 41 form 10q quarterly report fiscal quarter ended september 30 2004 47 sixth supplemental indenture dated september 24 2004 among armor holdings inc subsidiary guarantors listed signatories thereto armor holdings aircraft llc wachovia bank national association trustee filed exhibit 42 form 10q quarterly report fiscal quarter ended september 30 2004 48 seventh supplemental indenture dated december 29 2004 among armor holdings inc subsidiary guarantors listed signatories thereto wachovia bank national association trustee filed exhibit 48 form 10k annual report fiscal year ended december 31 2004 49 eighth supplemental indenture dated may 25 2005 among armor holdings inc subsidiary guarantors listed signatories thereto wachovia bank national association trustee filed exhibit 42 form 10q quarterly report fiscal quarter ended june 30 2005 410 ninth supplemental indenture dated august 25 2005 among armor holdings inc subsidiary guarantors listed signatories thereto wachovia bank national association trustee filed exhibit 42 form 10q quarterly report fiscal quarter ended september 30 2005 411 registration rights agreement dated august 12 2003 among armor holdings inc subsidiary guarantors listed signatories thereto wachovia capital markets llc filed exhibit 103 form 10q quarterly report fiscal quarter ended june 30 2003 412 form new 8 14 senior subordinated notes due 2013 filed exhibit 46 registration statement form s4 filed commission january 7 2004 413 indenture dated october 29 2004 among armor holdings inc wachovia bank national association trustee filed exhibit 41 current report form 8k filed november 1 2004 414 first supplemental indenture dated october 29 2004 among armor holdings inc subsidiary guarantors named therein wachovia bank national association trustee together form note attached thereto filed exhibit 42 current report form 8k filed november 1 2004 415 second supplemental indenture dated december 29 2004 among armor holdings inc subsidiary guarantors named therein wachovia bank national association trustee filed exhibit 413 form 10k annual report fiscal year ended december 31 2004 416 third supplemental indenture dated may 25 2005 among armor holdings inc subsidiary guarantors named therein wachovia bank national association trustee filed exhibit 41 form 10q quarterly report fiscal quarter ended june 30 2005 417 fourth supplemental indenture dated august 25 2005 among armor holdings inc subsidiary guarantors named therein wachovia bank national association trustee filed exhibit 41 form 10q quarterly report fiscal quarter ended september 30 2005 101 purchase agreement dated august 6 2003 among armor holdings inc subsidiary guarantors listed signatories thereto wachovia capital markets llc filed exhibit 101 form 10q quarterly report fiscal quarter ended june 30 2003 102 credit agreement dated august 12 2003 among armor holdings inc lender time party thereto bank america na administrative agent swing line lender lc issuer wachovia bank national association syndication agent key bank national association documentation agent filed exhibit 104 form 10q quarterly report fiscal quarter ended june 30 2003 103 subsidiary guaranty agreement dated august 12 2003 certain subsidiaries armor holdings inc identified signature pages thereto additional guarantor may become party guaranty favor bank america na administrative agent filed exhibit 105 form 10q quarterly report fiscal quarter ended june 30 2003 104 collateral agreement dated august 12 2003 among armor holdings certain subsidiaries identified signature pages thereto additional grantor may become party agreement favor bank america na administrative agent filed exhibit 106 form 10q quarterly report fiscal quarter ended june 30 2003 105 trademark security agreement dated august 12 2003 entities listed signature pages thereto favor bank america na administrative agent filed exhibit 107 form 10q quarterly report fiscal quarter ended june 30 2003 106 patent security agreement dated august 12 2003 entities listed signature pages attached thereto favor bank america na administrative agent filed exhibit 108 form 10q quarterly report fiscal quarter ended june 30 2003 107 promissory note dated august 12 2003 principal amount 15000000 made armor holdings inc favor keybank national association filed exhibit 109 form 10q quarterly report fiscal quarter ended june 30 2003 108 promissory note dated august 12 2003 principal amount 22500000 made armor holdings inc favor wachovia bank national association filed exhibit 1010 form 10q quarterly report fiscal quarter ended june 30 2003 109 first amendment credit agreement dated january 9 2004 among armor holdings inc lenders time party thereto bank america na administrative agent wachovia bank national association syndication agent keybank national association documentation agent filed exhibit 101 form 10q quarterly report fiscal quarter ended march 31 2004 1010 second amendment credit agreement dated march 29 2004 among armor holdings inc lenders time party thereto bank america na administrative agent wachovia bank national association syndication agent keybank national association documentation agent filed exhibit 102 form 10q quarterly report fiscal quarter ended march 31 2004 1011 third amendment credit agreement dated october 19 2004 among armor holdings inc lenders time party thereto bank america na administrative agent wachovia bank national association syndication agent keybank national association documentation agent filed exhibit 101 current report form 8k filed november 1 2004 1012 fourth amendment credit agreement dated april 14 2005 among armor holdings inc lenders time party thereto bank america na administrative agent wachovia bank national association syndication agent keybank national association documentation agent filed exhibit 109 form 10q quarterly report fiscal quarter ended june 30 2005 1013 fifth amendment credit agreement dated july 26 2005 among armor holdings inc lenders time party thereto bank america na administrative agent wachovia bank national association syndication agent keybank national association documentation agent filed exhibit 1010 form 10q quarterly report fiscal quarter ended june 30 2005 1014 amended restated employment agreement dated january 1 2005 armor holdings inc warren b kanders filed exhibit 101 form 10q quarterly report fiscal quarter ended june 30 2005 1015 amended restated employment agreement dated january 1 2005 armor holdings inc robert r schiller filed exhibit 102 form 10q quarterly report fiscal quarter ended june 30 2005 1016 employment agreement dated may 20 2005 armor holdings inc glenn j heiar filed exhibit 103 form 10q quarterly report fiscal quarter ended june 30 2005 1017 employment agreement dated may 20 2005 armor holdings inc robert f mecredy filed exhibit 104 form 10q quarterly report fiscal quarter ended june 30 2005 1018 noncompetition agreement dated may 20 2005 armor holdings inc scott obrien filed exhibit 106 form 10q quarterly report fiscal quarter ended june 30 2005 1019 employment agreement dated may 20 2005 armor holdings inc scott obrien filed exhibit 105 form 10q quarterly report fiscal quarter ended june 30 2005 1020 form indemnification agreement directors officers armor holdings inc filed exhibit 104 form 10q quarterly report fiscal quarter ended march 31 2004 1021 american body armor equipment inc 1994 incentive stock plan incorporated reference form s8 filed october 10 1994 reg 33018863 1022 american body armor equipment inc 1994 directors stock plan incorporated reference form s8 filed october 31 1994 reg 33018863 1023 armor holdings inc amended restated 1996 stock option plan incorporated reference 1997 definitive proxy statement respect 1997 annual meeting stockholders held june 12 1997 filed commission may 27 1997 1024 armor holdings inc amended restated 1996 nonemployee directors stock option plan incorporated reference 1997 definitive proxy statement respect 1997 annual meeting stockholders held june 12 1997 filed commission may 27 1997 1025 armor holdings inc 1998 stock option plan filed exhibit 1019 form 10k annual report fiscal year ended december 31 1998 1026 armor holdings inc 1999 stock incentive plan filed appendix 1999 definitive proxy statement respect 1999 annual meeting stockholders filed commission may 21 1999 1027 armor holdings inc amended restated 2002 stock incentive plan filed exhibit 1024 form 10k annual report fiscal year ended december 31 2004 1028 armor holdings inc 2002 executive stock plan filed exhibit 106 form 10q quarterly report fiscal quarter ended march 31 2002 1029 armor holdings inc 2005 stock incentive plan filed appendix 2005 definitive proxy statement respect 2005 annual meeting stockholders filed commission may 23 2005 1030 form stock option agreement 2005 stock incentive plan filed exhibit 107 form 10q quarterly report fiscal quarter ended june 30 2005 1031 form stock bonus award agreement 2005 stock incentive plan filed exhibit 108 form 10q quarterly report fiscal quarter ended june 30 2005 1032 armor holdings inc 2005 annual incentive plan filed appendix b 2005 definitive proxy statement respect 2005 annual meeting stockholders filed commission may 23 2005 1033 executive deferred compensation plan armor holdings inc incorporated reference form s8 filed november 30 2005 reg 333130016 1034 amendment 1 executive deferred compensation plan armor holdings inc incorporated reference form s8 filed november 30 2005 reg 333130016 1035 armor holdings inc executive retirement plan dated january 25 2006 1036 transportation services agreement dated december 10 2003 kanders aviation llc armor holdings inc filed exhibit 103 form 10q quarterly report fiscal quarter ended march 31 2004 211 subsidiaries registrant 231 consent pricewaterhousecoopers llp 311 certification principal executive officer required rule 13a14a securities exchange act 1934 312 certification principal financial officer required rule 13a14a securities exchange act 1934 321 certification principal executive officer required rule 13a14b securities exchange act 1934 322 certification principal financial officer required rule 13a14b securities exchange act 1934 filed herewith incorporated herein reference exhibit represents management contract exhibit represents compensatory planitem 15 exhibits financial statement schedules a1 following consolidated financial statements appear sequentially beginning page number included report form 10k report independent registered certified public accounting firm consolidated balance sheets consolidated statements operations consolidated statements stockholders’ equity comprehensive income loss consolidated statements cash flow notes consolidated financial statements a2 financial statement schedules schedule ii valuation qualifying accounts financial statement schedules listed omitted since either required applicable information otherwise included b exhibits following exhibits hereby filed part annual report form 10k filed herewith incorporated herein reference exhibit represents management contract exhibit represents compensatory plan index consolidated financial statements armor holdings inc report independent registered certified public accounting firm consolidated balance sheets consolidated statements operations consolidated statements stockholders’ equity comprehensive income loss consolidated statements cash flow notes consolidated financial statements report independent registered certified public accounting firm board directors stockholders armor holdings inc completed integrated audits armor holdings inc’s consolidated financial statements internal control financial reporting december 31 2006 accordance standards public company accounting oversight board united states opinions based audits presented consolidated financial statements financial statement schedule opinion consolidated financial statements listed accompanying index present fairly material respects financial position armor holdings inc subsidiaries ‘‘the company’’ december 31 2006 2005 results operations cash flows three years period ended december 31 2006 conformity accounting principles generally accepted united states america addition opinion financial statement schedule listed accompanying index presents fairly material respects information set forth therein read conjunction related consolidated financial statements financial statements financial statement schedule responsibility company’s management responsibility express opinion financial statements financial statement schedule based audits conducted audits statements accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit financial statements includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion internal control financial reporting also opinion management’s assessment included managements annual report internal control financial reporting appearing item 9a company maintained effective internal control financial reporting december 31 2006 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission coso fairly stated material respects based criteria furthermore opinion company maintained material respects effective internal control financial reporting december 31 2006 based criteria established internal control integrated framework issued coso company’s management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting responsibility express opinions management’s assessment effectiveness company’s internal control financial reporting based audit conducted audit internal control financial reporting accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit internal control financial reporting includes obtaining understanding internal control financial reporting evaluating management’s assessment testing evaluating design operating effectiveness internal control performing procedures consider necessary circumstances believe audit provides reasonable basis opinions company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate pricewaterhousecoopers llp pricewaterhousecoopers llp jacksonville florida february 26 2007 armor holdings inc subsidiaries consolidated balance sheets december 31 2006 december 31 2005 thousands except share data accompanying notes integral part consolidated financial statements armor holdings inc subsidiaries consolidated statements operations years ended december 31 2006 2005 2004 thousands except per share data accompanying notes integral part consolidated financial statements armor holdings inc subsidiaries consolidated statements stockholders’ equity comprehensive income loss years ended december 31 2006 2005 2004 thousands accompanying notes integral part consolidated financial statements armor holdings inc subsidiaries consolidated statements cash flow years ended december 31 2006 2005 2004 thousands accompanying notes integral part consolidated financial statements armor holdings inc subsidiaries consolidated statements cash flow years ended december 31 2006 2005 2004 thousands continued accompanying notes integral part consolidated financial statements armor holdings inc subsidiaries notes consolidated financial statements 1 background summary significant accounting policies company overview one three major original equipment manufacturers ‘‘oem’’ tactical wheeled vehicles ‘‘twv’’ leading diversified manufacturer vehicle armoring systems life safety survivability products military law enforcement commercial markets prime aerospace defense contractor number key us military programs also provide broad portfolio branded security products customers include domestic international militaries law enforcement security corrections personnel government agencies multinational corporations individuals may 2006 acquired stewart stevenson services inc ‘‘stewart stevenson’’ positions us leading manufacturer family medium tactical vehicles ‘‘fmtv’’ us military acquisition stewart stevenson also adds 17 billion total backlog 26 billion december 31 2006 enhances future sales visibility business consists three principal segments aerospace defense group products group mobile security division aerospace defense group significant operations within aerospace defense group manufacturing fmtv armoring variety light medium heavy twv military example design develop manufacture ballistic blast protection armoring systems variety military ground vehicles including programs ‘‘uparmored’’ high mobility multipurpose wheeled vehicle ‘‘hmmwv’’ commonly known humvee armored security vehicle ‘‘asv’’ aerospace defense group also supplies life safety survivability systems us military major aerospace defense prime contractors core markets land marine aviation safety military personnel protection aerospace defense group develops supplies personnel equipment including small arms protective inserts ‘‘sapi’’ engineered ceramic body armor helmets shields similar protective duty equipment products include among others modular lightweight loadcarrying equipment ‘‘molle’’ systems outer tactical vests ‘‘otvs’’ advanced combat helmets ‘‘ach’’ currently largest supplier molle systems us army modular rucksack configured number ways depending needs military mission also manufacture otvs used sapi plates provide enhanced protection bullets mines grenades mortar artillery shells sapi plates adopted us military key element protective equipment worn us troops aerospace defense group develops sells military rotary fixedwing aircraft seating systems helicopter cockpit airbag systems aircraft armor kits emergency bailout parachutes survival equipment worn military aircrew primary customers products us army us navy us marine corps boeing sikorsky aircraft major us aircraft manufacturers products group products group manufactures sells broad range highquality equipment marketed brand names known military law enforcement communities products manufactured group include concealable tactical body armor hard armor duty gear lesslethal munitions antiriot products police batons handcuffs emergency lighting products forensic products firearms accessories weapon maintenance products foldable ladders backpacks specialty gloves mobile security division mobile security division operating brand name centigontm manufactures services integrates certified armoring systems commercial vehicles designed protect varying degrees ballistic blast threats global basis armor variety programs available commercially including custom limousines sedans sport utility vehicles commercial trucks cashintransit vehicles customers business include us federal law enforcement intelligence diplomatic agencies foreign heads state multinational corporations well high net worth individuals cashintransit operators armor holdings inc subsidiaries notes consolidated financial statements continued discontinued operations july 2 2004 sold security consulting division subsidiary new technology armor inc ‘‘nti’’ previously presented discontinued operations remaining division nti consisting primarily training services included part products group segment prior acquisition stewart stevenson completed sale substantially operating assets business power products engineered products segments january 2006 remaining costs related sales time acquisition stewart stevenson considered purchase accounting acquisition significant accounting policies principles consolidation consolidated financial statements include accounts company wholly owned subsidiaries consolidation intercompany balances transactions eliminated results operations companies acquired transactions accounted purchase method accounting included consolidated financial statements date acquisition cash equivalents consider highly liquid investments maturities three months less date purchase cash equivalents concentration credit risk financial instruments potentially subject us concentrations credit risk consist primarily cash equivalents trade accounts receivable maintain cash equivalents believe high quality banks year make periodic investments aaa rated auction rate securities held banks investments auction rate securities december 31 2006 2005 amounts held individual banks may exceed federally insured amounts accounts receivable consist amounts due customers distributors located throughout world international product sales generally require cash advance confirmed letters credit us banks maintain reserves potential credit losses december 31 2006 2005 management believes excluding us military significant concentrations credit risk receivables consist amounts billed currently due customers allowance doubtful accounts evaluate collectibility accounts receivable based numerous factors including past transaction history customers creditworthiness estimate periodically adjusted become aware specific customers’ inability meet financial obligations eg bankruptcy filing evidence liquidity problems determine specific balances ultimately uncollectible remove aged trial balance unbilled costs accrued profits unbilled costs accrued profits comprise principally amounts revenue recognized contracts billings presented contract owners amounts billable december 31 2006 december 31 2006 unbilled costs accrued profits us government expected billed first quarter 2007 inventories stated lower cost market determined actual cost method pursuant contract provisions agencies us government title security interest inventories related contracts result advances performancebased payments progress payments advances payments reflected offset related inventory balances fair value financial instruments carrying value cash equivalents accounts receivable accounts payable debt outstanding credit facility approximates fair value december 31 2006 2005 fair value public debt estimated based quoted armor holdings inc subsidiaries notes consolidated financial statements continued market prices see table carrying amount fair value debt december 31 2006 2005 respectively derivative instruments hedging activities account derivative instruments hedging activities accordance statement financial accounting standard 133 ‘‘accounting derivative instruments hedge activities’’ ‘‘sfas 133’’ amended derivative instruments recorded consolidated balance sheets fair value changes fair value derivatives recorded period current earnings comprehensive income depending whether derivative designated part hedge transaction depending type hedge transaction fair value hedge transactions hedge changes asset’s liability’s firm commitment’s fair value changes fair value derivative instrument generally offset income statement changes hedged item’s fair value put options company stock marked market consolidated statement operations end period property equipment property equipment carried cost less accumulated depreciation upon disposal property equipment appropriate accounts reduced related cost accumulated depreciation resulting gains losses reflected consolidated statement operations depreciation computed using straightline method estimated lives related assets follows assess recoverability carrying amount property equipment events changes circumstances indicate carrying amount asset group may recoverable determine carrying amount asset group recoverable based upon expected undiscounted future cash flows asset group record impairment loss equal excess carrying amount estimated fair value asset group goodwill represents excess purchase price fair value net assets acquired purchase business combination goodwill intangible assets stated basis cost addition unamortized goodwill december 31 2000 890 million goodwill resulting acquisitions made us subsequent june 30 2001 immediately subjected nonamortization provisions statement financial accounting standards 142 ‘‘goodwill intangible assets’’ ‘‘sfas 142’’ purchase method accounting business combinations requires us make use estimates judgments allocate purchase price paid acquisitions fair value net tangible identifiable intangible assets acquired liabilities assumed goodwill tested impairment annually possible impairment indicated using fair value based test prescribed sfas 142 performed annual assessment goodwill determined impairment existed june 30 2006 patents licenses trademarks patents licenses trademarks primarily acquired acquisitions accounted purchase method accounting assets amortized armor holdings inc subsidiaries notes consolidated financial statements continued straightline basis useful lives certain assets indefinite lives amortized identifiable intangibles reviewed annually impairment whenever events changes circumstances indicate carrying amount asset question may recoverable including limited deterioration profits business segment longlived assets changes occur might impair recovery longlived assets method used determine existence impairment would discounted operating cash flows estimated remaining useful lives related asset groups impairment measured difference estimated fair value unamortized cost date impairment determined deferred charges deferred charges consist costs related issuance certain financing arrangements amortization deferred charges charged interest expense respective lives applicable financing arrangement deferred charges included assets consolidated balance sheets research development research development occurs primarily fixedprice costplus government funded contracts well companysponsored efforts research development costs incurred contracts customers expensed incurred reported component cost revenues revenue contracts recognized revenue earned recorded revenue 23 million 4 million 8 million government funded research development years ended december 31 2006 2005 2004 respectively research development costs include salaries benefits research development personnel testing certification research development related costs research development costs included selling general administrative expenses incurred years ended december 31 2006 2005 2004 approximated 28 million 15 million 9 million respectively estimates preparation consolidated financial statements conformity accounting principles generally accepted united states ‘‘us gaap’’ requires management make estimates assumptions affect reported amounts consolidated financial statements accompanying notes significant estimates inherent preparation accompanying consolidated financial statements include carrying value longlived assets valuation allowances receivables inventories deferred income tax assets liabilities potential litigation claims settlements potential liabilities related tax filings ordinary course business vest exchange program warranty revision accrual defined benefit plan liabilities contract contingencies obligations actual results could differ estimates legal tax contingencies involved legal tax proceedings claims arising time management connection outside advisors periodically assesses liabilities contingencies connection matters based latest information available matters probable loss incurred record loss reasonable estimate loss consolidated financial statements additional information becomes available estimates probable losses adjusted based assessment circumstances believe outcome matters individually aggregate material adverse effect consolidated financial statements income taxes account income taxes pursuant statement financial accounting standards 109 ‘‘accounting income taxes’’ ‘‘sfas 109’’ asset liability method specified thereunder deferred taxes determined based difference financial reporting tax bases assets liabilities deferred tax liabilities offset deferred tax assets relating net operating loss carryforwards tax credit carryforwards deductible temporary differences recognition deferred tax assets based management’s belief likely tax benefit associated temporary differences operating armor holdings inc subsidiaries notes consolidated financial statements continued capital loss carryforwards utilized valuation allowance recorded deferred tax assets likely realization occur revenue recognition record aerospace defense group revenue related government contracts results principally fixed price contracts persuasive evidence arrangement exists fee reasonably determinable customer accepted product collectibility probable conditions met substantially cases department defense inspector signs material inspection receiving report indicating acceptance title transfer record revenue remaining aerospace defense group products group mobile security division product shipped except larger commercial contracts typically longer four months length revenue large commercial contracts recognized percentage completion unitsofwork performed method large commercial contracts loss position entire estimated loss would recognized balance contract period end current contracts profitable returns minimal materially affect consolidated financial statements record service revenue services provided contractbycontract basis revenues service contracts recognized term contract commensurate service provided warranty costs generally recorded component cost revenues accrued expenses consolidated financial statements amount recognized based historical claims cost experience see note 23 regarding zylon® vest exchange ‘‘zve’’ programwarranty revision product exchange program related zylon®containing vests advertising expense advertising costs period incurred earnings per share basic earnings per share computed dividing net income weightedaverage number common shares outstanding diluted earnings per share computed dividing net income weightedaverage number common shares outstanding considering effects potentially dilutive common stock equivalents principally options except cases effect would antidilutive comprehensive income financial statements foreign subsidiaries measured using local currency functional currency assets liabilities denominated foreign currency translated us dollars current rate exchange existing periodend revenues expenses translated average monthly exchange rates current year change accumulated amount net tax applicable included component comprehensive income accordance statement financial accounting standard 115 ‘‘accounting certain investments debt equity securities’’ ‘‘sfas 115’’ classify investments certain equitybased securities availableforsale unrealized gains losses excluded earnings recorded component comprehensive income loss unrealized holding loss equitybased securities classified availableforsale 9000 2 million december 31 2006 2005 respectively investments classified assets consolidated balance sheets declines fair value amortized cost basis investment determined temporary charged earnings temporary declines years ended december 31 2006 2005 armor holdings inc subsidiaries notes consolidated financial statements continued recently adopted standards defined benefit pension postretirement plans september 2006 fasb issued sfas 158 ‘‘employers’ accounting defined benefit pension postretirement plans’’ ‘‘sfas 158’’ statement effective december 2006 requires employer recognize funded status defined benefit post retirement plan multiemployer plan asset liability statement financial position recognize changes funded status year changes occur comprehensive income statement results changes balance sheet recognition defined benefit plans change measurement plan assets obligations measurement benefit expense statement income accordance sfas 158 prior period consolidated financial statements restated see note 19 comparison assets liabilities related defined benefit plans company’s 2006 consolidated balance sheet compared recognition 2005 consolidated balance sheet prior rules sfas 158 end 2008 must change current october measurement date valuation plan assets projected benefit obligations december fiscal yearend date simula noncontributory defined benefit pension plan stock options grants recognize cost equity classified sharebased awards straightline basis vesting period award prior january 1 2006 accounted stock option plans recognition measurement provisions accounting principles board opinion 25 ‘‘accounting stock issued employees’’ ‘‘apb 25’’ related interpretations permitted statement financial accounting standards 123 ‘‘accounting stockbased compensation’’ ‘‘sfas 123’’ excluding modification stock option agreements stock optionbased employee compensation cost recognized income statement stock options granted plans exercise price equal greater market value underlying common stock date grant january 1 2006 adopted statement financial accounting standards 123 revised 2004 ‘‘sharebased payments’’ ‘‘fas 123r’’ requiring us recognize expense related fair value stock option awards adopted fair value recognition provisions fas 123r using modified prospective transition method transition method compensation cost recognized 2006 includes compensation cost equity classified sharebased awards granted prior yet vested january 1 2006 based grant date fair value estimated accordance original provisions sfas 123 b compensation cost sharebased payments granted subsequent january 1 2006 based grantdate fair value estimated accordance provisions fas 123r results prior periods restated result adopting fas 123r january 1 2006 income taxes year ended december 31 2006 4 million lower continued account sharebased compensation abp 25 prior adoption fas 123r presented tax benefits deductions resulting exercise stock options operating cash flows statement cash flows beginning january 1 2006 changed cash flow presentation accordance fas 123r requires cash flows resulting tax benefits tax deductions excess compensation cost recognized options windfall tax benefits classified financing cash flows armor holdings inc subsidiaries notes consolidated financial statements continued estimated fair value option awards granted january 1 2006 using blackscholes option pricing model expected life options granted management’s estimate represents period time options granted expected outstanding currently pay dividends volatility based historical volatility stock price riskfree interest rate periods within contractual life option based us treasury yield curve effect time grant fair value option grant years ended december 31 2006 2005 2004 estimated date grant following weightedaverage assumptions weighted average fair value options granted years ended december 31 2006 2005 2004 follows outstanding options consisting incentive nonqualified stock options generally vest become exercisable three five year period date grant options granted immediately vested subject lockup provisions disallow recipient selling shares lockup expires generally staggered seven year period outstanding options generally expire seven ten years date grant upon retirement company contingent upon continued employment applicable seven ten year period compensation cost stock option grants determined based fair value grant dates years ended december 31 2005 2004 consistent method prescribed sfas 123 net earnings per share would adjusted proforma amounts indicated armor holdings inc subsidiaries notes consolidated financial statements continued 15 million stockbased employee compensation expense determined fair value based method fiscal 2005 related accelerated vesting certain existing stock options 22 million related certain stock options issued fiscal 2005 november 2005 fasb issued fasb staff position ‘‘fsp’’ fas 123r3 transition election related accounting tax effects sharebased payment awards fsp fas 123r3 provides alternative transition method establishing beginning balance pool excess tax benefits available absorb tax deficiencies recognized subsequent adoption fas 123r ‘‘apic pool’’ company elected adopt alternative transition method provided fsp fas 123r3 establishing beginning balance apic pool method consists computational component establishes beginning balance apic pool related employee compensation simplified method determine subsequent impact apic pool employee awards fully vested outstanding upon adoption fas 123r discontinued operations accordance statement financial accounting standards 144 ‘‘accounting impairment disposal longlived assets’’ ‘‘sfas 144’’ component classified held sale reported discontinued operations following conditions met operations cash flows component eliminated ongoing operations entity result disposal transaction b entity significant continuing involvement operations component disposal transaction period component entity either disposed classified held sale income statement current prior periods reports results operations component including estimated impairment loss discontinued operations results discontinued operations less applicable income tax expense benefit reported separate component income extraordinary items cumulative effect accounting changes applicable assets liabilities disposal group classified held sale presented separately asset liability sections respectively statement financial position discontinued operations december 31 2006 2005 see note 2 information related discontinued operations 2004 reclassifications certain reclassifications made 2004 2005 consolidated financial statements order conform presentation adopted 2006 reclassifications effect net income retained earnings recent accounting pronouncements june 2006 fasb issued financial accounting standards board interpretation 48 ‘‘accounting uncertainty income taxes’’ ‘‘ fin 48’’ interpretation fasb statement financial accounting standards 109 ‘‘accounting income taxes’’‘‘sfas 109’’ fin 48 clarifies accounting uncertainty income taxes recognized enterprise’s financial statements accordance sfas 109 interpretation prescribes recognition threshold measurement attribute financial statement recognition measurement tax provision taken expected taken tax return also interpretation provides guidance derecognition classification interest penalties accounting interim periods disclosure transition accounting provisions fin 48 effective company beginning january 1 2007 company currently evaluating effect fin 48 company’s consolidated financial statements september 2006 fasb issued statement financial accounting standards ‘‘sfas’’ 157 ‘‘fair value measurements’’ sfas 157 defines fair value establishes framework measuring fair value gaap expands disclosures fair value measurements sfas 157 effective fiscal years beginning november 15 2007 interim periods within fiscal years company currently evaluating effect adoption sfas 157 financial position results operations armor holdings inc subsidiaries notes consolidated financial statements continued 2 discontinued operations see note 1 information related discontinued operations following summary operating results discontinued operations year ended december 31 2004 discontinued operations years ended december 31 2006 2005 3 accumulated comprehensive loss income components accumulated comprehensive loss net tax benefit 7 million 325000 december 31 2006 2005 respectively listed 4 business combinations completed numerous purchase business combinations cash assumption liabilities certain cases three years ended december 31 2006 following acquisitions completed armor holdings inc subsidiaries notes consolidated financial statements continued 1 includes swissphotonics ag stewart stevenson services inc integrated textile systems inc hiatt company ltd schroth safety products 2 includes 31 million related shares stewart stevenson purchased 2005 3 includes second chance body armor inc optemizecom inc 4 includes vector associates inc dba odv inc kleenbore inc specialty group inc aka ‘‘specialty defense’’ bianchi international 2006 acquisitions april 6 2006 acquired 100 stock swissphotonics ag ‘‘projectina’’ projectina manufactures markets distributes highly specialized document examination equipment used verifying document authenticity detecting counterfeit currency crime lab microscopes used evaluate ballistics bullet casings results projectina included results products group since date acquisition purchase price immaterial consolidated financial statements may 25 2006 completed acquisition stewart stevenson approximately 769 million cash excluding transaction costs deducting stewart stevenson’s net cash balance stewart stevenson designs manufactures twv used us international militaries one three major oems twv sold us military stewart stevenson sole manufacturer us army’s fmtv currently contract produce fmtv september 2008 results stewart stevenson included results aerospace defense group since date acquisition stewart stevenson derived approximately 93 revenues 726 million fiscal year ended january 31 2006 production fmtv trucks trailers vehicle cabs spare parts service components primary strategic benefit acquisition stewart stevenson new position oem twv fleet us army transitions longterm armoring strategy twv oems expected gain contracting authority ballistic blast protection armoring systems giving us ability better position armoring technology survivability systems fmtv believe combination core competency vehicle armoring stewart stevenson’s leading design fabrication operations allow us capitalize us military’s evolving needs twv fleet primary factors led 682 million goodwill recorded result purchase stewart stevenson june 30 2006 acquired 100 stock integrated textile systems inc ‘‘its’’ monroe north carolinabased manufacturer highstrength material tensylontm armor holdings inc subsidiaries notes consolidated financial statements continued tensylontm derived ultrahigh molecular weight polyethylene polymer wide variety applications including advanced fiber composites use ballistic products results included results aerospace defense group since date acquisition purchase price immaterial consolidated financial statements july 10 2006 acquired 100 stock hiatt company ltd ‘‘hiatts’’ hiatts high end manufacturer steel handcuffs expandable friction lock batons handcuff pouches baton holders whose primary customers military law enforcement agencies uk europe results hiatts included results products group since date acquisition purchase price immaterial consolidated financial statements october 19 2006 acquired schroth safety products ‘‘schroth’’ schroth supplier advanced occupant retention safety restraint systems vehicle aviation platforms serving military commercial professional racing markets systems used military tactical wheeled vehicles military commercial rotary wing fixed wing aviation platforms professional auto racing vehicles nascar formula 1 racing circuits schroth integrated aerospace defense group results schroth included results aerospace defense group since date acquisition purchase price immaterial consolidated financial statements five acquisitions accounted purchase business combinations accordingly results operations included consolidated financial statements acquisition dates costs acquire stock projectina hiatts schroth considered material financial position costs acquire stock stewart stevenson allocated assets acquired liabilities assumed according estimated fair values time acquisition follows customerrelated intangible assets relate acquired customer relationships amortized eleven year weightedaverage useful life straightline basis marketingrelated intangible assets relate acquired trade names trademarks indefinite useful life allocations purchase prices assets acquired liabilities assumed preliminary subject change pending final purchase accounting goodwill acquired acquisitions stewart stevenson projectina hiatts schroth deductible tax purposes goodwill acquired acquisition tax deductible 2005 acquisitions july 27 2005 acquired substantially domestic assets second chance body armor inc ‘‘second chance’’ 45 million second chance manufactures concealable tactical armor holdings inc subsidiaries notes consolidated financial statements continued body armor law enforcement military markets worldwide second chance law enforcement business included products group military business included aerospace defense group result second chance acquisition expect 1 strengthen position leading supplier body armor law enforcement military markets 2 achieve crossselling opportunities leveraging global sales force relationships 3 offer opportunities cost reduction integration savings rationalization operations 2005 acquisition second chance accounted purchase business combinations accordingly results operations included consolidated financial statements acquisition dates costs acquire substantially assets second chance allocated assets acquired liabilities assumed according estimated fair values time acquisition follows customerrelated intangible assets relate acquired customer relationships amortized eighteenyear weightedaverage useful life straightline basis technologyrelated intangible assets relate certain acquired patents amortized eightyear weightedaverage useful life straightline basis marketingrelated intangible assets relate acquired trade names trademarks indefinite useful life goodwill acquired acquisition second chance deductible tax purposes 2004 acquisitions november 18 2004 acquired outstanding stock specialty defense 92 million includes assumption certain outstanding debt result specialty defense acquisition expect 1 strengthen position leading midtier defense security industry consolidator increased scale scope 2 increase relevance department defense customers programs 3 combine specialty defense’s high volume manufacturing capacity established reputation leader molle systems otvs warrior helmets existing proprietary technology compete aggressively solicitation vests 4 achieve crossselling opportunities leveraging global sales force relationships 5 offer opportunities cost reduction integration savings rationalization operations december 30 2004 acquired outstanding stock bianchi international inc ‘‘bianchi’’ 60 million bianchi manufacturer supplier duty concealment holsters belts accessories bianchi® brand name used primarily lawenforcement private security military personnel supplier spear rucksack system us special operations forces bianchi also market leader medium large technical internal frame backpacks highend daypacks satchels carrying cases gregory® brand name bianchi included products group result bianchi acquisition expect 1 strengthen position leading supplier holsters belts accessories 2 achieve crossselling opportunities leveraging armor holdings inc subsidiaries notes consolidated financial statements continued global sales force relationships 3 offer opportunities cost reduction integration savings rationalization operations 2004 acquisitions accounted purchase business combinations accordingly results operations included consolidated financial statements acquisition dates costs acquire specialty defense bianchi allocated assets acquired liabilities assumed according estimated fair values time acquisition follows customerrelated intangible assets relate acquired customer relationships amortized twelveyear weightedaverage useful life straightline basis technologyrelated intangible asset relates certain acquired patents amortized eightyear weightedaverage useful life straightline basis marketingrelated intangible asset relates acquired trade names trademarks indefinite useful life goodwill acquired acquisitions specialty defense bianchi deductible tax purposes unaudited pro forma results businesses acquired included consolidated results date acquisition pro forma results 2006 acquisitions swissphotonics integrated textile systems hiatts schroth 2005 acquisition optemizecom inc 2004 acquisitions vector associates inc dba odv inc kleenbore inc presented would differ material amount actual results following unaudited pro forma consolidated results presented show results pro forma basis 2006 acquisition stewart stevenson 2005 acquisition second chance 2004 acquisitions specialty defense bianchi completed january 1 2004 pro forma results negatively impacted acquisitions stewart stevenson due increased interest amortization expenses second chance purchased bankruptcy experienced legal financial troubles armor holdings inc subsidiaries notes consolidated financial statements continued 5 goodwill identified intangible assets sfas 142 goodwill intangible assets indefinite lives longer amortized tested impairment least annually often indicators impairment arise changes carrying amount goodwill years ended december 31 2006 2005 follows adjustment tofinalization purchase price allocation aerospace defense 2006 approximately 18 million primarily related receipt final tangible identifiable intangible asset valuations stewart stevenson subsequent initial purchase price allocation adjustments result material adjustment previously recorded depreciation amortization expense related acquisition purchase price allocations acquisitions bianchi international specialty defense acquired fourth quarter 2004 completed 2006 2005 respectively included patents licenses trademarks accompanying consolidated balance sheets following intangible assets december 31 2006 2005 included marketing approximately 73 million 61 million marketingrelated intangible assets indefinite lives december 31 2006 2005 respectively armor holdings inc subsidiaries notes consolidated financial statements continued anticipate recording related amortization expense future periods 6 inventories components inventory december 31 2006 2005 follows december 31 2006 2005 inactive inventory reserves totaled 31 million 18 million respectively 7 property equipment property equipment december 31 2006 2005 summarized follows depreciation expense years ended december 31 2006 2005 2004 approximately 18 million 12 million 10 million respectively armor holdings inc subsidiaries notes consolidated financial statements continued 8 accrued expenses current liabilities accrued expenses current liabilities december 31 2006 2005 summarized follows 9 short long term debt short term debt october 29 2004 completed placement 300 million aggregate principal amount 200 senior subordinated convertible notes due november 1 2024 ‘‘2 convertible notes’’ november 5 2004 goldman sachs co exercised option purchase additional 45 million principal amount 2 convertible notes 2 convertible notes guaranteed domestic subsidiaries senior subordinated basis see note 22 2 convertible notes provide interest rate 200 per year payable november 1 may 1 year beginning may 1 2005 ending november 1 2011 2 convertible notes provide accretion principal amount beginning november 1 2011 rate provides holders aggregate annual yield maturity 200 defined agreement 2 convertible notes provide contingent interest sixmonth period beginning november 1 2011 15 basis points paid cash average trading price notes certain levels 2 convertible notes convertible bond holder’s option time prior maturity initially conversion rate 185151 shares common stock per 1000 principal amount notes equivalent conversion price approximately 5401 per share subject adjustment upon conversion obligated satisfy conversion obligation respect accreted principal amount notes converted cash remaining amount satisfied shares common stock conversion rate subject adjustment without duplication upon occurrence following events 1 stock dividends common stock 2 issuance rights warrants 3 stock splits combinations 4 distribution indebtedness securities assets 5 cash distributions 6 tender exchange offers 7 repurchases common stock accordance us gaap 2 convertible notes classified short term debt converted time prior maturity b march 12 2003 entered collateralized revolving credit facility corporaciòn financiera provide working capital needs colombia facility 2004 expanded armor holdings inc subsidiaries notes consolidated financial statements continued collateralized revolving credit facility four additional colombian banks colombian credit facility oneyear revolving credit facility among things provides total maximum borrowings 65 billion colombian pesos us 3 million based exchange rate december 31 2006 borrowings credit facility bear interest rate equal colombian central bank rate based averages 30 day loans plus applicable margin ranging 35 40 c february 2005 entered collateralized revolving credit facility itaú sa provide working capital funds brazilian facility brazilian credit facility expired march 2006 renewed long term debt may 25 2006 terminated prior senior secured credit facility entered new senior secured credit facility ‘‘credit facility’’ wachovia bank national association administrative agent bank america na suntrust bank cosyndication agents key bank national association jpmorgan chase bank codocumentation agents lenders party thereto credit facility establishes commitment company provide 825 million aggregate loans financial accommodations consisting five year senior secured revolving credit facility aggregate principal amount 425 million ‘‘revolving facility’’ ii five year senior secured term loan aggregate principal amount 100 million ‘‘term loan’’ iii thirty day senior secured interim term loan aggregate principal amount 300 million ‘‘interim term loan’’ revolving facility term loan interim term loan make ‘‘senior secured facilities’’ revolving facility includes sublimit aggregate amount 75 million letters credit sublimit aggregate 20 million swing line loans december 31 2006 253 million availability credit facility excluding 23 million outstanding letters credit borrowings credit facility bear interest either rate equal libor plus applicable margin ranging 0875 15 depending certain conditions ii alternate base rate higher federal funds rate plus 050 b wachovia prime rate plus additional margin ranging 00 025 depending certain conditions december 31 2006 interest rate borrowings credit facility 662 armor holdings inc subsidiaries notes consolidated financial statements continued credit facility guaranteed certain direct indirect domestic subsidiaries secured among things pledge issued outstanding shares stock equity interests certain direct indirect domestic subsidiaries ii 65 issued outstanding shares voting stock voting equity interests certain direct indirect foreign subsidiaries iii 100 issued outstanding shares nonvoting stock nonvoting equity interests certain direct indirect foreign subsidiaries pursuant pledge agreement delivered connection credit facility ‘‘pledge agreement’’ b first priority perfected security interest certain domestic assets certain domestic assets certain direct indirect domestic subsidiaries pursuant security agreement delivered connection credit facility ‘‘security agreement’’ made customary representations warranties covenants credit agreement pledge agreement security agreement credit facility subject customary rights lenders administrative agent upon occurrence continuance event default including certain circumstances right accelerate payment loans made credit facility right charge default rate interest amounts outstanding credit facility interim term loan paid full quarter ended june 30 2006 b august 12 2003 completed private placement 150 million aggregate principal amount 825 senior subordinated notes due 2013 ‘‘825 notes’’ 825 notes guaranteed domestic subsidiaries senior subordinated basis see note 22 825 notes sold qualified institutional buyers reliance rule 144a securities act 1933 amended nonus persons reliance regulation securities act 1933 amended 2004 completion private placement 825 notes conducted exchange offer pursuant holders privately placed 825 notes exchanged notes 825 notes registered securities act 1933 amended 2003 used portion funds fund acquisitions including simula hatch repay portion outstanding debt general corporate working capital purposes including funding capital expenditures interest 825 notes payable semiannually fifteenth february august year 825 notes issued discount approximately 3 million investors 825 notes may redeemed option whole part prorata basis august 15 2008 certain specified redemption prices plus accrued interest payable redemption date c connection may 25 2006 acquisition stewart stevenson assumed 25 million 738 senior notes due may 31 2006 paid notes full may 31 2006 september 2 2003 entered interest rate swap agreements designated fair value hedges defined sfas 133 notional amount totaling 150 million agreements entered exchange fixed interest rate 825 notes variable interest rate equal sixmonth libor set arrears plus spread ranging 2735 275 fixed semiannually fifteenth day february august agreements subject terms conditions common transactions type accordance sfas 133 changes fair value interest rate swap agreements offset changes fair value fixed rate debt due changes market interest rate december 31 2005 1 million asset included assets result change fair value 283000 hedge asset december 31 2006 agreements deemed perfectly effective fair value hedge therefore qualify shortcut method accounting sfas 133 result ineffectiveness expected recognized earnings associated interest rate swap agreements armor holdings inc subsidiaries notes consolidated financial statements continued maturities longterm debt follows 10 derivative financial instruments defined sfas 133 ‘‘accounting derivative instruments hedge activities’’ contingent interest feature 2 convertible notes embedded derivative considered clearly closely related host contract fair value bifurcated derivative december 31 2006 2005 immaterial financial position hedge fair value 825 notes using interest rate swaps enter derivative contracts manage fair value changes could caused exposure interest rate changes fair value hedges qualify hedge accounting using shortcut method since swap terms match critical terms 825 notes accordingly changes fair value interest rate swap agreements offset changes fair value 825 notes due changes market interest rate result ineffectiveness expected recognized earnings associated interest rate swap agreements 825 notes fair value interest rate swap agreements approximately 283000 1 million december 31 2006 2005 respectively included assets longterm debt accompanying consolidated balance sheets fair values interest rate swap agreements obtained counterparties represent estimated amount would receive pay terminate agreement taking consideration difference contract rate interest rates currently quoted agreements similar terms maturities 11 integration incurred integration expenses approximately 3 million 4 million 3 million years ending december 31 2006 2005 2004 respectively integration expenses include costs related integrating new acquisitions costs associated unsuccessful acquisitions integration expenses fiscal 2006 related primarily integration stewart stevenson integration expenses fiscal 2005 related primarily integration second chance specialty defense bianchi integration expenses fiscal 2004 related primarily integration simula hatch 12 charges incurred income 2 million charges approximately 1 million 1 million years ending december 31 2006 2005 2004 respectively income fiscal 2006 includes reversal previously recorded accrual relating export fine settled 2006 inconsequential amount 13 commitments contingencies employment contracts party several employment contracts december 31 2006 certain members management contracts varying periods include restrictions armor holdings inc subsidiaries notes consolidated financial statements continued competition termination agreements provide salaries bonuses benefits also specify delineate granting various stock options legallitigation matters zylon® matters connection florida courtapproved settlements 2004 2005 class action lawsuits filed police organizations individual police officers regarding warranty performance ballisticresistant soft body armor vests containing zylon® third status report attorney general body armor safety initiative testing activities issued united states department justice national institute justice ‘‘nij’’ august 2005 substantially modified compliance standards ballisticresistant vests company halted sales shipment zylon®containing vest models effective august 25 2005 established zylon® vest exchange ‘‘zve’’ program provide cash voucher option purchased zylon®containing vests us august 29 2005 vest exchanges zve program continuing note 23 consolidated financial statement included elsewhere report sets forth information regarding estimated cost zve program also voluntarily cooperating request documents data received department justice reviewing body armor industry’s use zylon® subpoena served general services administration information relating zylon® march 27 2006 entered tolling agreement department justice toll statute limitations september 30 2006 regard possible civil claims united states could assert company respect certain body armor products made us contain zylon® september 26 2006 entered amendment tolling agreement department justice extends period tolling agreement january 31 2007 january 29 2007 entered second amendment tolling agreement doj extends period tolling agreement july 31 2007 administrative actions august 2006 january 2007 respectively us defense contract audit agency ‘‘dcaa’’ conducted two postaward pricing audits connection certain heavy truck vehicle kits delivered aerospace defense group’s subsidiary located phoenix arizona result us government submitted administrative claims approximately 6 million also expect subsequent claims 2007 believe actions without merit intend vigorously defend claims established reserve claims believe adequate december 2006 notified us department commerce bureau industry security ‘‘bis’’ potential claims relating certain exports made products group 2002 2004 lacked appropriate licenses associated documentation discussions bis continuing expected result settlement claims believe material impact financial position operations liquidity february 2007 simula inc entered order abatement consent ‘‘consent order’’ maricopa county air quality department ‘‘mcaqd’’ consent order states mcaqd reason believe simula operating violation maricopa county air pollution control regulations pursuant consent order mcaqd agreed seek closure simula facility located phoenix arizona ‘‘facility’’ accepted simula’s updated air permit application compliance plan respect facility matters addition normal course business result previous acquisitions subjected various types claims currently ongoing litigation areas armor holdings inc subsidiaries notes consolidated financial statements continued product liability product warranty general liability intellectual property employment periodically audited us government personnel contract regulatory compliance seek proactively identify address appropriate selfreport governmental compliance issues products used wide variety military law enforcement situations environments products cause serious personal property injury death carefully properly used adequately trained personnel believe adequate insurance coverage thirdparty damage claims incurred normal course business cases effect consolidated financial statements generally limited amount insurance deductible selfinsured retention annual insurance premiums selfinsured retention amounts risen significantly past several years may continue extent able purchase insurance coverage time except otherwise provided herein believe existing claims pending litigation material impact financial position operations liquidity 14 information concerning business segments geographical revenues management internal reporting purposes organized business three segments aerospace defense group products group mobile security division described note 1 aerospace defense group supplies twv life safety survivability systems us military major aerospace defense prime contractors products group manufactures sells broad range high quality equipment marketed brand names known military law enforcement communities mobile security division operating brand name centigontm manufactures services integrates certified armoring systems commercial vehicles protect varying degrees ballistic blast threats global basis corporate costs include corporate management expenses associated managing overall company expenses include compensation benefits corporate management staff legal professional fees administrative general expenses allocated business units corporate assets primarily include cash equivalents held corporate entities property equipment related corporate facility certain information technology costs assets related deferred compensation plan costs related issuance debt including 2 convertible notes 825 notes credit facility armor holdings inc subsidiaries notes consolidated financial statements continued revenues operating income total assets net segments follows products group operating income fiscal 2006 2005 includes pretax charge 4 million 20 million respectively cost zve program products group operating income fiscal 2004 includes pretax charge 5 million cost warranty revision product exchange program see notes 13 23 armor holdings inc subsidiaries notes consolidated financial statements continued financial information respect revenues based geographic location customer property equipment net principal geographic areas based actual location principle facility follows armor holdings inc subsidiaries notes consolidated financial statements continued 15 income taxes provision income taxes continuing operations years ended december 31 2006 2005 2004 consisted following significant components net deferred tax liability december 31 2006 2005 follows recognition deferred tax assets based management’s belief likely tax benefit associated temporary differences operating capital loss carryforwards utilized valuation allowance recorded deferred tax assets likely realization occur valuation allowance december 31 2006 consisted approximately 1 million related net operating loss tax credit carryforwards allocated goodwill approximately armor holdings inc subsidiaries notes consolidated financial statements continued 10 million related capital loss carryforwards decrease valuation allowance primarily attributable certain capital gains realized 2006 december 31 2006 us federal state foreign net operating losses ‘‘nols’’ providing tax effected benefit approximately 20 million federal state nols expire varying amounts fiscal years 2011 2026 subject limitations internal revenue code ‘‘irc’’ section 382 majority company’s foreign nols indefinite carryforward period december 31 2006 also certain state research development state income tax credits approximately 1 million subject limitations irc section 383 connection acquisitions hiatts projectina stewart stevenson schroth recorded additional net deferred tax liabilities approximately 1 million 1 million 32 million 5 million respectively relating primarily identifiable intangibles deductible tax purposes net deferred tax liabilities offset increase goodwill additionally 2005 connection acquisitions specialty defense bianchi recorded additional net deferred tax liabilities approximately 12 million 13 million respectively relating primarily identifiable intangibles offset increase goodwill february 9 2006 notified irs tax returns taxable years ended december 31 2003 2004 selected examination expect examination material impact financial position operations liquidity united states income taxes provided certain undistributed earnings nonus subsidiaries approximately 14 million earnings considered permanently reinvested nonus operations determination us tax liability related earnings practicable sources income continuing operations income taxes armor holdings inc subsidiaries notes consolidated financial statements continued following reconciles provision income taxes computed federal statutory income tax rate provision income taxes recorded consolidated statements operations years ended december 31 2006 2005 2004 16 stockholders’ equity preferred stock july 16 1996 stockholders authorized series preferred stock rights privileges preferences board directors shall time determine issued preferred stock common stock june 15 2004 sold 4000000 primary shares common stock price 3750 per share raising 143 million net proceeds deducting underwriter discounts commissions addition board directors granted underwriters 30day option purchase 600000 shares 30day option expired unexercised july 15 2004 used net proceeds offering primarily fund acquisitions specialty defense bianchi international fourth quarter 2004 june 22 2004 stockholders approved amendment certificate incorporation amended increased number shares authorized capital stock 80000000 75000000 shares common stock 5000000 shares preferred stock treasury stock 6060222 shares treasury december 31 2006 2005 stock options grants june 22 2005 implemented 2005 stock incentive plan 2005 stock incentive plan authorizes issuance 2500000 shares common stock shares common stock granted restricted stock performance stock stockbased awards counted shares authorized one eighttenths 18 shares every one share issued connection award 2005 stock incentive plan authorizes granting stock options restricted stock performance awards stockbased awards employees officers directors consultants independent contractors advisors company subsidiaries accordance 2005 stock incentive plan preexisting stock incentive plans described frozen accordingly longer authorized grant awards preexisting plans 2002 implemented two new stock option plans 2002 stock incentive plan authorizes issuance 2700000 shares common stock upon exercise stock options connection issuance restricted stock bonuses june 22 2004 stockholders approved amendment increase 2000000 shares total number shares common stock may awarded 2002 stock incentive plan 2002 stock incentive plan authorizes granting stock options restricted stock bonuses employees officers directors consultants independent contractors advisors company subsidiaries 2002 executive stock plan provides grant total 470000 stock options stock awards key employees terms provisions 2002 executive stock plan substantially 2002 stock incentive plan except may grant nonqualified stock options 2002 executive stock plan 2002 executive stock plan adopted march 13 2002 shares available grant 2002 executive stock plan granted executive officers march 13 2002 armor holdings inc subsidiaries notes consolidated financial statements continued 1999 implemented 1999 stock incentive plan reserved 2000000 shares common stock 1999 stock incentive plan 1999 stock incentive plan provides granting options employees officers directors consultants independent contractors advisors company option prices stock may purchased 1999 stock incentive plan less fair market value common stock dates grants 1998 implemented new nonqualified stock option plan pursuant new plan 725000 shares common stock reserved made available distribution january 1 1999 distributed 725000 shares allocated plan 1996 implemented incentive stock plan outside directors’ stock plan plans collectively provide granting options certain key employees directors pursuant plans amended 2200000 shares common stock reserved made available distribution option prices stock may purchased incentive stock plan less fair market value common stock dates grants 1994 implemented incentive stock plan outside directors’ stock plan plans collectively provide granting options certain key employees well providing grant common stock outside directors full time employees pursuant plans 1050000 shares common stock reserved made available distribution option prices stock may purchased incentive stock plan less fair market value common stock dates grants effective january 19 1996 stock grants awarded 1994 incentive stock plan accelerated considered fully vested summary status stock option grants december 31 2006 changes three years ending december 31 2006 presented aggregate intrinsic value options outstanding options exercisable december 31 2006 80 million 78 million respectively armor holdings inc subsidiaries notes consolidated financial statements continued following table summarizes information stock options outstanding december 31 2006 remaining nonexercisable options december 31 2006 become exercisable follows fair value nonvested shares determined based market price shares grant date summary status nonvested shares december 31 2006 changes year ended december 31 2006 follows december 31 2006 3 million unrecognized compensation cost related nonvested stock options expected recognized weighted average period 36 years restricted stock bonuses granted following restricted stock bonuses years ended december 31 2006 2005 2004 year ended december 31 2004 recorded 6 million noncash charge acceleration performancebased longterm restricted stock awards granted certain executives 2002 armor holdings inc subsidiaries notes consolidated financial statements continued earnings per share following details earnings per share computations basic diluted basis years ended december 31 2006 2005 2004 2 convertible notes include net share settlement conversion option cash settlement par amount 345 million result requires us use treasury stock method calculate dilutive effect 2 convertible notes result included 102983 shares diluted share count year ended december 31 2006 effect diluted share count years ended december 31 2005 2004 contingent shares due antidilutive nature company’s stock options year ended december 31 2006 13055 dilutive securities excluded calculation weighted average shares diluted earnings per share certain executives entitled receive stock bonus awards 53500 shares common stock based performance company’s common stock 2006 awards settled cash january 2007 effect dilutive share count addition certain executives entitled receive performance stock bonus awards 450000 shares common stock time january 1 2005 december 31 2007 certain conditions met defined employment agreements compensation committee board director’s discretion able settle performance stock bonus awards cash armor holdings inc subsidiaries notes consolidated financial statements continued 17 supplemental cash flow information 2006 total cash paid net cash acquired businesses excludes 31 million related shares stewart stevenson purchased 2005 18 quarterly results unaudited following table presents summarized unaudited quarterly results operations company fiscal 2006 2005 believe necessary adjustments included amounts stated present fairly following selected information read conjunction consolidated financial statements notes thereto included elsewhere herein future quarterly operating results may fluctuate depending number factors results operations particular quarter necessarily indicative results operations full year quarter gross profit third fourth quarter 2006 includes 3 million 650000 respectively related zve program gross profit third fourth quarter 2005 includes 19 million 500000 respectively related zve program armor holdings inc subsidiaries notes consolidated financial statements continued 19 employee benefit plans defined contribution plans october 1997 formed 401k plan ‘‘plan’’ provides voluntary contributions employees allows discretionary contribution us form cash made contributions approximately 3 million 3 million 520000 plan 2006 2005 2004 respectively may 25 2006 acquired outstanding stock stewart stevenson see note 4 stewart stevenson 401k savings plan made contributions approximately 577000 stewart stevenson‘s 401k savings plan 2006 january 1 2007 stewart stevenson 401k savings plan combined plan december 9 2003 acquired simula inc simula 401k profit sharing plan provides voluntary contributions employees allows discretionary contribution us form cash made contributions approximately 81000 simula’s 401k profit sharing plan 2004 october 25 2004 simula’s 401k profit sharing plan combined plan november 18 2004 acquired specialty defense specialty plastics products inc affiliated companies 401k savings plan provides voluntary contributions employees allows discretionary contribution us form cash made contributions approximately 22000 13000 specialty plastics products inc affiliated companies 401k savings plan 2005 2004 respectively february 1 2005 specialty plastics products inc affiliated companies 401k savings plan combined plan december 30 2004 acquired bianchi international bianchi international 401k retirement savings plan provides voluntary contributions employees allows discretionary contribution us form cash made contributions 193000 bianchi international 401k retirement savings plan 2005 make contributions bianchi international 401k retirement savings plan 2004 january 1 2006 bianchi international 401k retirement savings plan combined plan defined benefit plans may 25 2006 acquired outstanding stock stewart stevenson see note 4 included stewart stevenson’s liabilities acquired 31 million related following 1 frozen noncontributory defined benefit pension plan covering substantially stewart stevenson’s fulltime employees 2 unfunded defined benefit supplemental executive retirement plan covering certain highly compensated employees 3 unfunded defined benefit postretirement medical benefit plan 4 unfunded defined benefit retirement plan nonemployee directors effective july 1 2003 stewart stevenson froze benefits earned defined benefit pension plans defined benefit postretirement medical plan exception small transition group december 2003 medicare prescription drug improvement modernization act 2003 ‘‘act’’ signed law act introduced prescription drug benefit medicare ‘‘medicare part d’’ well federal subsidy sponsors retiree health care benefit plans provide benefit least actuarially equivalent medicare part defined benefit postretirement medical plan amended stewart stevenson prior acquisition effective january 1 2006 prescription medication coverage discontinued participants eligible prescription drug benefits medicare primary payor armor holdings inc subsidiaries notes consolidated financial statements continued january 25 2006 formally adopted supplemental nonqualified defined benefit pension plan referred armor holdings inc executive retirement plan ‘‘serp’’ serp provides supplemental retirement benefits employees company subsidiaries employed job level senior vice president higher selected compensation committee board directors participation normal form payment normal retirement age 62 serp late retirement monthly annuity payment participant’s lifetime based 2 participant’s final average pay multiplied year service company defined serp participant receive credit preacquisition service company business acquired company subsidiaries participant may granted additional years credited service discretion compensation committee alternate forms payment including various forms annuity single sum distribution available serp reduced benefits may paid case early retirement preretirement death early retirement serp earlier attaining age 60 ii attaining age 55 completing 10 years service company participant eligible deferred vested benefit upon attaining ten years credited service preretirement death benefit payable vested participant dies retirement acquired simula’s noncontributory defined benefit pension plan ‘‘pension plan’’ employees december 9 2003 pension plan originally adopted november 1 1980 contributions made pension plan based upon actuarially determined amounts effective july 1 1999 simula froze plan new participants effective december 8 2003 prior acquisition pension plan simula froze pension plan future service participants elected payout supplemental retirement plan simula representing 1 million net amount recognized february 25 2004 following tables include pension benefits information noncontributory defined benefit pension plans postretirement medical plan discussed funded status amounts recognized balance sheet december 31 2006 2005 defined benefit plans follows armor holdings inc subsidiaries notes consolidated financial statements continued reconciliation projected benefit obligation follows reconciliation fair value plan assets follows net periodic pension cost includes following net periodic pension cost postretirement benefit plan made 104000 interest cost 2006 fiscal years ended 2005 2004 net periodic pension costs postretirement benefit plan expect recognize components net periodic benefit gains accumulated comprehensive income 979000 281000 related prior service costs actuarial gains respectively 2007 armor holdings inc subsidiaries notes consolidated financial statements continued amounts recognized consolidated balance sheets consist following weightedaverage asset allocations asset category follows postretirement benefit plan currently unfunded investment strategy invest pension plan’s assets diversified portfolio domestic international equity fixed income cash equivalents provide longterm growth plan assets strategy resulting allocation pension plan assets selection independent investment managers reviewed periodically expect contribute approximately 7 million 210000 pension benefit plans postretirement benefit plan respectively 2007 assumed healthcare cost trend rate used calculate company’s obligations cost postretirement medical plan annual rate increase approximately 10 preage 65 covered healthcare benefits eventually gradually decreasing 5 2016 remaining level thereafter based assumption rate healthcare cost increases would level eventually approximate overall growth gross domestic product one percentage point change healthcare cost trend rate assumption future year would following effects armor holdings inc subsidiaries notes consolidated financial statements continued following benefit payments reflect expected future service appropriate expected paid weighted average assumptions used determine benefit obligations weighted average assumptions used determine net periodic pension costs assumptions table reviewed december 31 2006 found relevant based current yields high quality fixed income investments maturities corresponding expected duration benefit obligations use measurement date december 31 employee benefit plans exception simula pension plan used measurement date october 31 incremental effect applying fas 158 individual line items consolidated balance sheets 20 related party transactions reimburse kanders company inc ‘‘kanders co’’ corporation controlled warren b kanders chairman board directors chief executive officer outofpocket expenses mr kanders role chief executive officer reimbursed kanders co outofpocket expenses aggregate amount 242000 259000 369000 fiscal years ended december 31 2006 2005 2004 respectively effective january 1 2003 entered transportation services agreement kanders aviation llc entity controlled mr kanders pursuant terms transportation services agreement upon request kanders aviation may sole armor holdings inc subsidiaries notes consolidated financial statements continued discretion provide us airport air transportation services via certain aircraft transportation services agreement remain effect indefinitely terminated written notice either party thereto party thereto term transportation services agreement reimburse kanders aviation services provided kanders aviation us additional expenses incurred kanders aviation connection air transportation services reimbursed kanders aviation 332000 expenses fiscal year ended december 31 2004 services provided us agreement 2006 2005 related expense fiscal years ended december 31 2006 2005 21 operating leases party certain real estate equipment vehicle leases several leases include options renewal escalation clauses cases management expects normal course business leases renewed replaced leases approximate total future minimum annual lease payments noncancelable leases follows incurred rent expense approximately 9 million 8 million 5 million years ended december 31 2006 2005 2004 respectively 22 guarantor nonguarantor financial statements august 12 2003 sold 150 million 825 notes private placements pursuant rule 144a regulation 825 notes uncollateralized obligations rank junior right payment existing future senior debt october 29 2004 completed placement 300 million aggregate principal amount 2 convertible notes november 5 2004 goldman sachs co exercised option purchase additional 45 million principal amount 2 convertible notes 825 notes 2 convertible notes fully unconditionally guaranteed jointly severally senior subordinated uncollateralized basis domestic subsidiaries subsidiary guarantors direct indirect 100 owned subsidiary parent following consolidating financial information presents consolidating balance sheets december 31 2006 december 31 2005 related consolidating statements operations year ended december 31 2006 2005 2004 related consolidating statements cash flows years ended december 31 2006 2005 2004 • armor holdings inc parent • guarantor subsidiaries • nonguarantor subsidiaries • armor holdings inc consolidated basis information includes elimination entries necessary consolidate armor holdings inc parent guarantor nonguarantor subsidiaries armor holdings inc subsidiaries notes consolidated financial statements continued investments subsidiaries accounted parent using equity method accounting guarantor nonguarantor subsidiaries presented combined basis principal elimination entries eliminate investments subsidiaries intercompany balances transactions separate financial statements guarantor nonguarantor subsidiaries presented management believes financial statements would meaningful investors armor holdings inc subsidiaries notes consolidated financial statements continued armor holdings inc subsidiaries consolidating balance sheets armor holdings inc subsidiaries notes consolidated financial statements continued armor holdings inc subsidiaries consolidating balance sheets armor holdings inc subsidiaries notes consolidated financial statements continued armor holdings inc subsidiaries consolidating statements operations armor holdings inc subsidiaries notes consolidated financial statements continued armor holdings inc subsidiaries consolidating statements operations armor holdings inc subsidiaries notes consolidated financial statements continued armor holdings inc subsidiaries consolidating statements operations armor holdings inc subsidiaries notes consolidated financial statements continued armor holdings inc subsidiaries consolidating statements cash flows armor holdings inc subsidiaries notes consolidated financial statements continued armor holdings inc subsidiaries consolidating statements cash flows armor holdings inc subsidiaries notes consolidated financial statements continued armor holdings inc subsidiaries consolidating statements cash flows armor holdings inc subsidiaries notes consolidated financial statements continued 23 vest exchange programwarranty revision result voluntary zylon® vest exchange program relating zylon®vests recorded pretax charge 4 million 20 million years ended december 31 2006 2005 respectively 4 million charge incurred 2006 resulted higher redemption rate estimates existing zylon® vest replacement program 20 million charge incurred 2005 includes originally estimated exchange program costs inventory writeoffs liability classified accrued expenses current liabilities consolidated balance sheet costs estimated based expected cost incurred zve program physical replacement compensation qualifying vests surrendered program including administrative costs may form cash expected cost replacement products inventory writeoffs represent cost existing onhand unusable zylon® inventory charge based upon various estimates differences actual return rates program costs could result material adjustments recorded charge 24 concentration revenues approximately 795 757 653 consolidated revenues ten largest customers years ended december 31 2006 2005 2004 respectively largest customer us federal government accounted approximately 642 593 578 consolidated revenues years ended december 31 2006 2005 2004 respectively approximately 775 727 607 consolidated revenues came direct indirect us military contracts years ended december 31 2006 2005 2004 respectively aerospace defense group’s ten largest customers accounted approximately 951 983 939 segment revenues years ended december 31 2006 2005 2004 respectively aerospace defense group’s largest customer us federal government accounted approximately 776 793 871 segments revenue years ended december 31 2006 2005 2004 respectively products group’s ten largest customers accounted approximately 210 253 266 segment revenues products division years ended december 31 2006 2005 2004 respectively product division’s largest customer us federal government accounted approximately 56 90 122 segments revenue years ended december 31 2006 2005 2004 respectively mobile security division’s ten largest customers accounted approximately 394 526 436 segment revenues years ended december 31 2006 2005 2004 respectively mobile security’s largest customer accounted approximately 80 125 116 segment revenue years ended december 31 2006 2005 2004 military governmental contracts generally awarded periodic sporadic basis aerospace defense group lose fmtv contract continues september 2008 additional orders nextgeneration humvees known m115152 uparmored hmmwvs financial performance would experience material adverse effect armor holdings inc subsidiaries notes consolidated financial statements continued 25 balance sheet arrangements september 24 2004 entered offbalance sheet leasing arrangement aircraft company use upon expiration lease september 24 2009 subsidiary company option renew lease fair market value subject approval lessor buy aircraft approximately 10 million return aircraft lessor guarantee pay shortfall sales proceeds third party amount exceed 8 million annual rental expense related agreement approximately 1 million excluding leasing arrangement balance sheet arrangements 26 put option transactions account put option transactions company stock accordance statement financial accounting standards 150 ‘‘accounting certain financial instruments characteristics liabilities equity’’ ‘‘sfas 150’’ sfas 150 requires put options measured fair value recognized balance sheet liabilities fiscal 2005 sold put options various private transactions covering 35 million shares company stock 7 million premiums fiscal 2005 put options covering 25 million shares company stock expired unexercised leaving outstanding put options covering 1 million shares outstanding 28 outstanding shares december 31 2005 weighted average strike price 4000 per share february 2006 remaining outstanding put options covering 1 million shares expired unexercised accordingly recognized 710000 income net fiscal 2006 fiscal 2005 recognized fair value gains 6 million recorded income net 5 million recognized 25 million previously expired unexercised put options fair values put options company stock obtained counterparties represent estimated amount would received paid terminate put options taking account consideration received sale put options outstanding put options company stock remaining december 31 2006 27 interest expense net interest expense net comprised following 28 assets comprised following signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized armor holdings inc warren b kanders warren b kanders chairman board directors chief executive officer dated february 26 2007 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated index financial statement schedules schedule ii valuation qualifying accounts reserves schedules omitted applicable required information included elsewhere herein armor holdings inc valuation qualifying accounts thousands 2006 allowance doubtful accounts addition related acquisitions result acquisition stewart stevenson additions allowance doubtful accounts related acquisitions made 2005 2004 immaterial 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