SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 27,
1997 or
| | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______ TO _______
Commission file number 0-18863
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ARMOR HOLDINGS, INC.
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(Exact name of registrant as specified in its charter)
Delaware 59-3392443
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(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
13386 International Parkway, Jacksonville, Florida 32218
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(Address of principal executive offices) (Zip Code)
(904)741-5400
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(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a
plan confirmed by a court. Yes X No
APPLICABLE ONLY TO CORPORATE ISSUERS:
There were 16,023,740 shares of common stock, par value $.01 per share,
outstanding as of November 10, 1997.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 27, 1997 AND SEPTEMBER 28, 1996
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The accompanying unaudited condensed consolidated financial statements of Armor
Holdings, Inc. (the "Company") and its direct and indirect wholly owned
subsidiaries include all adjustments (consisting only of normal recurring
accruals and the elimination of all intercompany items and transactions) which
management considers necessary for a fair presentation of operating results as
of September 27, 1997 and for the three and nine month periods ended September
27, 1997 and September 28, 1996.
These condensed consolidated financial statements should be read in conjunction
with the financial statements included in the Company's Annual Report on Form
10-KSB for the year ended December 28, 1996, as amended.
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 27, DECEMBER 28,
1997 1996
-------------- ------------
(UNAUDITED) *
(IN THOUSANDS)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 21,239 $ 8,045
Accounts receivable (net of allowance for doubtful accounts of $1,006 and
$458) 18,484 10,309
Inventories 6,068 4,161
Prepaid expenses and other current assets 3,172 3,139
--------------- -------------
Total current assets 48,963 25,654
PROPERTY, PLANT AND EQUIPMENT, net 9,758 4,932
REORGANIZATION VALUE IN EXCESS OF AMOUNTS
ALLOCABLE TO IDENTIFIABLE ASSETS (net of accumulated
amortization of $744 and $651) 3,331 3,424
PATENTS AND TRADEMARKS (net of accumulated amortization of
$327 and $108) 3,977 4,196
GOODWILL (net of accumulated amortization of $491 and $167) 13,877 9,784
INVESTMENT IN UNCONSOLIDATED SUBSIDIARIES 265 1,268
OTHER ASSETS 216 272
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TOTAL ASSETS $ 80,387 $ 49,530
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* Condensed from audited financial statements.
See notes to condensed consolidated financial statements.
2
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(CONTINUED)
SEPTEMBER 27, DECEMBER 28,
1997 1996
-----------------------------------
(UNAUDITED) *
(IN THOUSANDS)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt and capitalized lease obligations $ 397 $ 2,423
Accounts payable, accrued expenses and other current liabilities 17,251 8,941
-------------- ---------------
Total current liabilities 17,648 11,364
MINORITY INTEREST 41 31
LONG TERM DEBT AND CAPITALIZED LEASE OBLIGATIONS,
less current portion 26 5,780
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Total liabilities 17,715 17,175
PREFERENCE SHARES - 7,480
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 5,000,000 shares
authorized; 0 shares issued and outstanding
Common stock, $.01 par value, 50,000,000 shares
authorized; 16,023,740 and 10,417,015 respectively,
issued and outstanding 160 117
Additional paid-in capital 61,352 23,322
Foreign currency translation adjustment (659) (229)
Retained earnings 3,348 1,665
Treasury stock, 186,023 shares (1,529) -
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Total stockholders' equity 62,672 24,875
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 80,387 $ 49,530
============= ============
* Condensed from audited financial statements.
See notes to condensed consolidated financial statements.
3
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 27, SEPTEMBER 28, SEPTEMBER 27, SEPTEMBER 28,
1997 1996 1997 1996
------------- ------------- ------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
REVENUES:
Products $ 7,780 $ 4,452 $ 21,951 $ 11,315
Services 14,344 5,263 32,988 5,263
----------- ---------- --------- ------------
TOTAL REVENUES 22,124 9,715 54,939 16,578
COST AND EXPENSES:
Cost of sales 16,328 7,038 40,013 11,406
Operating expenses 3,088 1,895 9,030 3,900
Depreciation and amortization 223 76 610 101
Equity in earnings of unconsolidated
subsidiary (58) (188) (622) (188)
Merger, integration and other non-recurring
charges - - 2,542 -
Interest (income) expense, net (20) 135 392 238
----------- ---------- --------- ------------
INCOME BEFORE PROVISION
FOR INCOME TAXES 2,563 759 2,974 1,121
PROVISION FOR INCOME TAXES 945 320 1,362 467
Dividends on preference shares - - 143 92
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NET INCOME 1,618 439 1,469 562
========== ========== ========= ===========
NET INCOME PER COMMON SHARE AND COMMON
EQUIVALENT SHARE $ .10 $ .05 $ .11 $ .07
========== ========== ========= ===========
WEIGHTED AVERAGE COMMON
SHARES AND COMMON
EQUIVALENT SHARES 15,940 8,607 13,837 7,929
========== ========== ========= ===========
See notes to condensed consolidated financial statements.
4
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 27, SEPTEMBER 28,
1997 1996
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(IN THOUSANDS)
OPERATING ACTIVITIES:
Net income $ 1,469 $ 562
Adjustments to reconcile net (loss) income to cash (used
in) provided by operating activities:
Depreciation and amortization 1,590 355
Foreign currency translation (430) (81)
Earnings from unconsolidated subsidiaries (622) (187)
Equity in earnings of minority owned subsidiaries - 8
Deferred income taxes - 84
Increase in accounts receivable (8,175) (1,900)
Increase in inventories (1,907) (384)
Decrease (increase) in prepaid expenses and other assets 23 (1,023)
Increase in accounts payable, accrued liabilities and other
current liabilities 8,310 1,873
Increase (decease) in minority interest 10 -
------------------ -------------------
Net cash provided (used in) by operating activities 268 (845)
INVESTING ACTIVITIES:
Capital expenditures (4,325) (554)
Dividends received from associated companies 1,625 442
Purchase of businesses net of cash acquired (5,891) -
------------------ --------------------
Net cash used in investing activities (5,444) (112)
FINANCING ACTIVITIES:
Proceeds from the issuance of common stock 36,556 1,466
Exercise of stock grants and options 202 96
Preferred stock dividends - (22)
Repurchase of preference shares (7,531 -
Net repayments under line of credit (2,051)
Net repayments of long-term debt (7,780) (30)
Net proceeds from issuance of 5% convertible subordinated notes - 10,528
------------------ -------------------
Net cash provided by financing activities 21,447 9,987
INCREASE IN CASH AND CASH EQUIVALENTS 9,030
13,194
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 8,045 273
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CASH AND CASH EQUIVALENTS, END OF PERIOD $ 21,239 $9,303
================= =================
See notes to condensed consolidated financial statements.
5
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
---------------------
The condensed consolidated financial statements include the accounts of Armor
Holdings, Inc. (the "Company") and its direct and indirect wholly-owned
subsidiaries. The financial statements have been prepared in accordance with
the instructions to Form 10-Q. All adjustments of a normal recurring nature
which, in the opinion of management, are necessary for a fair presentation of
operating results, have been included in the statements.
The financial statements should be read in conjunction with the financial
statements and notes thereto, included in the Company's Annual Report on Form
10-KSB for the year ended December 28, 1996, as amended.
2. ADOPTION OF NEW ACCOUNTING STANDARDS
------------------------------------
SFAS No. 128
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In 1997, the Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards ("SFAS") No. 128 Earnings per Share which will
require the Company to disclose Basic and Diluted earnings per share on the
face of the income statement. Basic earnings per share excludes dilution, and
is computed by dividing income available to common stockholders by the
weighted-average number of common shares outstanding for the period. The
Company will adopt SFAS 128 for the fiscal year ended 1997. Had the Company
adopted SFAS 128 for the periods presented, basic earnings per share would have
been $.11 and $.06 for the three month periods, and $.11 and $.08 for the nine
month periods ended September 27, 1997 and September 28, 1996 respectively.
SFAS No. 131
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In 1997, the Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards ("SFAS") No. 131 Disclosures about Segments of
an Enterprise and Related Information which requires that a public company
report a measure of segment profit and loss, certain specific revenue and
expense items and segment assets. The SFAS 131 also requires the Company report
descriptive information about the way that the operating segments were
determined, the products and services provided by the operating segments,
differences between measurements used in reporting segment information and
those used in the Company's general-purpose financial statements, and changes
in the measurement of segment amounts from period to period. The Company will
adopt SFAS 131 for the fiscal year ended 1997.
3. SIGNIFICANT DEVELOPMENTS
------------------------
Conversion to a Holding Company Structure - On June 12, 1997, at the annual
meeting of stockholders, the stockholders of the Company approved the creation
of a holding company structure for all of the Company's operations. As of June
16, 1997, the Company transferred all of the operating assets and
6
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(CONTINUED)
liabilities relating to its American Body Armor(TM) business to a subsidiary
and the Company became a holding company. As a result, the Company owns
directly or indirectly the outstanding capital stock of its subsidiary
corporations and no longer conducts any manufacturing operations directly.
Gorandel Trading Limited - On June 9, 1997, the Company acquired the remaining
50% of Gorandel Trading Limited ("GTL"). DSL Group Limited ("DSL"), an indirect
wholly-owned subsidiary of the Company, previously owned the other 50%. GTL
provides specialized security services throughout Russia and Central Asia. The
aggregate purchase price of the transaction was approximately $2.4 million,
consisting of $570,000 in cash paid at closing, $600,000 in cash to be paid
upon the satisfaction of certain conditions, and 115,176 shares of the
Company's common stock, $.01 par value per share (the "Common Stock") valued at
the time at $1.2 million. As part of this transaction, the Company agreed to
make a loan of $200,000 to a former stockholder of GTL, subject to certain
conditions. GTL's net revenues for 1996 were approximately $6.4 million.
DSL Group Limited - On April 16, 1997, the Company combined with DSL Group
Limited in a transaction accounted for as a pooling of interests (the "DSL
Transaction"). DSL is a leading provider of specialized security services in
high risk and volatile environments. DSL was formed on June 3, 1996 for the
purpose of acquiring DSL Holdings Limited ("DSL Holdings"), its predecessor
corporation, whose assets included an indirect 50% interest in GTL. DSL's
acquisition of DSL Holdings was completed on July 31, 1996. In connection with
the DSL Transaction, the Company issued 1,274,217 shares of Common Stock valued
at the time at $10.9 million for all of the outstanding ordinary share capital
of DSL and paid $7.5 million in cash for all of the outstanding preference
shares and accrued dividends. The Company also assumed and subsequently repaid
$6.9 million, plus interest, of DSL's outstanding credit facility. In
connection with the DSL Transaction, the Company recorded a non-recurring
charge to earnings in second quarter 1997 of approximately $2.5 million. This
charge consisted of transaction costs, principally professional fees of
approximately $1.1 million, and restructuring costs of approximately
$1.4 million incurred to consolidate the administrative and accounting
functions of DSL with those of the Company at its headquarters in Jacksonville,
Florida. The historical combined net revenues of DSL and its predecessor for
1996 were approximately $31.1 million.
A reconciliation of revenues, net income and net income per share of the
Company as previously reported and combined is as follows (in 000's, except per
share amounts):
Three Months Ended September 28, 1996 As previously
reported DSL Combined
-------------------------------------------------
Revenues $ 4,452 $ 5,263 $ 9,715
Net income $ 331 $ 108 $ 439
Net income per share $ .03 $ .02 $ .05
Weighted average shares 7,758 849 8,607
7
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(CONTINUED)
Nine Months Ended September 28, 1996 As previously
reported DSL Combined
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Revenues $ 11,315 $ 5,263 $ 16,578
Net income $ 454 $ 108 $ 562
Net income per share $ .06 $ .01 $ .07
Weighted average shares 7,646 283 7,929
Supercraft (Garments) Limited - On April 7, 1997, the Company acquired
Supercraft (Garments) Limited ("Supercraft"). Supercraft is a European
manufacturer of military apparel, high visibility garments and ballistic
resistant vests, which it distributes to law enforcement and military agencies
throughout Europe, the Middle East and Asia. The Company acquired Supercraft
for a total purchase price of approximately $2.6 million consisting of (i)
approximately $1.3 million in cash, subject to adjustments, (ii) $875,000 in
cash which was placed in escrow pending final disposition of title to certain
real property and (iii) certain additional consideration in an amount not to
exceed (pound)250,000 (approximately $410,000) based on 1997 operating results.
Supercraft's net revenues for 1996 were approximately $5.7 million.
The unaudited consolidated results of operations of the Company on a pro forma
basis (excluding restructuring costs) as if the Company had consummated its
acquisition of certain assets of the NIK Public Safety Product Line (the "NIK
Assets"), substantially all of the assets of Defense Technology Corporation of
America, a Wyoming corporation (the "DTCoA Assets"), Supercraft and GTL on
January 1, 1996, are as follows (in 000's, except per share amounts):
Nine Months Ended
September 27, 1997 September 28, 1996
------------------ ------------------
Revenues $ 57,864 $ 44,259
Net income $ 3,689 $ 2,062
Net income per share $ .27 $ .21
Weighted average shares 13,906 9,975
PUBLIC OFFERING OF COMMON STOCK
- --------------------------------
On July 25, 1997, the Company issued 4,000,000 new shares of Common Stock at
$10.125 per share through a public offering underwritten by Dillon, Read & Co.
Inc., Equitable Securities Corporation and Stephens Inc. (the "Public
Offering"). After subtracting underwriting discounts and commissions, the
Company realized net proceeds of $38,070,000, portions of which the Company
used to repay all of the outstanding indebtedness on its credit facility (the
"Credit Facility") with Barnett Bank, N.A. ("Barnett Bank"). As a result, the
Company presently has cash balances of approximately $21 million and a zero
balance outstanding on its Credit Facility.
8
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
---------------------------------------------------------------
The following is a discussion of the Company's results of operations
and analysis of financial condition for the three and nine months ended
September 27, 1997. The results of operations for the business combinations
accounted for as purchase transactions are included since their effective
acquisition dates: as of June 9, 1997 for GTL; as of April 7, 1997 for
Supercraft; as of September 30, 1996 for the DTCoA Assets; and July 1, 1996
for the NIK Assets. The results of operations for the Company have been
restated to give effect to the DSL Transaction, accounted for as a pooling
of interests, since DSL's inception on June 3, 1996.
Product and Service Businesses. Historically, the Company was
primarily a manufacturer and distributor of security products. Cost of goods
sold for the Company historically consisted of the cost of raw materials and
overhead allocated to manufacturing operations. Operating expenses for the
Company historically consisted of sales and marketing expenses and corporate
overhead at the Company's headquarters in Jacksonville.
As a result of the DSL Transaction, a significant portion of the
Company's business now involves the provision of security services. Cost of
goods sold for DSL consists principally of labor and related costs, at DSL's
various security sites. Operating expenses for DSL consist primarily of
corporate overhead at DSL's headquarters in London, Jacksonville and overhead
at DSL's various security sites.
Due to the DSL Transaction and other acquisitions in the services
sector, the Company's gross margins are not comparable with gross margins
reported in historical periods.
Fresh-Start Reporting. The Company emerged from Chapter 11 bankruptcy
reorganization on September 20, 1993. In connection with the confirmation of
its Plan of Reorganization, the Company adopted "fresh-start reporting" in
accordance with the American Institute of Certified Public Accountants
Statement of Position 90-7, "Financial Reporting by Entities in Reorganization
Under the Bankruptcy Code." Accordingly, since September 20, 1993, the
Company's financial statements have been prepared as if it were a new reporting
entity.
Revenue Recognition. The Company records product revenues at gross
amounts to be received, including amounts to be paid to agents as commissions,
at the time the product is shipped to the distributor. Although product returns
are permitted within 30 days from the date of purchase, these returns are
minimal and usually consist of minor modifications to the ordered product. The
Company records service revenue as the service is provided on a contract by
contract basis.
Foreign Currency Translation. In accordance with Statement of
Financial Accounting Standard No. 52, "Foreign Currency Translation," assets
and liabilities denominated in a foreign currency are translated into U.S.
dollars at the current rate of exchange as of the balance sheet date and
revenues and expenses are translated at the average monthly exchange rates. The
cumulative translation adjustment which represents the effect of translating
assets and liabilities of the Company's foreign operations was a loss of
approximately $659,000 as of September 27, 1997 and $229,000 for fiscal 1996.
9
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(CONTINUED)
Impact of Acquisitions. The results of operations for the three and
nine months ended September 27, 1997, reflect the results of operations of the
Company combined with DSL for the entire applicable period. However, the
results of operations for the three and nine months ended September 28, 1996,
reflect the results of operations of the Company combined with DSL as of August
1, 1996, the date DSL operations began. Additionally the results of operations
for GTL, Supercraft, Defense Technology of America, a Delaware corporation
("DTC"), the ultimate acquirer of the DTCoA Assets, and NIK Public Safety, Inc.
("NIK"), the ultimate acquirer of the NIK Assets, are reflected since their
respective acquisition dates of June 9, 1997, April 7, 1997, September 30, 1996
and July 1, 1996. Accordingly, period-to-period comparisons should be
considered in the context of the timing of the transactions.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 27, 1997 COMPARED TO NINE MONTHS
ENDED SEPTEMBER 28, 1996
- ------------------------------------------------------------
Revenues - products. Products revenues increased $10.6 million, or
94%, to $21.0 million for the nine months ended September 27, 1997 from $11.3
million for the nine months ended September 28, 1996. This increase in sales
resulted primarily from $7.3 million increase in sales generated from the DTC
and NIK operations in the nine months ended September 27, 1997, as well as
sales generated by Supercraft from the date of acquisition, April 7, 1997,
until September 27, 1997.
Revenues - services. Services revenues were $33.0 million in the nine
months ended September 27, 1997 compared to $5.3 million in the nine months
ended September 28, 1996. The increase is primarily due to only two months of
operations being reflected in the 1996 period, as DSL operations have only been
included as of August 1, 1996, as stated previously.
Cost of sales. Cost of sales increased $28.6 million, or 251%, to
$40.0 million in the nine months ended September 27, 1997 from $11.4 million in
the nine months ended September 28, 1996. The majority of the increase is due
to the combination with DSL, which had a $22.4 million impact in direct
operating costs associated with DSL revenues in the nine months ended September
27, 1997 compared to the nine months ended September 28 1996. The remaining
$6.2 million increase in cost of sales is attributed to the increased
manufacturing costs of the products business (associated with a 94% increase in
revenues). As a percentage of total revenues, cost of sales increased to 73% in
the nine months ended September 27, 1997 from 69% in the nine months ended
September 28, 1996, reflecting the higher cost of sales associated with the
security services business.
Operating expenses. Operating expenses increased $5.1 million to $9.0
million (16% of total revenues) in the nine months ended September 27, 1997
from $3.9 million (24% of total revenues) during the nine months ended
September 28, 1996. The increase in the actual dollar amount of operating
expenses between the periods was due to approximately $2.5 million related to
overhead costs associated with DSL, approximately $1.6 million related to
additional revenues generated by DTC and NIK and approximately $1.0 million
of corporate overhead costs for the development of the infrastructure of the
Company as a holding company.
Depreciation and amortization. Depreciation and amortization expense
increased to $610,000 in the nine months ended September 27, 1997 from $101,000
in the nine months ended September 28, 1996.
10
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(CONTINUED)
Of the $509,000 increase, approximately $260,000 was due to an increase in
the amortization of intangibles acquired during the second half of 1996, and
approximately $250,000 was due to an increase in the amortization of acquired
goodwill in the DSL Transaction.
Equity in earnings of unconsolidated subsidiaries. Equity in earnings
of unconsolidated subsidiaries amounted to approximately $622,000 in the nine
months ended September 27, 1997, compared to $188,000 in the nine months ended
September 28, 1996. The equity relates to DSL's original 50% investment in GTL
until June 9, 1997, the date the Company acquired the remaining 50% interest
not owned by DSL, at which point the 100% investment was consolidated into the
Company's results. The equity also relates to a 20% investment in Jardine
Securicor Gurkha Services Limited ("JSGS"), a joint venture company. The 1996
period reflects only two months of operations.
Operating income before non-recurring charges. Operating income before
non-recurring charges increased $4.5 million, or 221%, to $5.9 million in the
nine months ended September 27, 1997 from $1.4 million in the nine months ended
September 28, 1996. This increase was due primarily to the combination with
DSL and the acquisitions of Supercraft, the DTCoA Assets and the NIK Assets.
Interest expense, net. Interest expense, net increased $154,000, or
65%, to $392,000 for the nine months ended September 27, 1997 from $238,000 for
the nine months ended September 28, 1996. The increase in interest expense is
primarily due to borrowings of approximately $15.4 million in April 1997 under
the Company's Credit Facility in connection with the DSL Transaction, including
the acquisition of DSL's outstanding preference shares and the repayment of
DSL's outstanding loan balance with N.M. Rothschild & Sons Limited (the
"Rothschild Loan") at the time of the combination. Additional draws were
subsequently made on the Credit Facility, increasing the Company's balance
thereon to $18.6 million, which was repaid with proceeds realized from the
Public Offering.
Merger, integration and other non-recurring charges. Fees and expenses
associated with completing the DSL Transaction (approximately $1.1 million)
have been expensed. These expenses, in combination with certain other charges
relating to the financial and administrative restructuring and consolidation of
DSL into the Company, totaled approximately $2.5 million, or $0.13 per share,
and represent a one-time charge.
Income taxes. Income taxes totaled $1.4 million in the nine months
ended September 27, 1997, as compared to $467,000 in the nine months ended
September 28, 1996. The provision was based on the Company's U.S. federal and
state statutory rates of approximately 39% for its U.S.-based companies and a
38% blended effective tax rate for foreign operations of the Company, and was
significantly increased by certain non-recurring charges which are not tax
deductible.
Dividends on preference shares. During the nine months ended September
27, 1997, DSL incurred $143,000 in preference share dividends. These dividends
were paid out of after tax earnings. These preference shares were acquired by
the Company on April 16, 1997 in the DSL Transaction.
Net income. Net income increased $907,000, or 161%, to $1.5 million in
the nine months ended September 28, 1997 from $562,000 for the nine months
ended September 28, 1996. As noted previously, the increase is due to the
effect of acquisitions made during the period being partially offset by the
non-recurring charge incurred by the Company in the nine months ended September
27, 1997.
11
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(CONTINUED)
THIRD QUARTER 1997 COMPARED TO THIRD QUARTER 1996
- -------------------------------------------------
Revenues - products. Products revenues increased $3.3 million, or 75%,
to $7.8 million for third quarter 1997 from $4.5 million for third quarter
1996. This increase in sales resulted primarily from $3.1 million in
sales generated from the DTC and Supercraft operations in third quarter
1997.
Revenues - services. Services revenues increased $9.1 million, or
173%, to $14.3 million for third quarter 1997 from $5.2 million for
third quarter 1996. The increase is due to only two months of operations being
reflected in the 1996 period, the consolidation of GTL in the 1997 period and
internal growth of this business segment.
Cost of sales. Cost of sales increased $9.3 million, or 132%, to $16.3
million in third quarter 1997 from $7.0 million in third quarter 1996.
The majority of the increase is due to DSL which had $7.1 million increase in
direct operating costs associated with the increase in DSL revenues in
third quarter 1997. The remaining $2.2 million increase in cost of sales is
attributed to the increased manufacturing costs of the products business
(associated with a 75% increase in revenues). As a percentage of total
revenues, cost of sales increased to 74% in third quarter 1997 from 72% in
third quarter 1996, reflecting the higher cost of sales associated with the
security services business.
Operating expenses. Operating expenses increased $1.2 million to $3.1
million (14% of total revenues) in third quarter 1997 from $1.9 million
(20% of total revenues) during third quarter 1996. The increase in the
actual dollar amount of operating expenses between the periods was primarily
due to approximately $619,000 related to the increased overhead costs
associated with DSL and approximately $527,000 related to the additional
revenues generated by DTC. The decrease in operating expenses as a percentage
of total revenues reflects the impact of the increased revenues of the security
services operations in third quarter 1997.
Depreciation and amortization. Depreciation and amortization expense
increased to $223,000 in third quarter 1997 from $76,000 in third quarter
1996. Of the $147,000 increase, approximately $52,000 was due to
amortization of intangibles acquired during the second half of 1996 and the
remainder is primarily due to increased amortization of acquired goodwill in
the DSL Transaction, as well as amortization of goodwill relating to the
acquisitions of Supercraft and GTL.
Equity in earnings of unconsolidated subsidiaries. Equity in earnings
of unconsolidated subsidiaries amounted to approximately $58,000 in third
quarter 1997, compared to $188,000 in third quarter 1996. The equity
relates to DSL's original 50% investment in GTL until June 9, 1997, the date
the Company acquired the remaining 50% interest not owned by DSL, at which
point the 100% investment was consolidated into the Company's results. The
equity also relates to a 20% investment in JSGS.
12
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(CONTINUED)
Interest (income) expense, net. Interest (income) expense, net
decreased $155,000, or 115%, to $20,000 income in third quarter 1997 from
$135,000 expense for third quarter 1996. The Company incurred approximately
$134,000 in interest expense during third quarter 1997 related to the $15.4
million borrowing under the Credit Facility to acquire DSL's preference shares
and to repay DSL's outstanding balance on the Rothschild Loan at the time of
combination. In addition, the Company recognized approximately $184,000 in
interest income during third quarter 1997 related to the net proceeds
obtained from the Public Offering.
Income taxes. Income tax totaled $945,00 in third quarter 1997, as
compared to $320,000 expense in third quarter 1996. The provision is based
on the Company's U.S. federal and state statutory rates of approximately 39%
for its U.S.-based companies and a 38% blended effective tax rate for foreign
operations of the Company.
Net income. Net income increased $1.2 million, or 269%, to $1.6
million in third quarter 1997 from $439,000 for third quarter 1996.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Prior to April 30, 1996, the Company's principal source of working
capital was its credit facility with LaSalle Business Credit, Inc. ("LaSalle").
On April 30, 1996, the Company sold $11.5 million principal amount of its 5%
Convertible Subordinated Notes ("the Convertible Notes") and used a portion of
the proceeds thereof to repay all amounts outstanding under the LaSalle credit
facility. Thereafter, the Company terminated the LaSalle credit facility. In
December 1996, the holders of all of the Convertible Notes converted their
Convertible Notes into an aggregate of 2,300,000 shares of Common Stock.
On November 14, 1996, the Company entered into the Credit Facility
with Barnett Bank for a revolving credit facility of up to $10 million for
working capital purposes. The Credit Facility was amended as of March 26, 1997
to increase the revolving line of credit to $20 million. As of August 11, 1997,
the Company had no indebtedness to Barnett Bank. As of November 11, 1997 each
of the Company's U.S. subsidiaries (the "U.S. Subsidiaries"), other than
American Body Armor & Equipment, Inc. ("ABA") and U. S. Defense Systems, Inc.
("USDS"), is a guarantor of the Company's obligations under the Credit
Facility. The Credit Facility is secured by a security interest in, among other
things, inventory, accounts receivable, equipment and general intangibles of
the Company and each of the U.S. Subsidiaries. In addition, as further
collateral for the Credit Facility (i) the Company entered into a Pledge
Agreement with Barnett Bank pursuant to which the Company pledged as further
collateral for the Credit Facility, all of the issued and outstanding capital
stock of each of the U.S. Subsidiaries, other than ABA and USDS, and (ii) NIK
and DTC entered into a Collateral Assignment with Barnett Bank (the "Collateral
Assignment") pursuant to which they each granted a security interest in the
trademarks, patents and other intellectual property owned by each entity. The
Company agreed to cause any newly formed or acquired subsidiaries to guarantee
the Company's obligations under the Credit Facility.
On July 25, 1997 the Company issued 4,000,000 new shares of Common
Stock at $10.125 per share through a public offering underwritten by Dillon,
Read & Co. Inc., Equitable Securities Corporation and Stephens Inc. After
subtracting underwriting discounts and commissions, the Company realized net
13
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(CONTINUED)
proceeds of $38,070,000, of which approximately $18.6 million was used to
reduce the Company's outstanding balance on the Credit Facility to a zero
balance. The remaining net proceeds were placed in short term investments.
The Company anticipates that cash generated from the Public Offering,
operations, and borrowings under the Credit Facility will enable the Company to
meet its liquidity, working capital requirements and capital expenditure
requirements during the next 12 months. The Company, however, may require
additional financing to pursue its strategy of growth through acquisitions. If
such financing is required, there are no assurances that it will be available,
or if available, that it can be obtained on terms favorable to the Company or
on a basis that is not dilutive to stockholders.
As of December 28, 1996, the Company had working capital of $14.3
million, which reflects the net proceeds of $8.6 million (after paying down the
LaSalle credit facility to a zero balance) from the issuance of the Convertible
Notes as well as positive cash flow from operations. As of September 27, 1997,
the Company had working capital of $31.3 million, which reflects the net
proceeds (after paying down the credit facility to a zero balance) of the
public offering.
The Company's spending for its fiscal 1997 capital expenditures will
approximate $4.5 million of which the Company has already spent $4.3 million.
Such expenditures include, among other things, construction and other costs
related to the Company's new office and manufacturing facility at the
Jacksonville International Tradeport as well as upgrading the Company's
management information systems.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In November 1989, the Federal Trade Commission (the "FTC") conducted
an investigation into the accuracy of the Company's claims that body armor it
sold between 1988 and 1990 complied with testing and certification procedures
promulgated by the National Institute of Justice. On November 2, 1994, the
Company entered into a consent order voluntarily settling the FTC's charges
that the Company engaged in false advertising. Under the consent order, the
Company admitted no violations of law but agreed to establish a body armor
replacement program under which persons who had purchased body armor between
1988 and 1990 would be identified and offered the chance to buy new replacement
body armor at a reduced price. The consent order sets forth many detailed
requirements governing the conduct of the replacement program, the retention of
records and the avoidance of false or misleading advertising. Failure to comply
with the requirements could make the Company liable for civil penalties. On
January 4, 1995, the Company filed with the FTC a comprehensive compliance
report detailing the manner in which it was performing the obligations imposed
upon it by the consent order. In February 1997, the FTC asked for additional
information which the Company believes will be the FTC's final request for
information before closing the case.
On January 30, 1997, the Company commenced an action in the Supreme Court of
the State of New York, New York County, against XM Corporation, f/k/a Defense
Technology Corporation of America, a Wyoming corporation ("DTCoA"), the sole
stockholder of DTCoA and the President and Chief Executive Officer of DTCoA
(collectively, the "Defendants") claiming that the Defendants breached their
agreements
14
relating to the sale of substantially all of the assets of DTCoA
(the "DTCoA Assets") to the Company. The relief sought by the Company includes
monetary damages of approximately $515,000, plus accruals, and punitive
damages. On April 3, 1997, the Defendants filed with the court an answer and
counterclaims to the Company's affirmative defenses. Defendants have
counterclaimed for, among other things, breach of the terms of the asset
purchase agreement and the authorized distributor agreement entered into in
connection with the Company's acquisition of the DTCoA Assets. The Company
believes that the counterclaims asserted against it are without merit, and
intends to vigorously defend such counterclaims.
The Company and DTC, among other parties, have been named as defendants in a
product liability lawsuit claiming damages for wrongful death resulting from
the use by law enforcement officers of less-than-lethal products sold by DTCoA.
The Company's insurance carrier has assumed the defense of this lawsuit, and
the Company does not believe at this time that the outcome of this lawsuit will
have a material adverse effect on the Company.
In addition to the above, the Company, in the normal course of its business, is
subject to claims and litigation in the areas of product and general liability.
The Company believes that it has adequate insurance coverage for most claims
that are incurred in the normal course of business. In such cases, the effect
on the Company's financial statements is generally limited to the amount of its
insurance deductibles. Management does not believe at this time that any such
claims have a material impact on the Company's financial position, operations
and liquidity.
ITEM 6. EXHIBITS & REPORTS ON FORM 8-K
------------------------------
a. Exhibits
The following Exhibits are hereby filed as part of this
Quarterly Report on Form 10-Q:
Exhibit No. Description
- ----------- -----------
10.1 Employment Agreement between J. Lawrence Battle and the Company, dated as of
October 29, 1997.
10.2. Employment Agreement between David W. Watson and the Company, dated as of
October 29, 1997.
11.1 Statement re: computation of per share earnings.
27.1 Financial Data Schedule.
The Company filed a report on Form 8-K/A-1 on August 12, 1997
amending the Form 8-K it filed on June 24, 1997.
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ARMOR HOLDINGS, INC.
/s/ David W. Watson
---------------------------------
David W. Watson
Vice President - Chief Financial
Officer and Treasurer
Dated November 11, 1997
---------------------------
/s/ Carol T. Burke
---------------------------------
Carol T. Burke
Vice President - Finance
Dated November 11, 1997
--------------------------
16
EXHIBIT INDEX
Exhibit No. Description
- ----------- ------------
10.1 Employment Agreement between J. Lawrence Battle and the Company, dated
as of October 29, 1997.
10.2 Employment Agreement between David W. Watson and the Company, dated
as of October 29, 1997.
11.1 Statement re: computation of per share earnings.
27.1 Financial Data Schedule.