SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED June 30, 1998 , or
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[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____ TO ___.
COMMISSION FILE NUMBER 0-18863
ARMOR HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 59-3392443
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
13386 INTERNATIONAL PARKWAY
JACKSONVILLE, FLORIDA 32218
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (904) 741-5400
----------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
APPLICABLE ONLY TO REGISTRANTS 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
The number of shares outstanding of the registrant's Common Stock as
of August 14, 1998 is 16,498,168.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
THREE AND SIX MONTH PERIODS ENDED JUNE 30, 1998 AND JUNE 28, 1997
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 June 30, 1998 and for the three and six month periods ended June 30, 1998
and June 28, 1997.
These unaudited condensed consolidated financial statements should be read in
conjunction with the financial statements included in the Company's Annual
Report on Form 10-K for the year ended December 27, 1997.
2
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
JUNE 30, DECEMBER 27,
1998 1997
----------- -----------
(UNAUDITED) *
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $11,055 $19,300
Accounts receivable (net of allowance for
doubtful accounts of $1,191 and $845) 18,849 15,752
Inventories 7,559 5,731
Prepaid expenses and other current assets 2,948 1,816
----------- ----------
Total current assets 40,411 42,599
PROPERTY, PLANT AND EQUIPMENT (net of accumulated
depreciation of $2,829 and $2,517) 10,950 10,041
GOODWILL (net of accumulated amortization
of $984 and $659) 23,411 13,701
REORGANIZATION VALUE IN EXCESS
OF AMOUNTS ALLOCABLE TO
IDENTIFIABLE ASSETS (net of accumulated
amortization of $782 and $757) 3,297 3,318
PATENTS AND TRADEMARKS (net of
accumulated amortization of $548 and $403) 3,760 3,978
OTHER ASSETS 2,623 1,850
----------- ----------
TOTAL ASSETS $84,452 $75,487
=========== ==========
* Condensed from audited financial statements.
See notes to condensed consolidated financial statements.
3
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
JUNE 30, DECEMBER 27,
1998 1997
----------- ----------
(UNAUDITED) *
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt and
capitalized lease obligations $ 273 $ 190
Accounts payable, accrued expenses and other
current liabilities 13,506 10,475
---------- ----------
Total current liabilities 13,779 10,665
MINORITY INTEREST 99 213
LONG-TERM DEBT AND CAPITALIZED LEASE
OBLIGATIONS, less current portion 804 11
---------- ----------
Total liabilities 14,682 10,889
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; 16,480,739 and 16,023,740 issued and
16,210,011 and 16,023,740 outstanding 165 160
Additional paid-in capital 65,140 61,496
Foreign currency translation adjustment (358) (353)
Retained earnings 8,139 4,823
Treasury stock (3,316) (1,528)
---------- ----------
Total stockholders' equity 69,770 64,598
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $84,452 $75,487
========== ==========
* Condensed from audited financial statements.
See notes to condensed consolidated financial statements.
4
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 28, JUNE 30, JUNE 28,
1998 1997 1998 1997
---- ---- ---- ----
REVENUES:
Manufactured products $ 10,928 $ 7,748 $ 18,763 $ 14,172
Services 11,905 10,315 23,705 18,643
------------- ------------- ------------- -------------
Total Revenues 22,833 18,063 42,468 32,815
COSTS AND EXPENSES:
Cost of sales 15,826 13,229 29,427 23,684
Operating expenses 3,935 2,810 7,238 5,846
Depreciation and amortization 482 259 861 484
Equity in earnings of investees (169) (291) (324) (564)
Merger, integration and other non-recurring
charges - 2,542 - 2,542
Interest (income) expense, net (198) 342 (440) 411
------------- ------------- ------------- -------------
INCOME (LOSS) BEFORE PROVISION
(BENEFIT) FOR INCOME TAXES 2,957 (828) 5,706 412
PROVISION (BENEFIT) FOR INCOME
TAXES 1,122 (132) 2,097 417
------------- ------------- ------------- -------------
NET INCOME (LOSS) 1,835 (696) 3,609 (5)
DIVIDENDS ON PREFERENCE SHARES - - - 143
------------- ------------- ------------- -------------
NET INCOME (LOSS) APPLICABLE TO
COMMON SHAREHOLDERS $ 1,835 $ (696) $ 3,609 $ (148)
============= ============= ============= =============
BASIC EARNINGS (LOSS) PER SHARE $ 0.11 $ (0.06) $ 0.22 $ (0.01)
============= ============= ============= =============
DILUTED EARNINGS (LOSS) PER SHARE $ 0.11 $ (0.05) $ 0.21 $ (0.01)
============= ============= ============= =============
WEIGHTED AVERAGE SHARES - BASIC 16,144 11,892 16,089 11,859
============= ============= ============= =============
WEIGHTED AVERAGE SHARES - DILUTED 17,034 12,965 16,949 12,876
============= ============= ============= =============
See notes to condensed consolidated financial statements.
5
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
SIX MONTHS ENDED
---------------------------
JUNE 30, JUNE 28,
1998 1997
-------- --------
OPERATING ACTIVITIES:
Net income (loss) $ 3,609 $ (148)
Adjustments to reconcile net income (loss) to cash used in
Operating activities:
Depreciation and amortization 1,035 781
Deferred income taxes (550) (256)
Earnings from investees (324) (564)
Increase in accounts receivable (534) (4,036)
Increase in inventories (1,210) (1,452)
(Increase) decrease in prepaid expenses and other assets (1,255) 377
(Decrease) increase in accounts payable, accrued liabilities
and other current liabilities (2,935) 3,009
Decrease in minority interest (114) -
-------- --------
Net cash used in operating activities (2,278) (2,289)
-------- --------
INVESTING ACTIVITIES:
Purchase of property and equipment (1,223) (4,584)
Purchase of businesses (3,562) (3,379)
Dividends received from associated companies 116 79
-------- --------
Net cash used in investing activities (4,669) (7,884)
-------- --------
FINANCING ACTIVITIES:
Proceeds from the exercise of stock options 172 164
Net borrowings under line of credit -- 10,068
Net repayments of long-term debt (780) --
Repurchase of treasury stock (685) --
Repurchase of preference shares -- (7,480)
-------- --------
Net cash (used in) provided by financing activities (1,293) 2,752
-------- --------
Net effect of translation of foreign currencies (5) 119
NET DECREASE IN CASH AND CASH EQUIVALENTS (8,245) (7,302)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 19,300 8,045
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 11,055 $ 743
======== ========
See notes to condensed consolidated financial statements.
6
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited 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. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. 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, have been
included in the statements. Operating results for the quarter are not
necessarily indicative of the results that may be expected for the
year ending December 31, 1998.
These unaudited condensed consolidated financial statements
should be read in conjunction with the financial statements, and notes
thereto, included in the Company's Annual Report on Form 10-K for the
year ended December 27, 1997.
Beginning in fiscal 1998, the Company's fiscal year ends on
December 31 and quarters end on the last day of every third month. The
Company previously had a 52 or 53 week year ending on the Saturday
closest to the last day of December with each quarter being a 13 week
period. This change does not significantly or materially impact the
comparability of the results of operations for the period ended June
30, 1998 as compared to the period ended June 28, 1997.
2. ADOPTION OF NEW ACCOUNTING STANDARDS
SFAS No. 130
In June 1997, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards ("SFAS")
No. 130, "Reporting Comprehensive Income." Comprehensive income
includes net income and several other items that current accounting
standards require to be recognized outside of net income. SFAS No. 130
is effective for fiscal years beginning after December 15, 1997, and
the Company has adopted the standard for its fiscal year beginning
December 28, 1997. During the six months ended June 30, 1998 and June
28, 1997, total comprehensive income (loss) amounted to $3,614,000 and
$(29,000) respectively, and includes unrealized gains or losses on the
Company's foreign currency translation adjustments, which prior to
adoption were reported separately in shareholders' equity.
7
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(CONTINUED)
3. SIGNIFICANT DEVELOPMENTS
Asmara Limited - On April 8, 1998 the Company acquired all of
the issued and outstanding stock of Asmara Limited, based in London,
England (hereinafter "Asmara"). Asmara provides business intelligence
and investigative due diligence services to clients on a worldwide
basis. Services include personnel investigations, due diligence, asset
tracing, and litigation intelligence. This acquisition has been
accounted for as a purchase and has a current aggregate purchase price
of (pound)1.825 million. The purchase price consists of (pound)1.575
million in cash paid at closing and 36,846 shares of unregistered
common stock valued at closing at (pound)250,000. Asmara had
liabilities of approximately (pound)300,000 at closing. Additional
purchase price could be paid for the fiscal years ending 1998, 1999
and 2000 totaling an aggregate of (pound)1.5 million. The payment of
additional purchase price is contingent upon operating performance
meeting certain agreed targets during this period. All 36,846 shares
are restricted from sale until April 8, 2001.
Pro-Tech Armored Products of Massachusetts, Inc. - On April
14, 1998 the Company acquired all of the issued and outstanding stock
of Pro-Tech Armored Products of Massachusetts, Inc. of Pittsfield,
Massachusetts (hereinafter "Pro-Tech"). Pro-Tech is a leading
manufacturer of hard armor products including ballistic shields,
bulletproof vests, visors, and other personal accessories. Pro-Tech
also manufactures protective armor products for helicopters,
automobiles, and riot control vehicles. This acquisition has been
accounted for as a purchase and has a current purchase price of
$1.6 million. The purchase price consists of $1.115 million in cash
and 42,592 shares of unregistered common stock valued at closing at
$485,000. Pro-Tech had liabilities of $1.3 million at closing.
Additional purchase price could be paid for the fiscal years ending
1998, 1999 and 2000 totaling an aggregate of $4 million, with up to
50% payable in common stock and the remainder in cash. The payment of
additional purchase price is contingent upon operating performance
meeting certain agreed targets during this period. All of the shares
and any shares issued for payment of the earn-out are restricted from
sale until April 14, 2001.
8
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(CONTINUED)
3. SIGNIFICANT DEVELOPMENTS - (CONTINUED)
CDR International Ltd. - On June 11, 1998 the Company
acquired all of the outstanding shares of CDR International Ltd.
("CDR"), a London based investigation firm with offices in London,
Charlotte, Los Angeles and Moscow. CDR provides a full range of
consulting and investigative services specializing in worldwide
intellectual property asset protection for multinational corporations
involved in the manufacturing and distribution of, among other things,
sportswear, tobacco, spirits and pharmaceuticals. Its services range
from protecting companies against counterfeiting, patent
infringements, product tampering and extortion to identifying
unethical supplier activity such as the use of child labor. CDR also
provides training services to law enforcement agencies in foreign
countries. This acquisition has been accounted for as a purchase and
has a current aggregate purchase price of (pound)1.5 million. The
purchase price consists of 210,460 shares of registered common stock
valued at closing at (pound)1.5 million. CDR had liabilities of
approximately $1.6 million at closing. Additional purchase price could
be paid for the fiscal years ending 1999, 2000 and 2001 totaling an
aggregate of (pound)6.0 million. The payment of additional purchase
price is contingent upon operating performance meeting certain agreed
targets during the period. Any additional purchase price will be paid
entirely in common stock of the Company. Of the total shares of the
Company's common stock received at Closing, 70,154 shares and 40% of
the additional consideration will be restricted from sale for a
period of three years from the date of issue, and 50% of any
additional consideration in excess of (pound)4.25 million will be
restricted from sale for between 4.5 and 6 years.
The unaudited consolidated results of operations of the
Company on a pro forma basis as if the Company had consummated each of
the above acquisitions, as well as the Supercraft (Europe) Limited
("Supercraft") and Gorandel Trading Limited ("GTL") acquisitions as
discussed in the Company's December 27, 1997 filing on Form 10-K for
its fiscal year ended December 27, 1997 and the LST acquisition as
discussed in the Company's March 31, 1998 filing on Form 10-Q, on
January 1, 1997, at the beginning of each period shown are as follows:
FOR THE SIX MONTHS ENDED
JUNE 30, 1998 JUNE 28, 1997
------------- -------------
Revenues $ 48,011 $ 36,066
Net income $ 3,346 $ 2,080
Diluted earnings per share $ 0.19 $ 0.16
Weighted average shares - diluted 17,191 13,010
9
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(CONTINUED)
4. INFORMATION CONCERNING BUSINESS SEGMENTS AND GEOGRAPHICAL SALES
The Company is a global provider of security solutions and
products to multi-national corporations and government agencies. Armor
Holdings Products manufactures law enforcement equipment, including
body armor, less-lethal munitions and anti-riot products for law
enforcement and military agencies. Armor Holdings Services provides
remote site logistics, investigative due diligence, systems
integration and physical asset, executive and intellectual property
asset protection.
The Company has invested substantial resources outside of the
United States and plans to continue to do so in the future.
Substantially all of the operations of the services segment are
conducted in emerging markets in Africa, Asia, CIS and South America.
These operations are subject to the risk of new and different legal
and regulatory requirements in local jurisdictions, tariffs and trade
barriers, potential difficulties in staffing and managing local
operations, potential imposition of restrictions on investments,
potentially adverse tax consequences, including imposition or increase
of withholding and other taxes on remittances and other payments by
subsidiaries, and local economic, political and social conditions. The
Company has obtained political risk insurance in certain countries in
which it currently conducts business.
Revenues, income from operations and total assets for each of
the Company's segments for the six months ended June 30, 1998 and June
28, 1997 were as follows:
JUNE 30, 1998 JUNE 28, 1997
------------- -------------
(IN THOUSANDS)
Revenues:
Manufactured products $ 18,763 $ 14,172
Services 23,705 18,643
------------- -------------
Total revenues $ 42,468 $ 32,815
Income from operations:
Manufactured products $ 2,958 $ 1,830
Services 2,998 1,835
------------- -------------
Total income from operations $ 5,956 $ 3,665
Total assets:
Manufactured products $ 33,137 $ 30,385
Services 40,321 24,589
Corporate 10,994 --
------------- -------------
Total assets $ 84,452 $ 54,974
10
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(CONTINUED)
4. INFORMATION CONCERNING BUSINESS SEGMENTS AND
GEOGRAPHICAL SALES (CONTINUED)
The following unaudited information with respect to sales,
operating profit and total assets in principal geographic areas for
the six months ended June 30, 1998 and June 28, 1997 is as follows:
JUNE 30, 1998 JUNE 28, 1997
------------- -------------
(IN THOUSANDS)
Sales to unaffiliated customers:
North America $ 14,322 $ 10,757
South America 9,036 6,259
Africa 8,810 12,104
Europe/Asia 10,300 3,695
--------- ---------
Total revenues $ 42,468 $ 32,815
Operating profit:
North America $ 1,999 $ 313
South America 1,393 599
Africa 1,084 1,867
Europe/Asia 1,327 506
--------- ---------
Total operating profit $ 5,803 $ 3,285
Total assets:
North America $ 41,041 $ 27,603
South America 735 311
Africa 334 919
Europe/Asia 42,342 26,141
--------- ---------
Total assets $ 84,452 $ 54,974
11
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(CONTINUED)
5. EARNINGS PER SHARE
The following is a reconciliation of the numerators and
denominators of the basic and diluted earnings per share computations
for net income:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 28, JUNE 30, JUNE 28,
1998 1997 1998 1997
-------- -------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Numerator for basic and diluted earnings
per share:
Net income $ 1,835 $ (696) $ 3,609 $ (148)
-------- -------- -------- -------
Denominator for basic earnings per share
Weighted average shares: 16,144 11,892 16,089 11,859
Effect of dilutive securities:
Effect of shares issuable under stock option
and stock grant plans, based on the
treasury stock method 890 1,073 860 1,017
-------- -------- -------- -------
Dilutive potential common shares 890 1,073 860 1,017
-------- -------- -------- -------
Denominator for diluted earnings per share-
Adjusted weighted average shares 17,034 12,965 16,949 12,876
-------- -------- -------- -------
Basic earnings per share $ 0.11 $ (0.06) $ 0.22 $ (0.01)
======== ======== ======== =======
Diluted earnings per share $ 0.11 $ (0.05) $ 0.21 $ (0.01)
======== ======== ======== =======
12
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(CONTINUED)
6. SUBSEQUENT EVENTS
Law Enforcement Division of MACE Security International, Inc.
- On July 14, 1998 the Company completed the acquisition of the Law
Enforcement Division of MACE Security International, Inc. (hereinafter
"MSI"). This acquisition includes the assets of the Federal
Laboratories division and an exclusive license to use the MACE(R)
trademark for the manufacture and sale of MACE(R) brand aerosol
defensive sprays to law enforcement markets worldwide. This
acquisition has been accounted for as a purchase and has an aggregate
purchase price of $5.2 million, including a $650,000 one-time license
fee paid in full. The purchase price was paid entirely in cash,
however the Company has retained in escrow $600,000 for six months.
The acquisition was structured as an asset purchase and the Company
only assumed those liabilities relating to the purchased assets.
Alarm Protection Services, Inc. - On July 14, 1998 the
Company completed the acquisition of all of the outstanding common
stock of Alarm Protection Services, Inc. ("APS") located in Kampala,
Uganda. APS is a fully licensed physical security and consulting
company providing alarm monitoring, physical asset and executive
protection, quick response and cash in transit capabilities. APS has
been in operation in Uganda since 1993. Since 1996, the Company has,
through its DSL Group subsidiary, managed APS pursuant to a management
agreement. This acquisition has been accounted for as a purchase and
had an aggregate purchase price of $635,000. The purchase price
consists of $435,000 in cash paid at closing and 17,429 shares of
unregistered common stock valued at closing at $200,000. APS had
liabilities of approximately $752,000 at closing. Through its USDS and
DSL Group subsidiaries, the Company has a number of contracts to
provide security services to clients in the region, including the US
Embassy and the British High Commission.
13
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 six
months ended June 30, 1998. Beginning in fiscal 1998, the Company's
fiscal year ends on December 31 and quarters end on the last day of
every third month. The Company previously had a 52 or 53 week year
ending on the Saturday closest to the last day of December with each
quarter being a 13 week period. This change does not significantly or
materially impact the comparability of the results of operations for
the period ended June 30, 1998 as compared to the period ended June
28, 1997. The results of operations for the business combinations
accounted for as purchase transactions are included since their
effective acquisition dates: as of June 11, 1998 for CDR; as of April
14, 1998 for Pro-Tech; as of April 8, 1998 for Asmara; as of January
23, 1998 for LST; as of June 9, 1997 for GTL; and as of April 7, 1997
for Supercraft. The following discussion may be understood more fully
by reference to the financial statements, notes to the financial
statements, and management's discussion and analysis contained in the
Company's Annual Report on Form 10-K for the year ended December 27,
1997, as filed with the Securities and Exchange Commission.
Manufactured Product and Services 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 and subsequent
acquisitions previously discussed, a significant portion of the
Company's business now involves the provision of remote site
logistics, investigative due diligence, systems integration, and
physical asset, executive and intellectual property asset protection.
Cost of goods sold for the services business consists principally of
labor, equipment and related costs used in the direct provision of
services. Operating expenses consist primarily of corporate overhead
at the headquarters in London and Jacksonville.
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.
Revenue Recognition. The Company records manufactured 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 in certain
circumstances 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.
14
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(CONTINUED)
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 $358,000
as of June 30, 1998 and $353,000 as of December 27, 1997.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS
ENDED JUNE 28, 1997
Revenues - manufactured products. Manufactured products
revenues increased $3.2 million, or 41%, to $10.9 million for the
three months ended June 30, 1998 from $7.7 million for the three
months ended June 28, 1997. This increase in sales resulted primarily
from the increase in sales generated from the operations of Pro-Tech
in the three months ended June 30, 1998, as well as sales growth
generated by internal operations.
Revenues - services. Services revenues increased $1.6
million, or 15%, to $11.9 million for the three months ended June 30,
1998 from $10.3 million for the three months ended June 28, 1997.
Despite the effect of the loss of revenue that related to the ceased
operations in Angola, the service revenues increased from growth of
internal operations and the acquisitions of the remaining 50% of GTL
not previously owned in June 1997 and the acquisitions of LST, Asmara
and CDR in the first half of 1998.
Cost of sales. Cost of sales increased $2.6 million, or 20%,
to $15.8 million in the three months ended June 30, 1998 from $13.2
million in the three months ended June 28, 1997. The increase in cost
of sales dollars is attributed to the revenue growth described above.
As a percentage of total revenues, cost of sales decreased to 69% in
the three months ended June 30, 1998 from 73% in the three months
ended June 28, 1997, reflecting an improvement in the margins
associated with the services business.
Operating expenses. Operating expenses increased
approximately $1.1 million to $3.9 million (17% of total revenues) in
the three months ended June 30, 1998 from $2.8 million (16% of total
revenues) during the three months ended June 28, 1997. The increase in
operating expenses as a percentage of revenues is primarily due to
acquisitions occurring in the second quarter and controlled expansion
of infrastructure to support the Company's acquisition strategy.
15
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(CONTINUED)
Depreciation and amortization. Depreciation and amortization
expense increased to $482,000 in the three months ended June 30, 1998
from $259,000 in the three months ended June 28, 1997. The $223,000
increase was primarily due to an increase in the amortization of
intangibles acquired during the second half of 1997 and the first half
of 1998.
Equity in earnings of investees. Equity in earnings of
investees amounted to approximately $169,000 in the three months ended
June 30, 1998, compared to $291,000 in the three months ended June 28,
1997. The equity in earnings 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 in earnings also
relates to a 20% investment in Jardine Securicor Gurkha Services
Limited ("JSGS"), a joint venture company.
Merger, integration and other non-recurring charges. Fees and
expenses associated with completing the DSL Transaction (approximately
$1.0 million) were expensed in the three months ended June 28, 1997.
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 in the three months ended June 28, 1997, and represent a
one-time charge.
Interest (income) expense, net. Interest (income) expense,
net increased $540,000, or 158%, to interest income of $198,000 for
the three months ended June 30, 1998 from interest expense of $342,000
for the three months ended June 28, 1997. The Company recognized
interest income for the three months ended June 30, 1998 on the
remaining net proceeds from the public offering in July 1997. Those
proceeds were used to repay all debt that was outstanding as of June
28, 1997.
Income (loss) before provision (benefit) for income taxes.
Income (loss) before provision (benefit) for income taxes increased
$3.8 million, or 457%, to income of $3.0 million in the second quarter
of 1998 from a loss of $828,000 in the second quarter of 1997. Income
(loss) before provision (benefit) for income taxes before
non-recurring charges increased $1.3 million, or 73%, to $3.0 million
in the second quarter of 1998 from $1.7 million in the second quarter
of 1997. The increase is primarily due to the internal growth of the
business as well as the successful integration of the acquisitions
consummated during 1997 and the first half of 1998.
Provision (Benefit) for Income taxes. Provision (benefit) for
income taxes totaled a provision of $1.1 million in the three months
ended June 30, 1998, as compared to a benefit of $132,000 in the three
months ended June 28, 1997. The provision and benefit were based on
the Company's U.S. federal and state statutory rates of approximately
39% for its U.S.-based companies and a 37% blended effective tax rate
for foreign operations of the Company. The benefit in the three months
ended June 30, 1997 was due to the loss from operations as a result of
the merger, integration and other non-reusing charges, some of which
were not tax deductible. The effective tax rate for the foreign
operations is not necessarily indicative of continued tax rates due to
continually changing concentration of income in each country in which
the Company operates.
16
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(CONTINUED)
Net income (loss) applicable to common shareholders. Net
income (loss) applicable to common shareholders increased $2.5
million, or 364%, to net income of $1.8 million in the three months
ended June 30, 1998 from a net loss of $696,000 for the three months
ended June 28, 1997. The increase is due to internal growth and the
successful integration of the acquisitions made in the three months
ended June 30, 1998 and the non-recurring charges that were incurred
in the three months ended June 28, 1997.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED
JUNE 28, 1997
Revenues - manufactured products. Manufactured products
revenues increased $4.6 million, or 32%, to $18.7 million for the six
months ended June 30, 1998 from $14.1 million for the six months ended
June 28, 1997. This increase in sales resulted primarily from the
increase in sales generated from the operations of Supercraft and
Pro-Tech in the six months ended June 30, 1998, as well as sales
growth generated by internal operations.
Revenues - services. Services revenues increased $5.1
million, or 27%, to $23.7 million for the six months ended June 30,
1998 from $18.6 million for the six months ended June 28, 1997.
Despite the effect of the loss of revenue that related to the ceased
operations in Angola, the service revenues increased from growth of
internal operations and the acquisitions of the remaining 50% of GTL
not previously owned in June 1997 and the acquisitions of LST, Asmara
and CDR in the first half of 1998.
Cost of sales. Cost of sales increased $5.7 million, or 24%,
to $29.4 million in the six months ended June 30, 1998 from $23.7
million in the six months ended June 28, 1997. The increase in cost of
sales dollars is attributed to the revenue growth described above. As
a percentage of total revenues, cost of sales decreased to 69% in the
six months ended June 30, 1998 from 72% in the six months ended June
28, 1997, reflecting an improvement in the margins associated with the
services business.
Operating expenses. Operating expenses increased
approximately $1.4 million to $7.2 million (17% of total revenues) in
the six months ended June 30, 1998 from $5.8 million (18% of total
revenues) during the six months ended June 28, 1997. Operating
expenses as a percentage of revenues has decreased due to a number of
consolidation efficiencies in operations as the revenue stream
increases resulting from the successful integration of acquired
companies.
Depreciation and amortization. Depreciation and amortization
expense increased to $861,000 in the six months ended June 30, 1998
from $484,000 in the six months ended June 28, 1997. The $377,000
increase was primarily due to an increase in the amortization of
intangibles acquired during the second half of 1997 and the first half
of 1998.
17
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(CONTINUED)
Equity in earnings of investees. Equity in earnings of
investees amounted to approximately $324,000 in the six months ended
June 30, 1998, compared to $564,000 in the six months ended June 28,
1997. The equity in earnings 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 in earnings also
relates to a 20% investment in JSGS, a joint venture company.
Merger, integration and other non-recurring charges. Fees and
expenses associated with completing the DSL Transaction (approximately
$1.0 million) were expensed in the six months ended June 28, 1997.
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 and represent
a one-time charge.
Interest (income) expense, net. Interest (income) expense,
net increased $851,000, or 207%, to interest income of $440,000 for
the six months ended June 30, 1998 from interest expense of $411,000
for the six months ended June 28, 1997. The Company recognized
interest income for the six months ended June 30, 1998 on the
remaining net proceeds from the Public Offering in July 1997. Those
proceeds were used to repay all debt that was outstanding as of June
28, 1997.
Income (loss) before provision (benefit) for income taxes.
Income (loss) before provision (benefit) for income taxes increased
$5.3 million, or 1,285%, to $5.7 million in the first half of 1998
from $412,000 in the first half of 1997. Income (loss) before
provision (benefit) for income taxes before non-recurring charges
increased $2.7 million, or 93%, to $5.7 million in the first half of
1998 from $3.0 million in the first half of 1997. The increase is
primarily due to the internal growth of the business as well as the
successful integration of the acquisitions consummated during 1997 and
the first half of 1998.
Provision (Benefit) for Income taxes. Provision (benefit) for
income taxes totaled $2.1 million in the six months ended June 30,
1998, as compared to $417,000 in the six months ended June 28, 1997.
The provision and benefit were based on the Company's U.S. federal and
state statutory rates of approximately 36% for its U.S.-based
companies and a 37% blended effective tax rate for foreign operations
of the Company. The effective tax rate for the foreign operations is
not necessarily indicative of continued tax rates due to continually
changing concentration of income in each country in which the Company
operates.
Dividends on preference shares. During the six months ended
June 28, 1997, DSL incurred $143,000 in preference share dividends.
These dividends were paid out of after tax earnings. The Company
acquired these preference shares on April 16, 1997 in the DSL
Transaction, thus no dividends are reflected in the six months ended
June 30, 1998.
18
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(CONTINUED)
Net income (loss) applicable to common shareholders. Net
income (loss) applicable to common shareholders increased $3.7 million,
or 2,539%, to $3.6 million in the six months ended June 30, 1998 from
a loss of $148,000 for the six months ended June 28, 1997. The increase
is due to internal growth and the successful integration of the
acquisitions made in the six months ended June 30, 1998 and the
non-recurring charges that were incurred in the six months ended
June 28, 1997.
LIQUIDITY AND CAPITAL RESOURCES
On November 14, 1996, the Company entered into a revolving
working capital credit facility (the "Credit Facility") with Barnett
Bank for up to $10 million. The Credit Facility was amended as of
March 26, 1997 to increase the revolving line of credit to $20
million. In addition, the Credit Facility provides for a separate
sub-limit of $5 million under an acceptance facility. The Credit
Facility also provides for the issuance of letters of credit to the
Company. As of the end of the second quarter of 1998, the Company had
no indebtedness to Barnett Bank. The Company's indebtedness under the
Credit Facility bears interest, at the Company's option, at a rate of
either (i) Barnett Bank's prime rate less .25% or (ii) an adjusted
LIBOR rate equal to 2.25% over the LIBOR rate.
As of March 20, 1998, each of the Company's U.S. subsidiaries
(the "U.S. Subsidiaries"), other than American Body Armor and
Equipment, Inc. ("ABA") and U.S. Defense Systems, Inc., a Delaware
corporation ("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 other than ABA and USDS. 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 Public Safety,
Inc. ("NIK") and Defense Technology Corporation of America ("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.
The Credit Facility contains certain restrictive covenants,
including limitations on the encumbrance and transfer of assets, the
creation of indebtedness and the maintenance of certain levels of
tangible net worth and working capital. In addition, the Credit
Facility restricts the payment of dividends. The Credit Facility
expires on March 1, 1999, subject to extension under certain
circumstances.
19
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(CONTINUED)
On July 25, 1997, the Company issued 4,000,000 new shares of
Common Stock at $10.125 per share in a public offering, which was
underwritten by Dillon, Read & Co. Inc. (now known as SBC Warburg
Dillon Read Inc.), Equitable Securities Corporation (now known as
SunTrust Equitable Securities) and Stephens Inc. Net of underwriting
discounts and commissions, the Company realized proceeds of
$38,070,000, of which approximately $18.6 million was used to repay in
full the Company's outstanding balance on the Credit Facility. The
remaining net proceeds were invested in short-term instruments.
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 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.
The Company's spending for its fiscal 1998 capital
expenditures will be approximately $2.2 million, of which the Company
has already spent approximately $1.2 million. Such expenditures
include, among other things, vehicles and communication equipment used
in servicing DSL customers, costs of establishing local offices in new
locations, computer equipment and software, and manufacturing
machinery and equipment. In addition, the Company purchased 7 acres of
land adjacent to the Company's headquarters in Jacksonville for
approximately $575,000 to be used for future development.
As of June 30, 1998 and December 27, 1997, the Company had
working capital of $26.6 million and $31.9 million, respectively,
which primarily reflects the net proceeds (after paying down the
credit facility to a zero balance) of the public offering in July 1997
less cash used in various acquisitions.
20
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(CONTINUED)
FORWARD-LOOKING INFORMATION
Certain statements in this Form 10-Q and elsewhere (such as
in other filings by the Company with the Securities and Exchange
Commission, press releases, presentations by the Company or its
management and oral statements) may constitute "forward-looking
statements" within the meaning of the Private Securities Litigation
Reform Act of 1995. Such forward-looking statements include those
relating to future opportunities, the outlook of the Company's clients
and customers, the reception of new products and services, the success
of new initiatives and acquisitions and the likelihood of incremental
revenues offsetting expenses related to such new initiatives and
acquisitions. In addition, such forward-looking statements involve
known and unknown risks, uncertainties, and other factors which may
cause the actual results, performance or achievements of the Company
to be materially different from any future results expressed or
implied by such forward-looking statements. Such factors include: (i)
the inherent volatility of currency fluctuations; (ii) demand for the
Company's products and services; (iii) the actions of current and
potential new competitors; (iv) rapid changes in technology; (v) the
ability to realize cost reductions and operating efficiencies; (vi)
overall economic conditions; and (vii) other risks detailed from time
to time in the Company's periodic earnings releases and reports filed
with the Securities and Exchange Commission, as well as the risks and
uncertainties discussed in this Form 10-Q.
21
PART II
ITEM 1. LEGAL PROCEEDINGS
Effective May 29, 1998, AHI and its subsidiary, DTC, entered
into a Settlement and Mutual Release Agreement (the "Settlement
Agreement") with respect to the litigation (the "Litigation")
commenced by AHI and DTC against XM Corporation ("XMC"), Robert Oliver
and Sandra Oliver (collectively, the "Defendants").
The principal terms of the Settlement Agreement provide that
(i) the parties released each other from the respective claims and
counterclaims asserted in the Litigation; (ii) AHI received 270,728
shares of common stock, par value $0.01 per share, of AHI that were
held in escrow pursuant to the terms of the Asset Purchase Agreement,
dated as of August 23, 1996. The value of all such shares as of the
settlement date was approximately $3.3 million; (iii) the Defendants
agreed to a permanent injunction until September 30, 2001, binding
each of them to the terms of the restrictive covenants set forth in
the Asset Purchase Agreement; (iv) the Defendants consented to the
continuing jurisdiction of the New York State Supreme Court; and (v)
AHI paid $684,742 to the Defendants.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting of Stockholders on June
10, 1998. Of the 16,258,279 shares of Common Stock entitled to vote at
the meeting, 13,574,726 shares of Common Stock were present in person
or by proxy and entitled to vote. Such number of shares represented
approximately 83% of the Company's outstanding shares of Common Stock.
At the meeting, the Company's Stockholders approved the
election of Warren B. Kanders, Jonathan M. Spiller, Burtt R. Ehrlich,
Nicholas Sokolow, Thomas W. Strauss, Richard C. Bartlett and Alair A.
Townsend to the Company's Board of Directors. The Company's
Stockholders voted as follows in connection with such election:
NAME VOTES FOR VOTES WITHHELD
Warren B. Kanders 13,561,562 13,164
Jonathan M. Spiller 13,561,828 12,898
Burtt R. Ehrlich 13,561,828 12,898
Nicholas Sokolow 13,561,428 13,298
Thomas W. Strauss 13,561,828 12,898
Richard C. Bartlett 13,561,828 12,898
Alair A. Townsend 13,561,828 12,898
22
ITEM 5. OTHER INFORMATION
On May 11, 1998, the Board of Directors of the Company
ratified and approved the adjustment of the Company's fiscal year-end
to coincide with the calendar year-end, December 31, and each fiscal
quarter-end to coincide with the last day of the calendar quarter-end
(i.e. March 31, June 30, September 30 and December 31). Previously,
the Company had a 52 or 53 week fiscal year ending on the Saturday
closest to the last day of December, with each fiscal quarter being a
13-week period. The Company will not be required to file a report
covering the transition period.
On August 10, 1998 the Company announced that the Company's
Board of Directors approved a stock repurchase program pursuant to
which the Company is authorized, depending upon market conditions and
other factors, to repurchase up to a maximum of $10,000,000 of its
Common Stock in the open market, in privately negotiated transactions
or otherwise. The repurchase program will be effective through
December 31, 1999. Such repurchases will be made in accordance with
applicable rules and regulations, and may be discontinued at any time.
ITEM 6. EXHIBITS AND 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
27.1 Financial Data Schedule
99.1 Stock Repurchase Program Press Release
(b) Reports on Form 8-K
None.
23
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
ARMOR HOLDINGS, INC.
/s/ Jonathan M. Spiller
----------------------------------
Jonathan M. Spiller
President, Chief Executive Officer
and Director
Dated: August 14, 1998
/s/ Carol T. Burke
----------------------------------
Carol T. Burke
Vice President - Finance
Principal Financial Officer
Dated: August 14, 1998
24
EXHIBIT INDEX
The following Exhibits are filed herewith:
EXHIBIT NO. DESCRIPTION
27.1 Financial Data Schedule
99.1 Stock Repurchase Program Press Release
25