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 30, 1998, or
------------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NUMBER 0-18863
ARMOR HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 59-3392443
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
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
November 13, 1998 is 16,227,440.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 1998 AND SEPTEMBER 27, 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 significant intercompany items and
transactions) which management considers necessary for a fair presentation of
operating results as of September 30, 1998 and for the three and nine month
periods ended September 30, 1998 and September 27, 1997.
These 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)
SEPTEMBER 30, DECEMBER 27,
1998 1997
------------- -----------
(UNAUDITED) *
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 4,670 $19,300
Accounts receivable (net of allowance for
doubtful accounts of $1,489 and $845) 20,668 15,752
Inventories 9,380 5,731
Prepaid expenses and other current assets 3,659 1,816
------- -------
Total current assets 38,377 42,599
PROPERTY, PLANT AND EQUIPMENT (net
of accumulated depreciation of $3,995 and
$2,517) 12,708 10,041
GOODWILL (net of accumulated amortization
of $1,267 and $659) 26,308 13,701
REORGANIZATION VALUE IN EXCESS
OF AMOUNTS ALLOCABLE TO
IDENTIFIABLE ASSETS (net of accumulated
amortization of $795 and $757) 3,280 3,318
PATENTS AND TRADEMARKS (net of
accumulated amortization of $622 and $403) 4,602 3,978
OTHER ASSETS 2,791 1,850
------- -------
TOTAL ASSETS $88,066 $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)
SEPTEMBER 30, DECEMBER 27,
1998 1997
------------- -----------
(UNAUDITED) *
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt and capitalized
lease obligations $ 1,217 $ 190
Accounts payable, accrued expenses and other
current liabilities 13,736 10,475
-------- --------
Total current liabilities 14,953 10,665
MINORITY INTEREST 100 213
LONG-TERM DEBT AND CAPITALIZED LEASE
OBLIGATIONS, less current portion 789 11
-------- --------
Total liabilities 15,842 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; 16,498,168 and 16,023,740 issued and
16,227,440 and 16,023,740 outstanding 165 160
Additional paid-in capital 65,340 61,496
Foreign currency translation adjustment (430) (353)
Retained earnings 10,465 4,823
Treasury stock (3,316) (1,528)
-------- --------
Total stockholders' equity 72,224 64,598
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 88,066 $ 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 NINE MONTHS ENDED
---------------------------- ---------------------------
SEPTEMBER 30, SEPTEMBER 27, SEPTEMBER 30, SEPTEMBER 27,
1998 1997 1998 1997
------------ ------------ ------------ ------------
REVENUES:
Manufactured products $ 12,584 $ 7,780 $ 31,347 $ 21,951
Services 13,860 14,344 37,565 32,988
-------- -------- -------- --------
Total Revenues 26,444 22,124 68,912 54,939
-------- -------- -------- --------
COSTS AND EXPENSES:
Cost of sales 17,840 16,328 47,267 40,013
Operating expenses 4,734 3,088 11,972 9,030
Depreciation and amortization 402 223 1,263 610
Equity in earnings of investees (199) (58) (523) (622)
Merger, integration and other non-recurring
charges -- -- -- 2,542
Interest (income) expense, net (104) (20) (544) 392
-------- -------- -------- --------
INCOME BEFORE PROVISION FOR
INCOME TAXES 3,771 2,563 9,477 2,974
PROVISION FOR INCOME TAXES
1,445 945 3,542 1,362
-------- -------- -------- --------
NET INCOME 2,326 1,618 5,935 1,612
DIVIDENDS ON PREFERENCE SHARES -- -- -- 143
-------- -------- -------- --------
NET INCOME APPLICABLE TO
COMMON SHAREHOLDERS $ 2,326 $ 1,618 $ 5,935 $ 1,469
======== ======== ======== ========
BASIC EARNINGS PER SHARE $ 0.14 $ 0.10 $ 0.37 $ 0.11
======== ======== ======== ========
DILUTED EARNINGS PER SHARE $ 0.14 $ 0.10 $ 0.35 $ 0.10
======== ======== ======== ========
WEIGHTED AVERAGE SHARES -
BASIC 16,224 15,940 16,143 13,837
======== ======== ======== ========
WEIGHTED AVERAGE SHARES -
DILUTED 17,022 16,025 17,040 13,991
======== ======== ======== ========
See notes to condensed consolidated financial statements.
5
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
NINE MONTHS ENDED
-------------------------------
SEPTEMBER 30, SEPTEMBER 27,
1998 1997
------------ ------------
OPERATING ACTIVITIES:
Net income $ 5,935 $ 1,469
Adjustments to reconcile net income to cash (used in)
provided by operating activities:
Depreciation and amortization 2,017 1,590
Earnings from investees (523) (622)
Increase in accounts receivable (2,089) (8,175)
Increase in inventories (1,092) (1,907)
(Increase) decrease in prepaid expenses (1,725) 23
Increase in other assets (941) --
(Decrease) increase in accounts payable, accrued liabilities
and other current liabilities (4,941) 8,310
(Decrease) increase in minority interest (113) 10
------- --------
Net cash (used in) provided by operating activities (3,472) 698
------- --------
INVESTING ACTIVITIES:
Purchase of property and equipment (1,588) (4,255)
Purchase of businesses, net of assets acquired (9,444) (5,891)
Dividends received from associated companies 315 1,625
------- --------
Net cash used in investing activities (10,717) (8,521)
------- --------
FINANCING ACTIVITIES:
Proceeds from the exercise of stock options 172 202
Proceeds from the issuance of common stock -- 36,556
Net borrowings under line of credit 999 --
Net repayments of long-term debt (850) (7,780)
Repurchase of treasury stock (685) --
Repurchase of preference shares -- (7,531)
------- --------
Net cash (used in) provided by financing activities (364) 21,447
------- --------
Net effect of translation of foreign currencies (77) (430)
------- --------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (14,630) 13,194
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 19,300 8,045
------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 4,670 $ 21,239
======= ========
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 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
significant intercompany items and transactions) which management considers
necessary for a fair representation 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 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 fiscal quarters end on the last day of every third month. The Company
previously 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. This
change does not significantly or materially impact the comparability of the
results of operations for the period ended September 30, 1998 as compared to
the period ended September 27, 1997.
Inventories are valued at the lower of cost or market determined on
the first-in, first-out (FIFO) basis.
Inventories consist of the following:
SEPTEMBER 30, DECEMBER 27,
1998 1997
------------- ------------
Raw materials $5,475 $2,958
Work-in-process 1,724 770
Finished goods 2,181 2,003
------ ------
$9,380 $5,731
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."
7
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(CONTINUED)
2. ADOPTION OF NEW ACCOUNTING STANDARDS (CONTINUED)
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 nine months ended September 30, 1998 and September 27,
1997, total comprehensive income amounted to $5,858,000 and $1,345,000
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.
3. SIGNIFICANT DEVELOPMENTS
Alarm Protection Services, Inc. - On July 15, 1998 the Company
announced 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 approximately 900 employees and has been in operation in
Uganda since 1993. Since 1996, the Company has managed APS through a management
agreement. This acquisition has been accounted for as a purchase and has a
current aggregate purchase price of $1,215,166. The purchase price consisted of
$734,426 in cash paid at closing, 17,429 shares of unregistered common stock
valued at closing at approximately $200,000 and $280,740 in cash to be paid as
the outstanding accounts receivable of APS at the time of closing is collected.
Deferred purchase price will be paid in fiscal years 1999 and 2000 totaling
$235,000 in cash.
Law Enforcement Division of MACE Security International - On July 16,
1998 the Company announced the acquisition of certain assets of the Law
Enforcement Division of MACE Security International (hereinafter "MSI"). This
acquisition includes the assets of the Federal Laboratories ("Fed Labs")
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. MSI received approximately $4.6 million in cash,
including a $650,000 license fee. The Company is holding an additional amount
of $600,000 in escrow of which $480,000 is payable six months after closing and
$120,000 is payable twelve months after closing. In addition, the Company
received warrants to purchase 300,000 shares of MSI at a price of $1.25. The
warrants expire in three years.
The unaudited consolidated results of operations of the Company on a
pro forma basis as if the Company had consummated the above acquisitions as
well as the Supercraft (Europe) Limited ("Supercraft") and Gorandel Trading
Limited ("GTL") acquisitions as discussed in the Company's filing on Form 10-K
for its fiscal year
8
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(CONTINUED)
3. SIGNIFICANT DEVELOPMENTS (CONTINUED)
ended December 27, 1997, the Low Voltage Systems Technology, Inc. ("LST")
acquisition as discussed in the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1998, the Asmara Limited ("Asmara"), Pro-Tech Armored
Products of Massachusetts, Inc. ("Pro-Tech"), and CDR International, Ltd.
("CDR") acquisitions as discussed in the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1998, are as follows as of the beginning of
each period shown:
FOR THE NINE MONTHS ENDED
-----------------------------
SEPTEMBER 30, SEPTEMBER 27,
1998 1997
------------ ------------
Revenues $78,656 $72,193
Net income $ 5,689 $ 4,596
Diluted earnings per share $ 0.33 $ 0.32
Weighted average shares - diluted 17,214 14,232
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
Division manufactures law enforcement equipment, including body armor,
less-lethal munitions and anti-riot products for law enforcement and military
agencies. Armor Holdings Services Division 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 Company's Services Division 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
is in the process of receiving quotes from insurance carriers to provide
political risk insurance for the counties in which it operates.
9
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(CONTINUED)
4. INFORMATION CONCERNING BUSINESS SEGMENTS AND GEOGRAPHICAL SALES (CONTINUED)
Revenues, income from operations and total assets for each of the
Company's segments for the nine months ended September 30, 1998 and September
27, 1997 were as follows:
SEPTEMBER 30, 1998 SEPTEMBER 27, 1997
-------------------- --------------------
(IN THOUSANDS)
Revenues:
Manufactured products $31,347 $21,951
Services 37,565 32,988
------- -------
Total revenues $68,912 $54,939
======= =======
Income from operations:
Manufactured products $ 4,326 $ 3,859
Services 5,485 2,499
------- -------
Total income from operations $ 9,811 $ 6,358
------- -------
Total assets:
Manufactured products $38,234 $47,392
Services 43,046 32,995
Corporate 6,786 --
------- -------
Total assets $88,066 $80,387
======= =======
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 to principal
geographic areas for the nine months ended September 30, 1998 and September 27,
1997 is as follows:
SEPTEMBER 30, SEPTEMBER 27,
1998 1997
------------- -------------
(IN THOUSANDS)
Sales to unaffiliated customers:
North America $27,401 $16,428
South America 11,639 9,202
Africa 14,052 19,243
Europe/Asia 15,820 10,066
------- -------
Total revenues $68,912 $54,939
------- -------
Operating profit:
North America $ 3,843 $ 2,267
South America 1,905 822
Africa 1,940 1,675
Europe/Asia 2,123 1,132
------- -------
Total operating profit $ 9,811 $ 5,896
------- -------
Total assets:
North America $38,992 $42,689
South America 4,549 3,422
Africa 2,605 1,083
Europe/Asia 41,920 33,193
------- -------
Total assets $88,066 $80,387
======= =======
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 NINE MONTHS ENDED
----------------------------- -----------------------------
SEPTEMBER 30, SEPTEMBER 27, SEPTEMBER 30, SEPTEMBER 27,
1998 1997 1998 1997
------------- ------------- ------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Numerator for basic and diluted
earnings per share:
Net income $ 2,326 $ 1,618 $ 5,935 $ 1,469
------- ------- ------- -------
Denominator for basic earnings per
share weighted average shares: 16,224 15,940 16,143 13,837
Effect of dilutive securities:
Effect of shares issuable under stock
option and stock grant plans, based
on the treasury stock method 798 85 897 154
------- ------- ------- -------
Dilutive potential common shares 798 85 897 154
------- ------- ------- -------
Denominator for diluted earnings per
share-adjusted weighted average
shares 17,022 16,025 17,040 13,991
------- ------- ------- -------
Basic earnings per share $ 0.14 $ 0.10 $ 0.37 $ 0.11
======= ======= ======= =======
Diluted earnings per share $ 0.14 $ 0.10 $ 0.35 $ 0.10
======= ======= ======= =======
12
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 30, 1998. Beginning in fiscal 1998, the Company's fiscal year ends on
December 31 and fiscal quarters end of the last day of every third month. The
Company previously 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. This change does not significantly or materially impact the
comparability of the results of operations for the period ended September 30,
1998 as compared to the period ended September 27, 1997. The results of
operations for the business combinations accounted for as purchase transactions
are included since their effective acquisition dates. The results of operations
for the Company have been restated to give effect to the Company's acquisition
("DSL Transaction") of DSL Group Ltd. ("DSL") accounted for as a pooling of
interests, since DSL's inception on June 3, 1996. 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, FL.
As a result of acquisitions in 1997 and 1998, a significant portion of
the Company's business now involves the provision of security solutions to
multi-national corporations and government agencies. Cost of sales for the
services businesses consists principally of labor and related costs at DSL's
various security sites as well as direct costs of investigations. Operating
expenses for the services businesses consist primarily of corporate and
regional overheads including the headquarters in London, England and
Jacksonville, FL.
Due to the 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 services revenue as
the service is provided on a contract by contract basis.
13
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 $430,000 as of September 30, 1998 and $353,000 as of December 27,
1997.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED
- --------------------------------------------------------------------
SEPTEMBER 27, 1997
- ------------------
Revenues - manufactured products. Manufactured products revenues
increased $4.8 million, or 62%, to $12.6 million for the three months ended
September 30, 1998 from $7.8 million for the three months ended September 27,
1997. The acquisitions of Pro-Tech and certain assets from MSI represented
approximately 30% of the growth, with the balance coming from internal sources.
Revenues - services. Services revenues decreased $0.4 million, or 3%,
to $13.9 million for the three months ended September 30, 1998 from $14.3
million for the three months ended September 27, 1997. The prior period
included $3.4 million of revenue from the Company's Angolan operations, which
were terminated in January 1998, and $1.3 million related to a de-mining
contract. This revenue, however, has been largely replaced with significantly
more profitable sources through the acquisitions of Asmara, CDR and LST.
Cost of sales. Cost of sales increased $1.5 million, or 9%, to $17.8
million in the three months ended September 30, 1998 from $16.3 million in the
three months ended September 27, 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 67% in the three months ended September
30, 1998 from 74% in the three months ended September 27, 1997, reflecting an
improvement in the margins associated with the services business.
Operating expenses. Operating expenses increased approximately $1.6
million to $4.7 million (18% of total revenues) in the three months ended
September 30, 1998 from $3.1 million (14% of total revenues) during the three
months ended September 27, 1997. Approximately $1.1 million of this increase
was directly attributable to acquisitions. The remainder of the increase is
directly attributed to commissions on the increased Products Division revenues
and to controlled expansion of infrastructure, incurred to support the
Company's acquisition strategy.
14
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(CONTINUED)
Depreciation and amortization. Depreciation and amortization expense
increased to $402,000 in the three months ended September 30, 1998 from
$223,000 in the three months ended September 27, 1997. The $179,000 increase
was primarily due to an increase in the amortization of intangibles acquired
during 1997 and 1998.
Equity in earnings of investees. Equity in earnings of investees
amounted to approximately $199,000 in the three months ended September 30,
1998, compared to $58,000 in the three months ended September 27, 1997. The
equity in earnings relates to a 20% investment in Jardine Securicor Gurkha
Services Limited ("JSGS"), a joint venture company.
Interest (income) expense, net. Interest (income) expense, net
increased $84,000, or 420%, to interest income of $104,000 for the three months
ended September 30, 1998 from interest income of $20,000 for the three months
ended September 27, 1997. The Company recognized interest income for the three
months ended September 30, 1998 from operating cash on hand invested in
overnight investments.
Income before provision for income taxes. Income before provision for
income taxes increased $1.2 million, or 47%, to $3.8 million in the third
quarter of 1998 from $2.6 million in the third quarter of 1997. The increase is
primarily due to the internal growth of the business of the Company as well as
the successful integration of the Company's acquisitions consummated during
1997 and 1998.
Provision for income taxes. Provision for income taxes totaled $1.4
million in the three months ended September 30, 1998, as compared to $945,000
in the three months ended September 27, 1997. The provision was based on the
Company's U.S. federal and state statutory income tax rates of approximately
39% 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 Company's
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.
Net income applicable to common shareholders. Net income applicable to
common shareholders increased $708,000, or 44%, to $2.3 million in the three
months ended September 30, 1998 from $1.6 million for the three months ended
September 27, 1997. The increase is due to a combination of acquisitions made
during the period being successfully integrated, coupled with internal growth.
15
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED
- ------------------------------------------------------------------
SEPTEMBER 27, 1997
- ------------------
Revenues - manufactured products. Manufactured products revenues
increased $9.4 million, or 43%, to $31.3 million for the nine months ended
September 30, 1998 from $21.9 million for the nine months ended September 27,
1997. This increase in sales resulted from the increase in sales generated from
the operations of Supercraft, Pro-Tech and Fed Labs in the nine months ended
September 30, 1998, as well as substantial sales growth generated by internal
operations.
Revenues - services. Services revenues increased $4.6 million, or 14%,
to $37.6 million for the nine months ended September 30, 1998 from $33.0
million for the nine months ended September 27, 1997. The increase is primarily
due to the acquisitions of the remaining 50% of GTL not previously owned in
June 1997 and the acquisitions of LST, Asmara, CDR and APS in 1998.
Cost of sales. Cost of sales increased $7.3 million, or 18%, to $47.3
million in the nine months ended September 30, 1998 from $40.0 million in the
nine months ended September 27, 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 nine months ended September 30,
1998 from 73% in the nine months ended September 27, 1997, reflecting an
improvement in the margins associated with the services business.
Operating expenses. Operating expenses increased approximately $2.9
million to $11.9 million (17% of total revenues) in the nine months ended
September 30, 1998 from $9.0 million (16% of total revenues) during the nine
months ended September 27, 1997. The increase is directly attributed to
commissions on the increased Products Division revenues and to controlled
expansion of infrastructure, incurred to support the Company's acquisition
strategy.
Depreciation and amortization. Depreciation and amortization expense
increased to $1.3 million in the nine months ended September 30, 1998 from
$610,000 in the nine months ended September 27, 1997. The $653,000 increase was
primarily due to an increase in the amortization of intangibles acquired during
1997 and 1998.
16
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(CONTINUED)
Equity in earnings of investees. Equity in earnings of investees
amounted to approximately $523,000 in the nine months ended September 30, 1998,
compared to $622,000 in the nine months ended September 27, 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.
Merger, integration and other non-recurring charges. Fees and expenses
associated with completing the DSL Transaction (approximately $1.0 million)
were expensed in the nine months ended September 27, 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 $936,000, or 239%, to interest income of $544,000 for the nine months
ended September 30, 1998 from interest expense of $392,000 for the nine months
ended September 27, 1997. The Company recognized interest income for the nine
months ended September 30, 1998 on the remaining net proceeds from the
Company's public offering in July 1997. Those proceeds were used to repay all
debt that was outstanding as of July 1997.
Income before provision for income taxes. Income before provision for
income taxes increased $6.5 million, or 219%, to $9.5 million in the nine
months ended September 30, 1998 from $3.0 million in the nine months ended
September 30, 1997. Income before provision for income taxes and non-recurring
charges increased $4.0 million, or 72%, to $9.5 million in the nine months
ended September 30, 1998 from $5.5 million in the nine months ended September
30, 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 1998.
Provision for Income taxes. Provision for income taxes totaled $3.5
million in the nine months ended September 30, 1998, as compared to $1.4
million in the nine months ended September 27, 1997. The provision was based on
the Company's U.S. federal and state statutory income tax rates of
approximately 38% 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
Company's 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.
17
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(CONTINUED)
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. The Company acquired these preference
shares on April 16, 1997 in the DSL Transaction; thus no dividends are
reflected in the nine months ended September 30, 1998.
Net income applicable to common shareholders. Net income applicable to
common shareholders increased $4.4 million, or 304%, to $5.9 million in the
nine months ended September 30, 1998 from $1.5 million for the nine months
ended September 27, 1997. The increase is due to a combination of acquisitions
made during the period being successfully integrated, coupled with internal
growth as well as merger, integration and other non-recurring charges being
expensed in the nine months ended September 27, 1997.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company anticipates that cash generated from operations and
borrowings under the Company's 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 $1.6 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, FL for
approximately $575,000 to be used for future development.
As of September 30, 1998 and December 27, 1997, the Company had
working capital of $23.4 million and $31.9 million, respectively, which
primarily reflects the growth from acquisitions in 1998 funded by the net
proceeds (after paying down the credit facility to a zero balance) of the
public offering in July 1997.
18
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(CONTINUED)
YEAR 2000 COMPUTER READINESS
- ----------------------------
Many older computer software programs refer to years in terms of their
final two digits only. Such programs may interpret the year 2000 to mean the
year 1900 instead. If not corrected, those programs could cause date-related
transaction failures.
The Company developed a Y2K Initiative to address this concern. A
project team has performed a detailed assessment of all internal computer
systems and, as discussed below, is developing and implementing plans to
correct the problems. The Company expects these projects to be successfully
completed during 1999.
Year 2000 readiness could affect many of the Company's research and
development, production, financial, administrative and communication
operations. Systems critical to the Company's business which have been
identified as non-Year 2000 compliant are either being replaced or corrected
through programming modifications. In addition, a separate team is looking at
Year 2000 readiness from other aspects of the Company's business, including
customer order-taking, manufacturing, raw materials supply and plant process
equipment. The Company's goal is to have the remedied and replaced systems
operational by the first quarter of 1999 to allow time for testing and
verification. In addition to the Company's in-house efforts, the Company is
asking vendors, major customers, suppliers, communications providers and banks
whose systems failures potentially could have a significant impact on the
Company's operations to verify their Year 2000 readiness. The Company is
testing such systems where appropriate and possible.
As part of the Y2K Initiative, the Company is developing Business
Continuity Plans for those areas that are critical to the Company's business.
These Business Continuity Plans will be designed to mitigate serious
disruptions to the Company's business flow beyond the end of 1999, and will
operate independent of the external providers' Year 2000 compliance. The major
drive for contingency planning will be in the last quarter of 1998 and the
first half of 1999, with the expectation that the Company's business groups
will have plans in place by the end of the second quarter of 1999. Based on the
Company's current plans and efforts to date, the Company does not anticipate
that Year 2000 problems will have a material effect on the Company's results of
operations or financial condition.
External and internal costs specifically associated with modifying
internal use software for Year 2000 compliance are expensed as incurred. To
date, the Company has spent $5,000 on this project. Costs to be incurred for
the remainder of 1998 and 1999 to fix the Year 2000 problems are estimated at
approximately $40,000. Such costs do not include normal system upgrades and
replacements. The Company does not expect the costs relating to Year 2000
remedy to have a material effect on the results of operations or financial
condition.
19
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(CONTINUED)
YEAR 2000 COMPUTER READINESS (CONTINUED)
- ----------------------------------------
The above expectations are subject to uncertainties. For example, if
the Company is unsuccessful in identifying or fixing all Year 2000 problems in
critical operations, or if the Company is affected by the inability of
suppliers or major customers to continue operations due to such a problem,
results of operations or financial condition could be materially impacted.
The total costs that the Company incurs in connection with Year 2000
problems will be influenced by the ability to successfully identify Year 2000
system flaws, the nature and amount of programming required to fix the affected
programs, the related labor and/or consulting costs for such remediation, and
the ability of third parties with whom the Company has business relationships
to successfully address their own Year 2000 concerns. These and other
unforeseen factors could have a material adverse effect on the Company's
results of operations or financial condition.
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; (vii) political risks in the countries in which the
Company operates; and (viii) 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.
20
PART II
ITEM 5. OTHER INFORMATION
None.
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
(b) Reports on Form 8-K
The Company filed a Current Report on 8-K under Item 4, Changes in
Registrant's Certifying Accountant, on October 22, 1998.
21
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: November 13, 1998
/s/ Carol T. Burke
----------------------------------
Carol T. Burke
Vice President - Finance
Principal Financial Officer
Dated: November 13, 1998
22
EXHIBIT INDEX
The following Exhibits are filed herewith:
EXHIBIT NO. DESCRIPTION
----------- -----------
27.1 Financial Data Schedule
23