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 June 30, 1999 , or
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO .
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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.)
1400 MARSH LANDING PARKWAY
SUITE 112
JACKSONVILLE, FLORIDA 32250
(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
12, 1999 is 23,871,772.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
THREE AND SIX MONTH PERIODS ENDED JUNE 30, 1999 AND JUNE 28, 1998
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, 1999 and for the three and six month periods ended June 30, 1999 and
June 30, 1998. The historical results of operations have been restated to
reflect the combination with Alarm Systems Holding Company of Lyndhurst, New
Jersey ("ASH") and Fire Alarm Service Corporation of Tampa, Florida ("FAS") as
discussed in the notes to the condensed consolidated financial statements.
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 31, 1998.
2
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
JUNE 30, DECEMBER 31,
1999 1998
-------- --------
(UNAUDITED) *
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 22,571 7,076
Accounts receivable (net of allowance for
doubtful accounts of $1,544 and $1,752) 32,379 23,728
Inventories 14,133 9,450
Prepaid expenses and other current assets 9,335 5,999
-------- --------
Total current assets 78,418 46,253
PROPERTY, PLANT AND EQUIPMENT (net
of accumulated depreciation of $6,100 and
$5,309) 15,589 12,755
GOODWILL (net of accumulated amortization
of $2,569 and $1,577) 66,627 25,820
REORGANIZATION VALUE IN EXCESS
OF AMOUNTS ALLOCABLE TO
IDENTIFIABLE ASSETS (net of accumulated
amortization of $2,688 and $2,513) 1,387 1,562
PATENTS AND TRADEMARKS (net of
accumulated amortization of $919 and $728) 6,992 7,180
OTHER ASSETS 5,775 4,850
-------- --------
TOTAL ASSETS $174,788 $ 98,420
======== ========
* Condensed from audited financial statements and restated for the combination
with ASH and FAS.
See notes to condensed consolidated financial statements.
3
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
JUNE 30, DECEMBER 31,
1999 1998
--------- ---------
(UNAUDITED) *
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term debt $ -- $ 5,041
Current portion of long-term debt and capitalized
lease obligations 1,158 1,018
Accounts payable, accrued expenses and other
current liabilities 24,246 14,933
--------- ---------
Total current liabilities 25,404 20,992
MINORITY INTEREST 118 108
LONG-TERM DEBT AND CAPITALIZED LEASE
OBLIGATIONS, less current portion 2,800 2,941
--------- ---------
Total liabilities 28,322 24,041
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; 24,142,500 and 17,424,251 issued and
23,871,772 and 17,153,533 outstanding 241 174
Additional paid-in capital 132,689 65,538
Cumulative comprehensive income excluded from
net income, net of tax (1,458) (574)
Unearned ESOP shares (2,950) (2,951)
Retained earnings 21,260 15,508
Treasury stock (3,316) (3,316)
--------- ---------
Total stockholders' equity 146,466 74,379
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY
$ 174,788 $ 98,420
========= =========
* Condensed from audited financial statements and restated for the combination
with ASH and FAS.
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 30, JUNE 30, JUNE 30,
1999 1998 1999 1998
------- ------- ------- -------
REVENUES:
Services $15,853 $15,113 $31,623 $29,708
Products 26,063 10,928 40,088 18,763
------- ------- ------- -------
Total Revenues $41,916 $26,041 $71,711 $48,471
------- ------- ------- -------
COSTS AND EXPENSES:
Cost of sales 25,433 17,638 43,463 33,128
Operating expenses 10,342 4,940 17,595 9,033
Amortization 829 482 1,208 861
Equity in earnings of investees (26) (169) (166) (324)
Merger, integration and other non-recurring
charges 611 - 611 -
Interest (income) expense, net 49 (153) 65 (350)
------- ------- ------- -------
4,678 3,303 8,935 6,123
------- ------- ------- -------
OPERATING INCOME
Other income - - 513 -
------- ------- ------- -------
INCOME BEFORE PROVISION
FOR INCOME TAXES 4,678 3,303 9,448 6,123
------ ------ ------ ------
PROVISION FOR INCOME TAXES 1,898 1,279 3,696 2,286
------ ------ ------ ------
NET INCOME APPLICABLE TO
COMMON SHAREHOLDERS $2,780 $ 2,024 $ 5,752 $ 3,837
====== ======= ======= =======
BASIC EARNINGS PER SHARE $ 0.13 $ 0.12 $ 0.30 $ 0.23
====== ======= ======= =======
DILUTED EARNINGS PER SHARE $ 0.13 $ 0.11 $ 0.29 $ 0.21
====== ======= ======= =======
WEIGHTED AVERAGE SHARES - BASIC 20,998 17,070 19,160 17,015
====== ======= ======= =======
WEIGHTED AVERAGE SHARES - DILUTED 21,755 17,960 20,043 17,875
====== ======= ======= =======
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 30,
1999 1998
-------- --------
OPERATING ACTIVITIES:
Net income $ 5,752 $ 3,837
Adjustments to reconcile net income to cash provided by (used in)
Operating activities: Net of effects of acquisitions
Depreciation and amortization 2,149 1,065
Deferred income taxes (245) (550)
Earnings from investees (140) (324)
Increase in accounts receivable (2,093) (853)
Increase in inventories (1,073) (1,292)
Decrease (increase) in prepaid expenses and other assets 776 (1,527)
(Decrease) in accounts payable, accrued liabilities
and other current liabilities (4,186) (2,620)
Increase (decrease) in minority interest 10 (114)
-------- --------
Net cash provided by (used in) operating activities 950 (2,378)
-------- --------
INVESTING ACTIVITIES:
Purchase of property and equipment (779) (1,077)
Purchase of businesses (36,522) (3,562)
Dividends received from associated companies 140 116
-------- --------
Net cash used in investing activities (37,161) (4,523)
-------- --------
FINANCING ACTIVITIES:
Proceeds from the exercise of stock options 803 172
Proceeds from the issuance of common stock 61,661
Net repayments under line of credit (5,041) --
Net repayments of long-term debt (4,833) (932)
Repurchase of treasury stock -- (685)
-------- --------
Net cash provided by (used in) financing activities 52,590 (1,445)
-------- --------
Net effect of translation of foreign currencies (884) (5)
-------- --------
Net increase (decrease) in Cash and Cash equivalents 15,495 (8,351)
Cash and Cash Equivalents, Beginning of Period 7,076 19,470
-------- --------
Cash and Cash Equivalents, End of Period $ 22,571 $ 11,119
======== ========
See notes to condensed consolidated financial statements
7
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements of Armor
Holdings, Inc. ("AHI" or the "Company") includes its direct and indirect wholly
owned subsidiaries. These financial statements have been prepared in accordance
with the instructions to Form 10-Q, and accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
these financial statements include all adjustments (consisting only of normal
recurring accruals and the elimination of all significant intercompany items and
transactions) necessary to present fairly the financial position and results of
operations for the periods indicated. The accompanying condensed consolidated
financial statements give retroactive effect to the mergers with Alarm Systems
Holding Company of Lyndhurst, New Jersey ("ASH") and Fire Alarm Service
Corporation of Tampa, Florida ("FAS") known collectively as the "Pooled
Entities." These mergers were accounted for under the pooling-of-interests
method of accounting, and accordingly, the accompanying condensed consolidated
financial statements have been retroactively restated as if AHI, ASH, and FAS
had operated as one entity since inception. The Company's previously issued
financial statements included in the Company's 1998 Annual Report on Form 10-K
were not restated.
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 As
March 31, 1999 Reported ASH FAS Combined
- ------------------ ---------- -------- --- --------
Revenues $26,840 $1,281 $1,630 $29,751
Net income $ 2,740 $ 101 $ 131 $ 2,972
Net income per share $ 0.16 $ 0.16
Weighted average
Shares -- diluted 17,476 18,402
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 31, 1998.
Operating results for the quarter are not necessarily indicative of the results
that may be expected for the year ending December 31, 1999.
2. COMPREHENSIVE INCOME
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 three months ended 1999 and June 30, 1998, comprehensive
loss (income) of net income amounted to approximately $163,000 and (101,000),
respectively, consisting of unrealized gains or losses on the Company's foreign
currency translation adjustments, which prior to adoption were reported
separately in shareholders' equity. During the six months ended June 30, 1999
and June 30, 1998, comprehensive loss exclusive of net income amounted to
approximately $1,181,000 and $5,000 respectively, consisting of unrealized gains
or losses on the Company's foreign currency translation adjustments, which prior
to adoption were reported separately in shareholders' equity.
8
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(CONTINUED)
3. SIGNIFICANT DEVELOPMENTS
Public Offering - On May 7, 1999, the Company completed a public
offering of 6,125,000 shares of common stock at a price of $11.00 per share. The
net proceeds to the Company from the offering were approximately $61.6 million,
after all fees and expenses, and were used to pay down indebtedness on the
Company's credit facilities and for working capital. Excess proceeds will be
used to finance future acquisitions.
Safariland Ltd., Inc. - On April 12, 1999, the Company acquired all of
the outstanding stock of Safariland Ltd., Inc., a leading U.S. manufacturer of
law enforcement and military equipment based in Ontario, California. The
purchase price was approximately $45.0 million, subject to certain adjustments,
consisting of approximately $35.6 million in cash, $4 million (300,752 shares)
of the Company's common stock and repayment of approximately $5.1 million of
Safariland's indebtedness. The transaction was financed with borrowings of
approximately $39.2 million. This transaction was accounted for as a purchase.
The Parvus Company - On May 4, 1999, the Company acquired all of the
outstanding capital stock of The Parvus Company, a Washington, D.C. based
consulting firm specializing in international investigations, corporate
intelligence and security services. The purchase price was approximately $1.3
million, subject to adjustments, consisting of approximately $754,000 (64,876
shares) of the Company's common stock, the repayment of approximately $297,389
of Parvus' indebtedness and approximately $150,000 in cash. Up to an aggregate
of 54,449 additional shares may be issued to the seller in the event certain
revenue targets of Parvus are achieved. This transaction was accounted for as a
purchase.
ASH and FAS - On June 30, 1999, the Company combined with two
affiliated security systems integrators, Alarm Systems Holding Company of
Lyndhurst, New Jersey ("ASH") and Fire Alarm Service Corporation of Tampa,
Florida ("FAS") in transactions structured as pooling of interests. In exchange
for 100% of the common stock of both companies, Armor Holdings, Inc. issued a
total of 1,226,021 shares of its common stock to the shareholders of ASH and
FAS. Of these shares, 299,568 are unallocated and held by the Company. For the
year ended December 31, 1998, ASH and FAS, combined, generated total revenues of
$11.6 million and net income of $0.5 million.
Each of ASH and FAS design, install and service commercial and
industrial security systems, including access control systems, burglar and fire
alarm systems, closed circuit television and other engineered low voltage
systems in New Jersey, Florida, and South Carolina. Collectively, ASH and FAS
employ approximately 90 technicians and 135 employees in total.
9
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(CONTINUED)
3. SIGNIFICANT DEVELOPMENTS - (CONTINUED)
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 each of its 1998 acquisitions, including Low Voltage
Systems Technology, Inc., Asmara Limited, Pro-Tech Armored Products of
Massachusetts, Inc., CDR International Ltd., Law Enforcement Division of MACE
Security International, Inc. and the Alarm Protection Services, Inc. as
discussed in the Company's December 31, 1998 filing on Form 10-K for its fiscal
year ended December 31, 1998 at the beginning of each period shown are as
follows:
FOR THE SIX MONTHS ENDED
--------------------------------
JUNE 30, 1999 JUNE 30, 1998
------------- -------------
Revenues $82,881 $81,358
Net income $ 5,508 $ 4,037
Diluted earnings per share $ 0.27 $ 0.22
Weighted average shares - diluted 20,138 18,371
4. INFORMATION CONCERNING BUSINESS SEGMENTS AND GEOGRAPHICAL SALES
The Company is a leading global provider of security risk management
services to multi-national corporations and governmental agencies and products
to law enforcement personnel through two operating divisions - ArmorGroup
Services and Armor Holdings Products. The ArmorGroup Services division provides
sophisticated security planning and risk management, electronic security systems
integration, consulting and training services, as well as intellectual property
asset protection, business intelligence and investigative services. The Armor
Holdings Products division manufactures and sells a broad range of high quality
branded equipment including body armor, less than lethal munitions, duty gear
and anti-riot equipment to law enforcement and military personnel.
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 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. Governments of many developing
countries have exercised and continue to exercise substantial influence over
many aspects of the private sector. Government actions in the future could have
a material adverse effect on the Company and its operating
10
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(CONTINUED)
companies. The Company does not have political risk insurance in the countries
in which it currently conducts business. Moreover, applicable agreements
relating to the Company's interests in its operating companies are frequently
governed by foreign law. As a result, in the event of a dispute, it may be
difficult for the Company to enforce its rights. Accordingly, the Company may
have little or no recourse upon the occurrence of any of these developments.
Revenues, income from operations (before amortization, equity and
earnings and interest expense (income), net) and total assets for each of the
Company's segments for the six months ended June 30, 1999 and June 30, 1998 were
as follows:
JUNE 30, 1999 JUNE 30, 1998
------------- -------------
(IN THOUSANDS)
Revenues:
Services $ 31,623 $ 29,708
Products 40,088 18,763
--------- ---------
Total revenues $ 71,711 $ 48,471
Income from operations:
Services $ 3,616 $ 3,415
Products 8,175 3,605
Corporate expenses (1,138) (710)
--------- ---------
Total income from operations $ 10,653 $ 6,310
Total assets:
Services $ 50,932 $ 50,639
Products 100,406 33,137
Corporate 23,450 10,994
--------- ---------
Total assets $ 174,788 $ 94,770
11
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(CONTINUED)
Revenues from unaffiliated customers by geographic area consist of the
following:
JUNE 30, 1999 JUNE 30, 1998
------------- -------------
(IN THOUSANDS)
Sales to unaffiliated customers:
North America $ 40,907 $ 20,325
South America 8,162 9,036
Africa 8,893 8,810
Europe/Asia 13,749 10,300
-------- --------
Total revenues $ 71,711 $ 48,471
Income from operations:
North America $ 6,406 $ 2,506
South America 1,435 1,393
Africa 1,400 1,084
Europe/Asia 1,375
1,327
Other 37 --
-------- --------
Total income from operations $ 10,653 $ 6,310
Total assets:
North America $133,812 $ 55,194
South America 6,993 4,530
Africa 2,405 334
Europe/Asia 31,578 34,712
-------- --------
Total assets $174,788 $ 94,770
12
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 30, JUNE 30, JUNE 30,
1999 1998 1999 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Numerator for basic and diluted earnings
per share:
Net income $ 2,780 $ 2,024 $ 5,752 $ 3,837
------- ------- ------- -------
Denominator for basic earnings per share 20,998 17,070 19,160 17,015
Weighted average shares:
Effect of dilutive securities:
Effect of shares issuable under stock option
and stock grant plans, based on the
treasury stock method 757 890 883 860
------- ------- ------- -------
Dilutive potential common shares 757 890 883 860
------- ------- ------- -------
Denominator for diluted earnings per share-
Adjusted weighted average shares 21,755 17,960 20,043 17,875
Basic earnings per share $ 0.13 $ 0.12 $ 0.30 $ 0.23
======= ======= ======= =======
Diluted earnings per share $ 0.13 $ 0.11 $ 0.29 $ 0.21
======= ======= ======= =======
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,
1999. The results of the Company have been restated to give effect to the recent
combination with ASH and FAS in transactions accounted for as a
pooling-of-interests as if they had operated as one entity since inception. The
results of operations for the business combinations accounted for as purchase
transactions are included since their effective acquisition dates. 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 our Annual Report on Form 10-K for the year ended
December 31, 1998, as filed with the Securities and Exchange Commission.
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 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.
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
$1.5 million as of June 30, 1999 and $574,000 as of December 31, 1998 resulting
primarily from the decline in value of the British Pound.
14
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(CONTINUED)
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998
Service Revenues. Service revenues increased by $740,000, or 4.9%, to
$15.9 million in the three months ended June 30, 1999 compared to $15.1 million
in the three months ended June 30, 1998. This increase was primarily due to the
integration of the acquisitions of CDR and APS acquired on June 11, 1998 and
July 15, 1998 respectively. These acquisitions were accounted for as purchases
and the results of their operations are recorded only for the period the Company
owned them.
Product Revenues. Product revenues increased by $15.1 million, or 139%,
to $26.1 million in the three months ended June 30, 1999 compared to $10.9
million in the three months ended June 30, 1998. This increase was primarily due
to acquisitions of Safariland and Fed Labs whose results are included in the
three months ended June 30, 1999 but not in the three months ended June 30,
1998. In addition to the increased revenues from these two acquisitions,
internal product sales grew 15% in the second quarter of 1999 compared to the
second quarter of 1998.
Cost of sales. Cost of sales increased by $7.8 million, or 44.2%, to
$25.4 million in the three months ended June 30, 1999 compared to $17.6 million
in the three months ended June 30, 1998. This increase was primarily due to the
acquisition of Safariland and increased revenues for the three months ended June
30, 1999 compared to the three months ended June 30, 1998 net of a
reclassification to operating expenses in 1999 of $1.6 million related to the
field operations of the ArmorGroup Services division. As a percentage of total
revenues, cost of sales decreased to 60.7% of total revenues for the three
months ended June 30, 1999 from 67.7% for the three months ended June 30, 1998
reflecting a greater proportion of total revenues generated by our Armor
Holdings Products division in the period ended June 30, 1999, improvement in the
gross margin of the ArmorGroup Services Division and the reclassification
previously mentioned.
Operating expenses. Operating expenses increased by $5.4 million, or
109.3%, to $10.3 million (24.7% of total revenues) in the three months ended
June 30, 1999 compared to $4.9 million (19.0% of total revenues) in the three
months ended June 30, 1998. This increase was primarily due to the acquisition
of Safariland and the reclassification from cost of sales mentioned previously
which are reflected in the three month period ended June 30, 1999 but not in the
three month period ended June 30, 1998.
15
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(CONTINUED)
Amortization. Amortization expense increased by $347,000, or 72.0%, to
$829,000 in the three months ended June 30, 1999 compared to $482,000 in the
three months ended June 30, 1998. This increase was primarily due to additional
amortization of intangible assets acquired as a result of the Safariland and
Parvus acquisitions during the three months ended June 30, 1999 which would not
have been reflected in the quarter ended June 30, 1998.
Equity in earnings of investees. Equity in earnings of investees
decreased by $143,000 or 84.6%, to $26,000 in the three months ended June 30,
1999 compared to $169,000 in the three months ended June 30, 1998. The equity in
earnings relates to the Company's 20% investment in Jardine Securicor Gurkha
Services Limited ("JSGS").
Merger, integration and other non-recurring charges. The Company
incurred $611,000 in fees, expenses and costs associated with completing the
mergers with AHS and FAS. The Company expects to incur additional merger and
integration related expenses as a result of the recently completed acquisitions.
Interest expense (income). The company had net interest expense of
$49,000 for the three months ended June 30, 1999 compared to net interest income
of $153,000 for the three months ended June 30, 1998. This decrease in interest
income of $202,000 for the three months ended June 30, 1999 is the result of the
acquisition of Safariland. This acquisition was financed with borrowings under
the Company's line of credit.
Operating Income. Operating income increased by $1.4 million, or 41.6%,
to $4.7 million in the three months ended June 30, 1999 compared to $3.3 million
in the three months ended June 30, 1998 primarily due to factors discussed
above.
Income before provision for income taxes. Income before provision for
income taxes increased by $1.4 million, or 41.6%, to $4.7 million in the three
months ended June 30, 1999 compared to $3.3 million in the three months ended
June 30, 1998 primarily due to factors discussed above.
Provision for income taxes. Provision for income taxes totaled $1.9
million in the three months ended June 30, 1999, as compared to $1.3 million in
the three months ended June 30, 1998. The increase in the Company's effective
tax rate is a result of the goodwill generated by the Safariland acquisition
whose amortization is not tax deductible. 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.
16
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(CONTINUED)
Net income. Net income increased $756,000, or 37.6 %, to $2.8 million
in the three months ended June 30, 1999 compared to $2.0 million for the three
months ended June 30, 1998. The increase is primarily due to a combination of
acquisitions made during the period being successfully integrated, coupled with
internal growth.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
Service Revenues. Service revenues increased by $1.9 million or 6.4%,
to $31.6 million in the six months ended June 30, 1999 compared to $29.7 million
in the six months ended June 30, 1998. This increase was primarily due to the
integration of the Parvus, CDR and APS acquired on May 4, 1999, June 11, 1998
and July 15, 1998 respectively. These acquisitions were accounted for as
purchases and the results of their operations are recorded only for the period
the Company owned them.
Product Revenues. Product revenues increased by $21.3 million, or
113.7%, to $40.1 million in the six months ended June 30, 1999 compared to $18.8
million in the six months ended June 30, 1998. This increase was primarily due
to integration of the Safariland, Fed Labs and Pro-Tech acquisitions on April
12, 1999, July 15, 1998 and April 1, 1998 respectively. These acquisitions were
accounted for as purchases and the results of their operations are recorded only
for the period the Company owned them.
Cost of sales. Cost of sales increased by $10.3 million, or 31.2%, to
$43.5 million in the six months ended June 30, 1999 compared to $33.1 million in
the six months ended June 30, 1998. This increase was primarily due to increased
revenues for the six months ended June 30, 1999 compared to the six months ended
June 30, 1998 net of a reclassification to operating expenses in 1999 of $3.2
million related to the field operations of the ArmorGroup Services division. As
a percentage of total revenues, cost of sales decreased to 60.6% of total
revenues for the six months ended June 30, 1999 from 68.3% for the six months
ended June 30, 1998 reflecting a greater proportion of total revenues generated
by our Armor Holdings Products division in the period ended June 30, 1999,
improvement in the gross margin of the ArmorGroup Services Division and the
reclassification previously mentioned.
Operating expenses. Operating expenses increased by $8.6 million, or
94.8%, to $17.6 million (24.5% of total revenues) in the six months ended June
30, 1999 compared to $9.0 million (18.6% of total revenues) in the six months
ended June 30, 1998. This increase was primarily due to the acquisitions
mentioned above and to higher selling expenses associated with the greater
proportion of total revenues generated by our Armor Holdings Products division
in the period ended June 30, 1999 compared to June 30, 1998 as well as the
reclassification in 1999 of certain operating expenses related to the field
operations of ArmorGroup Services division mentioned previously.
17
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(CONTINUED)
Amortization. Amortization expense increased by $347,000, or 40.3%, to
$1.2 million in the six months ended June 30, 1999 compared to $861,000 in the
six months ended June 30, 1998. This increase was primarily due to additional
amortization of intangible assets acquired as a result of the acquisitions of
Safariland and Parvus during six month period ending June 30, 1999 which would
not have been reflected in the six month period ended June 30, 1998.
Equity in earnings of investees. Equity in earnings of investees
decreased by $158,000 or 48.8%, to $166,000 in the six months ended June 30,
1999 compared to $324,000 in the six months ended June 30, 1998. The equity in
earnings relates to the Company's 20% investment in Jardine Securicor Gurkha
Services Limited ("JSGS").
Merger, integration and other non-recurring charges. The Company
incurred $611,000 in fees, expenses and costs associated with completing the
mergers with AHS and FAS. The Company expects to incur additional merger and
integration related expenses as a result of the recently completed acquisitions.
Interest expense (income). The company had net interest expense of
$65,000 for the six months ended June 30, 1999 compared to net interest income
of $350,000 for the six months ended June 30, 1998. This decrease in interest
income of $415,000 for the six months ended June 30, 1999 is the result of the
acquisition of Safariland during the six months ended June 30, 1999. This
acquisition was financed with borrowings under the Company's line of credit.
Operating Income. Operating income increased by $2.8 million, or 45.9%,
to $8.9 million in the six months ended June 30, 1999 compared to $6.1 million
in the six months ended June 30, 1998 primarily due to factors discussed above.
Other income. Other income increased $513,000 to $513,000 for the six
months ended June 30, 1999. There was no such income for the three months ended
March 31, 1998. The other income results primarily from the gain on sale of
stock in MACE Security International acquired through warrants received as part
of the acquisition of certain assets of the Law Enforcement Division of MACE
Security International in July of 1998.
Income before provision for income taxes. Income before provision for
income for taxes increased by $3.3 million, or 54.3%, to $9.4 million in the six
months ended June 30, 1999 compared to $6.1 million in the six months ended June
30, 1998 primarily due to factors discussed above.
Provision for income taxes. Provision for income taxes totaled $3.7
million in the six months ended June 30, 1999, as compared to $2.3 million in
the six months ended June 30, 1998. The increase in the Company's effective tax
rate is a result of the goodwill generated by the Safariland acquisition whose
amortization is not tax deductible. The provision was based on the Company's
U.S. federal and state statutory income tax rates of approximately 39% for
18
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
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. Net income increased $1.9 million, or 49.9 %, to $5.8
million in the six months ended June 30, 1999 compared to $3.8 million for the
six months ended June 30, 1998. The increase is primarily due to a combination
of acquisitions made during the period being successfully integrated, coupled
with internal growth.
LIQUIDITY AND CAPITAL RESOURCES
The Company anticipates that cash generated from operations, borrowings
under the Company's credit facility and the net proceeds of its recently
completed public offering 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 1999 capital expenditures will be
approximately $2.4 million, of which the Company has already spent approximately
$779,000.
As of June 30, 1999 and December 31, 1998, the Company had working
capital of $53.0 million and $25.3 million, respectively.
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
19
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(CONTINUED)
customer order-taking, manufacturing, raw materials supply and plant process
equipment. The Company's goal to have the remedied and replaced systems
operational by the second quarter of 1999 was substantially met. 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 half of 1999, with the expectation
that the Company's business groups will have plans in place by the end of the
third 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. The
total costs expected to be incurred to fix the Year 2000 problems are estimated
at approximately $50,000. 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.
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.
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, operating efficiencies and successfully integrate acquired
companies; (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.
21
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(CONTINUED)
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
The Company does business in numerous countries, including emerging
markets in Africa, Asia and South America. The Company has invested substantial
resources outside of the United States and plans to continue to do so in the
future. The Company's international 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. Governments of many developing
countries have exercised and continue to exercise substantial influence over
many aspects of the private sector. Government actions in the future could have
a significant adverse effect on economic conditions in a developing country or
may otherwise have a material adverse effect on the Company and its operating
companies. The Company does not have political risk insurance in the countries
in which it currently conducts business. Moreover, applicable agreements
relating to the Company's interests in its operating companies are frequently
governed by foreign law. As a result, in the event of a dispute, it may be
difficult for the Company to enforce its rights. Accordingly, the Company may
have little or no recourse upon the occurrence of any of these developments.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company, as a result of its global operating and financial
activities, is exposed to changes in raw material prices, interest rates and
foreign currency exchange rates which may adversely affect its results of
operations and financial position. In seeking to minimize the risks and/or costs
associated with such activities, the Company manages exposures to changes in raw
material prices, interest rates and foreign currency exchange rates through its
regular operating and financing activities. The Company does not utilize
financial instruments for trading or other speculative purposes, nor does it
utilize leveraged financial instruments.
The Company is exposed to interest rate risk primarily through its
investments in short-term investments as the Company currently has no short- or
long-term borrowings outstanding. There is inherent roll-over risk for
marketable securities as they mature and are renewed at current market rates.
The extent of this risk is not quantifiable or predictable because of the
variability of future interest rates and business financing requirements.
However, there is no risk of loss of principal, only a risk related to potential
reduction in future interest income. Derivative instruments are not presently
used to adjust the Company's interest rate risk profile.
The majority of the Company's business is denominated in U.S. dollars.
There are costs related to the London headquarters which are denominated in the
British currency. Several other currencies are used by the Company for various
transactions, but their effect on the total business is minimal. The Company
maintains a hedge against the costs paid out in the British currency as there
are several customers who pay in to the Company in that same currency.
Therefore, any sterling payments made are paid out of a sterling bank account
thus eliminating any foreign currency exchange gains or losses.
22
PART II
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting of Stockholders on June 24, 1999.
Of the 22,938,652 shares of Common Stock entitled to vote at the meeting,
19,191,792 shares of Common Stock were present in person or by proxy and
entitled to vote. Such number of shares represented approximately 84% 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, Alair A. Townsend and Stephen B. Salzman
to the Company's Board of Directors. The Company's Stockholders voted as follows
in connection with such election:
NAME VOTES FOR VOTES AGAINST
- ---- --------- -------------
Warren B. Kanders 19,175,434 16,358
Jonathan M. Spiller 19,175,434 16,358
Burtt R. Ehrlich 19,175,434 16,358
Nicholas Sokolow 19,175,434 16,358
Thomas W. Strauss 19,175,434 16,358
Richard C. Bartlett 19,175,434 16,358
Alair A. Townsend 19,175,434 16,358
Stephen B. Salzman 19,175,434 16,358
At the meeting, the Company's Stockholders approved the 1999 Stock
Incentive Plan of the Company. There were 12,125,370 vote in favor, 3,499,086
votes against and 29,815 absentions in connection with such proposal.
At the meeting, the Company's Stockholders approved the appointment of
PricewaterhouseCoopers LLP as the company's independent auditor for the
Company's fiscal year ending December 31, 1999. There were 19,176,571 votes in
favor, 3,835 votes against and 11,386 absentions in connection with such
proposal.
23
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 following Current Reports on Form 8-K were filed during the quarter
for which this Quarterly Report on Form 10-Q is filed:
(i) Current Report on Form 8-K, dated April 26, 1999, reporting the
Company's acquisition of Safariland Ltd., Inc. on Item 2 thereof. Included in
such filing was the unaudited pro-forma consolidated statement of operations for
the year ended December 31, 1998 and the unaudited pro-forma consolidated
balance sheet as of December 31, 1998. Safariland Ltd., Inc.'s audited
consolidated financial statements as of September 30, 1998 and September 30,
1997 and for the years then ended were incorporated by reference to the
Company's Form S-3 in this Current Report on Form 8-K.
(ii) Current Report on Form 8-K, dated May 3, 1999, reporting the
Company's earnings for the quarter ended March 31, 1999 on Item 5 thereof.
24
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 16, 1999
/s/ Nicholas B. Winiewicz
-----------------------------------
Nicholas B. Winiewicz
Chief Financial Officer
Dated: August 16, 1999
25
EXHIBIT INDEX
The following Exhibits are filed herewith:
EXHIBIT NO. DESCRIPTION
- ----------- ------------
27.1 Financial Data Schedule
26