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, 1999 , 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 (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
November 12, 1999 is 23,547,438.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30, 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 September 30, 1999 and for the three and nine month periods ended September
30, 1999 and September 30, 1998.
These unaudited condensed consolidated financial statements and notes thereto
should be read in conjunction with the financial statements included in the
Company's Annual Report on Form 10-K, as Amended ("Form 10-K") for the year
ended December 31, 1998.
2
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31,
1999 1998
-------- --------
(UNAUDITED) *
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 24,054 $ 6,789
Accounts receivable (net of allowance for
doubtful accounts of $1,618 and $1,380) 33,724 21,363
Inventories (See note 2) 14,970 9,103
Prepaid expenses and other current assets 11,522 5,910
-------- --------
Total current assets 84,270 43,165
PROPERTY, PLANT AND EQUIPMENT (net
of accumulated depreciation of $5,690 and 16,391 12,173
$4,172)
GOODWILL (net of accumulated amortization 74,690 25,820
of $2,914 and $1,577)
REORGANIZATION VALUE IN EXCESS
OF AMOUNTS ALLOCABLE TO
IDENTIFIABLE ASSETS (net of accumulated 1,374 1,562
amortization $2,701 and $2,513)
PATENTS AND TRADEMARKS (net of 7,038 7,180
accumulated amortization $1,028 and $728)
OTHER ASSETS 5,643 4,453
-------- --------
$189,406 $ 94,353
======== ========
* 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 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 868 433
Accounts payable, accrued expenses and other
current liabilities 24,724 13,325
--------- ---------
Total current liabilities 25,592 18,799
MINORITY INTEREST 100 108
LONG-TERM DEBT AND CAPITALIZED LEASE
OBLIGATIONS, less current portion 2,567 344
--------- ---------
Total liabilities 28,259 19,251
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; 24,178,166 and 16,497,808 issued and
23,907,438 and 16,227,080 outstanding, respectively 244 165
Additional paid-in capital 145,288 65,408
Cumulative comprehensive income excluded from
net income, net of tax (1,164) (574)
Retained earnings 22,896 13,419
Unallocated ESOP shares (2,801)
Treasury stock (3,316) (3,316)
--------- ---------
Total stockholders' equity 161,147 75,102
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 189,406 $ 94,353
========= =========
* 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 SEPTEMBER SEPTEMBER SEPTEMBER
30, 1999 30, 1998 30, 1999 30, 1998
------- ------- --------- -------
REVENUES:
Services $16,693 $13,860 $ 42,355 $37,565
Products 28,398 12,584 68,487 31,347
------- ------- -------- -------
Total Revenues 45,091 26,444 110,842 68,912
------- ------- -------- -------
COSTS AND EXPENSES:
Cost of sales 27,241 16,342 66,726 43,922
Operating expenses 10,121 6,264 26,790 15,715
Amortization 741 370 1,776 865
Equity in earnings of investees -- (199) (166) (523)
Integration charges 643 -- 1,289 --
Interest income, net (41) (104) (91) (544)
------- ------- -------- -------
6,386 3,771 14,518 9,477
OPERATING INCOME
Other income -- -- 816 --
------- ------- -------- -------
INCOME BEFORE PROVISION
FOR INCOME TAXES 6,386 3,771 15,334 9,477
PROVISION FOR INCOME TAXES 2,484 1,445 5,857 3,542
------- ------- -------- -------
NET INCOME $ 3,902 $ 2,326 $ 9,477 $ 5,935
======= ======= ======= =======
BASIC EARNINGS PER SHARE $ 0.16 $ 0.14 $ 0.47 $ 0.37
======= ======= ======= =======
DILUTED EARNINGS PER SHARE $ 0.16 $ 0.14 $ 0.45 $ 0.35
======= ======= ======= =======
WEIGHTED AVERAGE SHARES - BASIC 23,885 16,224 20,119 16,143
======= ======= ======= =======
WEIGHTED AVERAGE SHARES - DILUTED 24,473 17,022 20,855 17,040
======= ======= ======= =======
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 30,
1999 1998
-------- --------
OPERATING ACTIVITIES:
Net income $ 9,477 $ 5,935
Adjustments to reconcile net income to cash
Provided by (used in) operating activities net
of effects Of acquisitions:
Depreciation and amortization 3,636 2,017
Earnings from investees (166) (523)
Increase in accounts receivable (2,651) (2,089)
Increase in inventories (1,841) (1,092)
Increase in prepaid expenses and other assets (4,230) (2,666)
Decrease in accounts payable, accrued liabilities
And other current liabilities (4,095) (4,941)
Decrease in minority interest (8) (113)
-------- --------
Net cash provided by (used in) operating activities 122 (3,472)
-------- --------
INVESTING ACTIVITIES:
Purchase of property and equipment (2,944) (1,588)
Purchase of businesses (31,171) (9,444)
Dividends received from associated companies 145 315
-------- --------
Net cash used in investing activities (33,970) (10,717)
-------- --------
FINANCING ACTIVITIES:
Proceeds from the exercise of stock options 842 172
Proceeds from the issuance of common stock 61,082 --
Net repayments under line of credit (5,332) 999
Repayments of long-term debt (4,889) (850)
Repurchase of treasury stock -- (685)
-------- --------
Net cash provided by (used in) financing activities 51,703 (364)
-------- --------
Net effect of translation of foreign currencies (590) (77)
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 17,265 (14,630)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 6,789 19,300
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 24,054 $ 4,670
======== ========
See notes to condensed consolidated financial statements.
6
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
Armor Holdings, Inc., a Delaware corporation, together with its
subsidiaries (collectively "AHI" or the "Company"), is a leading global provider
of security risk management services and security products to multi-national
corporations and governmental agencies through its ArmorGroup Services and Armor
Holdings Products divisions.
The accompanying condensed consolidated financial statements of the Company
include 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.
Certain reclassifications have been made to the 1998 financial statements in
order to conform to the presentation adopted for 1999.
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. INVENTORIES
The inventories are stated at the lower of cost or market using the
first-in, first-out (FIFO) method and are summarized as followings (dollars in
thousands):
SEPTEMBER 30, 1999 DECEMBER 31, 1998
------------------ -----------------
INVENTORY CATEGORY
Raw material $ 7,984 $ 4,863
Work-in-process 1,354 1,348
Finished goods 5,632 2,892
------- -------
Total inventories $14,970 $ 9,103
3. ACQUISITIONS
The Company has completed several acquisitions in the periods presented.
These transactions were accounted for as purchases and are included in the
results of the Company only for the period owned. As a result of the
acquisitions of Safariland Ltd., Inc. ("Safariland"), The Parvus Company
("Parvus"), Alarm Systems Holding Company ("ASH") and Fire Alarm Service
Corporation ("FAS"), the Company has recorded integration charges
7
related to the financial and operational integration of these acquisitions.
These expenses, consisting primarily of severance, relocation, training and
travel expenses, were incurred by the Company to integrate these acquisitions.
The unaudited consolidated results of operations of the Company on a pro
forma basis as if the Company had consummated each of the acquisitions of
Safariland, Parvus, ASH and FAS, 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 NINE MONTHS ENDED
-------------------------------
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
------------- -------------
Revenues $ 128,346 $ 123,934
Net income $ 11,868 $ 7,129
Diluted earnings per share $0.55 $0.39
Weighted average shares - diluted 21,386 18,338
4. 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 was effective for fiscal years beginning after December 15, 1997,
and the Company adopted the standard for its fiscal year beginning December 28,
1997. During the three months ended September 30, 1999 and September 30, 1998,
comprehensive income was $3.6 million and $2.1 million respectively, with the
difference from net income consisting of unrealized gains or losses on the
Company's foreign currency translation adjustments, net of tax. During the nine
months ended September 30, 1999 and September 30, 1998, comprehensive income was
$8.3 million and $5.7 million respectively.
5. 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.
8
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 South
America, CIS (former Soviet Union), Africa and Asia. 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 companies. The Company does not currently have
political risk insurance in the countries in which it currently conducts
business, but does periodically analyze the need for and cost associated with
this type of policy. 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 in earnings,
integration expenses and interest income, net) and total assets for each of the
Company's segments for the nine months ended September 30, 1999 and September
30, 1998 were as follows:
NINE MONTHS ENDED
--------------------------------------------
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
------------------ ------------------
Revenues:
Services $ 42,355 $37,565
Products 68,487 31,347
-------- -------
Total revenues $110,842 $68,912
-------- -------
Income from operations:
Services $ 4,903 $ 4,949
Products 14,339 5,556
Corporate expenses (1,884) (1,230)
-------- -------
Total income from operations $ 17,358 $ 9,275
Total assets:
Services $ 63,772 $38,234
Products 101,598 43,046
Corporate 24,036 6,786
-------- -------
Total assets $189,406 $88,066
9
Revenues from unaffiliated customers by geographic area consist of the
following:
NINE MONTHS ENDED
--------------------------------------------
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
------------------ ------------------
Sales to unaffiliated customers:
North America $ 65,365 $ 27,401
South America 12,163 11,639
Africa 13,344 14,052
Europe/Asia 19,970 15,820
-------- --------
Total revenues $110,842 $ 68,912
Income from operations:
North America $ 10,631 $ 3,665
South America 2,236 1,905
Africa 2,040 1,762
Europe/Asia 2,451 1,943
-------- --------
Total income from operations $ 17,358 $ 9,275
Total assets:
North America $145,361 $ 38,992
South America 7,798 4,549
Africa 2,419 2,605
Europe/Asia 33,828 41,920
-------- --------
Total assets $189,406 $ 88,066
6. EARNINGS PER SHARE
In accordance with Statement of Financial Accounting Standards No. 128,
"Earnings Per Share", basic earnings per share are computed by dividing net
income by the weighted average number of shares of common stock outstanding
during the year. Diluted earnings per share are computed by dividing the net
income by the weighted average number of shares of common stock and common stock
equivalents outstanding during the year. Dilutive common stock equivalents
represent shares issuable upon assumed exercise of stock options.The following
is the composition of the numerators and denominators used in computation of the
basic and diluted earnings per share:
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------ ------------------------
SEPTEMBER SEPTEMBER SEPTEMBER SEPTEMBER
30, 1999 30, 1998 30, 1999 30, 1998
------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Numerator for basic and diluted
Earnings per share:
Net income $ 3,902 $ 2,326 $ 9,477 $ 5,935
======= ======= ======= =======
Denominator for basic earnings per
share weighted average shares 23,885 16,224 20,119 16,143
Effect of shares issuable under stock
option and stock grant plans, based on
the treasury stock method 588 798 736 897
------- ------- ------- -------
Denominator for diluted earnings per
share- Adjusted weighted average
shares 24,473 17,022 20,855 17,040
======= ======= ======= =======
Basic earnings per share $ 0.16 $ 0.14 $ 0.47 $ 0.37
======= ======= ======= =======
Diluted earnings per share $ 0.16 $ 0.14 $ 0.45 $ 0.35
======= ======= ======= =======
10
7. EMPLOYEE STOCK OPTION PLAN
As part of the acquisition of ASH, the Company became the sponsor of a
leveraged Employee Stock Ownership Plan ("ESOP"). All of ASH's employees who
worked twenty or more hours per week are eligible for the plan. The ESOP
borrowed $3,533,331 for a term of seven years at an interest rate of 7% and used
the proceeds, plus additional cash of approximately $200,000, to buy 51% of AHS'
shares at market price. All of the ESOP shares were initially pledged as
collateral for the debt of the ESOP. As this debt is repaid, shares are
allocated to ESOP participants pursuant to the terms of the ESOP Documents. The
unallocated shares held by the ESOP remain pledged as collateral.
Contributions are used to repay the loan, and stock is released from
collateral as principal and interest are paid. The stock is then allocated to
participants' accounts at fair value. Unallocated ESOP shares reflected in
stockholders' equity section of the Company's balance sheet is reduced as shares
are allocated to participants' accounts. Long-term debt is reduced as payments
are made on the third-party financing.
The number of shares allocated and unallocated are as follows:
9/30/99 6/30/99
------- -------
Allocated 79,278 79,278
Unallocated 299,569 299,569
------- -------
Total 378,847 378,847
======= =======
Compensation expense is equal to the current market price of the stock
released from collateral. Compensation expense relating to the ESOP
contributions for the three or nine months ended September 30, 1999 was
$107,283. There was no such compensation expense for the three or months ended
September 30, 1998.
8. SUBSEQUENT EVENT
On October 18, 1999, the Board of Directors of Armor Holdings, Inc. (the
"Company") 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% of its Common Stock in the open market, in privately
negotiated transactions or otherwise. Such repurchases will be made in
accordance with applicable rules and regulations, and may be discontinued at any
time. The new repurchase program will replace the Company's previous repurchase
program, which was adopted in August 1998, and will be in effect until December
31, 2001. The Company's existing credit facility limits repurchases pursuant to
a stock repurchase program to $25 million.
9. LEGAL MATTERS
On January 16, 1998, ArmorGroup Services division ceased operations in the
country of Angola. The cessation of operations in Angola was dictated by that
government's decision to deport all of ArmorGroup Services' expatriate
management and supervisors. As a result of the cessation of operations in
Angola, the Company's ArmorGroup Services division is involved in various
disputes with SHRM S.A., its minority joint venture partner relating to the
Angolan business. The Company believes that the likelihood of loss related to
these disputes is possible and the maximum exposure is approximately $500,000.
SHRM has alleged that as a result of the cessation of operations, it has
suffered damages of $5 million from lost business. In March 1999, the Company
filed a claim of $16.1 million in the Commercial Court Nanterre in France
against SHRM for actual and punitive damages from SHRM's violation of its
obligations resulting from its agreement with the Company.
On September 20, 1999, the Company was notified that SHRM and SIA filed a
complaint before the chamber of the Commercial Court of Paris against the
Company, several subsidiaries of the Company, the former president of DSIA,
members of the board of DSIA, a director of the Company, and Deloitte & Touche
and Mr. Declety (both of them being the statutory auditors of DSIA) seeking to
obtain damages in an amount of $20,000,000.
Among many allegations, SHRM claims that as a result (i) of
misrepresentation in the joint venture agreement regarding the setting up of
DSIA, (ii) and of the handling of the crisis and of the matters resulting form
the crisis by DSL and the other defendants, SHRM suffered substantial damages
and lost its business in Angola. No hearing is yet scheduled, and December 8,
1999 is stipulated in the claim is the first procedural hearing for the purpose
of which is to register the name and details of the lawyers of each defendant.
11
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, 1999. 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
$1.2 million as of September 30, 1999 and $574,000 as of December 31, 1998 net
of applicable taxes of $720,000 and $77,000, respectively.
12
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1998
Service Revenues. Service revenues increased by $2.8 million, or 20.4%, to
$16.7 million in the three months ended September 30, 1999 compared to $13.9
million in the three months ended September 30, 1998. This increase was
primarily due to the inclusion of the acquisitions of ASH and FAS acquired on
June 30, 1999. 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 $15.8 million, or 125.7%,
to $28.4 million in the three months ended September 30, 1999 compared to $12.6
million in the three months ended September 30, 1998. This increase was
primarily due to acquisition of Safariland whose results are included in the
three months ended September 30, 1999 but not in the three months ended
September 30, 1998. In addition to the increased revenues from the Safariland
acquisition, products sales grew internally by 20% in the third quarter of 1999
compared to the third quarter of 1998.
Cost of sales. Cost of sales increased by $10.9 million, or 66.7%, to $27.2
million in the three months ended September 30, 1999 compared to $16.3 million
in the three months ended September 30, 1998. This increase was primarily due to
the acquisitions of Safariland, ASH and FAS and the increased revenues
associated with the inclusion of these acquisitions in the three months ended
September 30, 1999 compared to the three months ended September 30, 1998. As a
percentage of total revenues, cost of sales decreased to 60.4% of total revenues
for the three months ended September 30, 1999 from 61.8% for the three months
ended September 30, 1998 reflecting a greater proportion of total revenues
generated by our Armor Holdings Products division in the period ended September
30, 1999 and improvement in the gross margin of the ArmorGroup Services
Division.
Operating expenses. Operating expenses increased by $3.9 million, or 61.6%,
to $10.1 million (22.4% of total revenues) in the three months ended September
30, 1999 compared to $6.3 million (23.7% of total revenues) in the three months
ended September 30, 1998. This increase was primarily due to the acquisitions of
Safariland, Parvus, ASH and FAS which are reflected in the three month period
ended September 30, 1999 but not in the three month period ended September 30,
1998.
13
Amortization. Amortization expense increased by $371,000, or 100.3%, to
$741,000 in the three months ended September 30, 1999 compared to $370,000 in
the three months ended September 30, 1998. This increase was primarily due to
additional amortization of intangible assets acquired as a result of the
Safariland, Parvus, ASH and FAS acquisitions during the three months ended
September 30, 1999, which would not have been reflected in the three months
ended September 30, 1998.
Equity in earnings of investees. Equity in earnings of investees decreased
by $199,000 in the three months ended September 30, 1999 compared to the three
months ended September 30, 1998. The equity in earnings relates to the Company's
20% investment in Jardine Securicor Gurkha Services Limited ("JSGS").
Integration charges. The Company incurred $643,000 in fees, expenses and
costs associated with the integration of the Company's recent acquisitions in
the three months ended September 30, 1999. The Company did not incur such fees
in the three months ended September 30, 1998.
Interest income, net. Net interest income decreased by $63,000, or 60.6%,
to $41,000 in the three months ended September 30, 1999 compared to net interest
income of $104,000 in the three months ended September 30, 1998. This decrease
was the result of interest on the ESOP loan acquired as part of the ASH and FAS
acquisitions, amortization of the fees associated with the Company's $60 million
credit facility, and the amortization of the discount on certain liabilities
acquired as part of the Safariland acquisition in the three months ended
September 30, 1999. The Company had no such loans or amortization in the three
months ended September 30, 1998.
Operating Income. Operating income increased by $2.6 million, or 69.3% to
$6.4 million in the three months ended September 30, 1999 compared to $3.8
million in the three months ended September 30, 1998 primarily due to factors
discussed above.
Income before provision for income taxes. Income before provision for
income taxes increased by $2.6 million, or 69.3%, to $6.4 million in the three
months ended September 30, 1999 compared to $3.8 million in the three months
ended September 30, 1998 primarily due to factors discussed above.
Provision for income taxes. Provision for income taxes totaled $2.5 million
in the three months ended September 30, 1999, as compared to $1.4 million in the
three months ended September 30, 1998. The increase in the Company's effective
tax rate to 38.9% from 38.3% last year is a result of the increased amortization
of the goodwill generated by the Safariland, Parvus, ASH and FAS acquisitions
that 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.
14
Net income. Net income increased $1.6 million, or 67.8 %, to $3.9 million
in the three months ended September 30, 1999 compared to $2.3 million for the
three months ended September 30, 1998. The increase is primarily due to a
combination of acquisitions made during the period being successfully
integrated, coupled with strong internal growth in the Products Division.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1998
Service Revenues. Service revenues increased by $4.8 million or 12.8%, to
$42.4 million in the nine months ended September 30, 1999 compared to $37.6
million in the nine months ended September 30, 1998. This increase was primarily
due to the inclusion of the CDR, APS, Parvus, ASH and FAS acquisitions acquired
on June 11, 1998, July 15, 1998, May 4, 1999 and June 30, 1999 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 $37.1 million, or 118.5%,
to $68.5 million in the nine months ended September 30, 1999 compared to $31.3
million in the nine months ended September 30, 1998. This increase was primarily
due to the inclusion of the Safariland acquisition on April 12, 1999 (included
in the nine month results for 1999 but not in 1998) as well as the acquisitions
of Fed Labs and Pro-Tech completed on July 15, 1998 and April 1, 1998
respectively and internal growth of the products division. These acquisitions
were accounted for as purchases and the results of their operations are recorded
only for the period the Company owned them. In addition to the increased
revenues from the acquisitions, products sales grew internally by 23% in the
1999 year to date period compared to the 1998 year to date period.
Cost of sales. Cost of sales increased by $22.8 million, or 51.9%, to $66.7
million in the nine months ended September 30, 1999 compared to $43.9 million in
the nine months ended September 30, 1998. This increase was primarily due to
increased revenues for the nine months ended September 30, 1999 compared to the
nine months ended September 30, 1998. As a percentage of total revenues, cost of
sales decreased to 60.2% of total revenues for the nine months ended September
30, 1999 from 63.7% for the nine months ended September 30, 1998 reflecting a
greater proportion of total revenues generated by our Armor Holdings Products
division in the period ended September 30, 1999 and improvement in the gross
margin of the ArmorGroup Services Division.
Operating expenses. Operating expenses increased by $11.1 million, or
70.5%, to $26.8 million (24.1% of total revenues) in the nine months ended
September 30, 1999 compared to $15.7 million (22.8% of total revenues) in the
nine months ended September 30, 1998. This increase was primarily due to the
acquisitions mentioned above, to higher selling expenses associated with the
greater proportion of total revenues generated by our Armor Holdings Products
division in the period ended September 30, 1999 compared to September 30, 1998
and duplicated costs in accounting, management information systems and customer
service in the period.
15
Amortization. Amortization expense increased by $911,000, or 105.3%, to
$1.8 million in the nine months ended September 30, 1999 compared to $865,000 in
the nine months ended September 30, 1998. This increase was primarily due to the
amortization of intangible assets acquired as a result of the Safariland,
Parvus, ASH and FAS acquisitions during the nine month period ending September
30, 1999 which would not have been reflected in the nine month period ended
September 30, 1998.
Equity in earnings of investees. Equity in earnings of investees decreased
by $357,000 or 68.3%, to $166,000 in the nine months ended September 30, 1999
compared to $523,000 in the nine months ended September 30, 1998. The equity in
earnings relates to the Company's 20% investment in Jardine Securicor Gurkha
Services Limited ("JSGS").
Integration and other non-recurring charges. The Company incurred $1.3
million in fees, expenses and costs associated with the integration of the
Company's recent acquisitions in the nine months ended September 30, 1999. The
Company did not incur such fees in the nine months ended September 30, 1998.
Interest income, net. Net interest income decreased by $453,000, or 83.3%,
to $91,000 for the nine months ended September 30, 1999 compared to $544,000 for
the nine months ended September 30, 1998. This decrease was primarily due to the
acquisition of Safariland during the nine months ended September 30, 1999, which
was financed with borrowings under the Company's $60 million credit facility,
the amortization of the costs associated with this credit facility and certain
loans and discounted liabilities acquired through the Safariland, ASH and FAS
acquisitions. The Company had no such loans or amortization in the nine months
ended September 30, 1998.
Operating Income. Operating income increased by $5.0 million, or 53.2%, to
$14.5 million in the nine months ended September 30, 1999 compared to $9.5
million in the nine months ended September 30, 1998 primarily due to factors
discussed above.
Other income. Other income increased to $816,000 for the nine months ended
September 30, 1999. There was no such income for the three months ended
September 30, 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 $5.9 million, or 61.8%, to $15.3 million in the
nine months ended September 30, 1999 compared to $9.5 million in the nine months
ended September 30, 1998 primarily due to factors discussed above.
Provision for income taxes. Provision for income taxes totaled $5.9 million
in the nine months ended September 30, 1999, as compared to $3.5 million in the
nine months
16
ended September 30, 1998. 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. 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. The increase in the
Company's effective tax rate is a result of the increased amortization of the
goodwill generated by the Safariland, Parvus, ASH and FAS acquisitions that is
not tax deductible.
Net income. Net income increased $3.5 million, or 59.7 %, to $9.5 million
in the nine months ended September 30, 1999 compared to $5.9 million for the
nine months ended September 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 $3.1 million, of which the Company has already spent approximately
$2.9 million.
As of September 30, 1999 and December 31, 1998, the Company had working
capital of $58.7 million and $24.3 million, respectively.
On October 18, 1999, the Board of Directors of Armor Holdings, Inc. (the
"Company") 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% of its Common Stock in the open market, in privately
negotiated transactions or otherwise. Such repurchases will be made in
accordance with applicable rules and regulations, and may be discontinued at any
time. The new repurchase program will replace the Company's previous repurchase
program, which was adopted in August 1998, and will be in effect until December
31, 2001. The Company's existing credit facility limits repurchases pursuant to
a stock repurchase program to $25 million.
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.
17
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, has developed and has implemented 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 has looked at Year 2000
readiness from other aspects of the Company's business, including customer
order-taking, manufacturing, raw materials supply and plant process equipment.
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 has developed Business
Continuity Plans for those areas that are critical to the Company's business.
These Business Continuity Plans are 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 was completed 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 fourth
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.
18
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.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
The Company does business in numerous countries, including emerging markets
in CIS, 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 currently have political risk insurance in the
countries in which it currently conducts business, but does periodically analyze
the need for and cost associated with this type of policy. 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.
19
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. 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. The amount of
foreign exchange loss included in comprehensive income relates to the period end
translation of assets and liabilities from local currencies to U.S. dollar.
20
PART II
ITEM 1. LEGAL PROCEEDINGS
On Janaury 22, 1997, Defense Systems Limited ("DSL" a company organized
under the laws of the United Kingdom and a subsidiary of the Company) and SHRM
(a French company) signed a memorandum of understanding ("M.O.U.") the purpose
of which was to create a joint venture to operate their respective security
business in Angola. The M.O.U. was entered into between DSL and SHRM on behalf
of themselves and of their subsidiaries. Based upon such M.O.U., a joint venture
agreement was signed between DSIL Ltd. (a company organized under the laws of
the United Kingdom and a subsidiary of DSL) and SHRM as a result of which a
limited liability company named DSIA was incorporated under the laws of France.
DSF (a subsidiary of DSIL) holds 66.66% of its capital stock and SHRM 33.33%.
In December 1997, the Angolan government decided to declare persona non
grata and its employees were expelled as a result of this decision. DSL had lost
all of its assets and business in Angola, and a conflict between DSIA
shareholders resulted from this situation.
On March 6, 1998, SIA (a subsidiary of SHRM) filed a complaint against DSF
before the Commercial Court of Nanterre (Tribunal de Commerce de Nanterre)
seeking to be paid an amount of $577,286 corresponding to an alleged debt of
DSIA toward SIA. On May 26, 1998, DSIA impleaded its shareholders (DSF and SHRM)
on the basis that the SIA claim should be viewed under the joint venture
agreement. On March 5, 1999, DSF and DSL filed a claim seeking to obtain damages
from SHRM in an amount of $16.1 million. No court hearing is scheduled yet.
On September 30, 1998, an administrator was appointed by the Court to try
to reconcile DSIA's shareholders and to close the DSIA's accounts. The
administrator concluded in his report to the Court dated February 22, 1999 that
there was no solution but to liquidate DSIA. On May 31, 1999, DSF filed a
request to liquidate DSIA. This procedure is pending before the Commercial Court
of Paris. To date, the case is pending and no hearing is yet scheduled.
On September 20, 1999, the Company was notified that SHRM and SIA filed a
complaint before the chamber of the Commercial Court of Paris against the
Company, several subsidiaries of the Company, the former president of DSIA,
members of the board of DSIA, a director of the Company, and Deloitte & Touche
and Mr. Declety (both of them being the statutory auditors of DSIA) seeking to
obtain damages in an amount of $20,000,000.
Among many allegations, SHRM claims that as a result (i) of
misrepresentation in the joint venture agreement regarding the setting up of
DSIA, (ii) and of the handling of the crisis and of the matters resulting form
the crisis by DSL and the other defendants, SHRM suffered substantial damages
and lost its business in Angola. No hearing is yet scheduled, and December 8,
1999, as stipulated in the claim is the first procedural hearing for the purpose
of registering the name and details of the lawyers of each defendant.
21
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 Press release dated October 18, 1999.
(b). Reports on Form 8-K
The Company filed a Current Report on Form 8-K under Item 5, dated October
18, 1999.
22
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 15, 1999
/s/ Nicholas B. Winiewicz
----------------------------------
Nicholas B. Winiewicz
Chief Financial Officer
Dated: November 15, 1999
23
EXHIBIT INDEX
The following Exhibits are filed herewith:
EXHIBIT NO. DESCRIPTION
- ----------- -----------
27.1 Financial Data Schedule
99.1 Press Release Stock Repurchase Plan
24