<PAGE>
UNITED STATES
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 28, 1997
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[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______ TO ______
Commission file number 0-18863
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ARMOR HOLDINGS, INC.
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(Exact name of registrant as specified in its charter)
Delaware 59-3392443
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
13386 International Parkway, Jacksonville, Florida 32218
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(Address of principal executive offices) (Zip Code)
(904)741-5400
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
--- ---
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes X No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
There were 15,990,073 shares of common stock, par value $.01 per share,
outstanding as of August 12, 1997.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
THREE AND SIX MONTH PERIODS ENDED JUNE 28, 1997 AND JUNE 30, 1996
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 28, 1997 and for the three and six month periods ended June 28, 1997
and June 30, 1996.
These condensed consolidated financial statements should be read in
conjunction with the financial statements included in the Company's Annual
Report on Form 10-KSB for the year ended December 28, 1996, as amended.
2
<PAGE>
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
JUNE 28, DECEMBER 28,
1997 1996
---------- ----------
(UNAUDITED) *
(IN THOUSANDS)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 743 $ 8,045
Accounts receivable (net of allowance for doubtful accounts of $457 and $458) 14,345 10,309
Inventories 5,613 4,161
Prepaid expenses and other current assets 3,612 3,139
------- -------
Total current assets 24,313 25,654
PROPERTY, PLANT AND EQUIPMENT, net 9,081 4,932
REORGANIZATION VALUE IN EXCESS OF AMOUNTS
ALLOCABLE TO IDENTIFIABLE ASSETS (net of accumulated
amortization of $731 and $651) 3,344 3,424
PATENTS AND TRADEMARKS (net of accumulated amortization of
$259 and $108) 4,045 4,196
GOODWILL (net of accumulated amortization of $371 and $256) 12,760 9,784
INVESTMENT IN ASSOCIATED COMPANIES 1,012 1,268
OTHER ASSETS 419 272
------- -------
TOTAL ASSETS $54,974 $49,530
======= =======
</TABLE>
* Condensed from audited financial statements.
See notes to condensed consolidated financial statements.
3
<PAGE>
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(CONTINUED)
<TABLE>
<CAPTION>
JUNE 28, DECEMBER 28,
1997 1996
-------- --------
(UNAUDITED) *
(IN THOUSANDS)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt and capitalized lease obligations $ 723 $ 2,423
Accounts payable, accrued expenses and other current liabilities 11,951 8,941
-------- --------
Total current liabilities 12,674 11,364
MINORITY INTEREST 30 31
LONG TERM DEBT AND CAPITALIZED LEASE OBLIGATIONS,
less current portion 17,548 5,780
-------- --------
Total liabilities 30,252 17,175
PREFERENCE SHARES -- 7,480
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 5,000,000 shares
authorized; 0 shares issued and outstanding
Common stock, $.01 par value, 50,000,000 shares
authorized; 11,985,073 and 10,417,015 respectively,
issued and outstanding 120 117
Additional paid-in capital 24,709 23,322
Foreign currency translation adjustment (110) (229)
Retained earnings 1,517 1,665
Treasury stock, 184,650 shares (1,514) --
-------- --------
Total stockholders' equity 24,722 24,875
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 54,974 $ 49,530
======== ========
</TABLE>
* Condensed from audited financial statements.
See notes to condensed consolidated financial statements.
4
<PAGE>
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------------- --------------------------
JUNE 28, JUNE 30, JUNE 28, JUNE 30,
1997 1996 1997 1996
-------- -------- -------- --------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
REVENUES:
Products $ 7,748 $ 3,596 $ 14,172 $ 6,863
Services 10,315 -- 18,643 --
-------- -------- -------- --------
TOTAL REVENUES 18,063 3,596 32,815 6,863
COST AND EXPENSES:
Cost of sales 13,229 2,258 23,684 4,368
Operating expenses 2,810 1,044 5,846 1,997
484
Depreciation and amortization 259 18 484 33
Equity in earnings of unconsolidated
subsidiary (291) -- (564) --
Merger, integration and
other non-recurring charges 2,542 -- 2,542 --
-------- -------- -------- --------
Interest expense, net 342 30 411 103
-------- -------- -------- --------
INCOME (LOSS) BEFORE PROVISION
(BENEFIT) FOR INCOME TAXES (828) 246 412 362
PROVISION (BENEFIT) FOR INCOME
TAXES (132) 102 417 147
Dividends on preference shares -- -- 143 --
-------- -------- -------- --------
NET INCOME (LOSS) $ (696) $ 144 $ (148) $ 215
======== ======== ======== ========
NET INCOME (LOSS) PER COMMON
SHARE AND COMMON EQUIVALENT
SHARE $ (0.05) $ 0.02 $ (0.01) $ 0.03
======== ======== ======== ========
WEIGHTED AVERAGE COMMON
SHARES AND COMMON
EQUIVALENT SHARES 12,965 7,765 12,876 7,660
======== ======== ======== ========
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 28, JUNE 30,
1997 1996
-------- --------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES:
Net (loss) income $ (148) $ 215
Adjustments to reconcile net (loss) income to cash (used
in) provided by operating activities:
Depreciation and amortization 781 132
Foreign currency translation 119
Deferred income taxes (256) 56
(Increase) decrease in accounts receivable (4,036) 352
Increase in inventories (1,452) (135)
Increase in prepaid expenses and other assets (364) (319)
Increase (decrease) in accounts payable, accrued liabilities and other
current liabilities 3,009 (157)
-------- --------
Net cash (used in) provided by operating activities (2,347) 144
INVESTING ACTIVITIES:
Capital expenditures (4,584) (71)
Decrease in investment in associated companies 256
Payment for purchases of net assets from business acquisitions (3,379) --
-------- --------
Net cash used in investing activities (7,707) (71)
FINANCING ACTIVITIES:
Preferred stock dividends (22)
Repurchase of preference shares (7,480)
Exercise of stock grants and options 164 77
Net proceeds (repayments) under line of credit 10,068 (2,051)
Net repayments of long-term debt (3)
Net proceeds from issuance of 5% convertible subordinated notes 10,657
-------- --------
Net cash provided by financing activities 2,752 8,658
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (7,302) 8,731
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 8,045 273
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 743 $ 9,004
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
6
<PAGE>
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The condensed consolidated financial statements include the accounts
of Armor Holdings, Inc. ("the Company") and its direct and indirect
wholly-owned subsidiaries. The financial statements have been
prepared in accordance with the instructions to Form 10-Q. All
adjustments of a normal recurring nature which, in the opinion of
management, are necessary for a fair presentation of operating
results, have been included in the statements.
The financial statements should be read in conjunction with the
financial statements and notes thereto, included in the Company's
Annual Report on Form 10-KSB for the year ended December 28, 1996, as
amended.
2. SFAS NO. 128 REQUIRED DISCLOSURE
In 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128 Earnings
per Share which will require the Company to disclose Basic and
Diluted earnings per share on the face of the income statement. Basic
earnings per share excludes dilution, and is computed by dividing
income available to common stockholders by the weighted-average
number of common shares outstanding for the period. The Company will
adopt SFAS 128 for the fiscal year ended 1997. The effects of
adopting this statement are as follows: $.05 and $.01 loss per basic
share and diluted share for the three months ended and six months
ended June 28, 1997, respectively.
3. SIGNIFICANT DEVELOPMENTS
Conversion to a Holding Company Structure - On June 12, 1997, at the
annual meeting of stockholders, the stockholders of the Company
approved the creation of a holding company structure for all of the
Company's operations. As of June 16, 1997, the Company transferred
all of its operating assets and liabilities relating to its armor
products business to a subsidiary and the Company became a holding
company. As a result, the Company owns directly or indirectly the
outstanding capital stock of its subsidiary corporations and no
longer conducts any manufacturing operations directly.
Gorandel Trading Limited - On June 9, 1997, the Company acquired the
remaining 50% of Gorandel Trading Limited ("GTL"). DSL previously
owned the other 50%. GTL provides specialized security services
throughout Russia and Central Asia. The aggregate purchase price of
the transaction was approximately $2.4 million, consisting of
$570,000 in cash paid at closing, $600,000 in cash to be paid on
September 30, 1997, subject to certain conditions, and 115,176 shares
of Common Stock valued at $1.2 million. As part of this transaction,
the Company agreed to make a loan of $200,000 to a former stockholder
of GTL, subject to certain conditions. GTL's net revenues for 1996
were approximately $6.4 million.
7
<PAGE>
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(CONTINUED)
DSL Group Limited - On April 16, 1997, the Company combined with DSL
Group Limited ("DSL") in a transaction accounted for as a pooling of
interests (the "DSL Transaction"). DSL is a leading provider of
specialized security services in high risk and volatile environments.
DSL was formed on June 3, 1996 for the purpose of acquiring DSL
Holdings Limited ("DSL Holdings"), its predecessor corporation, whose
assets included an indirect 50% interest in Gorandel Trading Limited.
DSL's acquisition of DSL Holdings was completed on July 31, 1996. In
connection with the DSL Transaction, the Company issued 1,274,217
shares of Common Stock valued at $10.9 million for all of the
outstanding ordinary share capital of DSL and paid $7.5 million in
cash for all of the outstanding preference shares and accrued
dividends. The Company also assumed and subsequently repaid $6.9
million, plus interest, of DSL's outstanding debt. In connection with
the DSL Transaction, the Company has recorded a non-recurring charge
to earnings of approximately $2.5 million in the second quarter
of fiscal 1997. This charge consists of transaction costs, principally
professional fees of approximately $1.0 million, and restructuring
costs of approximately $1.5 million incurred to consolidate the
administrative and accounting functions of DSL with those of the
Company at its headquarters in Jacksonville, Florida. The historical
combined net revenues of DSL and its predecessor for 1996 were
approximately $31.1 million.
A reconciliation of revenues, net income and net income per share of
the Company as previously reported and combined is as follows (in
000's, except per share amounts):
Three Months Ended March 29, 1997 As previously
reported DSL Combined
--------------------------------------
Revenues $ 6,422 $ 8,328 $14,750
Net income $ 405 $ 135 $ 540
Net income per share $ 0.04 $ 0.04
Weighted average shares 11,523 12,797
Supercraft (Garments) Limited - On April 7, 1997, the Company
acquired Supercraft (Garments) Limited ("Supercraft"). Supercraft is
a European manufacturer of military apparel, high visibility garments
and ballistic resistant vests, which it distributes to law
enforcement and military agencies throughout Europe, the Middle East
and Asia. The Company acquired Supercraft for a total purchase price
of approximately $2.6 million consisting of (i) approximately $1.3
million in cash, subject to adjustments, (ii) $875,000 in cash which
was placed in escrow pending final disposition of title to certain
real property and (iii) certain additional consideration in an amount
not to exceed (pound)250,000 (approximately $410,000) based on 1997
operating results.
Supercraft's net revenues for 1996 were approximately $5.7 million.
The unaudited consolidated results of operations of the Company on a
pro forma basis (excluding restructuring costs) as if the Company had
consummated the acquisitions of NIK, DTC, Supercraft, DSL and
Gorandel on January 1, 1996 are as follows:
Six Months Ended June 28, 1997
June 28, 1997 June 30, 1996
-----------------------------------
Revenues $35,740 $34,544
Net income $ 2,072 $ 1,715
Net income per share $ 0.16 $ 0.17
Weighted average shares 12,991 10,009
8
<PAGE>
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(CONTINUED)
4. SUBSEQUENT EVENTS
On July 25, 1997, the Company issued 4,000,000 new shares of Common
Stock at $10.125 per share through a public offering (the "Public
Offering") underwritten by Dillon, Read & Co. Inc., Equitable
Securities Corporation and Stephens Inc. After subtracting
underwriting discounts and commissions, the Company realized net
proceeds of $38,070,000, portions of which the Company has used to
repay all of the outstanding indebtedness on its credit facility
(the "Credit Facility") with Barnett Bank, N.A. ("Barnett Bank"). As
a result, the Company presently has cash balances of approximately
$19 million and a zero balance outstanding on its Credit Facility.
9
<PAGE>
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 28, 1997. The results of operations for the
business combinations accounted for as purchase transactions are
included since their effective acquisition dates: as of June 9, 1997
for GTL, as of April 7, 1997 for Supercraft, as of September 30, 1996
for Defense Technology Corporation of America ("DTC"), and July 1,
1996 for the NIK Public Safety Product Line. The results of
operations for the Company have been restated to give effect to the
DSL Transaction, accounted for as a pooling of interests, since DSL's
inception on June 3, 1996.
PRODUCT AND SERVICE BUSINESSES. Historically, the Company
was primarily a manufacturer and distributor of security products.
Cost of goods sold for the Company historically consisted of the cost
of raw materials and overhead allocated to manufacturing
operations. Operating expenses for the Company historically consisted
of sales and marketing expenses and corporate overhead at the
Company's headquarters in Jacksonville.
As a result of the DSL Transaction, a significant portion of
the Company's business now involves the provision of security
services. Cost of goods sold for DSL consists principally of labor
and related costs, including local overhead at DSL's various
security sites. Operating expenses for DSL consists primarily of
corporate overhead at DSL's headquarters in London and Jacksonville.
Due to the differences between manufacturing and service
operations, the Company's supplemental gross margins are not
comparable with gross margins reported in historical periods.
FRESH-START REPORTING. The Company emerged from Chapter 11
bankruptcy reorganization on September 20, 1993. In connection with
the confirmation of its Plan of Reorganization, the Company adopted
"fresh-start reporting" in accordance with the American Institute of
Certified Public Accountants Statement of Position 90-7, "Financial
Reporting by Entities in Reorganization Under the Bankruptcy Code."
Accordingly, since September 20, 1993, the Company's financial
statements have been prepared as if it were a new reporting entity.
REVENUE RECOGNITION. The Company records product revenues at
gross amounts to be received, including amounts to be paid to agents
as commissions, at the time the product is shipped to the
distributor. Although product returns are permitted within 30 days
from the date of purchase, these returns are minimal and usually
consist of minor modifications to the ordered product. The Company
records service revenue as the service is provided on a contract by
contract basis.
FOREIGN CURRENCY TRANSLATION. In accordance with Statement
of Financial Accounting Standard No. 52, "Foreign Currency
Translation," assets and liabilities denominated in a foreign
currency are translated into U.S. dollars at the current rate of
exchange at year-end 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 $110,000
as of June 28, 1997 and $229,000 for fiscal 1996.
IMPACT OF ACQUISITIONS. The results of operations for the
three and six months ended June 28, 1997, reflect the results of
operations of the Company combined with DSL. Additionally the results
of
10
<PAGE>
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(CONTINUED)
operations for GTL, Supercraft, DTC and the NIK Public Safety Product
Line are reflected since their respective acquisition dates of June
9, 1997, April 7, 1997, September 30, 1997 and July 1, 1996.
Accordingly, period-to-period comparisons should be considered in the
context of the timing of the transactions.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 28, 1997 COMPARED TO SIX MONTHS ENDED
JUNE 30, 1996
Revenues - products. Products revenues increased $7.3
million, or 106%, to $14.2 million for the six months ended June 28,
1997 from $6.9 million for the six months ended June 30, 1996. This
increase in sales resulted primarily from $6.5 million in sales
generated from the DTC and NIK Public Safety, Inc. ("NIK") operations
in the six months ended June 28, 1997, as well as sales generated by
Supercraft from the date of acquisition, April 7, 1997, until June
28, 1997.
Revenues - services. Services revenues were $18.6 million in
the six months ended June 28, 1997. There were no such revenues in
the six months ended June 30, 1996.
Cost of sales. Cost of sales increased $19.3 million, or
442%, to $23.7 million in the six months ended June 28, 1997 from
$4.4 million in the six months ended June 30, 1996. The majority of
the increase is due to the recent combination with DSL which had
$15.3 million in direct operating costs associated with DSL revenues
in the six months ended June 28, 1997. The remaining $4.0 million
increase in cost of sales is attributed to the increased
manufacturing costs of the products business (associated with a 106%
increase in revenues). As a percentage of total revenues, cost of
sales increased to 72.2% in the six months ended June 28, 1997 from
63.6% in the six months ended June 30, 1996, reflecting the higher
cost of sales associated with the security services business.
Operating expenses. Operating expenses increased $3.8
million to $5.8 million (17.8% of total revenues) in the six months
ended June 28, 1997 from $2.0 million (29% of sales) during the six
months ended June 30, 1996. The increase in the actual dollar amount
of operating expenses between the periods was due to approximately
$1.9 million related to the overhead costs associated with DSL,
approximately $1.0 million of corporate overhead costs for the
development of the infrastructure of the Company as a holding
company, approximately $588,000 related to the additional revenues
generated by DTC and NIK, and approximately $360,000 in costs
associated with the increase in revenues.
Depreciation and amortization. Depreciation and amortization
expense increased to $484,000 in the six months ended June 28, 1997
from $33,000 in the six months ended June 30, 1996. Of the $451,000
increase, approximately $362,000 was due to amortization of
intangibles acquired during the second half of 1996 and the remainder
is primarily due to existing depreciation and amortization of acquired
goodwill in the DSL Transaction.
Equity in earnings of unconsolidated subsidiaries. Equity in
earnings of unconsolidated subsidiaries amounted to approximately
$564,000 in the six months ended June 28, 1997, compared to no such
income in the six months ended June 30, 1996. The equity relates to
DSL's original 50% investment in GTL until June 9, 1997 at which
point the 100% investment was consolidated into the Company's
11
<PAGE>
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(CONTINUED)
results, as well as a 20% investment in Jardine Securicor Gurkha
Services Limited ("JSGS"), a joint venture company.
Operating income before non-recurring charges. Operating
income before non-recurring charges increased $2.9 million,
or 624%, to $3.4 million in the six months ended June 28, 1997 from
$465,000 in the six months ended June 30, 1996. This increase was due
primarily to the acquired businesses of DSL, Supercraft, DTC and NIK.
Interest expense, net. Interest expense, net increased
$308,000, or 299%, to $411,000 for the six months ended June 28, 1997
from $103,000 for the six months ended June 30, 1996. The increase in
interest expense is primarily due to borrowings of approximately
$15.4 million in April 1997 under the Company's Credit Facility with
Barnett Bank in connection with the DSL Transaction to acquire DSL's
preference shares and to repay DSL's outstanding loan balance with
N.M. Rothschild & Sons Limited (the "Rothschild Loan") at the time of
combination. Additional draws were made on the Credit Facility so
that a balance of $18.6 million was repaid with proceeds realized
from the Public Offering. In addition, interest expense of $149,000
related to the Rothschild Loan was incurred in the six months ended
June 28, 1997.
Merger, integration and other non-recurring charges. Fees and
expenses associated with completing the DSL Transaction (approximately
$1.0 million) have been expensed. These expenses, in combination with
certain other charges relating to the financial and administrative
restructuring and consolidation of DSL into the Company, totaled
approximately $2.5 million, or $0.13 per share, and represent a
one-time charge.
Income taxes. Income taxes totaled $417,000 in the six
months ended June 28, 1997, as compared to $147,000 in the six months
ended June 30, 1996. The provision was based on the Company's U.S.
federal and state statutory rates of approximately 39% for its
U.S.-based companies and a 38% blended effective tax rate for foreign
operations of the Company, and was significantly increased by
certain non-recurring charges which are not tax deductible.
Dividends on preference shares. During the six months ended
June 28, 1997, DSL incurred $143,000 in preference share dividends.
These dividends were paid out of after tax earnings. The shares
underlying the dividends were acquired by the Company on
April 16, 1997 in the DSL Transaction.
Net income. Net income decreased $363,000, or 169%, to a
loss of $148,000 in the six months ended June 28,1997 from income of
$215,000 for the six months ended June 30, 1996. As noted previously,
the decrease is due to the non-recurring charge incurred by the
Company in the six months ended June 28, 1997.
THREE MONTHS ENDED JUNE 28, 1997 COMPARED TO THREE MONTHS ENDED
JUNE 30, 1996
Revenues - products. Products revenues increased $4.2
million, or 115%, to $7.8 million for the three months ended June 28,
1997 from $3.6 million for the three months ended June 30, 1996. This
increase in sales resulted primarily from $4.0 million in sales
generated from the DTC, NIK and Supercraft operations in the three
months ended June 28, 1997.
12
<PAGE>
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(CONTINUED)
Revenues - services. Services revenues were $10.3 million in
three months ended June 28, 1997. There were no such revenues in the
three months ended June 30, 1996.
Cost of sales. Cost of sales increased $11.0 million, or
486%, to $13.2 million in the three months ended June 28, 1997 from
$2.3 million in the three months ended June 30, 1996. The majority of
the increase is due to the DSL Transaction which had $8.6 million in
direct operating costs associated with DSL revenues in the three
months ended June 28, 1997. The remaining $2.4 million increase in
cost of sales is attributed to the increased manufacturing costs of
the products business (associated with a 115% increase in revenues).
As a percentage of total revenues, cost of sales increased to 73.2%
in the three months ended June 28, 1997 from 62.8% in the three
months ended June 30, 1996, reflecting the higher cost of sales
associated with the security services business.
Operating expenses. Operating expenses increased $1.8
million to $2.8 million (16% of total revenues) in the three months
ended June 28, 1997 from $1.0 million (29% of sales) during the three
months June 30, 1996. The increase in the actual dollar amount of
operating expenses between the periods was due to approximately
$765,000 related to the overhead costs associated with DSL,
approximately $588,000 related to the additional revenues generated
by DTC and NIK, and approximately $400,000 of additional costs
related to commissions on increased sales and corporate overhead
costs for the development of the infrastructure of the Company as a
holding company. The decrease in operating expenses as a percentage
of total revenues reflects the inclusion of the security services
operations in the three months ended June 28, 1997.
Depreciation and amortization. Depreciation and amortization
expense increased to $259,000 in the three months ended June 28, 1997
from $18,000 in the three months ended June 30, 1996. Of the $241,000
increase, approximately $181,000 was due to amortization of
intangibles acquired during the second half of 1996 and the remainder
is primarily due to existing depreciation and amortization of acquired
goodwill in the DSL Transaction.
Equity in earnings of unconsolidated subsidiaries. Equity in
earnings of unconsolidated subsidiaries amounted to approximately
$291,000 in the three months ended June 28, 1997, compared to no such
income in the three months ended June 30, 1996. The equity relates to
DSL's original 50% investment in GTL until June 9, 1997 at which
point the 100% investment was consolidated into the Company's
results, as well as a 20% investment in JSGS.
Operating income before non-recurring charges. Operating
income before non-recurring charges increased $1.8 million,
or 645%, to $2.1 million in the three months ended June 28, 1997 from
$276,000 in the three months ended June 30, 1996. This increase was
due primarily to the acquired businesses of DSL, Supercraft, DTC and
NIK.
Interest expense, net. Interest expense, net increased
$312,000, or 1,040%, to $342,000 in the three months ended June 28,
1997 from $30,000 for the three months ended June 30, 1996. The
Company incurred approximately $298,000 in interest expense during
the three months ended June 28, 1997 related to the $15.4 million
borrowing under its Credit Facility with Barnett Bank to acquire
DSL's preference shares and to repay DSL's outstanding balance on the
Rothschild Loan at the time of combination. In addition, interest
expense of $40,000 related to the Rothschild Loan was incurred in the
three months ended June 28, 1997.
13
<PAGE>
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(CONTINUED)
Merger, integration and other non-recurring charges. Fees
and expenses associated with completing the transaction
(approximately $1.0 million) have been expensed. These expenses in
combination with certain other charges relating to the financial and
administrative restructuring and consolidation of DSL into the
Company totaled approximately $2.5 million, or $0.13 per share, and
represent a one-time charge.
Income taxes. Income taxes totaled a benefit of $132,000 in
the three months ended June 28, 1997, as compared to $102,000 expense
in the three months ended June 30, 1996. The benefit and provision
are based on the Company's U.S. federal and state statutory rates of
approximately 39% for its U.S.-based companies and a 38% blended
effective tax rate for foreign operations of the Company, and was
significantly increased by certain non-recurring charges which are
not tax deductible.
Net income. Net income decreased $840,000, or 583%, to a
loss of $696,000 in the three months ended June 28,1997 from $144,000
for the three months ended June 30, 1996. As noted previously, the
decrease is due to the non-recurring charge incurred by the Company
in the three months ended June 28, 1997.
LIQUIDITY AND CAPITAL RESOURCES
Prior to April 30, 1996, the Company's principal source of
working capital was its credit facility with LaSalle Business Credit,
Inc. ("LaSalle"). On April 30, 1996, the Company sold $11.5 million
principal amount of its 5% Convertible Subordinated Notes ("the
Convertible Notes") and used a portion of the proceeds thereof to
repay all amounts outstanding under the LaSalle credit facility.
Thereafter, the Company terminated the LaSalle credit facility. In
December 1996, the holders of all of the Convertible Notes converted
their Convertible Notes into an aggregate of 2,300,000 shares of
Common Stock.
On November 14, 1996, the Company entered into the Credit
Facility with Barnett Bank for a revolving credit facility of up to
$10 million for working capital purposes. The Credit Facility was
amended as of March 26, 1997 to increase the revolving line of credit
to $20 million. As of August 11, 1997, the Company had no
indebtedness to Barnett Bank. As of July 24, 1997 each of the
Company's U.S. subsidiaries (the "U.S. Subsidiaries"), other than
American Body Armor & Equipment, Inc. ("ABA"), is a guarantor of the
Company's obligations under the Credit Facility. The Credit Facility
is secured by a security interest in, among other things, inventory,
accounts receivable, equipment and general intangibles of the Company
and each of the U.S. Subsidiaries. In addition, as further collateral
for the Credit Facility (i) the Company entered into a Pledge
Agreement with Barnett Bank pursuant to which the Company pledged as
further collateral for the Credit Facility, all of the issued and
outstanding capital stock of each of the U.S. Subsidiaries, other
than ABA and (ii) NIK and DTC entered into a Collateral Assignment
with Barnett Bank (the "Collateral Assignment") pursuant to which
they each granted a security interest in the trademarks, patents and
other intellectual property owned by each entity. The Company agreed
to cause any newly formed or acquired subsidiaries to guarantee the
Company's obligations under the Credit Facility.
14
<PAGE>
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(CONTINUED)
As of December 28, 1996, the Company had working capital of
$14.3 million, which reflects the net proceeds of $8.6 million (after
paying down the LaSalle credit facility to a zero balance) from the
issuance of the Convertible Notes as well as positive cash flow from
operations. As of June 28, 1997, the Company had working capital of
$11.6 million.
On July 30, 1997 the Company completed a public offering
underwritten by Dillon, Read & Co. Inc., Equitable Securities
Corporation and Stephens Inc. of 4,000,000 shares of its Common Stock
at an offering price of $10.125 per share. After subtracting
underwriting discounts and commissions, the Company realized net
proceeds of $38,070,000, of which approximately $18.6 million was used
to reduce the Company's outstanding balance on the Credit Facility to a
zero balance. The remaining net proceeds were placed in short term
investments.
The Company anticipates that cash generated from the Public
Offering, operations, and borrowings under the Credit Facility will
enable the Company to meet its liquidity, working capital
requirements and capital expenditure requirements during the next 12
months. The Company, however, may require additional financing to
pursue its strategy of growth through acquisitions. If such financing
is required, there are no assurances that it will be available, or if
available, that it can be obtained on terms favorable to the Company
or on a basis that is not dilutive to stockholders.
The Company anticipates spending approximately $4.0 million
in connection with its capital expenditure plan for fiscal 1997. Such
expenditures include, among other things, construction and other
costs related to the Company's new office and manufacturing facility
at the Jacksonville International Tradeport as well as upgrading the
Company's management information systems.
15
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In November 1989, the Federal Trade Commission (the "FTC") conducted
an investigation into the accuracy of the Company's claims that body
armor it sold between 1988 and 1990 complied with testing and
certification procedures promulgated by the National Institute of
Justice. On November 2, 1994, the Company entered into a consent
order voluntarily settling the FTC's charges that the Company engaged
in false advertising. Under the consent order, the Company admitted
no violations of law but agreed to establish a body armor replacement
program under which persons who had purchased body armor between 1988
and 1990 would be identified and offered the chance to buy new
replacement body armor at a reduced price. The consent order sets
forth many detailed requirements governing the conduct of the
replacement program, the retention of records and the avoidance of
false or misleading advertising. Failure to comply with the
requirements could make the Company liable for civil penalties. On
January 4, 1995, the Company filed with the FTC a comprehensive
compliance report detailing the manner in which it was performing the
obligations imposed upon it by the consent order. In February 1997,
the FTC asked for additional information which the Company believes
will be the FTC's final request for information before closing the
case.
On January 30, 1997, the Company commenced an action in the Supreme
Court of the State of New York, New York County, against XM
Corporation, f/k/a Defense Technology Corporation of America, a
Wyoming corporation ("DTCoA"), the sole stockholder of DTCoA and the
President and Chief Executive Officer of DTCoA (collectively, the
"Defendants") claiming that the Defendants breached their agreements
relating to the sale of substantially all of the assets of DTCoA (the
"DTCoA Assets") to the Company. The relief sought by the Company
includes monetary damages of approximately $515,000 , plus accruals,
and punitive damages. On April 3, 1997, the Defendants filed with the
court an answer and counter claims to the Company's affirmative
defenses. Defendants have counterclaimed for, among other things,
breach of the terms of the asset purchase agreement and the
authorized distributor agreement entered into in connection with the
Company's acquisition of the DTCoA Assets. The Company believes that
the counterclaims asserted against it are without merit, and intends
to vigorously defend such counterclaims.
The Company and DTC, among other parties, have been named as
defendants in a product liability lawsuit claiming damages for
wrongful death resulting from the use by law enforcement officers of
less-than-lethal products sold by DTCoA. The Company's insurance
carrier has assumed the defense of this lawsuit, and the Company does
not believe at this time that the outcome of this lawsuit will have a
material adverse effect on the Company.
In addition to the above, the Company, in the normal course of its
business, is subject to claims and litigation in the areas of product
and general liability. The Company believes that it has adequate
insurance coverage for most claims that are incurred in the normal
course of business. In such cases, the effect on the Company's
financial statements is generally limited to the amount of its
insurance deductibles. Management does not believe at this time that
any such claims have a material impact on the Company's financial
position, operations and liquidity.
16
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Stockholders on June 12, 1997.
Of the 11,641,362 shares of Common Stock entitled to vote at the
meeting, 7,230,407 shares of Common Stock were present in person or
by proxy and entitled to vote. Such number of shares represented
approximately 62% of the Company's outstanding shares of Common
Stock.
At the meeting, the Company's Stockholders approved: (i) the election
of Warren B. Kanders, Jonathan M. Spiller, Burtt R. Ehrlich, Nicholas
Sokolow, Thomas W. Strauss, Richard C. Bartlett and Alair A. Townsend
to the Company's Board of Directors ("Proposal 1") (ii) the
establishment by the Company of a holding company structure, pursuant
to which the Company owns, either directly or indirectly, the capital
stock of its subsidiary corporations, through which all the
operations of the Company are conducted ("Proposal 2"); (iii) an
amendment to the Company's 1996 Non-Employee Directors Stock Option
Plan to, among other things, increase by 150,000 shares the total
number of shares of the Company's Common Stock that may be awarded
under such plan ("Proposal 3"); (iv) an amendment to the Company's
1996 Stock Option Plan to, among other things, increase by 250,000
shares the number of shares of Common Stock that may be awarded under
such plan and to adopt a schedule to such plan to permit the granting
of options to employees of the Company's United Kingdom subsidiaries
("Proposal 4"); and (v) the appointment of Deloitte & Touche LLP,
Certified Public Accountants, to audit the books and financial
records of the Company for the 1997 fiscal year ("Proposal 5").
Proposals 1, 2, 3, 4 and 5 were approved by the Company's
stockholders as follows:
<TABLE>
<CAPTION>
Votes For Votes Against Votes Abstaining Votes Withheld
--------- ------------- ---------------- --------------
<C> <C> <C> <C> <C>
Proposal 1:
Warren B. Kanders 7,227,934 2,473
Jonathan M. Spiller 7,208,434 1,973
Burtt R. Ehrlich 7,208,434 1,973
Nicholas Sokolow 7,208,334 2,073
Thomas W. Strauss 7,208,434 1,973
Richard C. Bartlett 7,208,268 2,139
Alair A. Townsend 7,208,434 1,973
Proposal 2: 7,221,251 5,576 3,580
Proposal 3: 7,103,639 123,055 3,713
Proposal 4: 7,154,025 73,146 3,236
Proposal 5: 7,226,835 2,991 581
</TABLE>
ITEM 5. OTHER INFORMATION
On July 25, 1997, the Company issued 4,000,000 new shares of Common
Stock at $10.125 per share through a public offering underwritten
by Dillon, Read & Co., Equitable Securities Corporation and
Stephens Inc. After subtracting underwriting discounts and commissions,
the Company realized net proceeds of $38,070,000, portions of which
the Company has used to repay all of the outstanding indebtedness on
its credit facility (the "Credit Facility") with Barnett Bank, N.A.
("Barnett Bank"). As a result, the Company presently has cash balances
of approximately $19 million and a zero balance outstanding on its
Credit Facility.
17
<PAGE>
ITEM 6. EXHIBITS & REPORTS ON FORM 8-K
a. Exhibits
The following Exhibits are hereby filed as part of this
Quarterly Report on Form 10-Q:
EXHIBIT DESCRIPTION
11.1 * Statement re: computations of earnings per share
27.1 * Financial Data Schedule
* Filed herewith
b. The Company filed a report on Form 8-K on April 22, 1997 in
connection with the Company's acquisition of all of the
outstanding share capital of Supercraft, the DSL Transaction
and the restructuring of the Credit Facility with Barnett Bank.
The Company filed a report on Form 8-K/A-1 on June 23, 1997
amending the Form 8-K it filed on April 22, 1997.
The Company filed a report on Form 8-K on June 24, 1997 in
connection with the Company's acquisition of the outstanding
share capital of Gorandel Trading Limited not already owned
by DSL.
The Company filed a report on Form 8-K/A-1 on August 12,
1997 amending the Form 8-K it filed on June 24, 1997.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
ARMOR HOLDINGS, INC.
/s/ Robert R. Schiller
---------------------------------------
Robert R. Schiller
Vice President - Corporate Development
Dated August 12, 1997
----------------------------------
/s/ Carol T. Burke
---------------------------------------
Carol T. Burke
Vice President - Finance and Secretary
Dated August 12, 1997
----------------------------------
19
<PAGE>
EXHIBIT INDEX
-------------
The following exhibits are filed herewith:
EXHIBIT DESCRIPTION
- ------- -----------
11.1 Statement re: Computations of earnings per share
27.1 Financial Data Schedule
<PAGE>
Exhibit 11.1
EARNINGS PER SHARE COMPUTATIONS
<TABLE>
<CAPTION>
THREE MONTH PERIOD ENDED
JUNE 28, 1997 JUNE 30, 1996
------------- -------------
<S> <C> <C>
PRIMARY EARNINGS PER SHARE:
Net income (Loss) $ (696) $ 144
----------- -----------
Shares:
Weighted average common shares outstanding 11,892 6,826
Effect of shares issuable under stock option
and stock grant plans, based on the treasury
stock method 1,073 939
Adjusted common shares and equivalents 12,965 7,765
----------- -----------
Earnings per share - primary $ (0.05) $ 0.02
----------- -----------
FULLY DILUTED EARNINGS PER SHARE:
Net income (Loss) $ (696) $ 144
Add Bank:
After tax interest expense accrued on Notes -- 60
----------- -----------
Adjusted net income (696) 204
Shares:
Weighted average common shares outstanding 11,892 6,826
Effect of shares issuable under stock option
and stock grant plans, based on the treasury
stock method 1,113 991
Effect of shares issuable under conversion of
preferred stock - if converted method (for
1996 the "if converted" method is applied from
the date of the note of April 30, 1996
to the end of the period) -- 1,542
----------- -----------
Adjusted common shares and equivalents 13,005 9,359
----------- -----------
Earnings per share - fully diluted $ (0.05) $ 0.02
----------- -----------
</TABLE>
<PAGE>
EARNINGS PER SHARE COMPUTATIONS
<TABLE>
<CAPTION>
SIX MONTH PERIOD ENDED
JUNE 28, 1997 JUNE 30, 1996
------------- -------------
<S> <C> <C>
PRIMARY EARNINGS PER SHARE:
Net income (Loss) $ (148) $ 215
----------- -----------
Shares:
Weighted average common shares outstanding 11,859 6,645
Effect of shares issuable under stock option
and stock grant plans, based on the treasury
stock method 1,017 854
Effect of shares issuable under conversion of
preferred stock - if converted method (for
1996 the "if converted" method is applied from
the beginning of the period to the actual
conversion date of the preferred stock of
January 19, 1996) -- 181
----------- -----------
Adjusted common shares and equivalents 12,876 7,680
----------- -----------
Earnings per share - primary $ 0.01 $ 0.03
----------- -----------
FULLY DILUTED EARNINGS PER SHARE:
Net income (Loss) $ (148) $ 215
Add Bank:
After tax interest expense accrued on Notes -- 60
----------- -----------
Adjusted net income (148) 275
Shares:
Weighted average common shares outstanding 11,859 6,645
Effect of shares issuable under stock option
and stock grant plans, based on the treasury
stock method 1,117 962
Effect of shares issuable under conversion of
subordinate note - if converted method (for
1996 the "if converted" method is applied from
the date of the note of April 30, 1996
to the end of the period) 0 771
----------- -----------
Effect of shares issuable under conversion of
preferred stock - if converted method (for
1996 the "if converted" method is applied from
the beginning of the period to the actual
conversion date of the preferred stock of
January 19, 1996) 0 181
----------- -----------
Adjusted common shares and equivalents 12,976 8,559
----------- -----------
Earnings per share - fully diluted $ (0.01) $ 0.03
----------- -----------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FINANCIAL STATEMENTS FOR THE QUARTERLY PERIOD ENDED JUNE 28, 1997 AND
IS QUALIFED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-28-1997
<CASH> 743
<SECURITIES> 0
<RECEIVABLES> 14,802
<ALLOWANCES> 457
<INVENTORY> 5,613
<CURRENT-ASSETS> 24,313
<PP&E> 9,081
<DEPRECIATION> 0
<TOTAL-ASSETS> 54,974
<CURRENT-LIABILITIES> 12,674
<BONDS> 17,548
0
0
<COMMON> 120
<OTHER-SE> 24,602
<TOTAL-LIABILITY-AND-EQUITY> 54,974
<SALES> 7,748
<TOTAL-REVENUES> 18,063
<CGS> 4,634
<TOTAL-COSTS> 13,229
<OTHER-EXPENSES> 16,007
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 342
<INCOME-PRETAX> (828)
<INCOME-TAX> (132)
<INCOME-CONTINUING> (696)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (696)
<EPS-PRIMARY> (0.05)
<EPS-DILUTED> (0.05)
</TABLE>
