<PAGE>
Filed Pursuant to Rule 424(b)(4)
Registration File No.: 333-28879
4,000,000 SHARES
[LOGO]
ARMOR HOLDINGS, INC.
COMMON STOCK
The 4,000,000 shares of common stock, par value $0.01 per share (the
"Common Stock"), offered hereby are being offered by Armor Holdings, Inc.
(the "Company"). The selling stockholders named herein under "Principal and
Selling Stockholders" (the "Selling Stockholders") have granted the
Underwriters an option to purchase up to an aggregate of 600,000 shares of
Common Stock solely to cover over-allotments. See "Principal and Selling
Stockholders."
The Common Stock is listed on the American Stock Exchange under the symbol
"ABE." On July 24, 1997, the closing sales price of the Common Stock on the
American Stock Exchange was $10 5/8 per share. See "Price Range of Common
Stock and Dividend Policy."
FOR A DISCUSSION OF CERTAIN RISKS OF AN INVESTMENT IN THE SHARES OF COMMON
STOCK OFFERED HEREBY, SEE "RISK FACTORS" ON PAGES 5 TO 8.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS
PRICE TO DISCOUNTS AND TO
PUBLIC COMMISSIONS* COMPANY+
<S> <C> <C> <C>
Per Share .. $10.125 $.6075 $9.5175
Total++..... $40,500,000 $2,430,000 $38,070,000
</TABLE>
- ------------
* The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933. See
"Underwriting."
+ Before deducting expenses of the Offering payable by the Company
estimated to be $800,000.
++ The Selling Stockholders have granted the Underwriters a 30-day option
to purchase up to 600,000 additional shares of Common Stock on the same
terms per share solely to cover over-allotments, if any. If such option
is exercised in full, the total price to public will be $46,575,000, the
total underwriting discounts and commissions will be $2,794,500 and the
total proceeds to the Selling Stockholders will be $5,710,500 . See
"Underwriting."
The Common Stock is being offered by the Underwriters as set forth under
"Underwriting" herein. It is expected that delivery of the certificates
therefor will be made in New York, New York, on or about July 30, 1997. The
Underwriters include:
DILLON, READ & CO. INC.
EQUITABLE SECURITIES CORPORATION
STEPHENS INC.
The date of this Prospectus is July 25, 1997
<PAGE>
[PICTURE OF THE COMPANY'S
PRODUCTS, TRADEMARKS
AND BRAND NAMES].
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING PURCHASES OF THE COMMON STOCK TO STABILIZE ITS MARKET PRICE,
PURCHASES OF THE COMMON STOCK TO COVER SOME OR ALL OF A SHORT POSITION IN THE
COMMON STOCK MAINTAINED BY THE UNDERWRITERS AND THE IMPOSITION OF PENALTY
BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and the Consolidated
Financial Statements (including the Notes thereto) included elsewhere in this
Prospectus. The historical Consolidated Financial Statements of Armor
Holdings, Inc. for the year ended December 28, 1996 and for the interim three
month period ended March 29, 1997 have been restated on a supplemental basis
to give effect to the Company's combination with DSL Group Limited ("DSL") on
April 16, 1997 in a transaction accounted for as a pooling of interests.
Accordingly, such financial statements reflect the combined results of Armor
Holdings, Inc. and DSL since July 31, 1996, the effective date of the
acquisition of DSL's predecessor company by DSL. Certain other financial and
operating data contained herein are presented on a pro forma basis to give
effect to the acquisition of Gorandel Trading Limited ("GTL") on June 9,
1997, Supercraft (Garments) Limited ("Supercraft") on April 7, 1997, and
assets of Defense Technology Corporation of America on September 30, 1996.
Unless the context otherwise requires (i) references to the Company mean
Armor Holdings, Inc. and its consolidated subsidiaries and (ii) the
information contained herein gives effect to the transfer on June 16, 1997,
of the Company's operating assets and liabilities to a subsidiary as a result
of which the Company became a holding company. References to the Company's
fiscal year mean the 52-or 53-week fiscal year ended on the last Saturday of
December of that calendar year (e.g., fiscal 1996 means the fiscal year ended
December 28, 1996). References to the Company's first quarter mean the 12-or
13-week period ended on the last Saturday of March of that calendar year
(e.g., first quarter 1997 means the 13-week period ended March 29, 1997). In
addition, unless the context otherwise requires, the information contained in
this Prospectus assumes that the Underwriters' over-allotment option is not
exercised. This Prospectus contains forward-looking statements that involve
risks and uncertainties. The Company's actual results may differ materially
from the results discussed in such forward-looking statements as a result of
various factors, including those set forth under the caption "Risk Factors"
and elsewhere in this Prospectus.
THE COMPANY
Armor Holdings, Inc. is a leading provider of security solutions to the
increasing level of security problems encountered by domestic and foreign law
enforcement personnel, governmental agencies and multi-national corporations.
The Company's solutions include a broad range of high quality branded
manufactured products, such as ballistic resistant vests and tactical armor,
bomb disposal equipment, less-than-lethal munitions and anti-riot products
marketed under brand names such as American Body Armor(Trademark), Defense
Technology(Trademark) and First Defense(Registered Trademark). The Company
distributes its manufactured products through its network of approximately
500 distributors or agents worldwide. The Company also provides sophisticated
security planning, advisory and management services to multi-national
corporations and governmental and non-governmental agencies, including the
provision of highly trained, multi-lingual and experienced security personnel
in violent and unstable areas of the world such as Angola, Colombia, Russia
and the Democratic Republic of Congo (the former Zaire).
Founded in 1969 as American Body Armor & Equipment, Inc., the Company was
until recently primarily a manufacturer of armored products. Since the
Company underwent a change of control in January 1996, the Company has
pursued a strategy of growth through acquisition of businesses and assets
that complement its existing operations. Since July 1996, the Company has
acquired or combined with five businesses in the security products and
specialty security services market including: (i) DSL, a leading provider of
specialty security services in high risk and volatile regions of the world;
(ii) GTL, a provider of specialized security services throughout Russia and
Central Asia; (iii) Supercraft, a European manufacturer of military apparel,
high visibility garments and ballistic resistant vests; (iv) assets of
Defense Technology Corporation of America, a manufacturer of less-than-lethal
and anti-riot products; and (v) assets of NIK Public Safety Product Line, a
product line of portable narcotic identification kits used by law enforcement
agencies. In 1996, the Company, on a pro forma basis giving effect to these
five transactions as though they had occurred as of the beginning of such
period, generated approximately $68 million in revenues. The Company
continues to seek to acquire businesses that will either expand its portfolio
of products and services, strengthen its distribution network or expand its
operations internationally.
1
<PAGE>
The market for security products and services worldwide is large and
growing. Spending for police protection in the U.S. alone is estimated at $41
billion per year. The industry continues to be very fragmented, consisting of
many small manufacturers and service providers. The market is changing,
driven by the nature and perception of violent criminal activity both
domestically and internationally, as increases in gang, illegal drug and
militant activities have created more sophisticated, well-equipped and
violent criminals. These changes have created opportunities for consolidation
among providers of sophisticated products to the law enforcement and
institutional corrections markets. Internationally, greater political,
economic and social tensions and the proliferation of weapons due to
deficient security and illegal arms sales continue to fuel criminal
activities in lesser-developed nations. As the targets of many of these
criminal activities, multi-national corporations and governmental agencies
operating in these volatile regions are increasingly outsourcing their
security services to reputable, experienced private companies.
The Company believes these trends are increasing demand for its products
and services. To capitalize on these trends, the Company is implementing its
business and growth strategies. The principal elements of the Company's
business strategy are: (i) offer a comprehensive portfolio of solutions to
security threats; (ii) promote brand development through training and sales
support; (iii) capitalize on the Company's global distribution network; (iv)
capitalize on a diversified, global and institutional service customer base;
and (v) maximize profitability and operational efficiencies. The principal
elements of the Company's growth strategy are: (i) pursue strategic
acquisitions; (ii) leverage its distribution network; (iii) leverage its
service client base; and (iv) continue global expansion.
The Company's executive offices are located at 13386 International
Parkway, Jacksonville, Florida 32218. Its telephone number is (904) 741-5400.
Armitron(Registered Trademark), Series 2000(Registered Trademark),
Armadillo (Design Mark)(Registered Trademark), Gold Series GSX(Registered
Trademark), Series 229(Registered Trademark), American Body Armor(Trademark),
Defense Technology(Trademark), Best Defense(Registered Trademark), Def-Tec
Products(Registered Trademark) and Flag Design(Registered Trademark), Eagle
Design(Registered Trademark), Eagle and Shield Design(Registered Trademark),
First Defense(Registered Trademark), Stinger(Registered Trademark), The Riot
Extinguisher(Registered Trademark), Distraction Device(Registered Trademark),
Identidrug(Registered Trademark), Tamper Guard(Registered Trademark),
NIK(Registered Trademark) and Design(Registered Trademark),
Porta-Pac(Registered Trademark), Sanatape-Sealtite(Registered Trademark) and
Secure-a-Seal(Registered Trademark) are trademarks of the Company.
The Flex-Cuf(Registered Trademark) and Key-Cuff (Trade Mark) trademarks
included in this Prospectus are owned by Thomas & Betts Corporation and
Vizions Ltd., respectively. The Gallet(Registered Trademark) trademark
included in this Prospectus is owned by Gallet S.A. The Kevlar(Registered
Trademark) and Nomex(Registered Trademark) trademarks included in this
Prospectus are owned by E.I. Du Pont de Nemours & Co., Inc. The
Twaron(Registered Trademark) and SpectraShield(Registered Trademark)
trademarks included in this Prospectus are owned by Akzo-Nobel Fibers B.V.
and Allied Signal Corp., respectively. The Scanna (Trade Mark) trademark
included in this Prospectus is owned by Scanna MSC Ltd.
2
<PAGE>
THE OFFERING
Common Stock offered by the
Company ....................... 4,000,000 shares
Common Stock to be outstanding
after the Offering(1) ......... 15,987,073 shares
Use of proceeds ............... To reduce indebtedness outstanding under the
Credit Facility (as hereinafter defined); to
provide working capital; and potentially to
fund acquisitions. See "Use of Proceeds."
American Stock Exchange
symbol ........................ ABE
- ------------
(1) Excludes (i) 1,682,667 shares of Common Stock reserved for issuance
under outstanding options under the Company's 1994 Incentive Stock
Plan, 1996 Amended and Restated Stock Option Plan and 1996 Amended and
Restated Non-Employee Directors Stock Option Plan, and (ii) 1,501,000
shares available for issuance, upon exercise of options that may be
granted under such plans. The weighted average exercise price of all
outstanding options is $3.64 per share. See "Management -- Option
Plans."
RISK FACTORS
An investment in the shares of Common Stock offered hereby involves a high
degree of risk. For a discussion of certain risks of an investment in the
Common Stock offered hereby, see "Risk Factors" on pages 5 through 8.
3
<PAGE>
SUMMARY HISTORICAL, SUPPLEMENTAL AND PRO FORMA FINANCIAL DATA
The summary historical and pro forma financial data of the Company
presented below have been derived from and should be read in conjunction with
the historical, supplemental and pro forma financial statements of the
Company and the Notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FISCAL YEAR
----------------------------------------------------------
HISTORICAL PRO FORMA
----------------------------- SUPPLEMENTAL AS ADJUSTED
1994 1995 1996 1996(A) 1996(B)
--------- --------- --------- -------------- -------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenues:
Products .................... $11,355 $11,741 $18,011 $18,011 $30,529
Services .................... -- -- -- 12,956 37,501
--------- --------- --------- -------------- -------------
Total revenues ............. 11,355 11,741 18,011 30,967 68,030
Cost of sales ................ 7,741 7,443 10,879 21,172 49,200
Operating expenses ........... 2,653 3,368 5,088 6,905 11,879
Depreciation and amortization 43 53 366 554 1,075
Interest expense (income), net 216 281 253 515 40
Equity in earnings of
unconsolidated subsidiaries.. -- -- -- (320) (766)
--------- --------- --------- -------------- -------------
Operating income ............. 702 596 1,425 2,141 6,602
Non-operating income ......... -- 228 2 2 3
--------- --------- --------- -------------- -------------
Income before income taxes ... 702 824 1,427 2,143 6,605
Income taxes ................. 279 304 592 1,215 2,974
Dividends on preference
shares........................ -- -- -- 239 --
--------- --------- --------- -------------- -------------
Net income applicable to
common stockholders.......... $ 423 $ 520 $ 835 $ 689 $ 3,631
========= ========= ========= ============== =============
Net income per common share
and common equivalent share.. $ .07 $ .08 $ .10 $ .08 $ .26
========= ========= ========= ============== =============
Weighted average number of
common shares and common
equivalent shares
outstanding................... 5,802 6,370 8,133 8,876 13,831
========= ========= ========= ============== =============
OTHER DATA:
Earnings before interest,
income taxes, non-operating
income and depreciation and
amortization (c)............. $ 961 $ 930 $ 2,044 $ 3,210 $ 7,717
Earnings before interest,
income taxes and
non-operating income (c)..... 918 877 1,678 2,656 6,642
</TABLE>
<PAGE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
FIRST QUARTER
----------------------------------------------
HISTORICAL PRO FORMA
----------------- SUPPLEMENTAL AS ADJUSTED
1996 1997 1997(A) 1997(B)(D)
-------- -------- -------------- -------------
<S> <C> <C> <C> <C>
OPERATING DATA:
Revenues:
Products ...................... $3,267 $ 6,422 $ 6,422 $ 7,575
Services .................... -- -- 8,328 10,228
-------- -------- -------------- -------------
Total revenues ............. 3,267 6,422 14,750 17,803
Cost of sales ................ 2,110 3,773 10,453 12,773
Operating expenses ........... 950 1,901 2,977 3,228
Depreciation and amortization 18 127 286 330
Interest expense (income), net 72 (40) 69 (51)
Equity in earnings of
unconsolidated subsidiaries.. -- -- (272) (190)
-------- -------- -------------- -------------
Operating income ............. 117 661 1,237 1,713
Non-operating income ......... -- -- -- --
-------- -------- -------------- -------------
Income before income taxes ... 117 661 1,237 1,713
Income taxes ................. 45 256 554 765
Dividends on preference
shares........................ -- -- 143 --
-------- -------- -------------- -------------
Net income applicable to
common stockholders.......... $ 72 $ 405 $ 540 $ 948
======== ======== ============== =============
Net income per common share
and common equivalent share.. $ .01 $ .04 $ .04 $ .07
======== ======== ============== =============
Weighted average number of
common shares and common
equivalent shares
outstanding................... 7,576 11,523 12,797 14,512
======== ======== ============== =============
OTHER DATA:
Earnings before interest,
income taxes, non-operating
income and depreciation and
amortization (c)............. $ 207 $ 748 $ 1,592 $ 1,992
Earnings before interest,
income taxes and
non-operating income (c)..... 189 621 1,306 1,662
</TABLE>
<TABLE>
<CAPTION>
MARCH 29, 1997
----------------------------------------------
PRO FORMA
HISTORICAL SUPPLEMENTAL(A) AS ADJUSTED (D)
-------------- --------------- ---------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital .......... $12,274 $14,473 $33,177
Total assets.............. 28,859 49,292 73,234
Total debt................ 703 15,887 95
Common stockholders'
equity.................... 25,132 25,700 64,170
</TABLE>
- ------------
(a) The supplemental financial data for fiscal 1996 and first quarter 1997
have been restated to give effect to the combination with DSL. See
"Significant Developments."
(b) See Unaudited Pro Forma Consolidated Statements of Operations for
fiscal 1996 and for first quarter 1997.
(c) Neither earnings before interest, income taxes, non-operating income
and depreciation and amortization nor earnings before interest, income
taxes and non-operating income should be considered as alternatives to
net income or cash flow and neither are a measure of performance under
generally accepted accounting principles. They are presented solely to
provide additional information for evaluating the Company.
(d) Gives effect to the sale of the 4,000,000 shares of Common Stock
offered by the Company and the application of the net proceeds thereof.
See "Use of Proceeds" and Unaudited Pro Forma Consolidated Balance
Sheet as of March 29, 1997.
4
<PAGE>
RISK FACTORS
Prospective purchasers of the Common Stock should consider carefully the
following risk factors relating to the Offering and the business of the
Company, together with the information and financial data set forth elsewhere
in this Prospectus, prior to making an investment decision. This Prospectus
contains forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended (the "Securities Act") and Section 21E of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Such
statements are indicated by words or phrases such as "anticipate,"
"estimate," "project," "management believes," "the Company believes" and
similar words or phrases. Such statements are based on current expectations
and are subject to risks, uncertainties and assumptions. Certain of these
risks are described below. Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual results
may vary materially from those anticipated, estimated or projected.
RISKS ASSOCIATED WITH FUTURE ACQUISITIONS
A key element of the Company's growth strategy is the acquisition of
businesses and assets that will complement its current businesses. There can
be no assurance that the Company will be able to identify attractive
acquisition opportunities, obtain financing for acquisitions on satisfactory
terms or successfully acquire identified targets. In addition, there can be
no assurance that the Company will be successful in integrating acquired
businesses into its existing operations or that such integration will not
result in unanticipated liabilities or unforeseen operational difficulties,
which may be material, or require a disproportionate amount of management's
attention. Such acquisitions may result in the Company incurring additional
indebtedness or issuing preferred stock or additional Common Stock. There can
be no assurance that competition for acquisition opportunities in the
industry will not escalate, thereby increasing the cost to the Company of
making acquisitions or causing the Company to refrain from making further
acquisitions. In addition, the terms and conditions of the Company's credit
facility with Barnett Bank, N.A. (the "Credit Facility") impose, and the
terms and conditions of future debt instruments may impose, restrictions on
the Company that, among other things, restrict the Company's ability to make
acquisitions. See "Business -- Growth Strategy."
RISKS ASSOCIATED WITH MANAGING A GROWING BUSINESS
The Company has rapidly expanded its operations, and this growth has
placed significant demands on its management, administrative, operating and
financial resources. The Company is seeking to meet these demands by
expanding its senior management, and has begun to identify potential
candidates for hire. The continued growth of the Company's customer base, the
types of services offered and the geographic markets served can be expected
to continue to place a significant strain on the Company's resources. In
addition, personnel qualified both in the provision of the Company's security
services and the marketing of such services are difficult to identify and
hire. The Company's future performance and profitability will depend in large
part on its ability to attract and retain additional management and other key
personnel, its ability to implement successfully enhancements to its
management systems and its ability to adapt those systems, as necessary, to
respond to growth in its business. No assurance can be made that the Company
will be able to hire such qualified persons as and when required. See
"Business -- Growth Strategy."
INHERENT RISKS OF CERTAIN PRODUCTS SOLD BY THE COMPANY
The products manufactured by the Company are used in applications where
the failure of such products to perform as expected, or the failure to use
such products properly, could result in serious bodily injury or death. These
products include body armor designed to protect against ballistic and sharp
instrument penetration, and less-than-lethal and anti-riot products such as
pepper sprays, distraction devices, and flameless expulsion grenades. The
Company and DTC (as hereinafter defined), 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 (as hereinafter defined). The Company
is aware of claims, including claims against DTCoA, of permanent physical
injury and death caused by self-defense sprays and other munitions intended
to be less-than-lethal. The Company also is aware that the U.S. Justice
Department is studying the role that self-defense pepper sprays may have had
in the deaths of suspects sprayed by law enforcement personnel. In addition,
the manufacture and sale of certain less-than-lethal products may be the
subject of product liability claims in the event that such products do not
perform in the manner in which they are intended to perform. See "--Risks of
Product Liability" and "Business--Litigation."
5
<PAGE>
INHERENT RISKS OF SERVICES PROVIDED BY THE COMPANY
The Company provides security services through DSL. These services are
most in demand in areas of the world encountering high levels of violence,
unstable or chaotic political environments and little or no effective local
law enforcement authorities. As a result, DSL's management and employees are
often located in highly unsafe and unstable environments, such as Africa,
South America and Central Asia. Under certain circumstances, the Company
supplements its own personnel with local police or military, who are not
legally under the control and supervision of the Company. This lack of direct
control may limit the Company's effectiveness without insulating the Company
from liability claims based on the actions of these personnel. In addition,
murders, kidnappings and attacks on facilities and installations are endemic
in the locations in which DSL operates. There can be no assurance that
lawsuits alleging negligence in the provision of security services and
seeking substantial amounts in damages will not be brought in the future, or
that any such lawsuit would not be successful and have a material adverse
effect on the Company's financial condition and results of operations. See
"Business -- Products and Services."
RISKS OF PRODUCT LIABILITY
The failure of the Company's products to perform as intended could result
in serious injury or death and give rise to product liability claims against
the Company. There can be no assurance that the Company's product liability
insurance coverage will be sufficient to cover the payment of any potential
claim. In addition, there can be no assurance that insurance coverage will
continue to be available or, if available, that the Company will be able to
obtain it at a reasonable cost. Any substantial uninsured loss would have to
be paid out of the assets of the Company and would have a material adverse
effect on the Company's financial condition. In addition, the lack of product
liability coverage would prohibit the Company from bidding for orders for
certain municipal customers which require such coverage. Any such lack of
coverage would have a material adverse effect on the Company's financial
condition and results of operations. See "Business -- Litigation."
RISKS OF CONDUCTING INTERNATIONAL OPERATIONS
The Company has operations and assets in many parts of Africa, South
America, South East Asia, Central Asia, the Balkans and Russia. In addition,
the Company sells its products and services in other foreign countries and is
seeking to increase its level of international business activity.
Accordingly, the Company is subject to various risks, including U.S.-imposed
embargoes of sales to specific countries, foreign import controls and foreign
currency restrictions, which may be arbitrarily imposed and enforced,
exchange rate fluctuations, expropriation of assets, war, civil uprisings and
riots, government instability and legal systems of decrees, laws,
regulations, interpretations and court decisions that are not always fully
developed and that may be retroactively or arbitrarily applied. The Company
may be subject to unanticipated income taxes, excise duties, import taxes,
export taxes or other governmental assessments. There can be no assurance
that such risks will not result in a loss of business or other unexpected
costs which could have a material adverse effect on the Company's financial
condition and results of operations. Since DSL routinely operates in areas
where local government policies regarding foreign entities and the local tax
and legal regimes are often uncertain, poorly administered and in a state of
flux, it is difficult to assure that the Company is in compliance with all
relevant local laws and taxes at any given point in time. A subsequent
determination that the Company failed to comply with relevant local laws and
taxes could have a material adverse effect on the Company's financial
condition and results of operations. See "Business -- Products and Services."
GOVERNMENT REGULATION
The Company is subject to federal licensing requirements with respect to
the sale in foreign countries of certain of its products. In addition, the
Company is obligated to comply with a variety of federal, state and local
regulations governing certain aspects of its operations and the workplace,
including regulations promulgated by, among others, the U.S. Departments of
Commerce, State and Transportation, the U.S. Environmental Protection Agency
and the U.S. Bureau of Alcohol, Tobacco and Firearms.
6
<PAGE>
The Company is subject to various federal, state and local environmental
laws, regulations and ordinances governing, among other things, emissions to
air, discharge to waters and the generation, handling, storage,
transportation, treatment and disposal of hazardous substances and wastes.
The Company uses a variety of hazardous chemicals in connection with the
manufacture of certain of its less-than-lethal products, including tear gas.
Current conditions and future events, such as changes in existing laws and
regulations, may give rise to additional compliance costs that could have a
material adverse effect on the Company's business, financial condition or
results of operations. Furthermore, if a release of hazardous substances
occurs on or from the Company's properties or any associated offsite disposal
location, or if contamination from prior activities is discovered at any of
the Company's properties, the Company may be held liable and the amount of
such liability could be material. See "Business -- Environmental Matters."
The Company, like other companies operating internationally, is subject to
the Foreign Corrupt Practices Act and other laws which prohibit improper
payments to foreign governments and their officials by U.S. and other
business entities. DSL operates in countries known to experience endemic
corruption. The Company's extensive operations in such countries creates the
risk of an unauthorized payment by an employee or agent of the Company which
would be in violation of various laws including the Foreign Corrupt Practices
Act. Violations of the Foreign Corrupt Practices Act may result in severe
criminal penalties which could have an adverse effect on the Company's
financial condition and results of operations.
BUDGET CONSIDERATIONS
Customers for the Company's products include law enforcement and
governmental agencies. Budgetary allocations for law enforcement are
dependent, in part, upon government tax revenues and budgetary constraints,
which fluctuate from time to time. Many domestic and foreign government
agencies have experienced budget deficits that have led to decreased
expenditures in certain areas. The Company's results of operations may be
subject to substantial period-to-period fluctuations as a result of these and
other factors affecting capital spending. A reduction of funding for law
enforcement could materially and adversely affect the Company's business,
financial condition and results of operations. See "Industry Overview --
Manufactured Security Products Market."
COMPETITION
The Company's business is highly competitive in all product and service
lines. Many of the Company's competitors have significantly greater financial
resources, larger facilities and operations and depth and experience of
personnel as well as more recognizable trademarks for products similar to
those sold by the Company. In addition, the Company's competitors may develop
or improve their products, in which event the Company's products may be
rendered obsolete or less marketable. The security services industry is
extremely competitive and highly fragmented. The Company expects that the
level of competition will increase in the future. There can be no assurance
that the Company will be able to continue to compete successfully. See
"Business -- Competition."
INFLUENCE OF SIGNIFICANT STOCKHOLDERS
Prior to this Offering, Warren B. Kanders, in his capacity as the sole
stockholder of Kanders Florida Holdings, Inc. ("Kanders"), may be deemed to
be the beneficial owner of approximately 37.2% of the outstanding shares of
Common Stock. Upon completion of this Offering, Kanders may be deemed to be
the beneficial owner of approximately 27.9% of the outstanding shares of
Common Stock (24.6% if the Underwriters' over-allotment option is exercised
in full). In addition, upon consummation of the Offering, officers and
directors of the Company, including Mr. Kanders, will beneficially own an
aggregate of approximately 6,044,081 shares, or 37.8%, of the Common Stock
(5,519,081 shares, or 33.2%, of the Common Stock if the Underwriters'
over-allotment option is exercised in full). Consequently, Mr. Kanders, as
Chairman of the Board of Directors of the Company and as the sole stockholder
of Kanders, together with the Company's officers and directors, will have the
ability to significantly influence the election of the Company's directors
and on the outcome of corporate actions requiring stockholder approval,
including a change in control. See "Principal and Selling Stockholders" and
"Description of Capital Stock."
7
<PAGE>
DEPENDENCE ON KEY PERSONNEL
The Company is substantially dependent upon the personal efforts and
abilities of Warren B. Kanders, Jonathan M. Spiller, Richard T. Bistrong,
Alastair G.A. Morrison and the Hon. Richard N. Bethell. Should any of these
members of the Company's senior management be unable or unwilling to continue
in their present roles, the Company's business could be materially adversely
affected. See "Management -- Directors and Executive Officers."
EFFECT OF CERTAIN STATUTORY PROVISIONS
The Company is subject to the anti-takeover provisions of Section 203 of
the Delaware General Corporation Law (the "DGCL"). In general, Section 203
prohibits a publicly-held Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years
after the date of the transaction in which the person became an interested
stockholder, unless the business combination is approved in a prescribed
manner. See "Description of Capital Stock -- Certain Provisions of Delaware
Law."
VOLATILITY OF MARKET PRICE FOR COMMON STOCK
The market price for the Common Stock may be highly volatile. The Company
believes that a variety of factors, including announcements by the Company or
its competitors, quarterly variations in financial results, trading volume,
general market trends and other factors, could cause the market price of the
Common Stock to fluctuate substantially. Due to the relatively small size of
the Company, a large contract awarded to or lost by the Company may have the
effect of distorting the Company's overall financial results. In addition,
the stock market has experienced extreme price and volume fluctuations that
are often unrelated to the operating performance of particular companies.
These market fluctuations may adversely affect the price of the Common Stock.
See "Price Range of Common Stock and Dividend Policy."
SUBSTANTIAL AMOUNT OF COMMON STOCK ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have 15,987,073 shares
of Common Stock outstanding. Of these shares, 9,978,658 shares, including the
4,000,000 shares of Common Stock sold in the Offering, will be freely
tradable under the Securities Act by persons who are not "affiliates" of the
Company (in general, an affiliate is any person who has a control
relationship with the Company). The remaining 6,008,415 outstanding shares of
Common Stock are deemed to be "restricted securities" as that term is defined
in Rule 144, all of which will become for sale in the public market in
compliance with Rule 144.
No prediction can be made as to the effect, if any, that market sales of
shares of Common Stock that are restricted securities, or the availability of
such shares for sale, will have on the market price of the Common Stock
prevailing from time to time. Sales of substantial amounts of Common Stock,
or the perception that such sales could occur, could adversely affect
prevailing market prices for the Common Stock and could impair the Company's
future ability to raise capital through an offering of equity securities.
As part of the Company's acquisition strategy, the Company anticipates
issuing additional shares of its Common Stock. To the extent that the Company
is able to execute its acquisition strategy, the number of outstanding shares
of Common Stock that will be eligible for sale in the future is likely to
increase substantially. In addition, the potential issuance of additional
shares in connection with anticipated acquisitions could depress demand for
the Common Stock and result in a lower price than would otherwise be
obtained. See "Shares Eligible for Future Sale."
NO DIVIDENDS
The Company currently does not intend to pay any cash dividends on the
Common Stock. The Company currently intends to retain any earnings for
working capital, repayment of indebtedness, capital expenditures and general
corporate purposes. The Credit Facility contains restrictions on the
Company's ability to pay dividends or make other distributions. See "Price
Range of Common Stock and Dividend Policy."
8
<PAGE>
SIGNIFICANT DEVELOPMENTS
Since Kanders acquired its interest in the Company in January 1996, the
Company has pursued a strategy of growth through acquisition of businesses
and assets that complement its existing businesses. Through July 24, 1997,
the Company has consummated the five transactions discussed below, and is
continuing to pursue other acquisition opportunities. In addition, the
Company recently established a holding company structure to facilitate
management of its growth.
DSL GROUP LIMITED
On April 16, 1997, the Company combined with 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. Supplemental
consolidated financial statements of the Company for fiscal 1996 and for
first quarter 1997 have been provided which give effect to the DSL
Transaction on a supplemental basis. 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. The Company
also assumed and subsequently repaid $6.9 million, plus interest, of DSL's
outstanding credit facility. In connection with the DSL Transaction, the
Company expects to record a non-recurring charge to earnings in the second
quarter of fiscal 1997 of approximately $2.5 million. This charge consists of
transaction costs, principally professional fees of approximately $1.1
million, and restructuring costs of approximately $1.4 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.
GORANDEL TRADING LIMITED
On June 9, 1997, the Company acquired the remaining 50% of Gorandel
Trading Limited that it did not previously own. 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.
SUPERCRAFT (GARMENTS) LIMITED
On April 7, 1997, the Company acquired Supercraft (Garments) Limited.
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 pounds
sterling250,000 (approximately $410,000) based on 1997 operating results.
Supercraft's net revenues for 1996 were approximately $5.7 million.
DEFENSE TECHNOLOGY CORPORATION OF AMERICA
On September 30, 1996, a subsidiary of the Company, Defense Technology
Corporation of America, a Delaware corporation ("DTC"), acquired
substantially all of the assets (the "DTCoA Assets") of Defense Technology
Corporation of America, a Wyoming corporation ("DTCoA"). DTC manufactures
less-than-lethal and anti-riot products, including pepper sprays, tear gas,
distraction devices, flameless expulsion grenades and specialty impact
munitions, which it distributes to U.S. and foreign law enforcement agencies
and the military. The Company acquired these assets by paying DTCoA a
purchase
9
<PAGE>
price consisting of approximately $838,000 in cash, 270,728 shares of Common
Stock valued at the time at $2.0 million, subject to reduction under certain
circumstances, and by paying to Key Bank of Wyoming ("Key Bank"), which made
a credit facility available to DTCoA, 358,714 shares of Common Stock valued
at $2.65 million in return for Key Bank's agreement to release its liens on
the assets of DTCoA. The Company also assumed certain specified liabilities
of DTCoA. The combined net revenues of DTC and its predecessor for 1996 were
approximately $8.9 million. See "Business -- Litigation" and "Shares Eligible
for Future Sale" and Note 2 to the Consolidated Financial Statements.
NIK PUBLIC SAFETY PRODUCT LINE
Effective as of July 1, 1996, NIK Public Safety, Inc. ("NIK"), a
subsidiary of the Company, acquired the NIK Public Safety Product Line (the
"NIK Product Line"). NIK assembles and distributes portable narcotic
identification kits used for the identification of narcotic substances by law
enforcement agencies. In addition, NIK distributes the Flex-Cuf(Registered
Trademark) restraint, specimen collection kits, evidence collection kits and
tamper guard evidence tape. The Company acquired the NIK Product Line for a
purchase price consisting of 310,931 shares of Common Stock valued at the
time at $2.4 million. NIK's net revenues for 1996 were approximately $2.2
million.
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.
10
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 4,000,000 shares of
Common Stock offered hereby are estimated to be approximately $37.3 million,
after deducting underwriting discounts and commissions and estimated expenses
of the Offering. The Company expects to use approximately $17.3 million of
such net proceeds to reduce indebtedness outstanding under the Credit
Facility, approximately $20.0 million for working capital purposes and
potentially to finance future acquisitions. Indebtedness under the Credit
Facility was incurred principally to finance the DSL Transaction and the
acquisition of GTL. See "Description of Certain Indebtedness."
Although application of the net proceeds from the Offering will reduce
amounts outstanding under the Credit Facility, it will not reduce the amounts
available to the Company under the Credit Facility in the future. Pursuant to
its growth strategy, the Company is actively considering acquisitions. See
"Business -- Growth Strategy."
Indebtedness outstanding under the Credit Facility bears interest at
variable rates (8.25% per year at March 29, 1997) and matures on March 1,
1999. For information regarding the Credit Facility, see "Description of
Certain Indebtedness" and Note 6 to the Consolidated Financial Statements.
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Common Stock has been traded on the American Stock Exchange under the
symbol "ABE" since March 18, 1996. Prior to March 18, 1996, the Common Stock
was traded in the over-the-counter market, and was listed in the bid and ask
quotes of brokers as reported by the National Quotation Bureau, Inc. (the
"Bulletin Board") under the symbol "ABOA."
The following table sets forth the range of reported high and low bid
quotations for the Common Stock as listed on the Bulletin Board for fiscal
1995 and for the period January 1, 1996 to March 17, 1996 and the range of
high and low sales prices for the Common Stock on the American Stock Exchange
for the period from March 18, 1996 to July 24, 1997. The bid quotations
represent inter-dealer prices, and do not include mark-ups, mark-downs or
commissions, and may not necessarily represent actual transactions.
<TABLE>
<CAPTION>
HIGH LOW
-------- -------
<S> <C> <C>
1995
- ----
1st Quarter ........................$ 1 1/4 $ 3/4
2nd Quarter ........................ 1 1/16
3rd Quarter ........................ 15/16 7/8
4th Quarter ...................... 3 1/4 1
1996
- ----
1st Quarter (through March 17) ....$ 5 3/4 $ 2 3/4
1st Quarter (from March 18) ..... 5 1/2 5 1/16
2nd Quarter ...................... 9 5 1/8
3rd Quarter ...................... 7 7/8 6
4th Quarter ........................ 8 6 1/2
1997
- ----
1st Quarter ........................$ 9 1/2 $ 7 1/2
2nd Quarter ....................... 10 7/8 8 3/4
3rd Quarter (through July 24) ..... 11 10 1/4
</TABLE>
On July 24, 1997, the last reported sales price of the Common Stock on the
American Stock Exchange was $10.625 per share. As of July 24, 1997, the
Company had approximately 1,300 stockholders of record.
The Company has not paid any cash dividends on its Common Stock for the
last three fiscal years, and does not intend to pay any cash dividends on the
Common Stock for the foreseeable future. The Company currently intends to
retain any earnings for working capital, repayment of indebtedness, capital
expenditures and general corporate purposes. In addition, except under
certain conditions, the Company is precluded from paying dividends on its
Common Stock pursuant to the Credit Facility. See "Description of Certain
Indebtedness" and Note 6 to the Consolidated Financial Statements.
11
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company as reported in the historical consolidated financial statements at
March 29, 1997, and as adjusted as of such date to reflect the supplemental
and pro forma adjustments and to give effect to the issuance and sale of the
4,000,000 shares of Common Stock offered hereby and the application of the
net proceeds therefrom. This table should be read in conjunction with the
Consolidated Financial Statements, the Supplemental Consolidated Financial
Statements and the Notes thereto and the Unaudited Pro Forma Consolidated
Balance Sheet included elsewhere in this Prospectus. See "Description of
Certain Indebtedness."
<TABLE>
<CAPTION>
MARCH 29, 1997
-----------------------
PRO FORMA
ACTUAL AS ADJUSTED
--------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Short-term debt........................................................... $ 608 $ --
========= =============
Long-term debt, net of current portion(1)................................. $ 95 $ 95
Stockholders' equity:
Preferred Stock, par value $.01 per share; 5,000,000 shares authorized,
no shares issued and outstanding........................................ -- --
Common Stock, par value $.01 per share; 50,000,000 shares authorized,
10,591,681 and 15,987,073 shares issued and outstanding(2) ............. 106 160
Additional paid-in capital............................................... 22,810 61,909
Retained earnings........................................................ 2,216 2,101
--------- -------------
Total stockholders' equity.............................................. 25,132 64,170
--------- -------------
Total capitalization................................................... $25,227 $64,265
========= =============
</TABLE>
- ------------
(1) Substantially all of the Company's assets are pledged as collateral
under the Credit Facility. See Note 6 to the Consolidated Financial
Statements.
(2) Excludes (i) 358,000 shares of Common Stock issuable upon the exercise
of outstanding non-qualified stock options, (ii) 625,667 shares of
Common Stock issuable upon the exercise of outstanding options under
the 1994 Incentive Stock Plan, (iii) 399,000 shares of Common Stock
issuable upon the exercise of outstanding options under the 1996
Amended and Restated Stock Option Plan and (iv) 300,000 shares of
Common Stock issuable upon the exercise of outstanding options under
the 1996 Amended and Restated Non-Employee Directors Stock Option Plan.
The weighted average exercise price of all outstanding options is $3.64
per share. Excludes an aggregate of 1,501,000 additional shares
reserved for issuance pursuant to options that may be issued in the
future under the 1996 Amended and Restated Stock Option Plan. See
"Management -- Option Plans."
12
<PAGE>
SELECTED CONSOLIDATED HISTORICAL, SUPPLEMENTAL AND
PRO FORMA FINANCIAL DATA
The selected consolidated historical balance sheet data of the Company
presented below for fiscal 1992 and as of September 20, 1993 (predecessor
company) and the selected consolidated historical operating and other data of
the Company presented below for fiscal 1992 and for the period January 1 to
September 20, 1993 (predecessor company) have been derived from the Company's
unaudited consolidated historical financial statements. The selected
consolidated historical balance sheet data, operating data and other data for
the Company as of December 31, 1993 and 1994 and for the period from
September 20, 1993 through December 31, 1993 have been derived from the
Company's audited financial statements for such period. The selected
consolidated historical balance sheet data of the Company presented below for
fiscal 1995 and 1996 and the selected consolidated historical operating and
other data of the Company presented below for fiscal 1994, 1995 and 1996 have
been derived from the Company's audited Consolidated Historical Financial
Statements and the Notes thereto included elsewhere in this Prospectus. The
selected consolidated supplemental balance sheet data, operating data and
other data of the Company presented below for fiscal 1996 have been derived
from the Company's audited Supplemental Consolidated Financial Statements and
the Notes thereto included elsewhere in this Prospectus. The selected
consolidated historical financial information of the Company presented below
as of and for first quarter 1996 and 1997 have been derived from the
Company's unaudited Consolidated Historical Financial Statements and include,
in the opinion of the Company's management, all adjustments, consisting only
of normal recurring adjustments, necessary to present fairly the data for
such period. The selected consolidated supplemental financial information of
the Company presented below as of and for first quarter 1997 have been
derived from the Company's unaudited Supplemental Consolidated Financial
Statements and include, in the opinion of the Company's management, all
adjustments, consisting only of normal recurring adjustments, necessary to
present fairly the data for such period. The selected consolidated historical
balance sheet data for fiscal 1995 and 1996 and for first quarter 1996 and
1997; the selected consolidated historical operating and other data for
fiscal 1994, 1995 and 1996 and for first quarter 1996 and 1997; and the
selected consolidated supplemental balance sheet data, operating data and
other data for fiscal 1996, and as of and for the first quarter 1997 should
be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operation." The results for first quarter
1997 are not necessarily indicative of the results expected for fiscal 1997
or for any future periods.
13
<PAGE>
SELECTED CONSOLIDATED HISTORICAL, SUPPLEMENTAL
AND PRO FORMA FINANCIAL DATA
<TABLE>
<CAPTION>
FISCAL YEAR
-------------------------------------------------------------------------
HISTORICAL SUPPLEMENTAL
------------------------------------------------------------------------
PREDECESSOR
COMPANY COMPANY
-------------------- ----------------------------------------------------
JANUARY 1- SEPTEMBER 20-
SEPTEMBER 20 DECEMBER 31
1992 1993 1993(A) 1994 1995 1996 1996(B)
------- ------------ -------------- ------- ------- ------- ------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenue ..................
Products................. $ 8,413 $6,496 $2,953 $11,355 $11,741 $18,011 $18,011
Services................. -- -- -- -- -- -- 12,956
------- ------------ -------------- ------- ------- ------- ------------
Total revenues.......... 8,413 6,496 2,953 11,355 11,741 18,011 30,967
Cost of sales............. 5,508 4,120 1,878 7,741 7,443 10,879 21,172
Operating expenses........ 2,673 1,806 773 2,653 3,368 5,088 6,905
Depreciation and
amortization............. -- -- 32 43 53 366 554
Interest expense
(income), net............ 205 146 47 216 281 253 515
Equity in earnings of
unconsolidated
subsidiaries............. -- -- -- -- -- -- (320)
------- ------------ -------------- ------- ------- ------- ------------
Operating income.......... 27 424 223 702 596 1,425 2,141
Non-operating income .... 100 -- -- -- 228 2 2
------- ------------ -------------- ------- ------- ------- ------------
Income before income
taxes.................... 127 424 223 702 824 1,427 2,143
Income taxes.............. -- 160 85 279 304 592 1,215
Dividends on preference
shares................... -- -- -- -- -- -- 239
------- ------------ -------------- ------- ------- ------- ------------
Net income applicable to
common stockholders...... $ 127 $ 264 $ 138 $ 423 $ 520 $ 835 $ 689
======= ============ ============== ======= ======= ======= ============
Net income per common
share and common
equivalent shares
outstanding.............. $ .04 $ .07 $ .02 $ .07 $ .08 $ .10 $ .08
======= ============ ============== ======= ======= ======= ============
Weighted average number
of common shares and
common equivalent shares
outstanding.............. 3,231 3,952 6,116 5,802 6,370 8,133 8,876
======= ============ ============== ======= ======= ======= ============
OTHER DATA:
Earnings before interest,
income taxes,
non-operating income and
depreciation and
amortization(d).......... $ 232 $ 570 $ 302 $ 961 $ 930 $ 2,044 $ 3,210
Earnings before interest,
income taxes and
non-operating income(d) . 232 570 270 918 877 1,678 2,656
BALANCE SHEET DATA
(PERIOD END):
Working capital........... $ 1,691 $ (691) $ 463 $ 40 $ 796 $13,519 $14,290
Total assets.............. 4,497 7,053 6,725 7,470 8,161 28,731 49,530
Total debt................ 7,604 1,017 1,107 1,743 2,110 400 15,683
Common stockholders'
equity (deficit)......... (3,231) 2,208 2,346 2,970 3,733 24,567 24,875
</TABLE>
<PAGE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
FIRST QUARTER
---------------------------------------------
PRO PRO
FORMA FORMA
AS AS
ADJUSTED HISTORICAL SUPPLEMENTAL ADJUSTED
-------- -------------- ------------ --------
1996(C) 1996 1997 1997(B) 1997(C)(E)
-------- ------ ------- ------------ --------
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenue ..................
Products................. $30,529 $3,267 $ 6,422 $ 6,422 $ 7,575
Services................. 37,501 -- -- 8,328 10,228
-------- ------ ------- ------------ --------
Total revenues.......... 68,030 3,267 6,422 14,750 17,803
Cost of sales............. 49,200 2,110 3,773 10,453 12,773
Operating expenses........ 11,879 950 1,901 2,977 3,228
Depreciation and
amortization............. 1,075 18 127 286 330
Interest expense
(income), net............ 40 72 (40) 69 (51)
Equity in earnings of
unconsolidated
subsidiaries............. (766) -- -- (272) (190)
-------- ------ ------- ------------ --------
Operating income.......... 6,602 117 661 1,237 1,713
Non-operating income .... 3 -- -- -- --
-------- ------ ------- ------------ --------
Income before income
taxes.................... 6,605 117 661 1,237 1,713
Income taxes.............. 2,974 45 256 554 765
Dividends on preference
shares................... -- -- -- 143 --
-------- ------ ------- ------------ --------
Net income applicable to
common stockholders...... $ 3,631 $ 72 $ 405 $ 540 $ 948
======== ====== ======= ============ ========
Net income per common
share and common
equivalent shares
outstanding.............. $ .26 $ .01 $ .04 $ .04 $ .07
======== ====== ======= ============ ========
Weighted average number
of common shares and
common equivalent shares
outstanding.............. 13,831 7,576 11,523 12,797 14,512
======== ====== ======= ============ ========
OTHER DATA:
Earnings before interest,
income taxes,
non-operating income and
depreciation and
amortization(d).......... $ 7,717 $ 207 $ 748 $ 1,592 $ 1,992
Earnings before interest,
income taxes and
non-operating income(d) . 6,642 189 621 1,306 1,662
BALANCE SHEET DATA
(PERIOD END):
Working capital........... $ 950 $12,274 $14,473 $33,177
Total assets.............. 7,723 28,859 49,292 73,234
Total debt................ 1,759 703 15,887 95
Common stockholders'
equity (deficit)......... 4,996 25,132 25,700 64,170
</TABLE>
- ------------
(a) As a result of emerging from Chapter 11 bankruptcy reorganization and
adopting fresh-start reporting, the financial information for the
period from September 20, 1993 through December 31, 1993 and thereafter
includes the operating results of the reorganized Company.
(b) The supplemental financial data for fiscal 1996 and first quarter 1997
have been restated to give effect to the combination with DSL. See
"Significant Developments."
(c) See Unaudited Pro Forma Consolidated Statements of Operations for
fiscal 1996 and for first quarter 1997.
(d) Neither earnings before interest, income taxes, non-operating income
and depreciation and amortization nor earnings before interest, income
taxes and non-operating income should be considered as alternatives to
net income or cash flow and neither are a measure of performance under
generally accepted accounting principles. They are presented solely to
provide additional information for evaluating the Company.
(e) Gives effect to the sale of the 4,000,000 shares of Common Stock
offered by the Company and the application of the net proceeds thereof.
See "Use of Proceeds" and Unaudited Pro Forma Consolidated Balance
Sheet as of March 29, 1997.
14
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma consolidated financial statements have
been derived from the consolidated historical financial statements of the
Company (which have been restated to give effect to the combination of the
Company with DSL since DSL's inception, on a supplemental basis); DSL
Holdings, the predecessor company of DSL, for the period from January 1, 1996
through July 31, 1996; and the historical financial statements of DTC and
GTL. The unaudited pro forma statements of income for fiscal 1996 and for
first quarter 1997 give effect to the acquisition of the DTCoA Assets,
Supercraft and GTL as if such acquisitions had occurred as of the first day
of the period presented. The unaudited pro forma balance sheet as of March
29, 1997 gives effect to the above transactions as if such transactions had
occurred on March 29, 1997. The unaudited pro forma statement of income for
fiscal 1996 also gives effect to the conversion of the Company's 5%
Convertible Subordinated Notes due April 30, 2001 (the "Convertible Notes")
as of January 1, 1996.
The unaudited pro forma consolidated financial statements are presented
for informational purposes only and are not necessarily indicative of actual
results that would have been achieved had such transactions been consummated
on the dates or for the periods indicated and do not purport to indicate
results of operations as of any future period. The unaudited pro forma
consolidated financial statements should be read in conjunction with the
historical financial statements of the Company, DSL and DSL Holdings, the
Supplemental Consolidated Financial Statements of the Company and the related
notes thereto and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this Prospectus.
15
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED DECEMBER 28, 1996
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA
SUPPLEMENTAL HISTORICAL AS ADJUSTED
-------------- ------------------------------------------------------- ------------------------
DSL DEFENSE TECHNOLOGY SUPERCRAFT GORANDEL
HOLDINGS CORPORATION OF (GARMENTS) TRADING
COMPANY (A) LIMITED (A) AMERICA (A) LIMITED (A) LIMITED (A) ADJUSTMENTS COMBINED
-------------- ----------- ------------------ ------------ ----------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Total revenues ....... $30,967 $18,191 $6,772 $5,746 $6,354 -- $68,030
Cost of sales ........ 21,172 15,175 3,562 4,910 4,381 -- 49,200
Operating expenses ... 6,905 2,107 2,017 235 615 -- 11,879
Depreciation and
amortization ........ 554 304 186 -- -- 31(b) 1,075
Interest expense
(income), net ....... 515 147 31 (28) 105 (730)(c) 40
Equity in earnings of
unconsolidated
subsidiaries ........ (320) (768) -- -- -- 322(h) (766)
-------------- ----------- ------------------ ------------ ----------- ------------- ----------
Operating income ..... 2,141 1,226 976 629 1,253 377 6,602
Non-operating income . 2 1 -- -- -- -- 3
-------------- ----------- ------------------ ------------ ----------- ------------- ----------
Income before income
taxes ............... 2,143 1,227 976 629 1,253 377 6,605
Income taxes ......... 1,215(f) 603(f) 381 207 608 (40)(e) 2,974
Dividends on
preference share .... 239 -- -- -- -- (239)(d) --
-------------- ----------- ------------------ ------------ ----------- ------------- ----------
Net income applicable
to common
stockholders ........ $ 689 $ 624 $ 595 $ 422 $ 645 $ 656 $ 3,631
============== =========== ================== ============ =========== ============= ==========
Net income per common
share and common
equivalent shares
outstanding ......... $ .08 $ .26
============== ==========
Weighted average
number of shares and
common equivalent
shares............... 8,876 13,831(g)
============== ==========
</TABLE>
See Notes to Unaudited Pro Forma Consolidated Statement of Operations.
16
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED DECEMBER 28, 1996
(DOLLARS IN THOUSANDS)
(a) Results of operations include the following:
Company -combined results of operations of the Company for fiscal 1996
and results of operations of DSL for the period June 3, 1996 (inception) to
December 31, 1996 (supplemental to give effect to the pooling transaction).
DSL Holdings -results of operations for the period January 1, 1996 to
July 31, 1996 (date of purchase of DSL Holdings by DSL).
DTCoA -results of operations for the period January 1, 1996 to September
30, 1996.
Supercraft -results of operations for the year ended December 31, 1996.
GTL -results of operations for the 12 month period ended December 31,
1996.
(b) The following adjustments are made to record adjustments to depreciation
and amortization:
Amortization of intangible assets resulting from the acquisitions
described in "Significant Transactions":
<TABLE>
<CAPTION>
<S> <C>
Amortization of excess cost over net assets--Supercraft ........... $ 82
Amortization of excess cost over net assets--GTL ................... 92
Elimination of historical amortization of deferred debt issue costs (143)
-------
$ 31
=======
</TABLE>
While the Company has yet to complete the final allocation of the excess
cost over net assets acquired to the specific assets acquired, based on
its preliminary estimate, the Company believes that the excess will be
allocated principally to goodwill, which will be amortized over an average
of 25 years. The preliminary estimate of the excess cost over net assets
does not reflect certain assumed liabilities which have not been
quantified as of the date of this Registration Statement.
(c) Reflects adjustments to interest expense as follows:
<TABLE>
<CAPTION>
<S> <C>
Elimination of historical interest on the Convertible Notes for the period May
1, 1996 through December 18, 1996............................................... $(371)
Elimination of historical interest expense for the period January 1, 1996
through April 30, 1996.......................................................... (97)
Elimination of interest expense recorded by DSL on historical debt ............. (262)
--------
$(730)
========
</TABLE>
(d) Reflects the elimination of preference share dividends on the DSL
preference shares.
(e) Adjustment to reflect the income tax effect of the pro forma
adjustments.
(f) Includes non-recurring tax penalties for DSL of approximately $320 in
the 12 month period ended December 31, 1996.
(g) Includes 629,442 shares issued in connection with the acquisition of the
DTCoA Assets, 115,176 shares for the acquisition of GTL and
approximately 2,236,000 shares issued for the conversion of the
Convertible Notes as if such shares were issued on January 1, 1996. Also
includes 1,600,000 shares required to be issued by the Company in the
Offering to generate sufficient net proceeds to repay the balance on the
Credit Facility.
(h) Reflects the elimination of the historical 50% equity in earnings of
GTL, which is included in the supplemental Company amounts, as such
amounts are included gross in the GTL amounts.
17
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE-MONTHS ENDED MARCH 29, 1997
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA
SUPPLEMENTAL HISTORICAL AS ADJUSTED
-------------- ------------------------ ------------------------
SUPERCRAFT GORANDEL
(GARMENTS) TRADING
COMPANY (A) LIMITED (A) LIMITED (A) ADJUSTMENTS COMBINED
-------------- ------------ ----------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Total revenues....................... $14,750 $1,153 $1,900 $17,803
Cost of sales........................ 10,453 996 1,324 12,773
Operating expenses................... 2,977 25 226 3,228
Depreciation and amortization ....... 286 44 (b) 330
Interest expense (income), net ...... 69 (11) (109)(c) (51)
Equity in earnings of unconsolidated
subsidiaries ....................... (272) 82(g) (190)
-------------- ------------ ----------- ------------- ----------
Income before income taxes........... 1,237 143 350 (17) 1,713
Income taxes......................... 554 47 186 (22)(e) 765
Dividends on preference shares ...... 143 (143)(d) --
-------------- ------------ ----------- ------------- ----------
Net income applicable to common
stockholders........................ $ 540 $ 96 $ 164 $ 148 $ 948
============== ============ =========== ============= ==========
Net income per common share.......... $ 0.04 $ 0.07
============== ==========
Weighted average number of common
shares and common equivalent
shares.............................. 12,797 14,512 (f)
============== ==========
</TABLE>
See Notes to Unaudited Pro Forma Consolidated Statement of Operations.
18
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE-MONTHS ENDED MARCH 29, 1997
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(a) Results of operations include the following:
Company -results of operations of Armor Holdings, Inc. for first quarter
1997 (supplemental to give effect to the DSL pooling),
Supercraft -results of operations for the three months ended March 31,
1997,
GTL -results of operations for the three months ended March 31, 1997.
(b) Reflects the following adjustments to record the amortization of
intangible assets resulting from the acquisitions described in
"Significant Transactions" as follows:
<TABLE>
<CAPTION>
<S> <C>
Amortization of excess cost over net assets--
Supercraft .................................. $21
Amortization of excess cost over net assets--
GTL.......................................... 23
-----
$44
=====
</TABLE>
While the Company has yet to complete the final allocation of the excess
cost over net assets acquired to the specific assets acquired based on its
preliminary estimate, the Company believes that the excess will be
allocated principally to goodwill, which will be amortized over an average
of 25 years. The preliminary estimate of the excess of assets acquired over
liabilities assumed does not reflect certain assumed liabilities which have
not been quantified as of the date of this Registration Statement.
(c) Reflects the elimination of interest expense recorded by DSL on
historical debt included in the Company results. This debt is assumed
paid as of the beginning of the period presented.
(d) Reflects the elimination of preference share dividends on the DSL
preference shares.
(e) Adjustment to reflect the income tax effect of the pro forma
adjustments.
(f) Includes 115,176 shares for the acquisition of GTL as if such shares
were issued on January 1, 1997 and 1,600,000 shares required to be
issued in the Offering to generate sufficient net proceeds to repay the
balance on the Credit Facility.
(g) Reflects the elimination of the historical 50% equity in earnings of
GTL, which is included in the supplemental Company amounts, as such
amounts are included gross in the GTL amounts.
19
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF MARCH 29, 1997
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
SUPPLEMENTAL HISTORICAL PRO FORMA
-------------- ------------ ---------------------------------------
SUPERCRAFT
(GARMENTS) PRO FORMA OFFERING
COMPANY (A) LIMITED ADJUSTMENTS ADJUSTMENTS COMBINED
-------------- ------------ -------------- ------------- ----------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .... $ 4,135 $ 1 $(3,237)(b) $ 19,840 (h) $20,739
Accounts receivable, net .... 12,408 1,071 13,479
Inventories .................. 4,897 567 5,464
Prepaid expenses and other
current assets .............. 2,432 2,432
-------------- ------------ -------------- ------------- ----------
Total current assets ......... 23,872 1,639 (3,237) 19,840 42,114
-------------- ------------ -------------- ------------- ----------
--
Property, plant and equipment,
net .......................... 6,676 1,077 (80)(d) 7,673
Intangible assets ............. 16,844 4,703 (d) 21,547
Investment in unconsolidated
subsidiary ................... 1,451 1,451
Other assets .................. 449 449
-------------- ------------ -------------- ------------- ----------
Total assets................... $49,292 $2,716 $ 1,386 $ 19,840 $73,234
============== ============ ============== ============= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings ........ $ 357 $ -- $ -- $ (357)(h) $ --
Current portion of long-term
debt and capitalized lease
obligation................... 1,369 304 (1,673)(h) --
Accounts payable, accrued
expenses and other .......... 7,673 1,510 (246)(b)(d)(f) 8,937
-------------- ------------ -------------- ------------- ----------
Total current liabilities .. 9,399 1,814 (246) (2,030) 8,937
-------------- ------------ -------------- ------------- ----------
Minority interest ............. 32 32
Long-term debt and capitalized
lease obligations ............ 6,945 8,550 (g) (15,400)(h) 95
-------------- ------------ -------------- ------------- ----------
Total liabilities ........... 16,376 1,814 8,304 (17,430) 9,064
-------------- ------------ -------------- ------------- ----------
Preference shares ............. 7,216 -- (7,216)(c) --
Stockholders' equity:
Common stock .................. 119 49 (48)(e)(d) 40 (h) 160
Additional paid-in capital .. 23,480 703 496 (e)(d) 37,230 (h) 61,909
Foreign currency exchange
translation ................. (104) (104)
Retained earnings ............ 2,205 150 (150)(e) 2,205
-------------- ------------ -------------- ------------- ----------
Total stockholders' equity . 25,700 902 298 37,270 64,170
-------------- ------------ -------------- ------------- ----------
Total liabilities and
stockholders' equity.......... $49,292 $2,716 $ 1,386 $ 19,840 $73,234
============== ============ ============== ============= ==========
</TABLE>
See Notes to Unaudited Pro Forma Consolidated Balance Sheet.
20
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF MARCH 29, 1997
(AMOUNTS IN THOUSANDS)
(a) Reflects the combined accounts for the Company as of March 29, 1997 and
DSL as of March 31, 1997.
(b) Reflects the following adjustments to cash:
<TABLE>
<CAPTION>
<S> <C>
Borrowing under existing Credit Facility .... $15,400
Repayment of DSL indebtedness:
N.M. Rothschild & Sons Limited .............. (6,850)
Other........................................ (872)
Payment for DSL preference share capital:
Principal ................................... (7,216)
Accrued dividend ............................ (385)
Cash portion of purchase price of Supercraft (2,214)
Cash portion of purchase price of GTL ........ (1,100)
----------
$ (3,237)
==========
</TABLE>
(c) Reflects payment for DSL preference shares.
(d) Reflects the allocation of the excess cost over net assets acquired of
Supercraft and GTL as follows:
<TABLE>
<CAPTION>
<S> <C>
Purchase price of Supercraft:
Cash ................................................................. $2,214
Contingent purchase price ............................................ 410
Transaction costs .................................................... 250
Purchase price of GTL:
Cash ................................................................. 1,100
Value of Company shares--GTL ......................................... 1,200
Transaction costs .................................................... 350
---------
5,524
Less: pro forma value of net tangible assets acquired ................. 821
---------
Unallocated excess of purchase price over net tangible assets acquired $4,703
=========
</TABLE>
While the Company has yet to complete the final allocation of the excess
cost over net assets acquired to the specific assets acquired based on its
preliminary estimate, the Company believes that the excess will be
allocated principally to goodwill, which will be amortized over an average
of 25 years. The preliminary estimate of the excess of assets acquired
over liabilities assumed does not reflect certain assumed liabilities
which have not been quantified as of the date of this Registration
Statement.
(e) Reflects the elimination of the historical accounts of Supercraft.
(f) Reflects the following adjustments to accrued expenses:
<TABLE>
<CAPTION>
<S> <C>
Set up liability for contingent purchase price
(Supercraft).............................................. $ 410
Payment of accrued interest on preference shares ......... (385)
-------
$ 25
=======
</TABLE>
21
<PAGE>
(g) Reflects the following adjustments to long-term;
<TABLE>
<CAPTION>
<S> <C>
Borrowings under the Credit Facility $15,400
Repayment of DSL indebtedness ....... (6,850)
----------
$ 8,550
==========
</TABLE>
(h) Adjustments reflect the Offering and the use of the net proceeds
therefrom after deducting underwriting discounts and estimated expenses
payable by the Company in connection with the Offering.
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the "Selected
Consolidated Historical and Supplemental Financial Data," "Unaudited Pro
Forma Consolidated Financial Statements," the Consolidated Financial
Statements and the Supplemental Consolidated Financial Statements and the
Notes thereto included elsewhere in this Prospectus. This Prospectus contains
forward-looking statements within the meaning of Section 27A of the
Securities Act and Section 21E of the Exchange Act. Such statements are
indicated by words or phrases such as "anticipate," "estimate," "project,"
"management believes," "the Company believes" and similar words or phrases.
Such statements are based on current expectations and are subject to risks,
uncertainties and assumptions. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those anticipated, estimated or
projected.
GENERAL
Supplemental Consolidated Financial Statements. On April 16, 1997, the
Company consummated the DSL Transaction. Pursuant to the DSL Transaction, the
Company, among other things, issued 1,274,217 shares of Common Stock in
exchange for all the outstanding ordinary and deferred share capital of DSL,
and Armor Holdings Limited, a wholly owned subsidiary of the Company ("AHL"),
paid the sum of pounds sterling4.6 million (approximately $7.5 million) in
cash for all of the outstanding preference share capital of DSL. The DSL
Transaction was accounted for as a pooling of interests. Accordingly, the
historical Consolidated Financial Statements for the Company as at and for
fiscal 1996 and for first quarter 1997 have been restated on a supplemental
basis to reflect the historical financial statements of the Company combined
with DSL since DSL's inception. DSL was incorporated on June 3, 1996 and,
through a management buy-out transaction on July 31, 1996, acquired all of
the outstanding share capital of DSL Holdings. The buy-out transaction
resulted in a step up in basis for accounting purposes which resulted in the
recording of approximately $9.6 million of goodwill.
The following discussion of the Company's results of operations and
analysis of financial condition for fiscal 1996 and first quarter 1997
reflects results on this supplemental basis. The discussion of the Company's
results of operations for the prior periods are not affected by the DSL
Transaction and accordingly are presented on a historical basis. The results
of operations for the business combinations accounted for as purchase
transactions are included since their effective acquisition dates: as of
September 30, 1996 for the DTCoA Assets and July 1, 1996 for the NIK Product
Line.
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.
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 corporate
overhead at DSL's various security sites. Operating expenses for DSL
consisted primarily of corporate overhead at DSL's corporate headquarters.
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.
23
<PAGE>
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
$229,000 for fiscal 1996.
Impact of Acquisitions. The results of operations for fiscal 1996 and
first quarter 1997, which are reported on a supplemental basis, reflect the
results of operations of the Company combined with DSL. Additionally the
results of operations for DTC and NIK are reflected since the acquisition
dates of the DTCoA Assets and the NIK Product Line, September 30, 1996 and
July 1, 1996, respectively. Accordingly, period-to-period comparisons should
be considered in the context of the timing of the transactions.
Subsequent Events. On June 9, 1997, the Company acquired the remaining 50%
interest of GTL that it did not previously own. The aggregate purchase price
of the transaction is 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
$200,000 loan available to a former stockholder of GTL, subject to certain
conditions.
On April 16, 1997, the Company completed its combination with DSL, which
was accounted for under the pooling method of accounting for business
combinations. 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. The Company also assumed and
subsequently repaid $6.9 million, plus interest, of DSL's outstanding credit
facility.
In connection with the DSL Transaction, the Company expects to record a
non-recurring charge to earnings in the second quarter of fiscal 1997 of
approximately $2.5 million. The components of this charge relate to
transaction costs, principally professional fees of approximately $1.1
million, and restructuring costs of approximately $1.4 million incurred to
consolidate the administrative and accounting functions of DSL with those of
the Company at its headquarters in Jacksonville, Florida.
On April 7, 1997, the Company completed the acquisition of Supercraft,
which has been accounted for under the purchase method of accounting for
business combinations. The Company acquired Supercraft for a total purchase
price of approximately $2.6 million consisting of (i) $1.3 million in cash,
subject to adjustments, (ii) $875,000 which was held in escrow pending final
dispostion of title to certain real property and (iii) certain additional
consideration in an amount not to exceed pounds sterling250,000
(approximately $410,000) based on 1997 operating results.
RESULTS OF OPERATIONS
FIRST QUARTER 1997 AS COMPARED TO FIRST QUARTER 1996
Revenues -products. Products revenues increased $3.1 million, or 97%, to
$6.4 million in first quarter 1997 from $3.3 million in first quarter 1996.
This increase in sales resulted from $2.4 million in sales generated from the
DTC and NIK operations in first quarter 1997, and a 17% increase in the
Company's domestic products business.
Revenues -services. Services revenues were $8.3 million in first quarter
1997. There were no such revenues in first quarter 1996.
24
<PAGE>
Cost of sales. Cost of sales increased $8.3 million, or 395%, to $10.4
million in first quarter 1997 from $2.1 million in first quarter 1996. The
majority of the increase is due to the recent combination with DSL which had
$6.6 million in operating costs associated with DSL revenues in first quarter
1997. The remaining $1.7 million increase in cost of sales is attributed to
the increased manufacturing costs of the products business (associated with a
97% increase in revenues). As a percentage of total revenues, cost of sales
increased to 70.8% in first quarter 1997 from 64.6% in first quarter 1996,
reflecting the higher cost of sales associated with the security services
business.
Operating expenses. Operating expenses increased $2.0 million to $2.9
million (20% of total revenues) in first quarter 1997 from $950,000 (29% of
total revenues) during first quarter 1996. The increase in the actual dollar
amount of operating expenses between the periods was primarily due to
approximately $1.2 million related to the overhead costs associated with DSL,
approximately $585,000 related to the additional revenues generated by DTC
and NIK and approximately $382,000 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 first quarter 1997.
Depreciation and amortization. Depreciation and amortization expense
increased to $286,000 in first quarter 1997 from $18,000 in first quarter
1996. Of the $268,000 increase, approximately $181,000 was due to
amortization of intangibles acquired during 1996, $64,000 represents existing
depreciation and amortization attributed to DSL at the time of the DSL
Transaction and the remainder was primarily due to depreciation on DTC
purchased assets.
Interest expense, net. Interest expense, net decreased $3,000, or 4%, to
$69,000 in first quarter 1997 from $72,000 in first quarter 1996. Although
interest expense of $109,000 related to DSL's loan with Rothschild was
incurred in first quarter 1997, it was partially offset by the Company's
reduction of its credit facility with LaSalle Business Credit, Inc.
("LaSalle") to a zero balance and investment of the proceeds from the
Company's offering of its Convertible Notes in April 1996.
Equity in earnings of unconsolidated subsidiaries. Equity in earnings of
unconsolidated subsidiaries amounted to approximately $272,000 in first
quarter 1997, compared to no such income in first quarter 1996. This equity
relates to DSL's original 50% investment in GTL, as well as a 20% investment
in Jardine Securicor Gurkha Services Limited ("JSGS"), a joint venture
company.
Income before income taxes. Income before income taxes increased $1.1
million, or 957%, to $1.2 million in first quarter 1997 from $117,000 in
first quarter 1996. This increase was due primarily to the integration of
DSL, DTC and NIK into the Company.
Income taxes. Income taxes totaled $554,000 in first quarter 1997, as
compared to $45,000 in first quarter 1996. The provision was based on the
Company's U.S. federal and state statutory rates of approximately 39% for its
U.S.-based company and 43% effective tax rate for DSL, excluding the U.S.
generally accepted accounting principles ("GAAP") adjustment for preferred
share dividends.
Dividends on preference shares. During first quarter 1997, DSL paid
$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 increased $468,000, or 650%, to $540,000 in first
quarter 1997 from $72,000 in first quarter 1996. As noted previously, the
increase is due to the integration of DSL, DTC and NIK into the Company.
FISCAL 1996 AS COMPARED TO FISCAL 1995
Revenues -products. Products revenues increased $6.3 million, or 54%, to
$18.0 million in fiscal 1996 from $11.7 million in fiscal 1995. This increase
resulted primarily from a 35% increase in domestic and international products
revenues, coupled with revenues generated by the DTC and NIK operations for
one and two quarters, respectively.
25
<PAGE>
Revenues -services. Services revenues were $13.0 million in fiscal 1996
during the period from August 1, 1996 through December 31, 1996. There were
no services revenues prior to August 1, 1996.
Cost of sales. Cost of sales increased $13.7 million, or 184%, to $21.1
million in fiscal 1996 from $7.4 million in fiscal 1995. Of such increase,
$10.1 million is due to increased services revenues generated in fiscal 1996,
as stated above. As a percentage of total revenues, cost of sales increased
to 68.4% in fiscal 1996 from 63.4% in fiscal 1995, reflecting the higher cost
of sales associated with the security services business. Products business
gross margin increased to 40% in fiscal 1996 from 37% in fiscal 1995, due to
the impact of higher margin products being sold by both DTC and NIK.
Operating Expenses. Operating expenses increased $3.5 million, or 103%, to
$6.9 million in fiscal 1996 from $3.4 million in fiscal 1995. As a percentage
of net sales, operating expenses decreased to 22% in fiscal 1996 from 29% in
fiscal 1995. DSL's operating expenses as a percentage of net sales amounted
to 14% for fiscal 1996, whereas the products businesses' percentage amounted
to 28% for fiscal 1996. Of the $3.5 million increase, $1.8 million is
attributable to DSL, approximately $800,000 is due to increases in
commissions resulting from increased sales in the products business and the
remainder is due to the additional operating costs associated with NIK and
DTC.
Depreciation and amortization. Depreciation and amortization increased
$501,000 to $554,000 in fiscal 1996 from $53,000 in fiscal 1995. Of the
$501,000 increase, the majority was due to additional depreciation and
amortization related to the products business, including the DTCoA Assets
purchased. In addition, approximately $159,000 of this expense relates to the
amortization of intangibles incurred by DSL and carried over onto the books
of the Company.
Interest expense, net. Interest expense, net increased $234,000, or 83%,
to $515,000 in fiscal 1996 from $281,000 in fiscal 1995. This increase
resulted primarily from $261,000 of interest expense incurred by DSL relating
to a $6.8 million working capital loan. This loan has subsequently been paid
off. In addition, the Company incurred net interest expense of $253,000
relating to the Convertible Notes.
Equity in earnings of unconsolidated subsidiaries. Equity in investments
held by DSL amounted to approximately $320,000 in fiscal 1996 compared to no
such income in fiscal 1995. This equity relates to GTL and JSGS, as discussed
previously.
Non-operating income. Non-operating income decreased $226,000 to $2,000 in
fiscal 1996 from $228,000 in fiscal 1995. The non-operating income in fiscal
1995 relates to the termination of a non-compete agreement entered into in
1990 between the Company and a competitor.
Income before income taxes. Income before income taxes increased $1.3
million to $2.1 million in fiscal 1996 from $824,000 in fiscal 1995. Of the
$1.3 million increase, approximately $600,000 was due to the products
business and approximately $700,000 was due to the services business.
Income taxes. The Company's net operating loss carry forward ("NOL") at
December 28, 1996 decreased to approximately $4.4 million from approximately
$4.7 million at January 1, 1996. Due to the Company's change in control
resulting from the Kanders investment in January 1996, the allowed annual
usage of this tax benefit became restricted to approximately $300,000 per
year.
The Company's effective tax rate was 37% in fiscal 1995 compared to 57% in
fiscal 1996 (excluding the U.S. GAAP adjustment of the preference share
dividends). This increase in rate was incurred due to an unusual and
extraordinary tax penalty of approximately $320,000 relating to DSL's
operation in Kazakhstan. Had this charge not been incurred, DSL's effective
tax rate would have been 45%.
In accordance with Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("SFAS 109"), the Company has recorded a
deferred tax asset, representing its cumulative net operating loss
carryforward and deductible temporary differences, subject to applicable
limits and an asset valuation allowance. Any future benefit obtained from the
realization of this asset will be applied to reduce the reorganization value
in excess of amounts allocable to identifiable assets. As of December 28,
1996, the gross amount of this deferred tax asset was $1.8 million, the
entire amount of which has been offset by a valuation allowance.
26
<PAGE>
Dividends on preference shares. Preference share dividends were
approximately $239,000 in fiscal 1996 compared to no dividends in fiscal
1995. These preference shares were acquired by the Company on April 16, 1997
in the DSL Transaction.
Net income. Net income increased $169,000, or 33%, to $689,000 in fiscal
1996 from $520,000 in fiscal 1995. This increase reflects the effect of
increased sales in fiscal 1996 as well as the positive effects on net income
from the NIK and DTC operations, partially offset by non-recurring
non-operating income received in fiscal 1995 and no such income being
received in fiscal 1996.
FISCAL 1995 AS COMPARED TO FISCAL 1994
Revenues -products. Products revenues increased $386,000, or 3.4%, to
$11.7 million in fiscal 1995 from $11.3 million in fiscal 1994. This increase
resulted primarily from an increase in sales in the domestic body armor
products business.
Cost of sales. Cost of sales decreased $298,000, or 4%, to $7.4 million in
fiscal 1995 from $7.7 million in fiscal 1994. The decrease was due to
positive manufacturing variances (better utilization of labor and purchases
of raw material). In addition, the domestic market experienced better margins
and contributed a greater percentage to the overall sales figures as the
products business gross margin increased from 31.8% to 36.6%.
Operating expenses. Operating expenses increased $715,000, or 27%, to $3.4
million in fiscal 1995 from $2.7 million in fiscal 1994. Increases in
salaries for additional personnel in the sales and marketing areas of the
Company and domestic commissions (due to the increase in domestic sales)
comprised the majority of the overall increase in operating expenses. In
addition, increased domestic travel costs and certain costs associated with
the investment by Kanders in the Company are included in operating expenses
for fiscal 1995. Increases in research and development expenses were also
incurred due to new vest certification and testing costs, as well as in
connection with the ISO 9002 certification of the Company's quality control
standards. The Company received the ISO 9002 certification in October 1995.
See "Business -- Manufacturing and Raw Materials."
Depreciation and amortization. Depreciation and amortization increased
$10,000, or 23%, to $53,000 in fiscal 1995 from $43,000 in fiscal 1994. The
increase was due to increasing capital expenditures during the year.
Interest expense. Interest expense increased $65,000, or 30%, to $281,000
in fiscal 1995 from $216,000 in fiscal 1994. This increase resulted primarily
from higher borrowings under the Company's LaSalle credit facility.
Non-operating income. Non-operating income amounted to $228,000 in fiscal
1995, compared to no such income in fiscal 1994. This income is non-recurring
and relates to the termination of a non-compete agreement entered into in
1990 between the Company and a competitor.
Income before income taxes. Income before income taxes increased $122,000,
or 17%, to $824,000 in fiscal 1995 from $702,000 in fiscal 1994. The increase
is primarily due to the non-operating income incurred in 1995 being partially
offset by the increases in selling, general, and administrative expenses.
Income taxes. In accordance with SFAS 109, the Company has recorded a
deferred tax asset, representing its cumulative net operating loss
carryforward and deductible temporary differences, subject to applicable
limits and an asset valuation allowance. Any future benefit obtained from the
realization of this asset will be applied to reduce the reorganization value
in excess of amounts allocable to identifiable assets. As of December 31,
1995, the gross amount of this deferred tax asset was $2.0 million the entire
amount of which has been offset by a valuation allowance.
Net income. Net income increased $97,000, or 23%, to $520,000 in fiscal
1995 from $423,000 in fiscal 1994. This increase in profit reflects the
improved margins and non-recurring, non-operating income received in fiscal
1995, partially offset by the increase in selling, general and administrative
expenses.
LIQUIDITY AND CAPITAL RESOURCES
Prior to April 30, 1996, the Company's principal source of working capital
was its credit facility with LaSalle. On April 30, 1996, the Company sold
$11.5 million principal amount of its Convertible Notes and
27
<PAGE>
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, N.A. ("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 July 24, 1997, the Company was indebted to Barnett Bank for approximately
$17.3 million. The Credit Facility is secured by, among other things, the
inventory, accounts receivable, equipment, patents, trademarks and other
intellectual property of the Company and its U.S. subsidiaries, and is
guaranteed by the U.S. subsidiaries. In addition, the Company has pledged to
Barnett Bank all of the outstanding shares of common stock owned by the
Company in DTC, NIK and Armor Holdings Properties, Inc. See "Description of
Certain Indebtedness" and Note 6 to the Consolidated Financial Statements.
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 La
Salle credit facility to a zero balance) from the issuance of the Convertible
Notes as well as positive cash flow from operations. At the end of first
quarter 1997, working capital was $14.5 million.
The Company anticipates that its cash from operations and borrowings under
the Credit Facility will enable the Company to meet its liquidity, working
capital and capital expenditure requirements during the next 12 months. The
Company, however, may require additional financing to pursue its strategy of
growth through acquisitions. If such financing is required, there are no
assurances that it will be available, or if available, that it can be
obtained on terms favorable to the Company or on a basis that is not dilutive
to stockholders.
The Company 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.
QUARTERLY RESULTS -- HISTORICAL
The following table presents summarized unaudited quarterly results of
operations for the Company for fiscal 1995 and 1996. The Company believes all
necessary adjustments have been included in the amounts stated below to
present fairly the following selected information when read in conjunction
with the Consolidated Financial Statements and Notes thereto included
elsewhere herein. Future quarterly operating results may fluctuate depending
on a number of factors. Results of operations for any particular quarter are
not necessarily indicative of results of operations for a full year or any
other quarter.
<TABLE>
<CAPTION>
FISCAL 1995
---------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- ---------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C> <C>
Sales........................................ $2,537 $2,939 $2,930 $3,335
Gross profit................................. 951 1,089 1,106 1,152
Net income................................... 112 128 226 54
Net income per common share and common share
equivalent.................................. $ 0.02 $ 0.02 $ 0.03 $ 0.01
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
FISCAL 1996
---------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- ---------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C> <C>
Sales........................................ $3,267 $3,596 $4,452 $6,696
Gross profit................................. 1,157 1,338 1,808 2,829
Net income................................... 72 144 239 380
Net income per common share and common share
equivalent.................................. $ 0.01 $ 0.02 $ 0.03 $ 0.04
</TABLE>
QUARTERLY RESULTS -- SUPPLEMENTAL
The following table presents summarized unaudited quarterly results of
operations for the Company for fiscal 1995 and 1996, giving retroactive
effect to the DSL Transaction. The Company believes all necessary adjustments
have been included in the amounts stated below to present fairly the
following selected information when read in conjunction with the Supplemental
Consolidated Financial Statements and Notes thereto included elsewhere
herein. Future quarterly operating results may fluctuate depending on a
number of factors. Results of operations for any particular quarter are not
necessarily indicative of results of operations for a full year or any other
quarter.
<TABLE>
<CAPTION>
FISCAL 1995
---------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- ---------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C> <C>
Sales........................................ $2,537 $2,939 $2,930 $3,335
Gross profit................................. 951 1,089 1,106 1,152
Net income................................... 112 128 226 54
Net income per common share and common share
equivalent.................................. $ 0.02 $ 0.02 $ 0.03 $ 0.01
</TABLE>
<TABLE>
<CAPTION>
FISCAL 1996
---------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- ---------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C> <C>
Sales........................................ $3,267 $3,596 $12,746 $11,358
Gross profit................................. 1,157 1,338 2,387 4,913
Net income................................... 72 144 62 411
Net income per common share and common share
equivalent.................................. $ 0.01 $ 0.02 $ 0.01 $ 0.04
</TABLE>
29
<PAGE>
INDUSTRY OVERVIEW
The Company participates in the global security industry through the
manufacture of security products marketed to law enforcement and correctional
personnel and the provision of specialized security services to
multi-national corporations and governmental agencies. The industry
information described below illustrates certain trends which management
believes will contribute to increasing demand for the Company's products and
services. Due to the fragmented nature of the security industry, however,
specific statistical data directly relating to the market segments in which
the Company operates are generally unavailable.
GENERAL
In recent years, the nature and perception of violent criminal activity
have changed in the U.S. and internationally. The proliferation of advanced
weaponry and related technologies has made the criminal and terrorist element
a more serious and unpredictable threat to the safety of citizens and law
enforcement personnel. Legal gun ownership has reached over 65 million people
in the U.S., and 31 U.S. states now permit the carrying of concealed weapons,
thereby increasing the risk of gun-related incidents. Such diverse trends as
increases in gang, illegal drug and militant activities have created more
sophisticated, well-equipped and violent criminals. For example, studies by
the U.S. Department of Justice indicate that the incidence of bombings in the
U.S. has grown over 200% from 1985 to 1995. Crime is viewed as a leading
public concern by the U.S. population, according to a recent Gallup poll.
Internationally, greater political, economic and social tensions and the
proliferation of weapons due to deficient security and illegal arms sales
continue to fuel criminal activities in lesser-developed nations. For
example, industry sources estimate that the crime rate in Russia has doubled
in the last five years. As multi-national corporations have increased their
presence in these lesser-developed nations to take advantage of new markets
and natural resources, they are frequently the targets of violent activity,
including kidnapping, terrorism and vandalism. A study by the U.S. Department
of State indicates that approximately two-thirds of all international
terrorist incidents in 1996 were targeted at private business concerns. Some
20% to 30% of multi-national corporations operating in Russia have been faced
with demands for protection money. Kidnappings for ransom have been on the
rise for the past few years and, increasingly, the targets are local and
foreign business executives. According to industry sources, over 7,900
kidnappings of business executives or their family members took place
worldwide in 1995.
MANUFACTURED SECURITY PRODUCTS MARKET
Certain industry studies estimate that U.S. spending for private security
equipment will increase from $14 billion in 1990 to over $24 billion in 2000
and worldwide expenditures for private security equipment will grow by 9.2%
per year from approximately $26 billion in 1994 to approximately $44 billion
in 2000. Although these statistics do not correlate directly to the Company's
product lines, the Company believes that the increasing spending in the
private security sector is indicative of a greater demand for the Company's
products in the law enforcement, correctional and governmental sectors.
Partially in response to increased awareness of crime, the number of
police officers has increased by approximately 23% in the period from 1985 to
1994. Expenditures on police protection in the U.S. have increased at a
compounded annual rate of 8% from 1980 to 1992 to a total of approximately
$41 billion annually. In 1993, a U.S. Department of Justice survey of local
police departments indicated that 65% of such organizations have purchased
body armor for all of their officers, 60% supply their officers with pepper
spray, 35% supply their officers with tear gas and 10% maintain inventories
of stun grenades and less-than-lethal projectiles. In addition, the Company
believes the rise in the prison population has spurred demand from
institutional correctional facilities for manufactured security products. In
the U.S., the prison population has grown at a compounded annual rate of 8%
from 1980 to approximately 1.6 million inmates in 1995.
SPECIALIZED SECURITY SERVICES MARKET
Many multi-national corporations, such as petrochemical and mining
companies, have significant manpower and money invested in large projects in
poor, lesser-developed nations that are often beset by
30
<PAGE>
political instability, ineffective and corrupt police forces and judicial
systems, terrorism, high crime rates and a general breakdown or lack of
political, economic and social infrastructures. Recent developments such as
the fall of Communism in Europe and the former Soviet Union and reduced
interest of world superpowers in the stabilization of many third world
governments have resulted in numerous changes in government and, in certain
cases, great political instability in such countries. Providing security for
personnel and assets in such volatile and dangerous areas is a primary factor
considered by companies and governmental agencies making decisions to invest
in and send personnel to unstable areas.
In response to such security problems, corporations are increasingly
contracting experienced private companies to perform their security services.
Industry studies demonstrate that the security services market in the U.S.,
which does not contend with the same level of security threats as most
lesser-developed nations, is expected to increase at a rate of 7.9% annually
from approximately $17 billion in 1994 to approximately $26 billion by the
year 2000. Management believes that demand by multi-national corporations and
governmental agencies operating in lesser-developed nations for specialized
security services, such as risk assessment, crisis management, guard force
management, security force organization and executive protection, is likely
to increase as such entities continue to establish operations and
manufacturing facilities in foreign and developing countries.
31
<PAGE>
BUSINESS
GENERAL
The Company is a leading provider of effective security solutions to the
increasing level of security threats encountered by domestic and foreign law
enforcement personnel, governmental agencies and multi-national corporations.
These solutions include a broad range of high quality branded manufactured
products such as ballistic resistant vests and tactical armor, bomb disposal
equipment, less-than-lethal munitions and anti-riot products marketed under
brand names such as American Body Armor(Trademark), Defense
Technology(Trademark) and First Defense(Registered Trademark), and
sophisticated security planning, advisory and management services, including
the provision of highly trained, multi-lingual and experienced security
personnel in violent and unstable areas of the world.
Founded in 1969 as American Body Armor & Equipment, Inc., the Company
until recently was primarily a manufacturer of armored products such as
ballistic resistant vests and tactical armor. Since Kanders acquired its
interest in the Company in January 1996, the Company has pursued a strategy
of growth through acquisition of businesses and assets that complement its
existing businesses. Through such acquisitions and the expansion of its
existing businesses, the Company seeks to: (i) offer superior customer
service through a comprehensive portfolio of security products and services;
(ii) capitalize on its growing, diversified, global and institutional client
base; (iii) promote brand development through the quality of its products,
superior training and customer service; and (iv) maximize profitability and
operational efficiencies. The Company believes that further growth will be
generated by the leverage of its distribution network and client base as well
as expansion into new territories.
Because the Company's customers require the highest level of reliability
from the Company's products and services the Company focuses on quality,
testing, training and support. To demonstrate its commitment to quality, the
Company became the first domestic manufacturer of body armor to qualify for
ISO 9002 certification by successfully completing an audit certifying its
compliance with a comprehensive series of quality management and quality
control standards. The Company routinely tests its products before releasing
them to customers and tests each layout of its ballistic resistant vests.
Recognizing the importance of safe and proper use of its products, the
Company offers comprehensive training to end-users and provides extensive
customer service support to its distributor network and end users. All
security personnel furnished by the Company undergo extensive and on-going
training.
The Company believes that governmental and international agencies and
multi-national corporations will continue to face significant threats of
violent criminal and hostile activity, terrorism and civil disturbances. The
Company therefore expects demand for its products and services to increase as
these entities anticipate, mitigate and react to perceived or actual security
threats worldwide.
BUSINESS STRATEGY
The Company approaches its markets by focusing on customer service,
providing customized security solutions and offering branded, differentiated
products. The Company is pursuing the following business strategy in order to
increase its scale and profitability:
Offer a Comprehensive Portfolio of Solutions to Security Threats. The
Company has established a comprehensive portfolio of security solutions that
respond to a wide array of customer needs. Historically, the Company
manufactured, marketed and sold body armor and related products to law
enforcement agencies. Since July 1996, however, the Company has significantly
increased the scope of its product offerings through acquisitions of
complementary business lines, including less-than-lethal munitions and
anti-riot products, military apparel and narcotic identification kits.
Through the Company's combination with DSL, the Company has become a leading
provider of specialized security solutions that are designed to ensure the
safety and security of personnel and fixed assets in remote and hostile areas
of the world. The Company intends to continue to diversify its product and
service portfolio through internal development and acquisitions of
complementary business and product lines.
Promote Brand Development through Training and Sales Support. The
Company's products are sold under established, highly-regarded brand names
such as American Body Armor(Trademark), Defense Technology(Trademark),
32
<PAGE>
First Defense(Registered Trademark) and NIK(Registered Trademark). To
maintain the value of these brands, the Company employs strict quality
control measures by conducting thorough product testing and providing
extensive customer support through a domestic and international network of
factory-direct sales representatives. These representatives offer
comprehensive customer training and dedicated customer service. DSL is one of
the world's oldest and most respected providers of sophisticated security
services and protects its reputation through rigorous selection, training and
management of personnel.
Capitalize on the Company's Broad Distribution Network. To sell its
portfolio of manufactured products, the Company has developed a broad network
of approximately 345 domestic independent distributors and approximately 150
international agents through whom it markets its products to end-users,
including domestic and international law enforcement agencies and
governmental authorities. The distributors benefit from their association
with the Company due to the quality of the Company's manufactured products,
the scope of its product line, the high degree of service provided by the
Company and the distributors' opportunity to participate profitably in the
sale of the Company's products. The wide range of products provided by the
Company create efficiencies in distribution which help to lower the Company's
selling cost per unit.
Capitalize on a Diversified, Global and Institutional Service Client
Base. DSL's client base includes international law enforcement agencies,
governmental authorities, the United Nations, the U.S. State Department and
multi-national corporations including petrochemical companies, mineral
extraction companies and financial services institutions operating in remote
and hostile environments. Once established in a particular region, the
Company is often selected by other multi-national organizations currently
operating in or expanding operations into that region. Through its service
client base, the Company believes it can expand its global presence through
additional referrals, enhance its reputation as the provider of choice within
certain geographic regions and reinforce its image as an innovative and
worldwide provider of specialized security services.
Maximize Profitability and Operational Efficiencies-Products. The Company
manufactures superior quality, high-end products which it sells for premium
prices. Because margins are an important consideration, the Company generally
has avoided highly-competitive bids for its manufactured products. In
addition, the Company maintains production efficiency through its close
attention to raw materials purchasing and flexible production planning.
Maximize Profitability and Operational Efficiencies-Services. The Company
provides value-added security services in unstable, high risk areas of the
world through highly qualified specialists with extensive international
security training and in most cases, military experience. Such services
require an in-depth understanding of foreign, political, economic and
cultural norms. In certain regions of the world, DSL has opened offices to
establish a strong local presence and efficiently gather local intelligence.
DSL attempts to absorb these fixed costs across a number of contracts in a
particular geographic region to enhance operating margins.
GROWTH STRATEGY
The Company expects the demand for defensive security products and
services to continue to grow in the foreseeable future. The Company seeks to
capitalize on this growth through the pursuit of strategic acquisitions,
leveraging of existing distribution network and geographic operating presence
with new products and services and continued global expansion.
Pursue Strategic Acquisitions. The Company believes that there currently
exists a large pool of attractive acquisition candidates in the manufacturing
and service sectors potentially available for purchase. The Company intends
to continue to pursue selective acquisitions to enhance its position in its
current markets, to acquire operations in new markets and to acquire
operations that will broaden the range of products and scope of services
which the Company can provide.
Leverage Distribution Network. The Company plans to leverage its
distribution network by expanding its range of branded and differentiated
security products through the acquisition of niche defensive security
products manufacturers and investment in the development of new and enhanced
products which complement the Company's existing offerings. The Company
believes that a broader
33
<PAGE>
product line will enable it to provide more comprehensive security solutions,
thereby strengthening the relationship between the Company and its
distributors.
Leverage Service Client Base. The Company intends to grow with its service
clients, particularly those involved in the petrochemical and mineral
extraction industries, as they expand their commercial activities in remote
and hostile areas. In addition, satisfied clients historically have provided
significant growth opportunities for the Company in the form of client
referrals, providing additional growth to the Company with little associated
marketing expense.
Continue Global Expansion. The Company seeks to expand the geographic
scope of its security product and service offerings through acquisitions,
through the extension of its distribution network into new territories and by
providing security products and services to existing customers who are
expanding geographically. The Company anticipates targeting those regions
which contain substantial supplies of natural resources, such as Africa,
South America and Russia, and those countries which represent significant
opportunities for economic growth, such as India. In addition, many of the
Company's existing clients are pursuing rapid global expansion strategies
which may provide the Company with access to new territories and prospective
new client relationships.
PRODUCTS AND SERVICES
LAW ENFORCEMENT AND SECURITY PRODUCTS
Armor Products
The Company manufactures a wide array of armor products under the brand
name American Body ArmorTM which are designed to protect against bodily
injury caused by bullets, knives and explosive shrapnel. The Company's
principal armor products are ballistic resistant vests, sharp instrument
penetration armor and bomb protective gear. In addition to body armor, the
Company also markets an assortment of other personal armor products,
including helmets, shields and upgrade armor plates. The Company's lines of
ballistic protective vests provide varying levels of protection depending
upon the configuration of ballistic materials and the standards (domestic or
international) to which the armor is built. The Company's body armor products
manufactured in the United States are certified under guidelines established
by the National Institute of Justice.
The Company offers two types of ballistic resistant armor: concealable
armor and tactical armor. Concealable armor, which generally is worn beneath
the user's clothing, is the Company's basic line of body armor. These vests
are often sold with a shock plate, which is an insert designed to improve the
protection of vital organs from sharp instrument attack and to provide
enhanced blunt trauma protection.
Tactical armor is worn externally and is designed to provide protection
over a wider area of a user's body and defeat higher levels of ballistic
threats. These vests, which are usually manufactured with hard armor
ballistic plates that provide additional protection against rifle fire, are
designed to afford the user maximum protection. Tactical armor may also
provide enhanced protection against neck, shoulder and kidney injuries.
Tactical armor is offered in a variety of styles, including tactical assault
vests, tactical police jackets, floatation vests, high-coverage armor and
flak jackets.
The sharp instrument penetration armor manufactured by the Company is
designed primarily for use by personnel in correctional facilities and by
other law enforcement employees who are primarily exposed to threats from
knives and other sharp instruments. These vests are constructed with special
metallic blends and are available in both concealable and tactical models. In
addition, these vests can be combined with ballistic armor configurations to
provide both ballistic and sharp instrument penetration resistant protection.
The Company manufactures a wide range of bomb protective gear. This
equipment, known as Explosive Ordnance Disposal (EOD) equipment, includes
bomb disposal suits, which are primarily constructed of an aramid ballistic
fabric that is sheathed in a Nomex(Registered Trademark) brand fire-retardant
cover. These
34
<PAGE>
suits cover the user's entire body (except the hands) and include a fitted
helmet that provides protection and communication capabilities. Other EOD
equipment manufactured by the Company includes bomb protection blankets and
letter bomb suppression pouches. The Company also distributes
Scanna(Registered Trademark) letter bomb detection equipment.
The Company manufactures a variety of hard armor ballistic shields
primarily for use in tactical clearance applications. These shields are
manufactured using Spectra(Registered Trademark) ballistic fibers,
polyethylene ballistic materials, ballistic steel, ceramic tiles, ballistic
glass or a combination of any one or more of these materials. Other hard
armor products include tactical face masks and helmets, ballistic shields,
barrier shields and blankets. These products allow tactical police officers
to enter high threat environments with maximum ballistic protection.
Other specialty products manufactured by the Company include armored press
vests, executive vests, raincoats and fireman turnout coats. These specialty
products can be custom designed to provide various levels of ballistic
protection. The Company also manufactures specialty armor applications for
vehicles and aircraft, including the construction of customized armored cars.
The Company has the exclusive rights in the United States to distribute
Gallet(Registered Trademark) helmets to the law enforcement community. The
Company also distributes a variety of items manufactured by others, including
gas masks, batons and holsters.
Less-Than-Lethal Products
The Company manufactures a complete line of less-than-lethal and anti-riot
and crowd control products designed to assist law enforcement and military
personnel in handling situations that do not require the use of deadly force.
These products, which generally are available for use only by authorized
public safety agencies, include pepper sprays, tear gas, specialty impact
munitions and distraction devices.
The Company manufactures pepper sprays containing the active ingredient
oleoresin capsicum, a cayenne pepper extract. The Company's pepper spray
formula is patented and carries the trademark name of First
Defense(Registered Trademark). The products range from small "key-ring" and
hand-held units to large volume canisters for anti-riot and crowd control
applications.
The Company's tear gases are manufactured using
Orthochlorobenzalmalononitrile (CS) and Chloroacetophenone (CN). These
products are packaged in hand-held or launchable grenades, both pyrotechnic
and non-pyrotechnic, as well as in 37 mm, 40 mm and 12 gauge munitions. The
munitions include barricade rounds, blast dispersions and pyrotechnic
canisters. The Company holds a patented design covering two of its
non-pyrotechnic grenades.
The Company manufactures a wide range of specialty impact munitions that
can be used against either individual targets or in anti-riot and crowd
control situations. These products, which range from single projectiles such
as bean bags, rubber balls, wood batons and rubber batons to multiple
projectile products containing rubber pellets, rubber balls or foam, can be
fired from standard 12 gauge shotguns, 37 mm gas guns and 40 mm launchers.
The Company also manufactures a patented and trademarked device that is
used for dynamic entries by specially trained forces where it is necessary to
divert the attention of individuals away from an entry area. This product,
which carries the trademark name of Distraction Device(Registered Trademark),
emits a loud bang and brilliant flash of light when used.
Narcotic Identification and Evidence Equipment
The Company assembles and markets portable narcotic identification kits
under the NIK(Registered Trademark) brand name which are used by law
enforcement personnel to identify a variety of controlled substances,
including cocaine, marijuana, heroin and LSD. The Company also assembles and
markets evidence collection kits and evidence tape, and has the exclusive
rights to distribute Flex-Cuf(Registered Trademark) and Key-Cuff (Trade Mark)
disposable restraints.
SPECIALIZED SECURITY SERVICES
The Company is the world's leading provider of specialized security
services in high risk and hostile environments, including Africa, South
America, Central Asia, Russia and the Balkans. The core of the
35
<PAGE>
Company's security service business is the creation and implementation of
solutions to complex security problems in high risk areas through detailed
and targeted analysis of potential threats to security, assistance in the
secure design of facilities, the provision of highly qualified specialists
with extensive international experience in practical security applications
and on-going training of security personnel and client personnel with respect
to preventive security measures. The Company also provides humanitarian mine
clearance and ordnance disposal, maintenance of the security of lines of
communication, including airlines and airports, and high risk insurance
services.
The security solutions offered by the Company generally involve security
consultation services and the provision of very experienced security
personnel who act as planners, trainers, managers, advisors, instructors and
liaison personnel. The Company also provides teams of supervisors, many of
whom are British Special Air Services ("SAS") veterans, who frequently are
employed as premium guards for government embassies. In connection with its
security services, the Company utilizes the services of approximately 5,200
locally recruited guards. These guards are supervised, managed and trained by
the Company's professional security staff, but approximately 3,000 are
employed by local companies that subcontract their manpower to the Company.
Other security services provided by the Company include risk assessment,
project organization and management, equipping, training and management of
existing guard forces, system design, procurement, installation, crisis
management, VIP protection, specialist instruction and training and
evacuation planning.
CUSTOMERS
LAW ENFORCEMENT AND SECURITY PRODUCTS
The Company sells its products through a network of independent
distributors who serve the law enforcement communities. In 1996, the Company
sold approximately 75% of its products in the U.S., with the balance sold
internationally. The primary end-users of the Company's products are law
enforcement agencies, local police departments such as the Philadelphia
Police Department, state police agencies such as the Georgia State Patrol,
state correctional facilities, highway patrols and sheriffs' departments. The
Company's largest distributor accounted for approximately 6.1% of the
Company's overall revenue from product sales in 1996, and the Company's top
ten customers accounted for approximately 21.6% of overall revenue from
product sales in 1996.
SPECIALIZED SECURITY SERVICES
The Company's principal security services clients include large
multi-national corporations that have significant investments in remote and
hostile areas of the world. These clients include petrochemical companies,
who accounted for approximately 35% of the Company's security business in
fiscal 1996, and mining and construction companies, who accounted for
approximately 24% of the Company's security business in fiscal 1996. Other
significant clients include the United Nations, governmental embassies,
including those belonging to the United States, projects funded by the World
Bank and the European Commission and a variety of banking, finance, aid and
humanitarian organizations and companies engaged in international trade and
commerce.
36
<PAGE>
The following table sets forth certain information regarding selected
current and recent clients, the nature of the security services provided to
such clients, and the countries in which such services are being or have been
performed.
<TABLE>
<CAPTION>
CLIENT COUNTRY FACILITY SERVICES PROVIDED
- ------------------------ ---------------------- --------------- --------------------------------------
<S> <C> <C> <C>
Anadarko Petroleum Algeria Major oil Expatriate security managers and
Corporation fields supervisors (1994 to date)
British Petroleum Colombia Exploration Security coordination management
rigs and liaison (1992 to date)
Continental Airlines Colombia Airline Passenger/baggage search; aircraft
guarding (1993 to date)
DeBeers Congo (former Zaire) Diamond mine Expatriate security supervisors
(1984 to date)
European Commission Bosnia-Herzegovina -- Mine clearance training program for
the government of Bosnia-Herzegovina
(1997 to 1998)
Price Waterhouse Russia Offices Guards/investigations
(1994 to date)
U.S. Department of State Bahrain, Uganda, Embassies Expatriate-managed guard forces
Congo, Ecuador, (1985 to date)
Angola
United Nations Former Republic of U.N. facilities Logistics, manpower and support to
Yugoslavia UNPROFOR (1992 to 1996)
</TABLE>
MARKETING AND DISTRIBUTION
LAW ENFORCEMENT AND SECURITY PRODUCTS
The Company believes that, as a result of its history of providing high
quality and reliable armor, less-than-lethal products and narcotic
identification and evidence equipment, it enjoys excellent name recognition
and a strong reputation in the security industry. The central element of the
Company's marketing strategy is to leverage its name recognition and
reputation by positioning the Company as a global provider of many of the
security products and services that the Company's customers may need. The
Company believes that, by positioning itself in this manner, it can
capitalize on its existing customer base and its extensive global
distribution network, maximize the benefits of its long history of supplying
security-related products around the world and leverage its leadership
position in the security product and services markets. When entering a
foreign market, the Company seeks to penetrate the market by offering the
most comprehensive range of products and services available in the security
industry. The Company tailors its marketing strategy to each geographic area
of the world and will often tailor its product offering by country. The
Company believes that there are opportunities for cross-marketing of military
and law enforcement products which could strengthen the image of each product
group. The Company believes that its ability to cross-market its security
products and services will enhance the Company's position as an integrated
provider of an extensive assortment of security products and services.
In addition, the Company has designed comprehensive training programs to
provide initial and continuing training to its customers in the proper use of
its various product lines. These training programs are typically conducted by
trained law enforcement and military personnel hired by the Company for such
purpose. The training programs may potentially reduce the Company's liability
for damages that the Company may incur from the use of its products. Certain
of the Company's training programs also contribute to the Company's revenues.
The Company's training programs are an integral part of the Company's
customer service offerings. Not only do the training programs enhance
customer satisfaction, but they also breed customer loyalty and brand
awareness, thereby enabling the Company to sell additional products to the
same customer.
37
<PAGE>
The Company's marketing effort is further augmented by its involvement
with and support of several important law enforcement associations, including
the National Tactical Officer's Association, the International Law
Enforcement Firearms Instructors, the American Society of Law Enforcement
Trainers and the International Association of Chiefs of Police.
The Company's distribution strategy involves the utilization of a
worldwide distribution network of approximately 345 domestic distributors and
150 international agents, as well as 15 regional domestic sales managers who
promote the Company's products but refer customers to a local distributor for
purchasing. The Company further reinforces distributor loyalty by offering
price discounts to high volume distributors. The Company believes its
relationships with its distributors are strong. The distributors benefit from
their association with the Company due to the quality of the Company's
manufactured products, the scope of its product line, the high degree of
service provided by the Company and the distributor's opportunity to
participate profitably in the sale of the Company's products.
The Company is continually looking for ways to expand its distribution
network. As the Company identifies and acquires businesses that fit
strategically into its existing product and service portfolio, the Company
believes that it will maximize its distribution network by offering
additional products and services. The Company's recent acquisition of
Supercraft has opened new channels of global distribution to parts of the
world not previously penetrated by the Company. The Company believes that its
combination with DSL will allow the Company to take advantage of DSL's
extensive access to multi-national corporations, whose security service needs
in unstable countries may in the future require security products that
complement the services provided. The Company also believes that the addition
of these new distribution channels will allow the Company and its
subsidiaries to take advantage of each other's distribution networks by
offering the products of the other, thereby increasing operating
efficiencies.
SPECIALIZED SECURITY SERVICES
The Company's experience has been that its most successful form of
marketing for its security services is client referrals generated by the
professional ability of its personnel. As a result, the Company spends
minimal amounts on direct unsolicited marketing for its security service
business. The Company does not, however, rely upon client referrals as its
only strategy of growth. While the Company will rarely enter a country
without a substantial contract for services already in place, the Company
regularly seeks out new areas which offer potential investment opportunities
for multi-national corporations and present serious security problems which
make such investment opportunities risky. In such cases, the Company will
make contact with organizations that are either currently investing or
considering an investment in such areas. Once established in a new country,
the Company employs qualified country project managers, who often speak the
language native to that country, to develop additional business.
The Company also seeks contracts with high visibility customers for
security services in the countries in which it operates. Examples of such
customers include United States embassies, the United Nations and its related
organizations, projects funded by the World Bank and the European Commission,
the International Committee for the Red Cross, the International Federation
of Red Cross and Red Crescent Societies and large multi-national
corporations. The Company may accept a lower profit margin on these contracts
because the referral and advertising value of these contracts outweighs any
reduced profit that may result from such contracts. By providing services to
such high visibility customers, the Company believes that it will be able to
increase its market share of the security services required by large
multi-national companies operating in those countries.
MANUFACTURING AND RAW MATERIALS
The Company manufactures substantially all of its bullet, bomb and
projectile resistant garments and other ballistic protection devices and
assembles its portable narcotic identification kits at its Jacksonville,
Florida facility. The Company manufactures virtually all of its
less-than-lethal products, other than piece parts which are assembled and
used in the finished goods, at its Casper, Wyoming facilities. The Company
manufactures most of its military apparel, high visibility garments and some
ballistic resistant garments at its manufacturing facility in Westhoughton,
England, near Manchester, where Supercraft is located.
38
<PAGE>
The primary raw materials used by Company in manufacturing ballistic
resistance garments are various ballistic fibers, including Kevlar(Registered
Trademark), Twaron(Registered Trademark) and SpectraShield(Registered
Trademark). Kevlar(Registered Trademark), an aramid fiber, is a patented
product of E.I. Du Pont de Nemours & Co., Inc. ("Du Pont") and is only
available from Du Pont and its European licensee. The Company has begun to
use SpectraShield(Registered Trademark), a high strength polyethylene product
of Allied Signal Corp., as an alternative ballistic resistant fabric to
reduce its dependence on Kevlar(Registered Trademark).
SpectraShield(Registered Trademark) has been used in combination with
Kevlar(Registered Trademark) in approximately 20% of all vests sold by the
Company. SpectraShield(Registered Trademark) is not, however, expected to
become a complete substitute for Kevlar(Registered Trademark) in the near
future due to the fabric's physical characteristics. The Company also uses
Twaron(Registered Trademark), an aramid fiber product of Akzo-Nobel Fibers
B.V. The Company does not purchase these fibers directly from the
manufacturers, but rather purchases fiber from weaving companies who convert
the raw fibers into cloth. In the opinion of management, the Company enjoys a
good relationship with these weaving companies and believes that, if
necessary, it could readily find replacement weavers. See "Certain
Transactions."
The raw materials used by the Company in the production of chemical agents
are supplied by several sources. The raw chemicals used in the production of
CS tear gas are readily obtainable with the exception of Malononitrile, for
which sources are limited. If the Company were unable to obtain
Malononitrile, its production of CS tear gas could be severely curtailed. The
remainder of the chemicals and piece parts used by the Company are readily
available from other suppliers. While it manufactures its armor on a
built-to-order basis, the Company does maintain reasonable inventories on its
less-than-lethal and anti-riot products.
The Company purchases other raw materials used in the manufacture of its
various products from a variety of sources, and it believes additional
sources of supply of these materials are readily available. The Company also
owns several molds which are used throughout its less-than-lethal product
line.
The Company adheres to strict quality control standards and conducts
extensive product testing throughout its manufacturing process. Raw materials
supplied to the Company are also tested to ensure quality. The body armor
manufactured by the Company is ISO 9002 certified. ISO 9002 standards are
promulgated by the International Organization of Standardization and have
been adopted by more than 100 countries worldwide. The Company obtained ISO
9002 certification by successfully completing an audit certifying its
compliance with a comprehensive series of quality management and quality
control standards. The Company is one of only two corporations in the
industry who have earned this prestigious certification. The Company is in
the process of seeking ISO 9002 certification for its less-than-lethal
products.
COMPETITION
The markets for the Company's products and services are highly
competitive. In the body armor business, the Company competes by attempting
to provide superior design and engineering and production expertise with
respect to its line of fully-integrated ballistic and blast protective wear.
The less-than-lethal product industry has become increasingly competitive and
the Company is one of many major manufacturers of such products. The Company
believes there are approximately 40 companies marketing less-than-lethal
products. The Company competes by attempting to provide a broad variety of
less-than-lethal products with unique features and formulations. There can be
no assurance, however, that the Company will be able to compete successfully
in the future. The principal competitive factors for all of the Company's
products are price, quality of engineering and design, production capability
and capacity, ability to meet delivery schedules and reputation in the
industry.
The security services industry is extremely competitive and highly
fragmented. Companies within the security services industry compete on the
basis of the quality of services provided, ability to provide national and
international services and range of services offered, as well as price and
reputation. The Company's security services also face a wide variety of
competition in different areas, although there is no single organization that
competes directly with DSL globally. The main competition in supplying
security services to the petrochemical and mining industries comes from local
security companies, in-house security programs and small consultancy
companies. In the embassy and international agency protection business, the
competition comes from local companies and from the largest manned guarding
companies including the Wackenhut Corporation, Pinkerton's, Inc., Group 4 and
ICTS International, N.V. As the countries within which DSL operates become
more mature and stable, competition is likely to increase.
39
<PAGE>
PROPERTIES
The Company's principal facilities consist of the following:
<TABLE>
<CAPTION>
LOCATION PRINCIPAL USE OWNED/LEASED APPROXIMATE SIZE
- ------------------------ ------------------------------------ -------------------- ----------------------
<S> <C> <C> <C>
Jacksonville, Florida Manufacturing, distribution, Owned 7 acres
corporate headquarters 70,000 square feet(1)
Casper, Wyoming Manufacturing, Warehouse, Office Owned/Leased (2) 60 acres
61,700 square feet
Westhoughton, England Sales, Manufacturing, Warehouse Owned (3) 44,000 square feet
London, England Sales, Office Leased (4) 6,500 square feet
</TABLE>
- ------------
(1) The Company has the capacity to expand the building facility to 142,000
square feet.
(2) Of the four properties at this location, three are owned by DTC. The
fourth property occupied by DTC consists of two buildings. DTC owns one
building and leases the other. The real property upon which these two
buildings are situated is also leased. The leased building and the real
property carry an annual rental of $26,400. The lease for this property
expires on September 1, 1998.
(3) AHL acquired the property from Bodycote International plc ("Bodycote")
as part of the Company's acquisition of Supercraft. Bodycote was
determined to have imperfect title to the property. If title to the
property is not resolved by December 31, 1997, AHL will receive pounds
sterling536,500, which was placed in escrow at closing.
(4) DSL leases three floors and pays annual rent thereon in an amount equal
to pounds sterling96,000. The lease for this property expires in March
2002.
In addition, the Company also leases a 50,000 square foot facility in
Yulee, Florida, the Company's former manufacturing facility, which it is
attempting to sublease until April 30, 1999, the expiration of the lease. The
annual rent for this property is $130,960 plus annual increases. See Note 9
to the Consolidated Financial Statements.
The Company believes its manufacturing, warehouse and office facilities
are suitable, adequate and have sufficient manufacturing capacity for its
current and anticipated requirements. The Company believes that it has
adequate insurance coverage for all of its properties and their contents.
EMPLOYEES
As of July 24, 1997, the Company had a total of approximately 3,500
employees, of which approximately 250 were employed in product manufacturing
and approximately 3,250 were employed in security services. Approximately 45
employees employed by Supercraft are represented by the General Municipal
Boilermaker and Allied Trade Union. The collective bargaining agreement
currently in effect for these employees expires on December 31, 1997. None of
the Company's remaining employees are represented by unions or covered by any
collective bargaining agreements. The Company has not experienced any work
stoppages or employee related slowdowns and believes that its relationship
with its employees is good.
PATENTS AND TRADEMARKS
The Company currently has numerous issued U.S. and foreign patents and
pending patent applications relating to its product lines. The Company also
has several registered trademarks concerning
40
<PAGE>
its products. The trademarks include Gold Series GSX(Registered Trademark),
Def-Tec Products(Registered Trademark), Distraction Device(Registered
Trademark), NIK(Registered Trademark) and Identidrug(Registered Trademark).
Although the Company does not believe that its ability to compete in any of
its product markets is dependent solely on its patents and trademarks, the
Company does believe that the protection afforded by its intellectual
property provides the Company with important technological and marketing
advantages over its competitors. Although the Company has protected its
technologies to the extent that it believes appropriate, there can be no
assurance that the Company's measures to protect its proprietary rights will
deter or prevent unauthorized use of the Company's technologies. In other
countries, the Company's proprietary rights may not be protected to the same
extent as in the United States.
ENVIRONMENTAL MATTERS
The Company and its operations are subject to a number of federal, state
and local environmental laws, regulations and ordinances that govern
activities or operations that may have adverse environmental effects. Such
activities or operations include discharges to air and water, as well as
handling, storage and disposal practices regarding solid and hazardous
materials. Such laws and regulations may impose liability for the cost of
remediating sites of, and certain damages resulting from, past releases of
hazardous materials. Environmental laws continue to change rapidly, and it is
likely that the Company will be subject to increasingly stringent
environmental standards in the future. The Company uses CS and CN chemical
agents in connection with its production of tear gas. The chemicals are
hazardous, and if not handled and disposed of properly could cause
environmental damage. The Company believes that it currently conducts its
activities and operations in substantial compliance with applicable
environmental laws. The Company believes that its potential liability under
the environmental laws, if any, would not have a material adverse effect,
individually or in the aggregate, on its results of operations or financial
condition. There can be no assurance in this regard, however, nor can there
be any assurance that environmental laws will not become more stringent in
the future or that the Company will not incur significant costs in the future
to comply with such environmental laws.
LITIGATION
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 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 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 counterclaims to the Company's
complaint. The Defendants have denied each of the Company's allegations and
have asserted several 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.
41
<PAGE>
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.
42
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the name, age and position of each of the
directors, executive officers and significant employees of the Company as of
July 24, 1997. Each director of the Company will hold office until the next
annual meeting of stockholders of the Company or until his or her successor
has been elected and qualified. The executive officers of the Company are
appointed by the Board of Directors of the Company and serve at the
discretion of the Board of Directors.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------ ----- -----------------------------------------------
<S> <C> <C>
Warren B. Kanders ....... 39 Chairman of the Board of Directors
Jonathan M. Spiller .... 46 Director, President and Chief Executive Officer
Burtt R. Ehrlich ........ 57 Director
Nicolas Sokolow ......... 46 Director
Thomas W. Strauss ....... 54 Director
Richard C. Bartlett .... 61 Director
Alair A. Townsend ....... 55 Director
Richard T. Bistrong .... 34 Vice President--Sales and Marketing
Carol T. Burke .......... 36 Vice President--Finance and Secretary
Robert R. Schiller ...... 34 Vice President--Corporate Development
J. Lawrence Battle....... 46 President--Manufactured Products Division
SIGNIFICANT EMPLOYEES:
Alastair G. A. Morrison 54 Chairman, DSL Holdings
Hon. Richard N. Bethell 46 Chief Executive Officer, DSL Holdings
Martin Brayshaw ......... 41 Director and Commercial Director, DSL Holdings
</TABLE>
Warren B. Kanders has served as Chairman of the Board of the Company since
January 1996. From October 1992 to May 1996, Mr. Kanders served as Vice
Chairman of the Board of Directors of Benson Eyecare Corporation. From June
1992 to March 1993, Mr. Kanders was the President and a Director of Pembridge
Holdings, Inc.
Jonathan M. Spiller has served as President and as a Director of the
Company since July 1991 and as Chief Executive Officer since September 1993.
From June 1991 to September 1993, Mr. Spiller served as the Company's Chief
Operating Officer. Mr. Spiller is a chartered and certified public accountant
and was previously a partner in the international accounting firm of Deloitte
& Touche LLP, where he served for 18 years.
Burtt R. Ehrlich has served as a Director of the Company since January
1996. Mr. Ehrlich served as Chairman and Chief Executive Officer of Ehrlich
Bober Financial Corp. from December 1986 until October 1992 and as a Director
of Benson Eyecare Corporation from October 1992 until November 1995.
Nicolas Sokolow has served as a Director of the Company since January
1996. Mr. Sokolow is a partner in the law firm of Sokolow, Dunaud, Mercadier
& Carreras. From June 1973 until October 1994, Mr. Sokolow was an associate
and partner in the law firm of Coudert Brothers. Mr. Sokolow is a Director of
Rexel, Inc.
Thomas W. Strauss has served as a Director of the Company since May 1996.
Since 1995, Mr. Strauss has been a Principal with Ramius Capital Group, a
privately held investment management firm. From June 1993 until July 1995,
Mr. Strauss was Co-Chairman of Granite Capital International Group. From 1963
to 1991, Mr. Strauss served in various capacities with Salomon Brothers Inc
("Salomon"), including President and Vice-Chairman.
Richard C. Bartlett has served as a Director of the Company since May
1996. Mr. Bartlett has served as Vice Chairman of Mary Kay Holding
Corporation since January 1993 and served as President, Chief Operating
Officer and Director of Mary Kay Inc. from 1987 through 1992. Mr. Bartlett
has served as
43
<PAGE>
Chairman of the Board of Directors since 1995 and Chief Executive Officer
from 1994 to 1995 of The Richmont Group, a holding company with portfolio
businesses including financial services, apparel, sporting goods and
restaurant chains.
Alair A. Townsend has served as a Director of the Company since December
1996. Since February 1989, Ms. Townsend has been Publisher of Crain's New
York Business. Ms. Townsend currently serves as a Governor of the American
Stock Exchange. Ms. Townsend served as New York City's Deputy Mayor for
Finance and Economic Development from February 1985 to January 1989.
Richard T. Bistrong has served as Vice President of Sales and Marketing of
the Company since February 1995. From 1993 to February 1995, Mr. Bistrong
held the position of Director of Retail Operations for Fechheimer Brothers
Company, a wholly owned subsidiary of Berkshire Hathaway. From 1986 to 1992,
Mr. Bistrong was an Executive Vice President of Point Blank Body Armor.
Carol T. Burke has served as Vice President of Finance of the Company
since January 1996 and as Secretary since March 1996. Ms. Burke joined the
Company as Controller in January 1995. From 1990 to January 1995, Ms. Burke
was a Senior Finance Manager at the Walt Disney Company.
Robert R. Schiller has served as Vice President of Corporate Development
of the Company since July 1996. From 1994 to July 1996, Mr. Schiller was a
Principal in the merchant banking firm of Circadian Capital Corporation and
from 1993 to 1995 he was a Director of Corporate Finance for Jonathan Foster
& Co. L.P. From January 1995 to September 1995, Mr. Schiller served as Chief
Financial Officer of Troma, Inc., an independent film studio. From 1991 to
1992, Mr. Schiller served as Vice President of the Special Situation
Investment Fund, an investment fund controlled by the Brooke Group.
J. Lawrence Battle joined the Company on July 22, 1997 as President of its
Manufactured Products Division. From September 1996 until April 1997, Mr.
Battle served as Chief Development Officer of Physician Solutions, Inc. From
August 1994 to September 1996, Mr. Battle served as President and Chief
Operating Officer of Dayton Parts, Inc. From August 1992 to August 1994, Mr.
Battle served as President of Nutritional Support Services, L.P. From 1987 to
1991, Mr. Battle was Vice President and General Manager of the Automotive
Products Division of Ferodo America Inc., a subsidiary of T&N, plc.
Alastair G. A. Morrison, OBE MC was one of four partners who founded DSL
Holdings in 1981. He served as Chief Executive of DSL Holdings from 1981 to
1995 and has served as a Director of DSL Holdings since 1981. Since 1995, Mr.
Morrison has served as Chairman of DSL Holdings. From 1961 to 1981, Mr.
Morrison was an officer in the Special Air Services of the British Army,
achieving the rank of Second in Command, 22 SAS Regiment.
The Hon. Richard N. Bethell MBE has served as the Chief Executive Officer
of DSL Holdings since 1995. Mr. Bethell previously served as a Director of
DSL Holdings from 1991 to 1995. From 1988 to 1991, Mr. Bethell was Director
and Deputy Chief Executive of Leadership Trust, a leadership training company
for senior executives. From 1968 to 1988, Mr. Bethell served as a Senior
Officer in the Special Air Services of the British Army.
Martin Brayshaw has served as a member of the Board of Directors and as
Commercial Director of DSL Holdings since August 1996. Mr. Brayshaw was
Chairman and Chief Executive Officer of PEX plc from June 1995 until the sale
of the Company in December 1995. From October 1989 to December 1994, Mr.
Brayshaw served as Finance Director of Clayform Properties plc.
INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS
On December 3, 1992, without admitting or denying any liability, Mr.
Strauss consented to an order of the Securities and Exchange Commission (the
"Commission") under which he was suspended from associating with any broker,
dealer, municipal securities dealer, investment company or investment advisor
for a period of six months, and paid a civil penalty of $75,000. The central
claim in these proceedings was that, as President of Salomon, Mr. Strauss
delayed in reporting an unauthorized bid by the head of Salomon's Government
Trading Desk who reported to one of Mr. Strauss' subordinates. Mr. Strauss
has maintained that he reported the unauthorized bid both to Salomon's Chief
Executive Officer and General Counsel immediately upon learning of the
unauthorized bid.
44
<PAGE>
Mr. Spiller was the President and Chief Executive Officer of the Company
at the time the Company filed for Chapter 11 bankruptcy protection in May
1992 through the confirmation on September 20, 1993 of the Company's Plan of
Reorganization.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has standing Audit, Compensation, Nominating and
Option Committees. The purpose of the Compensation Committee is to recommend
to the Board of Directors the compensation and benefits of the Company's
executive officers and other key management. During fiscal 1996, the
Compensation Committee consisted of Messrs. Sokolow (Chairman), Kanders and
Ehrlich.
DIRECTOR COMPENSATION
The non-employee directors of the Company participate in the 1996 Amended
and Restated Non-Employee Directors Stock Option Plan (the "1996 Directors
Plan"). See "Option Plans." Messrs. Kanders, Ehrlich, Sokolow, Strauss and
Bartlett and Ms. Townsend are all non-employee directors of the Company.
During 1996 each non-employee director, except for Messrs. Kanders and
Bartlett, was granted options to purchase 75,000 shares of Common Stock at an
exercise price per share equal to the closing trading price of the Common
Stock on the date of the grant. No other compensation was paid to directors
in 1996.
EXECUTIVE COMPENSATION
The following summary compensation table sets forth information concerning
the annual and long-term compensation earned by the Company's chief executive
officer and each of the other most highly compensated executive officers of
the Company whose annual salary and bonus during fiscal 1996 exceeded
$100,000 (collectively, the "Named Executive Officers").
<TABLE>
<CAPTION>
ANNUAL LONG TERM
COMPENSATION (1) COMPENSATION
------------------------------ --------------
SECURITIES
FISCAL ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS(#) COMPENSATION
- --------------------------- -------- ----------- --------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Jonathan M. Spiller......... 1996 $ 160,000 $ 60,000 24,000 $ 5,775(2)
Chief Executive Officer
and 1995 160,000 21,000 18,000 --
President 1994 140,000 62,000 432,000 --
Richard T. Bistrong......... 1996 120,000 107,000 50,000 --
Vice President-- 1995 120,000 105,000 50,000 --
Sales and Marketing 1994 -- -- -- --
Robert R. Schiller.......... 1996 44,210(3) 45,000 150,000 17,500(4)
Vice President-- 1995 -- -- -- --
Corporate Development 1994 -- -- -- --
</TABLE>
- ------------
(1) The Company has no long-term incentive compensation plan other than the
1994 Incentive Stock Option Plan and the 1996 Amended and Restated
Stock Option Plan and various individually granted options. The Company
does not award stock appreciation rights, restricted stock awards or
long term incentive plan pay-outs.
(2) Represents the dollar value of 7,500 stock award grants awarded to Mr.
Spiller in December 1995, which options became fully vested on January
19, 1996. Does not include any amounts that Mr. Spiller may receive
with respect to 316,823 shares of Common Stock upon the earlier to
occur of (i) the sale by Kanders of at least 452,604 shares of Common
Stock (which will occur if the Underwriters exercise their
over-allotment option in full) or (ii) January 18, 1999. See "Certain
Transactions."
(3) Mr. Schiller became an employee of the Company on July 24, 1996. He was
paid at an annual rate of salary of $120,000.
(4) Represents compensation earned by Mr. Schiller in his capacity as a
consultant to the Company prior to the execution of his employment
agreement.
45
<PAGE>
OPTIONS GRANTED IN FISCAL 1996
The following information is furnished for fiscal 1996 with respect to the
Company's Named Executive Officers for stock options granted during such
fiscal year. Stock options were granted without tandem stock appreciation
rights.
<TABLE>
<CAPTION>
NUMBER OF % OF TOTAL
SECURITIES OPTIONS
UNDERLYING GRANTED TO EXERCISE
OPTIONS EMPLOYEES PRICE PER
NAME GRANTED(#)(1) IN FISCAL YEAR SHARE
- -------------------- ------------ -------------- -----------
<S> <C> <C> <C>
Jonathan M. Spiller 24,000 5.1 $1.00
Richard T. Bistrong 50,000 10.7 0.97
Robert R. Schiller . 150,000 32.1 6.06
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF STOCK
PRICE APPRECIATION FOR
OPTION TERM
MARKET PRICE
PER SHARE ON
DATE OF EXPIRATION
NAME GRANT(2) DATE 0% ($) 5% ($) 10% ($)
- -------------------- -------------- ------------ ---------------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Jonathan M. Spiller $ 4.125 1/19/2006 $ 75,000 $137,261 $ 232,781
Richard T. Bistrong 3.8125 1/18/2006 142,125 262,008 445,932
Robert R. Schiller . 6.06 7/24/2006 0 571,665 1,448,712
</TABLE>
- ------------
(1) All options granted to such officers (except those granted to Mr.
Schiller) have a term of ten years and were granted under the Company's
1994 Incentive Stock Plan. The options granted to Mr. Schiller have a
term of ten years and were granted under the Company's 1996 Amended and
Restated Stock Option Plan.
(2) The market price on the date of grant shown for January 18, 1996 and
January 19, 1996 is the bid price of the Common Stock as listed on the
Bulletin Board on such date. The bid quotations represent inter-dealer
prices, and do not include mark-ups, mark-downs or commissions, and may
not necessarily represent actual transactions. For this reason, and
because of the low trading volume of the Common Stock at that time,
such bid quotations may not be an accurate reflection of the fair value
of the Common Stock on such dates. Therefore, at the direction of the
Board of Directors, the Company obtained an independent valuation of
the Common Stock during fourth quarter 1995 which valued the Common
Stock at $0.77 per share, and the Company used this value in
determining the exercise price per share of the options granted on such
dates. The market price on the date of grant shown for July 24, 1996
for options granted to Mr. Schiller is the closing price of the Common
Stock on the American Stock Exchange on such date.
AGGREGATED OPTION EXERCISES IN FISCAL 1996 AND FISCAL YEAR END OPTION VALUES
The following table contains certain information regarding options to
purchase Common Stock held as of December 28, 1996 by each of the Named
Executive Officers. None of the Named Executive Officers exercised any
options during fiscal 1996.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF
UNDERLYING UNEXERCISED UNEXERCISED IN-THE-MONEY
OPTIONS AT FISCAL YEAR END OPTIONS AT FISCAL YEAR END(1)
----------------------------- -----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------------- ------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C>
Jonathan M. Spiller 474,000 0 $3,296,450 $ 0
Richard T. Bistrong 50,000 50,000 345,250 345,250
Robert R. Schiller . 0 150,000 0 272,250
</TABLE>
- ------------
(1) Calculated on the basis of $7.875 per share, the last reported sale
price of the Common Stock on the American Stock Exchange on December
28, 1996, less the exercise price payable for such shares.
AGREEMENTS WITH KEY EMPLOYEES
The Company has entered into an employment agreement with Jonathan M.
Spiller which provides that he will serve as the President and Chief
Executive Officer of the Company for an initial term expiring January 17,
1999. The agreement provides for a base salary of $200,000 effective January
1, 1997, subject
46
<PAGE>
to increase by the Board of Directors, and for yearly bonuses based upon the
Company's net income. Mr. Spiller will also be entitled, at the discretion of
the Option Committee of the Board of Directors, to participate in the 1996
Amended and Restated Stock Option Plan (the "1996 Option Plan") and other
bonus plans adopted by the Company based on his performance and the Company's
performance. Mr. Spiller's employment with the Company will continue, unless
earlier terminated by Mr. Spiller or by the Company or due to Mr. Spiller's
death or disability, for successive one year periods, on terms to be mutually
agreed upon by the Company and Mr. Spiller. See "Certain Transactions" for a
description of an agreement between Mr. Spiller and Kanders pursuant to which
Mr. Spiller, under certain circumstances, may either purchase 316,823 shares
of Common Stock from Kanders for $0.9302 per share or receive the net
proceeds of the sale by Kanders of 316,823 shares of Common Stock reduced by
$0.9302 per share.
The Company has entered into an employment agreement with Richard T.
Bistrong which agreement provides that he will serve as Vice President --
Sales and Marketing of the Company for an initial term expiring January 17,
1999. The agreement provides for a base salary of $120,000 and for yearly
bonuses. In addition to his base salary and bonus, Mr. Bistrong received
non-qualified stock options to purchase 21,250 shares of Common Stock and
incentive stock options to purchase 28,750 shares of Common Stock, in each
case at an exercise price of $0.97 per share of Common Stock. These options
are exercisable for a period of eight years from the date of the grant, and
all of such options vest on January 18, 1999. The vesting of the options may
be accelerated on a pro rata basis upon the occurrence of certain events.
Pursuant to his employment agreement, Mr. Bistrong will be entitled, at the
discretion of the Option Committee of the Board of Directors, to participate
in the 1996 Option Plan and other bonus plans adopted by the Company based on
his performance and the Company's performance. Mr. Bistrong's employment with
the Company will continue, unless earlier terminated by Mr. Bistrong or by
the Company or due to Mr. Bistrong's death or disability, for successive one
year periods, on terms to be mutually agreed upon by the Company and Mr.
Bistrong.
The Company has entered into an employment agreement with Robert R.
Schiller which provides that he will serve as Vice President -- Corporate
Development of the Company for an initial term expiring July 23, 1999, at a
base salary of $120,000 per year. Effective January 1, 1997, Mr. Schiller's
base salary was increased by the Company to $130,000 per year. Mr. Schiller
is also entitled to a one-time relocation bonus of $45,000. In addition to
his base salary, Mr. Schiller received incentive stock options under the 1996
Option Plan to purchase 150,000 shares of Common Stock at an exercise price
per share equal to $6.06, the market price of the Common Stock on July 24,
1996, the date of the grant. These options vest over a period of three years
from the date of the grant, and all of such options become exercisable on
July 24, 1999. The vesting of the options may be accelerated on a pro rata
basis upon the occurrence of certain events. Pursuant to his employment
agreement, Mr. Schiller will be entitled, at the discretion of the Option
Committee of the Board of Directors, to participate in the 1996 Option Plan
and other bonus plans adopted by the Company based on his performance and the
Company's performance. Mr. Schiller's employment with the Company will
continue, unless earlier terminated by Mr. Schiller or by the Company or due
to Mr. Schiller's death or disability, for successive one year periods, on
terms to be mutually agreed upon by the Company and Mr. Schiller.
OPTION PLANS
1994 Incentive Stock Plan
The purpose of the Armor Holdings, Inc. 1994 Incentive Stock Plan (the
"1994 Incentive Plan") is to attract, retain and motivate selected employees
and officers and to encourage such persons to devote their best efforts to
the business and financial success of the Company. The 1994 Incentive Plan
was discontinued for the purpose of further stock option grants on January
19, 1996.
The 1994 Incentive Plan was administered by the Option Committee of the
Board of Directors. The Option Committee determined which employees and
officers were granted awards pursuant to the 1994 Incentive Plan. The 1994
Incentive Plan provided for grants of stock options and for grants of stock
grant awards. The maximum number of shares of the Common Stock reserved and
available for grant pursuant
47
<PAGE>
to the 1994 Incentive Plan was 1,000,000 shares. Stock options granted under
the 1994 Incentive Plan are incentive stock options or non-qualified stock
options and have an exercise price equal to the fair market value of the
Common Stock at the date of the grant. Options granted under the 1994
Incentive Plan are exercisable no more than ten years from the date of grant
at any time after the first six months after the date of grant. Options are
not transferable other than by will or by the laws of descent or
distribution. Full payment for shares purchased upon exercise of an option
must be made at the time of exercise. Stock grant awards entitle the
recipient to acquire shares of the Common Stock without payment at dates and
upon conditions determined by the Option Committee. Stock grant awards are
not transferable. The 1994 Incentive Plan also provided for the grant of
loans to recipients of awards under such plan at the discretion of the Option
Committee.
1996 Amended and Restated Stock Option Plan
The purpose of the 1996 Option Plan is to afford key employees and
consultants of the Company and its subsidiaries who are responsible for the
continued growth of the Company an opportunity to acquire an ownership
interest in the Company, and thus create in such persons an increased
interest in and a greater concern for the welfare of the Company and its
subsidiaries.
The 1996 Option Plan is administered by the Option Committee of the Board
of Directors. The Option Committee determines those individuals who will
receive options, the time period during which the options may be partially or
fully exercised and the number of shares of Common Stock that may be
purchased under each option. Options granted under the 1996 Option Plan may
be incentive options or non-qualified options. The Option Committee may
determine the option exercise price of options granted under the 1996 Option
Plan, provided that incentive options granted under the 1996 Option Plan may
not have an exercise price of an amount less than the fair market value of
the Common Stock on the date of the grant. Under certain conditions, the
Board of Directors as a whole has the power to grant options under the 1996
Option Plan.
Generally, options may be granted only to employees employed and
consultants engaged by the Company or of any subsidiary corporation or parent
corporation of the Company. Directors who are also employees of the Company
are also eligible to participate. Consultants are eligible to receive awards
of non-qualified options, but are not eligible to receive incentive stock
options. No person who owns, directly or indirectly, at the time of the
granting of an incentive stock option to him, 10% or more of the total
combined voting power of all classes of stock of the Company will be eligible
to receive any incentive stock options under the 1996 Option Plan unless the
exercise price is at least 110% of the fair market value of the Common Stock
on the date of grant. Options granted under the 1996 Option Plan are not
transferable. Except under certain circumstances such as death, disability or
retirement and unless otherwise specified by the Board of Directors, options
granted under the 1996 Option Plan become null and void upon the termination
of an option holder's employment with the Company. Subject to certain limits,
the Board of Directors or the Option Committee may amend the 1996 Option
Plan.
At the annual meeting of stockholders held on June 12, 1997, the
stockholders of the Company approved the following four amendments to the
1996 Option Plan: (i) the number of shares of Common Stock available for
option grants under the 1996 Option Plan was increased by 250,000 shares to
1,750,000 shares; (ii) the governing law of the 1996 Option Plan was changed
from Florida to Delaware; (iii) the 1996 Option Plan was restated to comport
with recent amendments to Rule 16b-3 promulgated under the Exchange Act; and
(iv) a schedule was adopted to permit the grant of options to employees of
the Company's United Kingdom subsidiaries.
1996 Amended and Restated Non-Employee Directors Stock Option Plan
The purpose of the 1996 Directors Plan is to attract, retain and
compensate for service as directors of the Company highly qualified
individuals who are not current or former employees of the Company, by
permitting such directors to have a greater personal financial stake in the
Company through the ownership of Common Stock, in addition to underscoring
their common interest with stockholders in increasing the value of the Common
Stock in the long term.
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<PAGE>
The 1996 Directors Plan is a formula plan pursuant to which non-qualified
options to acquire 75,000 shares of Common Stock will automatically be
granted to each Non-Employee Director on the date of his or her initial
election or appointment to the Board of Directors in consideration for
service as a Director. There are 450,000 shares of Common Stock reserved for
issuance under the 1996 Directors Plan. Under the 1996 Directors Plan
formula, the exercise price for all 75,000 options granted to each
Non-Employee Director under the 1996 Director Plan will be the closing price
on the date of the grant of the Common Stock as quoted on the composite tape
of the American Stock Exchange, or on such exchange as the Common Stock may
then be trading. Of the 75,000 options granted to each Non-Employee Director,
options to acquire 25,000 shares become exercisable upon each of the first
three anniversary dates following the date of the grant and all 75,000
options granted to each Non-Employee Director shall expire ten years from the
date of grant. The exercise price must be paid in cash. If, on the day of the
grant, counsel for the Company determines, in its sole discretion, that the
Company is in possession of material, undisclosed information that would
prevent it from issuing securities, then the grant of options to Non-Employee
Directors will be suspended until the second day after public dissemination
of the information (or the first trading day thereafter). The amount, pricing
and other terms of the grant will remain as set forth in the 1996 Directors
Plan, with the exercise price of the option to be determined in accordance
with the formula on the date the option is finally granted.
Upon retirement, a Non-Employee Director's options will continue to become
exercisable and must be exercised by the earlier of (i) 36 months following
the date of retirement or (ii) the expiration of the applicable option
period, or such options shall be forfeited. Upon a Non-Employee Director's
disability or death, those options held by the Non-Employee Director for at
least one year prior to the date of death or the date of cessation of service
following disability shall become immediately exercisable. The Non-Employee
Director or his/her legal representatives or heirs must exercise such options
by the earlier of (i) six months or 36 months from the date of cessation of
service due to disability or death, respectively, as the case may be, or (ii)
the expiration of the applicable option period, or such options shall be
forfeited. Should an individual cease to serve as a Non-Employee Director for
any reason other than retirement, disability, death or cause, he/she will
have 90 days within which to exercise only those options which were
exercisable as of the date he/she ceased to serve as a director.
At the annual meeting of stockholders held on June 12, 1997, the
stockholders of the Company approved two amendments to the 1996 Directors
Plan. As a result, the number of shares of Common Stock available for
issuance under the 1996 Directors Plan was increased by 150,000 shares to a
total of 450,000 shares and certain adjustments were made to the 1996
Directors Plan to comport with recent amendments to Rule 16b-3 promulgated
under the Exchange Act.
49
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of Common Stock (a) as of July 24, 1997 and (b) as
adjusted to reflect the Offering and the sale by the Selling Stockholders of
the shares offered hereby, assuming the Underwriters' over-allotment option
is exercised in full, by (i) each person who is known by the Company to own
beneficially more than 5% of the outstanding shares of the Common Stock; (ii)
each director and Named Executive Officer and (iii) all executive officers
and directors as a group. Unless otherwise indicated, each of the
stockholders shown in the table below has sole voting and investment power
with respect to the shares beneficially owned. Unless otherwise indicated,
the address of each person named in the table below is c/o Armor Holdings,
Inc., 13386 International Parkway, Jacksonville, Florida 32218.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OWNED AFTER THE
NUMBER OF
OFFERING(1) OFFERING
NAMED EXECUTIVE OFFICERS, --------------------- SHARES SUBJECT TO ---------------------
DIRECTORS OR 5% STOCKHOLDERS NUMBER PERCENT OVER-ALLOTMENT OPTION NUMBER PERCENT
- ------------------------------------ ----------- --------- --------------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Warren B. Kanders and Kanders
Florida Holdings, Inc.(2)........... 4,462,178 37.2% 525,000(3) 3,937,178 24.6%
Nevis Capital Management, Inc.(4) ... 1,061,800 8.8 0 1,061,800 6.6
Richmont Capital Partners I,
L.P.(5)............................. 800,000 6.6 75,000 725,000 4.5
Jonathan M. Spiller(6)............... 690,205 5.5 0 690,205 4.2
Burtt R. Ehrlich(7).................. 229,100 1.9 0 229,100 1.4
Alastair G.A. Morrison(8)............ 210,257 1.8 0 210,257 1.3
Nicolas Sokolow(9)................... 155,000 1.3 0 155,000 *
Hon. Richard N. Bethell(10).......... 140,159 1.2 0 140,159 *
Martin Brayshaw(11).................. 87,613 * 0 87,613 *
Richard T. Bistrong(12).............. 66,667 * 0 66,667 *
Thomas W. Strauss(13)................ 65,000 * 0 65,000 *
Carol T. Burke(14)................... 19,999 * 0 19,999 *
Alair A. Townsend.................... 5,516 * 0 5,516 *
Richard C. Bartlett(15).............. 0 * 0 0 *
Robert R. Schiller(16)............... 0 * 0 0 *
All executive officers and directors
as a group (13 persons)(17)......... 6,044,081 50.4% -- 5,519,081 33.2%
</TABLE>
- ------------
* Less than 1%
(1) As used in this table, a beneficial owner of a security includes any
person who, directly or indirectly, through contract, arrangement,
understanding, relationship or otherwise has or shares (i) the power
to vote, or direct the voting of, such security or (ii) investment
power which includes the power to dispose, or to direct the
disposition of, such security. In addition, a person is deemed to be
the beneficial owner of a security if that person has the right to
acquire beneficial ownership of such security within 60 days.
(2) Of such shares, 4,133,037 shares prior to the Offering and 3,674,187
shares after the Offering are owned by Kanders Florida Holdings,
Inc., of which Mr. Kanders is the sole stockholder and sole director,
and 300,000 shares are owned by the Kanders Florida Holdings, Inc.
1996 Charitable Remainder Unitrust, of which Mr. Kanders is trustee.
Mr. Kanders disclaims beneficial ownership of the shares owned by the
trust. All of the 525,000 shares shown as being offered hereby are
being offered by Warren B. Kanders and Kanders Florida Holdings, Inc.
and are subject to the Underwriters' over-allotment option.
50
<PAGE>
(3) Pursuant to an agreement with Kanders, Mr. Spiller may be deemed to
have a beneficial ownership interest in 316,823 of these shares, and
will be entitled to receive the net proceeds of the sale of up to
225,000 of these shares, less $0.9302 per share, if the Underwriters
exercise their over-allotment option. See "Certain Transactions."
(4) All such shares are owned by Snowden Limited Partnership of which
Nevis Capital Management, Inc. is the general partner. The address of
Nevis Capital Management, Inc. is 1119 St. Paul Street, Baltimore,
Maryland 21202.
(5) Includes options to purchase 200,000 shares of Common Stock. The
address of Richmont Capital Partners I, L.P. ("Richmont") is 4300
Westgrove Drive, Dallas, Texas 75248.
(6) Includes options to purchase 474,000 shares of Common Stock. Also
includes 43,541 shares owned by Mr. Spiller's children, of which Mr.
Spiller disclaims beneficial ownership. Does not include 316,823
shares of which Mr. Spiller may be deemed to have a beneficial
ownership interest pursuant to an agreement with Kanders. See
"Certain Transactions."
(7) Includes options to purchase 25,000 shares of Common Stock. Also
includes 13,400 shares owned by Mr. Ehrlich's children and 20,600
held in trust for the benefit of his children, of which Mr. Ehrlich's
spouse is trustee, of which he disclaims beneficial ownership. Also
includes 400 shares owned by Mr. Ehrlich's spouse's individual
retirement account, of which Mr. Ehrlich disclaims beneficial
ownership.
(8) Mr. Morrison's address is 21 Embankment Gardens, Flat 6, London SW3
4LW United Kingdom. Mr. Morrison has granted a beneficial ownership
interest in 87,613 of the shares listed to Mr. Brayshaw pursuant to
that certain Option Deed dated April 14, 1997, between Messrs.
Morrison and Brayshaw.
(9) Includes options to purchase 25,000 shares of Common Stock. Also
includes 100,000 shares owned by S.T. Investors Fund, LLC ("STIF"), a
limited liability company of which Mr. Sokolow is a member and 20,000
shares owned by Mr. Sokolow's children, of which he disclaims
beneficial ownership. Also includes 10,000 shares owned by Mr.
Sokolow's profit sharing plan.
(10) Mr. Bethell's address is 60 Bromfelde Road, London SW4 6PR United
Kingdom.
(11) Mr. Brayshaw's address is Redhall, 87 Main Street, Lyddington, Near
Uppingham, Rutland, LE15 9LS United Kingdom. The shares listed are
pursuant to vested but unexercised stock options granted by Mr.
Morrison to Mr. Brayshaw pursuant to that certain Option Deed dated
April 14, 1997, between Messrs. Morrison and Brayshaw.
(12) Includes options to purchase 66,667 shares of Common Stock.
(13) Includes options to purchase 25,000 shares of Common Stock.
(14) Includes options to purchase 19,999 shares of Common Stock.
(15) Mr. Bartlett does not own any shares individually. Mr. Bartlett is
Chairman of The Richmont Group, whose affiliate, Richmont, is the
beneficial owner of 800,000 shares of Common Stock. Mr. Bartlett
disclaims beneficial ownership of the shares owned by Richmont.
(16) Mr. Schiller does not own any shares of Common Stock. Pursuant to the
terms of his employment agreement, Mr. Schiller was granted options
to purchase 150,000 shares of Common Stock on July 24, 1996 under the
1996 Option Plan at an exercise price of $6.06 per share, the market
price of the Common Stock on the date of the grant. The options vest
over a period of three years from the date of the grant, and all
options become exercisable on July 24, 1999.
(17) See footnotes (2), (3) and (6)-(16).
51
<PAGE>
CERTAIN TRANSACTIONS
On May 15, 1996, the Company issued options to purchase 300,000 shares of
Common Stock to Richmont Capital Partners I, L.P. ("Richmont"), at an
exercise price of $7.50 per share, subject to adjustment (the "Richmont
Options"). The Richmont Options and the underlying shares, whether vested or
unvested, are callable by the Company in the event that the closing price per
share of the Common Stock is equal to or greater than $10.00 for a period of
ten consecutive trading days after December 31, 1997, upon written notice to
Richmont given within 30 days of the conclusion of such ten consecutive
trading days during which the closing price per share of the Common Stock was
equal to or greater than $10.00. In such event, the Company may require
Richmont to exercise the Richmont Options in whole with respect to all such
shares within ten days of such notice to Richmont. In the event that Richmont
does not exercise the Richmont Options, the Richmont Options will lapse.
Richmont was also the holder of a Convertible Note in the principal amount
of $3.0 million. Richmont converted its Convertible Note into 600,000 shares
of Common Stock pursuant to the terms of the Convertible Subordinated Note
Purchase Agreement on December 18, 1996. Including the 200,000 Richmont
Options which have fully vested and the shares into which Richmont's
Convertible Note were converted, Richmont is the beneficial owner of 6.6% of
the Company's outstanding Common Stock. Richard C. Bartlett, a Director of
the Company, is the Chairman of the Board of Directors of The Richmont Group,
the parent corporation of Richmont. Mr. Bartlett disclaims beneficial
ownership of any shares of Common Stock beneficially owned by Richmont.
Kanders and Mr. Spiller entered into an agreement, dated as of January 18,
1996, pursuant to which Kanders granted to Mr. Spiller a beneficial ownership
interest in 316,823 shares of Common Stock owned by Kanders. Such agreement
provides that, in the event that Kanders sells at least 452,604 shares of
Common Stock in a single transaction, then Mr. Spiller will have the option
to either (i) pay to Kanders an amount equal to $0.9302 per share, in which
event Mr. Spiller will be entitled to receive stock certificates representing
such 316,823 shares of Common Stock, or (ii) receive the net proceeds
relating to 316,823 shares of Common Stock that are the subject of the sale
by Kanders, reduced by $0.9302 per share. In the event that Kanders does not
sell at least 452,604 shares of Common Stock as described above, Mr.
Spiller's rights to the 316,823 shares of Common Stock will vest on January
18, 1999 so long as, at such time, Mr. Spiller is the President and Chief
Executive Officer of the Company and his employment agreement with the
Company is in full force and effect and Mr. Spiller is not in breach thereof.
If Mr. Spiller's employment agreement with the Company is terminated due to
his death or disability, or without cause, prior to January 18, 1999,
however, a pro-rata portion of such 316,823 shares of Common Stock, based
upon the number of months elapsed from January 18, 1996 in relation to 36
months, will vest to Mr. Spiller. Unless sooner acquired by Mr. Spiller, Mr.
Spiller shall have the right to acquire any such vested shares of Common
Stock on January 18, 2001 upon payment by Mr. Spiller to Kanders of $0.9302
per share relating to such shares. Pursuant to such agreement, Mr. Spiller
will have the right to receive the net proceeds from the sale of up to
225,000 of the shares of Common Stock (less $0.9302 per share) that will be
sold by Kanders in the Offering if the Underwriters exercise their
over-allotment option.
Burtt R. Ehrlich, a Director of the Company, was the holder of a
Convertible Note in the principal amount of $250,000. Mr. Ehrlich converted
his Convertible Note into 50,000 shares of Common Stock pursuant to the terms
of the Convertible Subordinated Note Purchase Agreement on December 18, 1996.
Thomas W. Strauss, a Director of the Company, was the holder of a
Convertible Note in the principal amount of $200,000. Mr. Strauss converted
his Convertible Note into 40,000 shares of Common Stock pursuant to the terms
of the Convertible Subordinated Note Purchase Agreement on December 18, 1996.
The Jeanne Kanders Revocable Inter Vivos Trust and the Ralph F. Kanders
Revocable Inter Vivos Trust, named for the parents of Warren B. Kanders, the
Chairman of the Board of Directors of the Company, were holders of
Convertible Notes in the principal amounts of $150,000 and $100,000,
respectively. The trusts converted their Convertible Notes into 30,000 and
20,000 shares of Common Stock, respectively, pursuant to the terms of the
Convertible Subordinated Note Purchase Agreement on December 18, 1996.
52
<PAGE>
The Company historically has purchased substantially all of the ballistic
resistant fabric used in the manufacture of its products from Clark Schwebel,
Inc. ("Schwebel"), a subsidiary of Springs Industries, Inc. and a former
holder of 45.7% of the outstanding Common Stock. Kanders purchased all of the
capital stock of the Company owned by Schwebel on January 18, 1996. The
Company's purchases from Schwebel totaled approximately $3.4 million, $5.1
million and $5.0 million in fiscal 1994, fiscal 1995 and fiscal 1996,
respectively, and were made in the normal course of business at prices which
the Company believes were competitive with other available sources for such
materials.
DESCRIPTION OF CAPITAL STOCK
GENERAL
The Company's authorized capital stock consists of 50 million shares of
Common Stock, $0.01 par value per share, and 5 million shares of preferred
stock, par value $0.01 per share (the "Preferred Stock"). Upon completion of
the Offering, the Company will have 15,987,073 shares of Common Stock issued
and outstanding. The material terms of the Company's certificate of
incorporation and bylaws are discussed below.
COMMON STOCK
Holders of Common Stock are entitled to one vote per share in the election
of directors and on all other matters on which stockholders are entitled or
permitted to vote. Holders of Common Stock are not entitled to vote
cumulatively for the election of directors. Holders of Common Stock have no
redemption, conversion, preemptive or other subscription rights. There are no
sinking fund provisions relating to the Common Stock. Holders of Common Stock
are entitled to receive dividends when and as declared by the Board of
Directors of the Company out of funds legally available therefor. The Company
does not anticipate paying cash dividends on the Common Stock in the
foreseeable future. See "Price Range of Common Stock and Dividend Policy." In
the event of the liquidation, dissolution or winding up of the Company, the
holders of Common Stock will be entitled to share ratably in all of the
assets of the Company, if any, remaining after satisfaction of the debts and
liabilities of the Company. The outstanding shares of Common Stock are, and
the shares of Common Stock offered hereby by the Company will be, upon
payment therefor as contemplated herein, validly issued, fully paid and
nonassessable.
PREFERRED STOCK
Under the Company's Certificate of Incorporation (the "Charter"), the
Board of Directors is authorized, subject to certain limitations prescribed
by law, to issue the Preferred Stock in one or more classes or series and to
fix the designations, powers, preferences and relative participation, option
or other special rights and qualifications, limitations or restrictions
thereof, including the dividend rate, conversion or exchange rights,
redemption price and liquidation preference, of any such class or series. In
addition, the Board of Directors may fix the number of shares constituting
any such class or series, and increase or decrease the number of shares of
any such class or series, but not below the number of outstanding shares of
any such class or series. The rights of the holders of Common Stock will be
subject to, and may be adversely affected by, the rights of the holders of
any Preferred Stock that may be issued in the future. The issuance of
Preferred Stock, while providing desirable flexibility in connection with
possible acquisitions and other corporate purposes, could have the effect of
making it more difficult for a third party to acquire a majority of the
outstanding voting stock of the Company. The Company has no current plans to
issue shares of Preferred Stock.
CERTAIN PROVISIONS OF DELAWARE LAW
The Company is incorporated under the DGCL. The Company is subject to
Section 203 of the DGCL, which restricts certain transactions and "business
combinations" between a Delaware corporation and an "interested stockholder"
(in general, a stockholder owning 15% or more of the corporation's
outstanding voting stock) or an affiliate or associate of an interested
stockholder, for a period of three years from the date the stockholder
becomes an interested stockholder. A "business combination" includes mergers,
asset sales and other transactions resulting in a financial benefit to the
interested
53
<PAGE>
stockholder. Subject to certain exceptions, unless the transaction is
approved by the Board of Directors and the holders of at least 66 2/3% of the
outstanding voting stock of the corporation (excluding shares held by the
interested stockholder), Section 203 prohibits significant business
transactions such as a merger with, disposition of assets to or receipt of
disproportionate financial benefits by the interested stockholder, or any
other transaction that would increase the interested stockholder's
proportionate ownership of any class or series of the corporation's stock.
The statutory ban does not apply if, upon consummation of the transaction in
which any person becomes an interested stockholder, the interested
stockholder owns at least 85% of the outstanding voting stock of the
corporation (excluding shares held by persons who are both directors and
officers or by certain employee stock plans). See "Risk Factors -- Effect of
Certain Statutory Provisions."
The Charter contains certain provisions permitted under the DGCL relating
to the liability of directors. The Charter provides that, to the fullest
extent permitted by the DGCL, no director of the Company will be personally
liable to the Company or its stockholders for monetary damages for breach of
fiduciary duty as a director. The Charter and Bylaws (the "Bylaws") of the
Company also contain provisions indemnifying the directors, officers and
employees of the Company or individuals serving at the request of the Company
as directors, officers, employees or agents of another corporation,
partnership, joint venture, trust or other enterprise, to the fullest extent
permitted by the DGCL.
Section 203 and certain provisions of the Charter and Bylaws described
above may make it more difficult for a third party to acquire, or discourage
acquisition bids for, the Company. Section 203 and these provisions could
have the effect of inhibiting attempts to change the membership of the Board
of Directors of the Company. In addition, the limited liability provisions in
the Charter and the indemnification provisions in the Charter and Bylaws may
discourage stockholders from bringing a lawsuit against directors for breach
of their fiduciary duty (including breaches resulting from grossly negligent
conduct) and may have the effect of reducing the likelihood of derivative
litigation against directors and officers, even though such an action, if
successful, might otherwise have benefited the Company and its stockholders.
Furthermore, a stockholder's investment in the Company may be adversely
affected to the extent the Company pays the costs of settlement and damage
awards against directors and officers of the Company pursuant to the
indemnification provisions in the Bylaws. The limited liability provisions in
the Charter will not limit the liability of directors under federal
securities laws.
SHARES RESERVED FOR ISSUANCE
As of July 24, 1997, the Company had 358,000 shares of Common Stock
reserved for issuance upon the exercise of outstanding non-qualified options
and 625,667 shares of Common Stock issuable upon the exercise of outstanding
options under the 1994 Incentive Plan, 399,000 shares of Common Stock
reserved for the exercise of options issued pursuant to the 1996 Option Plan
and 300,000 shares of Common Stock reserved for the exercise of options
issued pursuant to the 1996 Directors Plan. Upon consummation of the
Offering, options for the purchase of 879,916 shares of Common Stock will be
fully vested.
TRANSFER AGENT
The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company.
LISTING
The Common Stock is listed on the American Stock Exchange under the
trading symbol "ABE."
54
<PAGE>
DESCRIPTION OF CERTAIN INDEBTEDNESS
On March 26, 1997, the Company entered into the Credit Facility with
Barnett Bank. The Credit Facility provides for a $20 million revolving line
of credit. In addition, the Credit Facility provides for a separate sublimit
of $5 million under an acceptance facility. The Credit Facility also provides
for issuance of letters of credit to the Company.
The Company's indebtedness under the Credit Facility bears interest, at
the Company's option, at a rate of either (i) Barnett Bank's prime rate less
.25% or (ii) an adjusted LIBOR rate equal to 2.25% per year over the LIBOR
rate.
As of July 24, 1997 each of the Company's U.S. subsidiaries (the "U.S.
Subsidiaries"), other than American Body Armor & Equipment, Inc., 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 American Body Armor & Equipment, Inc., 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.
The Credit Facility contains certain restrictive covenants, including
limitations on the encumbrance and transfer of assets, the creation of
indebtedness and the maintenance of certain levels of tangible net worth and
working capital. In addition, the Credit Facility restricts the payment of
dividends. The Credit Facility matures on March 1, 1999, subject to extension
under certain circumstances.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have 15,987,073 shares
of Common Stock outstanding. Of these shares, 9,978,658 shares, including the
4,000,000 shares of Common Stock sold by the Company in the Offering, will be
freely tradable under the Securities Act, by persons who are not "affiliates"
of the Company (in general, an "affiliate" is any person who has a control
relationship with the Company). The remaining 6,008,415 outstanding shares of
Common Stock are deemed to be "restricted securities" as that term is defined
in Rule 144, all of which are eligible for sale in the public market in
compliance with Rule 144. The Company, its officers and directors and certain
existing stockholders of the Company (who in the aggregate beneficially own
7,787,142 shares of Common Stock) have agreed, subject to certain exceptions,
that they will not offer, sell or otherwise dispose of any of the shares of
Common Stock, or any securities convertible into or exerciseable for Common
Stock, owned by them for a period of 180 days after the date of this
Prospectus without the prior written consent of Dillon, Read & Co. Inc., as
representative of the Underwriters. Of such shares, approximately 3,900,000
are pledged as security for loan obligations of certain stockholders. If such
stockholders were to default in their obligations and the bank were to
foreclose on such pledged shares, such shares could be subject to sale during
the 180 day period from the date of the Prospectus. Additionally, the Company
has agreed that, during the period of 180 days from the date of this
Prospectus, subject to certain exceptions, it will not issue, sell, offer or
agree to sell, grant any options for the sale of (other than employee stock
options) or otherwise dispose of, directly or indirectly, any shares of
Common Stock or any securities convertible into or exercisable for Common
Stock, other than pursuant to the Offering or in connection with future
acquisitions.
In general, under Rule 144 as currently in effect any person (or persons
whose shares are aggregated) who has beneficially owned restricted securities
for at least one year is entitled to sell, within any three-month period, a
number of shares of Common Stock which does not exceed the greater of 1% of
the number of then-outstanding shares of the Common Stock (15,987,073 shares
outstanding immediately after the Offering) or the average weekly trading
volume of the Common Stock during the four calendar
55
<PAGE>
weeks preceding the date on which notice of the sale is filed with the
Commission. Sales under Rule 144 also may be subject to certain manner of
sale provisions, notice requirements and the availability of current public
information about the Company. Any person (or persons whose shares are
aggregated) who is not deemed to have been an affiliate of the Company at any
time during the three months preceding a sale, and who has beneficially owned
shares within the definition of "restricted securities" under Rule 144 for at
least two years, is entitled to sell such shares under Rule 144(k) without
regard to the volume limitation, manner of sale provisions, public
information requirements or notice requirements.
In connection with the DSL Transaction, the Company agreed to register the
shares of Common Stock issued by the Company in connection with such
transaction for sale under the Securities Act, pursuant to the terms of a
registration rights agreement between the Company and each of the holders of
such shares. Pursuant to the terms of the registration rights agreement, the
holders are entitled to one demand registration right. Such stockholders have
agreed, subject to certain exceptions, that they will not offer, sell,
contract to sell, transfer or otherwise encumber or dispose of any shares of
Common Stock, or securities convertible or exchangeable for shares of Common
Stock for a period of 180 days after the date of this Prospectus without the
prior written consent of Dillon, Read & Co. Inc.
The shares of Common Stock received by Richmont upon conversion of the
Convertible Notes have previously been registered. In addition, Richmont also
has certain piggyback registration rights with respect to such shares.
Shares held by certain of the Company's executive officers and directors
are subject to a three year lock-up agreement (each a "Kanders Lockup")
between such executives and Kanders. Pursuant to the terms of a letter
agreement, dated January 18, 1996, each of such executives agreed that he or
she will not, directly or indirectly, without the prior written consent of
Kanders, offer to sell, sell, grant any options for the sale of, assign,
transfer, pledge, hypothecate or otherwise encumber or dispose of certain of
his or her shares of Common Stock or securities convertible into, exercisable
or exchangeable for or evidencing any right to purchase or subscribe for,
such shares of Common Stock or dispose of any beneficial interest therein for
a period of three years from January 18, 1996, except as provided in such
letter agreement. Mr. Spiller, Mr. Ehrlich and S.T. Investors Fund, LLC have
646,664, 100,000 and 100,000 shares, respectively, subject to a Kanders
Lockup. Mr. Bistrong has 100,000 options subject to a Kanders Lockup and Ms.
Burke has 45,000 options subject to a Kanders Lockup.
No prediction can be made as to the effect, if any, that market sales of
shares of Common Stock that are restricted securities, or the availability of
such shares, will have on the market price of the Common Stock prevailing
from time to time. Sales of substantial amounts of Common Stock, or the
perception that such sales could occur, could adversely affect prevailing
market prices for the Common Stock and could impair the Company's future
ability to raise capital through an offering of equity securities.
56
<PAGE>
UNDERWRITING
The names of the Underwriters of the Common Stock offered hereby and the
aggregate number of shares of Common Stock which each has severally agreed to
purchase from the Company, subject to the terms and conditions specified in
the Underwriting Agreement, are as follows:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- ---------------------------------------------------- ------------
<S> <C>
Dillon, Read & Co. Inc. ............................. 1,175,000
Equitable Securities Corporation .................... 587,500
Stephens Inc. ....................................... 587,500
Advest, Inc. ........................................ 35,000
Allen & Company Incorporated ........................ 35,000
Arnhold and S. Bleichroeder, Inc. ................... 35,000
Banque Wormser Freres S.A. .......................... 35,000
Brean Murray & Co., Inc. ............................ 25,000
Alex. Brown & Sons Incorporated ..................... 60,000
Deutsche Morgan Grenfell Inc. ....................... 60,000
Doft & Co., Inc. .................................... 35,000
Donaldson, Lufkin & Jenrette Securities Corporation 60,000
A.G. Edwards & Sons, Inc. ........................... 60,000
Allen C. Ewing & Co. ................................ 25,000
First Albany Corporation ............................ 35,000
Furman Selz LLC ..................................... 35,000
Goldman, Sachs & Co. ................................ 60,000
Hanifen, Imhoff Inc. ................................ 35,000
Hoak Breedlove Wesneski & Co. ....................... 25,000
J.C. Bradford & Co. ................................. 35,000
Jefferies & Company, Inc. ........................... 35,000
C.L. King & Associates, Inc. ........................ 25,000
Lazard Freres & Co. LLC ............................. 60,000
Legg Mason Wood Walker, Incorporated ................ 35,000
Lehman Brothers Inc. ................................ 60,000
Montgomery Securities ............................... 60,000
David A. Noyes & Company ............................ 25,000
Oppenheimer & Co., Inc. ............................. 60,000
Pennsylvania Merchant Group Ltd. .................... 25,000
Prudential Securities Incorporated .................. 60,000
Raymond James & Associates, Inc. .................... 35,000
Salomon Brothers Inc ................................ 60,000
Schroder & Co. Inc. ................................. 60,000
Scott & Stringfellow, Inc. .......................... 25,000
Smith Barney Inc. ................................... 60,000
W.M. Smith & Co. .................................... 60,000
Soditic Finance Company Limited ..................... 35,000
UBS Securities LLC .................................. 60,000
Wasserstein, Perella Securities Inc. ................ 60,000
H.G. Wellington & Co. Inc. .......................... 25,000
Wheat, First Securities, Inc. ....................... 35,000
------------
Total ........................................... 4,000,000
============
</TABLE>
The Managing Underwriters are Dillon, Read & Co. Inc., Equitable
Securities Corporation and Stephens Inc.
57
<PAGE>
The Underwriters are committed to purchase all of the shares of Common
Stock, if any are so purchased. The Underwriting Agreement contains certain
provisions whereby, if any Underwriter defaults in its obligation to purchase
such shares of Common Stock, and the aggregate obligations of the
Underwriters so defaulting does not exceed ten percent of the shares of
Common Stock offered hereby, some or all of the remaining Underwriters must
assume such obligations.
The Underwriters propose to offer the shares of Common Stock directly to
the public initially at the public offering price per share set forth on the
cover page of this Prospectus and to certain dealers at such price less a
concession not in excess of $0.36 per share. The Underwriters may allow, and
such dealers may re-allow, a concession not to exceed $0.10 per share to
certain other dealers. The Offering of the shares of Common Stock is made for
delivery when, as and if accepted by the Underwriters and subject to prior
sale and withdrawal, cancellation or modification of the offer without
notice. The Underwriters reserve the right to reject any order for the
purchase of the shares of Common Stock. After this Offering, the public
offering price and the concessions may be changed by the Managing
Underwriters.
The Selling Stockholders have granted to the Underwriters an option for 30
days from the date of this Prospectus, to purchase up to 600,000 additional
shares of Common Stock at the public offering price less the underwriting
discount set forth on the cover page of this Prospectus. The Underwriters may
exercise such option only to cover over-allotments in the sale of the shares
of Common Stock that the Underwriters have agreed to purchase. To the extent
that the Underwriters exercise this option, each Underwriter will be
obligated, subject to certain conditions, to purchase the number of
additional shares of Common Stock proportionate to such Underwriter's initial
commitment.
The Company has agreed to indemnify the Underwriters against certain
liabilities under the Securities Act, or to contribute to payments that the
Underwriters may be required to make.
The Company, all of the directors and executive officers and certain
existing stockholders of the Company (who in the aggregate beneficially own
7,787,142 shares of Common Stock) have agreed, subject to certain exceptions,
that they will not offer, sell, contract to sell, transfer or otherwise
encumber or dispose of any shares of Common Stock, or securities convertible
or exchangeable for shares of Common Stock for a period of 180 days after the
date of this Prospectus without the prior written consent of Dillon, Read &
Co. Inc.
The Underwriters may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids in accordance with
Regulation M under the Exchange Act. Over-allotment involves syndicate sales
in excess of the offering size, which creates a syndicate short position.
Stabilizing transactions permit bids to purchase the underlying security so
long as the stabilizing bids do not exceed a specified maximum. Syndicate
covering transactions involve purchases of shares of the Common Stock in the
open market after distribution has been completed in order to cover syndicate
short positions. Penalty bids permit the Underwriters to reclaim a selling
concession from a syndicate member when the shares of Common Stock originally
sold by such syndicate member are purchased in a syndicate covering
transaction to cover syndicate short positions. Such stabilizing
transactions, syndicate covering transactions and penalty bids may cause the
price of the Common Stock to be higher than it would otherwise be in the
absence of such transactions.
Pursuant to an agreement between Stephens Inc., one of the Underwriters,
and Barnett Bank, Inc., Stephens Inc. has agreed to pay to Barnett Bank,
N.A., Jacksonville, an affiliate of Barnett Bank, Inc., a finder's fee in
connection with the Offering in an amount anticipated not to exceed $75,000.
Barnett Bank, N.A., Jacksonville, is the lender under the Credit Facility.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Kane Kessler, P.C., New York, New York. Certain legal
matters will be passed upon for the Underwriters by Gibson, Dunn & Crutcher
LLP, New York, New York. Robert L. Lawrence, a member of Kane Kessler, P.C.,
owns 5,000 shares of Common Stock.
58
<PAGE>
EXPERTS
The Consolidated Financial Statements of the Company as at December 31,
1995 and December 28, 1996 and for each of the years ended December 31, 1994,
December 31, 1995 and December 28, 1996 and the Supplemental Consolidated
Financial Statements of the Company as at December 31, 1995 and December 28,
1996 and for each of the years ended December 31, 1994, December 31, 1995 and
December 28, 1996 included in this Prospectus have been included herein in
reliance on the reports of Deloitte & Touche LLP, independent accountants, as
set forth in their reports thereon appearing elsewhere herein and are
included in reliance upon such reports given on the authority of that firm as
experts in accounting and auditing.
The Consolidated Financial Statements of DSL Group Limited and
Subsidiaries as of December 31, 1996 and for the period from June 3, 1996
(date of incorporation) to December 31, 1996 and of DSL Holdings Limited and
Subsidiaries as of March 31, 1996 and 1995 and for the two years then ended
have been audited by KPMG, as set forth in their reports thereon appearing
elsewhere herein and are included in reliance upon such reports, given on the
authority of that firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company is subject to the informational requirements of the Exchange
Act and in accordance therewith files reports, proxy statements and other
information with the Commission. Such reports, proxy statements and other
information filed by the Company can be inspected and copied at prescribed
rates at the public reference facilities maintained by the Commission at 450
Fifth Street , N.W., Judiciary Plaza, Washington, D.C. 20549 and at the
Commission's regional offices located at 7 World Trade Center, New York, New
York 10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
The Commission maintains a Web site (http://www.sec.gov) that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission. Reports, proxy and
information statements and other information regarding the Company may also
be inspected at the offices of the American Stock Exchange, 86 Trinity Place,
New York, New York 10006.
The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act with respect to the Common Stock offered hereby.
This Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules thereto, certain
portions having been omitted in accordance with the rules and regulations of
the Commission. For further information with respect to the Company and the
Common Stock, reference is hereby made to such Registration Statement and the
exhibits and schedules thereto. Statements contained in this Prospectus as to
the contents of any contract or other document are not necessarily complete,
although the material terms thereof are described in this Prospectus, and, in
each instance, reference is made to the copy of such contract or document
filed as an exhibit to the Registration Statement. Each such statement is
qualified by such reference to such exhibits. A copy of the Registration
Statement may be inspected by anyone without charge at the Commission's
principal office in Washington D.C., at the regional offices of the
Commission located at 7 World Trade Center, New York, New York 10048 and 500
West Madison Street, Suite 1400, Chicago, Illinois 60661 and through the
Commission's internet site at http://www.sec.gov. Copies of all or any part
of the Registration Statement may be obtained from the Public Reference
Section of the Commission, 450 Fifth Street, N.W. Washington, D.C. 20549,
upon payment of certain fees prescribed by the Commission.
59
<PAGE>
[THIS PAGE INTENTIALLY LEFT BLANK]
<PAGE>
INDEX TO FINANCIAL STATEMENTS
ARMOR HOLDINGS, INC. -- HISTORICAL
<TABLE>
<CAPTION>
<S> <C>
Independent Auditors' Report.......................................................... F-2
Consolidated Balance Sheets--December 31, 1995, December 28, 1996,
and March 29, 1997 (unaudited) ...................................................... F-3
Consolidated Income Statements--Three years ended December 31, 1994,
December 31, 1995 and December 28, 1996, and for the three months ended
March 31, 1996 and March 29, 1997 (unaudited)........................................ F-5
Consolidated Statements of Stockholders' Equity--For the three years ended
December 31, 1994, December 31, 1995 and December 28, 1996, and for the
three months ended March 29, 1997 (unaudited)........................................ F-6
Consolidated Statements of Cash Flows--Three years ended December 31, 1994, December
31, 1995 and December 28, 1996; and for the three months ended
March 31, 1996 and March 29, 1997 (unaudited) ....................................... F-7
Notes to Consolidated Financial Statements--For the three years ended
December 31, 1994, December 31, 1995 and December 28, 1996 and for the three months
ended March 31, 1996 and March 29, 1997 (unaudited) ................................. F-8
ARMOR HOLDINGS, INC.-- SUPPLEMENTAL
Independent Auditors' Report.......................................................... F-19
Report of Independent Auditors ....................................................... F-20
Supplemental Consolidated Balance Sheets--December 31, 1995, December 28, 1996,
and March 29, 1997 (unaudited) ...................................................... F-21
Supplemental Consolidated Income Statements--Three years ended December 31, 1994,
December 31, 1995 and December 28, 1996 and three months ended March 31, 1996
and March 29, 1997 (unaudited)....................................................... F-23
Supplemental Consolidated Statements of Stockholders' Equity-- For the three years
ended December 31, 1994, December 31, 1995 and December 28, 1996 and for the three
months ended March 29, 1997 (unaudited).............................................. F-24
Supplemental Consolidated Statements of Cash Flows--Three years ended
December 31, 1994, December 31, 1995 and December 28, 1996 and for the
three months ended March 31, 1996 and March 29, 1997 (unaudited)..................... F-25
Notes to Supplemental Consolidated Financial Statements--For the three years ended
December 31, 1994, December 31, 1995 and December 28, 1996 and for the three months
ended March 31, 1996 and March 29, 1997 (unaudited) .................................. F-26
DSL GROUP LIMITED AND SUBSIDIARIES
Unaudited Consolidated Balance Sheet as at March 31, 1997............................. F-41
Unaudited Consolidated Statements of profit and loss--For the three months ended
March 31, 1997 ...................................................................... F-42
Unaudited Consolidated Statements of Cash Flows--For the three months ended
March 31, 1997 ...................................................................... F-43
Notes to unaudited interim financial statements....................................... F-44
Report of Independent Auditors........................................................ F-45
Consolidated profit and loss account--For the period from incorporation to
December 31, 1996.................................................................... F-46
Consolidated balance sheet at December 31, 1996 ...................................... F-47
Consolidated cash flow statement--For the period from incorporation to
December 31, 1996 ................................................................... F-48
Consolidated statement of total recognized gains and losses--For the period from
incorporation to December 31, 1996 and Reconciliation of movements in shareholders'
funds--For the period from incorporation to December 31, 1996........................ F-49
Notes................................................................................. F-50
<PAGE>
DSL HOLDINGS LIMITED AND SUBSIDIARIES
Report of Independent Auditors........................................................ F-65
Consolidated profit and loss accounts--For the years ended March 31, 1995, and
March 31, 1996....................................................................... F-66
Consolidated balance sheets--at March 31, 1995, and March 31, 1996.................... F-67
Consolidated cash flow statements--For the years ended March 31, 1995, and
March 31, 1996....................................................................... F-68
Consolidated statements of total recognized gains and losses--For the years ended
March 31, 1995 and 1996 and Reconciliations of movements in shareholders' funds
--For the years ended March 31, 1995 and March 31, 1996.............................. F-69
Notes................................................................................. F-70
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Armor Holdings, Inc.
Jacksonville, Florida
We have audited the accompanying consolidated balance sheets of Armor
Holdings, Inc. (the "Company") as of December 31, 1995 and December 28, 1996
and the related consolidated statements of income, stockholders' equity and
cash flows for the three years ended December 31, 1994, December 31, 1995,
and December 28, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe our audits provide a reasonable
basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at December 31, 1995
and December 28, 1996, and the results of their operations and their cash
flows for the three years ended December 31, 1994, December 31, 1995, and
December 28, 1996 in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Jacksonville, Florida
February 21, 1997
F-2
<PAGE>
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1995, DECEMBER 28, 1996 AND MARCH 29, 1997 (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 28, MARCH 29,
1995 1996 1997
-------------- -------------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ................. $ 273 $ 7,062 $ 4,146
Accounts receivable (net of allowance for
doubtful accounts of $100, $186, and
$199)...................................... 2,320 5,753 6,210
Inventories ............................... 1,102 4,161 4,897
Prepaid expenses and other current assets 287 588 653
-------------- -------------- -----------
Total current assets ..................... 3,982 17,564 15,906
Property, plant and equipment, net ........ 474 3,391 5,115
Reorganization value in excess of amounts
allocable to identifiable assets (net of
accumulated amortization of
$488, $651 and $697) ...................... 3,587 3,424 3,378
Patents and trademarks (net of accumulated
amortization of $108 and $181) ............ -- 4,196 4,123
Other assets................................ 118 156 337
-------------- -------------- -----------
Total assets ............................... $8,161 $28,731 $28,859
============== ============== ===========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
AS OF DECEMBER 31, 1995, DECEMBER 28, 1996 AND MARCH 29, 1997 (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 28, MARCH 29,
1995 1996 1997
-------------- -------------- -----------
(UNAUDITED)
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt and
capitalized lease obligations.................... $2,082 $ 281 $ 608
Accounts payable, accrued expenses and other
current liabilities............................. 1,104 3,764 3,024
-------------- -------------- -----------
Total current liabilities ...................... 3,186 4,045 3,632
Long-term debt and capitalized lease obligations,
less current portion ............................ 28 119 95
-------------- -------------- -----------
Total liabilities .............................. 3,214 4,164 3,727
Commitments and contingencies (Notes 9
and 10)..........................................
Stockholders' equity:
Preferred stock, $.01 par value, 5,000,000
shares authorized; 0 shares issued and
outstanding .................................... -- -- --
Convertible preferred stock, $1 stated value,
1,700,000 shares authorized, 1,214,292 shares
issued and outstanding.......................... 1,214 -- --
Common stock, $.03, $.01 and $.01 par value,
15,000,000, 50,000,000 and 50,000,000 shares
authorized; 5,091,133, 10,417,015 and
10,591,681 respectively, issued and
outstanding...................................... 152 104 106
Additional paid-in capital ...................... 2,594 22,652 22,810
Retained earnings ............................... 987 1,811 2,216
-------------- -------------- -----------
Total stockholders' equity ..................... 4,947 24,567 25,132
-------------- -------------- -----------
Total liabilities and stockholders' equity ...... $8,161 $28,731 $28,859
============== ============== ===========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
YEARS ENDED DECEMBER 31, 1994 AND 1995 AND DECEMBER 28, 1996 AND
THREE MONTHS ENDED MARCH 31, 1996 AND MARCH 29, 1997 (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 28,
1994 1995 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Net sales ....................... $11,355 $11,741 $18,011
Cost and expenses:
Cost of sales .................. 7,741 7,443 10,879
Operating expenses ............. 2,696 3,421 5,454
Interest expense (income), net 216 281 253
-------------- -------------- --------------
Operating income ................ 702 596 1,425
Non-operating income ........... -- 228 2
-------------- -------------- --------------
Income before provision for
income taxes.................... 702 824 1,427
Provision for income taxes ..... 279 304 592
-------------- -------------- --------------
Net income ...................... $ 423 $ 520 $ 835
============== ============== ==============
Net income per common share and
common eqivalent share ......... $ 0.07 $ 0.08 $ 0.10
============== ============== ==============
Weighted average common shares
and common equivalent shares ... 5,802 6,370 8,133
============== ============== ==============
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------
MARCH 31, MARCH 29,
1996 1997
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Net sales ....................... $3,267 $ 6,422
Cost and expenses:
Cost of sales .................. 2,110 3,773
Operating expenses ............. 968 2,028
Interest expense (income), net 72 (40)
----------- -----------
Operating income ................ 117 661
Non-operating income ........... -- --
----------- -----------
Income before provision for
income taxes.................... 117 661
Provision for income taxes ..... 45 256
----------- -----------
Net income ...................... $ 72 $ 405
=========== ===========
Net income per common share and
common eqivalent share ......... $ 0.01 $ 0.04
=========== ===========
Weighted average common shares
and common equivalent shares ... 7,576 11,523
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1994 AND 1995 AND DECEMBER 28, 1996 AND
THREE MONTHS ENDED MARCH 29, 1997 (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK
------------------- ----------------
STATED PAR
SHARES VALUE SHARES VALUE
--------- --------- -------- -------
<S> <C> <C> <C> <C>
Balance, January 1, 1994 ........... 1,700 $ 1,700 4,416 $ 133
Dividends on preferred stock .....
Conversion of preferred stock .... (243) (243) 275 8
Issuance of stock in lieu of
directors fees ................... 6
Net income .......................
--------- --------- -------- -------
Balance, December 31, 1994 ......... 1,457 1,457 4,697 141
Dividends on preferred stock .....
Conversion of preferred stock .... (243) (243) 347 10
Issuance of stock in lieu of
directors fees .................. 14
Issuance of stock granted under
stock plans ..................... 33 1
Net income .......................
--------- --------- -------- -------
Balance, December 31, 1995 ......... 1,214 1,214 5,091 152
Change in par value of common
stock ........................... (102)
Dividends on preferred stock .....
Conversion of preferred stock .... (1,214) (1,214) 1,735 17
Exercise of stock options ........ 26 1
Exercise of stock grants ......... 72 1
Issuance of stock in lieu of
directors fees .................. 3
Conversion of convertible notes,
net of related debt issuance
costs............................. 2,300 23
Issuance of stock for acquisitions 940 9
Issuance of common stock ......... 250 3
Net income .......................
--------- --------- -------- -------
Balance, December 28, 1996 ......... -- -- 10,417 104
Exercise of stock options
(unaudited) ..................... 175 2
Net income (unaudited) ...........
--------- --------- -------- -------
Balance, March 29, 1997
(unaudited)........................ -- $ -- 10,592 $ 106
========= ========= ======== =======
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
ADDITIONAL
PAID-IN RETAINED
CAPITAL EARNINGS TOTAL
------------ ---------- --------
<S> <C> <C> <C>
Balance, January 1, 1994 ........... $ 2,075 $ 138 $ 4,046
Dividends on preferred stock ..... (51) (51)
Conversion of preferred stock .... 235 --
Issuance of stock in lieu of
directors fees ................... 9 9
Net income ....................... 423 423
------------ ---------- --------
Balance, December 31, 1994 ......... 2,319 510 4,427
Dividends on preferred stock ..... (43) (43)
Conversion of preferred stock .... 233 --
Issuance of stock in lieu of
directors fees .................. 14 14
Issuance of stock granted under
stock plans ..................... 28 29
Net income ....................... 520 520
------------ ---------- --------
Balance, December 31, 1995 ......... 2,594 987 4,947
Change in par value of common
stock ........................... 102 --
Dividends on preferred stock ..... (11) (11)
Conversion of preferred stock .... 1,197 --
Exercise of stock options ........ 62 63
Exercise of stock grants ......... 54 55
Issuance of stock in lieu of
directors fees .................. 15 15
Conversion of convertible notes,
net of related debt issuance
costs............................. 10,610 10,633
Issuance of stock for acquisitions 6,451 6,460
Issuance of common stock ......... 1,567 1,570
Net income ....................... 835 835
------------ ---------- --------
Balance, December 28, 1996 ......... 22,652 1,811 24,567
Exercise of stock options
(unaudited) ..................... 158 160
Net income (unaudited) ........... 405 405
------------ ---------- --------
Balance, March 29, 1997
(unaudited)........................ $22,810 $2,216 $25,132
============ ========== ========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1994 AND 1995 AND DECEMBER 28, 1996 AND
THREE MONTHS ENDED MARCH 31, 1996 AND MARCH 29, 1997 (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 28,
1994 1995 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Operating Activities:
Net income ......................... $ 423 $ 520 $ 835
Adjustments to reconcile net income
to cash (used in) provided by
operating activities:
Depreciation and amortization ..... 118 148 515
Deferred income taxes ............. 264 300 112
Directors' fees ................... 9 14 15
(Increase) decrease in accounts
receivable ....................... (558) (745) (990)
Increase in inventories ........... (108) (59) (423)
Decrease (increase) in prepaid
expenses and other assets ........ 96 (257) 15
(Decrease) increase in accounts
payable, accrued liabilities and
other current liabilities ........ (371) (168) 877
-------------- -------------- --------------
Net cash (used in) provided by
operating activities .............. (127) (247) 956
-------------- -------------- --------------
Investing Activities:
Purchase of property and equipment (118) (119) (1,236)
Purchase of patents and trademarks.. (2,828)
-------------- -------------- --------------
Net cash used in investing
activities.......................... (118) (119) (4,064)
-------------- -------------- --------------
Financing Activities:
Proceeds from issuance of common
stock ............................. 1,570
Preferred stock dividends .......... (51) (43) (11)
Exercise of stock options .......... 26
Net proceeds (payments) under line
of credit .......................... 596 329 (1,997)
Repayments of long-term debt and
capitalized lease obligation ...... (5) (14) (34)
Net borrowings (payments) under
capital expenditure facility ...... 52 (52)
Proceeds from issuance of longterm
debt ............................... (238)
Net borrowings from issuance of 5%
convertible subordinated notes .... 10,633
-------------- -------------- --------------
Net cash provided by (used in)
financing activities .............. 540 324 9,897
-------------- -------------- --------------
Net increase (decrease) in cash and
cash equivalents .................... 295 (42) 6,789
Cash and cash equivalents,
beginning of period ................. 20 315 273
-------------- -------------- --------------
Cash and cash equivalents,
end of period ....................... $ 315 $ 273 $ 7,062
============== ============== ==============
</TABLE>
F-7
<PAGE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------
MARCH 31, MARCH 29,
1996 1997
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Operating Activities:
Net income ......................... $ 72 $ 405
Adjustments to reconcile net income
to cash (used in) provided by
operating activities:
Depreciation and amortization ...... 40 202
Deferred income taxes ............. 45 33
Directors' fees ...................
(Increase) decrease in accounts
receivable ....................... 409 (457)
Increase in inventories ........... (97) (736)
Decrease (increase) in prepaid
expenses and other assets ........ (168) (246)
(Decrease) increase in accounts
payable, accrued liabilities and
other current liabilities ........ (136) (740)
----------- -----------
Net cash (used in) provided by
operating activities .............. 165 (1,539)
----------- -----------
Investing Activities:
Purchase of property and equipment (23) (1,840)
Purchase of patents and trademarks..
----------- -----------
Net cash used in investing
activities.......................... (23) (1,840)
----------- -----------
Financing Activities:
Proceeds from issuance of common
stock .............................
Preferred stock dividends .......... (23)
Exercise of stock options .......... 160
Net proceeds (payments) under line
of credit .......................... (351) 356
Repayments of long-term debt and
capitalized lease obligation ...... (53)
Net borrowings (payments) under
capital expenditure facility ......
Proceeds from issuance of longterm
debt ...............................
Net borrowings from issuance of 5%
convertible subordinated notes ....
----------- -----------
Net cash provided by (used in)
financing activities .............. (374) 463
----------- -----------
Net increase (decrease) in cash and
cash equivalents .................... (232) (2,916)
Cash and cash equivalents,
beginning of period ................. 273 7,062
----------- -----------
Cash and cash equivalents,
end of period ....................... $ 41 $ 4,146
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE>
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994 AND 1995 AND DECEMBER 28, 1996 AND
THREE MONTHS ENDED MARCH 31, 1996 AND MARCH 29, 1997 (UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION -- Armor Holdings, Inc. ("AHI") acquired certain assets of
the NIK Public Safety Product Line ("NIK Public Safety") effective as of July
1, 1996 and substantially all of the assets of Defense Technology Corporation
of America, a Wyoming corporation ("DTCoA") as of September 30, 1996. The
acquisitions were accounted for by the purchase method, and the purchase
price was assigned to assets acquired and liabilities assumed based on their
fair value at the date of acquisition.
COMPANY'S BUSINESS -- Since its founding, the Company has been engaged in
the development, manufacture and distribution of ballistic protective
equipment. Such equipment includes bullet resistant and sharp instrument
penetration resistant vests, bullet resistant blankets, bomb disposal suits
and helmets, bomb protection and disposal equipment and load bearing vests.
In addition to these products, the Company develops, manufactures and
distributes other ballistic protection and security equipment, including
explosive ordnance device ("EOD") handling and detection equipment, EOD
suppression and disposal equipment, helmets, face masks, shields, hard armor
ballistic plates, customized armor for vehicles and other custom armored
products. Through its recent acquisitions, the Company is also engaged in the
packaging, mixing and distribution of portable narcotic identification kits,
the distribution of Flex-Cuf disposable restraints, specimen and evidence
collection kits and evidence tape, and the manufacture and distribution of
less-than-lethal and anti-riot products including defensive aerosol sprays,
distraction devices, chemical agents, flameless expulsion grenades, specialty
impact munitions and other similar products including the distribution of gas
guns, gas masks, batons, shields, riot helmets and gun holsters. The scope of
these latter products involve a less-than-lethal approach for crowd and riot
control.
The Company's products are marketed to municipal, state, federal and
foreign law enforcement agencies, private security entities, United States
and foreign military and correctional services.
PRINCIPLES OF CONSOLIDATION -- The consolidated financial statements
include the accounts of Armor Holdings, Inc., its wholly-owned subsidiaries
Armor Holdings Properties, Inc., a Delaware corporation ("AHPI"), NIK Public
Safety, Inc., a Delaware corporation ("NIK") and Defense Technology
Corporation of America, a Delaware corporation ("DTC") (collectively the
"Company"). All material intercompany balances and transactions have been
eliminated in consolidation.
CASH EQUIVALENTS -- The Company considers all highly liquid investments
purchased with original maturities of three months or less to be cash
equivalents.
CONCENTRATION OF CREDIT RISK -- The Company's accounts receivable consist
of amounts due from customers and distributors located throughout the United
States. International sales generally require cash in advance or confirmed
letters of credit on U.S. banks.
INVENTORIES -- Inventories are stated at the lower of cost or market
determined on the first-in, first-out ("FIFO") basis.
FAIR VALUE OF FINANCIAL INSTRUMENTS -- The carrying values of the
Company's various financial instruments reflected in the accompanying
statements of financial position approximate their estimated fair values at
December 31, 1995 and December 28, 1996.
PROPERTY AND EQUIPMENT -- Property and equipment are carried at cost less
accumulated depreciation. Property and equipment acquired prior to September
21, 1993 were recorded at their estimated fair values as the result of the
emergence from bankruptcy. Depreciation is computed using the straight-line
method based on estimated lives of 3 to 30 years.
REORGANIZATION VALUE IN EXCESS OF AMOUNTS ALLOCABLE TO IDENTIFIABLE ASSETS
- -- Reorganization value in excess of amounts allocable to identifiable assets
is amortized or otherwise reduced in amounts not less than those which would
be recognized on a straight-line basis over twenty-five years.
F-8
<PAGE>
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1994 AND 1995 AND DECEMBER 28, 1996 AND
THREE MONTHS ENDED MARCH 31, 1996 AND MARCH 29, 1997 (UNAUDITED)
PATENTS AND TRADEMARKS -- Patents and trademarks were acquired through
acquisitions accounted for by the purchase method of accounting. Such assets
are amortized on a straight line basis over their remaining lives of 10 to 15
years.
NEW ACCOUNTING STANDARDS -- Effective January 1, 1996, the Company adopted
SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS 123 establishes
a fair value based method of accounting for stock-based employee compensation
plans; however, it also allows an entity to continue to measure compensation
cost for those plans using the intrinsic value based method of accounting
prescribed by Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees." Under the fair value based method,
compensation cost is measured at the grant date based on the value of the
award and is recognized over the service period, which is usually the vesting
period. Under the intrinsic value based method, compensation costs is the
excess, if any, of the quoted market price of the stock at the grant date or
other measurement date over the amount an employee must pay to acquire the
stock. The Company has elected to continue to account for its employee stock
compensation plans under APB Opinion No. 25 with pro forma disclosures of net
earnings and earnings per share, as if the fair value based method of
accounting defined in SFAS No. 123 had been applied.
In March 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share." This
Statement establishes standards for computing and presenting earnings per
share ("EPS") and applies to all entities with publicly held common stock or
potential common stock. This Statement replaces the presentation of primary
EPS and fully diluted EPS with a presentation of basic EPS and diluted EPS,
respectively. Basic EPS excludes dilution and is computed by dividing
earnings available to common stockholders by the weighted-average number of
common shares outstanding for the period. Similar to fully diluted EPS,
diluted EPS reflects the potential dilution of securities that could share in
the earnings. This Statement is effective for the Company's financial
statements for the year ended December 27, 1997. Proforma net income per
basic share and proforma net income per diluted share were both $.01 and $.04
for the quarters ended March 31, 1996 and March 29, 1997, respectively.
ESTIMATES -- The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
INCOME TAXES -- In connection with the adoption of fresh-start reporting,
the Company adopted Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("SFAS 109"). Under the asset and liability
method specified thereunder, deferred taxes are determined based on the
difference between the financial reporting and tax bases of assets and
liabilities. Deferred tax liabilities are offset by deferred tax assets
representing the tax-effected cumulative net operating loss carryforwards and
deductible temporary differences, subject to applicable limits and an asset
valuation allowance. Future benefits obtained from utilization of net
operating loss carryforwards or from the reduction in the income tax asset
valuation allowance existing on September 20, 1993 have been and will be
applied to reduce reorganization value in excess of amounts allocable to
identifiable assets.
REVENUE RECOGNITION -- The Company records sales at gross amounts to be
received, including amounts to be paid to agents as commissions.
Non-operating income for 1995 includes amounts received in settlement of a
non-competition agreement.
RECLASSIFICATIONS -- Certain reclassifications have been made to the 1994
and 1995 financial statements in order to conform to the presentation adopted
for 1996.
UNAUDITED INTERIM BALANCES -- The unaudited consolidated financial
statements included herein have been prepared by the Company in accordance
with the rules and regulations of the
F-9
<PAGE>
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1994 AND 1995 AND DECEMBER 28, 1996 AND
THREE MONTHS ENDED MARCH 31, 1996 AND MARCH 29, 1997 (UNAUDITED)
Securities and Exchange Commission and consequently, do not include all of
the disclosures normally required by generally accepted accounting
principles. These unaudited consolidated financial statements should be read
in conjunction with the audited consolidated financial statements and related
notes thereto included herein.
The unaudited financial information contained herein reflects all
adjustments (consisting of only normal recurring accruals) which, in the
opinion of management, are necessary for a fair presentation of the results
of operations for the three month periods ended March 31, 1996, and March 29,
1997.
2. ACQUISITIONS
DEFENSE TECHNOLOGY CORPORATION OF AMERICA
On September 30, 1996, the Company acquired, through its newly formed
wholly-owned subsidiary, substantially all of the assets of DTCoA. The
purchase price consisted of $838,025 paid in cash, the issuance of 629,442
shares (the "Total Shares") of the Company's common stock having a value of
$4,650,000, the assumption of certain liabilities totaling approximately
$2,300,000 and costs of $1,115,000 associated with completing the
transaction. The total purchase price was assigned to the acquired assets
based on their fair market values.
In order to secure the obligations of DTCoA and its seller in connection
with the transaction, 270,728 of the Total Shares were delivered to Union
Bank of Switzerland, New York Branch ("UBS"), as escrow agent pursuant to an
escrow agreement dated September 30, 1996. One half of the shares held in
escrow are subject to release March 15, 1998 and the remainder are subject to
release June 30, 1999.
Subject to a letter agreement dated August 16, 1996 (the "Key Bank Letter
Agreement") and in connection with the DTC transaction, 358,714 of the Total
Shares (the "Key Bank Shares"), having a value of $2,650,000 (the "Amount
Due"), were issued to Key Bank of Wyoming ("Key Bank") in consideration for
the release by Key Bank of its security interest in substantially all of the
assets of DTCoA. Key Bank held such security interest pursuant to certain
financings previously made available to DTCoA. On the closing date, the
Company advanced to Key Bank $662,500 cash (the "Initial Amount") as an
advance against the Amount Due. Also on the closing date, the Company
deposited $1,987,500 in an interest bearing Certificate of Deposit ("CD")
account at Key Bank (the "Deposit Account"). Subsequent to closing, any
amounts paid to Key Bank on account of the Amount Due, including the Initial
Amount, or advances from the Deposit Account will result in a reduction of
the then outstanding balance of the Amount Due by a like amount.
Pursuant to the Key Bank Letter Agreement, Key Bank agreed that upon the
registration of the Key Bank Shares, the Key Bank Shares would be sold,
provided that the Company would control, in its sole discretion, the timing,
manner and amount of Key Bank Shares to be sold; and in connection therewith,
the Company agreed to ensure that Key Bank realizes net proceeds from such
sales (the "Net Sale Proceeds"), which, together with any advances from the
Deposit Account and the Initial Amount will, in the aggregate, equal the
Amount Due, on or before September 30, 1997 (the "Maturity Date").
The acquisition of DTCoA has been accounted for under the purchase method.
Accordingly, the results of its operations are included in the consolidated
financial statements from the date of acquisition.
The following unaudited pro forma consolidated results of operations for
the years ended December 31, 1995 and December 28, 1996, and the three month
period ended March 31, 1996 are presented as if the DTCoA acquisition had
been made at the beginning of each period presented. The unaudited pro forma
information is not necessarily indicative of either the results of operations
that would have occurred had the purchase been made during the periods
presented or the future results of the combined operations.
F-10
<PAGE>
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1994 AND 1995 AND DECEMBER 28, 1996 AND
THREE MONTHS ENDED MARCH 31, 1996 AND MARCH 29, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
YEARS ENDED THREE MONTHS ENDED
DECEMBER 31, DECEMBER 28, MARCH 31,
1995 1996 1996
-------------- -------------- ------------------
(UNAUDITED)
<S> <C> <C> <C>
Net sales .................... $22,094,968 $24,783,497 $5,428,646
Net earnings ................. $ 1,209,979 $ 1,430,838 $ 251,572
Earnings per common share and
common share equivalent .... $ 0.17 $ 0.17 $ 0.03
</TABLE>
NIK PUBLIC SAFETY PRODUCT LINE
On July 15, 1996, the Company acquired, effective as of July 1, 1996,
certain assets of the NIK Public Safety Product Line from Ivers-Lee
Corporation (the "NIK Assets"). The purchase price of the acquisition was
310,931 shares (the "NIK Shares") of the Company's Common Stock valued at
$2,400,000, plus $374,000 in costs incurred related to the purchase. The
Company acquired inventory, receivables and certain intangibles. The total
purchase price was assigned to the NIK Assets based on their fair market
values.
3. INVENTORIES
Inventories are summarized as follows for the years ended December 31,
1995 and December 28, 1996 and the three months ended March 29, 1997:
<TABLE>
<CAPTION>
MARCH 29,
1995 1996 1997
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials .. $ 546,707 $1,737,761 $1,889,379
Work-in-process 382,680 859,196 980,099
Finished goods . 172,548 1,563,825 2,027,233
------------ ------------ ------------
$1,101,935 $4,160,782 $4,896,711
============ ============ ============
</TABLE>
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31, 1995 and December 28, 1996
are summarized as follows:
<TABLE>
<CAPTION>
1995 1996
----------- ------------
<S> <C> <C>
Land and improvements ..... $ 581,763
Buildings and improvements $ 62,544 1,254,553
Machinery and equipment ... 682,265 1,482,888
Construction in progress .. 585,635
----------- ------------
Total ...................... 744,809 3,904,839
Accumulated depreciation .. (270,450) (513,550)
----------- ------------
$ 474,359 $3,391,289
=========== ============
</TABLE>
Depreciation expense for 1994, 1995 and 1996 was approximately $118,000,
$148,100 and $243,100, respectively, and for the three months ended March 31,
1996 and March 29, 1997 (unaudited) was approximately $26,000 and $101,000,
respectively.
F-11
<PAGE>
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1994 AND 1995 AND DECEMBER 28, 1996 AND
THREE MONTHS ENDED MARCH 31, 1996 AND MARCH 29, 1997 (UNAUDITED)
The Company purchased property, plant and equipment of approximately
$1,700,000 during the three months ended March 29, 1997 in connection with
the construction of a new manufacturing and office facility.
5. ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accounts payable, accrued expenses and other current liabilities are
summarized as follows for the years ended December 31, 1995 and December 28,
1996:
<TABLE>
<CAPTION>
1995 1996
------------ ------------
<S> <C> <C>
Trade and other payables . $ 466,441 $2,005,511
Accrued expenses .......... 572,897 1,169,112
Other current liabilities 64,555 589,421
------------ ------------
$1,103,893 $3,764,044
============ ============
</TABLE>
6. INDEBTEDNESS
<TABLE>
<CAPTION>
1995 1996
------------- -----------
<S> <C> <C>
DEBT:
Line-of-credit under revolving credit and security
agreement with a weighted average interest rate of
10.31% expiring June 30, 1996 ..................... $ 1,997,060
Note payable to Finoff & Associates, payable in
monthly installments of $10,000 including interest
at 8% through October 5, 1998 ..................... $ 200,400
Mortgage loan payable in monthly installments of
$1,296 at 9% through April 1, 1997, with a balloon
installment of $127,739 due on May 1, 1997,
collateralized by a first mortgage on a building .. 129,389
Capital expenditure facility under revolving credit
and security agreement with a weighted average
interest rate of 10.31% expiring June 30, 1996 .... 52,000
Mortgage loan payable in monthly installments of
$310 including interest at 8.5% through August
1996, with a balloon installment of $23,684 due
September 1996, collateralized by a first mortgage
on a condominium apartment......................... 24,886
Other installment loans............................. 839 43,199
------------- -----------
2,074,785 372,988
Less current portion................................ (2,074,785) (272,839)
------------- -----------
$ -- $ 100,149
============= ===========
</TABLE>
F-12
<PAGE>
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1994 AND 1995 AND DECEMBER 28, 1996 AND
THREE MONTHS ENDED MARCH 31, 1996 AND MARCH 29, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
CAPITALIZED LEASE OBLIGATION:
Equipment lease bearing interest at 10.88%, expiring
November, 1999, collateralized by equipment with an
amortized cost of approximately $35,000 at December
28, 1996............................................ $35,163 $27,550
Less current portion ................................ (7,613) (8,483)
--------- ---------
$27,550 $19,067
========= =========
</TABLE>
The Company entered into a Credit Facility and Bankers Acceptance Facility
("Credit Agreement") on November 14, 1996 with Barnett Bank, N.A., which
provides for total borrowings up to $10,000,000 (the "Obligation"), with
maximum availability based upon 50% of eligible inventories (with a cap of
$1,000,000 for work in process inventory and $6,000,000 for inventory in
total) and 85% of eligible accounts receivable. The Credit Agreement has
various covenants which, among other things, require the Company to maintain
certain financial ratios, tangible net worth and working capital, as defined;
and limit the Company's ability to pay dividends on its common stock,
encumber and transfer assets, incur indebtedness or merge into another
corporation. The Company had no borrowings outstanding under the Credit
Agreement at December 28, 1996. The Credit Agreement expires November 13,
1997.
Aggregate principal maturities on indebtedness are as follows:
<TABLE>
<CAPTION>
OBLIGATION
UNDER CAPITALIZED
YEAR ENDING DEBT LEASE
- ----------- ---------- -----------------
<S> <C> <C>
1997............................................ $272,839 $11,065
1998............................................ 100,149 11,065
1999............................................ 10,143
---------- -----------------
372,988 32,273
----------
Less amount representing interest on obligation
under capitalized lease........................ (4,723)
-----------------
$27,550
=================
</TABLE>
7. GEOGRAPHIC SALES INFORMATION
Information with respect to sales to principal geographic areas for the
years ended December 31, 1994 and 1995 and December 28, 1996, and the three
month periods ended March 31, 1996 and March 29, 1997 is as follows:
<TABLE>
<CAPTION>
MARCH 31, MARCH 29,
1994 1995 1996 1996 1997
------------- ------------- ------------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Foreign .... $ 1,594,831 $ 1,370,003 $ 3,110,287 $ 161,542 $1,131,876
Domestic .. 9,760,311 10,371,364 14,900,727 3,105,786 5,290,305
------------- ------------- ------------- ------------ ------------
$11,355,142 $11,741,367 $18,011,014 $3,267,328 $6,422,181
============= ============= ============= ============ ============
</TABLE>
F-13
<PAGE>
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1994 AND 1995 AND DECEMBER 28, 1996 AND
THREE MONTHS ENDED MARCH 31, 1996 AND MARCH 29, 1997 (UNAUDITED)
8. INCOME TAXES
Income tax expense for the years ended December 31, 1994 and 1995 and
December 28, 1996, consisted of the following components:
<TABLE>
<CAPTION>
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Current .......................... $ 15,000 $ 3,650 $480,000
Deferred ......................... 263,500 300,000 112,000
---------- ---------- ----------
Total provision for income taxes $278,500 $303,650 $592,000
========== ========== ==========
</TABLE>
Significant components of the Company's net deferred tax asset are as
follows:
<TABLE>
<CAPTION>
1995 1996
------------- -------------
<S> <C> <C>
Deferred tax assets:
Reserves not currently deductible ..... $ 206,000 $ 255,000
Operating loss carryforwards ........... 1,783,000 1,507,000
Other .................................. 48,000 38,000
------------- -------------
2,037,000 1,800,000
Deferred tax asset valuation allowance (2,037,000) (1,800,000)
------------- -------------
Net deferred tax asset.................. $ -- $ --
============= =============
</TABLE>
The Company provided a valuation allowance of $2,037,000 and $1,800,000
against deferred tax assets recorded as of December 31, 1995 and December 28,
1996, respectively, in view of, among other things, the expiration dates and
other limitations on usage of the net operating loss carryforwards.
The Company emerged from bankruptcy on September 20, 1993 pursuant to a
Plan of Reorganization which resulted in an ownership change since a
substantial portion of the new stock was issued to the creditors of the
Company. However, since the ownership change occurred pursuant to Chapter 11
proceedings and because more than 50% of the new stock was issued to
qualifying creditors and shareholders, the Company was required to use the
rules contained in Section 382(1)(5) relating to usage of net operating
losses. After an ownership change, Section 382(1)(5) requires a reduction in
the amount of net operating loss carryforwards and other tax attributes.
As of January 1, 1996, the Company had an income tax net operating loss
carryforward ("NOL") of approximately $4.7 million. Effective with the change
in control of the Company by Kanders Florida Holdings, Inc. on January 18,
1996, the utilization of the NOL became restricted to approximately $300,000
per year. As a result, the Company has income taxes currently payable. In
previous years, the future benefits obtained by the Company from utilization
of the NOL had been applied to reduce goodwill. Beginning in 1996, and for
future years, amortization expenses related to this intangible will be a
minimum of approximately $50,000 and a maximum of approximately $160,000 per
year which is non-deductible for income tax purposes. As of December 28, 1996
the Company's net operating losses approximate $4,400,000 and expire in
varying amounts in fiscal years 2006 to 2010.
F-14
<PAGE>
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1994 AND 1995 AND DECEMBER 28, 1996 AND
THREE MONTHS ENDED MARCH 31, 1996 AND MARCH 29, 1997 (UNAUDITED)
9. OPERATING LEASES
The Company leases its manufacturing facilities under a six year operating
lease expiring in 1999, with an option to renew. The Company is also party to
various other equipment and vehicle leases. Approximate total future minimum
annual lease payments under all such arrangements are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
- -------------
<S> <C>
1997 ......... $170,318
1998 ......... 145,380
1999 ......... 135,817
2000 ......... 46,930
----------
$498,445
==========
</TABLE>
The Company incurred rent expense of approximately $167,000, $161,000 and
$189,000 during the years ended December 31, 1994 and 1995 and December 28,
1996.
10. COMMITMENTS AND CONTINGENCIES
CHAPTER 11 PROCEEDINGS -- The Company has provided for payment of certain
classes of bankruptcy related claims. Such amounts include amounts with
respect to claims that have been allowed by the Bankruptcy Court, as well as
amounts with respect to claims that are still being disputed by the Company.
Among the disputed claims is one in which an unsecured creditor did not
originally exercise its opportunity to elect to receive stock in satisfaction
of its claim, but has since asserted that it is so entitled. While there can
be no assurance that the actual amounts of any such claims that are
ultimately allowed by the Bankruptcy Court will not exceed the amounts
reserved, the Company does not expect that any variance between such actual
and reserved amounts will have a material adverse effect on the Company's
financial position.
EMPLOYMENT CONTRACTS -- The Company is party to several employment
contracts with its management. Such contracts are for varying periods and
include restrictions on competition after termination. These agreements
provide for salaries, bonuses and other benefits and also specify and
delineate the granting of various stock options.
CONSTRUCTION CONTRACT -- At December 28, 1996, the Company has an
outstanding commitment related to a new manufacturing facility construction
contract of approximately $2,400,000.
LEGAL/LITIGATION MATTERS -- In November 1989, the Federal Trade Commission
("FTC") conducted an investigation into the accuracy of the Company's claims
that body armor sold by the Company between 1988 and 1990 complied with
testing and certification procedures promulgated by the National Institute of
Justice ("NIJ"). On November 2, 1994, the FTC issued a consent order
embodying a voluntary settlement of 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
(the "Program") under which persons who had purchased body armor covered by
the Program 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 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.
Management has established reserves to cover the estimated cost of the above
program. During the year ended December 28, 1996 the Company completed
notification of persons pursuant to the program and has provided replacement
armor to those persons making such request.
F-15
<PAGE>
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1994 AND 1995 AND DECEMBER 28, 1996 AND
THREE MONTHS ENDED MARCH 31, 1996 AND MARCH 29, 1997 (UNAUDITED)
In addition to the above, the Company, in the normal course of business,
is subjected to claims and litigation in the areas of product and general
liability. Management does not believe any of such claims will have a
material impact on the Company's financial position.
11. STOCKHOLDERS' EQUITY AND PREFERRED STOCK
CONVERTIBLE PREFERRED STOCK -- The Plan of Reorganization provided for the
filing by the Company of its Restated Articles of Incorporation which
authorized the issuance of 1,700,000 shares of $1 stated value, 3%
convertible preferred stock ("preferred stock"). Pursuant to the Plan of
Reorganization, the Company issued 1,700,000 shares of preferred stock.
In 1994, 1995 and 1996, the Company elected to convert 242,857, 242,851
and 1,214,292 shares, respectively, of preferred stock to common stock at
$0.97, $0.77 and $0.77 per share, respectively under conversion provisions
calling for the issuance of common stock, the fair market value of which
represents 110% of the aggregate stated value of the preferred stock then
subject to redemption.
The Company has authorized a series of preferred stock with such rights,
privileges and preferences as the Board of Directors shall from time to time
determine.
ISSUANCE AND CONVERSION OF CONVERTIBLE DEBT -- On April 30, 1996, the
Company completed a private placement of its 5% Convertible Subordinated
Notes due April 30, 2001 (the "Notes") pursuant to which $11,500,000
aggregate principal amounts of Notes were sold by the Company.
On December 18, 1996, the Notes were converted into 2,300,000 shares of
common stock at a conversion price of $5.00 per share.
STOCK OPTIONS AND GRANTS -- In 1994, the Company implemented an incentive
stock plan and an outside directors' stock plan, which plans collectively
provide for the granting to certain key employees of options to acquire the
Company's common stock as well as providing for the grant of common stock to
outside directors and to all full time employees. Pursuant to such plans,
1,050,000 shares of common stock were reserved and made available for
distribution. The option prices of stock which may be purchased under the
incentive stock plan are not less than the fair market value of common stock
on the dates of the grants.
Effective January 19, 1996, all stock grants awarded under the 1994
incentive stock plan were accelerated and considered fully vested.
During 1996, the Company implemented a new incentive stock plan and a new
outside directors' stock plan. Pursuant to the new plans, 1,800,000 shares of
common stock were reserved and made available for distribution.
SFAS NO. 123 REQUIRED DISCLOSURES -- If compensation cost for stock option
grants had been determined based on the fair value on the grant dates for
1995 and 1996 consistent with the method prescribed by SFAS No. 123, the
Company's net earnings and earnings per share would have been adjusted to the
pro forma amounts indicated below:
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C> <C>
Net earnings ....... As reported $520,153 $834,921
Pro forma $519,734 $622,140
Earnings per share As reported $ 0.08 $ 0.10
Pro forma $ 0.08 $ 0.08
</TABLE>
F-16
<PAGE>
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1994 AND 1995 AND DECEMBER 28, 1996 AND
THREE MONTHS ENDED MARCH 31, 1996 AND MARCH 29, 1997 (UNAUDITED)
Outstanding options, consisting of ten-year incentive and non-qualified
stock options, vest and become exercisable over a three year period from the
date of grant. The outstanding options expire ten years from the date of
grant or upon retirement from the Company, and are contingent upon continued
employment during the applicable ten-year period.
Under SFAS No. 123, the fair value of each option grant is estimated on
the date of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions used for grants in 1995 and 1996:
dividend yield of 0%, expected volatility of 33%, risk-free interest rates of
5.46% and 5.12%-6.44%, and expected lives of 3 years.
A summary of the status of stock option grants as of December 31, 1994 and
1995 and December 28, 1996, and changes during the years ending on those
dates is presented below:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE EXERCISE
OPTIONS PRICE
----------- ----------------
<S> <C> <C>
Granted................................................... 727,500 $0.92
Forfeited................................................. (69,000) 0.92
-----------
Outstanding at December 31, 1994.......................... 658,500 0.92
Granted................................................... 136,000 0.97
Forfeited................................................. (11,000) 0.97
-----------
Outstanding at December 31, 1995.......................... 783,500 0.93
Granted................................................... 1,068,000 5.97
Exercised................................................. (26,467) 0.97
-----------
Outstanding at December 28, 1996.......................... 1,825,033 3.88
===========
Options exercisable at December 28, 1996.................. 727,566 $0.92
Weighted-average fair value of options granted during
1996..................................................... $ 982,978
</TABLE>
The following table summarizes information about stock options outstanding
at December 28, 1996:
<TABLE>
<CAPTION>
EXERCISE OPTIONS WEIGHTED AVERAGE REMAINING
PRICE OUTSTANDING OPTIONS EXERCISABLE LIFE
- ----------- ------------- ------------------- -----------
<S> <C> <C> <C>
$ 0.79 304,000 304,000 7.50
0.97 297,033 133,566 7.70
1.00 24,000 24,000 9.06
1.05 266,000 266,000 7.50
3.75 150,000 9.05
6.06 150,000 9.60
7.19 74,000 9.75
7.25 60,000 9.69
7.38 15,000 9.71
7.50 375,000 9.35
8.00 110,000 9.95
------------- ------------------- -----------
Total 1,825,033 727,566 8.56
============= =================== ===========
</TABLE>
Remaining non-exercisable options as of December 28, 1996 become
exercisable as follows:
<TABLE>
<CAPTION>
<S> <C>
1997 ... 401,467
1998 ... 348,000
1999 ... 348,000
----------
1,097,467
==========
</TABLE>
F-17
<PAGE>
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1994 AND 1995 AND DECEMBER 28, 1996 AND
THREE MONTHS ENDED MARCH 31, 1996 AND MARCH 29, 1997 (UNAUDITED)
EARNINGS PER SHARE -- The following table details the number of shares
used in computing primary and fully diluted earnings per share:
<TABLE>
<CAPTION>
MARCH 31, MARCH 29,
1994 1995 1996 1996 1997
----------- ----------- ----------- ----------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
PRIMARY:
Weighted average common shares outstanding 4,625,394 4,753,999 7,223,506 6,463,644 10,553,293
Effect of shares issuable under stock
option and stock grant plans, based on
the treasury stock method................. 254,498 325,290 819,223 750,101 969,280
Effect of shares issuable under conversion
of preferred stock ....................... 922,507 1,290,383 90,548 362,191 --
----------- ----------- ----------- ----------- ------------
5,802,399 6,369,672 8,133,277 7,575,936 11,522,573
=========== =========== =========== =========== ============
FULLY DILUTED:
Weighted average common shares outstanding 4,625,394 4,753,999 7,223,506 6,463,644 10,553,293
Effect of shares issuable under stock
option and stock grant plans, based on
the treasury stock method................. 284,319 598,191 892,326 784,913 1,038,143
Effect of shares issuable under conversion
of preferred stock ....................... 922,507 1,290,383 90,548 362,191 --
----------- ----------- ----------- ----------- ------------
5,832,220 6,642,573 8,206,380 7,610,748 11,591,436
=========== =========== =========== =========== ============
</TABLE>
Primary and fully diluted earnings per share are the same amounts.
Fully diluted earnings per share does not include the effect of shares
issuable under conversion of the convertible notes as such effect is
antidilutive. The weighted average common shares outstanding includes
2,300,000 shares of common stock issued on December 18, 1996 upon the
conversion of the convertible notes.
12. SUPPLEMENTAL CASH FLOW INFORMATION:
<TABLE>
<CAPTION>
1994 1995 1996
---------- ---------- -------------
<S> <C> <C> <C>
Cash paid during the year for:
Interest ..................................... $213,798 $273,538 $ 249,053
Income taxes ................................. $ 15,000 $ 3,400 $ --
Noncash investing and financing activities:
Capitalized lease obligation entered into for
equipment ................................... $ 43,451
Issuance of stock under stock plan ........... $ 28,836 $ 117,692
Conversion of preferred stock to common stock $242,851 $242,851 $ 1,214,292
Conversion of convertible debt to common
stock........................................ $10,633,136
Acquisitions:
Fair value of assets acquired ................ $ 9,672,241
Liabilities assumed .......................... (2,373,636)
Stock issued ................................. (6,460,580)
-------------
Total cash paid ............................. $ 838,025
=============
</TABLE>
F-18
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Armor Holdings, Inc.
Jacksonville, Florida
We have audited the supplemental consolidated balance sheets of Armor
Holdings, Inc. (the "Company") as of December 31, 1995 and December 28, 1996
and the related supplemental consolidated statements of income, stockholders'
equity, and cash flows for the three years ended December 31, 1994, December
31, 1995 and December 28, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits. These
supplemental financial statements give retroactive effect to the merger with
DSL Group Limited ("DSL") on April 16, 1997, which has been accounted for as
a pooling of interests as described in Note 1.
We did not audit the financial statements of DSL included in the supplemental
consolidated financial statements of the Company, which statements reflect
total assets of $20,799,000 as of December 28, 1996 and total revenues of
$12,956,000 for the period then ended. Those statements were audited by other
auditors whose report has been furnished to us, and our opinion, insofar as
it relates to the amounts included for DSL, is based solely upon the report
of such other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits and the report
of the other auditors provide a reasonable basis for our opinion.
In our opinion, based upon our audits and the report of the other auditors,
the supplemental consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Armor Holdings
Inc. as of December 31, 1995 and December 28, 1996 and the results of their
operations and their cash flows for the three years ended December 31, 1994,
December 31, 1995 and December 28, 1996 after giving effect to the merger
with DSL as described in Note 1, in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
New York, New York
February 21, 1997 (except for the pooling of interests with DSL as described
in Note 1, for which the date is April 16, 1997)
F-19
<PAGE>
DSL GROUP LIMITED
CONSOLIDATED FINANCIAL STATEMENTS
31 DECEMBER 1996
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF DSL GROUP LIMITED
We have audited the accompanying consolidated balance sheet of DSL Group
Limited and subsidiaries at 31 December 1996 and the related consolidated
profit and loss account, consolidated statement of total recognised gains and
losses, reconciliation of movements in shareholders' funds and consolidated
cash flow statement for the period from 3 June 1996 (date of incorporation)
to 31 December 1996. These consolidated financial statements are the
responsibility of the management of DSL Group Limited. Our responsibility is
to express an opinion on these consolidated financial statements based on our
audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United Kingdom and in the United States of America. Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of DSL Group
Limited and subsidiaries at 31 December 1996 and the results of their
operations and their cash flows for the period from 3 June 1996 to 31
December 1996, in conformity with generally accepted accounting principles in
the United Kingdom.
Accounting principles generally accepted in the United Kingdom vary in
certain significant respects from accounting principles generally accepted in
the United States of America. Application of accounting principles generally
accepted in the United States would have affected profit attributable to
shareholders for the period from 3 June 1996 to 31 December 1996 and
shareholders' funds at 31 December 1996, to the extent summarised in Note 24
to the consolidated financial statements.
KPMG
Chartered Accountants
Registered Auditors
London, England
15 April 1997
F-20
<PAGE>
ARMOR HOLDINGS INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1995, DECEMBER 28, 1996 AND MARCH 29, 1997 (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 28, MARCH 29,
1995 1996 1997
-------------- -------------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................... $ 273 $ 8,045 $ 4,135
Accounts receivable (net of allowance for
doubtful accounts of $100, $458 and $501) 2,320 10,309 12,408
Inventories ................................ 1,102 4,161 4,897
Prepaid expenses and other current assets . 287 3,139 2,432
-------------- -------------- -----------
Total current assets ...................... 3,982 25,654 23,872
Property, plant and equipment, net .......... 474 4,932 6,676
Goodwill (net of accumulated amortization of
$167 and $256) ............................. 9,784 9,343
Reorganization value in excess of amounts
allocable to identifiable assets (net of
accumulated amortization of $488, $651 and
$697) ...................................... 3,587 3,424 3,378
Patents and trademarks (net of accumulated
amortization of $108 and $181) ............. -- 4,196 4,123
Investment in associated companies .......... -- 1,268 1,451
Other assets ................................ 118 272 449
-------------- -------------- -----------
Total assets................................. $8,161 $49,530 $49,292
============== ============== ===========
</TABLE>
See notes to supplemental consolidated financial statements.
F-21
<PAGE>
ARMOR HOLDINGS INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1995, DECEMBER 28, 1996 AND MARCH 29, 1997 (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 28, MARCH 29,
1995 1996 1997
-------------- -------------- -----------
(UNAUDITED)
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt and
capitalized lease obligations................... $2,082 $ 2,423 $ 1,726
Accounts payable, accrued expenses and other
current liabilities............................. 1,104 8,941 7,673
-------------- -------------- -----------
Total current liabilities ...................... 3,186 11,364 9,399
Minority interest ............................... -- 31 32
Long-term debt and capitalized lease
obligations, less current portion............... 28 5,780 6,945
-------------- -------------- -----------
Total liabilities .............................. 3,214 17,175 16,376
Commitments and contingencies (Notes 8 and 9) ...
Preference shares ................................ -- 7,480 7,216
Stockholders' equity:
Preferred stock, $.01 par value, 5,000,000
shares authorized; 0 shares issued and
outstanding..................................... -- -- --
Convertible preferred stock, $1 stated value,
1,700,000 shares authorized, 1,214,292 shares
issued and outstanding ......................... 1,214 -- --
Common stock, $.03, $.01 and $0.01 par value,
15,000,000, 50,000,000 and 50,000,000 shares
authorized; 5,091,133, 11,691,232 and
11,865,898 respectively, issued and
outstanding..................................... 152 117 119
Additional paid-in capital ...................... 2,594 23,322 23,480
Foreign currency translation adjustment ........ -- (229) (104)
Retained earnings ............................... 987 1,665 2,205
-------------- -------------- -----------
Total stockholders' equity ..................... 4,947 24,875 25,700
-------------- -------------- -----------
Total liabilities and stockholders' equity ....... $8,161 $49,530 $49,292
============== ============== ===========
</TABLE>
See notes to supplemental consolidated financial statements.
F-22
<PAGE>
ARMOR HOLDINGS INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED INCOME STATEMENTS
YEARS ENDED DECEMBER 31, 1994 AND 1995 AND DECEMBER 28, 1996 AND
THREE MONTHS ENDED MARCH 31, 1996 AND MARCH 29, 1997 (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
-------------------------------------------- -----------------------
DECEMBER 31, DECEMBER 31, DECEMBER 28, MARCH 31, MARCH 29,
1994 1995 1996 1996 1997
-------------- -------------- -------------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Products.......................... $11,355 $11,741 $18,011 $3,267 $ 6,422
Services.......................... -- -- 12,956 -- 8,328
-------------- -------------- -------------- ----------- -----------
Total revenues .................... 11,355 11,741 30,967 3,267 14,750
Cost and expenses:
Cost of sales .................... 7,741 7,443 21,172 2,110 10,453
Operating expenses ............... 2,696 3,421 7,459 968 3,263
Equity in earnings of
unconsolidated subsidiaries .... -- -- (320) -- (272)
Interest expense, net ............ 216 281 515 72 69
-------------- -------------- -------------- ----------- -----------
Operating income .................. 702 596 2,141 117 1,237
Non-operating income ............. -- 228 2 -- --
-------------- -------------- -------------- ----------- -----------
Income before provision for income
taxes............................. 702 824 2,143 117 1,237
Provision for income taxes ........ 279 304 1,215 45 554
-------------- -------------- -------------- ----------- -----------
Net income......................... 423 520 928 72 683
Dividends on preference shares .... -- -- 239 -- 143
-------------- -------------- -------------- ----------- -----------
Net Income applicable to common
stockholders ..................... $ 423 $ 520 $ 689 $ 72 $ 540
============== ============== ============== =========== ===========
Net income per common share and
common equivalent share .......... $ 0.07 $ 0.08 $ 0.08 $ 0.01 $ 0.04
============== ============== ============== =========== ===========
Weighted average common shares and
common equivalent shares.......... 5,802 6,370 8,876 7,576 12,797
============== ============== ============== =========== ===========
</TABLE>
See notes to supplemental consolidated financial statements.
F-23
<PAGE>
ARMOR HOLDINGS INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1994 AND 1995, AND DECEMBER 28, 1996 AND
THREE MONTHS ENDED MARCH 29, 1997 (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK
------------------- ----------------
STATED PAR
SHARES VALUE SHARES VALUE
--------- --------- -------- -------
<S> <C> <C> <C> <C>
Balance, January 1, 1994 ...... 1,700 $ 1,700 4,416 $ 133
Dividends on preferred stock
Conversion of preferred stock (243) (243) 275 8
Issuance of stock in lieu of
directors fees .............. 6
Net income ...................
--------- --------- -------- -------
Balance, December 31, 1994 ... 1,457 1,457 4,697 141
Dividends on preferred stock
Conversion of preferred stock (243) (243) 347 10
Issuance of stock in lieu of
directors fees .............. 14
Issuance of stock granted
under stock plans ........... 33 1
Net income ...................
--------- --------- -------- -------
Balance, December 31, 1995 ... 1,214 1,214 5,091 152
Change in par value of common
stock ....................... (102)
Dividends on preferred stock
Conversion of preferred stock (1,214) (1,214) 1,735 17
Exercise of stock options ... 26 1
Exercise of stock grants .... 72 1
Issuance of stock in lieu of
directors fees .............. 3
Conversion of convertible
notes, net of related debt
issuance costs .............. 2,300 23
Issuance of stock for
acquisitions ................ 2,214 22
Issuance of common stock .... 250 3
Foreign currency translation
adjustment ..................
Net income ...................
--------- --------- -------- -------
Balance, December 28, 1996 ... -- -- 11,691 117
Exercise of stock options
(unaudited) ................. 175 2
Foreign currency translation
adjustment (unaudited) .....
Net income (unaudited) ......
--------- --------- -------- -------
Balance, March 29, 1997
(unaudited) .................. -- -- 11,866 $ 119
========= ========= ======== =======
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
ADDITIONAL FOREIGN
PAID-IN RETAINED CURRENCY
CAPITAL EARNINGS TRANSLATION TOTAL
------------ ---------- ------------- --------
<S> <C> <C> <C> <C>
Balance, January 1, 1994 ...... $ 2,075 $ 138 -- $ 4,046
Dividends on preferred stock (51) (51)
Conversion of preferred stock 235 --
Issuance of stock in lieu of
directors fees .............. 9 9
Net income ................... 423 423
------------ ---------- ------------- --------
Balance, December 31, 1994 ... 2,319 510 -- 4,427
Dividends on preferred stock (43) (43)
Conversion of preferred stock 233 --
Issuance of stock in lieu of
directors fees .............. 14 14
Issuance of stock granted
under stock plans ........... 28 29
Net income ................... 520 520
------------ ---------- ------------- --------
Balance, December 31, 1995 ... 2,594 987 -- 4,947
Change in par value of common
stock ....................... 102 --
Dividends on preferred stock (11) (11)
Conversion of preferred stock 1,197 --
Exercise of stock options ... 62 63
Exercise of stock grants .... 54 55
Issuance of stock in lieu of
directors fees .............. 15 15
Conversion of convertible
notes, net of related debt
issuance costs .............. 10,610 10,633
Issuance of stock for
acquisitions ................ 7,121 7,143
Issuance of common stock .... 1,567 1,570
Foreign currency translation
adjustment .................. (229) (229)
Net income ................... 689 689
------------ ---------- ------------- --------
Balance, December 28, 1996 ... 23,322 1,665 (229) 24,875
Exercise of stock options
(unaudited) ................. 158 160
Foreign currency translation
adjustment (unaudited) ..... 125 125
Net income (unaudited) ...... 540 540
------------ ---------- ------------- --------
Balance, March 29, 1997
(unaudited) .................. 23,480 $2,205 (104) $25,700
============ ========== ============= ========
</TABLE>
See notes to supplemental consolidated financial statements.
F-24
<PAGE>
ARMOR HOLDINGS INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOW
YEARS ENDED DECEMBER 31, 1994 AND 1995 AND DECEMBER 28, 1996 AND
THREE MONTHS ENDED MARCH 31, 1996 AND MARCH 29, 1997 (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 28,
1994 1995 1996
-------------- -------------- --------------
OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income........................................ $ 423 $ 520 $ 689
Adjustments to reconcile net income to
cash (used in) provided by operating
activities:
Depreciation and amortization .................... 118 148 818
Deferred income taxes ............................ 264 300 2
Directors' fees .................................. 9 14 15
Earnings from unconsolidated subsidiaries ....... (320)
(Increase) decrease in accounts receivable ....... (558) (745) (2,115)
Increase in inventories .......................... (108) (59) (423)
Decrease (increase) in prepaid expenses and other
assets........................................... 96 (257) 870
(Decrease) increase in accounts payable, accrued
liabilities and other current liabilities ...... (371) (168) 1,783
-------------- -------------- --------------
Net cash (used in) provided by operating
activities ...................................... (127) (247) 1,319
-------------- -------------- --------------
INVESTING ACTIVITIES:
Purchase of property and equipment ............... (118) (119) (1,860)
Purchase of patents and trademarks ............... (2,828)
Purchase of business, net of cash acquired ....... (11,740)
Dividends received from associated companies ..... 320
-------------- -------------- --------------
Net cash used in investing activities ............ (118) (119) (16,108)
-------------- -------------- --------------
FINANCING ACTIVITIES:
Proceeds from issuance of common stock and
preference shares ............................... 8,886
Preferred stock dividends ........................ (51) (43) (11)
Exercise of stock options ........................ 26
Net borrowings (payments) under line of credit ... 596 329 (1,997)
Repayments of long-term debt ..................... (5) (14) (500)
Net borrowings (payments) under capital
expenditure facility ............................ 52 (52)
Proceeds from issuance of other debt ............. 6,863
Net proceeds from issuance of 5% convertible
subordinated notes .............................. 10,633
-------------- -------------- --------------
Net cash provided by (used in) financing
activities ...................................... 540 324 23,848
-------------- -------------- --------------
Net effect of translation of foreign currencies . (184)
-------------- -------------- --------------
Net Increase (decrease) in Cash and Cash
Equivalents....................................... 295 (42) 8,875
Cash and Cash Equivalents, Beginning of Period ... 20 315 (830)
-------------- -------------- --------------
Cash and Cash Equivalents, End of Period ......... $ 315 $ 273 $ 8,045
============== ============== ==============
</TABLE>
<PAGE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------
MARCH 31, MARCH 29,
1996 1997
----------- -----------
(UNAUDITED) (UNAUDITED)
OPERATING ACTIVITIES:
<S> <C> <C>
Net income........................................ $ 72 $ 540
Adjustments to reconcile net income to
cash (used in) provided by operating
activities:
Depreciation and amortization .................... 40 421
Deferred income taxes ............................ 45 33
Directors' fees ..................................
Earnings from unconsolidated subsidiaries ....... (272)
(Increase) decrease in accounts receivable ....... 409 (2,242)
Increase in inventories .......................... (97) (736)
Decrease (increase) in prepaid expenses and other
assets........................................... (168) 429
(Decrease) increase in accounts payable, accrued
liabilities and other current liabilities ...... (136) (1,014)
----------- -----------
Net cash (used in) provided by operating
activities ...................................... 165 (2,841)
----------- -----------
INVESTING ACTIVITIES:
Purchase of property and equipment ............... (23) (2,038)
Purchase of patents and trademarks ...............
Purchase of business, net of cash acquired .......
Dividends received from associated companies ..... 47
----------- -----------
Net cash used in investing activities ............ (23) (1,991)
----------- -----------
FINANCING ACTIVITIES:
Proceeds from issuance of common stock and
preference shares ...............................
Preferred stock dividends ........................ (23)
Exercise of stock options ........................ 160
Net borrowings (payments) under line of credit ... (351) 356
Repayments of long-term debt ..................... (992)
Net borrowings (payments) under capital
expenditure facility ............................
Proceeds from issuance of other debt ............. 1,375
Net proceeds from issuance of 5% convertible
subordinated notes ..............................
----------- -----------
Net cash provided by (used in) financing
activities ...................................... (374) 899
----------- -----------
Net effect of translation of foreign currencies . 23
----------- -----------
Net Increase (decrease) in Cash and Cash
Equivalents....................................... (232) (3,910)
Cash and Cash Equivalents, Beginning of Period ... 273 8,045
----------- -----------
Cash and Cash Equivalents, End of Period ......... $ 41 $ 4,135
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-25
<PAGE>
ARMOR HOLDINGS INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994 AND 1995 AND DECEMBER 28, 1996 AND
THREE MONTHS ENDED MARCH 31, 1996 AND MARCH 29, 1997 (UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION -- Armor Holdings, Inc. ("AHI") acquired certain assets of
the NIK Public Safety Product Line ("NIK Public Safety") effective as of July
1, 1996 and substantially all of the assets of Defense Technology Corporation
of America, a Wyoming corporation ("DTCoA") as of September 30, 1996. The
acquisitions were accounted for by the purchase method, and the purchase
price was assigned to assets acquired and liabilities assumed based on their
fair value at the date of acquisition.
POOLING OF INTERESTS -- On April 16, 1997, AHI issued 1,274,217 shares of
its common stock in exchange for all of the outstanding ordinary shares of
DSL Group Limited ("DSL"), a company incorporated on June 3, 1996 under the
laws of England and Wales. DSL provides specialized security services in high
risk and volatile environments. On July 31, 1996 DSL acquired all of the
share capital of DSL Holdings Limited ("DSL Holdings"). As a result, DSL
recorded the net assets acquired on July 31, 1996 at fair value of
approximately $2,800,000 and also recorded approximately $9,600,000 of
goodwill. AHI's combination with DSL was accounted for as a pooling of
interests and the accompanying supplemental financial statements have been
restated to give effect to the combined results of AHI and DSL since
inception. The accompanying Supplemental Consolidated Financial Statements
reflect the combined results as following:
<TABLE>
<CAPTION>
1996
------------------------------------------
COMPANY DSL SUPPLEMENTAL
HISTORICAL HISTORICAL COMPANY
------------- ------------- --------------
<S> <C> <C> <C>
Revenues............................... $18,011,000 $12,956,000 $30,967,000
Net Income............................. $ 835,000 $ (146,000) $ 689,000
Net Income Per Common Share and Common
Equivalent Share ..................... $ .10 -- $ .08
</TABLE>
All references to the "Company" hereafter shall mean the combined
supplemental company.
Results of operations for DSL Holdings were as following for its
year-ended:
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
1995 1996
------------- -------------
<S> <C> <C>
Revenues....... $28,708,000 $32,165,000
Net Earnings .. $ 694,000 $ 957,000
</TABLE>
In connection with the DSL combination, AHI paid $6,850,000 in repayment
of DSL's outstanding credit facility and approximately $7,508,000 for all of
the outstanding preference shares of DSL. (See Notes 6 and 7).
COMPANY'S BUSINESS -- Since its founding, the Company has been engaged in
the development, manufacture and distribution of ballistic protective
equipment. Such equipment includes bullet resistant and sharp instrument
penetration resistant vests, bullet resistant blankets, bomb disposal suits
and helmets, bomb protection and disposal equipment and load bearing vests.
In addition to these products, the Company develops, manufactures and
distributes other ballistic protection and security equipment, including
explosive ordnance device ("EOD") handling and detection equipment, EOD
suppression and disposal equipment, helmets, face masks, shields, hard armor
ballistic plates, customized armor for vehicles and other custom armored
products. Through its recent acquisitions, the Company is also engaged in the
packaging, mixing and distribution of portable narcotic identification kits,
the distribution of Flex-Cuf disposable restraints, specimen and evidence
collection kits and evidence tape, and the manufacture and distribution of
less-than-lethal and anti-riot products including defensive aerosol sprays,
distraction devices, chemical agents, flameless expulsion grenades, specialty
impact munitions and other similar products including the distribution of gas
guns, gas masks, batons, shields, riot helmets and gun holsters. The scope of
these latter products involve a less-than-lethal approach for crowd and riot
control.
F-26
<PAGE>
ARMOR HOLDINGS INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1994 AND 1995 AND DECEMBER 28, 1996 AND
THREE MONTHS ENDED MARCH 31, 1996 AND MARCH 29, 1997 (UNAUDITED)
The Company's products are marketed to municipal, state, federal and
foreign law enforcement agencies, private security entities, United States
and foreign military and correctional services.
DSL is in the business of devising and implementing solutions to complex
security problems in high risk areas. DSL's services encompass the provision
of detailed threat assessments, security planning, security training, the
provision, training and supervision of specialist manpower and other services
up to the implementation and management of fully integrated security systems.
The acquisition of DSL provides the Company with the cornerstone of its
security services business.
PRINCIPLES OF CONSOLIDATION -- The consolidated financial statements
include the accounts of Armor Holdings, Inc., its wholly-owned subsidiaries
Armor Holdings Properties, Inc., a Delaware corporation ("AHPI"), NIK Public
Safety, Inc., a Delaware corporation ("NIK") and Defense Technology
Corporation of America, a Delaware corporation ("DTC"). The DSL Combination
was accounted for under the pooling of interests method of accounting and,
accordingly, the accompanying supplemental consolidated financial statements
have been restated to give effect to combination with DSL since inception
(See Note 1 -- Pooling of Interests). All material intercompany balances and
transactions have been eliminated in consolidation.
CASH EQUIVALENTS -- The Company considers all highly liquid investments
purchased with original maturities of three months or less to be cash
equivalents.
CONCENTRATION OF CREDIT RISK -- The Company's accounts receivable consist
of amounts due from customers and distributors located throughout the United
States. International sales generally require cash in advance or confirmed
letters of credit on U.S. banks.
INVENTORIES -- Inventories are stated at the lower of cost or market
determined on the first-in, first-out ("FIFO") basis.
FAIR VALUE OF FINANCIAL INSTRUMENTS -- The carrying values of the
Company's various financial instruments reflected in the accompanying
statements of financial position approximate their estimated fair values at
December 31, 1995 and December 28, 1996.
PROPERTY AND EQUIPMENT -- Property and equipment are carried at cost less
accumulated depreciation. Property and equipment acquired prior to September
21, 1993 were recorded at their estimated fair values as the result of the
emergence from bankruptcy. Depreciation is computed using the straight-line
method based on estimated lives of 3 to 30 years.
GOODWILL -is amortized on a straight-line basis over twenty-five years
and is periodically reviewed for impairment by comparing carrying value to
undiscounted expected future cash flows.
REORGANIZATION VALUE IN EXCESS OF AMOUNTS ALLOCABLE TO IDENTIFIABLE ASSETS
- -is amortized or otherwise reduced in amounts not less than those which
would be recognized on a straight-line basis over twenty-five years.
PATENTS AND TRADEMARKS -- Patents and trademarks were acquired through
acquisitions accounted for by the purchase method of accounting. Such assets
are amortized on a straight line basis over their remaining lives of 10 to 15
years.
NEW ACCOUNTING STANDARDS -- Effective January 1, 1996, the Company adopted
SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS 123 establishes
a fair value based method of accounting for stock-based employee compensation
plans; however, it also allows an entity to continue to measure compensation
cost for those plans using the intrinsic value based method of accounting
prescribed by Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees." Under the fair value based method,
compensation cost is measured at the grant date based
F-27
<PAGE>
ARMOR HOLDINGS INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1994 AND 1995 AND DECEMBER 28, 1996 AND
THREE MONTHS ENDED MARCH 31, 1996 AND MARCH 29, 1997 (UNAUDITED)
on the value of the award and is recognized over the service period, which is
usually the vesting period. Under the intrinsic value based method,
compensation costs is the excess, if any, of the quoted market price of the
stock at the grant date or other measurement date over the amount an employee
must pay to acquire the stock. The Company has elected to continue to account
for its employee stock compensation plans under APB Opinion No. 25 with pro
forma disclosures of net earnings and earnings per share, as if the fair
value based method of accounting defined in SFAS No. 123 had been applied.
In March 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Earnings per Share." This
Statement establishes standards for computing and presenting earnings per
share ("EPS") and applies to all entities with publicly held common stock or
potential common stock. This Statement replaces the presentation of primary
EPS and fully diluted EPS with a presentation of basic EPS and diluted EPS,
respectively. Basic EPS excludes dilution and is computed by dividing
earnings available to common stockholders by the weighted average number of
common shares outstanding for the period. Similar to fully diluted EPS,
diluted EPS reflects the potential dilution of securities that could share in
the earnings. This Statement is effective for the Company's financial
statements for the year ended December 27, 1997. Pro forma net income per
basic share was $.01 and $.05 for the quarters ended March 31, 1996 and March
29, 1997, respectively. Pro forma net income per diluted share was $.01 and
$.04 for the quarter ended March 31, 1996 and March 29, 1997, respectively.
ESTIMATES -- The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
INCOME TAXES -- In connection with the adoption of fresh-start reporting,
the Company adopted Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("SFAS 109"). Under the asset and liability
method specified thereunder, deferred taxes are determined based on the
difference between the financial reporting and tax bases of assets and
liabilities. Deferred tax liabilities are offset by deferred tax assets
representing the tax-effected cumulative net operating loss carryforwards and
deductible temporary differences, subject to applicable limits and an asset
valuation allowance. Future benefits obtained from utilization of net
operating loss carryforwards or from the reduction in the income tax asset
valuation allowance existing on September 20, 1993 have been and will be
applied to reduce reorganization value in excess of amounts allocable to
identifiable assets.
REVENUE RECOGNITION -- The Company records sales at gross amounts to be
received, including amounts to be paid to agents as commissions. The Company
records service revenue as the service is provided on a contract by contract
basis. Non-operating income for 1995 includes amounts received in settlement
of a non-competition agreement.
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 existing 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 an approximate loss of
$229,200 for the year ended December 28, 1996.
UNAUDITED INTERIM BALANCES -- The unaudited consolidated financial
statements included herein have been prepared by the Company in accordance
with the rules and regulations of the Securities and Exchange Commission and
consequently do not include all of the disclosures normally required by
generally accepted accounting principles. These unaudited consolidated
financial statements should be read in conjunction with the audited
supplemental consolidated financial statements and related notes thereto
included herein.
F-28
<PAGE>
ARMOR HOLDINGS INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1994 AND 1995 AND DECEMBER 28, 1996 AND
THREE MONTHS ENDED MARCH 31, 1996 AND MARCH 29, 1997 (UNAUDITED)
The unaudited financial information contained herein reflects all
adjustments (consisting of only normal recurring accruals) which, in the
opinion of management, are necessary for a fair presentation of the results
of operations for the three month periods ended March 31, 1996 and March 29,
1997.
RECLASSIFICATIONS -- Certain reclassifications have been made to the 1994
and 1995 financial statements in order to conform to the presentation adopted
for 1996.
2. BUSINESS COMBINATIONS
DSL
As discussed in Note 1, on April 16, 1997, the Company issued 1,274,217
shares of its common stock in exchange for all of the outstanding share
capital of DSL. This business combination was accounted for as a pooling of
interests.
DEFENSE TECHNOLOGY CORPORATION OF AMERICA
On September 30, 1996, the Company acquired, through its newly formed
wholly-owned subsidiary, substantially all of the assets of DTCoA. The
purchase price consisted of $838,025 paid in cash, the issuance of 629,442
shares (the "Total Shares") of the Company's common stock having a value of
$4,650,000, the assumption of certain liabilities totaling approximately
$2,300,000 and costs of $1,115,000 associated with completing the
transaction. The total purchase price was assigned to the acquired assets
based on their fair market values.
In order to secure the obligations of DTCoA and its seller in connection
with the transaction, 270,728 of the Total Shares were delivered to Union
Bank of Switzerland, New York Branch ("UBS"), as escrow agent pursuant to an
escrow agreement dated September 30, 1996. One half of the shares held in
escrow are subject to release March 15, 1998 and the remainder are subject to
release June 30, 1999.
Subject to a letter agreement dated August 16, 1996 (the "Key Bank Letter
Agreement") and in connection with the DTC transaction, 358,714 of the Total
Shares (the "Key Bank Shares"), having a value of $2,650,000 (the "Amount
Due"), were issued to Key Bank of Wyoming ("Key Bank") in consideration for
the release by Key Bank of its security interest in substantially all of the
assets of DTCoA. Key Bank held such security interest pursuant to certain
financings previously made available to DTCoA. On the closing date, the
Company advanced to Key Bank $662,500 cash (the "Initial Amount") as an
advance against the Amount Due. Also on the closing date, the Company
deposited $1,987,500 in an interest bearing Certificate of Deposit ("CD")
account at Key Bank (the "Deposit Account"). Subsequent to closing, any
amounts paid to Key Bank on account of the Amount Due, including the Initial
Amount, or advances from the Deposit Account will result in a reduction of
the then outstanding balance of the Amount Due by a like amount.
Pursuant to the Key Bank Letter Agreement, Key Bank agreed that upon the
registration of the Key Bank Shares, the Key Bank Shares would be sold,
provided that the Company would control, in its sole discretion, the timing,
manner and amount of Key Bank Shares to be sold; and in connection therewith,
the Company agreed to ensure that Key Bank realizes net proceeds from such
sales (the "Net Sale Proceeds"), which, together with any advances from the
Deposit Account and the Initial Amount will, in the aggregate, equal the
Amount Due, on or before September 30, 1997 (the "Maturity Date").
The acquisition of DTCoA has been accounted for under the purchase method.
Accordingly, the results of its operations are included in the consolidated
financial statements from the date of acquisition.
The following unaudited pro forma consolidated results of operations for
the years ended December 31, 1995 and December 28, 1996, and the three month
period ended March 31, 1996 (unaudited) are
F-29
<PAGE>
ARMOR HOLDINGS INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1994 AND 1995 AND DECEMBER 28, 1996 AND
THREE MONTHS ENDED MARCH 31, 1996 AND MARCH 29, 1997 (UNAUDITED)
presented as if the DTCoA acquisition had been made at the beginning of each
period presented. The unaudited pro forma information is not necessarily
indicative of either the results of operations that would have occurred had
the purchase been made during the periods presented or the future results of
the combined operations.
<TABLE>
<CAPTION>
YEARS ENDED
-----------------------------
DECEMBER 31, DECEMBER 28, THREE MONTHS ENDED
1995 1996 MARCH 31, 1996
-------------- -------------- ------------------
(UNAUDITED)
<S> <C> <C> <C>
Net sales ........................... $22,094,968 $24,783,497 $5,428,646
Net earnings ........................ $ 1,209,979 $ 1,430,838 $ 251,572
Earnings per common share and common
share equivalent ................... $0.17 $0.17 $0.03
</TABLE>
NIK PUBLIC SAFETY PRODUCT LINE
On July 15, 1996, the Company acquired, effective as of July 1, 1996,
certain assets of the NIK Public Safety Product Line from Ives-Lee
Corporation (the "NIK Assets"). The purchase price of the acquisition was
310,931 shares (the "NIK Shares") of the Company's Common Stock valued at
$2,400,000, plus $374,000 in costs incurred related to the purchase. The
Company acquired inventory, receivables and certain intangibles. The total
purchase price was assigned to the NIK Assets based on their fair market
values.
3. INVENTORIES
Inventories are summarized as follows for the years ended December 31,
1995 and December 28, 1996 and the three months ended March 29, 1997
(unaudited):
<TABLE>
<CAPTION>
MARCH 29,
1995 1996 1997
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials ... $ 546,707 $1,737,761 $1,889,379
Work-in-process 382,680 859,196 980,099
Finished goods . 172,548 1,563,825 2,027,233
------------ ------------ ------------
$1,101,935 $4,160,782 $4,896,711
============ ============ ============
</TABLE>
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31, 1995 and December 28, 1996
are summarized as follows:
<TABLE>
<CAPTION>
1995 1996
----------- -------------
<S> <C> <C>
Land and improvements....... $ 581,763
Buildings and improvements $ 62,544 1,371,853
Machinery and equipment ... 682,265 4,111,088
Construction in progress .. 585,635
----------- -------------
Total ...................... 744,809 6,650,339
Accumulated depreciation .. (270,450) (1,718,850)
----------- -------------
$ 474,359 $ 4,931,489
=========== =============
</TABLE>
F-30
<PAGE>
ARMOR HOLDINGS INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1994 AND 1995 AND DECEMBER 28, 1996 AND
THREE MONTHS ENDED MARCH 31, 1996 AND MARCH 29, 1997 (UNAUDITED)
Depreciation expense for 1994, 1995 and 1996 was approximately $118,000,
$148,000 and $388,000, respectively, and for the three months ended March 31,
1996 and March 29, 1997 (unaudited) was approximately $26,000 and $309,000,
respectively.
The Company purchased property, plant and equipment of approximately
$1,700,000 during the three months ended March 29, 1997 in connection with
the construction of a new manufacturing and office facility.
5. ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accounts payable, accrued expenses and other current liabilities are
summarized as follows for the years ended December 31, 1995 and December 28,
1996:
<TABLE>
<CAPTION>
1995 1996
------------ ------------
<S> <C> <C>
Trade and other payables ............... $ 466,441 $4,827,511
Accrued expenses ....................... 572,897 1,779,412
Deferred consideration for
acquisitions........................... 680,000
Amounts due to affiliated companies .... 815,000
Other current liabilities .............. 64,555 838,621
------------ ------------
$1,103,893 $8,940,544
============ ============
</TABLE>
6. INDEBTEDNESS
<TABLE>
<CAPTION>
1995 1996
------------- -------------
<S> <C> <C>
Debt:
Line-of-credit under revolving credit and security agreement
expiring June 30, 1996 ............................................. $ 1,997,060
Note payable to Finoff & Associates, payable in monthly installments
of $10,000 including interest at 8% through October 5, 1998 ........ 200,400
Mortgage loan payable in monthly installments of $1,296 at 9%
through April 1, 1997, with a balloon installment of $127,739 due
on May 1, 1997, collateralized by a first mortgage on a building .. 129,389
Capital expenditure facility under revolving credit and security
agreement expiring June 30, 1996.................................... 52,000
Mortgage loan payable in monthly installments of $310 including
interest at 8.5% through August 1996, with a balloon installment of
$23,684 due September 1996, collateralized by a first mortgage on a
condominium apartment .............................................. 24,886
DSL credit facility, payable in semi-annually installments including
interest at LIBOR plus 2%, through June 28, 2002 (1) ............... 6,850,000
DSL bank overdraft facility with monthly interest payments .......... 590,000
Other installment loans ............................................. 839 43,199
------------- -------------
2,074,785 7,812,988
Less current portion................................................. (2,074,785) (2,233,339)
------------- -------------
$ -- $ 5,579,649
============= =============
</TABLE>
- ------------
(1) Proceeds were used to acquire the outstanding shares of DSL Holdings
as discussed in Note 1. These borrowings were paid in full subsequent
to the AHI Combination with DSL.
F-31
<PAGE>
ARMOR HOLDINGS INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1994 AND 1995 AND DECEMBER 28, 1996 AND
THREE MONTHS ENDED MARCH 31, 1996 AND MARCH 29, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
1995 1996
---------- -----------
<S> <C> <C>
Capitalized lease obligation:
Equipment lease bearing interest at 10.88%, expiring November,
1999, collateralized by equipment with an amortized cost of
approximately $35,000 at December 28, 1996 ........................ $35,163 $ 27,550
Equipment lease bearing interest at 12%, expiring June, 1998,
collateralized by equipment with an amortized cost of
approximately $508,300 at December 28, 1996 ....................... 363,300
---------- -----------
35,163 390,850
Less current portion ............................................... (7,613) (189,983)
---------- -----------
$27,550 $ 200,867
========== ===========
</TABLE>
The Company entered into a Credit Facility and Bankers Acceptance Facility
("Credit Agreement") on November 14, 1996 with Barnett Bank, N.A., which
provides for total borrowings up to $10,000,000 (the "Obligation"), with
maximum availability based upon 50% of eligible inventories (with a cap of
$1,000,000 for work in process inventory and $6,000,000 for inventory in
total) and 85% of eligible accounts receivable. The Credit Agreement has
various covenants which, among other things, require the Company to maintain
certain financial ratios, tangible net worth and working capital, as defined;
and limit the Company's ability to pay dividends on its common stock,
encumber and transfer assets, incur indebtedness or merge into another
corporation. The Company had no borrowings outstanding under the Credit
Agreement at December 28, 1996. The Credit Agreement expires November 13,
1997.
Aggregate principal maturities on indebtedness are as follows:
<TABLE>
<CAPTION>
UNDER
CAPITALIZED
YEAR ENDING DEBT LEASE
- ----------------------------------------------- ------------ -------------
<S> <C> <C>
1997............................................ $2,233,339 $218,206
1998............................................ 1,239,649 218,205
1999............................................ 1,240,000 10,143
2000............................................ 1,240,000
2001............................................ 1,240,000
Thereafter...................................... 620,000
------------ -------------
$7,812,988 446,554
------------
Less amount representing interest on obligation
under capitalized lease........................ (55,704)
-------------
$390,850
=============
</TABLE>
F-32
<PAGE>
ARMOR HOLDINGS INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1994 AND 1995 AND DECEMBER 28, 1996 AND
THREE MONTHS ENDED MARCH 31, 1996 AND MARCH 29, 1997 (UNAUDITED)
7. PREFERENCE SHARES
DSL has $7,480,000, (4,400,000 shares) of preference shares with a par
value of pounds sterling0.01. Such shares carry an 8% dividend, are
cumulative and redeemable and have a liquidation value of par. The preference
shares have no voting rights and shall be redeemed by DSL at their issue
price over a three year period commencing in 2001. DSL may also redeem the
preference shares giving appropriate notice to shareholders. If the
preference shares are not redeemed by the DSL, the dividend rate increases.
If DSL is sold or has an initial public offering, the preference shares must
be redeemed.
The Company paid cash of $7,508,000, including accrued interest of
approximately $380,000, to purchase such shares on April 16, 1997.
8. INCOME TAXES
Income tax expense (benefit) for the years ended December 31, 1994 and
1995, and December 28, 1996, consisted of the following components:
<TABLE>
<CAPTION>
1994 1995 1996
--------- --------- -----------
<S> <C> <C> <C>
Domestic
Domestic ......................... 15,000 3,650 480,000
Foreign........................... -- -- 733,500
--------- --------- -----------
Total Current.................... 15,000 3,650 1,213,500
Deferred
Domestic.......................... 263,500 300,000 112,000
Foreign........................... -- -- (110,500)
--------- --------- -----------
Total Deferred................... 263,500 300,000 1,500
Total Provision for Income
Taxes............................. 278,500 303,650 1,215,000
========= ========= ===========
</TABLE>
Significant components of the Company's net deferred tax asset are as
follows:
<TABLE>
<CAPTION>
1995 1996
------------- -------------
<S> <C> <C>
Deferred tax assets:
Reserves not currently deductible ...... $ 206,000 $ 255,000
Operating loss carryforwards ........... 1,783,000 1,507,000
Other .................................. 48,000 154,000
------------- -------------
2,037,000 1,916,000
Deferred tax asset valuation allowance (2,037,000) (1,800,000)
------------- -------------
Net deferred tax asset.................. $ -- $ 116,000
============= =============
</TABLE>
The Company provided a valuation allowance of $2,037,000 and $1,800,000
against deferred tax assets recorded as of December 31, 1995 and December 28,
1996, respectively, in view of, among other things, the expiration dates and
other limitations on usage of the net operating loss carryforwards.
F-33
<PAGE>
ARMOR HOLDINGS INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1994 AND 1995 AND DECEMBER 28, 1996 AND
THREE MONTHS ENDED MARCH 31, 1996 AND MARCH 29, 1997 (UNAUDITED)
The following reconciles the income tax expense computed at the Federal
statutory income tax rate to the provision for income taxes recorded in the
income statement:
<TABLE>
<CAPTION>
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Provision for income taxes at statutory Federal rate .... 34% 34% 34%
State and local income taxes, net of Federal benefit .... 1% -- 3%
Foreign income taxes..................................... -- -- 32%
Other non-deductible items .............................. 5% 3% (5)%
-------- -------- --------
40% 37% 64%
======== ======== ========
</TABLE>
The Company emerged from bankruptcy on September 20, 1993 pursuant to a
Plan of Reorganization which resulted in an ownership change since a
substantial portion of the new stock was issued to the creditors of the
Company. However, since the ownership change occurred pursuant to Chapter 11
proceedings and because more than 50% of the new stock was issued to
qualifying creditors and shareholders, the Company was required to use the
rules contained in Section 382(1)(5) relating to usage of net operating
losses. After an ownership change, Section 382(1)(5) requires a reduction in
the amount of net operating loss carryforwards and other tax attributes.
As of January 1, 1996, the Company had an income tax net operating loss
carryforward ("NOL") of approximately $4,700,000. Effective with the change
in control of the Company by Kanders Florida Holdings, Inc. on January 18,
1996, the utilization of the NOL became restricted to approximately $300,000
per year. As a result, the Company has income taxes currently payable. In
previous years, the future benefits obtained by the Company from utilization
of the NOL had been applied to reduce goodwill. Beginning in 1996, and for
future years, amortization expenses related to this intangible will be a
minimum of approximately $50,000 and a maximum of approximately $160,000 per
year which is non-deductible for income tax purposes. As of December 28, 1996
the Company's net operating losses approximate $4,400,000 and expire in
varying amounts in fiscal years 2006 to 2010.
9. OPERATING LEASES
The Company leases its manufacturing facilities under a six year operating
lease expiring in 1999, with an option to renew. The Company is also party to
various other equipment and vehicle leases. DSL leases its London office
under an operating lease expiring in 2002. Approximate total future minimum
annual lease payments under all such arrangements are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
- -------------
<S> <C>
1997.......... $ 331,818
1998 ......... 385,080
1999 ......... 324,517
2000 ......... 235,630
2001 ......... 188,700
Thereafter .. 47,175
-----------
$1,512,920
===========
</TABLE>
The Company incurred rent expense of approximately $167,000, $161,000 and
$330,000 during the years ended December 31, 1994 and 1995 and December 28,
1996.
10. COMMITMENTS AND CONTINGENCIES
CHAPTER 11 PROCEEDINGS -- The Company has provided for payment of certain
classes of bankruptcy related claims. Such amounts include amounts with
respect to claims that have been allowed
F-34
<PAGE>
ARMOR HOLDINGS INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1994 AND 1995 AND DECEMBER 28, 1996 AND
THREE MONTHS ENDED MARCH 31, 1996 AND MARCH 29, 1997 (UNAUDITED)
by the Bankruptcy Court, as well as amounts with respect to claims that are
still being disputed by the Company. Among the disputed claims is one in
which an unsecured creditor did not originally exercise its opportunity to
elect to receive stock in satisfaction of its claim, but has since asserted
that it is so entitled. While there can be no assurance that the actual
amounts of any such claims that are ultimately allowed by the Bankruptcy
Court will not exceed the amounts reserved, the Company does not expect that
any variance between such actual and reserved amounts will have a material
adverse effect on the Company's financial position.
EMPLOYMENT CONTRACTS -- The Company is party to several employment
contracts with its management. Such contracts are for varying periods and
include restrictions on competition after termination. These agreements
provide for salaries, bonuses and other benefits and also specify and
delineate the granting of various stock options.
CONSTRUCTION CONTRACT -- At December 28, 1996, the Company has an
outstanding commitment related to a new manufacturing facility construction
contract of approximately $2,400,000.
LEGAL/LITIGATION MATTERS -- In November 1989, the Federal Trade Commission
("FTC") conducted an investigation into the accuracy of the Company's claims
that body armor sold by the Company between 1988 and 1990 complied with
testing and certification procedures promulgated by the National Institute of
Justice ("NIJ"). On November 2, 1994, the FTC issued a consent order
embodying a voluntary settlement of 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
(the "Program") under which persons who had purchased body armor covered by
the Program 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 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. Management has established
reserves to cover the estimated cost of the above program. During the year
ended December 28, 1996 the Company completed notification of persons
pursuant to the program and has provided replacement armor to those persons
making such request.
On January 30, 1997, the Company commenced an action in the Supreme Court
of the State of New York, New York County, against 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 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 counterclaims to the Company's
complaint. The Defendants have denied each of the Company's allegations and
have asserted several 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.
In addition to the above, the Company, in the normal course of business,
is subjected to claims and litigation in the areas of product and general
liability. Management does not believe any of such claims will have a
material impact on the Company's financial position.
11. STOCKHOLDERS' EQUITY AND PREFERRED STOCK
CONVERTIBLE PREFERRED STOCK -- The Plan of Reorganization provided for the
filing by the Company of its Restated Articles of Incorporation which
authorized the issuance of 1,700,000 shares
F-35
<PAGE>
ARMOR HOLDINGS INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1994 AND 1995 AND DECEMBER 28, 1996 AND
THREE MONTHS ENDED MARCH 31, 1996 AND MARCH 29, 1997 (UNAUDITED)
of $1 stated value, 3% convertible preferred stock ("preferred stock").
Pursuant to the Plan of Reorganization, the Company issued 1,700,000 shares
of preferred stock.
In 1994, 1995 and 1996, the Company elected to convert 242,857, 242,851
and 1,214,292 shares, respectively, of preferred stock to common stock at
$0.97, $0.77 and $0.77 per share, respectively under conversion provisions
calling for the issuance of common stock, the fair market value of which
represents 110% of the aggregate stated value of the preferred stock then
subject to redemption.
The Company has authorized a series of preferred stock with such rights,
privileges and preferences as the Board of Directors shall from time to time
determine.
ISSUANCE AND CONVERSION OF CONVERTIBLE DEBT -- On April 30, 1996, the
Company completed a private placement of its 5% Convertible Subordinated
Notes due April 30, 2001 (the "Notes") pursuant to which $11,500,000
aggregate principal amounts of Notes were sold by the Company.
On December 18, 1996, the Notes were converted into 2,300,000 shares of
common stock at a conversion price of $5.00 per share.
STOCK OPTIONS AND GRANTS -- In 1994, the Company implemented an incentive
stock plan and an outside directors' stock plan, which plans collectively
provide for the granting to certain key employees of options to acquire the
Company's common stock as well as providing for the grant of common stock to
outside directors and to all full time employees. Pursuant to such plans,
1,050,000 shares of common stock were reserved and made available for
distribution. The option prices of stock which may be purchased under the
incentive stock plan are not less than the fair market value of common stock
on the dates of the grants.
Effective January 19, 1996, all stock grants awarded under the 1994
incentive stock plan were accelerated and considered fully vested.
During 1996, the Company implemented a new incentive stock plan and a new
outside directors' stock plan. Pursuant to the new plans, 1,800,000 shares of
common stock were reserved and made available for distribution.
SFAS NO. 123 REQUIRED DISCLOSURES -- If compensation cost for stock option
grants had been determined based on the fair value on the grant dates for
1995 and 1996 consistent with the method prescribed by SFAS No. 123, the
Company's net earnings and earnings per share would have been adjusted to the
pro forma amounts indicated below:
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C> <C>
Net earnings .......As reported $520,153 $689,313
Pro forma $519,734 $476,532
Earnings per share .As reported $0.08 $0.08
Pro forma $0.08 $0.05
</TABLE>
Outstanding options, consisting of ten-year incentive and non-qualified
stock options, vest and become exercisable over a three year period from the
date of grant. The outstanding options expire ten years from the date of
grant or upon retirement from the Company, and are contingent upon continued
employment during the applicable ten-year period.
Under SFAS No. 123, the fair value of each option grant is estimated on
the date of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions used for grants in 1995 and 1996:
dividend yield of 0%, expected volatility of 33%, risk-free interest rates of
5.46% and 5.12%-6.44%, and expected lives of 3 years.
F-36
<PAGE>
ARMOR HOLDINGS INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1994 AND 1995 AND DECEMBER 28, 1996 AND
THREE MONTHS ENDED MARCH 31, 1996 AND MARCH 29, 1997 (UNAUDITED)
A summary of the status of stock option grants as of December 31, 1994 and
1995 and December 28, 1996 and changes during the years ending on those dates
is presented below:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
OPTIONS EXERCISE PRICE
----------- --------------
<S> <C> <C>
Granted....................................... 727,500 $0.92
Forfeited..................................... (69,000) 0.92
-----------
Outstanding at December 31, 1994.............. 658,500 0.92
Granted....................................... 136,000 0.97
Forfeited..................................... (11,000) 0.97
-----------
Outstanding at December 31, 1995.............. 783,500 0.93
Granted....................................... 1,068,000 5.97
Exercised..................................... (26,467) 0.97
-----------
Outstanding at December 28, 1996.............. 1,825,033 3.88
===========
Options exercisable at December 28, 1996 ..... 727,566 $0.92
Weighted-average fair value of options
granted during 1996.......................... $ 982,978
</TABLE>
The following table summarizes information about stock options outstanding
at December 28, 1996:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE OPTIONS OPTIONS
PRICE OUTSTANDING EXERCISABLE REMAINING LIFE
- ---------- ------------- ------------- --------------
<S> <C> <C> <C>
$0.79...... 304,000 304,000 7.50
0.97...... 297,033 133,566 7.70
1.00...... 24,000 24,000 9.06
1.05...... 266,000 266,000 7.50
3.75...... 150,000 9.05
6.06...... 150,000 9.60
7.19...... 74,000 9.75
7.25...... 60,000 9.69
7.38...... 15,000 9.71
7.50...... 375,000 9.35
8.00...... 110,000 9.95
------------- ------------- --------------
Total.... 1,825,033 727,566 8.56
============= ============= ==============
</TABLE>
Remaining non-exercisable options as of December 28, 1996 become
exercisable as follows:
<TABLE>
<CAPTION>
<S> <C>
1997 ... 401,467
1998 ... 348,000
1999 ... 348,000
----------
1,097,467
==========
</TABLE>
F-37
<PAGE>
ARMOR HOLDINGS INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1994 AND 1995 AND DECEMBER 28, 1996 AND
THREE MONTHS ENDED MARCH 31, 1996 AND MARCH 29, 1997 (UNAUDITED)
EARNINGS PER SHARE -- The following table details the number of shares
used in computing primary and fully diluted earnings per share:
<TABLE>
<CAPTION>
MARCH 31, MARCH 29,
1994 1995 1996 1996 1997
----------- ----------- ----------- ----------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Primary:
Weighted average common shares outstanding ..... 4,625,394 4,753,999 7,966,799 6,463,644 11,827,510
Effect of shares issuable under stock option and
stock grant plans, based on the treasury stock
method.......................................... 254,498 325,290 819,223 750,101 969,280
Effect of shares issuable under conversion of
preferred stock ................................ 922,507 1,290,383 90,548 362,191 --
----------- ----------- ----------- ----------- ------------
5,802,399 6,369,672 8,976,570 7,575,936 12,796,790
=========== =========== =========== =========== ============
Fully diluted:
Weighted average common shares outstanding ..... 4,625,394 4,753,999 7,966,799 6,463,644 11,827,510
Effect of shares issuable under stock option and
stock grant plans, based on the treasury stock
method.......................................... 284,319 598,191 892,326 784,913 1,038,143
Effect of shares issuable under conversion of
preferred stock ................................ 922,507 1,290,383 90,548 362,191 --
----------- ----------- ----------- ----------- ------------
5,832,220 6,642,573 8,949,673 7,610,748 12,865,653
=========== =========== =========== =========== ============
</TABLE>
Primary and fully diluted earnings per share are the same amounts.
Fully diluted earnings per share does not include the effect of shares
issuable under conversion of the convertible notes as such effect is
antidilutive. The weighted average common shares outstanding includes
2,300,000 shares of common stock issued on December 18, 1996 upon the
conversion of the convertible notes and 1,274,217 shares of common stock
issued on April 16, 1997 for the DSL Combination.
12. SUPPLEMENTAL CASH FLOW INFORMATION:
<TABLE>
<CAPTION>
1994 1995 1996
---------- ---------- -------------
<S> <C> <C> <C>
Cash paid (received) during the year for:
Interest.......................................... $213,798 $273,538 $ 520,595
Income taxes...................................... $ 15,000 $ 3,400 $ (14,634)
Noncash investing and financing activities:
Capitalized lease obligation entered into for
equipment ....................................... $ 43,451
Issuance of stock under stock plan................ $ 28,836 $ 117,692
Conversion of preferred stock to common stock .... $242,851 $242,851 $ 1,214,292
Conversion of convertible debt to common stock ... $10,633,136
Acquisitions (businesses, patents and
trademarks):
Fair value of assets acquired..................... $25,573,241
Liabilities assumed .............................. (6,534,636)
Stock issued ..................................... (6,460,580)
-------------
Total cash paid................................... $12,578,025
=============
</TABLE>
F-38
<PAGE>
ARMOR HOLDINGS INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1994 AND 1995 AND DECEMBER 28, 1996 AND
THREE MONTHS ENDED MARCH 31, 1996 AND MARCH 29, 1997 (UNAUDITED)
13. UNCONSOLIDATED SUBSIDIARIES
At December 28, 1996, the Company has investments in the following
companies which it accounts for under the equity method of accounting for
investments:
<TABLE>
<CAPTION>
<S> <C>
Gorandel Trading Limited...................... 50%
Jardine Securicor Gurkha Services Limited .... 20%
</TABLE>
The following summarizes significant financial information of these
unconsolidated subsidiaries as of and for the nine months ended December 31,
1996.
<TABLE>
<CAPTION>
<S> <C>
Total Assets...... $ 6,582,100
=============
Retained
Earnings......... $ 2,938,800
=============
Total Revenues ... $20,720,300
-------------
Net Income........ $ 3,235,500
-------------
</TABLE>
As of December 28, 1996, the Company has the following balances due from
affiliates:
<TABLE>
<CAPTION>
<S> <C>
Receivable (included in prepaid and
other assets)......................... $ 421,000
Accounts payable (included in accounts
payable, accrued expenses and other
current liabilities).................. (815,000)
-----------
$(394,000)
===========
</TABLE>
14. INFORMATION CONCERNING BUSINESS SEGMENTS AND GEOGRAPHICAL SALES
Prior to the DSL combination, the Company operated in one business segment
- -- Products. This segment includes the development, manufacture and
distribution of ballistic protective equipment. Since the DSL combination,
the Company operates in a second business segment --Services. This segment
includes devising and implementing solutions to complex security problems in
high risk areas. DSL's services encompass the provision of detailed threat
assessments, security planning, security training, the provision, training
and supervision of specialist manpower and other services up to the
implementation and management of fully integrated security systems.
F-39
<PAGE>
ARMOR HOLDINGS INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1994 AND 1995 AND DECEMBER 28, 1996 AND
THREE MONTHS ENDED MARCH 31, 1996 AND MARCH 29, 1997 (UNAUDITED)
Revenues and income from continuing operations for the year ended December
28, 1996, were as follows:
<TABLE>
<CAPTION>
1996
-------------
<S> <C>
Revenues:
Products........................................... $18,011,000
Services .......................................... 12,956,000
-------------
Total revenues.................................... 30,967,000
Income from operations:
Products .......................................... 1,680,000
Services........................................... 658,000
-------------
Total income from operations...................... 2,338,000
Equity in earnings of unconsolidated subsidiaries:
Products .......................................... --
Services .......................................... 320,000
Total ............................................. 320,000
Corporate interest--net ........................... 515,000
-------------
Consolidated income before income taxes .......... $ 2,143,000
=============
</TABLE>
Identifiable assets were $28,731,000 and $20,799,000 for the Products and
Services Segments, respectively, as of December 28, 1996. Depreciation and
amortization was $515,000 and $303,000 and capital expenditures were
$1,236,000 and $624,000 for the Products and Services Segments, respectively,
for the year ended December 28, 1996.
Information with respect to sales to principal geographic areas for the
years ended December 31, 1994 and 1995 and December 28, 1996 and the three
month periods ended March 31, 1996 and March 29, 1997 (unaudited) is as
follows:
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
1994 1995 1996 1996 1997
------------- ------------- ------------- ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Foreign .... $ 1,595,000 $ 1,370,000 $16,066,000 $ 161,542 $ 9,460,000
Domestic .. 9,760,000 10,371,000 14,901,000 3,105,786 5,290,305
------------- ------------- ------------- ------------ ------------
$11,355,000 $11,741,000 $30,967,000 $3,267,328 $14,750,305
============= ============= ============= ============ ============
</TABLE>
F-40
<PAGE>
DSL GROUP LIMITED
UNAUDITED CONSOLIDATED BALANCE SHEET--31 MARCH 1997
<TABLE>
<CAPTION>
MAR-97
POUNDS
STERLING000
---------
<S> <C>
Fixed assets ...........................................
Tangible assets........................................ 952
Investments............................................ 885
---------
1,837
Current assets .........................................
Debtors................................................ 4,864
Cash at bank and in hand............................... (7)
---------
4,857
Creditors: amounts falling due within one year ......... (3,116)
---------
Net current assets...................................... 1,741
Total assets less current liabilities................... 3,578
Creditors: amounts falling due after more than one
year................................................... (4,577)
---------
Net liabilities......................................... (999)
=========
Capital and reserves ...................................
Calling up share capital............................... 182
Share premium account.................................. 4,655
Profit and loss account................................ (5,856)
---------
Equity and non-equity shareholders' funds............... (1,019)
Equity minority interest............................... 20
---------
(999)
=========
</TABLE>
F-41
<PAGE>
DSL GROUP LIMITED
UNAUDITED CONSOLIDATED PROFIT AND LOSS ACCOUNT--31 MARCH 1996 AND 1997
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
-----------------
MAR-96 MAR-97
POUNDS POUNDS
STERLING STERLING
000 000
-------- --------
<S> <C> <C>
Turnover........................................ 5,000 5,130
Cost of sales................................... 4,377 4,115
-------- --------
Gross profit.................................... 623 1,015
Administrative expenses......................... 447 702
-------- --------
Operating profit................................ 176 313
Income from interest in associated
undertakings................................... 166 168
Interest payable and similar charges, net ...... (40) (67)
-------- --------
Profit on ordinary activities before taxation .. 302 414
Tax on profit on ordinary activities............ 157 207
-------- --------
Profit on ordinary activities after taxation ... 145 207
Dividends--non-equity........................... -- 88
-------- --------
Retained income for the financial period ....... 145 119
======== ========
</TABLE>
F-42
<PAGE>
DSL GROUP LIMITED
UNAUDITED CONSOLIDATED CASH FLOW STATEMENT -31 MARCH 1996 AND 1997
<TABLE>
<CAPTION>
MAR-96 MAR-97
POUNDS POUNDS
STERLING STERLING
000 000
-------- --------
<S> <C> <C>
Net cash (outflow) inflow from operating activities................... 686 (420)
Returns on investments and servicing of finance
Interest received.................................................... 21 20
Interest paid........................................................ (61) (87)
Dividends received from associated undertakings...................... 102 24
-------- --------
Net cash (outflow) inflow from returns on investments and servicing
of finance........................................................... 62 (43)
Taxation
Overseas tax paid.................................................... (130) --
-------- --------
Net tax paid.......................................................... (130) --
Investing activities
(Purchase) sale of tangible fixed assets............................. 16 (122)
-------- --------
Net cash outflow from investing activities............................ 16 (122)
Financing............................................................. -- --
-------- --------
(Decrease) increase in cash and cash equivalents...................... 634 (585)
======== ========
</TABLE>
F-43
<PAGE>
DSL GROUP LIMITED
NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED
STATES OF AMERICA GENERALLY ACCEPTED ACCOUNTING PRINCIPLES. The group's
consolidated financial statements are prepared in conformity with generally
accepted accounting principles applicable in the United Kingdom (UK GAAP),
which differ in certain significant respects from those applicable in the
United States of America (US GAAP). These differences, together with the
approximate effects of the adjustments on profit attributable to shareholders
and shareholders' funds, relate principally to the items set out below:
(a) Goodwill
Under UK GAAP, goodwill arising from acquisitions is written off against
shareholders' funds. Under US GAAP, goodwill is capitalized and amortized
over its estimated useful life. For the purpose of calculating the
amortization of goodwill, a life of 25 years has been assumed.
(b) Cash flows
The principal difference between UK GAAP and US GAAP is in respect of
classification. Under UK GAAP, the group presents its cash flows for
operating activities, returns on investments and servicing of finance,
taxation, investing activities, and financing activities. US GAAP requires
only three categories of cash flow activities which are operating, investing
and financing. Cash flows arising from taxation and returns on investments
and servicing of finance under UK GAAP would, with the exception of dividends
paid, be included as operating activities under US GAAP; dividend payments
would be included as a financing activity under US GAAP. In addition, under
UK GAAP, cash and cash equivalents include short term borrowings which under
US GAAP would be presented as financing activities.
Approximate effect on profit attributable to shareholders of differences
between UK and US GAAP:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, 1997
POUNDS STERLING000
------------------
<S> <C>
Profit attributable to shareholders in conformity with UK
GAAP......................................................... 207
Adjustments:
Goodwill..................................................... 95
------------------
Profit attributable to shareholders in conformity with US
GAAP......................................................... 112
==================
</TABLE>
Approximate cumulative effect on shareholders' funds of differences
between UK and US GAAP:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, 1997
POUNDS STERLING000
------------------
<S> <C>
Shareholders' funds in conformity with UK GAAP................ (999)
Adjustments:
Goodwill..................................................... 5,697
------------------
Profit attributable to shareholders in conformity with US
GAAP......................................................... 4,698
==================
</TABLE>
F-44
<PAGE>
DSL GROUP LIMITED
CONSOLIDATED FINANCIAL STATEMENTS
31 DECEMBER 1996
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF DSL GROUP LIMITED
We have audited the accompanying consolidated balance sheet of DSL Group
Limited and subsidiaries at 31 December 1996 and the related consolidated
profit and loss account, consolidated statement of total recognised gains and
losses, reconciliation of movements in shareholders' funds and consolidated
cash flow statement for the period from 3 June 1996 (date of incorporation)
to 31 December 1996. These consolidated financial statements are the
responsibility of the management of DSL Group Limited. Our responsibility is
to express an opinion on these consolidated financial statements based on our
audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United Kingdom and in the United States of America. Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of DSL Group
Limited and subsidiaries at 31 December 1996 and the results of their
operations and their cash flows for the period from 3 June 1996 to 31
December 1996, in conformity with generally accepted accounting principles in
the United Kingdom.
Accounting principles generally accepted in the United Kingdom vary in
certain significant respects from accounting principles generally accepted in
the United States of America. Application of accounting principles generally
accepted in the United States would have affected profit attributable to
shareholders for the period from 3 June 1996 to 31 December 1996 and
shareholders' funds at 31 December 1996, to the extent summarised in Note 24
to the consolidated financial statements.
KPMG
Chartered Accountants
Registered Auditors
London, England
15 April 1997
F-45
<PAGE>
DSL GROUP LIMITED
CONSOLIDATED PROFIT AND LOSS ACCOUNT
for the period ended 31 December 1996
<TABLE>
<CAPTION>
PERIOD FROM
INCORPORATION TO
31 DECEMBER
1996
POUNDS
NOTE STERLING000
------ ----------------
<S> <C> <C>
TURNOVER .................................................... 2 7,968
Cost of sales ............................................... (6,330)
----------------
GROSS PROFIT ................................................ 1,638
Administrative expenses (includes exchange gain of pounds
sterling326,000) ........................................... (1,133)
----------------
OPERATING PROFIT ............................................ 505
Income from interests in associated undertakings ........... 197
Other interest receivable and similar income ................ 31
Interest payable and similar charges ........................ 6 (192)
----------------
PROFIT ON ORDINARY ACTIVITIES BEFORE TAXATION ............... 3 541
Tax on profit on ordinary activities ........................ 7 (451)
----------------
PROFIT ON ORDINARY ACTIVITIES AFTER TAXATION ................ 90
Equity minority interests ................................... 16 (3)
----------------
PROFIT ATTRIBUTABLE TO SHAREHOLDERS ......................... 87
Dividends--non-equity ....................................... 8 (147)
----------------
RETAINED LOSS FOR THE FINANCIAL PERIOD ...................... 15 (60)
================
</TABLE>
<TABLE>
<CAPTION>
PERIOD FROM
INCORPORATION TO
31 DECEMBER
1996
POUNDS
STERLING000
----------------
<S> <C>
RETAINED LOSS FOR THE FINANCIAL
PERIOD
The company .......................... 20
Subsidiary undertakings .............. (226)
Associated undertakings .............. 146
----------------
(60)
================
</TABLE>
All results for the period are attributable to acquisitions in continuing
activities.
F-46
<PAGE>
DSL GROUP LIMITED
CONSOLIDATED BALANCE SHEET
at 31 December 1996
<TABLE>
<CAPTION>
31 DECEMBER 1996
-------------------
POUNDS POUNDS
STERLING STERLING
NOTE 000 000
------ --------- ---------
<S> <C> <C> <C>
FIXED ASSETS
Tangible assets ........................................ 9 906
Investments ............................................ 10 746
---------
1,652
CURRENT ASSETS
Debtors ................................................ 11 4,181
Cash at bank and in hand ............................... 578
---------
4,759
CREDITORS: amounts falling due within one year ........ 12 (4,305)
---------
NET CURRENT ASSETS ..................................... 454
---------
TOTAL ASSETS LESS CURRENT LIABILITIES .................. 2,106
CREDITORS: amounts falling due after more than one year
13 (3,330)
---------
NET LIABILITIES ........................................ (1,224)
=========
CAPITAL AND RESERVES
Called up share capital ................................ 14 182
Share premium account .................................. 15 4,656
Profit and loss account ................................ 15 (6,080)
---------
EQUITY AND NON-EQUITY SHAREHOLDERS' FUNDS .............. (1,242)
Equity minority interests .............................. 16 18
---------
(1,224)
=========
</TABLE>
F-47
<PAGE>
DSL GROUP LIMITED
CONSOLIDATED CASH FLOW STATEMENT
for the period ended 31 December 1996
<TABLE>
<CAPTION>
PERIOD FROM
INCORPORATION TO
31 DECEMBER 1996
-------------------
POUNDS POUNDS
STERLING STERLING
NOTE 000 000
------ --------- ---------
<S> <C> <C> <C>
NET CASH OUTFLOW FROM OPERATING ACTIVITIES ................. 21 (57)
RETURNS ON INVESTMENTS AND SERVICING OF FINANCE
Interest received ......................................... 31
Interest paid ............................................. (167)
Dividends received from associated undertakings .......... 197
---------
NET CASH INFLOW FROM RETURNS ON INVESTMENTS AND SERVICING
OF FINANCE ................................................ 61
TAXATION
UK tax refunded ........................................... 43
Overseas tax paid ......................................... (34)
---------
NET TAX REFUNDED ........................................... 9
INVESTING ACTIVITIES
Purchase of tangible fixed assets ......................... (415)
Purchase of subsidiary undertaking (net of cash and cash
equivalents acquired) .................................... (8,775)
---------
NET CASH OUTFLOW FROM INVESTING ACTIVITIES ................. (9,190)
---------
NET CASH OUTFLOW BEFORE FINANCING .......................... (9,177)
=========
FINANCING
Issue of ordinary share capital ........................... (4,838)
New loans ................................................. (4,394)
---------
NET CASH INFLOW FROM FINANCING ............................. (9,232)
INCREASE IN CASH AND CASH EQUIVALENTS ...................... 22 55
---------
(9,177)
=========
</TABLE>
F-48
<PAGE>
DSL GROUP LIMITED
CONSOLIDATED STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES
for the period ended 31 December 1996
<TABLE>
<CAPTION>
PERIOD FROM
INCORPORATION TO
31 DECEMBER
1996
POUNDS
STERLING000
----------------
<S> <C>
LOSS FOR THE FINANCIAL PERIOD .... (60)
Exchange adjustments .............. (167)
----------------
TOTAL GAINS AND LOSSES RECOGNISED
(227)
================
</TABLE>
RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS
for the period ended 31 December 1996
<TABLE>
<CAPTION>
POUNDS
STERLING000
---------
<S> <C>
PROFIT ATTRIBUTABLE TO SHAREHOLDERS
87
Dividends ........................... (147)
---------
(60)
Exchange adjustments ................ (167)
Share capital issued ................ 4,838
Goodwill written off ................ (5,853)
---------
DECREASE IN SHAREHOLDERS' FUNDS .... (1,242)
Opening shareholders' funds ......... --
---------
CLOSING SHAREHOLDERS' FUNDS ......... (1,242)
=========
</TABLE>
F-49
<PAGE>
DSL GROUP LIMITED
NOTES
(forming part of the financial statements)
1. ACCOUNTING POLICIES
The following accounting policies have been applied consistently in
dealing with items which are considered material in relation to the group's
financial statements.
BASIS OF PREPARATION
The financial statements have been prepared in accordance with applicable
accounting standards and under the historical cost accounting rules.
BASIS OF CONSOLIDATION
The group's financial statements consolidate the results of DSL Group
Limited and all its subsidiary undertakings with effect from the date of
acquisition on 31 July 1996 until 31 December 1996. In respect of associated
undertakings, the group includes its share of post acquisition profits and
losses in the consolidated profit and loss account and its share of post
acquisition retained profits or accumulated deficits in the consolidated
balance sheet.
The consolidated financial statements are based on the reported results of
subsidiary undertakings and associated undertakings, which are based on the
financial statements of these companies whose period ends are coterminous
with or end three months before those of the parent company, and on
management accounts where appropriate for the period from 1 October to 31
December 1996.
The acquisition method of accounting has been adopted. Under this method,
the results of subsidiary and associated undertakings acquired or disposed of
in the period are included in the consolidated profit and loss account from
the date of acquisition or up to the date of disposal. Goodwill arising on
consolidation (representing the excess of the fair value of the consideration
given over the fair value of the separable net assets acquired) is written
off against reserves on acquisition.
FIXED ASSETS AND DEPRECIATION
Depreciation is provided by the group to write off the cost less the
estimated residual value of tangible fixed assets by equal instalments over
their estimated useful economic lives as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
Freehold land and buildings -- not depreciated
Short leasehold land and buildings -- term of lease
Plant and machinery -- 20%-25% per annum
Fixtures and fittings -- 20% per annum
</TABLE>
FOREIGN CURRENCIES
Transactions in foreign currencies are recorded using the rate of exchange
ruling at the date of the transaction. Monetary assets and liabilities
denominated in foreign currencies are translated using the rate of exchange
ruling at the balance sheet date and the gains or losses on translation are
included in the profit and loss account.
For consolidation purposes, the assets and liabilities of overseas
subsidiary undertakings and associated undertakings are translated at the
closing exchange rates and the profit and loss accounts are translated at the
average exchange rates. Exchange differences arising on these translations
are taken to reserves.
Subsidiaries operating in hyper-inflationary economies adjust the local
currency financial statements to reflect current price levels before
translation.
F-50
<PAGE>
DSL GROUP LIMITED
NOTES (CONTINUED)
LEASES
Where the group enters into a lease which entails taking substantially all
the risks and rewards of ownership of an asset, the lease is treated as a
'finance lease'. The asset is recorded in the balance sheet as a tangible
fixed asset and is depreciated over its estimated useful life or the term of
the lease, whichever is shorter. Future instalments under such leases, net of
finance charges, are included within creditors. Rentals payable are
apportioned between the finance element, which is charged to the profit and
loss account, and the capital element which reduces the outstanding
obligation for future instalments.
All other leases are accounted for as 'operating leases' and the rental
charges are charged to the profit and loss account on a straight line basis
over the life of the lease.
PENSIONS
The group operates a defined contribution pension scheme. The assets of
the scheme are held separately from those of the group in an independently
administered fund. The amount charged against profits represents the
contributions payable to the scheme in respect of the accounting period.
TURNOVER
Turnover represents the amounts (excluding value added tax) derived from
the provision of goods and services to third party customers during the
period.
TAXATION
The charge for taxation is based upon the profit for the period and takes
into account deferred taxation on timing differences. Provision is made for
deferred taxation if there is reasonable evidence that such tax will be
payable in the foreseeable future.
2. SEGMENTAL INFORMATION
The table below sets out information on turnover for each of the group's
geographic areas of operation.
<TABLE>
<CAPTION>
PERIOD FROM
INCORPORATION TO
31 DECEMBER
1996
----------------
POUNDS
STERLING000
<S> <C>
United Kingdom 299
Rest of Europe 197
Asia ........... 43
Africa ......... 4,877
Americas ....... 2,358
Middle East ... 194
----------------
7,968
================
</TABLE>
In the opinion of the directors there is one class of business.
F-51
<PAGE>
DSL GROUP LIMITED
NOTES (CONTINUED)
3. PROFIT ON ORDINARY ACTIVITIES BEFORE TAXATION
<TABLE>
<CAPTION>
PERIOD FROM
INCORPORATION TO
31 DECEMBER
1996
----------------
POUNDS
STERLING000
<S> <C>
PROFIT ON ORDINARY ACTIVITIES BEFORE TAXATION IS STATED
AFTER CHARGING
Auditors' remuneration:
Audit............................................................... 105
Other services...................................................... 32
Depreciation of fixed assets:
Owned............................................................... 67
Leased.............................................................. 22
Hire of plant and machinery--rentals payable under operating leases 42
Hire of other assets--rentals payable under operating leases ....... 83
================
AFTER CREDITING
Exchange gains ...................................................... 326
================
</TABLE>
The total amount charged to revenue for the hire of plant and machinery
amounted to pounds sterling72,000. For the period ended 31 December 1996 this
comprises rentals payable under operating leases and depreciation on plant
and machinery held under finance leases together with the related finance
charges.
4. REMUNERATION OF DIRECTORS AND DIRECTORS' INTERESTS
<TABLE>
<CAPTION>
PERIOD FROM
INCORPORATION TO
31 DECEMBER
1996
----------------
POUNDS
STERLING000
<S> <C>
Directors' emoluments ........... 112
Amounts paid to third parties in
respect of directors' services 77
----------------
189
================
</TABLE>
Benefits in kind include employers' pension contributions and health
insurance.
The emoluments, excluding pension contributions, of the chairman were:
<TABLE>
<CAPTION>
PERIOD FROM
INCORPORATION TO
31 DECEMBER
1996
----------------
POUNDS STERLING
<S> <C>
AGA Morrison from 31 July to 1 December
1996........................................ 38,808
C Mackay from 1 to 31 December 1996.......... 1,667
</TABLE>
The emoluments, excluding pension contributions, of the highest paid
director were pounds sterling48,510.
F-52
<PAGE>
DSL GROUP LIMITED
NOTES (CONTINUED)
The emoluments, excluding pension contributions, of the directors
(including the chairman and highest paid director) were within the following
ranges:
<TABLE>
<CAPTION>
NUMBER OF DIRECTORS
PERIOD FROM
INCORPORATION TO
31 DECEMBER
1996
-----------------------
<S> <C>
pounds sterling0--
pounds sterling5,000 4
pounds
sterling15,001--
pounds sterling20,000 2
pounds
sterling40,001--
pounds sterling45,000 1
pounds
sterling45,001--
pounds
sterling50,000........ 2
-----------------------
</TABLE>
SHARES
The interests of the directors of DSL Group Limited in office as at 31
December 1996 (including family interests) in the shares of group companies
are as follows:
<TABLE>
<CAPTION>
INTEREST INTEREST AT
CLASS OF AT END OF BEGINNING
COMPANY SHARE PERIOD OF PERIOD
--------------- -------------- ----------- -------------
<S> <C> <C> <C> <C>
AGA Morrison .. DSL Group pounds 16,551 --
Limited sterling1
ordinary
"A" shares
AGA Morrison .. DSL Group pounds 6,207 --
Limited sterling1
ordinary
"B" shares
AGA Morrison .. DSL Holdings pounds -- 1
Limited sterling1
ordinary
shares
AGA Morrison .. Defence Systems pounds 1 1
International sterling1
Limited ordinary
shares
AGA Morrison .. Defence Systems pounds 1 --
Limited sterling1
ordinary
shares
AGA Morrison .. Defence Systems P$1,000 1,900* 1,900*
Colombia SA ordinary
shares
RN Bethell ..... DSL Group pounds 11,034 --
Limited sterling1
ordinary
"A" shares
RN Bethell ..... Defence Systems P$1,000 1,900* 1,900*
</TABLE>
Colombia SA ordinary
shares
- ------------
* this represents 1% of the company's total share capital denominated in
Colombian pesos and is held in trust on behalf of DSL Holdings Limited.
SHARE OPTIONS
According to the register of directors' interests, no rights to subscribe
for shares in group companies were held by or granted to any of the directors
or their immediate families, or exercised by them, during the financial
period except as indicated below.
To acquire pounds sterling1 ordinary shares in DSL Holdings Limited:
At 3 June 1996 AGA Morrison had an option to purchase 73,332 pounds
sterling1 ordinary shares in DSL Holdings Limited. This option was exercised
on 31 July 1996.
F-53
<PAGE>
DSL GROUP LIMITED
NOTES (CONTINUED)
At 3 June 1996 RN Bethell held an option to acquire 25,000 pounds
sterling1 ordinary shares in DSL Holdings Limited from Hambro Group
Investments Limited. This option was exercised on 31 July 1996.
OTHER INTERESTS
At the end of the period AGA Morrison had an amount outstanding to a
subsidiary company of pounds sterling1,127, which was repaid subsequent to
the period end.
5. STAFF NUMBERS AND COSTS
The average number of persons employed by the group (including directors)
during the period, analysed by category, was as follows:
<TABLE>
<CAPTION>
NUMBER OF EMPLOYEES
PERIOD FROM
INCORPORATION TO
31 DECEMBER 1996
-------------------
<S> <C>
Security services ............. 2,128
Management and administration 65
Operatives .................... 27
-------------------
2,220
===================
</TABLE>
The aggregate payroll costs of these persons were as follows:
<TABLE>
<CAPTION>
PERIOD FROM
INCORPORATION TO
31 DECEMBER
1996
----------------
POUNDS
STERLING000
<S> <C>
Wages and salaries ................ 3,394
Social security costs ............. 211
Other pension costs (see note 20) 73
----------------
3,678
================
</TABLE>
6. INTEREST PAYABLE AND SIMILAR CHARGES
<TABLE>
<CAPTION>
PERIOD FROM
INCORPORATION TO
31 DECEMBER
1996
----------------
POUNDS
STERLING000
<S> <C>
On bank loans, overdrafts and other loans wholly repayable within
five years .......................................................... 184
Finance charges payable in respect of finance leases and hire
purchase contracts .................................................. 8
----------------
192
================
</TABLE>
F-54
<PAGE>
DSL GROUP LIMITED
NOTES (CONTINUED)
7. TAXATION
<TABLE>
<CAPTION>
PERIOD FROM
INCORPORATION TO
31 DECEMBER
1996
----------------
POUNDS
STERLING000
<S> <C>
UK corporation tax ............................. 39
Overseas taxation .............................. 361
Tax attributable to the share of profits of the
associated undertakings ....................... 51
----------------
451
================
</TABLE>
No deferred tax provision has been made for the UK corporation tax which
would become payable if further dividends were declared by associated
companies from accumulated reserves.
No deferred tax is provided in respect of the accumulated reserves of
overseas subsidiary companies as there is no current intention to remit
profits to the UK.
8. DIVIDENDS
<TABLE>
<CAPTION>
PERIOD FROM
INCORPORATION TO
31 DECEMBER
1996
----------------
POUNDS
STERLING000
<S> <C>
Proposed dividend on 8% preference shares 147
================
</TABLE>
Preference dividends are payable on 31 January and 31 July each year, the
first payment falling due on 31 July 1997.
F-55
<PAGE>
DSL GROUP LIMITED
NOTES (CONTINUED)
9. TANGIBLE FIXED ASSETS
<TABLE>
<CAPTION>
FIXTURES
LAND AND PLANT AND AND
BUILDINGS MACHINERY FITTINGS TOTAL
----------- ----------- ---------- -------
POUNDS POUNDS POUNDS POUNDS
STERLING STERLING STERLING STERLING
000 000 000 000
<S> <C> <C> <C> <C>
COST
At incorporation............ -- -- -- --
Acquisition of DSL
Holdings................... 69 855 473 1,397
Currency translation........ -- (23) (8) (31)
Additions................... -- 321 94 415
Disposals................... -- (135) (31) (166)
----------- ----------- ---------- -------
At 31 December 1996......... 69 1,018 528 1,615
----------- ----------- ---------- -------
DEPRECIATION
At incorporation............ -- -- -- --
Acquisition of DSL
Holdings................... (46) (458) (283) (787)
Currency translation........ -- 13 4 17
Charge for period........... (3) (72) (14) (89)
On disposals................ -- 119 31 150
----------- ----------- ---------- -------
At 31 December 1996......... (49) (398) (262) (709)
----------- ----------- ---------- -------
NET BOOK VALUE
AT 31 DECEMBER 1996 ........ 20 620 266 906
=========== =========== ========== =======
</TABLE>
ANALYSIS OF NET BOOK VALUE OF LAND AND BUILDINGS
<TABLE>
<CAPTION>
31 DECEMBER
1996
-------------
POUNDS
STERLING
000
<S> <C>
Freehold........ 13
Short
leasehold...... 7
-------------
20
=============
</TABLE>
Included in the total net book value of plant and machinery is pounds
sterling244,463 in respect of assets held under finance leases and similar
hire purchase contracts. Depreciation for the period on these assets was
pounds sterling22,490.
F-56
<PAGE>
DSL GROUP LIMITED
NOTES (CONTINUED)
10. FIXED ASSET INVESTMENTS
<TABLE>
<CAPTION>
TOTAL
GORANDEL JARDINE SECURICOR GROUP INTERESTS
TRADING GURKHA SERVICES IN ASSOCIATED
LIMITED LIMITED UNDERTAKINGS
---------- ----------------- ---------------
POUNDS POUNDS POUNDS
STERLING000 STERLING000 STERLING000
<S> <C> <C> <C>
At beginning of period ....... -- -- --
Acquired during the period .. 702 154 856
Retained profits less losses 36 110 146
Movement on exchange.......... (59) -- (59)
Less: Dividends received .... -- (197) (197)
---------- ----------------- ---------------
At end of period ............. 679 67 746
========== ================= ===============
</TABLE>
Gorandel Trading Limited and Jardine Securicor Gurkha Services Limited are
both associated undertakings of DSL Group Limited and therefore can be
considered to be related parties under Financial Reporting Standard 8.
Certain expenses are borne by a group company and recharged to Gorandel
Trading Limited and the balance receivable by the group as at 31 December
1996 was pounds sterling247,860. A loan was payable by the group to Gorandel
Trading Limited of pounds sterling479,130.
The companies which are material to the results of DSL Group Limited are
as follows:
<TABLE>
<CAPTION>
PRINCIPAL % SHARES COUNTRY OF
SUBSIDIARY UNDERTAKINGS ACTIVITY HELD INCORPORATION
--------------------- ------------ -----------------
<S> <C> <C> <C>
DSL Holdings Limited* ......................... Holding Company 100% UK(1)
Defence Systems International Limited ........ Security Services 100% UK(1)
Defence Systems Limited ....................... Security Services 100% UK(1)
Asset Recovery
Brooksight Limited ............................ Services 100% UK(1)
US Defense Systems Inc ........................ Security Services 100% USA
DSL Security (Asia) Private Limited ........... Security Services 100% Singapore
Defence Systems Colombia SA** ................. Security Services 97.5% Colombia
DSL (Overseas) Limited ........................ Holding Company 100% Cyprus
Defence Systems (Jersey) Limited .............. Security Services 100% UK
ASSOCIATED UNDERTAKINGS
Gorandel Trading Limited ...................... Security Services 50% Cyprus
Jardine Securicor Gurkha Services Limited .... Security Services 20% Hong Kong
</TABLE>
- ------------
(1) Registered in England and Wales.
* Owned directly by DSL Group Limited.
** 94.5% of the shares held are owned directly by DSL Holdings Limited and
3% are held in trust on its behalf.
F-57
<PAGE>
DSL GROUP LIMITED
NOTES (CONTINUED)
11. DEBTORS
<TABLE>
<CAPTION>
31 DECEMBER
1996
-------------
POUNDS
STERLING000
<S> <C>
AMOUNTS FALLING DUE WITHIN ONE YEAR
Trade debtors .................................... 2,680
ACT recoverable .................................. 37
Amounts recoverable from associated undertakings 248
Amounts receivable in respect of group relief ... 97
Other debtors .................................... 816
Prepayments and accrued income ................... 303
-------------
4,181
=============
</TABLE>
12. CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR
<TABLE>
<CAPTION>
31 DECEMBER
1996
-------------
POUNDS
STERLING000
<S> <C>
Bank loan .................................................... 805
Bank overdrafts .............................................. 347
Amounts payable in respect of finance leases ................. 108
Deferred consideration for acquisition of DSL Holdings
Limited...................................................... 400
Trade creditors .............................................. 465
Amounts owed to associated undertakings ...................... 479
Dividends payable............................................. 147
Other creditors including taxation and social security:
Corporation tax ............................................. 79
ACT payable ................................................. 37
Other taxes and social security ............................. 70
Other creditors ............................................. 1,009
Accruals and deferred income ................................. 359
-------------
4,305
=============
</TABLE>
The bank loan is secured by fixed and floating charges over the assets of
DSL Group Limited.
13. CREDITORS: AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR
<TABLE>
<CAPTION>
31 DECEMBER
1996
-------------
POUNDS
STERLING000
<S> <C>
Bank loan (denominated in US$) ............... 3,222
Amounts payable in respect of finance leases 108
-------------
3,330
=============
</TABLE>
The bank loan is secured by fixed and floating charges over the assets of
DSL Group Limited.
F-58
<PAGE>
DSL GROUP LIMITED
NOTES (CONTINUED)
14. CALLED UP SHARE CAPITAL
<TABLE>
<CAPTION>
1996
------------------
POUNDS
STERLING
NO. 000
----------- ------
<S> <C> <C>
AUTHORIZED
Preference shares
Preference shares of pounds
sterling0.01 each ................... 4,400,000 44
======
Ordinary shares
Ordinary shares of pounds sterling1
each "A"...................... 27,585 28
Ordinary shares of pounds sterling1
each "B"...................... 6,207 6
Ordinary shares of pounds sterling1
each "C"...................... 4,137 4
----------- ------
37,929 38
=========== ======
Preferred ordinary shares
Preferred ordinary shares of pounds
sterling1 each ...................... 100,000 100
------
182
======
ALLOTTED, CALLED UP AND FULLY PAID
Preference shares
Preference shares of pounds
sterling0.01 each ................... 4,400,000 44
======
Ordinary shares
Ordinary shares of pounds sterling1
each "A"...................... 27,585 28
Ordinary shares of pounds sterling1
each "B"...................... 6,207 6
Ordinary shares of pounds sterling1
each "C"...................... 4,137 4
----------- ------
37,929 38
=========== ======
Preferred ordinary shares
Preferred ordinary shares of pounds
sterling1 each ...................... 100,000 100
------
182
======
</TABLE>
The shares were allotted on 31 July 1996 for pounds sterling4,838,000 and
an amount of pounds sterling4,656,000 was transferred to the share premium
account. The proceeds from the allotment were used primarily to acquire
shares in DSL Holdings Limited.
SUMMARY OF RIGHTS OF PREFERENCE SHARES
Dividends
The preference shares are eligible for dividends at a rate of 8% per annum
of the issue price of the shares, payable in two equal instalments on 31
January and 31 July each year, commencing on 31 July 1997.
Priority on winding up
The preference shareholders have priority over the ordinary shareholders
on the winding up of the company and are entitled to receive the issue price
of the shares plus any accrued preference dividends. They have no entitlement
to any surplus following repayment of the share capital and accrued
dividends.
Voting rights
The preference shareholders are entitled to receive notice of general
meetings but are not entitled to attend or vote except in respect of certain
resolutions concerning the winding up of the company or the reduction of the
share capital or the variation of the rights of the shares.
F-59
<PAGE>
DSL GROUP LIMITED
NOTES (CONTINUED)
15. SHARE PREMIUM AND RESERVES AND SHAREHOLDERS' FUNDS
<TABLE>
<CAPTION>
SHARE PROFIT
PREMIUM AND LOSS
ACCOUNT ACCOUNT
--------- ----------
POUNDS POUNDS
STERLING STERLING
000 000
<S> <C> <C>
At incorporation ................................... -- --
Arising on shares issued in period ................. 4,656 --
Retained loss for period ........................... -- (60)
Goodwill written off on acquisition of DSL Holdings
Limited............................................ -- (5,853)
Exchange adjustments ............................... -- (167)
--------- ----------
AT 31 DECEMBER 1996 ................................ 4,656 (6,080)
========= ==========
</TABLE>
Shareholders' funds
Of the total amount of shareholders' funds of the group of pounds
sterling(1,242,000) at 31 December 1996, an amount of pounds
sterling4,400,000 is attributable to non-equity interests and an amount of
pounds sterling(5,642,000) is attributable to equity interests.
16. MINORITY INTERESTS
<TABLE>
<CAPTION>
POUNDS
STERLING000
<S> <C>
At beginning of period ......... --
Acquired during the period .... 15
Retained profit for period .... 3
--------
At 31 December 1996 ............ 18
========
</TABLE>
17. CONTINGENT LIABILITIES
A cross composite guarantee has existed since 1 August 1996 between DSL
Holdings Limited, Defence Systems Limited, DSL Security (Asia) Private
Limited and Brooksight Limited.
18. COMMITMENTS
(i) There were no authorised or contracted capital commitments unprovided
for at 31 December 1996.
(ii) Annual commitments under non-cancellable operating leases are as
follows:
<TABLE>
<CAPTION>
31 DECEMBER
1996
-----------------------
LAND AND
BUILDINGS OTHER
------------- ---------
POUNDS POUNDS
STERLING STERLING
000 000
<S> <C> <C>
Operating leases which expire:
Within one year ........................... -- 12
In the second to fifth years inclusive ... -- 30
Over five years ........................... 83 --
------------- ---------
83 42
============= =========
</TABLE>
F-60
<PAGE>
DSL GROUP LIMITED
NOTES (CONTINUED)
19. GUARANTEES
There were liabilities of pounds sterling103,000 under documentary credit
guarantees outstanding at 31 December 1996.
20. PENSION SCHEME
The group operates a defined contribution pension scheme. The assets of
the scheme are held separately from those of the group in an independently
administered fund. The pension charge for the period represents the
contributions payable by the group to the scheme and amounted to pounds
sterling73,000.
21. RECONCILIATION OF OPERATING PROFIT TO NET CASH OUTFLOW FROM OPERATING
ACTIVITIES
<TABLE>
<CAPTION>
PERIOD FROM
INCORPORATION TO
31 DECEMBER
1996
----------------
POUNDS
STERLING000
<S> <C>
Operating profit ........................... 505
Depreciation charge ........................ 89
Loss on sale of tangible fixed assets ..... 16
Increase in debtors ........................ (692)
Increase in creditors ...................... 25
----------------
Net cash outflow from operating activities (57)
================
</TABLE>
22. ANALYSIS OF CHANGES IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
CASH OVERDRAFT NET
------- ----------- ------
POUNDS POUNDS POUNDS
STERLING STERLING STERLING
000 000 000
<S> <C> <C> <C>
Balance at incorporation ...................... -- -- --
Net cash inflow before adjustments for foreign
exchange rate changes......................... 769 (714) 55
Effect of foreign exchange rate changes ...... (191) 367 176
------- ----------- ------
Balance at 31 December 1996 ................... 578 (347) 231
======= =========== ======
</TABLE>
F-61
<PAGE>
DSL GROUP LIMITED
NOTES (CONTINUED)
23. ACQUISITION OF DSL HOLDINGS LIMITED
On 31 July 1996 100% of the share capital of DSL Holdings Limited was
acquired. The fair values of the assets acquired were deemed to be equal to
their book values.
<TABLE>
<CAPTION>
POUNDS
STERLING000
---------
<S> <C>
NET ASSETS ACQUIRED
Tangible fixed assets ............................ 610
Investments in associated companies .............. 856
Debtors .......................................... 4,015
Bank loans and overdrafts ........................ (1,555)
Creditors ........................................ (2,144)
Minority shareholders' interests ................. (15)
---------
1,767
Goodwill ......................................... 5,853
---------
7,620
=========
Satisfied by
Cash consideration (including costs of pounds
sterling668,000) ................................ 7,220
Deferred consideration (payable within one year) 400
---------
7,620
=========
</TABLE>
The consolidated profit and loss account includes the results of the
company and its subsidiaries and associates with effect from the date of
acquisition of DSL Holdings Limited on 31 July 1996.
The proforma consolidated results of DSL Group Limited (being the
consolidated results of DSL Holdings Limited from 1 April 1995 to 31 July
1996 and DSL Group Limited from 1 August to 31 December 1996) for the nine
month period ended 31 December 1996 and the twelve month period ended 31
March 1996 are summarised below:
<TABLE>
<CAPTION>
NINE MONTH
PERIOD ENDED YEAR ENDED
31 DECEMBER 31 MARCH
1996 1996
-------------- ------------
POUNDS POUNDS
STERLING000 STERLING000
<S> <C> <C>
Turnover ............................................. 14,817 20,579
============== ============
Operating profit (including exchange gain of pounds
sterling326,000 (31 March 1996: pounds
sterling56,000))..................................... 790 751
Income from interests in associated undertakings .... 526 744
Other interest receivable and similar income ........ 67 76
Interest payable and similar charges ................. (287) (276)
-------------- ------------
Profit on ordinary activities before taxation ....... 1,096 1,295
Tax on profit on ordinary activities ................. (758) (678)
-------------- ------------
Profit on ordinary activities after taxation ........ 338 617
Minority interests ................................... (5) (5)
-------------- ------------
Profit attributable to shareholders .................. 333 612
Dividends ............................................ (147) --
-------------- ------------
Retained profit for the financial period ............. 186 612
============== ============
</TABLE>
F-62
<PAGE>
DSL GROUP LIMITED
NOTES (CONTINUED)
24. SUMMARY OF SIGNIFICANT DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED
STATES OF AMERICA GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
The group's consolidated financial statements are prepared in conformity
with generally accepted accounting principles applicable in the United
Kingdom (UK GAAP), which differ in certain significant respects from those
applicable in the United States of America (US GAAP). These differences,
together with the approximate effects of the adjustments on profit
attributable to shareholders and shareholders' funds, relate principally to
the items set out below:
(a) Goodwill
Under UK GAAP, goodwill arising from acquisitions is written off against
shareholders' funds. Under US GAAP, goodwill is capitalised and amortised
over its estimated useful life. For the purpose of calculating the
amortisation of goodwill a life of 20 years has been assumed.
(b) Deferred taxation
UK GAAP requires that no provision for deferred taxation should be made if
there is reasonable evidence that such taxation will not be payable in the
foreseeable future. Under US GAAP, deferred taxation is recognised under the
full liability method which permits deferred tax assets to be recognised if
their realisation is considered more likely than not.
(c) Cash flows
The principal difference between UK GAAP and US GAAP is in respect of
classification. Under UK GAAP, the group presents its cash flows for
operating activities, returns on investments and servicing of finance,
taxation, investing activities, and financing activities. US GAAP requires
only three categories of cash flow activities which are operating, investing
and financing. Cash flows arising from taxation and returns on investments
and servicing of finance under UK GAAP would, with the exception of dividends
paid, be included as operating activities under US GAAP; dividend payments
would be included as a financing activity under US GAAP. In addition, under
UK GAAP, cash and cash equivalents include short term borrowings which under
US GAAP would be presented as financing activities.
Approximate effect on profit attributable to shareholders of differences
between UK and US GAAP:
<TABLE>
<CAPTION>
PROFORMA
PERIOD FROM NINE MONTH
INCORPORATION TO PERIOD ENDED
31 DECEMBER 31 DECEMBER
1996 1996
---------------- --------------
POUNDS POUNDS
STERLING000 STERLING000
<S> <C> <C>
Profit attributable to shareholders in conformity with
UK GAAP .............................................. 87 333
Adjustments:
Goodwill amortisation ................................ (123) (154)
Deferred taxation .................................... 68 137
---------------- --------------
Profit attributable to shareholders in conformity with
US GAAP .............................................. 32 316
================ ==============
</TABLE>
F-63
<PAGE>
DSL GROUP LIMITED
NOTES (CONTINUED)
Approximate cumulative effect on shareholders' funds of differences
between UK and US GAAP:
<TABLE>
<CAPTION>
31 DECEMBER
1996
-------------
POUNDS
STERLING000
<S> <C>
Shareholders' funds in conformity with UK GAAP (1,242)
Adjustments:
Goodwill ...................................... 5,796
Deferred taxation ............................. 2
-------------
Shareholders' funds in conformity with US GAAP 4,556
=============
</TABLE>
F-64
<PAGE>
DSL HOLDINGS LIMITED
CONSOLIDATED FINANCIAL STATEMENTS
31 MARCH 1995 AND 1996
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF DSL HOLDINGS LIMITED
We have audited the accompanying consolidated balance sheets of DSL
Holdings Limited and subsidiaries as of 31 March 1995 and 1996, and the
related consolidated profit and loss accounts, consolidated statements of
total recognised gains and losses, reconciliations of movements in
shareholders' funds and consolidated cash flow statements for the years then
ended. These consolidated financial statements are the responsibility of the
management of DSL Holdings Limited. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with Auditing Standards generally
accepted in the United Kingdom and in the United States of America. Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of DSL
Holdings Limited and subsidiaries at 31 March 1995 and 1996, and the results
of their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles in the United
Kingdom.
Accounting principles generally accepted in the United Kingdom vary in
certain significant respects from accounting principles generally accepted in
the United States of America. Application of accounting principles generally
accepted in the United States would have affected profit attributable to
shareholders for each of the years in the two year period ended 31 March 1996
and shareholders' funds as of 31 March 1995 and 1996, to the extent
summarised in Note 24 to the consolidated financial statements.
KPMG
Chartered Accountants
Registered Auditors
London, England
29 July 1996
F-65
<PAGE>
DSL HOLDINGS LIMITED
CONSOLIDATED PROFIT AND LOSS ACCOUNTS
FOR THE YEARS ENDED 31 MARCH 1995 AND 1996
<TABLE>
<CAPTION>
NOTE 1995 1996
- ------------------------------------------------------- ------ ---------- ----------
POUNDS POUNDS
STERLING STERLING
000 000
<S> <C> <C> <C>
TURNOVER ............................................... 3 18,379 20,579
Cost of sales .......................................... (14,233) (14,606)
---------- ----------
GROSS PROFIT ........................................... 4,146 5,973
Administrative expenses (includes exchange gain of
pounds sterling55,673 (1995: loss of pounds
sterling184,000))...................................... 2 (3,454) (5,222)
---------- ----------
OPERATING PROFIT ....................................... 692 751
Income from interests in associated undertakings ...... 360 744
Other interest receivable and similar income .......... 24 76
Interest payable and similar charges ................... 7 (258) (276)
---------- ----------
PROFIT ON ORDINARY ACTIVITIES BEFORE TAXATION .......... 4 818 1,295
Tax on profit on ordinary activities ................... 8 (367) (678)
---------- ----------
PROFIT ON ORDINARY ACTIVITIES AFTER TAXATION .......... 451 617
Equity minority interests .............................. 16 (7) (5)
---------- ----------
PROFIT ATTRIBUTABLE TO SHAREHOLDERS' AND RETAINED
PROFIT FOR THE FINANCIAL YEAR.......................... 15 444 612
========== ==========
1995 1996
---------- ----------
POUNDS POUNDS
STERLING STERLING
000 000
RETAINED PROFIT FOR THE FINANCIAL YEAR
The company ............................................ (7) 46
Subsidiary undertakings ................................ 165 (60)
Associated undertakings ................................ 286 626
---------- ----------
444 612
========== ==========
</TABLE>
All results for the year and the prior year are attributable to continuing
activities.
F-66
<PAGE>
DSL HOLDINGS LIMITED
CONSOLIDATED BALANCE SHEETS
AT 31 MARCH 1995 AND 1996
<TABLE>
<CAPTION>
NOTE 1995 1996
------ ----------------- ----------------- -------
POUNDS POUNDS POUNDS POUNDS
STERLING STERLING STERLING STERLING
000 000 000 000
<S> <C> <C> <C> <C> <C>
FIXED ASSETS
Tangible assets .............................. 9 445 428
Investments .................................. 10 325 750
------- -------
770 1,178
CURRENT ASSETS
Stock ........................................ 11 --
Debtors ...................................... 11 4,171 3,776
Cash at bank and in hand ..................... 364 914
--------- ---------
4,546 4,690
CREDITORS: amounts falling due within one
year......................................... 12 (3,667) (3,696)
--------- ---------
NET CURRENT ASSETS ........................... 879 994
------- -------
TOTAL ASSETS LESS CURRENT LIABILITIES ........ 1,649 2,172
CREDITORS: amounts falling due after more
than one year................................ 13 (813) (611)
------- -------
NET ASSETS ................................... 836 1,561
======= =======
Represented by equity interests of:
CAPITAL AND RESERVES
Called up share capital ...................... 14 467 467
Share premium account ........................ 15 933 933
Profit and loss account ...................... 15 (572) 148
------- -------
EQUITY SHAREHOLDERS' FUNDS ................... 828 1,548
Equity minority interests .................... 16 8 13
------- -------
836 1,561
======= =======
</TABLE>
F-67
<PAGE>
DSL HOLDINGS LIMITED
CONSOLIDATED CASH FLOW STATEMENTS
FOR THE YEARS ENDED 31 MARCH 1995 AND 1996
<TABLE>
<CAPTION>
NOTE 1995 1996
------ ------------------ ---------------- -------
POUNDS POUNDS POUNDS POUNDS
STERLING STERLINGSTERLING STERLING
000 000 000 000
<S> <C> <C> <C> <C> <C>
NET CASH INFLOW FROM OPERATING ACTIVITIES .......... 21 1,491 1,485
RETURNS ON INVESTMENTS AND SERVICING OF FINANCE
Dividends received ................................. -- 200
Interest received .................................. 24 76
Interest paid ...................................... (255) (266)
Interest element of finance lease rental payments . (3) --
--------- -------
NET CASH INFLOW/(OUTFLOW) FROM RETURNS ON
INVESTMENTS AND SERVICING OF FINANCE ............... (234) 10
TAXATION
Overseas tax paid by UK group companies ............ (237) (93)
Overseas tax paid by overseas subsidiaries ........ (117) (349)
--------- -------
TAX PAID ............................................ (354) (442)
INVESTING ACTIVITIES
Purchase of tangible fixed assets .................. (313) (190)
Purchase of subsidiary undertaking (net of cash
and cash equivalents acquired)..................... (34) --
Sale of tangible fixed assets ...................... 46 --
--------- -------
NET CASH OUTFLOW FROM INVESTING ACTIVITIES ......... (301) (190)
------- -------
NET CASH INFLOW BEFORE FINANCING .................... 602 863
======= =======
FINANCING
Capital element of finance lease rental payments .. (16) --
Loan repaid to parent company ...................... (1,028) (157)
New secured loan from parent company ............... 960 --
--------- -------
NET CASH OUTFLOW FROM FINANCING ..................... (84) (157)
INCREASE IN CASH AND CASH EQUIVALENTS ............... 22 (518) (706)
------- -------
(602) (863)
======= =======
</TABLE>
F-68
<PAGE>
DSL HOLDINGS LIMITED
CONSOLIDATED STATEMENTS OF TOTAL RECOGNISED GAINS AND LOSSES
FOR THE YEARS ENDED 31 MARCH 1995 AND 1996
<TABLE>
<CAPTION>
1995 1996
------ ------
POUNDS POUNDS
STERLINGSTERLING
000 000
<S> <C> <C>
PROFIT FOR THE FINANCIAL YEAR ..... 444 612
Exchange adjustments ............... (16) 57
Gain on disposal of Brooksight Pty -- 11
------ ------
TOTAL GAINS AND LOSSES RECOGNIZED . 428 680
====== ======
</TABLE>
RECONCILIATIONS OF MOVEMENTS IN SHAREHOLDERS' FUNDS
FOR THE YEARS ENDED 31 MARCH 1995 AND 1996
<TABLE>
<CAPTION>
1995 1996
------ ------
POUNDS POUNDS
STERLINGSTERLING
000 000
<S> <C> <C>
PROFIT FOR THE FINANCIAL YEAR ...... 444 612
Exchange adjustments ................ (16) 57
Goodwill written back ............... 44 40
Gain on disposal of Brooksight Pty . -- 11
------ ------
NET ADDITION TO SHAREHOLDERS' FUNDS 472 720
Opening shareholders' funds ......... 356 828
------ ------
CLOSING SHAREHOLDERS' FUNDS ......... 828 1,548
====== ======
</TABLE>
F-69
<PAGE>
DSL HOLDINGS LIMITED
NOTES
(forming part of the financial statements)
1 ACCOUNTING POLICIES
The following accounting policies have been applied consistently in
dealing with items which are considered material in relation to the group's
financial statements.
BASIS OF PREPARATION
The financial statements have been prepared in accordance with applicable
accounting standards and under the historical cost accounting rules.
BASIS OF CONSOLIDATION
The group's financial statements consolidate the results of DSL Holdings
Limited and all its subsidiary undertakings. In respect of associated
undertakings, the group includes its share of post acquisition profits and
losses in the consolidated profit and loss account and its share of post
acquisition retained profits or accumulated deficits in the consolidated
balance sheet.
The consolidated financial statements are based on the reported results of
subsidiary undertakings and associated undertakings, which are based on the
financial statements of these companies whose year ends are coterminous with
or end either three or six months before those of the parent company, and on
management accounts where appropriate for the period from 1 October to 31
March 1996.
For the year ended 31 March 1995 the results of the associate Jardine
Securicor Gurkha Services Limited were consolidated for the 26 month period
ended 31 March 1995. The first 14 months of results were immaterial to the
results of the group. In addition the results of the subsidiary Defence
Systems Colombia SA were consolidated for the 15 months ended 31 March 1995.
The first 3 months of results were immaterial to the results of the group.
Unless otherwise stated, the acquisition method of accounting has been
adopted. Under this method, the results of subsidiary and associated
undertakings acquired or disposed of in the year are included in the
consolidated profit and loss account from the date of acquisition or up to
the date of disposal. Goodwill arising on consolidation (representing the
excess of the fair value of the consideration given over the fair value of
the separable net assets acquired) is written off against reserves on
acquisition. Any excess of the aggregate of the fair value of the separable
net assets acquired over the fair value of the consideration given (negative
goodwill) is credited direct to reserves.
FIXED ASSETS AND DEPRECIATION
Depreciation is provided by the group to write off the cost less the
estimated residual value of tangible fixed assets by equal instalments over
their estimated useful economic lives as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
Freehold land and buildings -- not depreciated
Short leasehold land and buildings -- term of lease
Plant and machinery -- 20%-25% per annum
Fixtures and fittings -- 20% per annum
</TABLE>
FOREIGN CURRENCIES
Transactions in foreign currencies are recorded using the rate of exchange
ruling at the date of the transaction. Monetary assets and liabilities
denominated in foreign currencies are translated using the rate of exchange
ruling at the balance sheet date and the gains or losses on translation are
included in the profit and loss account.
F-70
<PAGE>
DSL HOLDINGS LIMITED
NOTES (CONTINUED)
For consolidation purposes, the assets and liabilities of overseas
subsidiary undertakings and associated undertakings are translated at the
closing exchange rates and the profit and loss accounts are translated at the
average exchange rates. Exchange differences arising on these translations
are taken to reserves.
Subsidiaries operating in hyper-inflationary economies adjust the local
currency statements to reflect current price levels before translation.
LEASES
Where the group enters into a lease which entails taking substantially all
the risks and rewards of ownership of an asset, the lease is treated as a
'finance lease'. The asset is recorded in the balance sheet as a tangible
fixed asset and is depreciated over its estimated useful life or the term of
the lease, whichever is shorter. Future instalments under such leases, net of
finance charges, are included within creditors. Rentals payable are
apportioned between the finance element, which is charged to the profit and
loss account, and the capital element which reduces the outstanding
obligation for future instalments.
All other leases are accounted for as 'operating leases' and the rental
charges are charged to the profit and loss account on a straight line basis
over the life of the lease.
PENSIONS
The group operates a defined contribution pension scheme. The assets of
the scheme are held separately from those of the group in an independently
administered fund. The amount charged against profits represents the
contributions payable to the scheme in respect of the accounting period.
TURNOVER
Turnover represents the amounts (excluding value added tax) derived from
the provision of goods and services to third party customers during the year.
STOCK
Consumable stock is stated at the lower of cost or net realisable value.
TAXATION
The charge for taxation is based upon the profit for the year and takes
into account deferred taxation on timing differences. Provision is made for
deferred taxation if there is reasonable evidence that such tax will be
payable in the foreseeable future.
2 RECLASSIFICATION OF EXPENSES
Expenses have been reclassified such that administrative expenses contains
the total administration expenses for the whole group.
F-71
<PAGE>
DSL HOLDINGS LIMITED
NOTES (CONTINUED)
3 SEGMENTAL INFORMATION
The table below sets out information on turnover for each of the group's
geographic areas of operation.
<TABLE>
<CAPTION>
1995 1996
-------- -------
POUNDS POUNDS
STERLINGSTERLING
000 000
<S> <C> <C>
United Kingdom 1,086 1,097
Rest of Europe 8,264 6,665
Asia ........... 102 331
Australasia ... 199 --
Africa ......... 6,259 9,461
Americas ....... 1,969 2,497
Middle East ... 500 528
-------- -------
18,379 20,579
======== =======
</TABLE>
In the opinion of the directors there is one class of business.
4 PROFIT ON ORDINARY ACTIVITIES BEFORE TAXATION
<TABLE>
<CAPTION>
1995 1996
-------- --------
POUNDS POUNDS
STERLING STERLING
000 000
<S> <C> <C>
PROFIT ON ORDINARY ACTIVITIES BEFORE TAXATION IS STATED
AFTER CHARGING
Auditors' remuneration:
Audit........................................................... 45 69
Other services.................................................. 45 29
Depreciation of fixed assets:
Owned .......................................................... 210 263
Leased ......................................................... 2 --
Exchange losses ................................................. 184 --
Hire of plant and machinery--rentals payable under operating
leases.......................................................... 118 122
Hire of other assets--operating leases .......................... 324 368
Exceptional costs--costs incurred in connection with the
termination of employment of directors of subsidiary companies -- 325
-------- --------
AFTER CREDITING
Exchange gains................................................... -- 56
-------- --------
</TABLE>
The total amount charged to revenue for the hire of plant and machinery
amounted to pounds sterling122,297 (1995: pounds sterling123,295). For the
year ended 31 March 1995 this comprises rentals payable under operating
leases and depreciation on plant and machinery held under finance leases
together with the related finance charges but for the year ended 31 March
1996 it comprises rentals payable under operating leases only.
During the year pounds sterling325,116 was incurred in connection with the
termination of the contracts of employment of four directors of Defence
Systems Limited, one of whom was also a director of US Defense Systems Inc.
F-72
<PAGE>
DSL HOLDINGS LIMITED
NOTES (CONTINUED)
5 REMUNERATION OF DIRECTORS AND DIRECTORS' INTERESTS
<TABLE>
<CAPTION>
1995 1996
------ ------
POUNDS POUNDS
STERLING STERLING
000 000
<S> <C> <C>
Directors' emoluments ......................................... 224 272
Amounts paid to third parties in respect of directors'
services...................................................... 22 26
------ ------
246 298
====== ======
</TABLE>
Benefits in kind include employers' pension contributions, health
insurance, personal tax advice costs and car benefits.
The emoluments, excluding pension contributions, of the chairman were:
<TABLE>
<CAPTION>
1995 1996
------- -------
POUNDS POUNDS
STERLING STERLING
<S> <C> <C> <C>
DG Lewis: from 1 April 1994--3 June 1994 .. 1,818 --
JM May: from 6 July 1994--31 March 1996 . 8,182 10,000
</TABLE>
Amounts for the services of DG Lewis and JM May are payable to a third
party.
The emoluments, excluding pension contributions, of the highest paid
director were pounds sterling142,456 (1995: pounds sterling111,332).
The emoluments, excluding pension contributions, of the directors
(including the chairman and highest paid director) were within the following
ranges:
<TABLE>
<CAPTION>
NUMBER OF
DIRECTORS
-----------------
1995 1996
-------- --------
<S> <C> <C>
pounds sterling0 -- pounds sterling5,000 ........ 1 --
pounds sterling5,001 -- pounds sterling10,000 ....... 1 1
pounds sterling10,001 -- pounds sterling15,000 ....... 1 --
pounds sterling15,001 -- pounds sterling20,000 ....... -- 1
pounds sterling80,001 -- pounds sterling85,000 ....... 1 --
pounds sterling110,001 -- pounds sterling115,000 ...... 1 1
pounds sterling140,001 -- pounds sterling145,000 ...... -- 1
-------- --------
</TABLE>
F-73
<PAGE>
DSL HOLDINGS LIMITED
NOTES (CONTINUED)
SHARES
The interests of the directors of DSL Holdings Limited in office as at 31
March 1996 (including family interests) in the shares of group companies are
as follows:
<TABLE>
<CAPTION>
INTEREST INTEREST AT
AT END BEGINNING OF
COMPANY CLASS OF SHARE OF YEAR YEAR
--------------------------- ----------------------- ---------- --------------
<S> <C> <C> <C> <C>
AGA Morrison DSL Holdings Limited pounds sterling1 ordinary 1 1
shares
AGA Morrison Defence Systems Colombia SA P$1,000 ordinary shares 1,900* 1,900*
RN Bethell Defence Systems Colombia SA P$1,000 ordinary shares 1,900* 1,900*
JM May Hambros PLC 20p ordinary shares 3,589 3,555
JM May Hambro Countrywide PLC 5p ordinary shares 77,858 77,858
JR Hustler Hambros PLC 20p ordinary shares 1,000 1,000
JR Hustler Hambros PLC pounds sterling1 7.5% 2,000 2,000
Cumulative
Redeemable Preference
shares
JR Hustler Hambro Insurance pounds sterling1 ordinary 2,000 2,000
Services PLC shares
</TABLE>
- ------------
* this represents 1% of the company's total share capital denominated in
Colombian pesos and is held in trust on behalf of DSL Holdings Limited.
SHARE OPTIONS
According to the register of directors' interests, no rights to subscribe
for shares in group companies were held by or granted to any of the directors
or their immediate families, or exercised by them, except as indicated below.
(i) To subscribe for 20p ordinary shares of Hambros PLC:
HAMBROS SENIOR EXECUTIVE SHARE OPTION SCHEME 1984
Options exercisable at prices between 298p and 333p per share between 1990
and 2004.
<TABLE>
<CAPTION>
AT 1 APRIL 1995 GRANTED DURING THE YEAR AT 31 MARCH 1996
--------------- ----------------------- ----------------
<S> <C> <C> <C>
JM MAY 95,000 -- 95,000
</TABLE>
HAMBROS BANK "SAVE AS YOU EARN" SHARE OPTION SCHEME 1983
Options exercisable at 226p per share between 2001 and 2002.
<TABLE>
<CAPTION>
AT 1 APRIL 1995 GRANTED DURING THE YEAR AT 31 MARCH 1996
--------------- ----------------------- ----------------
<S> <C> <C> <C>
JM MAY 8,628 -- 8,628
</TABLE>
(ii) To acquire pounds sterling1 ordinary shares in DSL Holdings Limited:
At 1 April 1994 AGA Morrison had an option to purchase 73,332 pounds
sterling1 ordinary shares in DSL Holdings Limited, exercisable on or before 4
June 1996 from Hambro Group Investments Limited at a minimum acquisition
price of pounds sterling3.86 per share.
This option has been extended such that it was still exercisable at the
date of signing these financial statements.
F-74
<PAGE>
DSL HOLDINGS LIMITED
NOTES (CONTINUED)
On 3 April 1995 RN Bethell was granted an option to acquire 25,000 pounds
sterling1 ordinary shares in DSL Holdings Limited from Hambro Group
Investments Limited exercisable between April 1998 and 2005 at an acquisition
price of pounds sterling4.50 per share.
OTHER INTERESTS
At the end of the year AGA Morrison had an amount outstanding to a
subsidiary company of pounds sterling7,732 (1995: pounds sterling2,332).
6 STAFF NUMBERS AND COSTS
The average number of persons employed by the group (including directors)
during the year, analysed by category, was as follows:
<TABLE>
<CAPTION>
NUMBER OF
EMPLOYEES
---------------
1995 1996
------- -------
<S> <C> <C>
Security services ............. 1,004 1,159
Professional and logistics ... 480 437
Management and administration 48 63
Operatives .................... 22 26
------- -------
1,554 1,685
======= =======
</TABLE>
The aggregate payroll costs of these persons were as follows:
<TABLE>
<CAPTION>
1995 1996
-------- --------
POUNDS POUNDS
STERLING STERLING
000 000
<S> <C> <C>
Wages and salaries ................ 11,381 11,805
Social security costs ............. 177 164
Other pension costs (see note 20) 97 165
-------- --------
11,655 12,134
======== ========
</TABLE>
7 INTEREST PAYABLE AND SIMILAR CHARGES
<TABLE>
<CAPTION>
1995 1996
------ ------
POUNDS POUNDS
STERLINGSTERLING
000 000
<S> <C> <C>
On bank loans, overdrafts and other loans wholly repayable
within five years........................................... 255 276
Finance charges payable in respect of finance leases and
hire purchase contracts..................................... 3 --
------ ------
258 276
====== ======
</TABLE>
F-75
<PAGE>
DSL HOLDINGS LIMITED
NOTES (CONTINUED)
8 TAXATION
<TABLE>
<CAPTION>
1995 1996
------ ------
POUNDS POUNDS
STERLINGSTERLING
000 000
<S> <C> <C>
UK corporation (tax loss)/tax at 33% (1995: 33%) on the
profit for the year on ordinary activities................... 112 (55)
UK corporation (tax loss)/tax--prior year .................... 8 (13)
Overseas taxation--current year .............................. 173 544
Overseas taxation--prior year ................................ -- 162
Tax attributable to the share of profits of the associated
undertakings--current year................................... 67 119
Tax attributable to the share of profits of the associated
undertakings--prior year..................................... 7 --
Double taxation relief ....................................... -- (79)
------ ------
367 678
====== ======
</TABLE>
UK corporation tax losses are surrendered to other UK group companies.
No deferred tax provision has been made for the UK corporation tax which
would become payable if further dividends were declared by associated
companies from accumulated reserves.
No deferred tax is provided in respect of the accumulated reserves of
overseas subsidiary companies as there is no current intention to remit
profits to the UK.
F-76
<PAGE>
DSL HOLDINGS LIMITED
NOTES (CONTINUED)
9 TANGIBLE FIXED ASSETS
<TABLE>
<CAPTION>
FIXTURES
LAND AND PLANT AND AND
BUILDINGS MACHINERY FITTINGS TOTAL
----------- ----------- ---------- -------
POUNDS POUNDS POUNDS POUNDS
STERLING STERLING STERLING STERLING
000 000 000 000
<S> <C> <C> <C> <C>
COST
At 1 April 1994...... 87 334 272 693
Currency
translation......... -- (21) (4) (25)
Additions............ 17 270 79 366
Disposals............ -- (48) (15) (63)
Reclassification .... (34) 34 -- --
----------- ----------- ---------- -------
At 31 March 1995 .... 70 569 332 971
Currency
translation......... -- (8) 3 (5)
Additions............ -- 189 57 246
Disposals............ -- (71) (11) (82)
----------- ----------- ---------- -------
At 31 March 1996 .... 70 679 381 1,130
----------- ----------- ---------- -------
DEPRECIATION
At 1 April 1994...... 50 149 146 345
Currency
translation......... -- (5) (9) (14)
Charge for year...... 8 151 53 212
On disposals......... -- (11) (6) (17)
Reclassification .... (14) 14 -- --
----------- ----------- ---------- -------
At 31 March 1995 .... 44 298 184 526
Currency
translation......... -- (8) 3 (5)
Charge for year...... 3 187 73 263
On disposals......... -- (71) (11) (82)
----------- ----------- ---------- -------
At 31 March 1996 .... 47 406 249 702
----------- ----------- ---------- -------
NET BOOK VALUE
At 31 March 1995 .... 26 271 148 445
=========== =========== ========== =======
AT 31 MARCH 1996 ... 23 273 132 428
=========== =========== ========== =======
</TABLE>
F-77
<PAGE>
DSL HOLDINGS LIMITED
NOTES (CONTINUED)
Analysis of net book value of land and buildings
<TABLE>
<CAPTION>
1995 1996
------ ------
POUNDS POUNDS
STERLINGSTERLING
000 000
<S> <C> <C>
Freehold ........ 13 13
Short leasehold 13 10
------ ------
26 23
====== ======
</TABLE>
Included in the total net book value of plant and machinery is pounds
sterlingnil (1995: pounds sterlingnil) in respect of assets held under
finance leases and similar hire purchase contracts. Depreciation for the year
on these assets was pounds sterlingnil (1995: pounds sterling2,295).
10 FIXED ASSET INVESTMENTS
<TABLE>
<CAPTION>
TOTAL
GORANDEL JARDINE SECURICOR GROUP INTERESTS
TRADING GURKHA SERVICES IN ASSOCIATED
LIMITED LIMITED UNDERTAKINGS
---------- ----------------- ---------------
POUNDS
STERLING POUNDS STERLING POUNDS STERLING
000 000 000
<S> <C> <C> <C>
At 1 April 1994 .............. 39 -- 39
Retained profits less losses 207 79 286
---------- ----------------- ---------------
At 31 March 1995.............. 246 79 325
Retained profits less losses . 319 306 625
Less: Dividends received .... -- (200) (200)
---------- ----------------- ---------------
At 31 March 1996 ............. 565 185 750
========== ================= ===============
</TABLE>
The companies which are material to the results of DSL Holdings Limited
are as follows:
<TABLE>
<CAPTION>
PRINCIPAL % SHARES COUNTRY OF
ACTIVITY HELD INCORPORATION
--------------------------- ------------ -----------------
<S> <C> <C> <C>
SUBSIDIARY UNDERTAKINGS
Defence Systems International Limited* ....Security Services 100% UK(1)
Defence Systems Limited ....................Security Services 100% UK(1)
Brooksight Limited* ........................Asset Recovery Services 100% UK(1)
US Defense Systems Inc* ....................Security Services 100% USA
DSL Security (Asia) Private Limited .......Security Services 100% Singapore
Defence Systems Colombia SA** ..............Security Services 97.5% Colombia
DSL (Overseas) Limited .....................Holding Company 100% Cyprus
Defence Systems (Jersey) Limited ...........Security Services 100% UK
ASSOCIATED UNDERTAKINGS
Gorandel Trading Limited ...................Security Services 50% Cyprus
Jardine Securicor Gurkha Services Limited .Security Services 20% Hong Kong
</TABLE>
- ------------
(1) Registered in England and Wales.
* Owned directly by DSL Holdings Limited.
** 94.5% of the shares held are owned directly by DSL Holdings Limited and
3% are held in trust on its behalf.
F-78
<PAGE>
DSL HOLDINGS LIMITED
NOTES (CONTINUED)
11 DEBTORS
<TABLE>
<CAPTION>
1995 1996
------- -------
POUNDS POUNDS
STERLINGSTERLING
000 000
<S> <C> <C>
AMOUNTS FALLING DUE WITHIN ONE YEAR
Trade debtors ...................... 3,140 3,018
Group relief recoverable ........... 258 105
Other debtors ...................... 564 418
Prepayments and accrued income .... 209 235
------- -------
4,171 3,776
======= =======
</TABLE>
12 CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR
<TABLE>
<CAPTION>
1995 1996
------- -------
POUNDS POUNDS
STERLINGSTERLING
000 000
<S> <C> <C>
Bank loans and overdrafts (see note 22).................. 1,196 973
Trade creditors ......................................... 782 206
Amounts owed to parent and fellow subsidiary
undertakings............................................ 160 268
Other creditors including taxation and social security:
Corporation tax ........................................ 38 --
Other taxes and social security ........................ 74 6
Other creditors ........................................ 816 1,827
Accruals and deferred income ............................ 601 416
------- -------
3,667 3,696
======= =======
</TABLE>
13 CREDITORS: AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR
<TABLE>
<CAPTION>
1995 1996
------ ------
POUNDS POUNDS
STERLINGSTERLING
000 000
<S> <C> <C>
Amounts owed to parent undertaking
(repayable within 2-4 years) ..... 813 611
====== ======
</TABLE>
All amounts are repayable by instalments within four years.
14 CALLED UP SHARE CAPITAL
<TABLE>
<CAPTION>
1995 1996
------------------- -------------------
POUNDS POUNDS
STERLING STERLING
NO. 000 NO. 000
----------- ------- ----------- -------
<S> <C> <C> <C> <C>
AUTHORISED
Ordinary shares of pounds
sterling1 each ................... 1,000,000 1,000 1,000,000 1,000
=========== ======= =========== =======
ALLOTTED, CALLED UP AND FULLY PAID
Ordinary shares of pounds
sterling1 each ................... 466,668 467 466,668 467
=========== ======= =========== =======
</TABLE>
F-79
<PAGE>
DSL HOLDINGS LIMITED
NOTES (CONTINUED)
15 SHARE PREMIUM AND RESERVES
<TABLE>
<CAPTION>
SHARE PROFIT
PREMIUM AND LOSS
ACCOUNT ACCOUNT
--------- ----------
POUNDS POUNDS
STERLING STERLING
000 000
<S> <C> <C>
At 1 April 1994 ........................ 933 (1,044)
Retained profit for year ............... -- 444
Goodwill written back .................. -- 44
Exchange adjustments ................... -- (16)
--------- ----------
At 31 March 1995 ....................... 933 (572)
Retained profit for year ............... -- 612
Gain on the disposal of Brooksight Pty -- 11
Goodwill written back .................. -- 40
Exchange adjustments ................... -- 57
--------- ----------
At 31 March 1996 ....................... 933 148
========= ==========
</TABLE>
The cumulative amount of goodwill resulting from acquisitions in the
current year and earlier financial years which has been written off is pounds
sterling1,833,000 (1995: pounds sterling1,873,000).
16 MINORITY INTERESTS
<TABLE>
<CAPTION>
1995 1996
------ ------
POUNDS POUNDS
STERLINGSTERLING
000 000
<S> <C> <C>
At beginning of year .... 1 8
Retained profit for year 7 5
------ ------
At end of year ........... 8 13
====== ======
</TABLE>
17 CONTINGENT LIABILITIES
A cross composite guarantee has existed since 16 February 1995 between DSL
Holdings Limited, Defence Systems Limited, DSL Security (Asia) Private
Limited and Brooksight Limited.
18 COMMITMENTS
(i) There were no authorised or contracted capital commitments unprovided
for at 31 March 1996 (1995: pounds sterlingnil).
(ii) Annual commitments under non-cancellable operating leases are as
follows:
<TABLE>
<CAPTION>
1995 1996
----------------------- -----------------------
LAND AND LAND AND
BUILDINGS OTHER BUILDINGS OTHER
------------- --------- ------------- ---------
POUNDS POUNDS POUNDS POUNDS
STERLING STERLING STERLING STERLING
000 000 000 000
<S> <C> <C> <C> <C>
Operating leases which expire:
Within one year .......................... 25 8 -- 45
In the second to fifth years inclusive ... -- 80 -- 41
Over five years .......................... 150 -- 154 --
------------- --------- ------------- ---------
175 88 154 86
============= ========= ============= =========
</TABLE>
F-80
<PAGE>
DSL HOLDINGS LIMITED
NOTES (CONTINUED)
19 GUARANTEES
There were liabilities of pounds sterling67,242 under documentary credit
guarantees outstanding at 31 March 1996.
20 PENSION SCHEME
The group operates a defined contribution pension scheme. The assets of
the scheme are held separately from those of the group in an independently
administered fund. The pension charge for the period represents the
contributions payable by the group to the scheme and amounted to pounds
sterling164,509 (1995: pounds sterling96,636).
21 RECONCILIATION OF OPERATING PROFIT TO NET CASH INFLOW FROM OPERATING
ACTIVITIES
<TABLE>
<CAPTION>
1995 1996
------- ------
POUNDS POUNDS
STERLINGSTERLING
000 000
<S> <C> <C>
Operating profit .......................... 692 751
Depreciation charge ....................... 212 263
Decrease in stock ......................... 27 11
Decrease in debtors ....................... 128 332
Increase in creditors ..................... 446 141
Write back of goodwill .................... 44 --
Effect of exchange rates .................. (58) (13)
------- ------
Net cash inflow from operating activities 1,491 1,485
======= ======
</TABLE>
22 ANALYSIS OF CHANGES IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
CASH OVERDRAFT NET
------ ----------- ---------
POUNDS POUNDS POUNDS
STERLING STERLING STERLING
000 000 000
<S> <C> <C> <C>
Balance at 1 April 1994 ......................... 461 (1,800) (1,339)
Net cash (outflow)/inflow before adjustments for
foreign exchange rate changes................... (62) 580 518
Effect of foreign exchange rate changes ........ (35) 24 (11)
------ ----------- ---------
Balance at 1 April 1995 ......................... 364 (1,196) (832)
Net cash inflow before adjustments for
foreign exchange rate changes................... 323 383 706
Effect of foreign exchange rate changes ........ 227 (160) 67
------ ----------- ---------
Balance at 31 March 1996 ........................ 914 (973) (59)
====== =========== =========
</TABLE>
23 ULTIMATE PARENT COMPANY AND PARENT UNDERTAKING OF LARGER GROUP
The company is an indirect subsidiary undertaking of Hambros PLC which is
the ultimate parent company, registered in England and Wales.
The only group in which the results of the company are consolidated is
that headed by Hambros PLC. The consolidated financial statements of the
group are available to the public and may be obtained from Hambros PLC, 41
Tower Hill, London, EC3 4HA.
24 SUMMARY OF SIGNIFICANT DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED
STATES OF AMERICA GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
The group's consolidated financial statements are prepared in conformity
with generally accepted accounting principles applicable in the United
Kingdom (UK GAAP), which differ in certain significant
F-81
<PAGE>
DSL HOLDINGS LIMITED
NOTES (CONTINUED)
respects from those applicable in the United States of America (US GAAP).
These differences, together with the approximate effects of the adjustments
on profit attributable to shareholders and shareholders' funds, relate
principally to the items set out below:
(a) Goodwill
Under UK GAAP, goodwill arising from acquisitions is written off against
shareholders' funds. Upon the subsequent disposal of a business, goodwill
previously written off is reinstated and considered in the calculation of the
gain or loss on disposal. Under US GAAP, goodwill is capitalised and
amortised over its estimated useful life. For the purpose of calculating the
amortisation of goodwill a life of 20 years has been assumed. Upon the
subsequent disposal of a business, unamortised goodwill is considered in the
calculation of the gain or loss on disposal.
(b) Deferred taxation
UK GAAP requires that no provision for deferred taxation should be made if
there is reasonable evidence that such taxation will not be payable in the
foreseeable future. Under US GAAP, deferred taxation is recognised under the
full liability method which permits deferred tax assets to be recognised if
their realisation is considered more likely than not.
(c) Cash flows
The principal difference between UK GAAP and US GAAP is in respect of
classification. Under UK GAAP, the group presents its cash flows for
operating activities, returns on investments and servicing of finance,
taxation, investing activities, and financing activities. US GAAP requires
only three categories of cash flow activities which are operating, investing
and financing. Cash flows arising from taxation and returns on investments
and servicing of finance under UK GAAP would be included as operating
activities under US GAAP. In addition, under UK GAAP, cash and cash
equivalents include short term borrowings which under US GAAP would be
presented as financing activities.
Approximate effect on profit attributable to shareholders of differences
between UK and US GAAP:
<TABLE>
<CAPTION>
1995 1996
------ ------
POUNDS POUNDS
STERLINGSTERLING
000 000
<S> <C> <C>
Profit attributable to shareholders in conformity with
UK GAAP ................................................ 444 612
Adjustments:
Goodwill amortisation .................................. (94) (82)
Deferred taxation ...................................... (38) (76)
------ ------
Profit attributable to shareholders in conformity with
US GAAP................................................. 312 454
====== ======
</TABLE>
Approximate cumulative effect on shareholders' funds of differences
between UK and US GAAP:
<TABLE>
<CAPTION>
1995 1996
------- -------
POUNDS POUNDS
STERLING STERLING
000 000
<S> <C> <C>
Shareholders' funds in conformity with UK GAAP 828 1,548
Adjustments:
Goodwill ...................................... 1,424 1,302
Deferred taxation ............................. (59) (135)
------- -------
Shareholders' funds in conformity with US GAAP 2,193 2,715
======= =======
</TABLE>
F-82
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
(PICTURE OF GLOBAL MAP WITH THE
COMPANY'S LOCATIONS HIGHLIGHTED)
<PAGE>
NO DEALER, SALES PERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THIS OFFERING
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER
CONTAINED HEREIN, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY
UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY THE SHARES OF COMMON STOCK IN ANY
JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION IN SUCH JURISDICTION OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY
SINCE THE DATE HEREOF.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Prospectus Summary.......................... 1
Risk Factors................................ 5
Significant Developments.................... 9
Use of Proceeds............................. 11
Price Range of Common Stock and Dividend
Policy..................................... 11
Capitalization.............................. 12
Selected Consolidated Historical,
Supplemental and Pro Forma Financial Data . 13
Unaudited Pro Forma Consolidated Financial
Statements ................................ 15
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................. 23
Industry Overview........................... 30
Business.................................... 32
Management.................................. 43
Principal and Selling Stockholders.......... 50
Certain Transactions........................ 52
Description of Capital Stock................ 53
Description of Certain Indebtedness ........ 55
Shares Eligible for Future Sale............. 55
Underwriting................................ 57
Legal Matters............................... 58
Experts..................................... 59
Additional Information...................... 59
Index to Financial Statements............... F-1
</TABLE>
[LOGO]
4,000,000 Shares
Common Stock
PROSPECTUS
July 25, 1997
DILLON, READ & CO. INC.
EQUITABLE SECURITIES CORPORATION
STEPHENS INC.
