<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED March 31,1998, or
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____ TO ____ .
COMMISSION FILE NUMBER 0-18863
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ARMOR HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 59-3392443
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
13386 INTERNATIONAL PARKWAY
JACKSONVILLE, FLORIDA 32218
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (904) 741-5400
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes X No
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APPLICABLE ONLY TO CORPORATE ISSUERS
The number of shares outstanding of the registrant's Common Stock as of May 15,
1998 is 16,266,946.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
THREE MONTH PERIODS ENDED MARCH 31, 1998 AND MARCH 27, 1997
The accompanying unaudited condensed consolidated financial statements of Armor
Holdings, Inc. (the "Company") and its direct and indirect wholly owned
subsidiaries include all adjustments (consisting only of normal recurring
accruals and the elimination of all intercompany items and transactions) which
management considers necessary for a fair presentation of operating results as
of March 31, 1998 and for the three month periods ended March 31, 1998 and
March 29, 1997.
These condensed consolidated financial statements should be read in conjunction
with the financial statements included in the Company's Annual Report on Form
10-K for the year ended December 27, 1997.
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ARMOR HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
MARCH 31, DECEMBER 27,
1998 1997
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(UNAUDITED) *
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $17,291 $ 19,300
Accounts receivable (net of allowance for
doubtful accounts of $651 and $845) 17,066 15,752
Inventories 5,849 5,731
Prepaid expenses and other current assets 4,159 1,816
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Total current assets 44,365 42,599
PROPERTY, PLANT AND EQUIPMENT, net 10,908 10,041
GOODWILL (net of accumulated amortization
of $802 and $659) 14,541 13,701
REORGANIZATION VALUE IN EXCESS
OF AMOUNTS ALLOCABLE TO
IDENTIFIABLE ASSETS (net of accumulated
amortization of $769 and $757) 3,306 3,318
PATENTS AND TRADEMARKS (net of
accumulated amortization of $476 and $403) 3,896 3,978
OTHER ASSETS 566 1,850
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TOTAL ASSETS $77,582 $ 75,487
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* Condensed from audited financial statements.
See notes to condensed consolidated financial statements.
<PAGE>
ARMOR HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
MARCH 31, DECEMBER 27,
1998 1997
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(UNAUDITED) *
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt and
capitalized lease obligations $ 188 $ 190
Accounts payable, accrued expenses and other
current liabilities 10,601 10,475
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Total current liabilities 10,789 10,665
MINORITY INTEREST 83 213
LONG-TERM DEBT AND CAPITALIZED LEASE
OBLIGATIONS, less current portion 50 11
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Total liabilities 10,922 10,889
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 5,000,000
shares authorized; 0 shares issued
and outstanding -- --
Common stock, $.01 par value; 50,000,000
shares authorized; 16,042,259 and
16,023,740 issued and outstanding 160 160
Additional paid-in capital 61,683 61,496
Foreign currency translation adjustment (252) (353)
Retained earnings 6,597 4,823
Treasury stock (1,528) (1,528)
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Total stockholders' equity 66,660 64,598
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $77,582 $75,487
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* Condensed from audited financial statements.
See notes to condensed consolidated financial statements.
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ARMOR HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
MARCH 31, MARCH 29,
1998 1997
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REVENUES:
Manufactured products $ 7,835 $ 6,422
Integrated security services 11,800 8,328
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Total Revenues 19,635 14,750
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COSTS AND EXPENSES:
Cost of sales 13,601 10,453
Operating expenses 3,303 2,977
Depreciation and amortization 379 286
Equity in earnings of investees (155) (272)
Interest (income) expense, net (242) 69
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INCOME BEFORE INCOME TAXES 2,749 1,237
INCOME TAXES 975 554
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NET INCOME 1,774 683
DIVIDENDS ON PREFERENCE SHARES -- 143
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NET INCOME APPLICABLE TO COMMON
SHAREHOLDERS $ 1,774 $ 540
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BASIC EARNINGS PER SHARE $ 0.11 $ 0.05
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DILUTED EARNINGS PER SHARE $ 0.10 $ 0.04
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WEIGHTED AVERAGE SHARES - BASIC 16,037 11,827
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WEIGHTED AVERAGE SHARES - DILUTED 17,154 12,797
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See notes to condensed consolidated financial statements.
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ARMOR HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
FOR THE THREE MONTHS ENDED
MARCH 31, MARCH 29,
1998 1997
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OPERATING ACTIVITIES:
Net Income $ 1,774 $ 540
Adjustments to reconcile net income to cash
used in operating activities;
Depreciation and amortization 435 421
Deferred income taxes -- 33
Earnings from investees (155) (272)
Increase in accounts receivable (649) (2,242)
Increase in inventories (101) (736)
(Increase) decrease in prepaid
expenses and other assets (882) 429
Decrease in accounts payable,
accrued liabilities and other
current liabilities (419) (1,014)
Decrease in minority interest (130) --
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Net cash used in operating activities (127) (2,841)
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INVESTING ACTIVITIES:
Purchase of property and equipment (1,073) (2,038)
Purchase of business, net of assets acquired (975) --
Dividends received from associated companies 77 47
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Net cash used in investing activities (1,971) (1,991)
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FINANCING ACTIVITIES:
Proceeds from the exercise of stock options -- 160
Net borrowings under line of credit -- 356
Net repayments of long-term debt (12) (992)
Net proceeds from issuance of other debt -- 1,375
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Net cash (used in) provided by financing activities (12) 899
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Net effect of translation of foreign currencies 101 23
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NET DECREASE IN CASH AND CASH EQUIVALENTS (2,009) (3,910)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 19,300 8,045
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CASH AND CASH EQUIVALENTS, END OF PERIOD $ 17,291 $ 4,135
========= ========
See notes to condensed consolidated financial statements.
<PAGE>
ARMOR HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements include the
accounts of Armor Holdings, Inc. (the "Company") and its direct and indirect
wholly owned subsidiaries. The financial statements have been prepared in
accordance with the instructions to Form 10-Q. Accordingly, they do not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. All adjustments (consisting only
of normal recurring accruals and the elimination of all intercompany items and
transactions) which management considers necessary for a fair representation of
operating results, have been included in the statements. Operating results for
the quarter are not necessarily indicative of the results that may be expected
for the year ending December 31, 1998.
These condensed consolidated financial statements should be read in
conjunction with the financial statements, and notes thereto, included in the
Company's Annual Report on Form 10-K for the year ended December 27, 1997.
Beginning in fiscal 1998, the Company's fiscal year ends on December 31
and quarters end of the last day of every third month. The Company previously
had a 52 or 53 week year ending on the Saturday closest to the last day of
December with each quarter being a 13 week period. This change does not
significantly or materially impact the comparability of the results of
operations for the period ended March 31, 1998 as compared to the period ended
March 29, 1997.
2. ADOPTION OF NEW ACCOUNTING STANDARDS
SFAS No. 130
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income." Comprehensive income includes net income and several
other items that current accounting standards require to be recognized outside
of net income. SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997, and the Company has adopted the standard for its fiscal year
beginning December 28, 1997. During the three months ended March 31, 1998 and
March 29, 1997, total comprehensive income amounted to $1,875,000 and $665,000
respectively, and includes unrealized gains or losses on the Company's foreign
currency translation adjustments, which prior to adoption were reported
separately in shareholders' equity.
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ARMOR HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(CONTINUED)
3. SIGNIFICANT DEVELOPMENTS
Angolan operations - On January 16, 1998, DSL Group Ltd., a wholly owned
subsidiary of AHI ("DSL") ceased operations in the country of Angola. The
cessation of operations by DSL in Angola was dictated by that government's
decision to deport all of DSL's expatriate management and supervisors. As a
result of this action, DSL believed that it could no longer ensure the
safety of its personnel or that of its clients. While Angolan operations
represented approximately $12.0 million of the Company's revenues during
1997, the contribution was only $1.0 million before allocation of DSL's
corporate overhead charges. DSL's assets in Angola of approximately $900,000
have been substantially secured by DSL and DSL's clients have made
alternative arrangements for the provision of their ongoing security needs. The
Company has recorded a provision in fiscal 1997 which management continues to
believe will be sufficient for potential losses associated with DSL's
withdrawal from Angola. The Company is currently reviewing all of its available
alternatives in connection with the cessation of DSL's operations in Angola,
including various disputes with its minority partner in a joint venture which
managed certain of the Angolan business. Management does not believe that the
outcome of these matters has had or will have a material negative impact on the
financial statements of the Company.
Low Voltage Systems Technology, Inc. - Effective January 30, 1998 the
Company acquired all of the issued and outstanding stock of Low Voltage
Systems Technology, Inc., a New Jersey corporation (hereinafter "LST"). LST is
a leading engineered systems distributor specializing in the supply,
integration, maintenance and technical support of sophisticated electronic and
computer-driven security and fire alarm systems. The aggregate purchase price
of the transaction was approximately $750,000, consisting of $562,500 in cash
paid at closing and 18,519 unregistered shares of Common Stock valued at the
time at $187,500. The Company also assumed and subsequently repaid
approximately $204,340 to a stockholder of LST in full satisfaction of loans
previously made by such stockholder to LST. The acquisition was accounted for
as a purchase and accordingly the results of operations for LST are included in
the consolidated financial statements since the date of purchase.
The unaudited consolidated results of operations of the Company on a pro
forma basis as if the Company had consummated the above acquisition at the
beginning of each period shown, as well as the Supercraft (Europe) Limited and
Gorandel Trading Limited acquisitions as discussed in the Company's December
27, 1997 filing on Form 10-K for its fiscal year ended December 27, 1997, on
January 1, 1997, are as follows:
FOR THE THREE MONTHS ENDED
MARCH 31, MARCH 29,
1998 1997
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Revenues $ 19,778 $ 18,233
Net income $ 1,782 $ 972
Diluted earnings per share $ 0.10 $ 0.08
Weighted average shares- diluted 17,159 12,931
<PAGE>
ARMOR HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(CONTINUED)
4. SUBSEQUENT EVENTS
Law Enforcement Division of MACE Security International - On April 2,
1998 the Company announced the execution of a definitive agreement to acquire
the Law Enforcement Division of MACE Security International (hereinafter
"MSI"). This acquisition includes the assets of the Federal Laboratories
division and an exclusive license to use the MACE(R) trademark for the
manufacture and sale of MACE(R) brand aerosol defensive sprays to law
enforcement markets worldwide. The consummation of this acquisition is subject
to certain conditions which have yet to be satisfied including the approval of
51% of MSI shareholders. Although no assurances can be made that the
transaction will be consummated, the management of Armor Holdings, Inc.
expects this acquisition to be completed on or about July 1, 1998.
Asmara Limited - On April 8, 1998 the Company acquired all of the issued
and outstanding stock of Asmara Limited, based in London, England (hereinafter
"Asmara"). Asmara provides value-added investigative services to clients on a
worldwide basis. Services include personnel investigations, due diligence,
asset tracing, and litigation intelligence. This acquisition will be accounted
for as a purchase and has a current aggregate purchase price of pounds sterling
1.825 million. The purchase price consists of pounds sterling 1.575 million in
cash paid at closing, and 36,846 shares of unregistered stock valued at the
time at pounds sterling 250,000. The Company also assumed liabilities of
approximately pounds sterling 300,000. Additional purchase price could be paid
for the fiscal years ending 1998, 1999 and 2000 totalling an aggregate of
pounds sterling 1.5 million. The payment of additional purchase price is
contingent upon operating performance meeting certain agreed targets during
this period. All 36,846 shares are restricted from sale until April 8, 2001.
Pro-Tech Armored Products, Inc. - On April 14, 1998 the Company acquired
Pro-Tech Armored Products, Inc. of Pittsfield, Massachusetts (hereinafter
"Pro-Tech"). Pro-Tech is a leading international manufacturer of hard armor
products for the law enforcement market, with product lines that include
ballistic shields, bulletproof vests, visors, and other personal accessories.
Pro-Tech also manufactures for international distribution protective armor
products for helicopters, automobiles, and riot control vehicles. This
acquisition will be accounted for as a purchase and has an aggregate purchase
price of $1.6 million, $1.015 million in cash paid at closing, and 42,592
shares of unregistered stock valued at the time at $485,000. In addition to
the $1.015 million paid in cash, $100,000 remains in escrow and is subject to
an audited balance sheet reflecting $700,000 minimum net worth at
April 30, 1998. Additional purchase price could be paid in the fiscal years
ending 1998, 1999 and 2000 totalling an aggregate of $4 million. The payment
of additional purchase price is contingent upon operating performance meeting
certain agreed targets during this period. All of the shares and any shares
issued for payment of the earn-out are restricted from sale until April 14,
2001.
<PAGE>
ARMOR HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(CONTINUED)
4. SUBSEQUENT EVENTS (CONTINUED)
CDR International Ltd. - On May 7, 1998 the Company announced the
execution of a letter of intent to acquire all of the outstanding shares of CDR
International Ltd. ("CDR"), a London based investigation firm with offices in
London, England, Charlotte, NC and Moscow, Russia. CDR provides a full range
of consulting and investigative services specializing in worldwide Intellectual
Property Asset Protection for multinational corporations involved in the
manufacturing and distribution of, among other things, sportswear, tobacco,
spirits and pharmaceuticals. Its services range from protecting companies
against counterfeiting, patent infringements, product tampering and extortion
through to identifying unethical supplier activity such as the use of child
labor. CDR also provides training services to law enforcement agencies in
foreign countries. The shareholders of CDR will receive an initial purchase
price of approximately pounds sterling 1.5 million, payable entirely with the
Company's common stock. Additional purchase price could be paid for the fiscal
years ending 1999, 2000 and 2001 totalling an aggregate of pounds sterling 6.0
million. The payment of additional purchase price is contingent upon operating
performance meeting certain agreed targets during the period. Any additional
purchase price will be paid entirely in common stock of the Company. That
number of shares of the Company's common stock having a value of pounds
sterling 500,000 of the initial consideration and 40% of the additional
consideration will be restricted from sale for a period of three years from
the closing date, and 50% of any additional price in excess of pounds sterling
4.25 million will be restricted from sale for between 4.5 and 6 years. The
transaction is subject to customary conditions and is expected to close on or
around June 1, 1998.
5. INFORMATION CONCERNING BUSINESS SEGMENTS AND GEOGRAPHICAL SALES
Prior to its combinations with DSL, the Company operated in one business
segment - Manufactured Products for law enforcement and military customers.
This segment includes the development, manufacture and distribution of
ballistic protective equipment, less-than-lethal products and narcotic
identification and evidence equipment. These products are sold through an
international network of distributors who serve law enforcement communities.
Since the DSL combination, the Company operates in a second business segment -
Integrated Security 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.
<PAGE>
ARMOR HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(CONTINUED)
5. INFORMATION CONCERNING BUSINESS SEGMENTS AND GEOGRAPHICAL SALES (CONTINUED)
The Company has invested substantial resources outside of the United
States and plans to continue to do so in the future. Substantially all of the
operations of the services segment are conducted in emerging markets in Africa,
Asia, CIS and South America. These operations are subject to the risk of new
and different legal and regulatory requirements in local jurisdictions, tariffs
and trade barriers, potential difficulties in staffing and managing local
operations, potential imposition of restrictions on investments, potentially
adverse tax consequences, including imposition or increase of withholding and
other taxes on remittances and other payments by subsidiaries, and local
economic, political and social conditions. Governments of many developing
countries have exercised and continue to exercise substantial influence over
many aspects of the private sector. Government actions in the future could have
a significant adverse effect on economic conditions in a developing country or
may otherwise have a material adverse effect on the Company and its operating
companies. The Company is currently in the process of obtaining political risk
insurance in the countries in which it currently conducts business. Moreover,
applicable agreements relating to the Company's interests in its operating
companies are frequently governed by foreign law. As a result, in the event of
a dispute, it may be difficult for the Company to enforce its rights.
Accordingly, the Company may have little or no recourse upon the occurrence
of any of these developments. See Note 3.
Revenues, income from operations and total assets for each of the
Company's segments for the three months ended March 31, 1998 and March 27, 1997
were as follows:
MARCH 31, 1998 MARCH 27, 1997
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(IN THOUSANDS)
Revenues:
Manufactured products $ 7,835 $ 6,422
Integrated security services 11,800 8,328
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Total revenues $ 19,635 $ 14,750
Income from operations:
Manufactured products $ 1,307 $ 621
Integrated security services 1,854 685
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Total income from operations $ 3,161 $ 1,306
Total assets:
Manufactured products $ 21,575 $ 28,859
Integrated security services 31,979 20,433
Corporate 24,028 --
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Total assets $ 77,582 $ 49,292
<PAGE>
ARMOR HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(CONTINUED)
5. INFORMATION CONCERNING BUSINESS SEGMENTS AND GEOGRAPHICAL SALES (CONTINUED)
The following unaudited information with respect to sales to principal
geographic areas for the three months ended March 31, 1998 and March 27, 1997
is as follows:
MARCH 31, 1998 MARCH 27, 1997
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(IN THOUSANDS)
Sales to unaffiliated customers:
North America $ 6,278 $ 5,955
South America 4,020 2,346
Africa 4,560 5,616
Europe/Asia 4,777 833
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Total revenues $ 19,635 $ 14,750
Operating profit:
North America $ 723 $ 575
South America 630 166
Africa 717 398
Europe/Asia 677 72
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Total operating profit $ 2,747 $ 1,211
Total assets:
North America $ 40,171 $ 28,859
South America 4,554 2,910
Africa 7,098 5,135
Europe/Asia 25,759 12,388
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Total assets $ 77,582 $ 49,292
<PAGE>
ARMOR HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(CONTINUED)
6. EARNINGS PER SHARE
The following is a reconciliation of the numerators and denominators of
the basic and diluted earnings per share computations for net income:
FOR THE THREE MONTHS ENDED
MARCH 31, 1998 MARCH 27, 1997
-------------- --------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Numerator for basic and diluted
earnings per share:
Net income $ 1,774 $ 540
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Denominator for basic earnings per share
weighted average shares: 16,037 11,827
Effect of dilutive securities:
Effect of shares issuable under stock
option and stock grant plans, based on
the treasury stock method 1,117 970
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Dilutive potential common shares 1,117 970
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Denominator for diluted earnings per share-
adjusted weighted average shares 17,154 12,797
------- -------
Basic earnings per share $ 0.11 $ 0.05
======= =======
Diluted earnings per share $ 0.10 $ 0.04
======= =======
<PAGE>
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following is a discussion of the Company's results of
operations and analysis of financial condition for the three months ended March
31, 1998. Beginning in fiscal 1998, the Company's fiscal year ends on December
31 and quarters end of the last day of every third month. The Company
previously had a 52 or 53 week year ending on the Saturday closest to the last
day of December with each quarter being a 13 week period. This change does not
significantly or materially impact the comparability of the results of
operations for the period ended March 31, 1998 as compared to the period ended
March 29, 1997. The results of operations for the business combinations
accounted for as purchase transactions are included since their effective
acquisition dates: as of January 23, 1998 for LST; as of June 9, 1997 for GTL;
and as of April 7, 1997 for Supercraft. The results of operations for the
Company have been restated to give effect to the DSL Transaction, accounted for
as a pooling of interests, since DSL's inception on June 3, 1996. The following
discussion may be understood more fully by reference to the financial
statements, notes to the financial statements, and management's discussion and
analysis contained in the Company's Annual Report on Form 10-K for the year
ended December 27, 1997, as filed with the Securities and Exchange Commission.
Manufactured Product and Integrated Security Service Businesses.
Historically, the Company was primarily a manufacturer and distributor of
security products. Cost of goods sold for the Company historically consisted
of the cost of raw materials and overhead allocated to manufacturing
operations. Operating expenses for the Company historically consisted of
sales and marketing expenses and corporate overhead at the Company's
headquarters in Jacksonville.
As a result of the DSL Transaction, a significant portion of the
Company's business now involves the provision of security services. Cost of
goods sold for DSL consists principally of labor and related costs at DSL's
various security sites. Operating expenses for DSL consist primarily of
corporate overhead at DSL's headquarters in London and Jacksonville and
overhead at DSL's various security sites.
Due to the DSL Transaction and other acquisitions in the services sector,
the Company's gross margins are not comparable with gross margins reported in
historical periods.
Revenue Recognition. The Company records manufactured product revenues at
gross amounts to be received, including amounts to be paid to agents as
commissions, at the time the product is shipped to the distributor. Although
product returns are permitted in certain circumstances within 30 days from the
date of purchase, these returns are minimal and usually consist of minor
modifications to the ordered product. The Company records integrated security
service revenue as the service is provided on a contract by contract basis.
Foreign Currency Translation. In accordance with Statement of Financial
Accounting Standard No. 52, "Foreign Currency Translation," assets and
liabilities denominated in a foreign currency are translated into U.S. dollars
at the current rate of exchange as of the balance sheet date and revenues and
expenses are translated at the average monthly exchange rates. The cumulative
translation adjustment which represents the effect of translating assets and
liabilities of the Company's foreign operations was a loss of approximately
$252,000 as of March 31, 1998 and $353,000 as of December 27, 1997.
<PAGE>
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(CONTINUED)
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 29, 1997
Revenues - manufactured products. Manufactured products revenues
increased $1.4 million, or 22%, to $7.8 million for the three months ended
March 31, 1998 from $6.4 million for the three months ended March 29, 1997.
This increase in sales resulted primarily from the increase in sales generated
from the operations of Supercraft in the three months ended March 31, 1998, as
well as sales growth generated by internal operations.
Revenues - integrated security services. Integrated security services
revenues increased $3.5 million, or 42%, to $11.8 million for the three months
ended March 31, 1998 from $8.3 million for the three months ended March 29,
1997. Approximately $2.3 million of the increase is due to the acquisition of
the remaining 50% of GTL not previously owned by the company and subsequent
consolidation of their operations in June 1997. In addition, the acquisition of
LST in the three months ended March 31, 1998 accounted for approximately
$300,000 of the increase while the remaining approximately $900,000 increase
resulted from internally generated sales growth in the DSL operations.
Cost of sales. Cost of sales increased $3.1 million, or 30%, to $13.6
million in the three months ended March 31, 1998 from $10.5 million in the
three months ended March 29, 1997. The increase in cost of sales dollars is
attributed to the revenue growth described above. As a percentage of total
revenues, cost of sales decreased to 69.3% in the three months ended March 31,
1998 from 70.9% in the three months ended March 29, 1997, reflecting an
improvement in the margins associated with the integrated security services
business.
Operating expenses. Operating expenses increased approximately $300,000
to $3.3 million (16.8% of total revenues) in the three months ended March 31,
1998 from $3.0 million (20.2% of total revenues) during the three months ended
March 29, 1997. The decrease in operating expenses as a percentage of revenues
is due to a number of consolidation efficiencies in operations as the revenue
stream increases resulting from the successful integration of acquired
companies.
<PAGE>
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(CONTINUED)
Depreciation and amortization. Depreciation and amortization expense
increased to $379,000 in the three months ended March 31, 1998 from $286,000 in
the three months ended March 29, 1997. The $93,000 increase was primarily due
to an increase in the amortization of intangibles acquired during the second
half of 1997.
Equity in earnings of investees. Equity in earnings of investees amounted
to approximately $155,000 in the three months ended March 31, 1998, compared to
$272,000 in the three months ended March 29, 1997. The equity in earnings
relates to DSL's original 50% investment in GTL until June 9, 1997, the date
the Company acquired the remaining 50% interest not owned by DSL, at which
point the 100% investment was consolidated into the Company's results. The
equity in earnings also relates to a 20% investment in Jardine Securicor Gurkha
Services Limited ("JSGS"), a joint venture company.
Interest (income) expense, net. Interest (income) expense, net decreased
$311,000, or 451%, to interest income of $242,000 for the three months ended
March 31, 1998 from interest expense of $69,000 for the three months ended
March 29, 1997. The Company recognized interest income for the three months
ended March 31, 1998 on the remaining net proceeds from the Public Offering in
July 1997. Those proceeds were used to repay all debt that was outstanding as
of March 29, 1997.
Income before income taxes. Income before income taxes increased $1.5
million, or 122%, to $2.7 million in the first quarter of 1998 from $1.2
million in the first quarter of 1997. The increase is primarily due to the
internal growth of the business as well as the successful integration of the
acquisitions consummated during 1997.
Income taxes. Income taxes totaled $975,000 in the three months ended
March 31, 1998, as compared to $554,000 in the three months ended March 29,
1997. The provision was based on the Company's U.S. federal and state statutory
rates of approximately 34% for its U.S.-based companies and a 37% blended
effective tax rate for foreign operations of the Company. The lower effective
tax rate for the foreign operations of 37% as compared to 43% in the three
months ended March 29, 1997 reflects various tax planning strategies as well as
the increased foreign income in foreign jurisdictions with lower tax rates.
However, the first quarter 1998 tax rate is not necessarily indicative of
continued lower tax rates due to continually changing concentration of income
in each country in which the Company operates.
Dividends on preference shares. During the three months ended March 27,
1997, DSL incurred $143,000 in preference share dividends. These dividends
were paid out of after tax earnings. These preference shares were acquired by
the Company on April 16, 1997 in the DSL Transaction, thus no dividends are
reflected in the three months ended March 31, 1998.
Net income applicable to common shareholders. Net income increased $1.2
million, or 229%, to $1.8 million in the three months ended March 31, 1998 from
$540,000 for the three months ended March 29, 1997. As noted previously, the
increase is due to a combination of acquisitions made during the period being
successfully integrated, coupled with internal growth.
<PAGE>
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
On November 14, 1996, the Company entered into a revolving working
capital credit facility (the "Credit Facility") with Barnett Bank for up to $10
million. The Credit Facility was amended as of March 26, 1997 to increase the
revolving line of credit to $20 million. In addition, the Credit Facility
provides for a separate sublimit of $5 million under an acceptance facility.
The Credit Facility also provides for the issuance of letters of credit to the
Company. As of the end of the first quarter of 1998, the Company had no
indebtedness to Barnett Bank. 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% over the LIBOR rate.
As of March 20, 1998, each of the Company's U.S. subsidiaries (the "U.S.
Subsidiaries"), other than American Body Armor and Equipment, Inc. ("ABA")
and U.S. Defense Systems, Inc., a Delaware corporation ("USDS"), 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 other than ABA and USDS. In addition, as further collateral
for the Credit Facility (i) the Company entered into a Pledge Agreement with
Barnett Bank pursuant to which the Company pledged as further collateral for
the Credit Facility, all of the issued and outstanding capital stock of each of
the U.S. Subsidiaries, other than ABA and USDS, and (ii) NIK Public Safety,
Inc. ("NIK") and Defense Technology Corporation of America ("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 expires on March 1, 1999, subject to extension
under certain circumstances.
On July 25, 1997, the Company issued 4,000,000 new shares of Common Stock
at $10.125 per share through the Public Offering, which was underwritten by
Dillon, Read & Co. Inc. (now known as SBC Warburg Dillon Read Inc.), Equitable
Securities Corporation (now known as SunTrust Equitable Securities) and
Stephens Inc. Net of underwriting discounts and commissions, the Company
realized proceeds of $38,070,000, of which approximately $18.6 million was used
to repay in full the Company's outstanding balance on the Credit Facility. The
remaining net proceeds were invested in short term instruments.
<PAGE>
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(CONTINUED)
The Company anticipates that cash generated from the Public Offering,
operations and borrowings under the Credit Facility will enable the Company to
meet its liquidity, working capital and capital expenditure requirements during
the next 12 months. The Company, however, may require additional financing to
pursue its strategy of growth through acquisitions. If such financing is
required, there are no assurances that it will be available, or if available,
that it can be obtained on terms favorable to the Company or on a basis that is
not dilutive to stockholders.
The Company's spending for its fiscal 1998 capital expenditures will be
approximately $2.2 million, of which the Company has already spent
approximately $1.1 million. Such expenditures include, among other things,
vehicles and communication equipment used in servicing DSL customers, costs of
establishing local offices in new locations, computer equipment and software,
and manufacturing machinery and equipment. In addition, the Company purchased 7
acres of land adjacent to the Company's headquarters in Jacksonville for
approximately $575,000 to be used for future development.
As of March 31, 1998 and December 27, 1997, the Company had working
capital of $33.6 million and $31.9 million, respectively, which primarily
reflects the net proceeds (after paying down the credit facility to a zero
balance) of the Public Offering in July 1997.
FORWARD LOOKING INFORMATION
Certain statements in this Form 10-Q and elsewhere (such as in other
filings by the company with the Securities and Exchange Commission, press
releases, presentations by the Company or its management and oral statements)
may constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements
include those relating to future opportunities, the outlook of the Company's
clients and customers, the reception of new products and services, the success
of new initiatives and acquisitions and the likelihood of incremental revenues
offsetting expenses related to such new initiatives and acquisitions. In
addition, such forward-looking statements involve known and unknown risks,
uncertainties, and other factors which may cause the actual results,
performance or achievements of the Company to be materially different from any
future results expressed or implied by such forward-looking statements. Such
factors include: (i) the inherent volatility of currency fluctuations;
(ii) demand for the Company's products and services; (iii) the actions of
current and potential new competitors; (iv) rapid changes in technology; (v)
the ability to realize cost reductions and operating efficiencies; (vi) overall
economic conditions; and (vii) other risks detailed from time to time in the
company's periodic earnings releases and reports filed with the Securities and
Exchange Commission, as well as the risks and uncertainties discussed in this
Form 10-Q.
<PAGE>
PART II
ITEM 5. OTHER INFORMATION
On May 11, 1998, the Board of Directors of the Company ratified and
approved the adjustment of the Company's fisal year-end to coincide with
the calendar year-end, December 31, and each fiscal quarter-end to coincide
with the last day of the calendar quarter-end (i.e. March 31, June 30,
September 30 and December 31). Previously, the Company had a 52 or 53 week
fiscal year ending on the Saturday closest to the last day of December, with
each fiscal quarter being a 13-week period. The Company will not be required
to file a report covering the transition period.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
The following exhibits are hereby filed as part of this Quarterly Report
on Form 10-Q.
EXHIBIT NO. DESCRIPTION
----------- -----------
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ARMOR HOLDINGS, INC.
/s/ Jonathan M. Spiller
-----------------------------------
Jonathan M. Spiller
President, Chief Executive Officer
and Director
Dated: May 15, 1998
/s/ Carol T. Burke
----------------------------------
Carol T. Burke
Vice President - Finance
Principal Financial Officer
May 15, 1998
<PAGE>
EXHIBIT INDEX
The following Exhibits are filed herewith:
EXHIBIT NO. DESCRIPTION
- ----------- -----------
27.1 Financial Data Schedule.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FINANCIAL STATEMENTS FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998,
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000845752
<NAME> ARMOR HOLDINGS, INC.
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> DEC-28-1997
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<CASH> 17,291,000
<SECURITIES> 0
<RECEIVABLES> 17,717,000
<ALLOWANCES> 651,000
<INVENTORY> 5,849,000
<CURRENT-ASSETS> 44,365,000
<PP&E> 13,143,000
<DEPRECIATION> 2,235,000
<TOTAL-ASSETS> 77,582,000
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<BONDS> 0
0
0
<COMMON> 160,000
<OTHER-SE> 66,500,000
<TOTAL-LIABILITY-AND-EQUITY> 77,582,000
<SALES> 19,635,000
<TOTAL-REVENUES> 19,635,000
<CGS> 13,601,000
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<OTHER-EXPENSES> 3,477,000
<LOSS-PROVISION> 50,000
<INTEREST-EXPENSE> (242,000)
<INCOME-PRETAX> 2,749,000
<INCOME-TAX> 975,000
<INCOME-CONTINUING> 1,774,000
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<NET-INCOME> 1,774,000
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