SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
----------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED June 30, 2000, or
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____ TO ____ .
Commission File Number 0-18863
ARMOR HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware 59-3392443
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1400 Marsh Landing Parkway
Suite 112
Jacksonville, Florida 32250
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (904) 741-5400
----------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No __
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes __ No__
APPLICABLE ONLY TO CORPORATE ISSUERS
The number of shares outstanding of the registrant's Common Stock as of July 15,
2000 is 22,675,353.
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
Three and Six Month Periods Ended June 30, 2000 and June 30, 1999
-----------------------------------------------------------------
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 financial results as
of June 30, 2000 and for the three and six month periods ended June 30, 2000 and
June 30, 1999.
These unaudited condensed consolidated financial statements, and
notes thereto, should be read in conjunction with the financial statements
included in the Company's Annual Report on Form 10-K/A for the year ended
December 31, 1999.
2
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ARMOR HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
June 30, December 31,
2000 1999
------------- -------------
(unaudited) *
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 5,874 $ 13,246
Accounts receivable (net of allowance for
doubtful accounts of $1,716 and $1,691) 42,572 35,528
Inventories 19,535 16,452
Prepaid expenses and other current assets 15,610 7,215
---------- ----------
Total current assets 83,591 72,441
PROPERTY, PLANT AND EQUIPMENT (net
of accumulated depreciation of $7,220 and 22,865 16,367
$6,279)
GOODWILL (net of accumulated amortization
of $4,761 and $3,593) 80,814 74,586
REORGANIZATION VALUE IN EXCESS
OF AMOUNTS ALLOCABLE TO
IDENTIFIABLE ASSETS (net of accumulated
amortization of $2,589 and $2,564) 1,486 1,511
PATENTS AND TRADEMARKS (net of
accumulated amortization of $1,302 and 6,886 7,008
$1,124)
OTHER ASSETS 8,237 7,009
---------- ----------
TOTAL ASSETS $ 203,879 $ 178,922
========== ==========
* Condensed from audited financial statements.
See notes to condensed consolidated financial statements.
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<TABLE>
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
June 30, December 31,
2000 1999
------------ -------------
(Unaudited) *
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
<S> <C> <C>
Short-term debt $ 1,837 $1,924
Current portion of long-term debt and capitalized
lease obligations 570 509
Accounts payable, accrued expenses and other
current liabilities 15,993 15,974
------------ ----------
Total current liabilities 18,400 18,407
LONG-TERM DEBT AND CAPITALIZED LEASE
OBLIGATIONS, less current portion 27,311 2,453
------------ ----------
Total liabilities 45,711 20,860
MINORITY INTEREST 188 179
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 5,000,000 shares
authorized; 0 shares issued and outstanding - -
Common stock, $.01 par value; 50,000,000 shares
authorized; 24,757,304 and 24,513,830 issued and
22,675,353 and 23,302,958 outstanding 248 245
Additional paid-in capital 148,083 145,480
Retained earnings 36,231 26,615
Accumulated other comprehensive income:
Cumulative translation adjustments (1,483) (1,351)
Treasury stock (25,099) (13,106)
----------- ----------
Total stockholders' equity 157,980 157,883
------------ ----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $203,879 $ 178,922
=========== =========
* Condensed from audited financial statements.
See notes to condensed consolidated financial statements.
</TABLE>
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<TABLE>
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
(in thousands, except per share amounts)
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
--------- --------- --------- ---------
REVENUES:
<S> <C> <C> <C> <C>
Services $ 21,414 $ 12,847 $ 39,832 $ 25,662
Products 34,053 26,064 65,501 40,089
-------- -------- --------- --------
Total Revenues $ 55,467 $ 38,911 $ 105,333 $ 65,751
-------- -------- --------- --------
COSTS AND EXPENSES:
Cost of sales 34,357 23,195 65,465 39,485
Operating expenses 12,191 10,176 22,956 16,669
Amortization 770 656 1,482 1,035
Equity in earnings of investees (53) (26) (87) (166)
Integration and other non-recurring charges 765 646 1,456 646
-------- -------- --------- --------
OPERATING INCOME 7,437 4,264 14,061 8,082
Interest (income) expense, net 539 (6) 586 (50)
Other income 1,886 303 1,888 816
-------- -------- --------- --------
INCOME BEFORE PROVISION
FOR INCOME TAXES 8,784 4,573 15,363 8,948
PROVISION FOR INCOME TAXES 3,248 1,738 5,747 3,373
-------- -------- --------- --------
NET INCOME $ 5,536 $ 2,835 $ 9,616 $ 5,575
======== ======== ========= ========
BASIC EARNINGS PER SHARE $ 0.25 $ 0.14 $ 0.42 $ 0.31
======== ======== ========= ========
DILUTED EARNINGS PER SHARE $ 0.24 $ 0.14 $ 0.41 $ 0.29
======== ======== ========= ========
WEIGHTED AVERAGE SHARES - BASIC 22,595 20,082 22,839 18,205
======== ======== ========= ========
WEIGHTED AVERAGE SHARES - DILUTED 23,350 20,839 23,574 19,087
======== ======== ========= ========
See notes to condensed consolidated financial statements.
</TABLE>
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<TABLE>
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(in thousands)
Six Months Ended
June 30, June 30,
2000 1999
----------- ----------
OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 9,616 $ 5,575
Adjustments to reconcile net income to cash used in
operating activities, net of effects of acquisitions:
Depreciation and amortization 2,312 1,936
Gain on sales of investments (1,850) (816)
Deferred income taxes - (245)
Earnings from investees (87) (166)
Increase in accounts receivable (5,972) (1,016)
Increase in inventories (2,455) (1,004)
(Increase) decrease in prepaid expenses and other assets (8,823) 422
Decrease in accounts payable, accrued expenses and
other current liabilities (1,252) (5,839)
Increase in minority interest 9 10
-------- --------
Net cash used in operating activities (8,502) (1,143)
-------- --------
INVESTING ACTIVITIES:
Purchases of property and equipment (1,972) (1,513)
Purchases of businesses, net of cash acquired (7,919) (33,192)
Purchases of investments (1,682) (375)
Proceeds from sale of investments 3,598 1,191
Dividends received from associated companies 87 146
-------- --------
Net cash used in investing activities (7,888) (33,743)
-------- --------
FINANCING ACTIVITIES:
Proceeds from the exercise of stock options 311 803
Proceeds from the issuance of common stock - 61,018
Borrowings under short term facilities 450 -
Repayments under short term facilities ( 537) (5,041)
Borrowings under long term facilities and capitalized leases 39,326 -
Repayments under long term facilities and capitalized leases (18,407) (4,656)
Repurchases of common stock (11,993) -
-------- --------
Net cash provided by financing activities 9,150 52,124
-------- --------
Net effect of translation of foreign currencies (132) (884)
-------- --------
Net increase (decrease) in cash and cash equivalents (7,372) 16,354
Cash and cash equivalents, beginning of period 13,246 6,789
-------- --------
Cash and cash equivalents, end of period $ 5,874 $ 23,143
======== ========
See notes to condensed consolidated financial statements.
</TABLE>
6
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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 significant intercompany
items and transactions) which management considers necessary for a fair
representation of operating results, have been included in the
statements. Financial results for the quarter and year to date are
not necessarily indicative of the results that may be expected for
the year ending December 31, 2000.
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/A for the year
ended December 31, 1999. All amounts are reported in thousands except
per share amounts.
2. Adoption of New Accounting Standards
In December1999, the staff of the Securities and Exchange
Commission ("SEC") issued Staff Accounting Bulletin ("SAB") No. 101
"Revenue Recognition in Financial Statements". SAB No. 101 summarizes
the SEC staff's view in applying generally accepted accounting
principles to the recognition of revenues. The Company has evaluated
the impact of the reporting requirements of SAB No. 101 and has
determined that there will be no material impact on its consolidated
results of operations, financial position or cash flows.
3. Comprehensive Income
Comprehensive income includes net income and several other
items that current accounting standards require to be recognized
outside of net income. During the three months ended June 30, 2000 and
June 30, 1999, comprehensive income was approximately $5.2 million and
$2.4 million respectively, consisting of net income and the change in
unrealized gains or losses on the Company's foreign currency
translation adjustments net of tax, of $189,000 and $274,000,
respectively. During the six months ended June 30, 2000 and June 30,
1999, comprehensive income was approximately $9.2 million and $5.1
million respectively, consisting of net income and the change in
unrealized gains or losses on the Company's foreign currency
translation adjustments net of tax, of $242,000 and $304,000,
respectively.
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4. Inventories
The inventories are stated at the lower of cost or market
using the first-in, first-out (FIFO) method and are summarized as
followings:
($ in thousands) June 30, 2000 December 31, 1999
------------- -----------------
Raw material $ 10,798 $ 8,812
Work-in-process 2,836 1,243
Finished goods 5,901 6,397
-------------- -----------------
Total inventories $ 19,535 $16,452
5. Acquisitions
In the first half of 1999, the Company completed the acquisitions
of Safariland Ltd., Inc. ("Safariland"), The Parvus Company
("Parvus"), Alarm Systems Holding Company ("ASH") and Fire Alarm
Service Corporation ("FAS"). The unaudited consolidated results of
operations of the Company on a pro forma basis as if the Company had
consummated the acquisitions of Safariland, Parvus, ASH and FAS, at
the beginning of 1999 are as follows:
6 Months
June 30, 1999
----------------
($ in thousand,
except per share amounts)
Revenues $82,881
Net income $ 5,171
Diluted earnings per share $ 0.26
Weighted average shares - diluted 20,138
6. Information Concerning Business Segments and Geographical Sales
The Company is a leading global provider of security risk
management services and security products. Through its Armor Group
Services division, the Company provides a broad range of sophisticated
security risk management services to multi-national corporations and to
governmental and non-governmental agencies including: (1) security
planning, advisory and management, (2) intellectual property asset
protection, (3) business due diligence and investigations, and (4)
electronic security systems integration. Through its Armor Holdings
Products division, the Company manufactures and sells a broad range of
high quality branded law enforcement equipment including ballistic
resistant vests and tactical armor, police duty gear, less-than-lethal
munitions, anti-riot products and narcotics identification kits.
The Company has invested substantial resources outside of the
United States and plans to continue to do so in the future.
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Substantially all of the operations of the Company's 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.
Revenues, income from operations (operating income before
amortization expense, equity in earnings of investee, integration and
other non-recurring charges, and interest (income) expense, (net),
and total assets for each of the Company's segments for the six
months ended June 30, 2000 and June 30, 1999 were as follows:
June 30, 2000 June 30, 1999
--------------- ---------------
($ in thousands)
Revenues:
Services $39,832 $25,662
Products 65,501 40,089
--------------- ---------------
Total revenues $105,333 $65,751
=============== ===============
Income from operations:
Services $ 4,661 $ 2,619
Products 14,418 8,116
Corporate (2,167) (1,138)
--------------- ---------------
Total income from operations $ 16,912 $ 9,597
=============== ===============
Total assets:
Services $ 61,427 $62,851
Products 110,230 100,406
Corporate 30,809 23,450
--------------- ---------------
Total assets $202,466 $186,707
=============== ===============
The following unaudited information with respect to sales to
principal geographic areas for the six months ended June 30, 2000 and
June 30, 1999 is as follows:
June 30, 2000 June 30, 1999
------------- -------------
($ in thousands)
Sales to unaffiliated customers:
North America $ 68,403 $ 34,947
South America 8,789 8,162
Africa 9,727 8,893
Europe/Asia 18,414 13,749
------------- -------------
Total revenues $105,333 $ 65,751
============= =============
Income from operations:
North America $12,195 $ 5,350
South America 1,713 1,435
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June 30, 2000 June 30, 1999
------------- -------------
Africa 2,231 1,400
Europe/Asia 773 1,412
------------- -------------
Total income from operations $ 16,912 $ 9,597
============= =============
Total assets:
North America $160,707 $145,731
South America 6,025 6,993
Africa 3,390 2,405
Europe/Asia 32,344 31,578
------------- -------------
Total assets $202,466 $186,707
============= =============
7. Supplemental Cash Flow Information
The Company obtained property and equipment in the amount of $5.5
million and $3.1 milion and assumed $4.0 million and $7.5 million in
short and long term obligations as a result of the acquisitions and
asset purchases completed during the six month periods ended June 30
of 2000 and 1999, respectively.
8. Earnings Per Share and Stockholders' Equity
The following is a reconciliation of the numerators and
denominators of the basic and diluted earnings per share computations
for net income:
<TABLE>
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
----------- ------------ ------------ ------------
(In thousands, except per share data)
Numerator for basic and diluted earnings
per share:
<S> <C> <C> <C> <C>
Net income $5,536 $2,835 $9,616 $5,575
--------- --------- -------- --------
Denominator for basic earnings per share
Weighted average shares: 22,595 20,082 22,839 18,205
Effect of shares issuable under stock option
and stock grant plans, based on the
treasury stock method 755 757 735 882
--------- --------- -------- --------
Denominator for diluted earnings per
share- Adjusted weighted average shares 23,350 20,839 23,574 19,087
--------- --------- -------- --------
Basic earnings per share $ 0.25 $ 0.14 $ 0.42 $ 0.31
========= ========= ======== ========
Diluted earnings per share $ 0.24 $ 0.14 $ 0.41 $ 0.29
========= ========= ======== ========
</TABLE>
The increase in common stock and additional paid in capital includes
stock issued as partial consideration of acquisitions of $2.3 million
and $17.9 million for the six months ended June 30, 2000 and 1999,
respectively.
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Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
The following is a discussion of the Company's results of
operations and analysis of financial condition for the three and six
months ended June 30, 2000. The results of operations for the business
combinations accounted for as purchase transactions are included since
their effective acquisition dates. The following discussion may be
understood more fully by reference to the financial statements, notes
to the financial statements, and management's discussion and analysis
contained in the our Annual Report on Form 10-K/A for the year ended
December 31, 1999, as filed with the Securities and Exchange
Commission.
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Results of Operations
Three Months Ended June 30, 2000 Compared to Three Months Ended June
30, 1999
Service revenues. Service revenues increased by $8.6 million,
or 66.7%, to $21.4 million in the three months ended June 30, 2000
compared to $12.8 million in the three months ended June 30, 1999. This
increase was due to internal growth and the inclusion of the
acquisitions of Parvus, ASH and FAS acquired in 1999 and Technisec,
SCS, NTI and NAS in 2000. These acquisitions were accounted for as
purchases, and the results of their operations are recorded only for
the period the Company owned them. Internal growth within the Services
Division was over 33% in the second quarter of 2000 compared to the
second quarter of 1999.
Products revenues. Products revenues increased by $8.0 million, or
30.7%, to $34.1 million in the three months ended June 30, 2000
compared to $26.1 million in the three months ended June 30, 1999. This
increase was due to internal growth of over 27% and the inclusion of
the acquisition of Break-Free in the second quarter of 2000. This
acquisition was accounted for as a purchase, and the results of its
operations are recorded only for the period the Company owned it.
Cost of sales. Cost of sales increased by $11.2 million, or 48.1%, to
$34.4 million in the three months ended June 30, 2000 compared to $23.2
million in the three months ended June 30, 1999. The increase was
primarily due to the increased revenues for the three months ended June
30, 2000 over the three months ended June 30, 1999, relating to the
internal growth and to the acquisitions completed. As a percentage of
total revenues, cost of sales increased to 61.9% for the three months
ended June 30, 2000 from 59.6% for the three months ended June 30,
1999, due to a change in the mix of products and services sold and the
shipments of several large international and governmental orders for
products at margins below our typical margins.
Operating expenses. Operating expenses increased by $2.0 million, or
19.8%, to $12.2 million (22.0% of total revenues) in the three months
ended June 30, 2000 compared to $10.2 million (26.2% of total revenues)
in the three months ended June 30, 1999. This increase was primarily
due to the acquisitions completed since June 30, 1999, which are
included in the three months ended June 30, 2000, but not in the three
months ended June 30, 1999. The decrease as a percentage of total
revenues is reflective of the increasing revenue base and fixed nature
of certain of these expenses.
Amortization. Amortization expense increased $114,000, or 17.4%, to
$770,000 in the three months ended June 30, 2000 compared to $656,000
in the three months ended June 30, 1999. This increase was primarily
due to additional amortization of intangible assets acquired as a
result of the acquisitions of Parvus, ASH and FAS during the second
quarter of 1999 and the acquisitions of Break-Free, Technisec, SCS,
NTI, NAS and OVG during the first and second quarters of 2000 that
would not have been reflected in the quarter ended June 30,1999.
Equity in earnings of investees. Equity in earnings of investees
increased by $27,000 to $53,0000 in the three months ended June 30,
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2000, compared to $26,000 in the three months ended June 30, 1999. The
equity in earnings relates to the Company's 20% investment in Jardine
Securicor Gurkha Services Limited ("JSGS").
Integration and other non-recurring charges. Integration charges
increase by $119,000 or 18.4% to $765,000 in the three months ended
June 30, 2000 compared to $646,000 in the three months ended June 30,
1999. These costs relate to the integration of the Company's recent
acquisitions, and the increase reflects the greater number of
acquisitions compared to the year earlier period.
Operating income. Operating income increased $3.2 million or 74.4% to
$7.4 million in the three months ended June 30, 2000 compared to $4.3
million in the three months ended June 30, 1999, primarily due to the
factors discussed above.
Interest (income) expense, net. Net interest expense increased by
$545,000 to $539,000 in the three months ended June 30, 2000 compared
to net interest income of $6,000 in the three months ended June 30,
1999. This increase was the result of interest on and amortization of
the fees associated with the Company's $100 million credit facility,
and the amortization of the discount on certain liabilities acquired as
part of the Safariland acquisition.
Other income. Other income increased $1,583,000 to $1,886,000 in the
three months ended June 30, 2000 compared to $303,000 in the three
months ended June 30, 1999. The 2000 quarter includes the gain on the
sale of the Company's equity investment in JSGS of $1.7 million and
realized and unrealized gains on other investments of $116,000. The
1999 quarter includes the gain on the sale of the Company's equity
investment in MACE Security International of $303,000.
Income before provision for income taxes. Income before provision for
income taxes increased by $4.2 million or 92.1% to $8.8 million in the
three months ended June 30, 2000 compared to $4.6 million in the three
months ended June 30, 1999, primarily due to the reasons discussed
above.
Provision for income taxes. Provision for income taxes totaled $3.2
million in the three months ended June 30, 2000, as compared to $1.7
million in the three months ended June 30, 1999. The decrease in the
Company's effective tax rate to 37.0% from 38.0% last year is the
result of a restructuring of the domestic tax structure of the Company
and its subsidiaries. The provision was based on the Company's U.S.
federal and state statutory income tax rates of approximately 38% for
its U.S.-based companies and a 37% blended effective tax rate for
foreign operations of the Company. The effective tax rate for the
Company's foreign operations is not necessarily indicative of continued
tax rates due to continually changing concentration of income in each
country in which the Company operates.
Net income. Net income increased $2.7 million or 95.3% to $5.5 million
in the three months ended June 30, 2000 compared to $2.8 million in the
three months ended June 30, 1999, primarily due to the reasons
discussed above.
Six Months Ended June 30, 2000 Compared to Six Months Ended June 30,
1999
Service revenues. Service revenues increased by $14.2 million, or
55.2%, to $39.8 million in the six months ended June 30, 2000 compared
to $25.7 million in the six months ended June 30, 1999. This increase
was due to internal growth and the inclusion of the acquisitions of
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Parvus, ASH and FAS acquired in 1999 and Technisec, SCS, NTI and NAS in
2000. These acquisitions were accounted for as purchases, and the
results of their operations are recorded only for the period the
Company owned them. Internal growth within the Services Division was
over 25% in the first six months of 2000 compared to the first six
months of 1999.
Products revenues. Products revenues increased by $25.4 million, or
63.4%, to $65.5 million in the six months ended June 30, 2000 compared
to $40.1 million in the six months ended June 30, 1999. This increase
was due to internal growth of 25% and the inclusion of the acquisitions
of Safariland in the second quarter of 1999 and of Break-Free in the
first quarter of 2000. These acquisitions were accounted for as
purchases, and the results of their operations are recorded only for
the period the Company owned them.
Cost of sales. Cost of sales increased by $26.0 million, or 65.8%, to
$65.5 million in the six months ended June 30, 2000 compared to $39.5
million in the six months ended June 30, 1999. The increase was
primarily due to the increased revenues for the six months ended June
30, 2000 over the six months ended June 30, 1999, relating to the
internal growth and to the acquisitions completed. As a percentage of
total revenues, cost of sales increased to 62.2% for the six months
ended June 30, 2000 from 60.1% for the six months ended June 30, 1999,
due to a change in the mix of products and services sold and the
shipments of several large international and governmental orders for
products at margins below our typical margins.
Operating expenses. Operating expenses increased by $6.3 million, or
37.7%, to $23.0 million (21.8% of total revenues) in the six months
ended June 30, 2000 compared to $16.7 million (25.4% of total
revenues) in the six months ended June 30, 1999. This increase was
primarily due to the acquisitions completed since June 30, 1999, which
are included in the six months ended June 30, 2000, but not in the six
months ended June 30, 1999. The decrease as a percentage of total
revenues is reflective of the increasing revenue base and fixed nature
of certain of these expenses.
Amortization. Amortization expense increased $447,000, or 43.2%, to
$1,482,000 in the six months ended June 30, 2000 compared to $1,035,000
in the six months ended June 30, 1999. This increase was primarily due
to additional amortization of intangible assets acquired as a result of
the acquisitions of Parvus, ASH and FAS during the second quarter of
1999 and the acquisitions of Break-Free, Technisec, SCS, NTI, NAS and
OVG during the first and second quarters of 2000 that would not have
been reflected in the quarter ended June 30,1999.
Equity in earnings of investees. Equity in earnings of investees
decreased by $79,000 to $87,000 in the six months ended June 30, 2000,
compared to $166,000 in the six months ended June 30, 1999. The equity
in earnings relates to the Company's 20% investment in Jardine
Securicor Gurkha Services Limited ("JSGS").
Integration and other non-recurring charges. Integration charges
increase by $810,000 or 125.4% to $1,456,000 in the six months ended
June 30, 2000 compared to $646,000 in the six months ended June 30,
1999. These costs relate to the integration of the Company's recent
acquisitions, and the increase reflects the greater number of
acquisitions compared to the year earlier period.
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<PAGE>
Operating income. Operating income increased $6.0 million or 74.0% to
$14.1 million in the six months ended June 30, 2000 compared to $8.1
million in the six months ended June 30, 1999, primarily due to the
factors discussed above.
Interest (income) expense, net. Net interest expense increased by
$636,000 to $586,000 in the six months ended June 30, 2000 compared to
net interest income of $50,000 in the six months ended June 30, 1999.
This increase was the result of interest on and amortization of the
fees associated with the Company's $100 million credit facility, and
the amortization of the discount on certain liabilities acquired as
part of the Safariland acquisition.
Other income. Other income increased $1.1 million to $1.9 million in
the six months ended June 30, 2000 compared to $0.8 million in the six
months ended June 30, 1999. The first six months of 2000 includes the
gain on the sale of the Company's equity investment in JSGS, and
realized and unrealized gains on other investments. The first six
months of 1999 includes the gain on the sale of the Company's equity
investment in MACE Security International of $816,000.
Income before provision for income taxes. Income before provision for
income taxes increased by $6.4 million or 71.7% to $15.4 million in the
six months ended June 30, 2000 compared to $8.9 million in the six
months ended June 30, 1999, primarily due to the reasons discussed
above.
Provision for income taxes. Provision for income taxes totaled $5.7
million in the six months ended June 30, 2000, as compared to $3.4
million in the six months ended June 30, 1999. The decrease in the
Company's effective tax rate to 37.4% from 37.7% last year is the
result of a restructuring of the domestic tax structure of the Company
and its subsidiaries. The provision was based on the Company's U.S.
federal and state statutory income tax rates of approximately 38% for
its U.S.-based companies and a 37% blended effective tax rate for
foreign operations of the Company. The effective tax rate for the
Company's foreign operations is not necessarily indicative of continued
tax rates due to continually changing concentration of income in each
country in which the Company operates.
Net income. Net income increased $4.0 million or 72.5% to $9.6 million
in the six months ended June 30, 2000 compared to $5.6 million in the
six months ended June 30, 1999, primarily due to the reasons discussed
above.
Liquidity and Capital Resources
-------------------------------
The Company anticipates that cash generated from operations
and borrowings under the Company's 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 2000 capital
expenditures will be approximately $3.0 million, of which the Company
has already spent approximately $2.0 million.
15
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As of June 30, 2000 and December 31, 1999, the Company had
working capital of $65.2 million and $54.0 million, respectively.
Year 2000 Activities
--------------------
As described in the Form 10-K/A for the year ended December
31, 1999, we had developed plans to address our potential exposures to
our systems related to the Year 2000. Since entering the Year 2000,
we have not experienced any significant disruptions to our business
nor are we aware of any significant Year 2000 related disruptions
impacting our customers and suppliers. We will continue to monitor our
systems and operations until we are reasonably assured that no
significant business interruptions will occur as a result of any Year
2000 issues. We spent a total of approximately $50,000 on the Year
2000 Project with no significant additional expenses expected in 2000.
Forward Looking Statements
--------------------------
We believe that it is important to communicate our
expectations to our investors. Accordingly, this report contains
discussion of events or results that have not yet occurred or been
realized. You can identify this type of discussion, which is often
termed "forward-looking statements", by such words and phrases as
"expects", "anticipates", "intends", "plans", "believes", "estimates"
and "could be". Execution of acquisition strategies, expansion of
product lines and increase of distribution networks or product sales
are are as, among others, whose future success may be difficult to
predict. You should read forward-looking statements carefully because
they discuss our future expectations, contain projections of our future
results of operations or of our financial position, or state other
expectations of future performance. The actions of current and
potential new competitors, changes in technology, seasonality, business
cycles and new regulatory requirements are factors that impact greatly
upon strategies and expectations and are outside our direct control.
There may be events in the future that we are not able accurately to
predict or to control. Any cautionary language in this report provide
examples of risks, uncertainties and events that may cause our actual
results to differ from the expectations we express in our
forward-looking statements. Before you invest in our common stock, you
should be aware that the occurrence of certain of the events described
in this report could adversely affect our business, results of
operations and financial position.
Risks Associated With International Operations
----------------------------------------------
The Company does business in numerous countries, including
emerging markets in Africa, Asia and South America. The Company has
invested substantial resources outside of the United States and plans
to continue to do so in the future. The Company's international
operations are subject to the risk of new and different legal and
regulatory requirements in local jurisdictions, tariffs and trade
barriers, potential difficulties in staffing and managing local
operations, potential imposition of restrictions on investments,
potentially adverse tax consequences, including imposition or increase
of withholding and other taxes on remittances and other payments by
subsidiaries, and local economic, political and social conditions.
Governments of many developing countries have exercised and continue to
exercise substantial influence over many aspects of the private sector.
16
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Government actions in the future could have a significant adverse
effect on economic conditions in a developing country or may otherwise
have a material adverse effect on the Company and its operating
companies. The Company does not have political risk insurance in the
countries in which it currently conducts business, but does
periodically analyze the need for and cost associated with this type of
policy. Moreover, applicable agreements relating to the Company's
interests in its operating companies are frequently governed by foreign
law. As a result, in the event of a dispute, it may be difficult for
the Company to enforce its rights. Accordingly, the Company may have
little or no recourse upon the occurrence of any of these developments.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company, as a result of its global operating and financial
activities, is exposed to changes in raw material prices, interest
rates and foreign currency exchange rates which may adversely affect
its results of operations and financial position. In seeking to
minimize the risks and/or costs associated with such activities, the
Company manages exposures to changes in raw material prices, interest
rates and foreign currency exchange rates through its regular operating
and financing activities. The Company does not utilize financial
instruments for trading or other speculative purposes, nor does it
utilize leveraged financial instruments. The Company is exposed to
interest rate risk primarily through its short or long-term borrowings
under its credit agreement. The interest rate under the credit
agreement adjusts periodically. The extent of this risk is not
quantifiable or predictable because of the variability of future
interest rates and business financing requirements. Derivative
instruments are not presently used to adjust the Company's interest
rate risk profile. The majority of the Company's business is
denominated in U.S. dollars. There are costs related to the London
headquarters which are denominated in the British currency. Several
other currencies are used by the Company for various transactions, but
their effect on the total business is minimal. By maintaining a
sterling bank account, the Company is able to eliminate any foreign
currency exchange gains or losses arising under cash paid out in
British currency.
17
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PART II
Item 1. Legal Proceedings
On January 16, 1998, our ArmorGroup Services division ceased
operations in the country of Angola. The cessation of operations in
Angola was dictated by that government's decision to deport all of
ArmorGroup's expatriate management and supervisors. As a result of the
cessation of operations in Angola, our ArmorGroup Services division is
involved in various disputes with SHRM S.A. ("SHRM"), its minority
joint venture partner relating to the Angolan business. On March 6,
1998, SIA (a subsidiary of SHRM) filed a complaint against Defence
Systems France, S.A. ("DSF") before the Commercial Court of Nanterre
(Tribunal de Commerce de Nanterre) seeking to be paid an amount of
$577,286 corresponding to an alleged debt of DSIA to SIA. On March 5,
1999, DSF and Defense Systems Limited ("DSL"), a subsidiary of the
Company, filed a claim seeking to obtain damages from SHRM in the
amount of $16.1 million. On September 20, 1999, the Company was
notified that SHRM and SIA filed a complaint before the chamber of the
Commercial Court of Paris against the Company, several of its
subsidiaries, several current and past member of the board of DSIA,
and other parties, seeking to obtain damages in the amount of $20
million. On June 27, 2000, the judge of the Commercial Court of Paris
ruled that SHRM did not provide the evidence required to establish its
standing, and therefore, the proceedings relating to the action
brought by it on September 23, 1999 are cancelled.
On October 12, 1994, Second Chance Body Armor, Inc. ("Second
Chance") filed a complaint against the Company alleging infringement
by the Company of a certain trademark owned by Second Chance, unfair
competition and certain related state law claims. Second Chance has
claimed damages for, among other things, lost profits, unjust
enrichment and legal fees. One of the Company's defenses to these
claims was that any amounts alleged by Second Chance as damages should
have been discharged in the Company's bankruptcy and reorganization.
Although the court has preliminarily ruled against the Company on this
issue, the Company has reserved its rights to appeal that ruling, and
currently intends to do so. The Company's insurer was notified of the
commencement of the action in question, and assumed the defense of the
claims on behalf of the Company. In July, 2000, the Company's insurer
initially advised the Company that it would deny coverage on the
claims and withdraw it defense thereof. The Company intends to
vigorously defend this case.
In addition to the above, the Company, in the normal course of
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 could reasonably be expected to have a material impact
on the Company's financial position, operations and liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting of Stockholders on June
15, 2000. Of the 22,911,749 shares of Common Stock entitled to vote at
the meeting, 14,720,027 shares of Common Stock were present in person
or by proxy and entitled to vote. Such number of shares represented
approximately 64.2% of the Company's outstanding shares of Common
Stock.
At the meeting, the Company's Stockholders approved the
election of Warren B. Kanders, Jonathan M. Spiller, Burtt R. Ehrlich,
Nicholas Sokolow, Thomas W. Strauss, Richard C. Bartlett, Alair A.
Townsend and Stephen B. Salzman to the Company's Board of Directors.
The Company's Stockholders voted as follows in connection with such
election:
FOR AGAINST
Warren B. Kanders 14,666,134 12,465
Jonathan M. Spiller 14,666,134 12,465
Burtt R. Ehrlich 14,666,134 12,465
Nicholas Sokolow 14,666,134 12,465
Thomas W. Strauss 14,666,134 12,465
Richard C. Bartlett 14,666,134 12,465
Alair A. Townsend 14,666,134 12,465
Stephen B. Salzman 14,666,134 12,465
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At the meeting, the Company's Stockholders approved the
appointment of PricewaterhouseCoopers LLP as the company's independent
auditor for the Company's fiscal year ending December 31, 2000. There
were 14,247,543 votes in favor, 41,428 votes against and 431,059
absentions in connection with such proposal.
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.
SIGNATURES
Pursuant to the requirements of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
ARMOR HOLDINGS, INC.
/s/ Jonathan M. Spiller
----------------------------------
Jonathan M. Spiller
President, Chief Executive Officer
and Director
Dated: August 14, 2000
/s/ Nicholas Winiewicz
-----------------------------------
Nicholas Winiewicz
Chief Financial Officer
Dated: August 14, 2000
19
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EXHIBIT INDEX
The following Exhibits are filed herewith:
EXHIBIT NO. DESCRIPTION
---------- -----------
27.1 Financial Data Schedule
20
