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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 1998
[ ] TRANSITION REPORT PURSUANT TO 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 Identification No.)
incorporation or organization)
13386 International Parkway
Jacksonville, Florida 32218
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (904) 741-5400
Securities registered pursuant to Name of each exchange on which
Section 12(b) of the Act: registered:
Common Stock, par value of $.01 per share American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 15, 1999 is $153,017,851.
The number of shares outstanding of the registrant's Common Stock as of March
23, 1999 is 16,558,848.
DOCUMENTS INCORPORATED BY REFERENCE:
DOCUMENT FORM 10-K PART
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None
PART I
ITEM 1. DESCRIPTION OF BUSINESS
COMPANY OVERVIEW
We are a leading global provider of security risk management services
to multi-national corporations and governmental agencies through our Armor
Group Services division. We are also a leading manufacturer of security
products for law enforcement personnel around the world through our Armor
Holdings Products division. Armor Group Services division provides
sophisticated security planning and risk management, electronic security
systems integration, consulting and training services, as well as intellectual
property asset protection, business intelligence and investigative services.
We provide these services to multi-national corporations and governmental and
non-governmental agencies through our 22 offices in 18 countries. Armor
Holdings Products manufactures and sells a broad range of high quality
branded law enforcement equipment and has leading market positions in several
of the product categories in which we compete. Such products include ballistic
resistant vests and tactical armor, less-than-lethal munitions, anti-riot
products and narcotics identification kits. These products are sold primarily
to law enforcement agencies through a worldwide network of over 500
distributors and sales agents, including approximately 350 in the United
States. We believe significant opportunities exist to grow our company and
extend our global infrastructure through geographic expansion and strategic
acquisitions of related businesses in the fragmented security risk management
services and products industry.
Armor Group Services Division. Our Armor Group Services division provides
a broad range of sophisticated security risk management solutions to
multi-national corporations in diverse industries such as natural resources,
financial services and consumer products, and to governmental and
non-governmental agencies such as the U.S. Department of State, the United
Nations and the World Bank. Our clients typically have personnel and other
investments in unstable and often violent areas of the world. Through our
offices on five continents, we provide our multi-national clients with a
diversified portfolio of security solutions to assist them to mitigate risks in
their operations around the world. Our highly trained, multi-lingual and
experienced security personnel work closely with our clients to create and
implement solutions to complex security problems. These services include the
design and implementation of risk management plans and security systems,
provision of security specialists and training of security personnel. We also
provide our multi-national clients with specialized investigative services
enhanced by our global network. These services include intellectual property
asset protection and related investigative services ranging from protecting
companies against counterfeiting, patent infringements, product tampering and
extortion to identifying unethical supplier activities. In addition, we provide
business intelligence, fraud investigation and asset tracing and recovery
services to financial services companies, law firms and other entities
worldwide. We believe that many of our security services, while often
representing a small portion of our clients' overall cost of doing business,
are critical to our clients' success. We believe this creates a consistent
demand for our premium services at attractive margins.
Armor Holdings Products Division. Our Armor Holdings Products division
manufactures and sells a broad range of high quality branded law enforcement
equipment, such as ballistic resistant vests and tactical armor, bomb disposal
equipment, less-than-lethal munitions, anti-riot products including tear gas and
distraction grenades, narcotics identification kits and custom-built armored
vehicles. Our products are marketed under brand names which are well-known and
respected in the law enforcement community such as American Body Armor,
Defense Technology, First Defense, MACE, Pro-Tech and NIK. We sell our
manufactured products primarily to law enforcement agencies through a worldwide
network of over 500 distributors and sales agents including approximately 350 in
the United States. Our extensive distribution capabilities and commitment to
customer service and training have enabled us to become a leading provider of
security equipment to law enforcement agencies. We believe there are significant
opportunities to grow our manufacturing business through the acquisition and
development of new product lines, expansion into new territories and further
development of sales to specialized government and military agencies. In
addition, management believes that consistent demand for our premium products at
attractive margins will continue because our products are critical to the safety
and effectiveness of our customers.
1
INDUSTRY OVERVIEW
We participate in the global security risk management industry by
providing specialized security services to multi-national corporations and
governmental agencies and through the manufacture of security products marketed
to law enforcement and correctional personnel. Increasingly, governments,
businesses, and individuals have recognized the need for our services and
products to protect them from the risks associated with white-collar crime,
fraud, physical attacks and threats of violence. In general, the need for
protection against these risks is confirmed by a variety of statistics. For
example, according to the American Society for Industrial Security, damages
from intellectual property thefts result in estimated losses of $250 billion
annually for U.S.-based companies. In addition, fraud costs U.S. organizations
over $400 billion annually according to a recent estimate by the Association of
Certified Fraud Examiners. The number of casualties resulting from terrorist
incidents increased from 317 in 1991 to 2,963 in 1996, and in 1997, 73% of all
international terrorist incidents targeted businesses compared to 53% in 1992.
Specialized Security Services Market. In response to these security
problems, corporations are increasingly contracting experienced private
companies to perform their security services. Industry studies demonstrate that
the worldwide security services market is expected to grow at a rate of 8.0%
annually from 1995 to 2000. Total revenues for the worldwide market are
expected to grow to $61.8 billion by 2000 and continue to grow to $87.9 billion
by 2005. 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 these entities continue to establish operations and manufacturing
facilities in foreign and developing countries.
In recent months, the U.S. has been the target of several deadly
terrorists attacks directed toward U.S. Department of State personnel and
facilities across the world. In 1998, U.S. embassies in Nairobi and Dar Es
Salaam were bombed, resulting in over 235 deaths and over 5,000 injuries. The
U.S. government's response to these threats also supports the increased
emphasis on protection against security risks. A Senate panel was appointed to
investigate the causes for the lapses in security. The findings of the panel
report, like those of similar studies, pointed to the strong need for increased
security-related spending at U.S. embassies and other diplomatic facilities
worldwide. The panel recently recommended that the government spend $1.4
billion per year for the next ten years to improve embassy security, an
increase of $11 billion over the administration's current budget for that
period. With our global network of overseas offices and our broad portfolio of
security services and products, we believe that we are well-positioned to
participate in expected increases in security-related spending at U.S.
diplomatic facilities around the world.
Manufactured Security Products Market. Certain industry studies estimate
that worldwide expenditures for security products will grow at a compounded
annual rate of 7.9% from approximately $14 billion in 1990 to approximately $60
billion in 2010. Although these statistics do not correlate directly to our
product lines, we believe that the increasing spending in the private security
sector is indicative of a greater demand for our products in the law
enforcement, correctional and governmental sectors.
In response to an increased emphasis on safety and protection, the number
of police officers has increased significantly over the past several years. By
1996 there were approximately 738,000 full-time sworn law enforcement officers
in the U.S. 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 U.S. prison
population has doubled since 1985 to approximately 1.8 million inmates in 1998.
We believe this rise in the prison population has spurred demand from
institutional correctional facilities for manufactured security products.
Information concerning Business Segments and Geographical Sales. For
information concerning our business segments, please refer to Note 15 to our
Consolidated Financial Statements included elsewhere in this report.
2
KEY STRENGTHS
We believe that the following key strengths will enable us to continue to
increase sales to existing and new customers, expand our service and product
offerings, enter new markets, increase our profitability and capitalize on
industry trends:
Broad Portfolio of Services and Products. We offer a broad portfolio of
security services and products, enabling us to provide comprehensive solutions
to our customers' security needs. We strive to enhance our position as a single
source provider of global security services to our clients and believe that our
worldwide infrastructure enables us to follow our governmental and
multi-national corporate clients to new geographical markets as well as
cross-sell additional services to these customers. Similarly, our extensive
product distribution network allows us to provide our customers a broad array
of complementary manufactured law enforcement equipment. Through strategic
acquisitions and internal growth, we expect to continue to expand our service
and product offerings.
Strong Client Base and Extensive Distribution Network. Armor Group
Services serves a client base representing governmental agencies and
approximately 500 multi-national corporations worldwide, including The British
Petroleum Company, plc, British American Tobacco, Continental Airlines, Inc.
and Credit Suisse Group. Armor Holdings Products has a broad, full service
network of approximately 350 domestic distributors and 150 international agents
to sell our portfolio of manufactured law enforcement equipment. The quality
and scope of our products and the strength of our brand names has enabled us to
establish one of the largest distribution networks in the industry and
engendered the loyalty of our distributors. We work closely with our
distributors and agents to respond to and anticipate the needs of end-users,
which we believe allows us to maintain our market leadership position. We
believe that the diversity of our clients' end-markets, the continued
globalization of our clients and the strength of our distribution relationships
minimize our dependence on any particular product, market, or customer.
Strong Brands with Leading Market Positions. Our product lines are marketed
under brand names widely recognized in law enforcement, such as American Body
Armor, Defense Technology, Federal Laboratories and MACE. Due to the
life-protecting nature of the products in the markets that we serve, end-users
prefer to purchase premium products with brand names that have solid reputations
for quality and which provide high levels of performance. The strength of our
brand names has contributed to our leading market positions in several of the
product categories in which we compete, including body armor (Xtreme), aerosol
defense sprays (MACE), and less-than-lethal munitions (Defense Technology).
Proven Track Record of Identifying, Completing and Integrating
Acquisitions. Since January 1996, we have completed 11 acquisitions in the
security services and products industry. We employ a disciplined approach to
evaluating acquisition opportunities and integrating the operations of acquired
businesses. We believe that these acquisitions have strengthened our market
position, leveraged our distribution network and expanded our service and
product offerings. Further, we believe that our performance-based compensation
plan enables us to retain strong managers of acquired businesses and provides
for timely and efficient integration of acquired operations.
GROWTH STRATEGY
Our strategic objective is to be the leading global provider of security
risk management services and products to multi-national corporations,
governmental agencies and law-enforcement personnel. We expect the demand for
security risk management services and products to continue to grow and we seek
to capitalize on this growth by offering a comprehensive array of premium
security risk management services and law enforcement equipment throughout the
world. We intend to enhance our leadership position through strategic
acquisitions by creating a broad portfolio of services and products to satisfy
all of our customers' increasingly complex security needs. By establishing a
critical mass of services and a broad base of customers, we have built in the
capacity to perform all aspects of our clients' threat analyses and security
provision on a comprehensive basis. We plan to continue to execute this growth
strategy primarily through internal expansion of our existing businesses and
3
through strategic acquisitions of businesses offering complementary services,
markets, and customer bases. The following elements define our growth strategy:
Pursue Strategic Acquisitions. The security risk management services and
products industry is highly fragmented and characterized primarily by smaller
single service or product providers. We believe, however, that many clients in
the industry would prefer to deal with a consolidated entity that can provide a
broad spectrum of services and/or products in the security risk management
industry. As a result, we selectively pursue acquisitions that complement and
expand our service and product offerings and provide access to new geographic
markets, additional distribution channels and new client relationships.
Broaden Service Offerings to Existing Client Base. We broaden our existing
service offerings through strategic acquisitions and develop a comprehensive
range of security risk management offerings with a global network of service
providers. We intend to continue to market our expanded offerings by increasing
penetration of our existing client base with sales of additional services.
Expand Client Base. We expand our client base by offering a complete array
of security risk management services to our service clients, particularly those
involved in the petrochemical and mineral extraction industries, branded
product industries, and financial services industries as they expand their
commercial activities throughout the world. In addition, we market our expanded
offerings to new clients referred to us by our existing clients. Client
referrals have historically provided significant growth opportunities for us
with minimal incremental marketing expense.
Expand Distribution Network and Product Offering. We leverage our
distribution network by expanding our range of branded law enforcement equipment
through the acquisition of niche defensive security products manufacturers and
by investing in the development of new and enhanced products which complement
our existing offerings. A broader product line enables us to strengthen our
relationship with distributors and enhance our brand appeal with military, law
enforcement and other end users.
Continue Global Expansion. We expand the scope of our service and product
offerings by serving existing customers who are expanding geographically,
acquiring complementary assets and capabilities and extending our distribution
network into new territories. We target those regions where emerging market
conditions or political instability create demand for our services or where
increased regulation, political instability or growth of prison populations
create a demand for our products. Many existing clients are pursuing rapid
global expansion strategies which may also provide access to new territories
and prospective new client relationships.
ACQUISITIONS
We have pursued a strategy of growth by acquiring businesses and assets
that complement our existing operations. We use several criteria to evaluate
prospective acquisitions including whether the business to be acquired (1)
broadens the scope of the services or products we offer or the geographic areas
we serve, (2) offers attractive margins, (3) is accretive to earnings, and (4)
offers the opportunity to enhance profitability by improving the efficiency of
our operations. Since January 1996, we have consummated 11 and announced two
additional acquisitions including Safariland, a leading manufacturer of law
enforcement equipment.
Safariland. On February 24, 1999, we signed a letter of intent to acquire
all of the outstanding capital stock of Safariland, a leading manufacturer of
equipment for the law enforcement, military and sporting goods markets
worldwide, based in Ontario, California. The purchase price is $41 million,
subject to adjustments, consisting of $37 million in cash and the balance in
our common stock, plus the assumption of $5.2 million of indebtedness. The
transaction is subject to entering into a definitive agreement and customary
closing conditions, and is expected to close on or around March 31, 1999.
Safariland manufactures and distributes a variety of products including
ballistic resistant vests and duty gear.
Parvus. On December 2, 1998, we signed a letter of intent to acquire The
Parvus Company, a Washington, D.C. consulting firm specializing in
international investigations, corporate intelligence and security services. The
transaction is subject to entering into a definitive agreement and customary
closing conditions.
4
Acquisition History. The following table summarizes certain information
concerning the acquisitions we have announced or closed.
ARMOR GROUP SERVICES
APPROXIMATE ANNUAL
YEAR REVENUES PRIOR TO
COMPANY ACQUIRED SERVICES ACQUISITION
- --------------------------------- ---------- ------------------------------- ----------------------
(IN MILLIONS)
DSL Group Limited 1997 Security risk management $31.1
and consulting services
worldwide
Gorandel Trading Limited 1997 Security risk management $ 6.4
and consulting services in
Russia
Low Voltage Systems Technology, 1998 Electronic security systems $ 2.0
Inc. integration
Asmara Limited 1998 Investigation, asset tracing, $ 1.8
due diligence
CDR International Limited 1998 Intellectual property asset $ 3.8
protection
Alarm Protection Services, Inc. 1998 Alarm monitoring, systems $ 2.5
integration, and physical
security in Uganda
The Parvus Company* 1999 Global business $ 1.5
intelligence
ARMOR HOLDINGS PRODUCTS
APPROXIMATE ANNUAL
YEAR REVENUES PRIOR TO
COMPANY ACQUIRED PRODUCTS ACQUISITION
- ------------------------------------ ---------- --------------------------- ----------------------
(IN MILLIONS)
NIK Public Safety Product Line 1996 Portable narcotic $ 2.2
identification kits under
the NIK brand name
Defense Technology Corporation 1996 Less-than-lethal and $ 8.9
of America anti-riot products under
the brand names Defense
Technology, Def-Tech,
Distraction Device
Supercraft (Europe) Limited 1997 High visibility garments $ 5.7
Law Enforcement Division of 1998 Tear gas and pepper $ 7.0
Mace Security International, Inc. sprays under the brand
name MACE
Pro-Tech Armored Products of 1998 Hard armor, vehicle armor $ 5.0
Massachusetts, Inc. under the brand name
Pro-Tech
Safariland Ltd., Inc.* 1999 Law enforcement products $47.0
under the brand names
Safariland, Safari Armor,
Duty Gear, Safari Gear,
Zero-G, Nylok
- ----------
* Pending
5
SERVICES AND PRODUCTS
Armor Group Services
Our Armor Group Services division provides a broad range of sophisticated
security risk management services to multi-national corporations and to
governmental and non-governmental agencies, including the following services:
Security Planning, Advisory and Management. We believe we are the world's
leading provider of specialized security risk management services. We operate
in high risk and hostile environments characterized by rapid economic growth,
political instability, emerging market conditions and/or significant natural
resources, such as Africa, South America, Central Asia, Russia and the Balkans.
The core of our service business is the creation and implementation of risk
management plans and 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. We also provide
humanitarian mine clearance and ordnance disposal and maintenance of secure
lines of communication.
We offer security solutions that involve law enforcement training,
security consultation services and experienced security personnel who act as
planners, trainers, managers, advisors, instructors and liaison personnel. We
also provide teams of supervisors, many of whom are British Special Air
Services veterans, who frequently are employed as senior expatriate managers of
guards for government embassies. We provide security services including risk
assessment, project organization and management, equipping, training and
management of existing guard forces, system design, procurement and
installation, crisis management, VIP protection, specialist training and
evacuation planning. In connection with our security services, we utilize the
services of approximately 290 expatriates and 2,900 locally recruited guards.
These guards are supervised, managed and trained by our professional security
staff, while approximately 625 are employed by local companies that subcontract
their manpower to us. Our clients are multi-national corporations in industries
including petrochemical and natural resource extraction, manufacturing, travel
and financial services. Additionally, we serve governmental and
non-governmental agencies such as the U.S. Department of State, U.S. Navy, the
European Union, and the United Nations.
Intellectual Property Asset Protection. We provide a full range of
consulting and investigative services specializing in worldwide intellectual
property asset protection for multi-national corporations with products that
have valuable brand name recognition. Our services range from protecting
companies against counterfeiting, patent infringements, product tampering, gray
market distribution, and extortion to identifying unethical supplier activities
such as the use of child labor. These services are provided by professionals
with extensive backgrounds in related areas, including trade and customs law.
We offer brand protection and often work with our clients during product
development to establish trademark and patent protection strategies and work to
protect the brand throughout its lifecycle. Our clients include multi-national
branded product companies involved in tobacco, sportswear, spirits, and
pharmaceuticals, as well as financial services and insurance companies.
Investigation and Due Diligence. We provide fraud investigation, asset
tracing, due diligence, litigation research, political risk analysis and other
business intelligence services to multi-national and financial services
companies worldwide. We rely on our network of business intelligence contacts,
many proprietary and public databases, and our experience in gathering and
deciphering hard to find information. We are enhancing our capabilities in this
area through acquisition. Our professionals have various backgrounds including
experience in financial, due diligence and foreign intelligence services. Our
clients include investment and commercial banks, insurance companies, law firms
and other multi-national companies.
Security Systems Integration. We are a provider of security systems
specializing in the design, integration, maintenance and technical support of
sophisticated electronic and computer-driven
6
security and fire alarm systems. We specialize in high-speed analog and digital
transmission designs for life safety, communication, alarm, closed circuit
television, access control, television and security systems. These systems are
installed in airports, banks, government buildings, hospitals, prisons,
universities, stores, office buildings, telecommunication centers, radio and
television stations, and similar locations. Our clients include multi-national
companies, embassies and high commissions and military entities worldwide.
Armor Holdings Products
Body Armor. We manufacture and sell a wide array of armor products under
the leading brand name American Body Armor which are designed to protect against
bodily injury caused by bullets, knives and explosive shrapnel. Our principal
armor products are ballistic resistant vests, sharp instrument penetration
armor, hard armor such as anti-riot gear, helmets, shields and upgrade armor
plates, and bomb protective gear. Our line of ballistic protective vests
provides varying levels of protection depending upon the configuration of
ballistic materials and the standards (domestic or international) to which the
armor is built. In addition, we recently introduced an advanced ballistic
resistant vest under the brand name Xtreme. Our body armor products that are
manufactured in the United States are certified under guidelines established by
the National Institute of Justice.
We offer two types of ballistic resistant armor, concealable armor and
tactical armor. Concealable armor, which generally is worn beneath the user's
clothing, is our 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.
Our sharp instrument penetration armor 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.
We manufacture several hard armor products under the Pro-Tech brand name.
Pro-Tech products include ballistic shields, helmets, visors and other personal
protection accessories and armor products for helicopters, automobiles, riot
control vehicles, as well as "up-armoring" for the Tank Armored Command
division of the United States Army.
We also manufacture a variety of hard armor ballistic shields primarily
for use in tactical clearance applications. These shields are manufactured
using Spectra 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 that we manufacture 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. We
have the exclusive rights in the United States to distribute Gallet (Registered
Trademark) helmets to the law enforcement community. We also distribute a
variety of items manufactured by others, including gas masks, batons and
holsters.
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Less-Than-Lethal Products. Under the Defense Technology, First Defense,
Federal Laboratories and MACE brands, we manufacture and sell a complete line
of less-than-lethal, 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.
Through the acquisition of the assets of the law enforcement division of
Mace Security International, Inc., we acquired the exclusive license to use the
MACE brand in connection with the manufacturing and sale of MACE aerosol sprays
to law enforcement entities worldwide. We also manufacture pepper sprays
containing the active ingredient oleoresin capsicum, a cayenne pepper extract.
Our pepper spray formula is patented and carries the trademark name of First
Defense. The products range from small "key-ring" and hand-held units to large
volume canisters for anti-riot and crowd control applications.
Our tear gases are manufactured using CS and 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. We hold a patented design covering two of our non-pyrotechnic
grenades.
We manufacture 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 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.
We also manufacture 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, emits a loud bang and brilliant flash
of light when used.
Narcotic Identification and Evidence Equipment. We assemble and market
portable narcotic identification kits under the NIK brand name which are used
in the field by law enforcement personnel to identify a variety of controlled
substances, including cocaine, marijuana, heroin and LSD. We also assemble and
market evidence collection kits and evidence tape, and have the exclusive
rights to distribute Flex-Cuf and Key-Cuff disposable restraints.
CUSTOMERS
Armor Group Services. Our principal security services clients, include
large multi-national corporations that have significant investments in remote
and hostile areas of the world. We currently serve clients in over 15
industries including petrochemical, mining, branded products, financial
services, insurance and legal. Other significant clients include the United
Nations, governmental
8
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.
The following table sets forth certain information regarding selected
clients, the nature of the security services provided to such clients, and the
countries in which such services are being or have been performed:
CLIENT REGION FACILITY SERVICES PROVIDED
- --------------------------------- ---------------- ---------------- -----------------------------------
Bechtel Group, Inc. North Africa All facilities Expatriate security managers and
supervisors (1994 to date)
BAT Africa All facilities Expatriate security managers and
supervisors (1994 to date)
supervisors (1996 to date)
Continental Airlines, Inc. Colombia Airports Passenger/baggage search; aircraft
guarding (1993 to date)
U.S. Department of State Uganda, Congo, Embassies Expatriate-managed guard forces
Ecuador (1985 to date)
U.S. Navy Bahrain Administrative Expatriate security managers and
Support Unit supervisors (1998 to date)
Armor Holdings Products. In 1998, we sold approximately 82% of our
products in the U.S., with the balance sold internationally. The primary
end-users of our products are law enforcement agencies, local police
departments, state correctional facilities, highway patrols and sheriffs'
departments.
The British Petroleum Company, plc, a client of our Armor Group
Services division, accounted for approximately 10.2% of our net sales in fiscal
1998 under a contract which expires March 31, 1999. This contract has been
renewed for each of the previous eight years and is currently being renegotiated
for renewal. No other clients or customers of the Armor Group Services division
or the Armor Holdings Products division accounts for more than 10% of our total
sales for the 1998 fiscal year and our ten largest clients account for
approximately 25% of total sales for the 1998 fiscal year.
MARKETING AND DISTRIBUTION
Armor Group Services. As we have expanded our service offerings, we have
better exploited efficiencies and more active marketing has become an integral
part of our growth efforts. In addition to sourcing new business from client
referrals, we continue to follow our clients into new geographic areas where
there exist significant security risks. We rarely enter a country without a
substantial contract for services already in place. Once established in a
country, we seek to expand our service offerings and our customer base through
active marketing. As we have integrated new services our professionals have
increasingly relied on active marketing to generate new business. We have
fostered the cross selling of our services by physically locating our
professionals in common space and educating our professionals about all of our
service business lines. Further, a rebranding effort is underway to market our
services under the brand Armor Group. We are focusing on clients in high growth
industries where the need for investigation, brand protection and other
security services are critical to success. The industries we are targeting
include financial services, software and publishing, insurance, natural
resource extraction, and global consumer brands.
Armor Holdings Products. As a result of our history of providing
high-quality and reliable armor, less-than-lethal products and narcotic
identification and evidence equipment, we enjoy excellent
9
name recognition and a strong reputation in the law enforcement equipment
industry. The central element of our marketing strategy is to capitalize our
name recognition and reputation amongst our customers by positioning ourselves
as a global provider of many of the premier security risk management services
and law enforcement equipment that our customers may need. By positioning
ourselves in this manner, we can capitalize on our existing customer base and
our extensive global distribution network, maximize the benefits of our long
history of supplying security-related products around the world and leverage
our leadership position in the security risk management services and products
markets. When entering a foreign market, we penetrate the market by offering
the most comprehensive range of products and services available in the security
industry. We tailor our marketing strategy to each geographic area of the world
and will often tailor our product offering by country. There are opportunities
for cross-marketing of military and law enforcement products which could
strengthen the image of each product group. We believe that our ability to
cross-market our security risk management services and products will enhance
our position as an integrated provider of an extensive assortment of such
services and products.
In addition, we have designed comprehensive training programs to provide
initial and continuing training to our customers in the proper use of our
various product lines. These training programs are typically conducted by
trained law enforcement and military personnel we hire for such purpose.
Training is essential for our customers to use our products properly and to
avoid injury. Certain of our training programs also contribute to revenues.
Training programs are an integral part of our customer service. In addition to
enhancing customer satisfaction, we believe that they also help breed customer
loyalty and brand awareness, so that we may sell additional products to the
same customer. Our marketing efforts are further augmented by our 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.
Our distribution strategy involves the utilization of a worldwide
distribution network of approximately 350 domestic distributors and 150
international agents, as well as 15 regional domestic sales managers who
promote our products but refer customers to a local distributor for purchasing.
We further reinforce distributor loyalty by offering price discounts to high
volume distributors. We believe that relationships with our distributors are
strong. The distributors benefit from their association with us due to the
quality our manufactured products, the scope of our product line, the high
degree of service we provide and the distributor's opportunity to participate
profitably in the sale of our products.
We seek to expand our distribution network. As we identify and acquire
businesses that fit strategically into our existing product and service
portfolio, we maximize our distribution network by offering additional products
and services. Recent acquisitions have opened new channels of global
distribution to parts of the world not previously penetrated and have enabled
us to more fully exploit our 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 addition of these
new distribution channels will allow us to take advantage of our various units'
distribution networks by offering a wider variety of products, thereby
increasing operating efficiencies.
PRODUCT MANUFACTURING AND RAW MATERIALS
The primary raw materials used in manufacturing ballistic resistance
garments are various ballistic fibers, including Kevlar, Twaron and
SpectraShield. Kevlar, 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. We have begun to use SpectraShield, a high strength
polyethylene product of Allied Signal, Inc., as an alternative ballistic
resistant fabric to reduce our dependence on Kevlar. SpectraShield is not,
however, expected to become a complete substitute for Kevlar in the near future
due to the fabric's physical characteristics. We also use Twaron, an aramid
fiber product of Akzo-Nobel Fibers B.V. We do not purchase these fibers directly
from the manufacturers, but rather purchase fiber from weaving companies who
convert the raw fibers into cloth. We believe that we enjoy a good relationship
with these weaving companies.
10
However, if necessary, we believe that we could readily find replacement
weavers. We also use Spectrashield and Kevlar in our hard and vehicle armor
products. Additionally, we use polycarbonates, acrylics, ballistic quality
steel, ceramics, and ballistic glass. We are aware of multiple suppliers for
these materials and would not anticipate a significant impact if we were to
lose any suppliers. We do not manufacture equipment used in our security
systems integration business.
We obtain from several sources the raw materials we used in the production
of chemical agents. 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 we were unable to obtain Malononitrile, or if there were a material
increase in the price of Malononitrile, our production of CS tear gas could be
severely curtailed. The remainder of the chemicals and piece parts used by us
are readily available from other suppliers. Although we manufacture armor on a
built-to-order basis, we do maintain reasonable inventories of our
less-than-lethal and anti-riot products.
We purchase other raw materials used in the manufacture of our various
products from a variety of sources and additional sources of supply of these
materials are readily available. We also own several molds which are used
throughout our less-than-lethal product line.
We adhere to strict quality control standards and conduct extensive
product testing throughout our manufacturing process. Raw materials are also
tested to ensure quality. We have obtained ISO 9001 certification for our
Jacksonville manufacturing operation for body armor and narcotic identification
kits and our Wyoming manufacturing facility for less-than-lethal products.
We have obtained ISO 9002 certification for our Westhoughton, England
manufacturing facility for body armor and high visibility garments. ISO
standards are promulgated by the International Organization of Standardization
and have been adopted by more than 100 countries worldwide. We obtain ISO
certification by successfully completing an audit certifying our compliance
with a comprehensive series of quality management and quality control
standards.
BACKLOG
At December 31, 1998, we had unfilled customer orders of approximately $2.5
million compared with approximately $1.9 million of such orders at December 27,
1997. These orders are expected to be shipped by March 27, 1999, however, there
can be no assurance that such backlog will become revenues in any particular
period or at all.
COMPETITION
The security services industry is highly competitive, and we compete in a
variety of fields with competitors ranging from small business to
multi-national corporations. Within the security services industry we 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. Our security services also face a wide variety of competition in
different areas, although there is no single organization that competes
directly with us globally. Our principal competitors in this market include The
Kroll-O'Gara Company, The Wackenhut Corporation, Securitas AB, Pinkerton's,
Inc., Control Risk, Electronic One and Tyco International, Ltd. and its
subsidiary ADT. Our primary competitors in supplying security services to the
petrochemical and mining industries are local security companies, in-house
security programs and small consultancy companies. Our primary competitors in
the embassy and international agency protection business are local companies
and large manned guarding companies including The Wackenhut Corporation,
Pinkerton's, Inc., Group 4 Securitas (International) B.V. and ICTS
International, N.V. As the countries within which we operate become more mature
and stable, competition is likely to increase.
11
The market for our products is highly competitive and we compete in a
variety of fields with competitors ranging from small businesses to
multi-national corporations. In the body armor business, we compete by
providing superior design, engineering and production expertise in our line of
fully-integrated ballistic and blast protective wear. Our principal competitors
in this market include Point Blank Body Armor, Inc., Second Chance Body Armor,
Inc. and Rabin-Tex. In the less-than-lethal product industry we compete by
providing a broad variety of less-than-lethal products with unique features and
formulations which we believe afford us a competitive advantage over our
competitors. Although many of our competitors have larger facilities and
operations and greater financial resources, the principal competitive factors
for all of our products are quality of engineering and design, reputation in
the industry, production capability and capacity, price and ability to meet
delivery schedules.
EMPLOYEES
As of March 2, 1999, we have a total of approximately 2,834 employees,
of which approximately 380 were employed at Armor Holdings Products and
approximately 2,653 were employed at Armor Group. Additionally, we subcontract
625 employees from local companies. Approximately 31 employees employed by our
Supercraft subsidiary 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, 1999. Also our Low Voltage Systems
subsidiary has 3 employees covered under a collective bargaining agreement and
are represented by the International Brotherhood of Electrical Workers. None of
our remaining employees are represented by unions or covered by any collective
bargaining agreements. We have not experienced any work stoppages or employee
related slowdowns and believe that the relationship with our employees is good.
PATENTS AND TRADEMARKS
We currently own numerous issued U.S. and foreign patents and pending
patent applications relating to our product lines as well as several registered
and unregistered trademarks relating to our products. The trademarks include
Gold Series GSX, Xtreme, Def-Tec Products, Distraction Device, NIK, Identidrug,
Federal Laboratories and First Defense. We also have an exclusive license to use
the MACE trademarks in the law enforcement market. Although we do not believe
that our ability to compete in any of our product markets is dependent solely on
our patents and trademarks, we do believe that the protection afforded by our
intellectual property provides us with important technological and marketing
advantages over our competitors. Although we have protected our technologies to
the extent that we believe appropriate, the measures taken to protect our
proprietary rights may not deter or prevent unauthorized use of our
technologies. In other countries, our proprietary rights may not be protected to
the same extent as in the United States.
GOVERNMENT REGULATION
We are subject to federal licensing requirements with respect to the sale
in foreign countries of certain of our products. In addition, we are obligated
to comply with a variety of federal, state and local regulations governing
certain aspects of our operations and the workplace. We are also regulated by
the U.S. Bureau of Alcohol, Tobacco, and Firearms as a result of our
manufacturing of certain destructive devices and by the use of ethyl alcohol in
certain products. We also ship hazardous goods, and in doing so, must comply
with the regulations of the U.S. Department of Transportation for packaging and
labeling. We are also subject to certain regulations promulgated by, among
others, the U.S. Departments of Commerce and State and the U.S. Environmental
Protection Agency.
ENVIRONMENTAL MATTERS
We are subject to federal, state, and local laws and regulations governing
the protection of the environment, including those regulating discharges to the
air and water, the management of wastes, and the control of noise and odors.
While we always strive to operate in compliance with these requirements, we
cannot assure you that we are at all times in complete compliance with all such
requirements. Like all companies, we are subject to potentially significant
fines or penalties if we fail to comply with environmental requirements.
Although we have made and will continue to make capital expenditures in order
to comply with environmental requirements, we do not expect material capital
expenditures for environmental controls in 1999 or 2000. However, environmental
requirements are complex, change frequently, and could become more stringent in
the future. Accordingly, we cannot assure you that these requirements will not
change in a manner that will require material capital or operating expenditures
or will otherwise have a material adverse effect on us in the future.
We are also subject to environmental laws requiring the investigation and
cleanup of environmental contamination. We may be subject to liability,
including liability for cleanup costs, if contamination is discovered at one of
our current or former facilities or at a landfill or other location
12
where we have disposed wastes. The amount of such liability could be material.
We use Orthochlorabenzalmalononitrile ("CS") and Chloroacetophenone ("CN")
chemical agents in connection with our production of tear gas. These chemicals
are hazardous, and could cause environmental damage if not handled and disposed
of properly.
13
ITEM 2. PROPERTIES
The Company's principal facilities consist of the following:
APPROXIMATE PRODUCTS
LOCATION PRINCIPAL USE OWNED/LEASED SIZE MANUFACTURED
- -------- ------------- ------------ ---- ------------
Jacksonville, Florida Manufacturing, Owned 14 acres Body Armor
distribution, corporate 70,000 sq. ft.(1) Narcotic ID Kits
headquarters
Casper, Wyoming Manufacturing, Owned(2) 60 acres Tear Gas
Warehouse, Office 61,700 sq. ft. Pepper Spray
Less-than-Lethal
Munitions
Westhoughton, England Sales, Manufacturing Owned 44,000 sq. ft. High Visibility
Garments
London, England Sale, Office Leased(3) 6,500 sq. ft. Armor Group
services
Pittsfield, Massachusetts Manufacturing, Leased (4) 22,000 sq. ft. Hard Armor
distribution Vehicle Armor
(1) We have the capacity to expand the building facility to 250,000 sq. ft.
(2) DTC owns four properties at this location.
(3) DSL leases three floors and pays annual rent thereon in an amount equal to
pounds sterling 96,000. The lease for this property expires in March 2002.
(4) Pro-Tech leases two facilities in Pittsfield, Massachusetts, one for 16,000
sq. ft. at an annual rental of $46,800, the lease for which expires in April
2003, and one for 6,000 sq. ft. at an annual rental of $15,288 on a
month-to- month basis. Pro-Tech has given notice that the 6,000 sq. ft.
facility will be vacated. On April 1, 1999, Pro-Tech will lease an
additional 20,000 sq. ft. for an additional annual rental of $39,360, under
a lease expiring on March 31, 2002.
In addition, we lease a 50,000 square foot facility in Yulee, Florida,
our former manufacturing facility, which is sublet at full rental value until
April 30, 1999, the expiration of the lease. The annual rent for this property
is $130,960 plus annual increases. We also lease an average of 22,000 square
feet at each of our 21 worldwide locations, at an aggregate annual rental of
$550,000 having terms expiring from 1 to 10 years.
We believe our manufacturing, warehouse and office facilities are
suitable, adequate and afford sufficient manufacturing capacity for our current
and anticipated requirements. We believe we have adequate insurance coverage for
our properties and their contents.
14
ITEM 3. LEGAL PROCEEDINGS
On January 16, 1998, our Armor Group 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 our expatriate management and
supervisors. As a result of the cessation of operations in Angola, our Armor
Group Services division is involved in various disputes with SHRM S.A., its
minority joint venture partner relating to the Angolan business. SHRM has
alleged that, as a result of the cessation of operations, it has suffered
damages of $5 million from lost business. The Company believes that the
likelihood of loss is possible and the maximum exposure is approximately
$500,000. In March 1999, we filed a claim of $16.1 million in the Commercial
Court Nanterre in France against SHRM for actual and punitive damages from
SHRM's violation of its obligations to us resulting from its agreement with us.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during
the last quarter of fiscal 1998.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock, par value $.01 per share (the "Common
Stock") is traded under the symbol "ABE" on the American Stock Exchange (the
"AMEX"). The following table sets forth the range of high and low sales prices
for the Common Stock on the AMEX for fiscal years 1998 and 1997 and for the
first quarter of fiscal 1999 (through March 23, 1999).
HIGH LOW
---- ---
1999
1st Quarter (through March 23, 1999)......................... 14 5/8 11 5/16
1998
1st Quarter.................................................. 11 1/2 9 3/4
2nd Quarter.................................................. 12 1/2 10 5/8
3rd Quarter ................................................. 11 11/16 8 7/8
4th Quarter ................................................. 11 9/16 9
1997
1st Quarter.................................................. 9 1/2 7 1/2
2nd Quarter.................................................. 10 7/8 8 3/4
3rd Quarter.................................................. 12 3/4 10 1/2
4th Quarter.................................................. 13 3/8 10 1/8
HOLDERS
As of March 8, 1999, the Company had approximately 1,783 stockholders
of record. Holders of shares held in "nominee" or street names are included in
this number.
15
DIVIDENDS
The Company has not paid any cash dividends on its Common Stock for the
last two 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, the Company is
restricted from paying dividends on its Common Stock pursuant to its Credit
Facility. See Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations-Liquidity and Capital Resources" and Note 19
to Consolidated Financial Statements.
RECENT SALES OF UNREGISTERED SECURITIES
The following information relates to sales of unregistered securities
by the Company during fiscal 1998. All of these sales of securities were made in
reliance upon an exemption from the registration provisions of the Securities
Act set forth in Sections 4(2) and/or 4(b) thereof and the rules and regulations
under the Securities Act, including Regulation D, as transactions by an issuer
not involving any public offering and/or sales to a limited number of purchasers
who were acquiring such securities for their own account for investment purposes
and not with a view to the resale or distribution thereof.
LOW VOLTAGE SYSTEMS TECHNOLOGY, INC.
On January 30, 1998, the Company acquired all of the issued and
outstanding shares of capital stock of LST. As part of the purchase price
thereof, the Company issued 18,519 unregistered shares of Common Stock valued at
the time at $187,500.
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"). As
part of the purchase price thereof, the Company issued 36,846 shares of
unregistered common stock valued at closing at (pound)250,000.
PRO-TECH ARMORED PRODUCTS OF MASSACHUSETTS, INC.
On April 14, 1998 the Company acquired all of the issued and
outstanding stock of Pro-Tech Armored Products of Massachusetts, Inc. of
Pittsfield, Massachusetts (hereinafter "Pro-Tech"). As part of the purchase
consideration, the Company issued 42,592 shares of unregistered common stock
valued at closing at $485,000. Additional purchase price, contingent upon
operating performance meeting certain agreed targets during this period, could
be paid for the fiscal years ending 1998, 1999 and 2000 totaling an aggregate of
$4 million, with up to 50% payable in common stock and the remainder in cash.
All of the shares and any shares issued for payment of the earn-out are
restricted from sale until April 14, 2001.
ALARM PROTECTION SERVICES, INC.
On July 15, 1998 the Company announced the acquisition of all of the
outstanding common stock of Alarm Protection Services, Inc. ("APS") located in
Kampala, Uganda. The purchase price consisted of cash and the issuance of 17,429
shares of unregistered common stock valued at closing at approximately $200,000.
AMENDED AND RESTATED 1996 STOCK OPTION PLAN
During fiscal 1998, the Company granted options to various employees to
purchase an aggregate of 286,450 shares of Common Stock under the 1996 Option
Plan at exercise prices ranging from $9.25 to $12.25 per share. These options
vest equally over a period of three years from the date of the grant. The
vesting of the options may be accelerated in the event of the occurrence of
certain events.
16
ITEM 6. SELECTED FINANCIAL DATA
1998 1997 1996 1995 1994
Total Revenues $97,207 $78,314 $30,967 $11,741 $11,355
Net Income 8,596 3,158 689 520 423
Basic Earnings Per Share .53 0.23 0.09 0.11 0.09
Diluted Earnings Per Share .50 0.21 0.08 0.08 0.07
Total Assets 94,353 75,487 49,530 8,161 7,470
Long-Term Obligations 344 11 5,780 28 61
Stockholders' Equity 75,102 64,598 24,875 4,947 4,427
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This analysis of the Company's results of operations should be viewed in
conjunction with the accompanying financial statements, including notes thereto,
contained in Item 8 of this Annual Report on Form 10K. This report contains
forward-looking statements within the meaning of Section 27A of the Securities
Act and Section 21E of the Exchange Act. Statements that are predictive in
nature, that depend upon or refer to future events or conditions or that include
the words such as "expects", "anticipates", "intends", "plans", "believes",
"estimates", "could be" and similar expressions are forward looking statements.
Although we believe that these statements are based upon reasonable assumptions,
we can give no assurance that their goals will be achieved. See "Forward Looking
Statements."
Actual results may differ from those expressed or implied in
forward-looking statements. With respect to any forward-looking statements
contained in this report, the Company believes that it is subject to a number of
risk factors, including: the inherent unpredictability of currency fluctuations;
competitive actions, including pricing; the ability to realize cost reductions
and operating efficiencies, including the ability to implement headcount
reduction programs timely and in a manner that does not unduly disrupt business
operations, and the ability to identify and to realize other cost-reduction
opportunities; and general economic and business conditions. Any forward-looking
statements in this report should be evaluated in light of these important risk
factors.
17
COMPANY OVERVIEW
We are a leading global provider of security risk management services and
products to multi-national corporations, governmental agencies and law
enforcement personnel through our two operating divisions -- Armor Group
Services and Armor Holdings Products. Our Armor Group Services division provides
sophisticated security planning and risk management, electronic security systems
integration, consulting and training services, as well as intellectual property
asset protection, business intelligence and investigative services. We provide
these services to multi-national corporations and governmental and
non-governmental agencies through our 22 offices in 18 countries. Our Armor
Holdings Products division manufactures and sells a broad range of high quality
branded law enforcement equipment and has a leading market position in several
of the product categories in which we compete. Such products include ballistic
resistant vests and tactical armor, less-than-lethal munitions, anti-riot
products and narcotics identification kits. These products are sold primarily to
law enforcement agencies through a worldwide network of over 500 distributors
and sales agents including approximately 350 in the United States. We believe
significant opportunities exist to grow our company and extend our global
infrastructure through geographic expansion and strategic acquisitions of
related businesses in the fragmented security risk management services and
products industry.
ACQUISITIONS
We have pursued a strategy of growth through acquisition of businesses and
assets that complement our existing operations. We use several criteria to
evaluate prospective acquisitions including whether the business to be
acquired:
o broadens the scope of the services or products we offer or the
geographic areas we serve,
o offers attractive margins,
o is accretive to earnings, and
o offers the opportunity to enhance profitability by improving the
efficiency of our operations.
RESULTS OF OPERATIONS
The following table sets forth selected statement of operations data for
us as a percentage of total revenues for the periods indicated:
18
FISCAL YEAR
---------------------------------
1996 1997 1998
-------- -------- -----------
Revenues:
Services ........................................... 42% 62% 53%
Products ........................................... 58% 38% 47%
Total revenues ....................................... 100% 100% 100%
Interest (income) expense, net ....................... 2% 0% (1)%
Operating income ..................................... 7% 7% 14%
Provision of income taxes ............................ 4% 3% 5%
Net income applicable to common stockholders ......... 2% 4% 9%
EBITDA ............................................... 11% 10% 16%
FISCAL 1998 AS COMPARED TO FISCAL 1997
Service revenues. Service revenues increased by $3.1 million, or 6.4%, to
$51.6 million in fiscal 1998 compared to $48.4 million in fiscal 1997. This
increase was primarily due to the award of new contracts to our Armor Group
Services division and the integration of acquisitions completed during 1998.
This increase was partially offset by the reduction of $12.0 million in revenue
associated with the termination of our Angolan operation in early 1998.
Product revenues. Product revenues increased by $15.8 million, or 52.8%,
to $45.6 million in fiscal 1998 compared to $29.9 million in fiscal 1997. This
increase was primarily due to internal growth of approximately 25% over fiscal
1997 for acquired companies owned by us for more than one year and the increase
resulting from the integration of acquisitions completed during 1998.
Cost of sales. Cost of sales increased by $9.0 million, or 15.7%, to $66.5
million in fiscal 1998 compared to $57.4 million in fiscal 1997. This increase
was primarily due to increased revenues in fiscal 1998 compared to fiscal 1997.
As a percentage of total revenues, cost of sales decreased to 68.4% in fiscal
1998 from 73.3% in fiscal 1997 reflecting a greater proportion of total revenue
generated by our Armor Holdings Products division in fiscal 1998, which has
higher gross margins than our Armor Group Services division.
Operating expenses. Operating expenses increased by $4.6 million, or
37.1%, to $17.2 million (17.6% of total revenues) in fiscal 1998 compared to
$12.5 million (15.9% of total revenues) in fiscal 1997. This increase was
primarily due to the increased revenues from our Armor Holdings Products
division which has higher sales and marketing expenses than the revenues from
the Armor Group Services division.
Depreciation and amortization. Depreciation and amortization expense
increased by $200,000, or 18.2%, to $1.3 million in fiscal 1998 compared to
$1.1 million in fiscal 1997. This increase excludes depreciation expense
included in cost of sales. This increase was primarily due to additional
amortization of intangible assets acquired during fiscal 1998 which would not
have been reflected in fiscal 1997.
Merger, integration and other non-recurring charges. The fees and expenses
associated with the acquisition of DSL, a component of our Armor Group Services
division, which was accounted for as a pooling of interests and had
non-recurring expenses relating to the financial and administrative
restructuring and integration of DSL into our Armor Group Services division,
totaled approximately $2.5 million in fiscal 1997. No such non-recurring
charges were incurred in fiscal 1998.
Equity in earnings of investees. Equity in earnings of investees decreased
by $33,000, or 4.4%, to $713,000 in fiscal 1998 compared to $746,000 in fiscal
1997. The equity in earnings of investees in fiscal 1998 is comprised of a 20%
investment in Jardine Securicor Gurkha Services Limited ("JSGS"), a Hong Kong
joint venture company. The equity in earnings of investees in fiscal 1997
related to the investment in JSGS, as well as DSL's original 50% investment in
Gorandel Trading Limited until June 9, 1997, when the 100% investment was
consolidated into our results of operations.
Interest (income) expense, net. Interest (income) was $(625) in fiscal
1998 compared to interest expense of $195 in fiscal 1997. This increase was
primarily due to interest income earned on the
19
proceeds from our 1997 public offering and the repayment of the balance of
approximately $18.6 million that was outstanding on the credit facility at the
time the offering was completed.
Operating income. Operating income increased by $8.4 million, or 158.2%,
to $13.6 million in fiscal 1998 compared to $5.3 million in fiscal 1997
primarily due to the factors discussed above.
Non-operating income. Non-operating income decreased by $364,000, or
92.9%, to $28,000 in fiscal 1998 compared to $392,000 in fiscal 1997. This
decrease was primarily due to fees paid to us by a former employee in fiscal
1997 in connection with our role as agent for the sale of our common stock.
Income taxes. Income taxes increased by $2.7 million, or 113.7%, in fiscal
1998, compared to $2.4 million in fiscal 1997, based on a provision of 37%.
This provision is comprised of our U.S. federal and state statutory rates of
approximately 36% for our U.S.-based companies and a 38% blended effective tax
rate for our foreign operations.
Dividends on preference shares. In connection with our acquisition of DSL,
a unit of our Armor Group Services division, we incurred $143,000 in preference
share dividends in fiscal 1997. We acquired the shares underlying the dividends
on April 16, 1997, and therefore, did not incur any dividends on these shares
during fiscal 1998.
Net income applicable to common stockholders. Net income applicable to
common stockholders increased approximately $5.4 million or 172.2%, to $8.6
million in fiscal 1998 compared to $3.2 million in fiscal 1997. This increase
was primarily due to the factors discussed above.
FISCAL 1997 AS COMPARED TO FISCAL 1996
Service revenues. Service revenues increased by $35.5 million, or 273.9%,
to $48.4 million in fiscal 1997 compared to $13.0 million in fiscal 1996. This
increase was primarily due to the reflection of only five months of operations
in fiscal 1996, as results of DSL operations have only been included from
August 1, 1996, as previously stated. In addition, the Armor Group Services
generated substantial internal growth during fiscal 1997. Fiscal 1997 revenues
also included approximately $12.0 million related to Angolan operations which
ceased on January 16, 1998. See Note 17 to Consolidated Financial Statements.
Product revenues. Product revenues increased by $11.9 million, or 65.8%,
to $29.9 million in fiscal 1997 compared to $18.0 million in fiscal 1996. This
increase was primarily due to sales generated from the DTC and NIK operations
in fiscal 1997, as well as sales generated by Supercraft from the date of
acquisition, April 7, 1997, until December 27, 1997 and internal growth in the
body armor business.
Cost of sales. Cost of sales increased $36.3 million, or 171.3%, to $57.4
million in fiscal 1997 compared to $21.1 million in fiscal 1996. This increase
was primarily due to the combination with DSL, which had a $28.8 million impact
on direct operating costs in fiscal 1997. The remaining $7.5 million increase
in cost of sales is attributed to the increased costs of the Armor Holdings
Products business (associated with a 65.8% increase in revenues). As a
percentage of total revenues, cost of sales increased to 73.3% in fiscal 1997
compared to 68.4% in fiscal 1996, reflecting the higher cost of sales
associated with the security services business. In fiscal 1997, we also
recorded reserves of approximately $500,000 related to the cessation of
operations in Angola. See Note 17 to the Consolidated Financial Statements.
Operating expenses. Operating expenses increased $5.6 million, or 80.6%,
to $12.5 million (15.9% of total revenues) in fiscal 1997 compared to $6.9
million (22.3% of total revenues) during fiscal 1996. This increase in the
actual dollar amount of operating expenses between the periods was primarily
due to overhead costs associated with DSL, DTC and NIK and approximately
$800,000 of selling, general and administrative costs at our headquarters in
Jacksonville, Florida, primarily for the development of our infrastructure as a
holding company.
Depreciation and amortization. Depreciation and amortization expense
increased to $1.1 million, or 103.4% in fiscal 1997 compared to $554,000 in
fiscal 1996. Of this $573,000 increase, approximately
20
$260,000 was due to amortization of intangible assets acquired during 1996,
another approximate $250,000 was due to amortization of acquired goodwill in
the DSL acquisition, with the remaining increase due to the amortization of
goodwill acquired with the Supercraft and GTL acquisitions.
Merger, integration and other non-recurring charges. Fees and expenses
associated with completing the DSL acquisition were expended in fiscal 1997.
These non-recurring expenses, in combination with certain other charges
relating to the financial and administrative restructuring and consolidation of
DSL into Armor Holdings, totaled approximately $2.5 million.
Equity in earnings of investees. Equity in earnings of investees amounted
to approximately $746,000 in fiscal 1997 compared to $320,000 in 1996. The
equity in earnings of investees in fiscal 1997 relates to DSL's original 50%
investment in GTL until June 9, 1997, the date we acquired the remaining 50%
interest not owned by DSL, at which point the 100% investment was consolidated
into our results. The equity also relates to DSL's 20% investment in JSGS. The
1996 period reflected only five months of equity earnings, as results of DSL
operations were only included from August 1, 1996, as previously stated.
Interest expense, net. Interest expense, net decreased $320,000, or 62.1%,
to $195,000 in fiscal 1997 compared to $515,000 in fiscal 1996. The decrease in
interest expense was primarily due to interest income earned on the proceeds
realized from our 1997 public offering, after the repayment of the balance of
approximately $18.6 million that was outstanding on the credit facility at the
time.
Operating income. Operating income increased $3.1 million, or 146.8%, to
$5.3 million in fiscal 1997 compared to $2.1 million in fiscal 1996. Management
believes that an additional measurement, "operating income before merger,
integration and other non-recurring charges," is useful and meaningful to an
understanding of our operating performance. However, operating income before
merger, integration and other non-recurring charges should not be considered as
an alternative either to operating income or net income nor as an indicator of
our operating performance, cash flow or as a measurement of liquidity.
Operating income before the merger, integration and other non-recurring charges
of $2.5 million increased $5.7 million, or 265.6%, to $7.8 million in fiscal
1997 compared to $2.1 million in fiscal 1996. This increase is due to the
combination with DSL and the acquisitions of Supercraft, the DTCoA Assets and
the NIK Assets, as well as internal growth within DSL and American Body Armor &
Equipment, Inc., a Delaware corporation ("ABA").
Non-operating income. Non-operating income increased $390,000 to $392,000
in fiscal 1997 compared to $2,000 in fiscal 1996. This increase resulted
primarily due to fees paid to us by a former employee in fiscal 1997 in
connection with our role as agent for the sale of our common stock.
Income taxes. As of January 1, 1996, we had an income tax net operating
loss carryforward ("NOL") of approximately $4.4 million. Effective with our
change in control by Kanders Florida Holdings, Inc. on January 18, 1996, the
utilization of this NOL became restricted in the United States to approximately
$300,000 per year. However, as of December 27, 1997, our net operating losses
increased to approximately $7.8 million and expire in varying amounts in fiscal
years 2006 to 2010. The increase in the net operating losses is a result of the
recording of DSL deferred tax assets that related to fiscal 1997 losses
generated in the United Kingdom which will be offset against future income.
Income taxes totaled $2.4 million in fiscal 1997 compared to $1.2 million
in fiscal 1996. The provision of 41.9% was based on our U.S. federal and state
statutory rates of approximately 35% for its U.S.-based companies and a 38%
blended effective tax rate for our foreign operations, and was increased by
approximately $750,000 for certain items, primarily merger-related,
non-recurring charges which were not tax deductible.
In accordance with Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("SFAS 109"), we have recorded a deferred tax
asset, representing our cumulative net operating loss carryforward and
deductible temporary differences, subject to applicable limits and an asset
valuation allowance. As of December 27, 1997, the gross amount of this deferred
tax asset was $3.1 million, of which $1.8 million has been offset by a
valuation allowance.
21
Dividends on preference shares. In connection with our acquisition of DSL,
a unit of our Armor Group Services division, we incurred $143,000 and $239,000
in fiscal 1997 and fiscal 1996, respectively, in preference share dividends.
These accrued dividends as well as the shares underlying the dividends were
acquired by us on April 16, 1997 in the DSL transaction.
Net income applicable to common stockholders. Net income applicable to
common stockholders increased $2.5 million or 358.3%, to $3.2 million in fiscal
1997 compared to $689,000 in fiscal 1996. This increase was due to the effect
of acquisitions made during fiscal 1997 together with growth in the core
businesses, being partially offset by the non-recurring charge incurred by us
in fiscal 1997. Excluding the merger, integration and other non-recurring
charges discussed above, we would have earned $0.33 per diluted share as
compared to actual diluted earnings per share of $0.21.
22
QUARTERLY RESULTS
Set forth below is certain unaudited quarterly financial data for each of
our last eight quarters and such data expressed as a percentage of our revenue
for the respective quarters. The information has been derived from unaudited
financial statements that, in the opinion of management, include all
adjustments (consisting only of normal recurring adjustments) necessary to
fairly present such quarterly information in accordance with generally accepted
accounting principles. The operating results for any quarter are not
necessarily indicative of the results to be expected for any future period.
QUARTER ENDED
-------------------------------------------------------------------------------------------
MAR 29, JUNE 28, SEPT. 27, DEC. 27, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1997 1997 1997 1997 1998 1998 1998 1998
----------- ---------- ----------- ---------- ---------- ---------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues
Services .................... $ 8,328 $10,315 $14,344 $15,458 $11,800 $11,905 $13,860 $13,998
Products .................... 6,422 7,748 7,780 7,919 7,835 10,928 12,584 14,297
-------- ------- ------- ------- ------- ------- ------- -------
Total revenue ................ 14,750 18,063 22,124 23,377 19,635 22,833 26,444 28,295
Operating income (loss) ...... 1,306 (486) 2,543 2,117 2,507 2,759 3,667 4,087
Interest expense (income),
net ......................... 69 342 (20) (196) (242) (198) (104) (81)
Provision (benefit) for income
taxes ....................... 554 (132) 945 1,009 975 1,122 1,445 1,535
Net income (loss) applicable
to common stockholders ...... 540 (696) 1,618 1,696 1,774 1,835 2,326 2,661
Earnings (loss) per
common share
Basic ....................... $ 0.05 $ (0.06) $ 0.10 $ 0.11 $ 0.11 $ 0.11 $ 0.14 $ 0.16
Diluted ..................... $ 0.04 $ (0.05) $ 0.10 $ 0.10 $ 0.10 $ 0.11 $ 0.14 $ 0.15
Weighted average common
shares outstanding
Basic ....................... 11,827 11,892 15,940 16,024 16,037 16,144 16,224 16,227
Diluted ..................... 12,797 12,965 16,025 17,209 17,154 17,034 17,022 17,471
QUARTER ENDED
---------------------------------------------------------------------------------------
MAR 29, JUNE 28, SEPT. 27, DEC. 27, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1997 1997 1997 1997 1998 1998 1998 1998
--------- ---------- ----------- ---------- ---------- ---------- ----------- ---------
Revenues
Services ..................... 56% 57% 65% 66% 60% 52% 52% 49%
Products ..................... 44% 43% 35% 34% 40% 48% 48% 51%
----- ----- ---- ----- ----- ----- ---- -----
Total revenue ................. 100% 100% 100% 100% 100% 100% 100% 100%
Operating income (loss) ....... 9% (3)% 11% 9% 13% 12% 14% 14%
Interest expense (income), net. 0% 2% 0% (1)% (1)% (1)% 0% 0%
Provision (benefit) for income
taxes ........................ 4% (1)% 4% 4% 5% 5% 5% 5%
Net income (loss) applicable to
common stockholders .......... 4% (4)% 7% 7% 9% 8% 9% 9%
23
LIQUIDITY AND CAPITAL RESOURCES
Historically, we have funded operations through cash flow from
operations and debt and equity financing, including an April 1996 private
placement of $11.5 million of convertible notes, a November 1996 $10 million
revolving credit facility with Barnett Bank, which was increased to $20 million
in March 1997, and a July 1997 public offering of 4,000,000 shares of common
stock. On February 12, 1999, we established a five-year $60 million line of
credit. As of March 19, 1999, we had $5,757,951 outstanding and $54,211,749
available under the credit facility.
On February 12, 1999, the Company entered into a Credit Agreement among
the Company, as Borrower, CIBC, Inc. ("CIBC"), NationsBank, N.A.
("NationsBank"), First Union National Bank ("First Union") and SunTrust Bank,
North Florida, N.A. ("SunTrust"), as lenders, NationsBank, as Documentation
Agent and Canadian Imperial Bank of Commerce, as Administrative Agent (the
"Credit Agreement"). Pursuant to the Credit Agreement, the several lenders
established a five-year $60,000,000 line of credit (the "Credit Facility") for
the benefit of the Company. The Company's indebtedness under the Credit Facility
is evidenced by (i) Five Year Revolving Credit Notes of up to $40,000,000 and
(ii) 364-Day Revolving Credit Notes of up to $20,000,000, convertible at the
Company's option at the end of 364 days into four-year term notes. All
borrowings under the Credit Facility bear interest at either (i) the base rate,
plus an applicable margin ranging from .125% to .375% depending on certain
conditions, or (ii) the eurodollar rate, plus an applicable margin ranging from
1.375% to 1.625% depending on certain conditions. In addition, the Credit
Facility provides that NationsBank will make swing-line loans of up to
$5,000,000 available to the Company to be used by the Company for working
capital purposes. CIBC, Inc. and NationsBank, N.A. will also issue letters of
credit of up to $5,000,000 to the Company.
As part of the Credit Facility, all direct and indirect domestic
subsidiaries of the Company (NIK Public Safety, Inc. ("NIK"), Armor Holdings
Properties, Inc. ("Properties"), Defense Technology Corporation of America
("DTC"), Low Voltage Systems Technology, Inc. ("LST"), Federal Laboratories,
Inc. ("FLI"), American Body Armor & Equipment, Inc. ("ABAE"), Pro-Tech Armored
Products of Massachusetts, Inc. ("Pro-Tech", together with NIK, Properties, DTC,
LST, FLI and ABAE, collectively, the "Direct Domestic Subsidiaries"), US Defense
Systems, Inc. ("USDS") and CDR International, Inc. ("CDR", together with the
Direct Domestic Subsidiaries and USDS, collectively, the "Domestic
Subsidiaries")) agreed to guarantee the Company's obligations under the Credit
Facility pursuant to a Subsidiaries Guarantee. The Credit Facility is secured
by (i) a pledge by the Company of all of the issued and outstanding shares of
stock of the Direct Domestic Subsidiaries pursuant to a Borrower Pledge
Agreement and (ii) a pledge by the Company of 65% of the issued and outstanding
shares of its foreign subsidiary, Armor Holdings Limited, organized under the
laws of England and Wales, pursuant to a Security Deed. In connection with the
closing of the Credit Facility, the Company fully paid its existing credit
facility with Barnett Bank, N.A. and obtained a release of all collateral and
security interests which Barnett Bank, N.A. held in connection with such
facility.
As of December 27, 1997, the Company had working capital of $31.9
million, which reflected the net proceeds of $19.4 million (after paying down
the then existing credit facility to zero) from the issuance of common stock in
our 1997 public offering as well as cash flow from operations. As of December
31, 1998, the Company had working capital of $24.4 million.
24
The Company anticipates that cash generated 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's spending for its fiscal 1999 capital expenditures will be
approximately $2.4 million, of which the Company has already spent approximately
$426,577. Such expenditures include, among other things, leasehold improvements,
computer equipment and software, and manufacturing machinery and equipment.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounts Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130"). Comprehensive income includes net income and several other items that
current accounting standards require to be recognized outside of net income.
This standard requires enterprises to display comprehensive income and its
components in financial statements, to classify items of comprehensive income
by their nature in financial statements, and to display the accumulated
balances of other comprehensive income in stockholders' equity separately from
retained earnings and additional paid-in capital. SFAS 130 was effective for
fiscal years beginning after December 31, 1997. We adopted this standard for
our fiscal year beginning December 28, 1997.
INFLATION
We believe that the relatively moderate rates of inflation in recent years
have not had a significant impact on our revenue or profitability.
Historically, we have been able to offset any inflationary effects by either
increasing prices or improving cost efficiencies.
YEAR 2000 COMPLIANCE
Many older computer software programs refer to years in terms of their
final two digits only. Such programs may interpret the Year 2000 to mean the
year 1900 instead. If not corrected, those programs could cause date-related
transaction failures.
25
We have developed a Year 2000 initiative to address this concern. A
project team has performed a detailed assessment of all internal computer
systems and, as discussed below, is developing and implementing plans to
correct problems that may arise as a result of Year 2000. We expect these
projects to be successfully completed during 1999.
A Year 2000 status failure could affect many of our research and
development, production, financial, administrative and communication
operations. Systems critical to our business which have been identified as
non-Year 2000 compliant are either being replaced or corrected through
programming modifications. In addition, a separate team is looking at Year 2000
readiness from other aspects of our business, including customer order-taking,
manufacturing, raw materials supply and plant process equipment. Our goal is to
have the remedied and replaced systems operational by the second quarter of
1999 to allow time for testing and verification.
We are in the process of communicating with all of our significant
vendors, major customers, suppliers, communications providers and banks whose
systems failures potentially could have a significant impact on our operations
to determine the extent to which we are vulnerable to those third parties'
failure to remediate their own Year 2000 issues or to verify their Year 2000
readiness. We are testing such systems where appropriate and possible.
As part of the Year 2000 initiative, we are developing business continuity
plans for those areas that are critical to our business. These business
continuity plans will be designed to mitigate serious disruptions to our
business flow beyond the end of 1999, and will operate independent of the
external providers' Year 2000 compliance. The major drive for contingency
planning will be in the first half of 1999, with the expectation that our
business groups will have plans in place by the end of the second quarter of
1999. Based on our current plans and efforts to date, we do not anticipate that
Year 2000 problems will have a material adverse effect on our business,
financial condition and results of operations.
We have not yet developed any contingency plans in the event our Year 2000
remediation efforts are unsuccessful, but plan to do so in 1999. While we have
not identified a reasonably likely worst case scenario in the event we do not
become Year 2000 compliant, we continue to evaluate the Year 2000 issue and are
attempting to address any Year 2000 deficiencies.
External and internal costs specifically associated with modifying
internal use software for Year 2000 compliance are expensed as incurred. To
date, we have spent $19,300 on this project. Costs to be incurred for the
remainder of 1999 to remedy the Year 2000 problems are estimated at
approximately $30,700. These costs do not include normal system upgrades and
replacements. We do not expect the costs relating to our Year 2000 remediation
efforts to have a material adverse effect on our business, financial condition
and results of operations.
The above expectations are subject to uncertainties. For example, if we
are unsuccessful in identifying or remedying all Year 2000 problems in critical
operations, or if we are affected by the inability of our suppliers or major
customers to continue operations due to such a problem, our business, financial
condition and results of operations could be materially adversely effected.
The total costs that we incur in connection with Year 2000 problems will
be influenced by the ability to successfully identify Year 2000 system flaws,
the nature and amount of programming required to fix the affected programs, the
related labor and/or consulting costs for such remediation, and the ability of
third parties with whom we have business relationships to successfully address
their own Year 2000 concerns. These and other unforeseen factors could have a
material adverse effect on our business, financial condition and results of
operations.
26
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 areas,
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company, as a result of its global operating and financial
activities, is exposed to changes in raw material prices, interest rates and
foreign currency exchange rates which may adversely affect its results of
operations and financial position. In seeking to minimize the risks and/or costs
associated with such activities, the Company manages exposures to changes in raw
material prices, interest rates and foreign currency exchange rates through its
regular operating and financing activities. The Company does not utilize
financial instruments for trading or other speculative purposes, nor does it
utilize leveraged financial instruments.
The Company is exposed to interest rate risk primarily through its
investments in short-term investments as the Company currently has no short- or
long-term borrowings outstanding. There is inherent roll-over risk for
marketable securities as they mature and are renewed at current market rates.
The extent of this risk is not quantifiable or predictable because of the
variability of future interest rates and business financing requirements.
However, there is no risk of loss of principal, only a risk related to potential
reduction in future interest income. Derivative instruments are not presently
used to adjust the Company's interest rate risk profile.
The majority of the Company's business is denominated in U.S. dollars.
There are costs related to the London headquarters which are denominated in the
British currency. Several other currencies are used by the Company for various
transactions, but their effect on the total business is minimal. The Company
maintains a hedge against the costs paid out in the British currency as there
are several customers who pay in to the Company in that same currency.
Therefore, any sterling payments made are paid out of a sterling bank account
thus eliminating any foreign currency exchange gains or losses.
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
27
requirements in local jurisdictions, tariffs and trade barriers, potential
difficulties in staffing and managing local operations, potential imposition of
restrictions on investments, potentially adverse tax consequences, including
imposition or increase of withholding and other taxes on remittances and other
payments by subsidiaries, and local economic, political and social conditions.
Governments of many developing countries have exercised and continue to exercise
substantial influence over many aspects of the private sector. Government
actions in the future could have a significant adverse effect on economic
conditions in a developing country or may otherwise have a material adverse
effect on the Company and its operating companies. The Company does not have
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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is included in Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
At a meeting held on October 16, 1998, the Audit Committee of the Board
of Directors of the Company approved the engagement of PricewaterhouseCoopers
LLP as the Company's independent auditors to replace the firm of Deloitte &
Touche LLP. The Audit Committee determined to change the auditors of the Company
as a result of a competitive selection process which was part of the ongoing
role of the Audit Committee to review the audit functions of the Company.
The reports of Deloitte & Touche LLP on the Company's financial
statements for the past two fiscal years did not contain an adverse opinion or a
disclaimer of opinion and were not qualified or modified as to uncertainty,
audit scope (except as to references therein to other auditors engaged to
perform audits of certain of the company's subsidiaries), or accounting
principles.
In connection with the audits of the Company's financial statements for
each of the two periods ended December 27, 1997, and in subsequent interim
periods, there were no disagreements with Deloitte & Touche LLP on any matters
of accounting principles or practices, financial statement disclosure, or
auditing scope and procedures which, if not resolved to the satisfaction of
Deloitte & Touche LLP, would have caused Deloitte & Touche LLP to make reference
to the matter in their report.
The Company has requested Deloitte & Touche LLP to furnish it with a
letter addressed to the Securities and Exchange Commission stating whether it
agrees with the above statements. A copy of that letter dated October 21, 1998,
is filed as Exhibit 16.01 to the Current Report on Form 8-K filed by the Company
on October 22, 1998.
28
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the name, age and position of each of
our directors, executive officers and significant employees as of March 1, 1999.
Each director will hold office until the next annual meeting of our stockholders
or until his or her successor has been elected and qualified. Our executive
officers are appointed by and serve at the discretion of, the board of
directors.
Name Age Position
- ---- --- --------
Warren B. Kanders........ 41 Chairman of the Board of Directors
Jonathan M. Spiller...... 47 Director, President and Chief Executive
Officer
Robert R. Schiller....... 36 Executive Vice President and Director of
Corporate Development
Nicholas B. Winiewicz.... 50 Vice President--Finance, Chief Financial
Officer, Secretary and Treasurer
Stephen E. Croskrey...... 39 President and Chief Executive Officer-Armor
Holdings Products Division
Burtt R. Ehrlich......... 59 Director
Nicholas Sokolow......... 49 Director
Thomas W. Strauss........ 57 Director
Richard C. Bartlett...... 64 Director
Alair A. Townsend........ 57 Director
Warren B. Kanders has served as the Chairman of our board since January
1996. From October 1992 to May 1996, Mr. Kanders served as Vice Chairman of the
board 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 our President and as a director
since July 1991 and as Chief Executive Officer since September 1993. From June
1991 to September 1993, Mr. Spiller served as our Chief Operating Officer. From
1989 to 1991 Mr. Spiller served as a partner with Deloitte & Touche LLP, an
international accounting firm, where he worked for 18 years. From 1988 to 1991
Mr. Spiller served as Senior Vice President and Chief Financial Officer of
Hunter Environmental Services, Inc., an environmental services company. Mr.
Spiller is a chartered accountant and a certified public accountant.
Robert R. Schiller has served as Executive Vice President and Director
of Corporate Development since January 1, 1999, and as Vice President of
Corporate Development from July 1996 to December 1998. From January 1995 to
September 1995, Mr. Schiller served as Chief Financial Officer of Troma, Inc.,
an independent film studio. 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., an investment banking and financial advisory firm.
Nicholas B. Winiewicz joined the Company as Vice President--Finance,
Chief Financial Officer, Secretary and Treasurer in February 1999. Since 1994
and prior to joining the Company, Mr. Winiewicz served as Vice President and
Chief Financial Officer for Aladdin Industries, Inc., a consumer branded
applicance company. From 1984 to 1994 Mr. Winiewicz served as Vice
President--Finance of Bentler Industries, Inc., an auto parts manufacturer.
Stephen E. Croskrey joined the Company as President and Chief
Executive Officer -- Armor Holdings Products division in February 1999. From
1998 to February 1999, Mr. Croskrey served as Director of Sales for Allied
Signal, Inc.'s global fibers business. From 1988 to 1998, Mr. Croskrey served
in various positions for Mobil Oil, most recently as its Central Regional
Manager for its Industrial Lubricant division.
29
Burtt R. Ehrlich has served as one of our directors since January
1996. Mr. Ehrlich served as Chairman and Chief Operating Officer of Ehrlich
Bober Financial Corp. (the predecessor of Benson Eyecare Corporation) from
December 1986 until October 1992 and as a director of Benson Eyecare
Corporation from October 1992 until November 1995.
Nicholas Sokolow has served as one of our directors since January
1996. Mr. Sokolow has been a partner in the law firm of Sokolow, Dunaud,
Mercadier & Carreras since 1994. From June 1973 until October 1994, Mr. Sokolow
was an associate and partner in the law firm of Coudert Brothers.
Thomas W. Strauss has served as one of our directors 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, an investment
banking firm. From 1963 to 1991, Mr. Strauss served in various capacities with
Salomon Brothers Inc., an investment banking and brokerage firm, including
President and Vice-Chairman.
Richard C. Barlett has served as one of our directors since May 1996.
Mr. Bartlett has also served as Vice Chairman of Mary Kay Holding Corporation,
a consumer branded products company, since January 1993 and as President, Chief
Operating Officer, and director of Mary Kay Inc. from 1987 through 1992. Mr.
Bartlett has also served as Chairman of the board of directors (from 1995 to
1999) and Chief Executive Officer (from 1994 to 1995) of Richmont Group, Inc.,
an affiliate of Richmont Capital Partners I, L.P. Richmont Group, Inc. and its
affiliates own and operate portfolio businesses in industries such as financial
services, apparel, sports products, and food services. On March 1, 1999, Mr.
Bartlett resigned from his positions with Richmont Group, Inc., but he continues
to serve as Vice Chairman of Mary Kay Holding Corporation.
Alair A. Townsend has served as one of our directors since December
1996. Since February 1989, Ms. Townsend has been publisher of Crain's New York
Business, a business periodical. Ms. Townsend was a former 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.
COMMITTEES OF THE BOARD OF DIRECTORS
During fiscal 1998, the Board of Directors held 10 meetings. The Board
of Directors has standing Audit, Compensation, Nominating and Option Committees.
During fiscal 1998, all of the directors then in office attended at least 60% of
the total number of meetings of the Board of Directors and the Committees of the
Board of Directors on which they served. The Audit, Compensation, Nominating and
Option Committees do not meet on a regular basis, but only as circumstances
require.
AUDIT COMMITTEE
The functions of the Audit Committee are to recommend to the Board of
Directors the appointment of independent auditors for the Company and to analyze
the reports and recommendations of such auditors. The committee also monitors
the adequacy and effectiveness of the Company's financial controls and reporting
procedures. During fiscal 1998, the Audit Committee consisted of Ms. Townsend
(Chairwoman), and Messrs. Kanders and Strauss. The Audit Committee met twice
during fiscal 1998.
COMPENSATION COMMITTEE
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 managerial personnel. During fiscal 1998, the Compensation
Committee consisted of Messrs. Sokolow (Chairman), Kanders and Ehrlich. The
Compensation Committee met twice during fiscal 1998.
NOMINATING COMMITTEE
The purpose of the Nominating Committee is to identify, evaluate and
nominate candidates for election to the Board of Directors. The Nominating
Committee will consider nominees recommended by stockholders. The names
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of such nominees should be forwarded to Nicholas B. Winiewicz, Secretary, Armor
Holdings, Inc., 13386 International Parkway, Jacksonville, Florida 32218, who
will submit them to the committee for its consideration. During fiscal 1998, the
Nominating Committee consisted of Messrs. Kanders (Chairman), Bartlett and
Sokolow. The Nominating Committee did not meet during fiscal 1998.
OPTION COMMITTEE
The purpose of the Option Committee is to administer the Company's 1998
Stock Option Plan (the "1998 Stock Option Plan"), Amended and Restated 1996
Stock Option Plan (the "1996 Option Plan") and Amended and Restated 1996
Non-Employee Directors Stock Option Plan (the "1996 Directors Plan"), and to
recommend to the Board of Directors awards of options to purchase Common Stock
of the Company thereunder. During fiscal 1998, the Option Committee consisted of
Messrs. Ehrlich (Chairman) and Kanders. The Option Committee met twice during
fiscal 1998.
COMPENSATION OF DIRECTORS
In 1998, no compensation was paid to directors of the Company for their
services as directors. Directors who are not employees of the Company
("Non-Employee Directors") are compensated for their services as directors
through their participation in the 1996 Directors Plan. The 1996 Directors Plan
is a formula plan pursuant to which non-qualified options to acquire 75,000
shares of Common Stock are automatically 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. The exercise price for all
75,000 options granted to each Non-Employee Director under the 1996 Directors
Plan is the closing price of the Common Stock on the date of the grant as quoted
on the composite tape of the American Stock Exchange, or on such exchange as the
Common Stock may then be trading. All of the 300,000 options outstanding under
the 1996 Directors Plan were granted to Non-Employee Directors in 1996. No
option grants under the 1996 Directors Plan were made in 1998.