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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from_______ to________
Commission File No. 01-13112
DHB INDUSTRIES, INC.
(Name of issuer in its charter)
DELAWARE 11-3129361
____________________________ ___________________
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
555 WESTBURY AVENUE, CARLE PLACE, NEW YORK 11514
(Address of principal executive offices)
Issuer's telephone number: (516) 997-1155
Securities registered under Section 12(b) of the Exchange Act:
COMMON STOCK, $0.001 PAR VALUE
(Title of Class)
Securities registered under Section 12(g) of the Exchange Act: None
Indicate by check mark whether the issuer (1) has filed all reports required to
be filed by section 13 or 15(d) of the Exchange Act during the past 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 in response 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 the definitive proxy or information
statements incorporated by Reference in Part III of this Form 10-K or any
amendment to this Form 10-K [ ].
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [X] No [ ] .
Aggregate market value of the voting stock held by non-affiliates computed by
reference to the price at which the stock sold, or the average bid and asked
price of such stock, as of June 28, 2002: $88,939,397.
Number of shares outstanding of the issuer's common equity, as of March 1, 2003
(Exclusive of securities convertible into common equity): 40,413,746
DOCUMENTS INCORPORATED BY REFERENCE: None
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ITEM 1. BUSINESS
GENERAL
DHB Industries, Inc., a Delaware corporation organized in 1992
("DHB" or the "Company"), is a holding company comprised of two divisions: DHB
Armor Group and DHB Sports Group. DHB Armor Group consists of Protective Apparel
Corporation of America ("PACA"), Point Blank Body Armor Inc. ("Point Blank"),
and Point Blank International S.A. ("PB International"). DHB Armor Group
develops, manufactures and distributes bullet and projectile-resistant garments,
bullet-resistant and fragmentation vests, and related ballistic accessories. DHB
Sports Group, which consists of NDL Products, Inc. ("NDL"), manufactures and
distributes protective athletic apparel and equipment, including elbow, breast,
hip, groin, knee, shin and ankle supports and braces, as well as a line of
therapy products.
The Company's executive offices are located at 555 Westbury Avenue,
Carle Place, New York 11514. Its telephone number is 516-997-1155. The Company's
website is www.DHBT.com. The Company's manufacturing facilities are located in
Florida, Tennessee and Belgium.
DHB reincorporated in Delaware in 1995 and changed its name from DHB
Capital Group Inc. to DHB Industries, Inc. in July 2001. Its shares began
trading on the American Stock Exchange on February 1, 2002 under the symbol DHB.
DHB ARMOR GROUP
OVERVIEW. The Armor Group faced unique challenges last year. It
resisted a union organizing drive that began in the Summer of 2002. The Union of
Needletrades, Industrial and Textile Employees ("UNITE")--then engaged in a
corporate campaign aimed at financial analysts and customers in an attempt to
disparage the Company and to force it to recognize the union. Another union
brought a shareholder derivative action against the Company and its officers and
directors parroting the union's allegations, among others. The Company refused
to succumb to the union's threats. As a result, it suffered adverse publicity
and a decline in its stock price. By year's end, however, DHB had endured the
controversy still atop the body armor industry. Indeed, it continues to be the
largest provider of body armor to our nation's military as our troops go to war
against Iraq. Moreover, during the first quarter of 2003, the Armor Group has
expanded to a second production facility in South Florida, reintegrated striking
workers into its work force, and won dismissal with prejudice of that
shareholder suit. In sum, the Company emerged from a year of tumult in triumph,
and is now proudly providing the body armor that is protecting our soldiers in
battle.
PRODUCTS AND MARKETS. The DHB Armor Group, the preeminent name in the
armor industry, principally manufactures three types of body armor: concealable
armor, which is designed to be worn beneath the user's clothing; tactical armor,
which is worn externally and is designed to protect against more serious
ballistic threats; and modular concealable / tactical armor which allows the
wearer to customize the armor for either concealable or tactical use. The Armor
Group's products are sold predominantly through a network of distributors, sales
representatives, private label sales and direct contracts, with few direct
orders. All Armor Group products are certified to the applicable NIJ standards.
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The Armor Group's "Interceptor" contract with the U.S. Department of Defense is
an integral and expanding Company program. The Interceptor program is designed
as a continually upgradeable modular, soft body armor system for the U.S.
Military. The Armor Group has now delivered over 400,000 Interceptors to the
U.S. Marine Corps, U.S. Army, and U.S. Air Force. Interceptor was worn
throughout Operation Anaconda in Afghanistan and has been credited with saving
the lives of U.S. Marines and Soldiers. The Armor Group provides different
ballistic models of the Interceptor to different braches of the U.S. Military.
Through this diversification of the Interceptor ballistic packages, Point Blank
can deliver the Interceptor at a much higher rate of production.
In addition to the Interceptor, the Armor Group manufactures a number
of other protective armor systems for military use. Fragmentation armor is
designed to U.S. government military specification and offers protection against
materials and velocities associated with the fragmentation of explosive devices
such as grenades, mortars, artillery shells and ballistic projectiles. During
2002, the Armor Group was awarded authorization to proceed with the U.S. Army
Countermine program, requiring the delivery of several thousand
anti-fragmentation Countermine Ensembles.
The Armor Group expanded the sales of its tactical body armor
throughout the U.S. during 2002 and continued to offer department-specific
modification to standard products. By providing customized tactical armor, the
Armor Group was able to increase the Company's market share specifically in the
tactical market. Many of the Armor Group's Tactical vests have become recognized
as the most advanced tactical armor available in terms of form, fit, and
function.
The Armor Group's extensive lines of body-armor products also include
tactical police jackets, military field jackets, executive vests, K-9
protection, fragmentation and close-quarter-battle systems.
During 2002, DHB's Armor Group expanded by establishing a stronger
presence in the government and international community, by opening a sales and
marketing office strategically located near Washington, D.C. DHB's Government &
International liaison office is located in the prestigious Crystal City complex,
which is in close strategic proximity to the Pentagon in Washington, D.C. This
office has been able to develop special accounts with customized products
available for immediate delivery for the Military, Domestic and International
law enforcement communities.
RAW MATERIALS AND MANUFACTURING. The Armor Group manufactures all of
its bullet, fragmentation and projectile-resistant products. The primary woven
fabrics used by the Armor Group in the manufacturing of the ballistic-resistant
products include Kevlar(TM), Twaron(TM), Zylon(TM), and shield products such as
GoldFlex(TM) and Spectra Flex(TM). Research and Development efforts ensure that
the materials are combined to suit particular applications.
Substantially all of the raw materials used in the manufacturing of
ballistic-resistant garments are made from fabrics which are patented by major
corporations and which are purchased from three independent weaving or
manufacturing companies. Should any of the manufacturers cease to produce these
products for any reason, DHB would be required to use other fabrics. In such an
event, an alternative fabric would have to be selected and ballistic tests would
need to be performed. Until this was done, DHB's sale of ballistic resistant
products would be severely curtailed and DHB's financial condition would be
materially adversely affected.
RESEARCH AND DEVELOPMENT. DHB Armor Group's internal employee research
and development team has combined 75 years of ballistic research and development
experience, including 30+ years of experience in an NIJ certification
environment. Many of its research and development personnel previously held
positions of responsibility within the industry.
PATENTS AND TRADEMARKS. The Company holds numerous patents and
trademarks registered in the United States for various products. A number of
these patents are of considerable value and are believed to be critical to the
Company's business. No challenges to its patents and trademarks have arisen and
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the Company has no reason to believe that any such challenge will arise in the
future. The Company has numerous patents pending for unique, futuristic
protective armor designs and integrated technologies and has been issued 9
additional trademarks during 2002.
CUSTOMERS. The Armor Group's products are sold domestically to United
States law enforcement agencies, distributors, corrections facilities and the
U.S. Military; and internationally to governments and distributors. Sales to the
United States Armed Forces directly or as a subcontractor accounted for 57%,
62%, and 57%, of the Armor Group's revenues for the years ended December 31,
2002, 2001 and 2000, respectively. Sales directly and indirectly to domestic
state and local law enforcement agencies, security and intelligence agencies,
and federal and state correctional facilities, accounted for 22%, 22%, and 30%,
respectively, of the Armor Group's revenues in each of the years ended December
31, 2002, 2001 and 2000.
Certain sales by the Armor Group to federal agencies are made pursuant
to standard purchasing contracts issued by the General Services Administration
of the Federal Government, commonly referred to as a "GSA Schedule". GSA
Schedule contracts accounted for approximately 16%, 14% and 19%, respectively,
of the Armor Group's sales for the years ended December 31, 2002, 2001 and 2000.
PACA and Point Blank, as GSA Schedule Contract vendors, are obligated to make
all sales pursuant to such contracts at its lowest unit price. Their current GSA
Contracts expire on July 31, 2006.
With the exception of the U.S. Government, no customer accounted for
10% or more of the Company's revenues in 2002, 2001 and 2000.
MARKETING AND DISTRIBUTION. The Armor Group employs 23 customer support
representatives and 26 sales representatives under the direction of 4 sales
managers. These personnel are responsible for marketing the Armor Group's
products to federal, state, and local law enforcement agencies in the United
States. Sales to such law enforcement agencies are made primarily through
distributorships established by the sales team. However, in areas in which there
are no suitable distributors, the Armor Group will fill orders directly.
GOVERNMENT AND INDUSTRY REGULATIONS AND STANDARDS. Bullet and
fragmentation garments and accessories manufactured and sold by the Armor Group
are not currently the subject of government regulations. However, law
enforcement agencies and the military specify certain standards of performance,
such as NIJ standards for bullet-resistant vests in several categories. In
addition, the NIJ has established a voluntary standard for testing
stab-resistant armor. The Armor Group regularly submits its vests to independent
laboratories for testing under these standards and all of its products have, at
the time of manufacture, met or exceeded such standards in their respective
categories.
COMPETITION. The ballistic-resistant garment business is highly
competitive and fragmented. The number of United States manufacturers is
estimated to be approximately 20. Management is not aware of published reports
concerning the market, and most companies are privately held. Nevertheless, the
Company believes that the Armor Group is the largest manufacturer of
ballistic-resistant garments in the United States.
The Armor Group believes that the principal elements of competition in
the sale of ballistic-resistant garments are innovative design, price and
quality. The Company believes that the Armor Group enjoys a favorable reputation
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in the industry with over 30 years of supplying federal, state and municipal
governments and agencies.
BACKLOG. As of March 1, 2003, the Armor Group had a backlog of
approximately $57 million. Backlog at any one date is not a reliable indicator
of future sales. In addition to its backlog, from time to time the Armor Group
receives contract awards for municipal orders that may be extended over a period
of time. The actual dollar amount of products to be delivered pursuant to these
and similar contracts cannot be accurately predicted and is generally excluded
from reported backlog.
POTENTIAL PRODUCT LIABILITY. The products manufactured or distributed
by the Armor Group are used as protective devices in situations that could
result in serious injuries or death, including injuries that may result from the
failure of such products. The Armor Group maintains product liability insurance
for PACA and Point Blank in the amount of $21,000,000 each per occurrence, and
$22,000,000 in the aggregate, less a deductible of $100,000 for each company. PB
International maintains product liability insurance in the amount of $2,000,000
for each occurrence, with a $5,000 deductible. There is no assurance that these
amounts would be sufficient to cover the payment of any potential claim. In
addition, there is no assurance that this or any other insurance coverage will
continue to be available, or, if available, that Point Blank, PACA and PB
International would be able to obtain such insurance at a reasonable cost. Any
substantial uninsured loss would have to be paid out of the subject subsidiary's
assets, as applicable, and may have a material adverse effect on the Company's
financial condition and results of operations on a consolidated basis. The
inability to obtain product liability coverage may prohibit Point Blank, PACA or
PB International in the future from bidding for orders from certain governmental
customers. Many governmental agencies currently require such insurance coverage,
and any such inability to bid would have a material adverse effect on the
Company's financial condition and results of operations on a consolidated basis.
EMPLOYEES. As of December 31, 2002, the Armor Group employed
approximately 450 full-time employees. There was one officer of the Armor Group,
20 persons employed in supervisory capacities, 365 employed in manufacturing,
shipping and warehousing, 30 in customer service and sales, six
technical/research development personnel, and 28 office personnel. In the
opinion of management, the Armor Group maintains a satisfactory relationship
with its employees.
DHB SPORTS GROUP
PRODUCTS AND MARKETS. DHB Sports Group is a collection of brands that
service specific segments of the sporting goods and health care markets with its
sports medicine, protective gear, health supports and magnetic therapy products.
The Sports Group also offers private label or house brand programs to major
retailers and large wholesalers along with specific OEM programs to outside
brands that service the same markets.
Currently, the Sports Group manufactures and markets products under the
brands NDLTM, GRIDTM, MagneSystemsTM, FLEX-AIDTM, and Doctor Bone SaversTM. The
Sports Group markets its product to a variety of distribution points with an
emphasis on major retailers. Mass merchandisers, chain drug stores, food chains,
independent sporting goods and pharmacy retailers, catalog, wholesale and
e-commerce offer the various brands to the consumer. The Sports Group account
list includes retail and wholesale establishments such as Wal-Mart, Target,
Meijer and Phar Mor. Two customers, Wal-Mart and Target, collectively accounted
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for 75%, 61% and 54% of the Sports Group's revenues for the years ended December
31, 2002, 2001 and 2000, respectively.
The Sports Group has negotiated private label programs with three of
the largest wholesalers to the retail trade: Amerisource, Cardinal Health and
CDMA. These wholesalers have begun servicing their 10,000 store networks with
their Family PharmacyTM, LeaderTM and Quality Choice BrandsTM of health support
products.
The Sports Group is a member of NACDS (National Association of Chain
Drug Stores), PLMA (Private Label Manufacturers Association), and SGMA (Sporting
Goods Manufacturers Association).
POTENTIAL PRODUCT LIABILITY. The products manufactured or distributed
by the Sports Group are used as protective devices in situations that could
result in serious injuries or death, including injuries that may result from the
failure of such products. The Sports Group maintains product liability insurance
in the amount of $21,000,000 each per occurrence, and $22,000,000 in the
aggregate, less a deductible of $100,000. There is no assurance that these
amounts would be sufficient to cover the payment of any potential claim. In
addition, there is no assurance that this or any other insurance coverage will
continue to be available, or, if available, that the Sports Group would be able
to obtain such insurance at a reasonable cost. Any substantial uninsured loss
would have to be paid out of the Sport's Group assets and may have a material
adverse effect on the Company's financial condition and results of operations on
a consolidated basis.
EMPLOYEES. As of December 31, 2002, the Sports Group employed
approximately 45 full-time employees. There was one officer of the Sports Group,
four persons employed in supervisory capacities, 30 employed in manufacturing,
shipping and warehousing, three in sales and customer service, and seven office
personnel. All of the Sports Group's employees are employed full-time. In the
opinion of management, the Sports Group's relationship with its employees is
good. The Sports Group also has more than 50 independent sales representatives
who, together with the sales executives, are responsible for sales throughout
the Untied States, Western Europe, Asia, the Middle East and Latin America. The
Sports Group has in-house sales support and state-of-the-art EDI order and
invoicing capabilities.
SEGMENT INFORMATION
As described in detail above, the Company operates in two principal
segments: ballistic-resistant equipment and protective athletic/sports products.
The Company disposed of its Electronics Group in March 2000, and closed its hard
armor company, LAP, in October 1999. These two divestitures are accounted for as
discontinued operations. Financial information on the Company's business
segments (in thousands) is as follows:
NET SALES 2002 2001 2000
_________ ________ _______ _______
Ballistic-resistant equipment $124,860 $93,506 $64,721
Electronic components/LAP -- -- 401
Protective athletic & sports products 5,492 4,520 5,297
________ _______ _______
130,352 98,026 70,419
Less inter-segment sales (5) (11) --
Less discontinued operations (3) -- -- (401)
________ _______ _______
Consolidated net sales $130,347 $98,015 $70,018
======== ======= =======
6
Income from Operations
Ballistic-resistant equipment $17,534 $15,029 $10,591
Electronic components -- -- (517)
Protective athletic & sports products 563 94 (166)
Corporate and other (1) (4,274) (2,344) (2,226)
________ _______ _______
Sub-total 13,823 12,779 7,682
Income from discontinued operations(3) -- 517
________ _______ _______
Consolidated operating income $13,823 $12,779 $8,199
======= ======= ======
Depreciation Expense
Ballistic-resistant equipment $ 289 $ 223 $ 147
Protective athletic & sports products 86 157 108
_______ _______ ______
375 380 255
Corporate and other 88 98 69
_______ _______ ______
Consolidated depreciation expense $ 463 $ 478 $ 324
======= ======= ======
Interest Expense
Ballistic-resistant equipment $ 935 $ 463 $ 33
Protective athletic & sports products -- 77 40
_______ _______ ______
935 540 73
Corporate and other 710 1,973 2,670
_______ _______ ______
Consolidated interest expense $ 1,645 $ 2,513 $2,743
======= ======= ======
Income Taxes (Benefit)
Ballistic-resistant equipment $ 22 $ 143 $ 1
Protective athletic & sports products 2 -- 2
_______ _______ ______
24 143 3
Corporate and other (3,696) 32 127
_______ _______ ______
Consolidated tax (benefit) expense $(3,672) $ 175 $ 130
======= ======= ======
Identifiable Assets
Ballistic-resistant equipment $56,471 $36,426 $22,383
Protective athletic & sports products 2,907 2,768 3,517
________ _______ _______
59,378 39,194 25,900
Corporate and other (2) 5,993 1,702 2,156
________ _______ _______
Consolidated net assets $65,371 $40,896 $28,056
======= ======= =======
Foreign sales accounted for 2%, 2% and 2%, of the total revenues for
the years ended December 31, 2002, 2001 and 2000, respectively. Foreign
identifiable assets accounted for 1%, 1%, and 1% of the total assets at
December 31, 2002, 2001 and 2000, respectively.
(1) Corporate and other includes corporate general and
administrative expenses.
(2) Corporate assets are principally deferred income tax assets,
other investment and property and equipment.
(3) Discontinued operations included the Electronics Group sold on
March 10, 2000, as well as the loss from the shutdown of the
LAP plant in 1999.
AVAILABLE INFORMATION
The Company's internet address/website is www.dhbt.com. As of the date
of this Form 10-K, due to a late start in establishing the necessary links and
certain technical difficulties on the website, the Company does not make
available free of charge on its website the Company's reports filed under the
Securities Exchange Act of 1934, although the Company anticipates being able to
do so some time during the second quarter of 2003, such that these reports can
be available promptly after they are filed with the SEC. In the interim, the
Company will voluntarily provide electronic copies (or a reasonable number of
paper copies) of its filings free of charge upon request.
ITEM 2. PROPERTIES
CORPORATE HEADQUARTERS. The Company's corporate headquarters are in a
3,750 square foot leased office located at 555 Westbury Avenue, Carle Place, New
York 11514. The lease expires on December 31, 2004.
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PACA. The Company leases a 60,060 square foot manufacturing facility
with administrative offices at 179 Mine Lane, Jacksboro, Tennessee 37757, for
its subsidiary, PACA. The lease expires on April 15, 2006.
NDL/POINT BLANK FACILITY. Point Blank leases a 67,000 square foot
office and manufacturing facility (the "Oakland Park Facility") located at 4031
N.E. 12th Terrace, Oakland Park, Florida 33334, from V.A.E. Enterprises, LLC
("V.A.E."), a Limited Liability Corporation controlled by Mrs. Terry Brooks,
wife of Mr. David H. Brooks, and beneficially owned by Mr. and Mrs. Brooks'
minor children. NDL Products occupies a portion of the space in the Oakland Park
facility. The lease expires on December 31, 2010. Management believes that the
terms of the lease are no less favorable to the Company than terms that would
have been obtained at the time of the lease from an unrelated third party.
NDL WAREHOUSE. On October 1, 2002, the Company entered into a two-year
lease for a 31,500 square foot warehouse adjacent to the Oakland Park Facility
from an unrelated third party. This warehouse is located at 1201 NE 38th Street,
Oakland Park, Florida.
POINT BLANK-ADDITIONAL FACILITY. In January 2003, the Company leased a
51,246 square foot manufacturing facility with administrative offices in
Deerfield, Florida, to expand Point Blank's military operations. The lease
expires on April 30, 2008.
DC OFFICE. In May 2002, the Company opened a 2,192 square foot
government and international liaison sales office at 1215 Jefferson Davis
Highway, Arlington, Virginia. The lease expires on April 30, 2006.
POINT BLANK INTERNATIONAL FACILITY. PB International leases a 5,700
square foot office and warehouse facility located at Rue Leon Frederiq, 14, 4020
Liege, Belgium. This space is rented on a month-to-month basis.
ITEM 3. PENDING LITIGATION
The Company has filed a lawsuit in the Supreme Court of the State of
New York, County of Nassau, against its insurance carrier and an insurance
agent, for negligence and breach of fiduciary duties as a result of the damages
the Company incurred during Hurricane Irene in October 1999. The Company is
vigorously pursuing this action. On March 17, 2003, the Company entered into a
settlement agreement with its insurance agent for a $1 million payment to the
Company. The lawsuit against the insurance carrier has been scheduled for trial
in the fall of 2003.
On or about June 21, 2001, American Body Armor and Equipment Inc.
commenced an action against the Company's subsidiary, PACA, in the United States
District Court of the Middle District of Florida. In September 2002, the parties
filed a joint resolution and settlement with American Body Armor, ending this
patent infringement case. This settlement will not have a material adverse
effect on the Company's business, result of operations or financial condition.
On October 1, 2002, a shareholders' derivative action was commenced in
the Supreme Court of the State of New York, County of Nassau, on behalf of the
Company against the directors and officers of the Company and the Company as a
nominal defendant, by Plumbers & Pipefitters Local 112 Pension Fund,
derivatively on behalf of itself and all others similarly situated
("Plaintiff"). This case was dismissed with prejudice on March 13, 2003, without
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liability to the Company or its officers or directors. The Company is seeking
dismissal of another identical suit brought on behalf of a second shareholder on
the same grounds that required dismissal in the other suit. The Company
maintains $10 million of directors and officers' liability insurance covering
this type of claim.
On or about October 30, 2002, the Company filed a lawsuit in the United
States District Court for the Southern District of Florida against certain union
leaders, claiming defamation, conspiracy to defame and tortuous interference
with contractual and ongoing business relationships. The case is still in its
preliminary stages, and the Company is vigorously pursuing this action.
The Company is involved in other litigation, none of which is
considered by management to be material to the Company's business or, if
adversely determined, would have a material adverse effect on the Company's
financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS: None
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The common stock of the Company began trading on the American Stock
Exchange on February 1, 2002 under the symbol DHB. Previously, the Company was
trading on the OTC Bulletin Board under the symbol DHBT. The following table
shows the high and low bid prices of the Company's common stock for each quarter
in the two-year period ended December 31, 2002.
Low High
2002 4th Quarter 1.27 2.33
3rd Quarter 1.69 4.69
2nd Quarter 4.05 7.24
1st Quarter 5.50 8.10
2001 4th Quarter 3.00 6.03
3rd Quarter 1.95 3.00
2nd Quarter 1.95 2.79
1st Quarter 1.69 3.09
The Company pays cash dividends on its Series A, 12% convertible
preferred stock (the "Preferred Stock"). The Preferred Stock has a dividend rate
of $0.72 per share per annum, an amount equal to the interest that would have
been payable on the shareholder indebtedness from which the Preferred Stock was
converted (See "Certain Transactions" below).
The Company presently retains its income from earnings and anticipates
that its future earnings will be retained to finance the expansion of its
business. Any determination to pay cash dividends on the Company's common stock
in the future will be at the discretion of the Board of Directors after taking
9
into account various factors, including financial condition, results of
operations, current and anticipated cash needs, and restrictions, if any, under
the Company's credit agreements.
On March 1, 2003 there were 134 holders of record of the Company's
common stock. However, the number of holders of record includes brokers and
other depositories for the accounts of others. The Company estimates that there
are approximately 3,700 beneficial owners of its common stock.
In 2002, the Company issued 8,931,832 unregistered shares of common
stock pursuant to the exercise of warrants, for which the Company received
aggregate proceeds of approximately $6,324,000. The Company also issued 275,000
unregistered common stock purchase warrants to its investor relations firm;
these warrants have an exercise price of $4.95 per share and expire on June 4,
2006. In addition, the Company issued to directors and executive officers a
total of 200,000 unregistered five-year common stock purchase warrants
exercisable at $7.11 per share. Also during 2002 the Company issued and canceled
150,000 warrants to an employee. See "Executive Compensation-Stock Warrants"
below.
ITEM 6. SELECTED FINANCIAL INFORMATION
The selected consolidated financial data set forth below for the years
ended December 31, 2002, 2001, 2000, 1999, and 1998, were derived from the
audited consolidated financial statements of the Company. The data set forth
below should be read in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the Consolidated Financial
Statements and related Notes appearing elsewhere in this Form 10-K.
INCOME STATEMENT DATA (IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
2002 2001 2000 1999 1998
________ _______ _______ _______ _______
Net sales $130,347 $98,015 $70,018 $35,141 $33,073
Cost of goods sold 92,621 71,639 49,359 27,566 20,442
________ _______ _______ _______ _______
Gross profit 37,726 26,376 20,659 7,575 12,631
Selling, general and
administrative expenses 23,903 13,597 12,460 17,446 9,778
________ _______ _______ _______ _______
Income (loss) before other income
(expense) 13,823 12,779 8,199 (9,871) 2,853
Interest expense (1,645) (2,513) (2,743) (2,908) (1,096)
Other income (expense) 130 42 341 (9,561) 22
________ _______ _______ _______ _______
Income (loss) before discontinued
operations 12,308 10,308 5,797 (22,340) 1,779
Discontinued operations -- -- 340 (9,714) (1,628)
________ _______ _______ _______ _______
Income (loss) before income taxes
12,308 10,308 6,137 (32,054) 151
Income tax (benefit) expense (3,672) 175 130 67 21
________ _______ _______ _______ _______
Net income (loss) 15,980 10,133 6,007 (32,121) 130
Dividend - preferred stock (345) -- -- -- --
________ _______ _______ _______ _______
Income available to common stockholders
$ 15,635 $10,133 $ 6,007 $(32,121) $ 130
======== ======= ======= ======== =======
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Earnings per share
Basic $0.42 $0.32 $0.19 $(1.24) $0.005
Diluted $0.37 $0.28 $0.18 $(1.09) $0.005
BALANCE SHEET DATA (IN THOUSANDS) 2002 2001 2000 1999 1998
_________________________________ ________ _______ _______ _______ _______
Working capital $ 53,125 $20,472 $ 7,497 $ 2,047 $21,634
Total assets 65,371 40,896 28,056 23,300 41,364
Total current liabilities 7,822 16,585 16,949 5,153 4,335
Long-term liabilities 26,204 19,305 16,062 16,280 11,915
Stockholders' equity (deficit) 31,345 5,006 (4,955) (10,186) 18,172
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following analysis of the Company's financial condition and results
of operations should be read in conjunction with the financial statements,
including the notes thereto, contained elsewhere in this Form 10-K.
GENERAL
The Company is a holding company, which currently conducts business
through its wholly-owned subsidiaries organized in two divisions, the DHB Armor
Group and the DHB Sports Group. The Company's products are sold both nationally
and internationally. The Armor Group's sales are directed primarily to law
enforcement agencies and military services. Sales to the U.S. military comprise
the largest portion of the Armor Group's business, followed by sales to federal,
state and local law enforcement agencies, including correctional facilities.
Accordingly, any substantial increase or reduction in governmental spending or
change in emphasis in defense and law enforcement programs could have a material
effect on the Armor Group's business. The Sports Group manufactures and markets
a variety of sports medicine, protective gear, health supports and magnetic
therapy products under its own labels, private labels and house brands for major
retailers.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001.
Consolidated net sales for the year ended December 31, 2002 increased
33.0% to a record $130.3 million compared to net sales of $98.0 million for the
year ended December 31, 2001. Due to the emphasis on homeland security and
various military actions occurring throughout 2002, the Armor Group's revenue
increased 33.5% to $124.8 million compared to $93.5 million for 2001. The Sports
Group's revenues increased by 22.1% to $5.5 million in 2002 versus $4.5 million
for 2001. Gross profit margin for the year ended December 31, 2002 was 28.9%
compared to 26.9% in 2001, primarily as a result of the increase in revenues as
well as volume purchase discounts which the Company was able to utilize during
2002. Selling, general and administrative expenses as a percentage of sales
increased to 18.3% of 2002 revenues as compared to 13.9% of revenues in 2001.
The selling, general and administrative expenses increased from $13.6 million in
2001 to $23.9 million in 2002, primarily as a result of increased legal fees in
the successful defense of a patent infringement case and legal and professional
fees associated with the union organizing campaign targeting DHB's subsidiary,
11
including the associated security, public relations and legal fees arising out
of the defense of the organizing effort. Also included in selling, general and
administrative expenses for 2002 were a $646,000 non-cash compensation charge
and $255,000 straight-line rent described above. Primarily as a result of the
increased selling, general and administrative expenses, operating margin
decreased from 13.0% in 2001 to 10.6% in 2002.
Interest expense for the year ended December 31, 2002 was $1.6 million,
down nearly $900,000 from the $2.5 million of interest expense for the year
ended December 31, 2001. This decrease is the result of lower interest rates
under the Company's credit facility combined with the repayment of $5.5 million
of shareholder indebtedness and the conversion of $3 million of shareholder
indebtedness into preferred stock. Although the total amount owed under the
credit facility increased, the overall cost of capital decreased during 2002.
The Company has net operating loss (NOL) carryforwards of approximately
$7.4 million available to offset income in future years. The benefit to the
Company is the cash tax payments such NOL carryforwards can offset. Because the
Company has had three solid years of growth and is projecting profitability in
2003, it is more likely than not that the Company can utilize this benefit prior
to its expiration in 2019. Therefore, in 2002, the Company has recognized a
deferred income tax benefit of approximately $3.7 million related to temporary
differences that will result in deductible amounts in future years and the net
operating loss carryforwards. The deferred tax asset is broken down into the
current portion of $3.3 million and the long-term portion of $1.4 million for
temporary timing differences in book to tax income. The income tax expense for
2001 was nominal and was offset by the NOL, so that only state and franchise
taxes were expensed.
Net income was approximately $16.0 million for 2002, which was reduced
by the $345,000 preferred stock dividend paid to bring the income available to
common stockholders to $15.6 million or $0.37 cents per fully diluted share
compared to income of $10.1 million for the year ended December 31, 2001 or
$0.28 per fully diluted share. The fully diluted shares outstanding for the
years ended December 31, 2002 and 2001 were 42,304,254 and 36,775,910,
respectively.
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000.
Consolidated net sales for the year ended December 31, 2001 were $98.0
million, a 40.0% increase over the 2000 annual net sales of $70.0 million. This
increase is primarily attributable to increased purchases by the Military and
domestic law enforcement customers. The gross margin decreased from 29.5% to
26.9%, primarily as a result of the plant shutdown and relocation of the PACA
facility during the first quarter of 2001. However, operating margins expanded
to 13.0% of revenues or $12.8 million for the year ended December 31, 2001 as
compared to 11.7% of revenues or $8.2 million for the year ended December 31,
2000. This increase is attributable to the manufacturing operating efficiencies
resulting from higher sales volumes, volume purchasing discounts from our
vendors, and tighter control of expenses.
The Company's selling, general and administrative expenses for the year
ended December 31, 2001 as a percentage of revenues decreased to 13.9% as
compared to 17.8% in 2000.
12
Interest expense for the year 2001 decreased by approximately $230,000
to $2.5 million as a result of lower interest rates under the Company's credit
facility with LaSalle Business Credit. Other income declined by $250,000, as the
2000 figure included gain on the sale of the previous corporate headquarters.
As a result of the foregoing, the Company achieved net income of $10.1
million for the year 2001 as compared to $6.0 million for the year 2000, a 68.7%
increase. Earnings per share for the year ended December 31, 2001 were $0.28 per
share with 36,775,910 fully diluted shares versus $0.18 per share on 34,086,963
fully diluted shares for 2000.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary capital requirements over the next twelve months
are to assist its subsidiaries in financing their working capital requirements.
Its operating subsidiaries sell the majority of their products on 60 to 90-day
terms. Working capital is needed to finance the receivables, manufacturing
process and inventory. Working capital at December 31, 2002 was approximately
$53.1 million as compared to working capital of approximately $20.5 at December
31, 2001. This increase in working capital reflects primarily an $11.9 million
increase in accounts receivable, an $8.8 million increase in inventory and a
$7.9 million decrease in accounts payable. These changes caused the Company to
use approximately $15.5 million in its cash flow from operations.
On September 24, 2001, the Company entered into a Loan and Security
Agreement (the "Credit Agreement"), as amended on June 28, 2002 and February 25,
2003, which expires on September 24, 2004. Pursuant to the Credit Agreement, the
Company may borrow up to the lesser of (i) $35 million during the period
commencing on February 18, 2003 and ending on August 31, 2003, $30 million
during the period commencing on September 1, 2003 and ending on November 30,
2003, and $25 million at all times on and after December 1, 2003, or (ii) 85% of
eligible accounts receivable plus the lesser of $14 million or certain
percentages of eligible inventory, as defined. Interest is either at the prime
rate or LIBOR plus 2.50%. A portion of these funds was used to partially
refinance higher interest debt. The remaining funds have been and will be used
to meet increased demands for capital generated during a period of rapid growth,
which has accelerated in response our growing markets.
The Company's capital expenditures in 2002 decreased to $367,000, as
compared to approximately $554,000 during 2001. The Company anticipates
increasing its capital expenditures in 2003 to help further the growth of the
Company. This increase should not have a material impact on the financial
statements.
The Company believes that its existing credit line, together with funds
generated from operations, will be adequate to sustain its operations through
2003.
13
CASH CONTRACTUAL OBLIGATIONS
The following table presents the Company's estimated cash requirements for
contractual obligations outstanding as of December 31, 2002:
Payments Due by Period
($ in thousands)
______________________
Less
than 1-3 4-5 After
Contractual Obligations 1 year years years 5 years Total
_______________________ ______ _______ ______ _______ _______
Long-Term Debt $ -- $25,854 $ -- $ -- $25,854
Employment Contracts 625 1,400 -- -- 2,025
Operating Leases 1,295 2,741 2,456 3,035 9,527
Total Contractual Cash
Obligations $1,920 $29,995 $2,456 $3,035 $37,406
14
CRITICAL ACCOUNTING POLICIES
The Company's management believes that its critical accounting polices
include:
REVENUE RECOGNITION - DHB recognizes revenue when it is realized or
realizable and has been earned. Product revenue is recognized when persuasive
evidence of an arrangement exists, the product has been delivered and legal
title and all risks of ownership have been transferred, written contract and
sales terms are complete, customer acceptance has occurred and payment is
reasonably assured. Returns are minimal and do not materially affect the
consolidated financial statements.
ESTIMATES - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets, liabilities and contingent assets and liabilities in the
financial statements and accompanying notes. Significant estimates inherent in
the preparation of the accompanying consolidated financial statements include
the carrying value of long-lived assets and allowances for receivables and
inventories. Actual results could differ from these estimates.
INCOME TAXES - DHB uses the asset and liability approach to account for
income taxes. Under this method, deferred tax assets and liabilities are
recognized for the expected future tax consequences of differences between the
carrying amounts of assets and liabilities and their respective tax basis using
enacted tax rates in effect for the year in which the differences are expected
to reverse. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period when the change is enacted. Deferred
tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all of the deferred
tax assets will not be realized.
OTHER INVESTMENT - DHB has a cost-based investment in a non-publicly traded
company. A decline in the value of this cost-based investment below cost that is
deemed other than temporary is charged to earnings, resulting in a new cost
basis for the investment.
NEW ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 143, "Accounting for Asset Retirement Obligations." This standard addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. DHB is required to implement SFAS No. 143 on January 1, 2003. DHB does
not expect this standard to have a material impact on its consolidated financial
position or results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This standard nullifies Emerging
Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to exit an Activity (including Certain
Costs Incurred in a Restructuring)." This standard requires that a liability for
a cost associated with an exit or disposal activity be recognized when the
liability is incurred rather than the date of an entity's commitment to an exit
plan. DHB is required to implement SFAS No. 146 on January 1, 2003.
15
DHB does not expect this standard to have a material impact on its consolidated
financial position or results of operations.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, including Indirect
Guarantees of Indebtedness of Others," which expands previously issued
accounting guidance and disclosure requirements for certain guarantees. The
interpretation requires an entity to recognize an initial liability for the fair
value of an obligation assumed by issuing a guarantee. The provision for initial
recognition and measurement of the liability will be applied on a prospective
basis to guarantees issued or modified after December 31, 2002. DHB does not
expect this interpretation to have a material impact on its consolidated
financial position or results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure- an amendment of FASB Statement No.
123," which provides optional transition guidance for those companies electing
to voluntarily adopt the accounting provisions of SFAS No. 123. In addition,
SFAS No. 148 amends the disclosure requirements of SFAS 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. The Company does not plan to change its method of
accounting for stock-based employee compensation. The Company will make the
required interim disclosures effective with the quarter ending March 31, 2003.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an Interpretation of ARB No. 51," which requires all
variable interest entities ("VIEs") to be consolidated by the primary
beneficiary. The primary beneficiary is the entity that holds the majority of
the beneficial interest in the VIE. In addition, the interpretation expands
disclosure requirements for both variable interest entities that are
consolidated as well as VIEs from which the entity is the holder of a
significant amount of the beneficial interests, but not the majority. The
disclosure requirements of this interpretation are effective for all financial
statements issued after January 31, 2003. The consolidation requirements of this
interpretation are effective for all periods beginning after June 15, 2003. DHB
does not expect this interpretation to have a material impact on its
consolidated financial position or results of operations.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report contains certain forward-looking statements and
information relating to the Company that is based on the beliefs of the
Company's management, as well as assumptions made by and information currently
available to the Company's management. When used in this document, the words
"anticipate," "believe," "estimate," "expect," "going forward," and similar
expressions, as they relate to the Company or Company management, are intended
to identify forward-looking statements. Such statements reflect the current
views of the Company with respect to future events and are subject to certain
risks, uncertainties and assumptions, including, but not limited to: general
business and economic conditions, the maintenance of the Company's military
supply contacts, the level of governmental expenditures on law enforcement
equipment, continued supplies of materials from critical vendors, and the
continued availability of insurance for the Company's products. Should one or
more of these risks or uncertainties materialize, or should the underlying
assumptions prove incorrect, actual results may vary materially from those
described herein as anticipated, believed, estimated or expected. Readers are
cautioned not to place undue reliance on these forward-looking statements that
speak only as of the date hereof. The Company undertakes no obligation to
publish revised forward-looking statements to reflect the occurrence of
unanticipated events or circumstances after the date hereof.
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company does not issue or invest in financial instruments or their
derivatives for trading or speculative purposes. The Company's market risk is
limited to fluctuations in interest rates as it pertains to its borrowings under
its $35 million credit facility. The Company can borrow at either the prime rate
of interest or LIBOR plus 2.50%. Any increase in these reference rates could
adversely affect the Company's interest expense. The Company does not have any
material sales, purchases, assets or liabilities denominated in currencies other
than the U.S. Dollar, and as such, is not subject to material foreign currency
exchange rate risk.
16
ITEM 8. FOURTH SECOND THIRD FINANCIAL QUARTER QUARTER QUARTER STATEMENTS AND
SUPPLEMENTAL DATA
SEE INDEX TO CONSOLIDATED FINANCIAL STATEMENTS APPEARING IN THE CONSOLIDATED
FINANCIAL STATEMENTS ANNEXED HERETO.
SUPPLEMENTAL QUARTERLY FINANCIAL DATA (UNAUDITED, IN THOUSANDS EXCEPT FOR PER
SHARE DATA
First Second Third Fourth
FISCAL 2002 Quarter Quarter Quarter Quarter
_______ _______ _______ _______
Net sales $33,639 $34,014 $30,146 $32,548
Cost of goods sold 24,184 23,977 21,005 23,455
_______ _______ _______ _______
Gross profit 9,455 10,037 9,141 9,093
Selling, general and admin expense 4,229 5,098 7,282 7,294
_______ _______ _______ _______
Operating income 5,226 4,939 1,859 1,799
Other income (expense), net (441) (452) (503) (119)
_______ _______ _______ _______
Income before income taxes 4,785 4,487 1,356 1,680
Income taxes 27 61 81 (3,841)
_______ _______ _______ _______
Net income 4,758 4,426 1,275 5,521
Dividend - preferred stock -- -- -- (345)
_______ _______ _______ _______
Income available to common stockholders $4,758 $4,426 $1,275 $5,176
======= ======= ======= =======
Earnings per share
Basic $0.14 $0.12 $0.03 $0.13
======= ======= ======= =======
Diluted $0.11 $0.11 $0.03 $0.12
======= ======= ======= =======
Weighted average shares outstanding
Basic shares 31,486,391 36,789,796 40,413,746 40,413,746
========== ========== ========== ==========
Diluted shares 41,722,903 41,024,916 43,827,580 42,641,615
========== ========== ========== ==========
First Second Third Fourth
FISCAL 2001 Quarter Quarter Quarter Quarter
_______ _______ _______ _______
Net sales $20,175 $23,514 $24,009 $30,317
Cost of good sold 15,223 17,309 17,280 21,827
_______ _______ _______ _______
Gross profit 4,952 6,205 6,729 8,490
Selling, general and admin expense 3,304 3,090 3,282 3,921
_______ _______ _______ _______
Operating income 1,648 3,115 3,447 4,569
Other income (expense) (619) (678) (627) (547)
_______ _______ _______ _______
Income before income taxes 1,029 2,437 2,820 4,022
Income taxes 6 134 27 8
_______ _______ _______ _______
Net income $ 1,023 $ 2,303 $ 2,793 $ 4,014
======= ======= ======= =======
Earnings per share
Basic $0.03 $0.07 $0.09 $0.13
======= ======= ======= =======
Diluted $0.03 $0.07 $0.08 $0.11
======= ======= ======= =======
Weighted average shares outstanding
Basic shares 31,230,898 31,316,940 31,411,180 31,168,088
========== ========== ========== ==========
Diluted shares 36,760,623 35,923,088 35,666,896 36,567,864
========== ========== ========== ==========
17
First Second Third Fourth
FISCAL 2000 Quarter Quarter Quarter Quarter
_______ _______ _______ _______
Net sales $13,576 $16,128 $18,591 $21,723
Cost of sales 9,594 11,516 13,034 15,215
_______ _______ _______ _______
Gross profit 3,982 4,612 5,557 6,508
Selling, general and admin expenses 2,887 2,815 3,062 3,696
_______ _______ _______ _______
Operating income 1,095 1,797 2,495 2,812
Other income (expense) (785) (763) (391) (463)
_______ _______ _______ _______
Income before discontinued operations 310 1,034 2,104 2,349
Discontinued operations 340 -- -- --
_______ _______ _______ _______
Income before income taxes 650 1,034 2,104 2,349
Income taxes 28 23 93 (14)
_______ _______ _______ _______
Net income $622 $1,011 $2,011 $ 2,363
==== ====== ====== =======
Earnings per share
Basic $0.02 $0.03 $0.07 $0.07
===== ===== ===== =====
Diluted $0.02 $0.03 $0.07 $0.07
===== ===== ===== =====
Weighted average shares outstanding
Basic shares 32,332,181 32,343,941 32,237,463 31,964,196
========== ========== ========== ==========
Diluted shares 32,332,181 32,343,941 32,751,423 34,969,533
========== ========== ========== ==========
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE: NONE
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The Directors serve for a term of one year following their election at
the Annual Meeting of Stockholders, and until their successors have been elected
and qualified. The officers serve at the discretion of the Board of Directors.
Set forth below is certain information regarding the Company's current Directors
and executive officers:
DAVID H. BROOKS, age 48, has served as the Chairman or Co-Chairman of the
Company since its inception in 1992. Mr. Brooks has served as the Chief
Executive Officer of the Company since July 2000, having previously served in
that capacity prior to September 1998. Mr. Brooks also serves as Chairman of the
Board, President and a Director of Brooks Industries of L.I., Inc., a privately
held venture capital firm.
JEROME KRANTZ, age 47, has been a Director of the Company since July 2000.
He has over 20 years' experience in the insurance and financial industry. Mr.
Krantz is a chartered life underwriter and a chartered financial consultant. In
addition, he is a registered investment advisor. He presently serves as the
Chairman of the Company's audit and compensation committees.
18
DAWN M. SCHLEGEL, age 33, is the Chief Financial Officer of the Company.
She has also served as Treasurer and Secretary of the Company since September
1999, and was elected a Director as of July 2000. She has functioned in various
positions within the Company's operations and finances since 1996. Prior to
joining the Company, Mrs. Schlegel worked for Israeloff, Trattner & Co. CPA's
P.C., a certified public accounting firm, for more than five years.
GARY NADLEMAN, age 50, has been a Director of the Company since July 2001.
He has over 20 years' experience in the apparel industry. Mr. Nadleman is a
private investor and the President of Synari, Inc., a manufacturer of women's
sportswear and other apparel. Mr. Nadelman is a member of the audit and
compensation committees.
CARY CHASIN, age 55, has been a Director of the Company since October 2002.
Mr. Chasin is presently an advertising executive. He has over 30 years'
experience in owning and operating apparel retail, manufacturing and importing
businesses. Mr. Chasin is a member of the audit and compensation committees.
BARRY BERKMAN, age 62, has been a Director of the Company since February
2003. Mr. Berkman is a partner with Berkman Bottger & Rodd, a New York law firm,
and is a member of the American Bar Association.
SANDRA L. HATFIELD, age 49, has been Chief Operating Officer of the Company
since December 2000. From October 1996 until December 2000, she served as
President of Point Blank. For more than five years before that, she was the Vice
President of Production at PACA.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE. The following table sets forth certain summary
information regarding the compensation of the executive officers whose total
salary and bonus for any of the years ended December 31, 2002, 2001 or 2000
exceeded $100,000:
NAME AND PRINCIPAL POSITION YEAR ANNUAL
SALARY(1)
_________________________________________________________________
David H. Brooks 2002 $643,750
Chairman and CEO 2001 525,000
2000 413,542
Sandra L. Hatfield 2002 $163,068
Chief Operating Officer 2001 163,497
2000 152,098
_________________________________________________________________
Dawn M. Schlegel 2002 $140,625
Chief Financial Officer 2001 103,718
2000 100,000
_________________________________________________________________
(1) Although certain officers receive certain benefits, such as auto
allowances and expense allowances, the value of such perquisites
did not in any year exceed the lesser of $50,000 or 10% of the
respective officer's salary and bonus.
19
EMPLOYMENT AGREEMENTS. In July 2000, Mr. Brooks and the Company entered
into a five-year employment agreement. Pursuant to the agreement, Mr. Brooks
received an annual salary of $500,000 through July 2001, with annual increases
of $50,000 thereafter. On the effective date of the agreement, Mr. Brooks
received 3,750,000 warrants exercisable at $1.00 per share and vesting 20%
immediately and in 20% annual increments thereafter. These warrants expire in
July 2010.
STOCK WARRANTS. During 2002, each of the five then-current board
members were awarded 25,000 warrants exercisable at $7.11 per share for five
years for serving as board members. Mrs. Hatfield was awarded 25,000 warrants
exercisable at $7.11 per share for being Chief Operating Officer. The Company
also issued 275,000 warrants to an independent consulting firm to handle the
Company's investor relations; these warrants expire on June 4, 2006 and have an
exercise price of $4.95 per share. The value of these warrants of approximately
$646,000 is included in selling, general and administrative expenses for the
year ended December 31, 2002. This non-cash payment increased the Company's
additional paid-in capital. During 2002, 150,000 warrants were issued and
cancelled. During the year ended December 31, 2002, no additional stock options,
warrants or similar securities, rights or interests were granted to any of the
executive officers of the Company listed in the Summary Compensation Table
above. Mr. Brooks and Mrs. Brooks exercised warrants during 2002 for 5,593,751
shares. Morton Cohen (a former Director) exercised warrants during 2002 for
121,415 shares. No other options, warrants or similar securities, rights or
interests were exercised by any Directors or any such executive officers in
2002.
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors and executive officers, and persons who own more than 10% of
a registered class of the Company's equity securities, to file with the
Securities and Exchange Commission initial reports of ownership and reports of
changes of ownership of Common Stock and other equity securities of the Company.
To the Company's knowledge, based solely on review of the copies of such reports
furnished to the Company and written representations that no other reports were
required during the year ended December 31, 2002, all Section 16(a) filing
requirements applicable to its officers, directors and greater-than-10%
beneficial owners were complied with.
The following table summarizes option/warrant grants (excluding
director grants) and the named officers' stock option activity during 2002.
Number of Potential Gain at assumed
Securities % of Total Annual Rates of Stock
underlying Options/SARs Price Appreciation for
options / granted to Exercise or Option Term (1):
SAR's(2) employees in Base Price Expiration _________________________
Name Granted Fiscal Year ($/Share) Date 5% 10%
__________________ __________ ____________ ___________ __________ ___ ___
David H. Brooks 25,000 4% $7.11 4/09/07 $00 $00
Sandra L. Hatfield 25,000 4% $7.11 4/09/07 $00 $00
Dawn M. Schlegel 25,000 4% $7.11 4/09/07 $00 $00
1. These amounts assume hypothetical appreciation rates of 5% and 10% over the
term of the option, as required by the SEC, and are not intended to forecast the
appreciation of the stock price. No gain to the named officers will occur unless
the price of DHB's common shares exceeds the options' exercise price.
2. The Company has no SAR's.
20
AGGREGATED WARRANT/OPTION VALUES
The following table sets forth information regarding the number and
value of unexercised warrants/options held at December 31, 2002 by the executive
officers listed in the Summary Compensation Table above. This table does not
include warrants provided to Mr. Brooks in capacities other than as a director
or officer of the Company.
Number of Securities
Underlying Unexercised Value of Unexercised In-the Money
Options / SAR at FY-End Options / SAR at FY-End
_____________________________ _________________________________
Name Exercisable Unexercisable Exercisable Unexercisable
__________________ ___________ _____________ ___________ _____________
David H. Brooks 2,325,000 1,500,000 $1,300,500 $990,000
Sandra L. Hatfield 225,000 200,000 -0- -0-
Dawn M. Schlegel 155,000 -0- -0- -0-
COMPENSATION COMMITTEE REPORT
The compensation of the Company's executive officers is generally
determined by either the Board of Directors or the Compensation Committee of the
Board of Directors, subject to approval by the Board of Directors, and subject
to applicable employment agreements. See "Executive Compensation." Each member
of the Compensation Committee is a director who is not an employee of the
Company or any of its affiliates.
GENERAL POLICIES
The Company's compensation programs are intended to enable the Company
to attract, motivate, reward and retain the management talent required to
achieve its corporate objectives, and thereby increase shareholder value. It is
the Company's policy to provide incentives to its senior management to achieve
both short-term and long-term objectives and to reward exceptional performance
and contributions to the development of the Company's businesses. To attain
these objectives, the Company's executive compensation program includes a
competitive base salary and stock-based compensation.
Stock warrants are granted to employees, including the Company's
executive officers, by the Board or the Compensation Committee. The Compensation
Committee believes that stock warrants provide an incentive that focuses the
executive's attention on managing the Company from the perspective of an owner
with an equity stake in the business. Incentive stock warrants are awarded with
an exercise price equal to the market value of Common Stock on the date of
grant, and all such warrants have a maximum term of ten years and generally
become exercisable not less than six months from the date of grant. Among the
Company's executive officers, the number of shares subject to warrants granted
to each individual generally depends upon the level of that officer's
responsibility. Previous grants of stock warrants are reviewed but are not
considered the most important factor in determining the size of any executive's
stock option award in a particular year.
21
RELATIONSHIP OF COMPENSATION TO PERFORMANCE The Compensation Committee annually
establishes, subject to the approval of the Board of Directors and any
applicable employment agreements, the salaries that will be paid to the
Company's executive officers during the coming year. In setting salaries, the
Compensation Committee takes into account several factors, including competitive
compensation data, the extent to which an individual may participate in the
stock plans maintained by the Company, and qualitative factors bearing on an
individual's experience, responsibilities, management and leadership abilities,
and job performance.
COMPENSATION OF CHIEF EXECUTIVE OFFICER For fiscal 2002, pursuant to the terms
of his employment agreement with the Company, David H. Brooks received a base
salary of $575,000. See "Executive Compensation - Employment Agreements." In
light of this employment agreement, the Compensation Committee was not required
to make any decision regarding the cash compensation of Mr. Brooks. Mr. Brooks
also received warrants to purchase 25,000 shares of common stock at $7.11 per
share (as did each of the other then-current Directors of the Company).
COMPENSATION COMMITTEE
Jerome Krantz, Chairman
Gary Nadelman
Cary Chasin
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the beneficial ownership of the
Company's common stock as of March 1, 2003, for (i) each person known by the
Company to beneficially own more than five percent of the shares of outstanding
Common Stock, (ii) each of the executive officers listed in the Summary
Compensation Table in "Executive Compensation", and (iii) all of the Company's
executive officers and directors as a group. Except as otherwise indicated, all
shares are beneficially owned, and the persons named as the owners hold
investment and voting power.
22
Number of Shares Percent Owned(1)
Name Beneficially Owned(2) * - Less than one (1%)
__________________ _____________________ ______________________
David H. Brooks(3) 20,469,351(3) 47%
Jerome Krantz 145,350(4) *
Sandra L. Hatfield 225,000(5) *
Dawn M. Schlegel 205,500(6) *
Gary Nadelman 219,000(7) *
Cary Chasin 112,000(8) *
Barry Berkman 132,200 *
All officers and 21,508,401(9) 50%(9)
Directors as a group
(7 people)
(1) Based upon 40,413,746 shares outstanding as of March 1, 2003. In
calculating the percentage owned by any individual officer or director,
the number of currently exercisable warrants and options held by such
individual have been included in the calculation of the percentage
owned.
(2) Includes currently exercisable options or warrants, which are those
exercisable within 60 days after the date of this Form 10-K.
(3) Consists of 10,037,059 common shares owned, 500,000 shares issuable
upon conversion of Series A, 12% Convertible Preferred Stock owned by
Mr. Brooks, 3,057,292 shares owned by his wife, 4,500,000 shares owned
by his wife as custodian for his minor children, and 2,375,000 shares
acquirable under currently exercisable warrants as described below. Mr.
Brooks may acquire 2,375,000 shares under currently exercisable
warrants at prices between $1.00 and $7.11 per share, 50,000 of the
warrants were issued in 2003. As the only person with more than 5%
ownership of the Company, Mr. Brooks' address is 555 Westbury Avenue,
Carle Place, New York 11514.
(4) Includes 100,000 shares, which may be acquired upon exercise of a
currently exercisable warrants at prices between $1.41 and $7.11 per
share, 50,000 of the warrants were issued in 2003.
(5) Includes 225,000 shares, which may be acquired under currently
exercisable warrants at prices between $2.00 and $7.11 per share.
(6) Includes 205,000 shares, which may be acquired under currently
exercisable warrants at prices between $1.41 and $7.11 per share,
50,000 of the warrants were issued in 2003.
(7) Includes 100,000 shares, which may be acquired upon exercise of
currently exercisable warrants at prices between $1.41 and $7.11 per
share, 50,000 of the warrants were issued in 2003.
(8) Includes 50,000 shares, which may be acquired under currently
exercisable warrants at a price of $1.41 per share issued in 2003.
(9) Includes 3,055,000 shares purchasable pursuant to currently
exercisable warrants held by directors and officers.
23
As of December 31, 2002, the Company maintained a single equity
compensation plan (its 1995 Stock Option Plan), which had previously
been approved by the Company's security holders, and under which the
Company is authorized to issue options for up to 3,500,000 shares of
common stock. As of December 31, 2002 and the date of this Form 10-K,
there were no options outstanding under such plan, and 3,500,000 common
stock options remain available for issuance under the plan.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company has funded certain of its acquisitions and operations
through the use of term loans from Mr. David H. Brooks, Chairman of the Board of
the Company, and Mrs. Terry Brooks, his wife. On January 14, 2002, David H.
Brooks, the principal stockholder of the Company, exchanged $3 million of the
approximately $10 million of indebtedness due him for 500,000 Shares of the
newly authorized Series A, 12% Convertible Preferred Stock (the "Preferred
Stock"). The Preferred Stock has a dividend rate of $0.72 per share per annum,
an amount equal to the interest that would have been payable on the exchanged
indebtedness. Shares of the Preferred Stock are convertible, on a one-to-one
basis, at the option of the holder, into shares of common stock. The shares of
Preferred Stock are redeemable at the option of the Company on December 15 of
each year. During 2002, the Company repaid $5.5 million of principal
indebtedness owed to Mr. Brooks, bringing the total indebtedness owed by the
Company to Mr. Brooks as of December 31, 2002 to $1.5 million. These shareholder
loans mature in November 2004 and bear interest at 12% per annum.
Point Blank leases a 67,000 square foot office and manufacturing
facility (the "Oakland Park Facility") located at 4031 N.E. 12th Terrace,
Oakland Park, Florida 33334, from V.A.E. Enterprise LLC ("V.A.E."), a Limited
Liability Corporation controlled by Terry Brooks, wife of Mr. David H. Brooks,
and beneficially owned by Mr. and Mrs. Brooks' minor children. Total base rental
under this lease was $643,000 in 2002, and the lease expires on December 31,
2010. Management performed a comparison of market rates at the time the lease
was entered into, and believes that the terms of the lease were at the current
market price that would then have been obtained from an unrelated party.
ITEM 14. CONTROLS AND PROCEDURES
Within the 90 days prior to the date of the filing of this report, the
Company carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Company's Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures as
defined in Rules 13a-14 and 15d-14 of the Exchange Act. Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that, subject to the inherent limitations described below, the Company's
disclosure controls and procedures are effective in timely alerting them to
material information relating to the Company (including its consolidated
subsidiaries) required to be included in the Company's periodic Securities and
Exchange Commission filings. No significant changes were made in the Company's
internal controls or in other factors that could significantly affect these
internal controls subsequent to the completion of the evaluation.
Disclosure controls and procedures are those controls and other
procedures that are designed with the objective of ensuring that information
required to be disclosed by the Company in the reports that it files or submits
under the Exchange Act is recorded, processed, summarized and reported within
24
the time periods specified in the Securities and Exchange Commission's rules and
forms. Disclosure controls and procedures include, without limitation, controls
and procedures designed to ensure that information required to be disclosed by
the Company in the reports that it files or submits under the Exchange Act is
accumulated and communicated to the Company's management, including the
Company's principal executive officer and principal financial officer, as
appropriate to allow timely decisions regarding required disclosure.
The Company's management, including the Chief Executive Officer and
Chief Financial Officer, does not expect that the Company's disclosure controls
will prevent all errors and uncover all fraud. A control system, no matter how
well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met. Further, the design
of a control system necessarily reflects the fact that there are resource
constraints, and the benefits of controls must be considered relative to their
costs. Because of the inherent limitations in all control systems, no evaluation
of controls can provide absolute assurance that all control issues and instances
of fraud, if any, within a company have been detected. These inherent
limitations include the realities that judgments in decision-making can be
faulty, and that breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some
persons, by collusion or two or more people, or by management override of the
control. The design of any system of controls is also based in part upon certain
assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions; over time, controls may become inadequate because of changes
in conditions, or the degree of compliance with the policies or procedures may
deteriorate.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8K
A. (1) FINANCIAL STATEMENTS
(2) FINANCIAL STATEMENT SCHEDULES
(3) EXHIBITS. THE EXHIBITS FILED HEREWITH ARE SET FORTH ON THE INDEX
TO EXHIBITS FILED AS PART OF THIS REPORT.
B. FORM 8-K: NO REPORTS ON FORM 8-K WERE FILED DURING THE QUARTER ENDED
DECEMBER 31, 2002.
25
DHB INDUSTRIES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CONTENTS
PAGE
Report of Independent Certified Public Accountants:
Grant Thornton LLP F-2
Report of Independent Certified Public Accountants:
Paritz & Company P.A. F-3
Consolidated Balance Sheets F-4
Consolidated Statements of Operations F-5
Consolidated Statement of Stockholders' Equity
(Deficit) and Comprehensive Income F-6
Consolidated Statements of Cash Flows F-7
Notes to the Consolidated Financial Statements F-8 - F- 24
Schedule II - Valuation and Qualifying Accounts F-25
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and
Stockholders of DHB Industries, Inc.
We have audited the accompanying consolidated balance sheet of DHB Industries,
Inc. and Subsidiaries (the "Company") as of December 31, 2002 and the related
consolidated statements of operations, stockholders' equity (deficit) and
comprehensive income, and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of DHB
Industries, Inc. and Subsidiaries as of December 31, 2002 and the consolidated
results of its operations and consolidated cash flows for the year then ended,
in conformity with accounting principles generally accepted in the United States
of America.
We have also audited the financial statement schedule listed in the Index at
Item 15(a)(2) for the year ended December 31, 2002. In our opinion, this
schedule presents fairly, in all material respects, the information required to
be set forth therein.
/s/GRANT THORNTON LLP
Melville, New York
February 14, 2003 (except for Note 6, as to which the date is February 25, 2003
and Note 13, as to which the date is March 17, 2003)
F-2
INDEPENDENT AUDITORS' REPORT
The Board of Directors of
DHB Industries, Inc.
We have audited the accompanying consolidated balance sheet of DHB Industries,
Inc. and Subsidiaries as of December 31, 2001 and the related consolidated
statements of operations, stockholders' equity (deficit) and other comprehensive
income and cash flows for each of the two years in the period ended December 31,
2001. Our audits also included the financial statement schedule. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall consolidated financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of DHB
Industries, Inc. and Subsidiaries as of December 31, 2001 and the consolidated
results of its operations and its cash flows for each of the two years in the
period ended December 31, 2001 in conformity with accounting principles
generally accepted in the United States of America. Also, in our opinion, such
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
Paritz and Company P.A.
Hackensack, New Jersey
March 5, 2002
F-3
DHB INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
DECEMBER 31,
___________________
2002 2001
_______ _______
ASSETS
Current assets
Cash and cash equivalents $ 393 $ 145
Accounts receivable, less allowance for doubtful
accounts of $1,070 and $792, respectively 22,904 11,253
Inventories 33,360 24,582
Deferred income tax assets 3,319 --
Prepaid expenses and other current assets 971 1,077
_______ _______
Total current assets 60,947 37,057
_______ _______
Property and equipment, net 1,620 2,017
_______ _______
Other assets
Other investment 942 942
Deferred income tax assets 1,402 259
Deposits and other assets 460 621
_______ _______
Total other assets 2,804 1,822
_______ _______
Total assets $65,371 $40,896
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 5,368 $13,298
Accrued expenses and other current liabilities 2,454 2,515
Current maturities of long term debt -- 772
_______ _______
Total current liabilities 7,822 16,585
_______ _______
LONG TERM LIABILITIES
Notes payable-bank 24,354 8,442
Long term debt, net of current maturities -- 863
Note payable - stockholder 1,500 10,000
Other liabilities 350 --
_______ _______
Total liabilities 34,026 35,890
_______ _______
COMMITMENTS AND CONTINGENCIES
Stockholders' equity
Convertible preferred stock, $0.001 par value, 5,000,000 shares
authorized, 500,000 shares of Series A, 12%
convertible preferred stock issued and outstanding 1 --
Common stock, $0.001 par value, 100,000,000 shares
authorized, 40,413,746 and 31,481,914 shares issued and
outstanding, respectively 40 31
Additional paid in capital 34,792 24,109
Other comprehensive income (loss) (41) (52)
Accumulated deficit (3,447) (19,082)
_______ _______
Total stockholders' equity 31,345 5,006
_______ _______
Total liabilities and stockholders' equity $65,371 $40,896
======= =======
The accompanying notes are an integral part of these consolidated financial statements.
F-4
DHB INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
(In thousands, except share and per share data)
2002 2001 2000
________ _______ _______
Net sales $130,347 $98,015 $70,018
Cost of goods sold 92,621 71,639 49,359
________ _______ _______
Gross profit 37,726 26,376 20,659
Selling, general and administrative expenses 23,903 13,597 12,460
________ _______ _______
Income before other income (expense) 13,823 12,779 8,199
________ _______ _______
Other income (expense)
Interest expense (1,645) (2,513) (2,743)
Realized loss on marketable securities -- (71) (26)
Other income 130 113 367
________ _______ _______
Total other expense (1,515) (2,471) (2,402)
________ _______ _______
Income from continuing operations before income taxes 12,308 10,308 5,797
Income taxes (benefit)
Current taxes 77 175 130
Deferred tax benefit (3,749) -- --
________ _______ _______
Total tax (benefit) expense (3,672) 175 130
________ _______ _______
Income from continuing operations 15,980 10,133 5,667
Discontinued operations
Loss from discontinued operations -- -- (517)
Gain on disposal of discontinued operations -- -- 857
________ _______ _______
Total discontinued operations -- -- 340
________ _______ _______
Net income 15,980 10,133 6,007
Dividend - preferred stock (345) -- --
________ _______ _______
Income available to common stockholders $15,635 $10,133 $6,007
======= ======= ======
Basic earnings per common share
Continuing operations $0.42 $0.32 $ 0.18
Discontinued operations 0.00 0.00 0.01
________ _______ _______
Net earnings per common share $0.42 $0.32 $0.19
======== ======= =======
Diluted earnings per common share
Continuing operations $0.37 $0.28 $ 0.17
Discontinued operations 0.00 0.00 0.01
________ _______ _______
Net earnings per common share $0.37 $0.28 $0.18
======== ======= =======
The accompanying notes are an integral part of these consolidated financial statements.
F-5
DHB INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT) AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(In thousands, except share and per share data)
Accumulated
Series A Additional Common Stock Other Retained
Preferred Par Par Paid-in Subscription Comprehensive Earnings
Shares Value Common Value Capital Receivable Income (Deficit) Total
_________ _____ ______ _____ __________ ____________ _____________ _________ ________
Balance January 1, 2000 32,332,181 $32 $25,692 $(700) $ 13 $(35,222) $(10,185)
Net income 6,007 6,007
Effect of foreign currency
translation (36) (36)
Effect of valuation allowance
on marketable securities (283) (283)
________
Total comprehensive income 5,688
Sale of common stock (9) 700 691
Stock issued for services 22,607 36 36
Stock issued in settlement of
a lawsuit 16,727 23 23
Purchase of treasury stock - - (697,538) -- (1,207) - - - (1,207)
________ ___ __________ ___ _______ _____ _____ ________ ________
Balance December 31, 2000 -- $-- 31,673,977 $32 $24,535 $ -- $(306) $(29,215) (4,954)
Net income 10,133 10,133
Effect of foreign currency
translation (29) (29)
Effect of valuation allowance
marketable securities 283 283
________
Total comprehensive income 10,387
Sale of common stock 225,000 506 506
Stock issued for services 111,000 355 355
Exercise of stock warrants 150,000 450 450
Purchase of treasury stock - - (678,063) (1) (1,737) - - - (1,738)
________ ___ __________ ___ _______ _____ _____ ________ ________
Balance December 31, 2001 -- -- 31,481,914 $31 $24,109 $ -- $ (52) $(19,082) $5,006
Net income 15,635 15,635
Effect of foreign currency
translation 11 11
________
Total comprehensive income 15,646
Issuance of Series A Preferred
Stock 500,000 1 2,999 3,000
Issuance of stock warrants to
outside consultant 646 646
Exercise of stock warrants
(net of taxes) - - 8,931,832 9 7,038 - - - 7,047
________ ___ __________ ___ _______ _____ _____ ________ ________
Balance December 31, 2002 500,000 $1 40,413,746 $40 $34,792 $ -- $( 41) $(3,447) $ 31,345
======== === ========== === ======= ===== ===== ======== ========
The accompanying notes are an integral part of these consolidated financial statements.
F-6
DHB INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
(In thousands, except share and per share data)
2002 2001 2000
_______ ________ ______
CASH FLOWS FROM OPERATING ACTIVITIES
Income available to common stockholders $15,635 $ 10,133 $6,007
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Depreciation and amortization 463 478 324
Amortization of deferred financing costs 125 30 --
Provision for doubtful accounts 278 283 (283)
Stock issued for services -- 355 36
Issuance of stock warrants to outside consultant 646
Stock issued in settlement of a lawsuit -- -- 23
Unrealized gain on transfers from other investments -- -- 58
Other liabilities 350
Deferred income tax assets (4,462) 170 15
Changes in operating assets and liabilities
Accounts receivable (11,929) (3,131) (2,913)
Marketable securities -- 369 (369)
Inventories (8,778) (10,285) (5,251)
Prepaid expenses and other current assets 106 (310) (495)
Deposits and other assets 67 327 41
Accounts payable (7,930) 2,040 1,762
Accrued expenses and other current liabilities (61) (3,033) 2,991
_______ ________ ______
Net cash (used in) provided by operating activities (15,490) (2,574) 1,946
_______ ________ ______
CASH FLOWS FROM INVESTING ACTIVITIES
Sale of assets of subsidiary, net of cash acquired -- -- 3,934
Proceeds from sale of property and equipment 302 -- 422
Purchases of property and equipment (367) (554) (429)
_______ ________ ______
Net cash (used in) provided by investing activities (65) (554) 3,927
_______ ________ ______
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds (repayments) of notes payable- bank 15,912 8,442 (5,000)
Payments of note payable- stockholder (5,500) (6,046) --
Proceeds from the issuance of long term debt -- 1,800 --
Issuance costs of long-term debt (32) (355) --
Principal payments on long-term debt (863) (324) (227)
Proceeds from the issuance of common stock 6,275 450 --
Purchase of treasury stock -- (1,738) (1,207)
Net proceeds from sale of common stock -- 506 691
_______ ________ ______
Net cash provided by (used in) financing activities 15,792 2,735 (5,743)
_______ ________ ______
Effect of foreign currency translation 11 (29) (36)
_______ ________ ______
Net increase (decrease) in cash and cash equivalents 248 (422) 94
Cash and cash equivalents at beginning of year 145 567 473
_______ ________ ______
Cash and cash equivalents at end of year $393 $145 $567
======= ======== ======
The accompanying notes are an integral part of these consolidated financial statements.
F-7
DHB INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
Note 1 BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation
The consolidated financial statements include the accounts of
DHB Industries, Inc. and its subsidiaries ("DHB" or the "Company"), all
of which are wholly owned. DHB has two major divisions, DHB Armor Group
and DHB Sports Group. All intercompany balances and transaction have
been eliminated in consolidation.
Business description
DHB Armor Group develops, manufactures, and distributes bullet
and projectile resistant garments, bullet resistant and fragmentation
vests, bomb projectile blankets, aircraft armor, bullet resistant
plates and shields and related ballistic accessories for United States
armed forces, federal agencies and state and local law enforcement
communities. DHB Sports Group produces and markets a comprehensive line
of athletic supports and braces which are merchandised through national
superstore chains. DHB maintains manufacturing facilities in Deerfield
Beach, FL, Oakland Park, FL, and Jacksboro, TN.
Use of estimates in the preparation of financial statements
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America, requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of net revenue and expenses during
each reporting period. Actual results could differ from those
estimates.
Revenue recognition
DHB recognizes revenue when it is realized or realizable and
has been earned. Product revenue is recognized when persuasive evidence
of an arrangement exists, the product has been delivered and legal
title and all risks of ownership have been transferred, written
contract and sales terms are complete, customer acceptance has occurred
and payment is reasonably assured. Returns are minimal and do not
materially affect the consolidated financial statements.
Inventories
Inventories are stated at the lower of cost (determined on the
first-in, first-out basis) or market.
Property and equipment
Property and equipment are recorded at cost less accumulated
depreciation. Major additions, improvements, and renewals, which
substantially increase the useful lives of assets, are capitalized.
Maintenance, repairs, and minor renewals are expensed as incurred.
Depreciation is calculated primarily on the straight-line basis over
the estimated lives of the assets. Leasehold improvements are amortized
over the shorter of the estimated life or the lease term of the related
asset.
F-8
DHB INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
Note 1 BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Cash and cash equivalents
All short-term, highly liquid investments with original
maturities of ninety days or less are considered cash equivalents.
Marketable Securities
Investments in marketable securities were accounted for in
accordance with the provisions of Statement of Financial Accounting
Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt
and Equity Securities". DHB classified all its marketable securities as
held for investment and, accordingly, unrealized gains and losses were
reflected as a component of other comprehensive income (loss) in the
statement of stockholders' equity (deficit) and comprehensive income.
During the year ended December 31, 2001, the Company liquidated its
investments in marketable securities.
Other investment
DHB has a cost-based investment in a non-publicly traded
company. The investment is included in "Other investment" in the
accompanying balance sheet and is carried at cost. A decline in the
value of this cost-based investment below cost that is deemed other
than temporary is charged to earnings, resulting in a new cost basis
for the investment.
Fair values of financial instruments
The Company's financial instruments include cash, accounts
receivable, accounts payable and long-term debt. The carrying values of
cash, accounts receivable, accounts payable and long-term debt
approximate their fair values.
Income taxes
DHB and its domestic subsidiaries file a consolidated Federal
income tax return and separate state income tax returns.
DHB uses the asset and liability approach to account for
income taxes. Under this method, deferred tax assets and liabilities
are recognized for the expected future tax consequences of differences
between the carrying amounts of assets and liabilities and their
respective tax basis using enacted tax rates in effect for the year in
which the differences are expected to reverse. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in
income in the period when the change is enacted. Deferred tax assets
are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all of the
deferred tax assets will not be realized.
Research and development expenses
Research and development expenses are included in selling,
general and administrative expenses as incurred and for the years ended
December 31, 2002, 2001 and 2000 was $4,221, $2,327 and $1,317,
respectively.
F-9
DHB INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
Note 1 BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES-Continued
Advertising expenses
The cost of advertising is expensed as incurred. The Company
incurred approximately $950, $742 and $728 of advertising costs during
the years ended December 31, 2002, 2001 and 2000, respectively.
Earnings per share
Basic earnings per share is computed by dividing net income by
the weighted average number of common shares outstanding. Diluted
earnings per share is computed by dividing net income by the weighted
average number of common shares outstanding compounding the effects of
all potentially dilutive common stock equivalents, principally
warrants, using the treasury stock method except in cases where the
effect would be anti-dilutive.
Comprehensive income and foreign currency translation
Comprehensive income consists of net income and other
comprehensive income. Other comprehensive income includes foreign
currency translation adjustments, which are a component of accumulated
other comprehensive income (loss) in stockholders' equity.
Stock based compensation
The Company accounts for stock-based compensation using the
intrinsic value method in accordance with Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" and related
Interpretations ("APB No. 25") and has adopted the disclosure
provisions of SFAS No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure, an amendment of FASB Statement No. 123"
(SFAS No. 148'). Under APB No. 25, when the exercise price of the
Company's employee stock warrants equals the market price of the
underlying stock on the date of grant, no compensation expense is
recognized. Accordingly, no compensation expense has been recognized in
the consolidated financial statement in connection with employee stock
warrant grants.
Impairment of long-lived assets
DHB reviews the recoverability of its long-lived assets when
events or changes in circumstances occur that indicate that the
carrying value of the asset or asset group may not be recoverable. The
assessment of possible impairment is based on DHB's ability to recover
the carrying value of the asset or asset group from the expected
pre-tax cash flows (undiscounted and without interest charges) of the
related operations. If these cash flows are less than the carrying
value of such asset, an impairment loss is recognized for the
difference between estimated fair value and carrying value. The
measurement of impairment requires management to estimate future cash
flows and the fair value of long-lived assets.
Reclassification
Certain prior year balances have been reclassified to conform
with current year presentation.
F-10
DHB INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
Note 1 BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES-Continued
New Accounting Standards
In June 2001, the Financial Accounting Standards Board
("FASB") issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." This standard addresses financial accounting and
reporting for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. DHB is
required to implement SFAS No. 143 on January 1, 2003. DHB does not
expect this standard to have a material impact on its consolidated
financial position or results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities." This standard
nullifies Emerging Issues Task Force Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs
to exit an Activity (including Certain Costs Incurred in a
Restructuring)." This standard requires that a liability for a cost
associated with an exit or disposal activity be recognized when the
liability is incurred rather than the date of an entity's commitment to
an exit plan. DHB is required to implement SFAS No. 146 on January 1,
2003. DHB does not expect this standard to have a material impact on
its consolidated financial position or results of operations.
In November 2002, the FASB issued Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
including Indirect Guarantees of Indebtedness of Others," which expands
previously issued accounting guidance and disclosure requirements for
certain guarantees. The interpretation requires an entity to recognize
an initial liability for the fair value of an obligation assumed by
issuing a guarantee. The provision for initial recognition and
measurement of the liability will be applied on a prospective basis to
guarantees issued or modified after December 31, 2002. DHB does not
expect this interpretation to have a material impact on its
consolidated financial position or results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting
for Stock-Based Compensation - Transition and Disclosure- an amendment
of FASB Statement No. 123," which provides optional transition guidance
for those companies electing to voluntarily adopt the accounting
provisions of SFAS No. 123. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS 123 to require prominent disclosures in
both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the
method used on reported results. The Company does not plan to change
its method of accounting for stock-based employee compensation. The
Company will make the required interim disclosures effective with the
quarter ending March 31, 2003.
In January 2003, the FASB issued Interpretation No. 46,
"Consolidation of Variable Interest Entities, an Interpretation of ARB
No. 51," which requires all variable interest entities ("VIEs") to be
consolidated by the primary beneficiary. The primary beneficiary is the
entity that holds the majority of the beneficial interest in the VIE.
In addition, the interpretation expands disclosure requirements for
both variable interest entities that are consolidated as well as VIEs
from which the entity is the holder of a significant amount of the
beneficial interests, but not the majority. The disclosure requirements
of this interpretation are effective for all financial statements
issued after January 31, 2003. The consolidation requirements of this
interpretation are effective for all periods beginning after June 15,
2003. DHB does not expect this interpretation to have a material impact
on its consolidated financial position or results of operations.
F-11
DHB INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
Note 2 SUPPLEMENTAL CASH FLOW INFORMATION
Year Ended December 31,
_____________________________________
Cash paid for: 2002 2001 2000
_____ ______ ____
Interest 1,618 $2,364 $125
Taxes 73 13 29
For the year ended December 31, 2002, approximately $646 is
included in selling, general and administrative expenses for a non-cash
payment, which represents the value of the warrants issued to an
independent consulting firm to handle the Company's investor relations
(See Note 8). The Company also recorded a $350 non-cash charge during
the year ended December 31, 2002 related to straight-lining rent (See
Note 15). In addition, on January 14, 2002, the Company reduced its
note payable- shareholder by $3,000 through the issuance of preferred
stock. (See Note 5 and Note 8.)
Note 3 INVENTORIES
The components of inventory as of December 31, 2002 and 2001
are as follows:
2002 2001
_______ _______
Raw materials and supplies $14,833 $12,624
Work in process 9,116 6,917
Finished goods 9,411 5,041
_______ _______
$33,360 $24,582
======= =======
Note 4 PROPERTY AND EQUIPMENT
Property and equipment as of December 31, 2002 and 2001 are
summarized as follows:
Estimated
2002 2001 useful life
______ ______ ___________
Machinery and equipment $1,937 $1,991 5-30 years
Furniture, fixtures and computer 1,146 1,074 5-7 years
equipment
Transportation equipment 374 601 3-5 years
Leasehold improvements 720 716 5-40 years
______ ______
4,177 4,382
Less accumulated depreciation and (2,557) (2,365)
______ ______
amortization
$1,620 $2,017
====== ======
Depreciation and amortization expense for the years ended
December 31, 2002, 2001 and 2000 was approximately $463, $478 and $324,
respectively.
F-12
DHB INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
Note 5 NOTE PAYABLE - STOCKHOLDER
This note is payable to the majority stockholder of DHB and
bears interest at 12% per annum and is payable, as extended, in
November 2004. The balance at December 31, 2001 was $10,000. On January
14, 2002, the noteholder exchanged $3,000 of this indebtedness due him
for 500,000 shares of the Company's Series A, 12% Convertible Preferred
Stock. During the year ended December 31, 2002 cash repayments of
$5,500 were also made, bringing the balance at December 31, 2002 to
$1,500. This note is subordinate to the Loan and Security Agreement
(See Note 6) however, the Credit Agreement allows for annual repayments
of this note payable based upon an excess cash flow calculation, as
defined.
Note 6 NOTE PAYABLE - BANK
December 31,
_______________________
2002 2001
_______ ______
Credit agreement $24,354 $8,442
======= ======
On September 24, 2001, the Company entered into a Loan and
Security Agreement (the "Credit Agreement"), as amended on June 28,
2002 and February 25, 2003, which expires on September 24, 2004.
Pursuant to the Credit Agreement, the Company may borrow up to the
lesser of (i) $35,000 during the period commencing on February 18, 2003
and ending on August 31, 2003, $30,000 during the period commencing on
September 1, 2003 and ending on November 30, 2003, and $25,000 at all
times on and after December 1, 2003, or (ii) 85% of eligible accounts
receivable plus the lesser of $14,000 or certain percentages of
eligible inventory, as defined. Borrowings under the Credit Agreement
bear interest, at the Company's option, at the bank's prime rate or
LIBOR plus 2 1/2% per annum (3.928% at December 31, 2002). The
borrowings under the Credit Agreement are collateralized by a first
security interest in substantially all of the assets of the Company. In
addition, the Credit Agreement includes both negative and affirmative
covenants customary for a credit facility of this nature. The Credit
Agreement, among other things, requires the Company to maintain a
minimum (i) tangible net worth, as defined, (ii) fixed charge coverage
ratio, and (iii) earnings before interest, taxes, depreciation and
amortization. The Credit Agreement further limits the amount of capital
expenditures that the Company may incur in any fiscal year.
Deferred financing costs associated with the Credit Agreement
were capitalized and are being amortized over the term of the Credit
Agreement. Amortization expense was $125 and $30 during the years ended
December 31, 2002 and 2001, respectively.
F-13
DHB INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
Note 7 LONG-TERM DEBT
December 31,
____________________
2002 2001
____ ______
Term loan, interest rate at the bank's prime $-- $1,613
rate plus1/2% or LIBOR plus 3%, payable in 24
monthly installments of approximately $63 plus
interest and 11 installments of approximately
$8 plus interest. Pursuant to the June 28, 2002
amendment of the Credit Agreement, this term
loan was required to be paid in full.
Other -- 22
___ ______
-- 1,635
Less current portion -- 772
___ ______
Total long term debt $ 0 $ 863
=== =====
Note 8 STOCKHOLDERS' EQUITY
Convertible Preferred Stock
DHB is authorized to issue 5,000,000 shares of Preferred Stock
("Preferred Stock"). On January 14, 2002, the majority stockholder of
the Company exchanged $3,000 of the approximately $10,000 of
indebtedness due him for 500,000 shares of Series A, 12% Convertible
Preferred Stock. The Series A, 12% Convertible Preferred Stock has a
dividend rate of $0.72 per share per annum, an amount equal to the
interest that would have been payable on the exchanged indebtedness.
Shares of the Series A, 12% Convertible Preferred Stock are
convertible, on a one-to-one basis, at the option of the holder, into
shares of common stock. The shares of Series A, 12% Convertible
Preferred Stock are redeemable at the option of the Company on December
15 of each year.
Common Stock
DHB has 100,000,000 shares authorized of its $0.001 par value
common stock.
Treasury Stock
On December 1, 2000, the Company's Board of Directors
announced the directive for the Company to purchase up to 2,000,000
shares of its common stock in the open market, from time to time, at
its discretion. As of December 31, 2002, the Company still has
authorization to purchase 1,264,395 shares of its common stock. The
Credit Agreement, as described in Note 6, limits the dollar amount
available to purchase treasury shares based upon an excess cash flow
calculation, as defined. All treasury shares repurchased by the Company
are immediately retired.
F-14
DHB INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
Note 8 STOCKHOLDERS' EQUITY - Continued
Earnings per common share
Earnings per common share calculations are based on the
weighted average number of common shares outstanding during each
period: 37,275,920, 31,455,406, and 32,219,376 shares for the years
ended December 31, 2002, 2001, and 2000, respectively. Calculations for
diluted earnings per share are based on the weighted average number of
outstanding common shares and common share equivalents during the
periods: 42,304,254, 36,775,910, and 34,086,963 shares for the years
ended December 31, 2002, 2001, and 2000, respectively.
Income Shares Per Share
(numerator) (denominator) Amount
___________ _____________ _________
Basic EPS
Income available for common
stockholders-2002 $15,635 37,275,920 $ 0.42
_______ __________ ______
Diluted EPS $15,635 42,304,254 $ 0.37
======= ========== ======
Basic EPS
Income from continuing $10,133 31,455,406 $ 0.32
operations-2001
_______ __________ ______
Diluted EPS $10,133 36,775,910 $ 0.28
======= ========== ======
Basic EPS
Income from continuing $ 5,667 32,219,376 $ 0.18
operations-2000
Income from discontinued 340 32,219,376 $ 0.01
operations-2000 _______ __________ ______
$6,007 32,219,376 $ 0.19
======= ========== ======
Diluted EPS
Income from continuing $ 5,667 34,086,963 $ 0.17
operations-2000
Income from discontinued 340 34,086,963 $ 0.01
operations-2000 _______ __________ ______
$6,007 34,086,963 $ 0.18
======= ========== ======
Stock option plan
The Company adopted a 1995 Stock Option Plan ("Plan") pursuant
to which the Board of Directors is authorized to award options to
purchase up to 3,500,000 shares of common stock to selected officers,
employees, agents, consultants and other persons who render services to
the Company. There are no outstanding options issued under the plan.
Stock warrants
During the year ended December 31, 2002, the five members of
the Board of Directors were each awarded 25,000 warrants exercisable at
$7.11 per share for five years. The chairman of the audit committee and
the chairman of the compensation committee were each awarded 25,000
warrants exercisable at $7.11 per share for five years. Also during the
year ended December 31, 2002, the Board of Directors awarded key
employees 25,000 warrants exercisable at $7.11 per share, which expire
in April 2007. The Company also issued and canceled 150,000 warrants to
an employee.
F-15
DHB INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
Note 8 STOCKHOLDERS' EQUITY - Continued
On June 4, 2002, the Company issued 275,000 warrants to its
investor relations firm with an exercise price of $4.95 per share. This
warrant expires June 4, 2006. The fair value of this warrant was
determined to be approximately $646,000 which is included in selling,
general and administrative expenses for the year ended December 31,
2002. The Black-Scholes warrant pricing model used for this warrant had
the following assumptions: Risk-free interest rate of 4.67%, expected
volatility of common stock of 59.83% and a 4 year option term.
During the year ended December 31, 2002 the CEO/Chairman and
his wife exercised warrants totaling 5,593,751 shares.
During 2001, the four members of the Board of Directors were
each awarded 25,000 warrants exercisable at $2.00 per share for five
years. Also during 2001, the Board of Directors awarded key employees
400,000 warrants exercisable at $2.00 per share, which expire in
January 2006.
A summary of the status of the Company's stock warrants is
presented in the table below:
For the Year Ended December 31,
_____________________________________________________________________
2002 2001 2000
_____________________________________________________________________
Weighted Weighted Weighted
Average Average Average
exercise exercise exercise
Shares price Shares price Shares price
__________ ________ __________ ________ __________ ________
Warrants outstanding -
beginning of year 13,620,689 $1.72 13,007,666 $1.74 8,761,666 $2.07
Granted 625,000 $5.15 763,023 $2.13 4,246,000 $1.11
Exercised (8,931,832) $0.58 (150,000) $3.00
Canceled (150,000) $2.92 -- --
__________ ________ __________ ________ __________ ________
Warrants outstanding -
end of year 5,163,857 $1.64 13,620,689 $1.72 13,007,666 $1.74
The per share weighted average fair value of stock warrants
granted during the year ended December 31, 2002 was $5.1625. The fair
value of these warrants was determined at the date of grant using the
Black-Scholes warrant pricing model with the following assumptions:
The Black-Scholes option valuation model was developed for use
in estimating the fair value of traded options, which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's employee stock
warrants have characteristics significantly different from those of
traded warrants and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's opinion,
the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock warrants.
F-16
DHB INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
Note 8 STOCKHOLDERS' EQUITY - Continued
The weighted-average warrant fair values and assumptions used
to estimate these values are as follows:
Grants Issued During
2002 2001
____ ____
Risk-free interest rate 4.67% 4.92%
Expected volatility of common stock 94.5467% 100.67%
Dividend yield 0.00% 0.00%
Expected option term 5 years 5.14 years
The following table illustrates the effect on net income and
earnings per share had the Company applied the fair value recognition
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation"
to stock-based employee compensation.
Year Ended December 31,
_______________________
2002 2001
_______ _______
Income available to common stockholders
As reported $15,635 $10,133
Deduct: total stock-based employee
compensation Expense determined
under fair value based method for
all awards, net of related tax
effect 1,829 2,225
_______ _______
Pro forma 13,806 7,908
Basic earnings per common share
As reported $0.42 $0.32
Pro forma $0.37 $0.25
Diluted earnings per common share
As reported $0.37 $0.28
Pro forma $0.33 $0.21
Pro forma compensation expense may not be indicative of pro
forma expense in future years. For purposes of estimating the fair value
of each warrant on the date of grant, the Company utilized the
Black-Scholes option pricing model.
The following table summarizes information regarding stock
warrants outstanding at December 31, 2002:
Weighted
Average Weighted
Number of Remaining Average Number of Weighted
Exercise Price Warrants Contractual Exercise Shares Average
Range Outstanding Life Price Exercisable Exercise Price
______________ ___________ ___________ ________ ___________ ______________
0 to $1.00 3,750,000 7.51 $1.00 2,250,000 $1.00
$1.01 to $1.50 133,000 0.49 $1.46 133,000 $1.46
$1.51 to $2.00 663,000 3.72 $2.00 453,000 $2.00
$2.01 to $2.50 45,000 3.04 $2.50 30,000 $2.50
$2.51 to $3.00 12,857 0.96 $2.88 12,857 $2.88
$3.01 and above 560,000 3.30 $5.48 560,000 $5.48
F-17
DHB INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
Note 9 DISCONTINUED OPERATIONS
In October 1999, the Company announced its strategic decision
to discontinue the operations of its Lanxide Armor Products ("LAP") and
the Electronics Group (LEC and DHB KK). LAP operations where shut down
in October 1999 and the Electronics Group was sold on March 10, 2000
for a sales price of $4,234, less the outstanding long-term debt. The
results of the closure of LAP and the Electronics Group have been
reported separately as discontinued operations.
The condensed statements of operations relating to the
discontinued operations for the year ended December 31, 2000 are
presented below:
Net sales $401
Cost and expenses (918)
____
Loss before income taxes (517)
Gain on disposal 857
____
Net income $340
====
Note 10 RELATED PARTY TRANSACTIONS
A summary of related party transactions for the years ended
December 31, 2002, 2001 and 2000 is as follows:
2002 2001 2000
____ ____ ____
Interest, dividends, rental, professional
and other expenses paid or accrued to DHB's
majority stockholder $2,116 $2,962 $3,529
The Company leases an office and manufacturing facility from a
limited liability corporation indirectly owned by the majority
stockholder of DHB pursuant to a lease expiring December 31, 2010 with
annual rental approximately $643 and $607 during the years ended
December 31, 2002 and 2001, respectively, with 6% annual increases
thereafter. The Company, recorded $350 non-cash charge during the year
ended December 31, 2002 related to straight-lining rent.
The Company has indebtedness to the principal shareholder as
described in Note 5.
Note 11 CONCENTRATION OF CREDIT RISK
The Company maintains cash balances at various financial
institutions. Accounts at each institution are insured by the Federal
Deposit Insurance Corporation up to $100,000. The Company's accounts at
these institutions may, at times, exceed the federally insured limits.
The Company has not experienced any losses in such accounts.
Approximately 76%, 75% and 64% for the years ended December
31, 2002, 2001 and 2000, respectively, of DHB's sales were made to the
United States Government or its agencies.
F-18
DHB INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
Note 11 CONCENTRATION OF CREDIT RISK - Continued
A substantial portion of the products sold by DHB are used in
situations which could result in serious personal injuries or death,
whether on account of the failure of such products, or otherwise.
Although DHB maintains substantial amounts of insurance coverage to
cover such risks, there is no assurance that these amounts would be
sufficient to cover the payment of any potential claims. In addition,
there is no assurance that this or any other insurance coverage will
remain available or, if available, that DHB would be able to obtain
such insurance at a reasonable cost. The inability to obtain such
insurance coverage would prohibit DHB from bidding for certain orders
for bullet resistant products from certain governmental customers.
Substantially all of the raw materials used in the
manufacturing of ballistic-resistant garments are made from fabrics
which are patented by major corporations and which are purchased from
three independent weaving or manufacturing companies. Should any of the
manufacturers cease to produce these products for any reason, DHB
would be required to use other fabrics. In such an event, an
alternative fabric would have to be selected and ballistic tests would
need to be performed. Until this was done, DHB's sale of ballistic
resistant products would be severely curtailed and DHB's financial
condition would be materially adversely affected.
Note 12 SEGMENT INFORMATION
As described in Note 1, the Company operates in two principal
segments: ballistic-resistant equipment and protective athletic/sports
products. The Company disposed of the Electronics Group in March 2000,
and closed its hard armor company, LAP, in October 1999. These two
divestitures were accounted for as discontinued operations. Financial
information on the Company's business segments was as follows:
2002 2001 2000
________ _______ _______
Net Sales
Ballistic-resistant equipment $124,860 $93,506 $64,721
Electronic components/LAP -- -- 401
Protective athletic & sports products 5,492 4,520 5,297
________ _______ _______
130,352 98,026 70,419
Less inter-segment sales (5) (11) --
Less discontinued operations (3) -- -- (401)
________ _______ _______
Consolidated net sales $130,347 $98,015 $70,018
======== ======= =======
Income from Operations
Ballistic-resistant equipment $17,534 $15,029 $10,591
Electronic components -- -- (517)
Protective athletic & sports products 563 94 (166)
Corporate and other (1) (4,274) (2,344) (2,226)
________ _______ _______
Sub-total 13,823 12,779 7,682
Income from discontinued operations(3) -- -- 517
________ _______ _______
Consolidated operating income $13,823 $12,779 $8,199
======== ======= ======
Depreciation Expense
Ballistic-resistant equipment $ 289 $ 223 $ 147
Protective athletic & sports products 86 157 108
_______ _______ ______
375 380 255
Corporate and other 88 98 69
_______ _______ ______
Consolidated depreciation expense $ 463 $ 478 $ 324
======= ======= ======
Interest Expense
Ballistic-resistant equipment $ 935 $ 463 $ 33
Protective athletic & sports products -- 77 40
_______ _______ ______
935 540 73
Corporate and other 710 1,973 2,670
_______ _______ ______
Consolidated interest expense $ 1,645 $ 2,513 $2,743
======= ======= ======
Income Taxes (Benefit)
Ballistic-resistant equipment $ 22 $ 143 $ 1
Protective athletic & sports products 2 -- 2
_______ _______ ______
24 143 3
Corporate and other (3,696) 32 127
_______ _______ ______
Consolidated tax (benefit) expense $(3,672) $ 175 $ 130
======= ======= ======
Identifiable Assets
Ballistic-resistant equipment $56,471 $36,426 $22,383
Protective athletic & sports products 2,907 2,768 3,517
________ _______ _______
59,378 39,194 25,900
Corporate and other (2) 5,993 1,702 2,156
________ _______ _______
Consolidated assets $65,371 $40,896 $28,056
======== ======= =======
F-19
DHB INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
Note 12 SEGMENT INFORMATION- Continued
Foreign sales accounted for 2%, 2% and 2% of the total revenues for the
years ended December 31, 2002, 2001 and 2000, respectively. Foreign
identifiable assets accounted for 1%, 1% and 1% of the total assets at
December 31, 2002, 2001 and 2000, respectively.
(1) Corporate and other includes corporate general and
administrative expenses.
(2) Corporate assets are principally deferred income tax assets,
other investment and property and equipment.
(3) Discontinued operations included the Electronics Group sold on
March 10, 2000, as well as the loss from the shutdown of the
LAP plant in 1999.
Note 13 COMMITMENTS AND CONTINGENCIES
Leases
The Company has non-cancelable operating leases, which expire
through 2010. These leases generally require the Company to pay certain
costs, such as real estate taxes. As further described in Note 10, the
Company leases an office and manufacturing facility from a limited
liability corporation indirectly owned by a related party.
In January 2003, the Company entered into a lease for an
additional facility for the purpose of expanding its operations. This
lease expires on April 30, 2008.
Future minimum lease commitments (excluding renewal options)
under non-cancelable leases are approximately:
For the Years Ending December 31,
_____________________________________
2003 $1,295
2004 1,452
2005 1,289
2006 1,219
2007 1,237
Thereafter 3,035
______
$9,527
Rent and real estate tax expense on operating leases for the
years ended December 31, 2002, 2001 and 2000 aggregated approximately
$1,785, $1,106 and $1,417, respectively.
Employment agreements
The Company is party to an employment agreement dated July 1,
2000 with its majority stockholder, which expires in July 2005 and
provides for an initial base salary of $500 per annum. The base rate is
increased $50 each year on the anniversary. In addition, on the
effective date of the employment agreement, the employee received
3,750,000 warrants, exercisable at $1.00 per share and vesting 20%
immediately and in 20% annual increments thereafter. The warrants
expire in July 2010.
F-20
DHB INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
Note 13 COMMITMENTS AND CONTINGENCIES - continued
Litigation
The Company has filed a lawsuit against its insurance carrier
and an insurance agent for negligence and breach of fiduciary duties as
a result of the damages incurred during Hurricane Irene in October
1999. On March 17, 2003 the Company entered into a settlement agreement
with its insurance agent for a $1,000 payment to the Company. The
lawsuit against the insurance carrier has been scheduled for trial in
the fall of 2003.
In June 2001, the Company was served with a lawsuit regarding
patent infringement. In September 2002, the parties filed a joint
resolution and settlement ending this patent infringement case. This
settlement will not have a material adverse effect on the Company's
business, results of operations or financial condition.
In October 2002, the Company was served with a derivative
shareholder suit against the Company's officers and directors as well
as the Company itself. This case was dismissed with prejudice on March
13, 2003, without liability to the Company or its officers or
directors. The Company is seeking dismissal of another identical suit
brought on behalf of a second shareholder, on the same grounds that
required dismissal in the other suit.
On or about October 30, 2002, the Company filed a lawsuit
against certain union leaders in the United States District Court for
the Southern District of Florida, claiming defamation, conspiracy to
defame and tortuous interference with contractual and ongoing business
relationships. The Company is vigorously pursuing this action.
The Company is subject to other legal proceedings and claims,
which have risen in the ordinary course of its business and have not
been finally adjudicated. These actions when ultimately concluded and
determined will not, in the opinion of management, have a material
adverse effect on the results of operations or the financial condition
of the Company.
Note 14 INCOME TAXES
Components of income taxes are as follows:
2002 2001 2000
_______ ____ ____
Federal
Current $ 0 $ 0 $ 0
Deferred (3,175) 0 0
_______ ____ -
Total federal $(3,175) $ 0 $ 0
======= ==== ====
State
Current 77 175 130
Deferred (574) 0 0
_______ ____ ____
Total state $ (497) $175 $130
======= ===== ====
F-21
DHB INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
Note 14 INCOME TAXES - continued
A reconciliation of the statutory federal income tax rates to the Company's
effective tax rate for the years ended December 31 is as follows:
2002 2001 2000
______ ______ ______
Statutory U.S. income tax rate 34.00% 34.00% 34.00%
Utilization of federal net operating loss carryforwards (34.00) (34.00) (34.00)
Utilization of state net operating loss carryforwards (5.00)
Reduction of valuation allowance (23.39)
Other .08
State and local income taxes (benefit), net of federal benefits (1.52) 1.60 2.10
______ ______ ______
Effective tax rate (29.83)% 1.60% 2.10%
====== ====== =====
The significant components of deferred tax assets and liabilities as of December
31, were as follows:
2002 2001
______ ______
Net operating loss carryforwards $2,843 $5,440
AMT credit 21
Accounts receivable reserve 417 270
Deferred rent 137
Inventory 455
Deferred compensation 252
Capital loss carryover 641 95
Write down of non-marketable securities 448
Write down of investment in Point Blank Int'l 596 520
______ ______
5,362 6,773
Less valuation allowance 641 6,514
______ ______
Net deferred income tax assets $4,721 $ 259
====== ======
Tax benefits of $713 relating to the exercise of stock warrants is
reflected in the statement of stockholders equity. As of December 31, 2002, the
Company has available a federal net operating loss carryforward of approximately
$7,375 and state net operating loss carryfowards of approximately $6,722. The
net operating losses expire in varying amounts during the calendar years 2019
through 2022. Further, the Company had established a valuation allowance with
respect to the deferred tax assets, which was reduced during 2002.
During the year ended December 31, 2002, the Company reduced approximately
$5,873 of valuation allowance placed on the U.S. portion of the Company's
deferred tax assets. This reduction was based on updated expectations about
future years' taxable income to reflect continuing improvements in operating
results influenced by the Company's continued revenue growth, and other
indications that certain concerns that had previously limited management's
expectations about future taxable income no longer were applicable.
F-22
DHB INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
Note 15 SIGNIFICANT FOURTH QUARTER ADJUSTMENTS
In the fourth quarter of 2002, the Company recorded a $646 expense for
the issuance of stock warrants to an outside consultant. (See Note 8). In
addition, the Company also reversed approximately $5,873 of valuation allowance
placed on the U.S. portion of the Company's deferred tax assets (See Note 14).
Furthermore, the Company recorded an additional accrual of $350 related to
straight-lining rent in accordance with SFAS No. 13, "Accounting for Leases".
Note 16 QUARTERLY RESULTS (UNAUDITED)
The following table presents summarized quarterly results of operations
for the Company for the years ended December 31, 2002 and 2001. The Company
believes all necessary adjustments have been included in the amounts stated
below to present fairly the following selected information when read in
conjunction with the consolidated financial statements and notes thereto
included elsewhere herein. Future quarterly operating results may fluctuate
depending on a number of factors. Results of operations for any particular
quarter are not necessarily indicative of results of operations for a full year
or any other quarter.
First Quarter Second Quarter Third Quarter Fourth Quarter
Year ended December 31, 2002
Net sales $33,639 $34,014 $30,146 $32,548
Gross profit 9,455 10,037 9,141 9,093
Income available to common stockholders 4,758 4,426 1,275 5,176
Basic earnings per share $0.14 $0.12 $0.03 $0.13
Diluted earnings per share $0.11 $0.11 $0.03 $0.12
Year ended December 31, 2001
Net sales $20,175 $23,514 $24,010 $30,316
Gross profit 4,952 6,205 6,729 8,490
Net income 1,023 2,303 2,793 4,014
Basic earnings per share $0.03 $0.07 $0.09 $0.13
Diluted earnings per share $0.03 $0.07 $0.08 $0.11
F-23
DHB INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE II TO THE FINANCIAL STATEMENTS
VALUATION AND QUALIFYING ACCOUNTS
DECEMBER 31, 2002, 2001 AND 2000
(In thousands)
Allowances deducted from related balance sheet accounts:
Investment in Net Write Down of
Accounts Non-marketable investment in
Receivable securities subsidiaries
__________ ______________ _________________
Balance at January 1, 2000 $ 757 $ 1,317 $1,530
Additions charged to 36 -- --
costs and expenses
Deductions/writeoffs (140) (1,317) (1,530)
______ _______ ______
Balance at December 31, 2000 $ 653 -- --
Additions charged to 290 -- --
costs and expenses
Deductions/writeoffs (151) -- --
______ _______ ______
Balance at December 31, 2001 $ 792 -- --
Additions charged to 379 -- --
costs and expenses
Deductions/writeoffs (101) -- --
______ _______ ______
Balance at December 31, 2002 $1,070 $ -- $ --
====== ======= ======
F-24
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized on this the 31st day of
March 2003.
DHB Industries, Inc.
/s/ DAVID H. BROOKS
_______________________
David H. Brooks
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Signature Capacity Date
_________ ________ ____
/s/ DAVID H. BROOKS Chairman of the Board, March 31, 2003
____________________ and Director
David H. Brooks
/s/ DAWN M. SCHLEGEL Treasurer March 31, 2003
____________________ Principal Financial Officer
Dawn M. Schlegel Principal Accounting Officer
/s/ JEROME KRANTZ Director March 31, 2003
____________________
Jerome Krantz
Exhibit Description
_______ ___________
3.1 Certificate of Incorporation of DHB Capital Group Inc., a Delaware corporation. 1
3.2 Certificate of Amendment to Certificate of Incorporation filed December 31, 1996 2
3.3 Certificate of Amendment to Certificate of Incorporation filed July 24, 2001 6
3.4 Certificate of Designations & Preference, an amendment to the Certificate of Incorporation filed 6
on December 26, 2001
3.5 By-Laws 1
4.2 Stock Subscription Agreement between the Registrant and David Brooks, dated December 14, 2001 6
4.3 Form of Warrant Agreement with respect to all Outstanding Warrant together 3
10.1 Employment Agreement dated July 1, 2000 between DHB and David Brooks 3
10.2 Promissory Note between the Company and David Brooks dated November 6, 2000 3
10.3 1995 Stock Option Plan 4
10.6 Sale agreement dated March 10, 2000 between DHB and DMC2 Electronic Components 5
10.7 Lease agreement dated January 1, 2001 between Point Blank Body Armor and VAE Enterprises. 3
10.8 Lease agreement dated April 15, 2001 between DHB Capital Group and A&B Holdings, Inc. 3
10.9 Loan and Security Agreement dated September 24, 2001 with LaSalle Business Credit Inc. 7
10.10 First Amendment and Waiver to Loan and Security Agreement, dated June 28, 2002 8
10.11 Second Amendment to Loan and Security Agreement, dated February 25, 2003 9
21 List of Subsidiaries
99.1 Certification of Chief Executive Officer
99.2 Certification of Chief Financial Officer
Notes to Exhibit Table:
1 Incorporated by reference to the Company's Definitive Proxy Material filed with the Commission in
connection with the Special Meeting in Lieu of Annual Meeting of Shareholders of the Company held
on February 15, 1995.
2 Incorporated by reference to Post-Effective Amendment No. #2 to the Company's Registration
Statement on Form SB-2, File #33-59764, filed on Jan 31, 1997.
3 Incorporated by reference to the Company's Form 10-K for the year ended December 31, 2000, filed
March 30, 2001.
4 Incorporated by reference to the Company's Registration Statement on Form S-8 filed on or about
November 6, 1995.
5 Incorporated by reference to the Company's Current Report on Form 8-K filed March 23, 2000.
6 Incorporated by reference to the Company's Current Report on Form 8-K filed January 28, 2002.
7 Incorporated by reference to the Company's Form 10-Q for the quarter ended September 30, 2001,
filed November 14, 2001.
8 Incorporated by reference to the Company's Current Report on Form 8-K filed July 12, 2002.
9 Incorporated by reference to the Company's Current Report on Form 8-K filed February 25, 2003.
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, David H. Brooks, Chairman and Chief Executive Officer of the Company, certify
that:
1. I have reviewed this annual report on Form 10-K of DHB Industries, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effective-
ness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 31, 2003
/s/ DAVID H. BROOKS
____________________________________
David H. Brooks
Chairman and Chief Executive Officer
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Dawn M. Schlegel, Chief Financial Officer of the Company, certify that:
1. I have reviewed this annual report on Form 10-K of DHB Industries, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effective-
ness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 31, 2003
/s/ DAWN M. SCHLEGEL
_______________________
Dawn M. Schlegel
Chief Financial Officer