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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003
For the transition period from _________ to ___________
Commission File No. 0-22429
DHB INDUSTRIES, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 11-3129361
(State or other jurisdiction of (I.R.S. Employer
incorporation) Identification No.)
555 WESTBURY AVENUE, CARLE PLACE, NEW YORK 11514
(Address of principal executive offices)
Registrant's telephone number: (516) 997-1155
Indicate by check mark whether the registrant (1) filed all reports required to
be filed by section 13 or 15(d) of the Exchange Act during the preceding 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes [ X ] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act.)
Yes [ X ] No [ ]
As of August 13, 2003, there were 40,594,746 shares of Common Stock, $.001 par
value outstanding.
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1
INDEX
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 2003
(Unaudited) and December 31, 2002 3
Unaudited Condensed Consolidated Statements of Operations
For The Three and Six Months Ended June 30, 2003 and 2002 4
Unaudited Condensed Consolidated Statements of Cash Flows For
The Three and Six Months Ended June 30, 2003 and 2002 5
Notes to Unaudited Condensed Consolidated Financial Statements 6-12
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12-14
Item 3. Quantitative and Qualitative Disclosures about Market Risk 14
Item 4. Controls and Procedures 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15-16
Item 2. Changes in Securities and Use of Proceeds 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
Certifications 18-19
2
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
DHB INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2003 (UNAUDITED) AND DECEMBER 31, 2002
(In thousands, except share and per share data)
June 30, December 31,
ASSETS 2003 2002
____ ____
Current assets
Cash and cash equivalents $882,884 $1,249,655 $432 $393
Accounts receivable, less allowance for doubtful
accounts of $1,027 and $1,070, respectively 24,241 22,904
Inventories 47,692 33,360
Deferred income tax assets 784 3,319
Prepaid expenses and other current assets 2,894 971
_______ _______
Total current assets 76,043 60,947
_______ _______
Property and equipment, net 1,819 1,620
_______ _______
Other assets
Other investment 942 942
Deferred income tax assets -- 1,402
Deposits and other assets 436 460
_______ _______
Total other assets 1,378 2,804
_______ _______
Total assets $79,240 $65,371
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $5,168 $5,368
Accrued expenses and other current liabilities 4,849 2,454
Capital lease obligation 7 --
_______ _______
Total current liabilities 10,024 7,822
_______ _______
Long term liabilities
Notes payable-bank 28,254 24,354
Note payable - stockholder -- 1,500
Other liabilities 409 350
_______ _______
Total liabilities 38,687 34,026
_______ _______
Commitments and contingencies
Stockholders' equity
Convertible preferred stock 1 1
Common stock 41 40
Additional paid in capital 35,108 34,792
Other comprehensive loss (40) (41)
Retained earnings (accumulated deficit) 5,443 (3,447)
_______ _______
Total stockholders' equity 40,553 31,345
_______ _______
Total liabilities and stockholders' equity $79,240 $65,371
======= =======
(See Notes to Condensed Consolidated Financial Statements)
3
DHB INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands, except share and per share data)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
2003 2002 2003 2002
____ ____ ____ ____
Net sales $56,525 $34,014 $102,678 $67,650
Cost of goods sold 41,001 23,977 74,186 48,160
_______ _______ ________ _______
Gross profit 15,524 10,037 28,492 19,490
Selling, general and administrative 7,773 5,098 13,566 9,325
_______ _______ ________ _______
expenses
Income before other income (expense) 7,751 4,939 14,926 10,165
_______ _______ ________ _______
Other income (expense)
Interest expense (342) (473) (671) (937)
Proceeds from settlement of lawsuit -- -- 739 --
Other income 11 21 24 44
_______ _______ ________ _______
Total other income (expense) (331) (452) 92 (893)
_______ _______ ________ _______
Income from continuing operations 7,420 4,487 15,018 9,272
before income taxes
Income taxes 3,369 61 5,948 88
_______ _______ ________ _______
Net income 4,051 4,426 9,070 9,184
Dividend - preferred stock (90) -- (180) --
_______ _______ ________ _______
Income available to common $3,961 $4,426 $8,890 $9,184
======= ======= ======== =======
stockholders
Earnings per common share:
Basic shares $0.10 $0.12 $0.22 $0.27
===== ===== ===== =====
Diluted shares $0.09 $0.11 $0.20 $0.24
===== ===== ===== =====
Weighted average shares outstanding:
Basic shares 40,458,867 36,789,796 40,436,557 34,152,728
Effect of convertible preferred 500,000 500,000 500,000 500,000
Warrants 3,277,012 3,735,120 2,786,133 3,785,978
__________ __________ __________ __________
Diluted shares 44,235,879 41,024,916 43,722,690 38,438,706
========== ========== ========== ==========
(See Notes to Condensed Consolidated Financial Statements)
4
DHB INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands, except share and per share data)
For the Six Months
Ended June 30,
CASH FLOWS FROM OPERATING ACTIVITIES 2003 2002
____ ____
Income available to common stockholders $8,890 $9,184
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Depreciation and amortization 264 280
Amortization of deferred financing costs 65 56
Stock issued for services 56
Other liabilities 59 --
Deferred income tax assets 3,937 --
Changes in operating assets and liabilities
Accounts receivable (1,337) (7,044)
Inventories (14,332) (3,952)
Prepaid expenses and other current assets (1,923) 335
Deposits and other assets (42) 115
Accounts payable (200) (8,935)
Accrued expenses and other current liabilities 2,395 503
________ ________
Net cash used in operating activities (2,168) (9,458)
________ ________
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from the disposition of assets -- 363
Purchases of property and equipment (442) (154)
________ ________
Net cash used in investing activities (442) 209
________ ________
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds of notes payable- bank 3,900 10,249
Payments of note payable- stockholder (1,500) (8,500)
Principal payments on long-term debt (13) (1,630)
Proceeds from the issuance of common stock 261 6,333
Proceeds from the issuance of preferred stock -- 3,000
________ ________
Net cash provided by financing activities 2,648 9,452
________ ________
Effect of foreign currency translation 1 18
________ ________
Net increase in cash and cash equivalents 39 221
Cash and cash equivalents at beginning of the period 393 145
________ ________
Cash and cash equivalents at end of the period $432 $366
======== ========
Supplemental cash flow information
Cash paid for:
Interest $321 $965
======== ========
Taxes $144 $28
======== ========
Property and equipment acquired under capital lease $20 $--
======== ========
(See Notes to Condensed Consolidated Financial Statements)
5
DHB INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of DHB
Industries, Inc. and subsidiaries (collectively "DHB" or the "Company") as of
June 30, 2003 and for the three and six months ended June 30, 2003 and 2002 have
been prepared in accordance with accounting principles generally accepted in the
United States of America ("US GAAP"). The unaudited financial statements include
all adjustments, consisting only of normal and recurring adjustments, which, in
the opinion of management, were necessary for a fair presentation of financial
condition, results of operations and cash flows for such periods presented.
However, these results of operations are not necessarily indicative of the
results for any other interim period or for the full year.
Certain information and footnote disclosures in financial statements prepared in
accordance with US GAAP have been omitted in accordance with published rules and
regulations of the Securities and Exchange Commission ("SEC"). These
consolidated financial statements should be read in conjunction with the audited
consolidated financial statements and notes thereto included in the Company's
Form 10-K for the year ended December 31, 2002 filed with the Securities and
Exchange Commission on March 31, 2003 amended and filed with the SEC on July 24,
2003.
NOTE 2. INVENTORIES
Inventories are stated at the lower of cost or market using the first-in,
first-out (FIFO) method and are summarized as follows:
JUNE 30, DECEMBER 31,
________ ____________
2003 2002
____ ____
Raw materials and supplies $17,512 $14,833
Work in process 10,496 9,116
Finished goods 19,684 9,411
______ ______
$47,692 $33,360
======= =======
NOTE 3. LONG TERM DEBT
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
(4.25% and 3.928% at June 30, 2003 and December 31, 2002, respectively).
6
DHB INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
NOTE 4. STOCK BASED COMPENSATION
Warrants
During the six months ended June 30, 2003, the five members of the Board of
Directors were each awarded 50,000 warrants exercisable at $1.41 per share for
five years. In addition, during the six months ended June 30, 2003, the Board of
Directors awarded key employees 45,000 warrants exercisable at $2.01 per share,
which expire in February 2008. The Company also issued 15,000 shares of its
restricted common stock to an employee.
During the six months ended June 30, 2003, warrants were exercised to purchase
166,000 shares of the Company's common stock with aggregate proceeds of
approximately $260. During the six month period ended June 30, 2002, warrants
were exercised to purchase 8,931,832 shares of the Company's common stock with
aggregate proceeds of approximately $6,333.
Warrants to purchase 430,000 and 200,000 shares of the Company's common stock
that were outstanding during the six months ended June 30, 2003 and 2002,
respectively, were not included in the computation of diluted earnings per share
because their effect would have been anti-dilutive, since the strike prices were
above the average fair market value of DHB's stock price.
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 Statement of Financial
Accounting Standards No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure, an amendment of FASB Statement No. 123" ("SFAS No.
148"). Under APB No. 25, compensation expense is only recognized when the market
value of the underlying stock at the date of grant exceeds the amount an
employee must pay to acquire the stock. Accordingly, no compensation expense has
been recognized in the condensed consolidated financial statements in connection
with employee stock warrant grants.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options and warrants 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.
The weighted-average warrant fair values and assumptions used to estimate these
values are as follows:
7
DHB INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
NOTE 4. STOCK BASED COMPENSATION - (Continued)
Grants Issued During
2003 2002
____ ____
Risk-free interest rate 3.942% 4.67%
Expected volatility of common stock 118.795% 94.5467%
Dividend yield 0.00% 0.00%
Expected option term 5 years 5.14 years
The Company's net income and earnings per share would have been reduced to the
pro forma amounts shown below if compensation cost had been determined based on
the fair value at the grant dates in accordance with SFAS No. 123 and 148,
"Accounting for Stock-Based Compensation."
For the Three Months For the Six Months
Ended June 30 Ended June 30
2003 2002 2003 2002
____ ____ ____ ____
Income available to common stockholders, as reported $3,961 $4,426 $8,890 $9,184
Deduct: compensation determined under fair value based method
for all awards, net of related tax effect 7 665 215 665
______ ______ ______ ______
Pro forma 3,954 3,761 8,675 8,519
______ ______ ______ ______
Basic earnings per common share
As reported $0.10 $0.12 $0.22 $0.27
Pro forma $0.10 $0.10 $0.21 $0.25
Diluted earnings per common share
As reported $0.09 $0.11 $0.20 $0.24
Pro forma $0.08 $0.09 $0.20 $0.22
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.
NOTE 5. OTHER COMPREHENSIVE INCOME
Accumulated other comprehensive income (loss) is comprised solely of foreign
currency translation losses at June 30, 2003 and 2002. The components of other
comprehensive income, net of taxes, were as follows:
Three months ended Six months ended
June 30, June 30, June 30, June30,
2003 2002 2003 2002
____ ____ ____ ____
Income available to common stockholders $3,961 $4,426 $8,890 $9,184
Other comprehensive income (loss):
Foreign currency translation, net of tax (4) 10 (6) 18
______ ______ ______ ______
Comprehensive income $3,957 $4,436 $8,884 $9,202
====== ====== ====== ======
8
DHB INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
NOTE 6. SEGMENT INFORMATION
The Company operates in two principal segments: Ballistic-resistant equipment
and protective athletic/sports products. Net sales, income from operations,
depreciation expense, interest expense, income taxes, and identifiable assets
for each of the Company's segments are as follows:
For The Three Months For The Six Months
Ended June 30, Ended June 30,
NET SALES 2003 2002 2003 2002
____ ____ ____ ____
Ballistic-resistant equipment $ 54,905 $ 32,493 $ 99,524 $ 64,652
Protective athletic & sports products 1,620 1,521 3,154 3,001
________ ________ ________ ________
Consolidated net sales $ 56,525 $ 34,014 $102,678 $ 67,653
======== ======== ======== ========
INCOME FROM OPERATIONS
Ballistic-resistant equipment $ 8,650 $ 5,489 $16,645 $11,233
Protective athletic & sports products 243 239 476 447
Corporate and other (1) (1,142) (789) (2,195) (1,515)
________ ________ ________ ________
Consolidated operating income $ 7,751 $ 4,939 $14,926 $10,165
======== ======== ======== ========
DEPRECIATION EXPENSE
Ballistic-resistant equipment $ 72 $ 84 $144 $168
Protective athletic & sports products 15 28 27 59
________ ________ ________ ________
87 112 172 227
Corporate and other 45 24 92 53
________ ________ ________ ________
Consolidated depreciation expense $132 $136 $263 $280
======== ======== ======== ========
INTEREST EXPENSE
Ballistic-resistant equipment $ 292 $ 169 $576 $329
Protective athletic & sports products -- -- -- --
________ ________ ________ ________
292 169 576 329
Corporate and other (1) 50 304 95 608
________ ________ ________ ________
Consolidated interest expense $ 342 $ 473 $ 671 $ 937
======== ======== ======== ========
INCOME TAXES
Ballistic-resistant equipment $ 7 $ 5 $11 $ 9
Protective athletic & sports products -- -- -- --
________ ________ ________ ________
7 5 11 9
Corporate and other (1) 3,362 56 5,937 79
________ ________ ________ ________
Consolidated tax expense $3,369 $ 61 $5,948 $ 88
======== ======== ======== ========
9
DHB INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
NOTE 6. SEGMENT INFORMATION - (Continued)
June 30, December 31,
2003 2002
____ ____
IDENTIFIABLE ASSETS
Ballistic-resistant equipment $72,938 $56,471
Protective athletic & sports products 3,614 2,907
_______ _______
76,552 59,378
Corporate and other (2) 2,688 5,993
_______ _______
Consolidated net assets $79,240 $65,371
======= =======
(1) Corporate and other expenses includes corporate general and
administrative expenses.
(2) Corporate and other assets are principally prepaid expenses, deferred
income tax assets, other investment and property and equipment.
NOTE 7. CONTINGENCIES
The Company is party to various claims, legal actions and complaints arising in
the ordinary course of business. In the opinion of management, all such matters
are without merit or are of such kind, or involve such amounts, that an
unfavorable disposition would not have a material adverse effect on the
consolidated financial position, results of operations or liquidity of the
Company.
In the past several months, the UNITE Union, as part of its unsuccessful
organizing campaign, has filed three unfair labor practice charges against the
Company with the National Labor Relations Board ("NLRB"). The NLRB has completed
its investigation of the first of these charges and found it to be without
merit. The NLRB is currently investigating the remaining two charges. The
Company is confident it has not breached any provision of the National Labor
Relations Act.
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. 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. The Company maintains $10,000 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 tortious interference
with contractual and ongoing business relationships. The case is still in its
preliminary stages, and the Company is vigorously pursuing this action.
10
DHB INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
NOTE 7. CONTINGENCIES - (Continued)
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 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 $1,000 payment to the Company. The
Company received a cash payment of approximately $739,000, which is net of the
associated legal fees of $261. The $739 received by the Company is included in
other income during the six months ended June 30, 2003. The lawsuit against the
insurance carrier has been scheduled for trial in the fall of 2003.
NOTE 8. RECENTLY ISSUED ACCOUNTING STANDARDS
In April 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No.
145, RESCISSION OF FASB STATEMENTS NO. 4, 44, AND 64, AMENDMENT OF FASB
STATEMENT NO. 13, AND TECHNICAL CORRECTIONS ("SFAS No. 145"). This statement
eliminates the requirement to report gains and losses from extinguishment of
debt as extraordinary unless they meet the criteria of APB Opinion No. 30. SFAS
No. 145 also requires sale-leaseback accounting for certain lease modifications
that have economic effects that are similar to sale-leaseback transactions. SFAS
No. 145 is effective for fiscal years beginning after May 15, 2002. The impact
of the adoption of SFAS No. 145 did not have a material impact on the Company's
financial position or results of operations.
In June 2002, the FASB issued SFAS No. 146, ACCOUNTING FOR COSTS ASSOCIATED WITH
EXIT OR DISPOSAL ACTIVITIES ("SFAS No. 146"). SFAS No. 146 nullifies Emerging
Issues Task Force Issue No. 94-3 and requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability is
incurred. This statement also establishes that fair value is the objective for
initial measurement of the liability. SFAS No. 146 is effective for exit or
disposal activities initiated after December 31, 2002. The impact of the
adoption of SFAS No. 146 did not have a material impact on the Company's
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. The impact of the
adoption of FIN No. 45 did not have a material impact on the Company's
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
11
DHB INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
NOTE 8. RECENTLY ISSUED ACCOUNTING STANDARDS - (Continued)
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 has adopted the
interim disclosure provision for its financial reports, for the quarter ended
June 30, 2003. The adoption of SFAS No. 148, has not had and is not expected to
have a material impact on the Company financial position or results of
operation.
In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). In general, a variable interest entity
is a corporation, partnership, trust, or any other legal structure used for
business purposes that either (a) does not have equity investors with voting
rights, or (b) has equity investors that do not provide sufficient financial
resources for the entity to support its activities. A variable interest entity
often holds financial assets, including loans or receivables, real estate or
other property. A variable interest entity may be essentially passive or it may
engage in activities on behalf of another company. Until now, a company
generally has included another entity in its consolidated financial statements
only if it controlled the entity through voting interests. FIN 46 changes that
by requiring a variable interest entity to be consolidated by a company if that
company is subject to a majority of the risk of loss from the variable interest
entity's activities or entitled to receive a majority of the entity's residual
returns or both. FIN 46's consolidation requirements apply immediately to
variable interest entities created or acquired after January 31, 2003. The
consolidation requirements apply to older entities in the first fiscal year or
interim period beginning after June 15, 2003. Certain of the disclosure
requirements apply in all financial statements issued after January 31, 2003,
regardless of when the variable interest entity was established. The Company
adopted FIN 46 effective January 31, 2003. The adoption of FIN 46 has not had
and is not expected to have a material impact on the Company's consolidated
financial condition or results of operations taken as a whole.
In April 2003, the FASB released SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" ("SFAS No. 149"). SFAS No. 149
clarifies under what circumstances a contract with an initial net investment
meets the characteristics of a derivative, amends the definition of an
underlying contract, and clarifies when a derivative contains a financing
component in order to increase the comparability of accounting practices under
SFAS No. 133. The statement is effective for contracts entered into or modified
after June 30, 2003, and for hedging relationships designated after June 30,
2003. The adoption of SFAS No. 149 is not expected to have a material impact on
the Company's financial position or results of operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity" ("SFAS No.
150"). SFAS No. 150 establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both liabilities
and equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). SFAS No.
150 is effective for financial instruments entered into or modified after May
31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003, except for mandatory redeemable financial
instruments of nonpublic entities. The adoption of SFAS No. 150 is not expected
to have a material impact on the Company's financial position or results of
operations.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2003, COMPARED TO THE THREE MONTHS ENDED JUNE 30,
2002
For the quarter ended June 30, 2003, the Company attained its highest
consolidated net sales level in its history of approximately $56.5 million an
increase of 66.2% over consolidated net sales of $34.0 million for the three
months ended June 30, 2002. The Armor Group's revenue increased 69% to $54.9
million for the three months ended June 30, 2003 from approximately $32.5 for
the three months ended June 30, 2002. This increase was attributable to increase
orders from all sectors, including military, state and local law enforcement
agencies as well as federal agencies. The Sports Group's revenue for the 2nd
quarter increased 7.0% to $1.6 million over revenue of $1.5 million for the
three months ended June 30, 2002. The increase in the Sports Group's revenue was
attributable to the addition of Walmart stores in Canada to its customer base
and expanded numbers of products in Target stores for 2003. The consolidated
gross profit percentage for the quarter ended June 30, 2003 was 27.5% as
compared to 29.5% for the quarter ended June 30, 2002. The primary reason for
this decline is the added costs associated with increasing and expediting the
Company's sales orders to meet the accelerated demand of our customers,
including overtime costs and freight and delivery charges.
The Company's selling, general and administrative expenses as a percentage of
sales improved to 13.8% of revenues for the three months ended June 30, 2003 as
compared to 15.0% for the three months ended June 30, 2002. Driven primarily by
the sales increases, operating income increased 56.9% to approximately $7.8
million for the three months ended June 30, 2003 versus approximately $4.9
million for the three months ended June 30, 2002.
Interest expense for the three months ended June 30, 2003 was approximately
$342,000, a 27.7% decrease from the corresponding 2002 period. This decrease was
due primarily to lower interest rates under the Company's revolving credit
facility.
Income before taxes was approximately $7.4 million for the three months ended
June 30, 2003, a 65.4% increase as compared to approximately $4.5 million for
the same period in 2002. Income taxes for the three months ended June 30, 2003
was $3.4 million as compared to $61,000 for the three months ended June 30,
2002. The effective tax rate was nominal in 2002 due to the utilization of net
operating loss carryforwards which was fully utilized during the three months
ended March 31, 2003.
Income available to common stockholders was $4.0 million or $0.09 per diluted
share for the three months ended June 30, 2003 as compared with income available
to common stockholders of $4.4 million or $0.11 per diluted share for the three
months ended June 30, 2002. The weighted average shares outstanding on a diluted
basis for the three months ended June 30, 2003 were 44,235,879 as compared to
41,024,916 for the three months ended June 30, 2002.
13
SIX MONTHS ENDED JUNE 30, 2003, COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2002
For the first half of 2003, consolidated net sales levels reached $102.7
million, an increase of 51% over consolidated net sales of $67.7 million for the
first half of 2002. The Armor Group's revenue increased 53% from $64.6 million
for the six months ended June 30, 2002 to $99.5 million for the six months ended
June 30, 2003. This increase was attributable to increase orders from all
sectors including, military, state and local law enforcement agencies as well as
federal agencies. The Sports Group's revenue for the six months ended June 30,
2003 increased 5% to $3.2 million, compared to revenue of $3.0 million for the
six months ended June 30, 2002. The increase in the Sports Group's revenue was
attributable to the addition of Walmart stores in Canada to its customer base
and expanded numbers of products in Target stores for 2003. The gross profit
percentage for the consolidated operations for the six months ended June 30,
2003 was 27.7% as compared to 28.8% for the six months ended June 30, 2002.
The Company's selling, general and administrative expenses as a percentage of
sales improved to 13.27% of revenues for the six months ended June 30, 2003 as
compared to 13.8% for the six months ended June 30, 2002. Driven primarily by
the sales increases, operating income increased 46.8% to approximately $14.9
million for the six months ended June 30, 2003 versus approximately $10.2
million for the six months ended June 30, 2002.
In March 2003, the Company signed a settlement agreement settling the lawsuit
against its insurance agent for $1 million. The Company received a cash payment
of approximately $739,000, which is net of the associated legal fees of
$261,000. The Company still has pending its lawsuit against its insurance
carrier for the majority of its loss arising from a hurricane. This case is
scheduled for trial during the fourth quarter of 2003. The $739,000 received
from the insurance agent is included in other income for the six months ended
June 30, 2003.
Interest expense for the six months ended June 30, 2003 was approximately
$671,000, a 28.4% decrease from the corresponding 2002 period. This decrease was
due primarily to lower interest rates under the Company's revolving credit
facility.
Income before taxes was approximately $15.0 million for the six months ended
June 30, 2003, a 62.0% increase as compared to approximately $9.3 million for
the same period in 2002. Income taxes for the six months ended 2003 was
approximately $5.9 million as compared to $88,000 for the six months ended June
30, 2002. The effective tax rate for 2003 is 39.6% while the effective tax rate
was nominal in 2002 due to the utilization of net operating loss carryforwards,
which was fully utilized during the three months ended March 31, 2003.
Income available to common stockholders was approximately $8.9 million for the
first half of 2003 or $0.20 per diluted share as compared with income available
to common stockholders of $9.2 million or $0.24 per diluted share for the first
half of 2002. The weighted average shares outstanding on a diluted basis for the
six months ended June 30, 2003 were 43,722,690 as compared to 38,438,706 for the
six months ended June 30, 2002.
On February 25, 2003, the Company signed an amendment to its credit agreement
increasing its $25 million revolving credit facility to $35 million to fund its
increased working capital requirements. Working capital at June 30,
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2003 was approximately $66,019,000 versus $65,318,000 at March 31, 2003. On June
30, 2003 the balance due under the credit agreement was $28,254,000 compared to
approximately $31,883,000 at March 31, 2003 and approximately $24,354,000 at
December 31, 2002. The current ratio on June 30, 2003 was 7.6 to 1 as compared
to 7.3 to 1 as of March 31, 2003. At June 30, 2003, stockholders' equity was
approximately $40,553,000.
LIQUIDITY AND CAPITAL RESOURCES
The Company's sources of liquidity are borrowings under its revolving credit
facility. On February 25, 2003, the Company signed an amendment to the credit
facility increasing the facility to $35 million (gradually decreasing to $25
million by November 30, 2003). The Company's primary capital requirements over
the next twelve months are to assist its subsidiaries, Point Blank Body Armor,
Inc., Protective Apparel Corporation of America (PACA) and NDL Products, Inc.,
in financing their working capital requirements. Working capital is required to
finance the receivables, manufacturing process and inventory. Working capital at
June 30, 2003 was approximately $66.01 million as compared to approximately
$53.13 million at December 31, 2002. The current ratio at June 30, 2003 was
7.6:1 as compared to 7.8:1 as of December 31, 2002. At June 30, 2003,
stockholders' equity was approximately $40.6 million, up from $31.35 million as
of December 31, 2002.
For the six months ended June 30, 2002 the Company's operations used cash of
approximately $2,168,000. All the components of inventory, raw materials, work
in process and finished goods increased to support the Company's increased sales
volumes. However the increase in finished goods outweighs the other components
and represents increased orders to be shipped to the Armor Group's customers.
Since March 31, 2003, the accounts receivable days outstanding improved 18 days
to 43 days at June 30, 2003 compared to the 61 days at March 31, 2003.
EFFECT OF INFLATION AND CHANGING PRICES
The Company did not experience any measurable increases in raw material prices
during the three months ended June 30, 2003. The Company believes it will be
able to increase prices on its products to meet future price increases in raw
materials, should they occur.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Report contains certain forward-looking statements and information relating
to the Company that are 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 within the meaning of the Private Securities Litigation Reform Act of
1995. Such statements reflect the current views of the Company with respect to
future events and are subject to certain risks, uncertainties and assumptions,
including, among others: risks associated with the uncertainty of future
financial results, additional financing requirements, development of new
products, government approval processes, the impact of competitive products or
pricing, technological changes, and the effect of economic conditions; and
continuing industry-wide pricing pressures and other
15
industry conditions, as well as other risks and uncertainties, including without
limitation those set forth in other sections of this Form 10-Q, in the Company's
Annual Report on Form 10-K/A for the year ended December 31, 2002, and/or in the
Company's other documents filed with the Securities and Exchange Commission,
whether or not such documents are incorporated herein by reference. In assessing
forward-looking statements, readers are urged to read carefully all such
cautionary statements. The forward-looking statements in this Form 10-Q speak
only as of the date of this Form 10-Q, and the Company disclaims any obligation
or undertaking to update such statements. If one or more of these risks or
uncertainties materialize, or if the underlying assumptions prove incorrect,
actual results may vary materially from those described herein as anticipated,
believed, estimated or expected.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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 revolving credit facility. The Company can borrow at either the bank's prime
rate of interest or LIBOR plus 2.50 percent. 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.
ITEM 4. CONTROLS AND PROCEDURES
The Company carried out an evaluation, as required by Exchange Act Rule
13a-15(b), 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) as of the end of the period covered by this report. Based upon
that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that 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. During the period covered by this
quarterly report, there have been no changes to our internal control over
financial reporting that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
Disclosure controls and procedures are those controls and other procedures that
are 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 recorded,
processed, summarized and reported, within 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 or its
internal controls will prevent all errors and all fraud. A control system, no
16
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 must reflect 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 the 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 of two or more people, or by management override of the
control. The design of any system of controls also is 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. Because of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and not be detected.
The Company monitors its disclosure controls and internal controls and makes
modifications as necessary; the Company's intent in this regard is that the
disclosure controls and the internal controls will be maintained as dynamic
systems that change (including with improvements and corrections) as conditions
warrant.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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 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 $1.0 million payment to the Company.
The Company received a cash payment of approximately $739,000, which is net of
the associated legal fees of $261,000. The $739,000 received by the Company is
included in other income during the six months ended June 30, 2003. The lawsuit
against the insurance carrier has been scheduled for trial in the fall of 2003.
In the past several months, the UNITE Union, as part of its unsuccessful
organizing campaign, has filed three unfair labor practice charges against the
Company with the National Labor Relations Board ("NLRB"). The NLRB has completed
its investigation of the first of these charges and found it to be without
merit. The NLRB is currently investigating the remaining two charges. The
Company is confident it has not breached any provision of the National Labor
Relations Act.
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. 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. The Company
17
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 tortious 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 also involved in other litigation, which management considers to
be routine and incidental to the Company's business. Management does not expect
the results of any of these routine and incidental actions to have a material
adverse effect on the Company's business, results of operations or financial
condition.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not Applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
31.1 Certification of the Chief Executive Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certification of the Chief Financial Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32.1 Certification of the Chief Executive Officer Pursuant to 18 U.S.C.ss.
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of the Chief Financial Officer Pursuant to 18 U.S.C.ss.
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(B) REPORTS ON FORM 8-K
The Company filed the following Report on Form 8-K during the quarter ended June
30, 2003:
Form 8-K filed April 30, 2003 to report financial results for the quarterly
period ended March 31, 2003. The Form 8-K included financial statements.
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed by the undersigned,
thereunto duly authorized.
Dated: August 13, 2003 DHB INDUSTRIES, INC.
(Registrant)
SIGNATURE CAPACITY DATE
Chief Executive Officer August 13, 2003
/s/ DAVID H. BROOKS and Chairman of the Board
___________________
Chief Financial Officer and August 13, 2003
/s/ DAWN M. SCHLEGEL Principal Accounting Officer
____________________
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