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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________________
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED
March 31, 2004 Commission File No. 0-22429
DHB INDUSTRIES, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 11-3129361
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
400 POST AVENUE, SUITE 303, WESTBURY, NY 11590
(Address of principal executive offices)
Registrant's telephone number: (516) 997-1155
Former name, former address and former fiscal year, if changed since last
report:
Not applicable
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 May 10, 2004, there were 40,812,136 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 March 31, 2004
(Unaudited) and December 31, 2003 3
Unaudited Condensed Consolidated Statements of Operations For The
Three Months Ended March 31, 2004 and 2003 4
Unaudited Condensed Consolidated Statements of Cash Flows For The
Three Months Ended March 31, 2004 and 2003 5
Notes to Unaudited Condensed Consolidated Financial Statements 6-11
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 12-15
Item 3. Quantitative and Qualitative Disclosures about Market Risk 15
Item 4. Controls and Procedures 16-18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18-19
Item 2. Changes in Securities and Use of Proceeds 19
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19-20
Signatures 20
2
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
DHB INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2004 (UNAUDITED) AND DECEMBER 31, 2003
(In thousands, except share and per share data)
March 31, December 31,
2004 2003
_________ ____________
ASSETS
Current assets
Cash and cash equivalents $ 478 $ 441
Accounts receivable, less allowance for doubtful accounts of
$879 and $852, respectively 38,643 33,707
Inventories 62,817 54,753
Deferred income tax assets 372 372
Prepaid expenses and other current assets 1,204 1,518
________ _______
Total current assets 103,514 90,791
________ _______
Property and equipment, net 2,392 1,819
________ _______
Other assets
Deferred income tax assets 468 437
Deposits and other assets 421 381
________ _______
Total other assets 889 818
________ _______
Total assets $106,795 $93,428
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current maturities of long-term debt $ 3,000 $ 2,000
Accounts payable 8,933 9,465
Accrued expenses and other current liabilities 8,497 6,869
Income taxes payable 7,394 5,635
________ _______
Total current liabilities 27,824 23,969
________ _______
Long-term liabilities
Notes payable-bank 15,588 22,012
Term loan payable 9,500
Other liabilities 530 502
________ _______
Total liabilities 53,442 46,483
________ _______
Commitments and contingencies
Minority interest in consolidated subsidiary 266 207
Stockholders' equity
Convertible preferred stock, $0.001 par value, 5,000,000 shares 1 1
authorized, 500,000 shares of Series A, 12% convertible preferred
stock issued and outstanding; liquidation preference $3,000
Common stock, $0.001 par value, 100,000,000 shares 41 41
authorized, 40,782,136 and 40,742,136 issued
Additional paid in capital 35,464 35,384
Accumulated other comprehensive loss (53) (53)
Retained earnings 17,634 11,365
________ _______
Total stockholders' equity 53,087 46,738
________ _______
Total liabilities and stockholders' equity $106,795 $93,428
======== =======
(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
Ended March 31,
_____________________________
2004 2003
___________ ___________
Net sales $ 74,403 $ 46,153
Cost of goods sold (includes related party purchases of
$3,302, and $6,548, respectively) 53,638 33,185
___________ ___________
Gross profit 20,765 12,968
Selling, general and administrative expenses 9,872 5,793
___________ ___________
Income before other income (expense) 10,893 7,175
___________ ___________
Other income (expense)
Interest expense (299) (329)
Proceeds from settlement of lawsuit -- 739
Other income 10 13
___________ ___________
Total other income (expense) (289) 423
___________ ___________
Income before income taxes and minority interest 10,604 7,598
Income taxes 4,186 2,579
___________ ___________
Income before minority interest of subsidiary 6,418 5,019
Minority interest of subsidiary (59) --
___________ ___________
Net income 6,359 5,019
Dividend - preferred stock (90) (90)
___________ ___________
Income available to common stockholders $ 6,269 $ 4,929
=========== ===========
Earnings per common share:
Basic shares $ 0.15 $ 0.12
=========== ===========
Diluted shares $ 0.14 $ 0.12
=========== ===========
Weighted average shares outstanding:
Basic shares 40,743,784 40,413,746
Effect of convertible preferred 500,000 500,000
Warrants 3,898,249 1,871,742
___________ ___________
Diluted shares 45,142,033 42,785,488
=========== ===========
(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 Three Months
Ended March 31,
_________________________
2004 2003
________ _______
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 6,359 $ 5,019
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization 205 132
Amortization of deferred financing costs 36 34
Provision for doubtful accounts 27 --
Minority interest of subsidiary 59 --
Deferred income tax (benefit) expense (31) 2,535
Changes in operating assets and liabilities
Accounts receivable (4,963) (8,918)
Inventories (8,064) (8,473)
Prepaid expenses and other current assets 314 (120)
Deposits and other assets 7 (68)
Accounts payable (532) 2,320
Income taxes payable 1,759 --
Accrued expenses and other current liabilities 1,628 168
Other liabilities 28 30
________ _______
Net cash used in operating activities (3,168) (7,341)
________ _______
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (778) (371)
________ _______
Net cash used in investing activities (778) (371)
________ _______
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid on preferred stock (90) (90)
Net proceeds of notes payable- bank 4,076 7,529
Issuance costs of long-term debt (83) --
Principal payments on long-term debt -- (7)
Proceeds from the issuance of common stock 80 --
________ _______
Net cash provided by financing activities 3,983 7,432
________ _______
Effect of foreign currency translation -- (2)
________ _______
Net increase (decrease) in cash and cash equivalents 37 (282)
Cash and cash equivalents at beginning of the period 441 393
________ _______
Cash and cash equivalents at end of the period $ 478 $ 111
======== =======
(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
March 31, 2004 and for the three months ended March 31, 2004 and 2003 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 normally included 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
(the "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/A for the year ended December 31, 2003 filed
with the SEC on March 30, 2004.
NOTE 2. SUPPLEMENTAL CASH FLOW INFORMATION
For the Three Months
Ended March 31,
____________________
2004 2003
_______ ____
Cash paid for:
Interest $ 428 $321
Taxes 3,924 44
Non-cash financing and investing activities:
Revolving credit loan refinanced to
long-term debt $12,500 --
Property and equipment acquired under
capital lease -- 20
NOTE 3. INVENTORIES
Inventories are stated at the lower of cost or market using the first-in,
first-out (FIFO) method and are summarized as follows:
March 31, December 31,
2004 2003
_________ ____________
Raw materials and supplies $28,493 $21,750
Work in process 18,528 15,430
Finished goods 15,796 17,573
_______ _______
$62,817 $54,753
======= =======
6
DHB INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
NOTE 4. LONG-TERM DEBT
On March 15, 2004, the Company amended its bank credit agreement (the "Credit
Agreement"), to increase its borrowing limits from $35,000 to $45,000. Pursuant
to the Credit Agreement, the Company may borrow, on a revolving basis, up to
$32,500 on 85% of eligible accounts receivable (the "Credit Facility"), and the
Company borrowed a secured term loan of $12,500, amortizing at the rate of
$1,000 per quarter, commencing July 2004. This amended agreement will expire on
October 1, 2007. Borrowings under the Credit Agreement bear interest, at the
Company's option, at the bank's prime rate (4% at March 31, 2004) or LIBOR
(1.11% at March 31, 2004) plus 1.75% per annum on the revolving Credit Facility
and at the bank's prime rate or LIBOR plus 2.25% on the term loan. For 2003, the
borrowings bore interest at the bank's prime rate or LIBOR plus 1.75% (3.145% at
December 31, 2003). The borrowings under the Credit Agreement are collateralized
by a first security interest in substantially all of the assets of the Company.
NOTE 5. STOCK BASED COMPENSATION
Warrants
No warrants were issued during the three months ended March 31, 2004. During the
three-month period ended March 31, 2004, employees exercised warrants to
purchase 40,000 shares of the Company's unregistered common stock at an average
price of $2.00 per share. During the three months ended March 31, 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 three months ended
March 31, 2003, the Board of Directors awarded key employees 45,000 warrants
exercisable at $2.01 per share, which expire in February 2008. No warrants were
exercised during the three months ended March 31, 2003.
Warrants to purchase 450,000 and 1,325,857 shares of the Company's common stock
that were outstanding during the three months ended March 31, 2004 and 2003,
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.
Stock issued for services is valued at fair value and is expensed as the
services are provided.
7
DHB INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
NOTE 5. STOCK BASED COMPENSATION - (Continued)
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, the Black-Scholes option valuation model
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:
Warrants Issued During
2004 2003
______ ______
Risk-free interest rate 3.12% 2.86%
Expected volatility of common stock 93.96% 98.44%
Dividend yield 0.00% 0.00%
Expected option term 4.3 years 5 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
Ended March 31,
____________________
2004 2003
______ ______
Net income $6,359 $5,019
Less dividend - preferred stock 90 90
______ ______
Income available to common stockholders,
as reported 6,269 4,929
Deduct: compensation determined under fair
value based method for all awards, net
of related tax effect 216 247
______ ______
Pro forma $6,053 $4,682
______ ______
Basic earnings per common share
As reported $ 0.15 $ 0.12
Pro forma $ 0.15 $ 0.12
Diluted earnings per common share
As reported $ 0.14 $ 0.12
Pro forma $ 0.13 $ 0.11
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-valuation model.
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 and sports products. Net sales, income before other
income (expense), depreciation and amortization expense, interest expense,
income taxes, and identifiable assets for each of the Company's segments are as
follows:
For The Three Months
Ended March 31,
____________________
2004 2003
_______ _______
NET SALES
Ballistic-resistant equipment $72,563 $44,619
Protective athletic & sports products 1,840 1,534
_______ _______
Consolidated net sales $74,403 $46,153
======= =======
INCOME BEFORE OTHER INCOME (EXPENSE)
Ballistic-resistant equipment $13,365 $ 7,995
Protective athletic & sports products 317 233
Corporate and other (1) (2,789) (1,053)
_______ _______
Consolidated income before other income (expense) $10,893 $ 7,175
======= =======
DEPRECIATION AND AMORTIZATION EXPENSE
Ballistic-resistant equipment $ 140 $ 72
Protective athletic & sports products 31 14
_______ _______
171 86
Corporate and other 34 46
_______ _______
Consolidated depreciation and amortization expense $ 205 $ 132
==== ====
INTEREST EXPENSE
Ballistic-resistant equipment $ 298 $ 284
Protective athletic & sports products -- --
_______ _______
298 284
Corporate and other (2) 1 45
_______ _______
Consolidated interest expense $ 299 $ 329
======= =======
INCOME BEFORE INCOME TAXES
Ballistic-resistant equipment $10,118 $ 3,452
Protective athletic & sports products 310 196
_______ _______
10,428 3,648
Corporate and other (2) 176 3,950
_______ _______
Consolidated income before income tax expense $10,604 $ 7,598
======= =======
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)
For The Three Months
Ended March 31,
_____________________________
2004 2003
________ _______
Income Taxes
Ballistic-resistant equipment $ 615 $ 5
Protective athletic & sports products -- --
________ _______
615 5
Corporate and other (2) 3,571 2,574
________ _______
Consolidated income tax expense $ 4,186 $ 2,579
======== =======
March 31, December 31,
2004 2003
_________ ____________
Identifiable Assets
Ballistic-resistant equipment $101,468 $88,503
Protective athletic & sports products 3,372 3,186
________ _______
104,840 91,689
Corporate and other (2) 1,955 1,739
________ _______
Consolidated total assets $106,795 $93,428
======== =======
(1) Corporate and other expenses includes corporate general and
administrative expenses.
(2) Corporate and other assets are principally deferred income tax assets
and property and equipment.
NOTE 7. CONTINGENCIES
The Company is currently the subject of an investigation by the SEC, with
respect to certain related party transactions between the Company and affiliates
of Mr. David H. Brooks (the Company's Chief Executive Officer). The Company and
Mr. Brooks are cooperating with the SEC in this investigation and the Audit
Committee of the Company's Board of Directors has retained a forensic accounting
firm to conduct an independent investigation with respect to these matters. In
addition, the Audit Committee expects to periodically monitor the status and
performance of these related party transactions to assess the relative benefits
to the Company and the related party's compliance with its contractual
obligations.
The Company is involved in other litigation, none of which individually or in
the aggregate is considered by management to be material to the Company's
business or would, if adversely determined, have a material adverse effect on
the Company's consolidated financial condition or operations.
10
DHB INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
NOTE 8. 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 revenues and expenses
during each reporting period. Actual results could differ from those estimates.
NOTE 9. RECENTLY ISSUED ACCOUNTING STANDARDS
In January 2003, the FASB issued Financial Interpretation No. 46, "Consolidation
of Variable Interest Entities" ("FIN 46"), which clarifies the application of
Accounting Research Bulletin No. 51, "Consolidated Financial Statements." FIN 46
requires certain variable interest entities to be consolidated by the primary
beneficiary of the entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not provide sufficient
equity at risk for the entity to support its activities. In December 2003, the
FASB revised certain elements of FIN 46. The FASB also modified the effective
date of FIN 46. For all entities that were previously considered special purpose
entities, FIN 46 should be applied in periods ending after December 15, 2004.
Otherwise, FIN 46 is to be applied for registrants who file under Regulation S-X
in periods ending after March 15, 2004. The adoption of FIN 46 did not have a
material impact on the Company's consolidated 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. SFAS No. 150 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. The adoption of SFAS No. 150 has
not had, and is not expected to, have a material impact on the Company's
consolidated financial position or results of operations.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
The Company is a holding company, which currently conducts business
through its wholly-owned subsidiaries through two divisions, the DHB Armor Group
("Armor Group") and the DHB Sports Group ("Sports Group"). The Armor Group
represented approximately 97%, 96% and 95% of consolidated revenues of the
Company during 2003, 2002 and 2001, respectively. The Company's products are
sold both nationally and internationally. The Armor Group's sales are derived
primarily from 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
government 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.
The Company derives substantially all of its revenues from sales of its
products. As indicated in the financial information included in this report and
in the Company's Form 10-K/A for the year ended December 31, 2003, the Company
has experienced substantial increases in its revenues in the past several years,
which have been attributable primarily to product demand from the U.S. military
and federal, state and local law enforcement. The Company's ability to maintain
these revenue levels will be highly dependent on continued demand for body armor
and projectile-resistant clothing; and although the Company does not foresee an
immediate material reduction in such demand, there is no assurance that
governmental agencies will not refocus their expenditures based on changed
circumstances or otherwise.
The Company has outgrown its small business status under government
procurement regulations. The Company believes it is now recognized by government
agencies as having the ability to manage larger contracts. This allows the
Company to competitively bid on large procurements and maintain support of small
businesses as subcontractors.
The Company's market share is highly dependent upon the quality of its
products and its ability to deliver its products in a prompt and timely fashion.
To meet projected demand, and to maintain its ability to deliver quality
products in a timely manner, the Company has recently entered into a long-term
lease for a new, expanded production facility in Pompano Beach, Florida.
However, there are no assurances that, in the long term, demand for the
Company's products will remain at recent levels, or that the Company will be
able to diversify into alternative markets or alternative products, or to
increase its market share through acquisitions of other businesses. Management's
current strategic focus is on quality and delivery, which management believes
are the key elements in obtaining additional and repeat orders under the
Company's existing procurement contracts with the U.S. military and other
governmental agencies.
12
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2004, COMPARED TO THE THREE MONTHS ENDED MARCH 31,
2003
Primarily as a result of increased product demand at the Company's
Armor Group, the Company attained its highest quarterly consolidated net sales
level in its history for the three months ended March 31, 2004. For the three
months, consolidated net sales were approximately $74.4 million, an increase of
61% over consolidated net sales of $46.2 million for the three months ended
March 31, 2003. The Armor Group's net sales increased nearly 63% from $44.6
million for the three months ended March 31, 2003 to $72.6 million for the three
months ended March 31, 2004 due primarily to substantial increased shipments to
the United States military and a $6 million dollar increase in international
sales. The Sports Group's net sales for the first quarter of 2004 increased 13%
to $1.8 million, as compared to $1.6 million for the first quarter of 2003.
Contributing to the increase in the Sports Group's net sales was the addition of
a high profile West Coast chain of drug stores, Longs Drug Stores, to the Sports
Group's customer base. Gross profit for the quarter ended March 31, 2004 was
approximately $20.8 million (27.9% of net sales), as compared to approximately
$13.0 million (28.1% of net sales) for the quarter ended March 31, 2003.
The Company's selling, general and administrative expenses were
approximately $9.9 million or 13.3% of net sales for the three months ended
March 31, 2004, versus approximately $5.8 million or 12.6% of net sales for the
three months ended March 31, 2003. The increase is attributable to increased
selling expenses in conjunction with the increased sales volumes. The increase
of 13.3% for the quarter ended March 31, 2004 is a significant improvement over
the fourth quarter of 2003, in which selling, general and administrative
expenses were approximately 20% of net sales and included significant non-direct
operating expenses which have not carried forward into 2004. Management believes
that selling, general and administrative expenses will be between 13.5% and
14.5% for 2004 as a whole. Driven primarily by the sales increases, operating
income increased to approximately $10.9 million for the first three months of
2004 versus approximately $7.2 million for the first three months of 2003.
Interest expense for the three months ended March 31, 2004 decreased
9.1% to $299,000 compared to approximately $329,000 for the three months ended
March 31, 2003. This decrease was due primarily to the shareholder loan interest
expense paid during the quarter ended March 31, 2003, which loan was repaid
later in 2003. In March 2003, the Company signed a settlement agreement with its
insurance agent, settling the lawsuit with its insurance agent for $1.0 million.
The Company received approximately $739,000, which is net of the associated
legal fees of $261,000. This $739,000 is included in total other income
(expense) during the three months ended March 31, 2003.
Income before taxes was approximately $10.6 million for the three
months ended March 31, 2004, compared to income before taxes of approximately
$7.6 million for the three months ended March 31, 2003. Income taxes for the
three months ended 2004 were approximately $4.2 million while income taxes for
the three months ended March 31, 2003 were approximately $2.6 million. The
effective tax rate for the first quarter of 2004 was 39.5% as compared to 34%
during the first quarter of 2003. The effective tax rate in 2003 was lower due
to the utilization of certain net operating loss carryovers.
13
On December 19, 2003, DHB's subsidiary Point Blank Body Armor, Inc.
("Point Blank") issued to Hightower Capital Management, LLC ("Hightower") shares
of common stock of Point Blank representing approximately .65% of the
outstanding capital stock of Point Blank, in exchange for inventory. The
minority interest's share of the consolidated subsidiary's income was $59,000
for the three months ended March 31, 2004. The total minority interest included
in the balance sheet as of March 31, 2004 was $265,901 as compared to $207,018
as of December 31, 2003.
After the preferred stock dividends of approximately $90,000 per
quarter, income available to common stockholders was $6.2 million for the three
months ended March 31, 2004 or $0.14 per diluted share, as compared with income
available to common stockholders of $4.9 million or $0.12 per diluted share for
the three months ended March 31, 2003. The weighted average shares outstanding
on a diluted basis for the first three months of 2004 were 45,142,033 as
compared to 42,785,488 for the first three months of 2003.
LIQUIDITY AND CAPITAL RESOURCES
The Company expects that its primary capital requirements over the next
twelve months will be to assist its subsidiaries in financing their working
capital requirements. The Company's operating subsidiaries sell the majority of
their products on 30- to 90-day terms. Working capital is needed to finance the
receivables, manufacturing process and inventory. Working capital at March 31,
2004 was $75.7 million, an approximate 13% increase over working capital at
December 31, 2003 of approximately $66.8 million. This increase in working
capital primarily reflects a $4.9 million increase in accounts receivable and an
$8.0 million increase in inventory, reduced by a $1.0 million increase in
current maturities of long-term debt, a $1.8 million increase in income taxes
payable and a $1.6 million increase in accrued expenses.
On March 15, 2004, the Company entered into an amendment to its
existing $35 million credit agreement, increasing borrowing limits from $35
million to $45 million. Pursuant to the credit agreement, the Company may
borrow, on a revolving basis, up to $32.5 million on 85% of eligible accounts
receivable, and the Company borrowed a secured term loan of $12.5 million
amortizing at the rate of $1 million per quarter commencing July 2004. This
amended agreement will expire on October 1, 2007. Borrowings under the credit
agreement are secured by substantially all of the Company's assets, and bear
interest, at the Company's option, at the bank's prime rate or LIBOR plus 1.75%
per annum on the revolving credit facility and at the bank's prime rate or LIBOR
plus 2.25% on the term loan. Under the terms of the credit agreement, the
Company can only pay dividends on common stock with the written consent of the
lender. For 2003, the borrowings under the credit agreement bore interest at the
bank's prime rate or LIBOR plus 1.75%. 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 by the Company's growth.
At March 31, 2004, the balance due under the credit facility was approximately
$28.1 million. As of March 31, 2004, the Company would have been able to borrow
the full $32.5 million under the amended revolving credit facility based upon
asset-based availability.
As anticipated with the expansion of the Company's facilities during
2004, the Company's capital expenditures in the first quarter of 2004 increased
to $778,000 as compared to $371,000 during the first quarter of 2003. The
Company anticipates increasing its capital expenditures in 2004 in connection
with the expansion into the new 104,000 square foot facility in Pompano Beach,
Florida.
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The Company believes that its existing credit line, together with funds
generated from operations, will be adequate to sustain its operations (including
projected capital expenditures) through 2004. Historically, the Company has been
successful in obtaining increases in its revolving credit facility, as required
in order to finance the increased working capital needs brought on by the rapid
and substantial expansion of the Company's business. However, there can be no
assurance that the Company will be able to obtain further such increases if
needed, and the Company may be required to explore other potential sources of
financing (including the issuance of equity securities and, subject to the
consent of the Company's lender, other debt financing) if the Company continues
to experience escalating demand for its products.
EFFECT OF INFLATION AND CHANGING PRICES
The Company did not experience any measurable increases in raw material
prices during the three months ended March 31, 2004.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly 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, the continued
availability of insurance for the Company's products and other risks described
in the Company's Annual Report on Form 10-K/A for the year ended December 31,
2003, and other reports and materials filed by the Company with the SEC. 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 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 credit facility. The Company can borrow at either the prime rate of interest
or LIBOR plus 1.75% on the revolving credit facility, and the prime rate or
LIBOR plus 2.25% on the term loan. 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 foreign currency exchange
rate risk.
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ITEM 4. CONTROLS AND PROCEDURES
The Company carried out an evaluation, as required by Rule 13a-15(b)
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
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 SEC
filings. During the period covered by this report, the Company has continued to
implement certain changes to its internal control over financial reporting as
described below, which 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 SEC'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.
As disclosed in the Company's Form 8-K filed on August 27, 2003, Grant
Thornton LLP, the Company's former independent accountants, informed the Company
that they considered there to be certain deficiencies in the Company's internal
control procedures that would be deemed to be a material weakness under
standards established by the American Institute of Certified Public Accountants.
Grant Thornton made this determination in connection with the preparation of the
Company's consolidated financial statements as of and for the year ended
December 31, 2002 for inclusion in the Company's Form 10-K/A, which was filed on
July 24, 2003 to supplement the Company's Form 10-K filed on March 31, 2003. The
opinion of Grant Thornton in the Form 10-K/A did not contain an adverse opinion
or disclaimer of opinion and was not qualified or modified as to uncertainty,
audit scope or accounting principles.
The former independent accountants informed the Company and the Audit
Committee of these deficiencies in a letter delivered on August 20, 2003. These
deficiencies included the failure to disclose certain related party transactions
in the Company's Form 10-K for the fiscal year ended December 31, 2002, the
Company's reliance on substantial outside assistance from outside professionals
in preparing the Company's financial statements, and understaffing in the
Company's accounting and finance department. The Form 10-K/A filed by the
Company on July 24, 2003 fully disclosed the related party transactions.
In accordance with their fiduciary responsibilities, senior management
and the Audit Committee directed the Company to dedicate resources and take
additional steps to strengthen its control processes and procedures to ensure
that these internal control deficiencies do not result in a material
16
misstatement in the Company's consolidated financial statements. Specifically,
we have implemented or are preparing to implement the following additional
procedures:
o The Company briefed the Chairman and Chief Executive Officer on the
requirement to disclose related party transactions.
o The Company distributed a questionnaire to each of the Company's
officers and directors specific to related party transactions; and the
Company has pursued and will pursue more rigorous follow-up with its
directors and executive officers regarding their responses to annual
questionnaires used in preparing the Company's Form 10-K and proxy
materials.
o The Company developed a financial statement disclosure checklist to be
completed by the Chief Financial Officer each time the Company prepares
financial statements.
o The Company has begun the preparation of its quarterly and annual
financial statements sooner after the end of each fiscal quarter and
fiscal year. The Company has undertaken an additional layer of internal
review prior to delivering drafts to its outside professionals.
o The Company continues to reinforce with its new auditors their ability
to communicate with and obtain information from lower level personnel
in the Company's accounting and finance department.
o The Company will evaluate further delegation and allocation of
responsibilities within its accounting and finance department to
facilitate prompt availability of financial information.
o Since the beginning of 2003, the Company hired new financial reporting
personnel, including a Vice President of Finance for the Point Blank
subsidiary and a staff accountant/assistant controller. The Company
also hired a Controller in late 2002 for its PACA facility.
o The Company continues to review, confirm and clarify with its personnel
their specific functions and responsibilities to promote the orderly
flow and availability of financial data and information.
o During the second quarter of 2003, the Company hired an internal
control specialist to review and revamp the Company's internal control
policies and procedures. The Company engaged the firm Eisner LLP to
assist management in complying with the internal control requirements
under Section 404 of the Sarbanes-Oxley Act of 2002 to gain greater
efficiency and effectiveness. The Company provided Eisner LLP with
copies of the updated policies and procedures and flowcharts of the
accounting and IT departments.
The Company will continue to: (a) evaluate the effectiveness of its
internal controls and procedures on an ongoing basis, (b) implement actions to
enhance its resources and training in the area of financial reporting and
disclosure responsibilities, and (c) review such actions with the Audit
Committee and the Company's new independent accountants, Weiser LLP. The Company
has discussed its corrective actions and plans with the Audit Committee and
Weiser LLP.
17
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 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
On October 1, 2002, a shareholders' derivative action was commenced in
the Supreme Court of the State of New York, County of Nassau, 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.
Another suit brought on behalf of a second shareholder on similar grounds for
breach of fiduciary duty, abuse of control, and constructive fraud was
discontinued on April 20, 2004 with prejudice and without any liability to the
Company.
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 was discontinued
in April 2004 pursuant to the settlement agreement described below.
In April 2004, the Company's Point Blank Body Armor, Inc. subsidiary
reached a settlement with UNITE Union which ended the lengthy dispute between
those parties regarding the employees working at Point Blank's Oakland Park
production facility. This settlement resolved all disputes pending between UNITE
and Point Blank. As part of the settlement, all proceedings, including unfair
labor practice charges, complaints and representation petitions, pending before
the National Labor Relations Board were withdrawn or dismissed. Further, Point
18
Blank recognized UNITE as the bargaining representative of those employees at
its Oakland Park production facility. On April 19, 2004, the employees at the
Oakland Park production facility ratified a three year collective bargaining
agreement between UNITE and Point Blank.
The Company is currently the subject of an investigation by the SEC
with respect to certain related party transactions between the Company and
affiliates of Mr. David H. Brooks (the Company's Chief Executive Officer). The
Company and Mr. Brooks are cooperating with the SEC in this investigation and
the Audit Committee of the Company's Board of Directors has retained a forensic
accounting firm to conduct an independent investigation with respect to these
matters. In addition, the Audit Committee expects to periodically monitor the
status and performance of these related party transactions, to assess the
relative benefits to the Company and the related party's compliance with its
contractual obligations.
The Company is involved in other litigation, none of which individually
or in the aggregate is considered by management to be material to the Company's
business or would, if adversely determined, have a material adverse effect on
the Company's consolidated financial condition or operations.
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER REPURCHASES OF EQUITY
SECURITIES
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 Section906 of the Sarbanes-Oxley Act
of 2002.
(b) REPORTS ON FORM 8-K
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The Company filed the following Report on Form 8-K during the quarter ended
March 31, 2004:
Form 8-K filed March 15, 2004 to report the financial results for the year ended
December 31, 2003. The Form 8-K included financial statements.
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 May 10, 2004 DHB INDUSTRIES, INC.
(Registrant)
Signature Capacity Date
_________ ________ ____
/s/ DAVID H. BROOKS Chief Executive Officer May 10, 2004
______________________ and Chairman of the Board
/s/ DAWN M. SCHLEGEL Chief Financial Officer, Director and May 10, 2004
______________________ Principal Accounting Officer
/s/ JEROME KRANTZ Director May 10, 2004
______________________
/s/ GARY NADELMAN Director May 10, 2004
______________________
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