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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
June 30, 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 August 5, 2004, there were 40,822,136 shares of Common Stock, $.001 par
value, outstanding.
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INDEX
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 2004
(Unaudited) and December 31, 2003 3
Unaudited Condensed Consolidated Statements of Operations
for the Three Months and Six Months Ended June 30, 2004
and 2003 4
Unaudited Condensed Consolidated Statements of Cash Flows
For The Six Months Ended June 30, 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 12-16
Item 3. Quantitative and Qualitative Disclosures about Market Risk 17
Item 4. Controls and Procedures 17-19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 19-20
Item 2. Changes in Securities and Use of Proceeds 20
Item 3. Defaults Upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20-21
Signatures 21
2
PART 1. FINANCIAL STATEMENTS (UNAUDITED)
DHB INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2004 (UNAUDITED) AND DECEMBER 31, 2003
(In thousands, except share and per share data)
June 30, December 31,
2004 2003
________ ____________
ASSETS
Current assets
Cash and cash equivalents $ 102 $ 441
Accounts receivable, less allowance for doubtful accounts of
$936 and $852, respectively 58,787 33,707
Inventories 74,342 54,753
Deferred income tax assets 262 372
Prepaid expenses and other current assets 1,626 1,518
________ ________
Total current assets 135,119 90,791
________ ________
Property and equipment, net 3,025 1,819
________ ________
Other assets
Deferred income tax assets 581 437
Deposits and other assets 418 381
________ ________
Total other assets 999 818
________ ________
Total assets $139,143 $ 93,428
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current maturities of term loan payable $ 4,000 $ 2,000
Accounts payable 12,672 9,465
Accrued expenses and other current liabilities 10,065 6,869
Income taxes payable 9,818 5,635
________ ________
Total current liabilities 36,555 23,969
Long-term liabilities
Notes payable-bank 32,334 22,012
Term loan payable 8,500
Other liabilities 712 502
________ ________
Total liabilities 78,101 46,483
________ ________
Commitments and contingencies
Minority interest in consolidated subsidiary 305 207
________ ________
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, 40,822,136 and 40,742,136 issued
Additional paid in capital 35,544 35,384
Accumulated other comprehensive loss (53) (53)
Retained earnings 25,204 11,365
________ ________
Total stockholders' equity 60,737 46,738
________ ________
Total liabilities and stockholders' equity $139,143 $ 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 For the Six Months
Ended June 30, Ended June 30,
___________________________ ___________________________
2004 2003 2004 2003
___________ ___________ ___________ ___________
Net sales $ 86,066 $ 56,525 $ 160,469 $ 102,678
Cost of goods sold (includes related party
purchases of $4,917, $6,931, $8,219, and
$13,479, respectively) 62,186 41,001 115,824 74,186
___________ ___________ ___________ ___________
Gross profit 23,880 15,524 44,645 28,492
Selling, general and administrative expenses 10,890 7,773 20,762 13,566
___________ ___________ ___________ ___________
Income before other income (expense) 12,990 7,751 23,883 14,926
___________ ___________ ___________ ___________
Other income (expense)
Interest expense (359) (342) (658) (671)
Proceeds from settlement of lawsuit -- -- -- 739
Other income 4 11 14 24
___________ ___________ ___________ ___________
Total other income (expense) (355) (331) (644) 92
___________ ___________ ___________ ___________
Income before income taxes and minority interest 12,635 7,420 23,239 15,018
Income taxes 4,936 3,369 9,122 5,948
___________ ___________ ___________ ___________
Income before minority interest of subsidiary 7,699 4,051 14,117 9,070
Minority interest of subsidiary (39) -- (98) --
___________ ___________ ___________ ___________
Net income 7,660 4,051 14,019 9,070
Dividend - preferred stock (90) (90) (180) (180)
___________ ___________ ___________ ___________
Income available to common stockholders $ 7,570 $ 3,961 $ 13,839 $ 8,890
=========== =========== =========== ===========
Earnings per common share:
Basic shares $ 0.19 $ 0.10 $ 0.34 $ 0.22
=========== =========== =========== ===========
Diluted shares $ 0.17 $ 0.09 $ 0.30 $ 0.20
=========== =========== =========== ===========
Weighted average shares outstanding:
Basic shares 40,808,345 40,458,867 40,776,064 40,436,557
Effect of convertible preferred 500,000 500,000 500,000 500,000
Warrants 4,430,932 3,277,012 4,164,590 2,786,133
___________ ___________ ___________ ___________
Diluted shares 45,739,277 44,235,879 45,440,654 43,722,690
=========== =========== =========== ===========
(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,
________________________
2004 2003
________ ________
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 14,019 $ 9,070
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization 427 264
Amortization of deferred financing costs 74 65
Provision for doubtful accounts 84 56
Minority interest of subsidiary 98 --
Deferred income tax (benefit) expense (34) 3,937
Changes in operating assets and liabilities
Accounts receivable (25,164) (1,337)
Inventories (19,589) (14,332)
Prepaid expenses and other current assets (108) (1,923)
Deposits and other assets (28) (42)
Accounts payable 3,207 (200)
Income taxes payable 4,183 --
Accrued expenses and other current liabilities 3,196 2,395
Other liabilities 210 59
________ ________
Net cash used in operating activities (19,425) (1,988)
________ ________
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (1,633) (442)
________ ________
Net cash used in investing activities (1,633) (442)
________ ________
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid on preferred stock (180) (180)
Net proceeds of notes payable- bank 8,322 3,900
Proceeds of term loan 12,500 --
Payments on note payable - stockholder -- (1,500)
Issuance costs of long-term debt (83) (13)
Principal payments on long-term debt -- 261
Proceeds upon the exercise of warrants 160 --
________ ________
Net cash provided by financing activities 20,719 2,468
________ ________
Effect of foreign currency translation -- 1
________ ________
Net increase (decrease) in cash and cash equivalents (339) 39
Cash and cash equivalents at beginning of the period 441 393
________ ________
Cash and cash equivalents at end of the period $ 102 $ 432
======== ========
(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, 2004 and for the three months and six months ended June 30, 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 Six
Months Ended
June 30,
_______________
2004 2003
_______ ____
Cash paid for:
Interest $ 644 $321
Taxes 5,883 144
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:
June 30, December 31,
2004 2003
________ ____________
Raw materials and supplies $ 30,756 $21,750
Work in process 21,198 15,430
Finished goods 22,388 17,573
________ _______
$ 74,342 $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"), which increased the total borrowing limits from $35,000 to $45,000
at that time. 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 term loan in the principal amount
of $12,500, amortizing at the rate of $1,000 per quarter commencing July 2004.
This amended agreement will expire on October 1, 2007. On July 1, 2004, the
Company amended its Credit Agreement, to increase the revolving credit borrowing
limit to $37,500 for the month of July 2004. In August 2004, the borrowing limit
returned to $32,500. Borrowings under the Credit Agreement bear interest, at the
Company's option, at the bank's prime rate (4% at June 30, 2004) or LIBOR (1.11%
at June 30, 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
During the six months ended June 30, 2004, the six members of the Company's
Board of Directors were issued 50,000 warrants each, exercisable at $5.88 per
share for five years. During the six months ended June 30, 2004, employees
exercised warrants to purchase 80,000 shares of the Company's unregistered
common stock at an average price of $2.00 per share. 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. No warrants were exercised during the six months ended
June 30, 2003.
During the three months ended June 30, 2004, all warrants were included in the
computation of diluted earnings per share. Warrants to purchase 430,000 shares
of the Company's common stock that were outstanding during the three months
ended June 30, 2003 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
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 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, the Black-Scholes option valuation model
requires 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 2.49% 2.86%
Expected volatility of common stock 93.49% 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 For the Six Months
Ended June 30, Ended June 30,
____________________ __________________
2004 2003 2004 2003
______ ______ _______ ______
Net income $7,660 $4,051 $14,019 $9,070
Less dividend - preferred stock 90 90 180 180
______ ______ _______ ______
Income available to common stockholders, as reported 7,570 3,961 13,839 8,890
Deduct: compensation determined under fair value
based method for all awards, net of related tax effect 1,392 7 1,608 215
______ ______ _______ ______
Pro forma $6,178 $3,954 $12,231 $8,675
______ ______ _______ ______
Basic earnings per common share
As reported $ 0.19 $ 0.10 $ 0.34 $ 0.22
Pro forma $ 0.15 $ 0.10 $ 0.30 $ 0.22
Diluted earnings per common share
As reported $ 0.17 $ 0.09 $ 0.34 $ 0.22
Pro forma $ 0.14 $ 0.09 $ 0.27 $ 0.20
8
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)
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.
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 For The Six Months
Ended June 30, Ended June 30,
_____________________ _____________________
2004 2003 2004 2003
________ ________ ________ ________
NET SALES
Ballistic-resistant equipment $ 84,375 $ 54,905 $156,938 $ 99,524
Protective athletic & sports products 1,691 1,620 3,531 3,154
________ ________ ________ ________
Consolidated net sales $ 86,066 $ 56,525 $160,469 $102,678
======== ======== ======== ========
INCOME BEFORE OTHER INCOME (EXPENSE)
Ballistic-resistant equipment $ 15,874 $ 8,650 $ 29,239 $ 16,645
Protective athletic & sports products 303 243 620 476
Corporate and other (1) (3,187) (1,142) (5,976) (2,195)
________ ________ ________ ________
Consolidated income before other income (expense) $ 12,990 $ 7,751 $ 23,883 $ 14,926
======== ======== ======== ========
DEPRECIATION AND AMORTIZATION EXPENSE
Ballistic-resistant equipment $ 141 $ 72 $ 281 $ 144
Protective athletic & sports products 30 15 61 27
Corporate and other 51 45 85 92
________ ________ ________ ________
Consolidated depreciation and amortization expense $ 222 $ 132 $ 427 $ 263
======== ======== ======== ========
INTEREST EXPENSE
Ballistic-resistant equipment $ 359 $ 292 $ 657 $ 576
Protective athletic & sports products -- -- -- --
________ ________ ________ ________
359 292 657 576
Corporate and other (1) -- 50 1 95
________ ________ ________ ________
Consolidated interest expense $ 359 $ 342 $ 658 $ 671
======== ======== ======== ========
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 For The Six Months
Ended June 30, Ended June 30,
_____________________ _____________________
2004 2003 2004 2003
________ ________ ________ ________
INCOME BEFORE INCOME TAXES AND MINORITY INTEREST
Ballistic-resistant equipment $ 7,770 $ 5,545 $ 17,888 $ 8,996
Protective athletic & sports products 303 209 613 405
________ ________ ________ ________
8,073 5,754 18,501 9,401
Corporate and other (1) 4,562 1,666 4,738 5,617
________ ________ ________ ________
Consolidated income before income tax expense
$ 12,635 $ 7,420 $ 23,239 $ 15,018
======== ======== ======== ========
INCOME TAXES
Ballistic-resistant equipment $ 594 $ 7 $ 1,209 $ 11
Protective athletic & sports products -- -- -- --
________ ________ ________ ________
594 7 1,209 11
Corporate and other (1) 4,342 3,362 7,913 5,936
________ ________ ________ ________
Consolidated income tax expense $ 4,936 $ 3,369 $ 9,122 $ 5,947
======== ======== ======== ========
June 30, December 31,
2004 2003
________ ____________
IDENTIFIABLE ASSETS
Ballistic-resistant equipment $133,573 $ 88,503
Protective athletic & sports products 4,910 3,186
________ ________
138,483 91,689
Corporate and other (2) 660 1,739
________ ________
Consolidated total assets $139,143 $ 93,428
======== ========
(1) Corporate and other expenses include 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 and executive compensation matters
regarding 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. 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.
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 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.
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 (FIN 46-R). The FASB also modified the
effective date of FIN 46. This interpretation applies immediately to variable
interest entities created after January 31, 2003 and variable interest entities
in which the Company obtains an interest after January 31, 2003. For variable
interest entities in which a company obtained an interest before February 1,
2003, the interpretation applies to the interim period 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 98%, 97%, and 96% of consolidated revenues of the Company during
2004 (first six months), and full 2003 and 2002, respectively. The Company's
products are sold both nationally and internationally. The Armor Group's sales
are derived primarily from military services and law enforcement agencies. 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 JUNE 30, 2004, COMPARED TO THE THREE MONTHS ENDED JUNE 30,
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 June 30, 2004. For the three months,
consolidated net sales were approximately $86.1 million, an increase of 52% over
consolidated net sales of approximately $56.5 million for the three months ended
June 30, 2004. The Armor Group's net sales increased nearly 54% from $54.9
million for the three months ended June 30, 2003 to approximately $84.4 million
for the three months ended June 30, 2004, due primarily to substantially
increased shipments to the U.S. Military and a $3 million increase in
international sales. The Sports Group's net sales for the second quarter of 2004
increased 6% to $1.7 million, as compared to $1.6 million for the second quarter
of 2003. Contributing to the increase in the Sports Group's net sales was
increased sales to Wal-Mart and Target. Gross profit for the quarter ended June
30, 2004 was approximately $23.9 million (27.7% of net sales), as compared to
approximately $15.5 million (27.5% of net sales) for the quarter ended June 30,
2003.
The Company's selling, general and administrative expenses were approximately
$10.9 million or 12.7% of net sales for the three months ended June 30, 2004,
versus approximately $7.8 million or 13.8% of net sales for the three months
ended June 30, 2003. Driven primarily by the sales increases, selling, general
and administrative expenses as a percentage of net sales has decreased, causing
operating income to increase to approximately $13.0 million (15.1% of net sales)
for the second quarter of 2004 versus approximately $7.8 million (13.8% of net
sales) for the second quarter of 2003.
Interest expense for the three months ended June 30, 2004 increased 5.0% to
approximately $359,000, compared to approximately $342,000 for the three months
ended June 30, 2003. This increase is primarily the result of increased
borrowing under the Company's credit facility to fund the Company's operations
and continued growth.
Income before taxes and minority interest of subsidiary was approximately $12.6
million for the three months ended June 30, 2004, compared to income before
taxes of approximately $7.4 million for the three months ended June 30, 2003.
Income taxes for the second quarter of 2004 were approximately $4.9 million
while income taxes for the second quarter of 2003 were approximately $3.4
million. The effective tax rate for the second quarter of 2004 was 39.1% as
compared to 45.4% during the second quarter of 2003.
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 approximately $39,000 for the
three months ended June 30, 2004.
After the preferred stock dividends of approximately $90,000 per quarter, income
available to common stockholders was approximately $7.6 million for the three
months ended June 30, 2004, or $0.17 per diluted share, as compared with income
available to common
13
stockholders of approximately $4.0 million or $0.09 per diluted share for the
three months ended June 30, 2003. The weighted average shares outstanding on a
diluted basis for the three months ended June 30, 2004 were 45,739,277, as
compared to 44,235,879 for the three months ended June 30, 2003.
SIX MONTHS ENDED JUNE 30, 2004, COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2003
For the first half of 2004, consolidated net sales were approximately $160.5
million, an increase of 56.3% over consolidated net sales of approximately
$102.7 million for the first half of 2003. The Armor Group's net sales increased
nearly 58% from $99.5 million for the six months ended June 30, 2003 to
approximately $156.9 million for the six months ended June 30, 2004, due
primarily to substantially increased shipments to the U.S. Military and a $9
million increase in international sales. The Sports Group's net sales for the
first half of 2004 increased 9% to approximately $3.5 million, as compared to
approximately $3.2 million for the first half 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 as well as increased sales to its major customers, Wal-Mart and Target.
Gross profit percentage remained nearly constant at 27.8% for the first half of
2004 as compared to approximately 27.8% for the first half of 2003.
The Company's selling, general and administrative expenses improved slightly as
a percentage of net sales. For the six months ended June 30, 2004, selling,
general and administrative expenses were approximately $20.8 million (13.0% of
net sales), versus approximately $13.6 million (13.2% of net sales) for the six
months ended June 30, 2003. Driven primarily by the sales increases, selling,
general and administrative expenses as a percentage of net sales has decreased,
causing income before other income (expense) to increase to approximately $23.9
million (14.9% of net sales) for the six months ended June 30, 2004 versus
approximately $14.9 million (14.5% of net sales) for the six months ended June
30, 2003.
Interest expense for the six months ended June 30, 2004 decreased slightly to
approximately $658,000 (4.1% of net sales), compared to approximately $671,000
(6.5% of net sales) for the six months ended June 30, 2003. This decrease is
primarily the result of borrowing at lower rates in 2004, and the repayment of a
stockholder loan. 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 six months ended June 30, 2003.
Income before taxes was approximately $23.2 million for the six months ended
June 30, 2004, compared to income before taxes of approximately $15.0 million
for the six months ended June 30, 2003. Income taxes for the six months ended
June 30, 2004 were approximately $9.1 million while income taxes for the six
months ended June 30, 2003 were approximately $5.9 million. The effective tax
rate for the first six months of 2004 was 39.3% as compared to 39.6% for the
first six months of 2003.
On December 19, 2003, DHB's subsidiary Point Blank Body Armor, Inc. ("Point
Blank")
14
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 approximately $98,000 for the six months
ended June 30, 2004. The total minority interest included in the balance sheet
as of June 30, 2004 was approximately $305,000 as compared to approximately
$207,000 as of December 31, 2003.
After the preferred stock dividends of approximately $180,000 for each of the
six-month periods, income available to common stockholders was approximately
$13.8 million for the six months ended June 30, 2004, or $0.30 per diluted
share, as compared with income available to common stockholders of approximately
$8.9 million or $0.20 per diluted share for the six months ended June 30, 2003.
The weighted average shares outstanding on a diluted basis for the six months
ended June 30, 2004 were 45,440,655, as compared to 43,722,690 for the six
months ended June 30, 2003.
Recent Developments
On June 8, 2004, the Company announced its receipt of a contract award from the
U.S. Army for recently developed body armor systems, for the upper and lower
arms and shoulders, valued at approximately $239.4 million over a period of
three years. On July 14, 2004, the Company announced the receipt of
approximately $37 million of new purchase and delivery orders in the month of
July for a variety of body armor products.
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 June 30,
2004 was approximately $98.6 million, representing an approximate 30.2% and
47.6% increase over working capital at March 31, 2004 and December 31, 2003 of
approximately $75.7 million and $66.8 million, respectively. This increase in
working capital since December 31, 2003 primarily reflects a $25.1 million
increase in accounts receivable and a $19.6 million increase in inventory,
reduced by a $3.2 million increase in accounts payable, a $4.2 million increase
in income taxes payable and a $3.2 million increase in accrued expenses.
On July 1, 2004, the Company entered into an amendment to its existing bank
credit agreement, increasing the limit on revolving credit borrowings from $32.5
million to $37.5 million solely for the month of July 2004. 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 term
loan in the principal amount 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 collateralized 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
15
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.
With the expansion of the Company's facilities during 2004, the Company's
capital expenditures in the first six months of 2004 increased to $1.6 million,
as compared to $442,000 for the first six months of 2003. The Company
anticipates increasing its capital expenditures in 2004 in connection with the
continued expansion into the new 104,000 square foot facility in Pompano Beach,
Florida and relocation of its corporate headquarters.
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 six months ended June 30, 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 contracts, 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. If one
or more of these risks or uncertainties were to materialize, or if the
underlying assumptions prove to be 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.
16
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 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 material foreign currency
exchange rate risk.
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.
17
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 misstatement in the
Company's consolidated financial statements. Specifically, the Company has
implemented or is 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 new Controller for the Point
Blank subsidiary as well as a staff accountant/assistant
controller and inventory control specialist/system analyst. 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
18
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.
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
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 Blank
recognized UNITE as the bargaining representative of those employees at its
Oakland Park production facility. On April
19
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. The
investigation initially focused on certain related party transactions between
the Company and affiliates of Mr. David H. Brooks (the Company's Chief Executive
Officer), and has since been expanded to include matters relating to the
Company's reporting and treatment of executive compensation (primarily relating
to Mr. Brooks). The Company and Mr. Brooks are cooperating with the SEC in this
investigation. The Audit Committee of the Company's Board of Directors has
retained a forensic accounting firm to conduct an independent investigation with
respect to the related party transactions. Their report was presented to the SEC
for evaluation in April 2004. The Company has also compiled extensive
information in response to the SEC's requests regarding executive compensation.
In addition, the Audit Committee is periodically monitoring the status and
performance of the related party transactions, to assess the relative benefits
to the Company and the related party's compliance with its contractual
obligations. The Company is unable to predict the outcome or results of the
SEC's investigation.
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.
20
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, 2004:
Form 8-K filed May 6, 2004 to report the financial results for the three months
ended March 31, 2004. 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 August 5, 2004 DHB INDUSTRIES, INC.
(Registrant)
SIGNATURE CAPACITY DATE
/s/ DAVID H. BROOKS Chief Executive Officer August 5, 2004
____________________ and Chairman of the Board
David H. Brooks
/s/ DAWN M. SCHLEGEL Chief Financial Officer, Director August 5, 2004
____________________ and Principal Accounting Officer
Dawn M. Schlegel
/s/ JEROME KRANTZ Director August 5, 2004
____________________
Jerome Krantz
/s/ GARY NADELMAN Director August 5, 2004
____________________
Gary Nadelman
21