Back to GetFilings.com
================================================================================
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
September 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 November 3, 2004, there were 40,922,416 shares of Common Stock, $.001 par
value, outstanding.
================================================================================
INDEX
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 2004
(Unaudited) and December 31, 2003 3
Unaudited Condensed Consolidated Statements of Operations for
the Three Months and Nine Months Ended September 30, 2004
and 2003 4
Unaudited Condensed Consolidated Statements of Cash Flows For
The Nine Months Ended September 30, 2004 and 2003 5
Notes to Unaudited Condensed Consolidated Financial Statements 6-12
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12-17
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 SEPTEMBER 30, 2004 (UNAUDITED) AND DECEMBER 31, 2003
(In thousands, except share and per share data)
September 30, December 31,
2004 2003
________ ____________
ASSETS
Current assets
Cash and cash equivalents $ 87 $ 441
Accounts receivable, less allowance for doubtful accounts of
$901 and $852, respectively 53,622 33,707
Inventories 81,970 54,753
Deferred income tax assets 632 372
Prepaid expenses and other current assets 1,498 1,518
________ ________
Total current assets 137,809 90,791
________ ________
Property and equipment, net 2,846 1,819
________ ________
Other assets
Deferred income tax assets 302 437
Deposits and other assets 382 381
________ ________
Total other assets 684 818
________ ________
Total assets $141,339 $ 93,428
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current maturities of term loan payable $ 4,000 $ 2,000
Accounts payable (includes 3,179 owed to a related party at
September 30, 2004) 14,600 9,465
Accrued expenses and other current liabilities 9,216 5,635
Income taxes payable 11,042 6,869
________ ________
Total current liabilities 38,858 23,969
Long-term liabilities
Notes payable-bank 24,890 22,012
Term loan payable 7,500
Other liabilities 933 502
________ ________
Total liabilities 72,181 46,483
________ ________
Commitments and contingencies
Minority interest in consolidated subsidiary 363 207
________ ________
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, 40,922,416 and 40,742,136 issued
Additional paid in capital 35,544 35,384
Accumulated other comprehensive loss (53) (53)
Retained earnings 33,262 11,365
________ ________
Total stockholders' equity 68,795 46,738
________ ________
Total liabilities and stockholders' equity $141,339 $ 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 Nine Months
Ended September 30, Ended September 30,
___________________________ ___________________________
2004 2003 2004 2003
___________ ___________ ___________ ___________
Net sales $ 89,410 $ 54,417 $ 249,879 $ 157,095
Cost of goods sold (includes related party
purchases of $6,290, $6,802, $14,509, and
$20,856, respectively) 64,537 39,599 180,361 113,785
___________ ___________ ___________ ___________
Gross profit 24,873 14,818 69,518 43,310
Selling, general and administrative expenses 11,591 9,055 32,353 22,621
___________ ___________ ___________ ___________
Income before other income (expense) 13,282 5,763 37,165 20,689
___________ ___________ ___________ ___________
Other income (expense)
Interest expense (389) (306) (1,047) (977)
Proceeds from settlement of lawsuit -- -- -- 739
Other income 41 24 55 48
___________ ___________ ___________ ___________
Total other income (expense) (348) (282) (992) (190)
___________ ___________ ___________ ___________
Income before income taxes and minority interest 12,934 5,481 36,173 20,499
Income taxes 4,728 2,231 13,850 8,179
___________ ___________ ___________ ___________
Income before minority interest of subsidiary 8,206 3,250 22,323 12,320
Minority interest of subsidiary (58) -- (156) --
___________ ___________ ___________ ___________
Net income 8,148 3,250 22,167 12,320
Dividend - preferred stock (90) (90) (270) (270)
___________ ___________ ___________ ___________
Income available to common stockholders $ 8,058 $ 3,160 $ 21,897 $ 12,050
=========== =========== =========== ===========
Earnings per common share:
Basic shares $ 0.20 $ 0.08 $ 0.54 $ 0.30
=========== =========== =========== ===========
Diluted shares $ 0.18 $ 0.07 $ 0.49 $ 0.28
=========== =========== =========== ===========
Weighted average shares outstanding:
Basic shares 40,891,896 40,594,746 40,814,675 40,490,062
Effect of convertible preferred 500,000 500,000 500,000 500,000
Warrants 4,570,213 3,416,044 4,299,798 3,063,268
___________ ___________ ___________ ___________
Diluted shares 45,962,109 44,510,790 45,614,473 44,053,330
=========== =========== =========== ===========
(See Notes to Condensed Consolidated Financial Statements)
4
DHB INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands, except share and per share data)
For the Nine Months Ended
September 30,
_________________________
2004 2003
________ ________
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 22,167 $ 12,320
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization 708 432
Amortization of deferred financing costs 113 98
Provision for doubtful accounts 49 (6)
Stock issued for services 56
Minority interest of subsidiary 156 --
Deferred income tax (benefit) expense (125) 3,938
Changes in operating assets and liabilities
Accounts receivable (19,964) (3,582)
Inventories (27,217) (16,573)
Prepaid expenses and other current assets 20 (1,858)
Deposits and other assets (31) (53)
Accounts payable 5,135 240
Income taxes payable 5,407 --
Accrued expenses and other current liabilities 2,347 5,939
Other liabilities 431 89
________ ________
Net cash provided by (used in) operating activities (10,804) 1,040
________ ________
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (1,735) (614)
________ ________
Net cash used in investing activities (1,735) (614)
________ ________
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid on preferred stock (270) (270)
Net proceeds of notes payable- bank 878 1,283
Proceeds of term loan payable 12,500 --
Payments on term loan payable (1,000)
Payments on note payable - stockholder -- (1,500)
Issuance costs of long-term debt (83) --
Principal payments on long-term debt -- (19)
Proceeds from the issuance of common stock -- 261
Proceeds upon the exercise of warrants 160 --
________ ________
Net cash provided by (used in) financing activities 12,185 (245)
________ ________
Effect of foreign currency translation -- (12)
________ ________
Net increase (decrease) in cash and cash equivalents (354) 169
Cash and cash equivalents at beginning of the period 441 393
________ ________
Cash and cash equivalents at end of the period $ 87 $ 562
======== ========
(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
September 30, 2004 and for the three months and nine months ended September 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 condensed 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 Nine Months Ended
September 30,
_________________________
2004 2003
_______ _______
Cash paid for:
Interest $ 1,069 $ 1,000
Taxes 9,866 290
Non-cash financing and investing activities:
Revolving credit loan refinanced to long-term debt 12,500 --
Property and equipment acquired under capital lease -- 20
Cashless exercise of a warrant 0 --
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:
September 30, December 31,
2004 2003
_____________ ____________
Raw materials and supplies $32,850 $21,750
Work in process 21,618 15,430
Finished goods 27,502 17,573
_______ _______
$81,970 $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 Credit Agreement will expire on October 1, 2007. On July 1, 2004,
the Company again amended the Credit Agreement, to increase the revolving credit
borrowing limit to $37,500 for the month of July 2004; and 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 (4.75% at September
30, 2004) or LIBOR (1.7875% at September 30, 2004) plus 1.75% per annum on the
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 nine months ended September 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 nine months ended September 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, and an outside
consulting firm exercised a warrant to purchase 100,280 shares on a cashless
exercise basis at an implied market price of $16.05 per share. During the nine
months ended September 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, and
the Board of Directors awarded key employees 45,000 warrants exercisable at
$2.01 per share expiring in February 2008. During the nine months ended
September 30, 2003, the Company also issued 15,000 shares of its restricted
common stock to an employee, and warrants to purchase 166,000 shares of the
Company's unregistered common stock were exercised at an average price of $1.57
per share.
During the three months ended September 30, 2004, all warrants to purchase
shares of the Company's common stock were included in the computation of diluted
earnings per share. Warrants to purchase 508,000 shares of the Company's common
stock that were outstanding during the three months ended September 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 market value of DHB's stock price.
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 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. 123,, "Accounting for Stock Based Compensation ("SFAS
No. 123") and Statement of Financial Accounting Standards No. 148, "Accounting
for Stock-Based Compensation - Transition and Disclosure, an amendment of FASB
Statement No. 123" ("SFAS No. 148"). Under APB No. 25, compensation expense is
only recognized when the market value of the underlying stock at the date of
grant exceeds the amount an employee must pay to acquire the stock. Accordingly,
no compensation expense has been recognized in the Condensed Consolidated
Financial Statements in connection with employee stock warrant grants.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options and warrants which have no vesting restrictions and
are fully transferable. In addition, 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 2.77% 3.942%
Expected volatility of common stock 99.99% 118.80%
Dividend yield 0.00% 0.00%
Expected option term 5 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 Nine Months
Ended September 30, Ended September 30,
____________________ ___________________
2004 2003 2004 2003
______ ______ _______ _______
Net income $8,148 $3,250 $22,167 $12,320
Less dividend - preferred stock 90 90 270 270
______ ______ _______ _______
Income available to common stockholders, as reported 8,058 3,160 21,897 12,050
Deduct: compensation determined under fair value
based method for all awards, net of related tax effect 22 439 1,630 656
______ ______ _______ _______
Pro forma $8,036 $2,721 $20,267 $11,394
______ ______ _______ _______
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)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
____________________ ___________________
2004 2003 2004 2003
_____ _____ _____ _____
Basic earnings per common share
As reported $0.20 $0.08 $0.54 $0.30
Pro forma $0.20 $0.07 $0.50 $0.28
Diluted earnings per common share
As reported $0.18 $0.07 $0.49 $0.28
Pro forma $0.18 $0.06 $0.45 $0.27
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 Nine Months
Ended September 30, Ended September 30,
______________________ ___________________
2004 2003 2004 2003
________ _______ ________ ________
NET SALES
Ballistic-resistant equipment $ 87,585 $52,962 244,528 152,485
Protective athletic & sports products 1,825 1,455 5,351 4,610
________ _______ ________ ________
Consolidated net sales $ 89,410 $54,417 $249,879 $157,095
======== ======= ======== ========
INCOME BEFORE OTHER INCOME (EXPENSE)
Ballistic-resistant equipment $ 15,773 $ 7,604 $45,013 $24,249
Protective athletic & sports products 260 142 879 618
Corporate and other (1) (2,751) (1,983) (8,727) (4,178)
________ _______ ________ ________
Consolidated income before other income (expense) $ 13,282 $ 5,763 $37,165 $20,689
======== ======= ======= =======
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 Nine Months
Ended September 30, Ended September 30,
_________________________ ___________________________
2004 2003 2004 2003
________ ______ _______ _______
DEPRECIATION AND AMORTIZATION EXPENSE
Ballistic-resistant equipment $ 193 $ 109 $ 474 $ 252
Protective athletic & sports products 33 13 94 42
Corporate and other 55 46 140 138
________ ______ _______ _______
Consolidated depreciation and amortization expense $ 281 $ 168 $ 708 $ 432
======== ====== ======= =======
INTEREST EXPENSE
Ballistic-resistant equipment $ 386 $ 302 $ 1,042 $ 877
Protective athletic & sports products -- -- -- --
Corporate and other (1) 3 4 5 100
________ ______ _______ _______
Consolidated interest expense $ 389 $ 306 $ 1,047 $ 977
======== ====== ======= =======
INCOME BEFORE INCOME TAXES AND MINORITY INTEREST
Ballistic-resistant equipment $ 10,590 $4,478 $28,479 $13,474
Protective athletic & sports products 260 110 873 516
Corporate and other (1) 2,084 893 6,821 6,509
________ ______ _______ _______
Consolidated income before income tax expenses
and minority interest $ 12,934 $5,481 $36,173 $20,499
======== ====== ======= =======
INCOME TAXES
Ballistic-resistant equipment $ 935 $ 47 $ 2,143 $ 58
Protective athletic & sports products -- 1 -- 1
Corporate and other (1) 3,793 2,183 11,707 8,120
________ ______ _______ _______
Consolidated income tax expense $ 4,728 $2,231 $13,850 $ 8,179
======== ====== ======= =======
September 30, 2004 December 31, 2003
IDENTIFIABLE ASSETS
Ballistic-resistant equipment $136,041 $88,503
Protective athletic & sports products 5,045 3,186
________ _______
141,086 91,689
Corporate and other (2) 253 1,739
________ _______
Consolidated total assets $141,339 $93,428
======== =======
(1) Corporate and other expenses include corporate general and administrative expenses.
(2) Corporate and other assets are principally deferred income tax assets, prepaid expenses and property and equipment.
10
DHB INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
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.
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 results of 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 a 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
11
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.
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 nine 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 SEPTEMBER 30, 2004, COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 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 September 30, 2004. For the three months
ended September 30, 2004, consolidated net sales were approximately $89.4
million, an increase of 64% over consolidated net sales of approximately $54.4
million for the three months September 30, 2003. The Armor Group's net sales
increased 65% from approximately $53.0 million for the three months ended
September 30, 2003 to approximately $87.6 million for the three months ended
September 30, 2004, due primarily to substantially increased shipments to the
U.S. Military. The Sports Group's net sales for the third quarter of 2004
increased approximately 26% to $1.8 million, as compared to $1.4 million for the
third quarter of 2003. Contributing to the increase in the Sports Group's net
sales was increased sales to Target and the addition of Walgreen Drug stores to
the customer base. Gross profit for the quarter ended September 30, 2004 was
approximately $24.9 million (27.8% of net sales), as compared to approximately
$14.8 million (27.2% of net sales) for the quarter ended September 30, 2003.
The Company's selling, general and administrative expenses were approximately
$11.6 million or 13.0% of net sales for the three months ended September 30,
2004, versus approximately $9.1 million or 16.6% of net sales for the three
months ended September 30, 2003. This percentage decrease was attributable
primarily to decreased selling expenses. 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 $13.3
million (14.9% of net sales) for the third quarter of 2004 versus approximately
$5.8 million (10.6% of net sales) for the third quarter of 2003.
Interest expense for the three months ended September 30, 2004 increased 27.1%
to approximately $389,000, compared to approximately $306,000 for the three
months ended September 30, 2003. This increase was primarily the result of
increased borrowing under the Company's credit facility to fund the Company's
operations, new facility and continued growth.
Income before taxes and minority interest of subsidiary was approximately $12.9
million for the three months ended September 30, 2004, compared to approximately
$5.5 million for the three months ended September 30, 2003. This increase was
attributable primarily to the substantial increase in sales, as well as the
expense reductions noted above. Income taxes for the third quarter of 2004 were
approximately $4.7 million while income taxes for the third quarter of 2003 were
approximately $2.2 million. The effective tax rate for the third quarter of 2004
was 36.6% as compared to 40.7% during the third 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 $58,000 for the
three months ended September 30, 2004.
13
After the preferred stock dividends of approximately $90,000 per quarter, income
available to common stockholders was approximately $8.1 million for the three
months ended September 30, 2004, or $0.18 per diluted share, as compared with
income available to common stockholders of approximately $3.2 million or $0.07
per diluted share for the three months ended September 30, 2003. The weighted
average shares outstanding on a diluted basis for the three months ended
September 30, 2004 were 45,962,109, as compared to 44,510,790 for the three
months ended September 30, 2003.
NINE MONTHS ENDED SEPTEMBER 30, 2004, COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 2003
For the first nine months of 2004, consolidated net sales were approximately
$249.9 million, an increase of 59% over consolidated net sales of approximately
$157.1 million for the first nine months of 2003. The Armor Group's net sales
increased 60% from approximately $152.5 million for the nine months ended
September 30, 2003 to approximately $244.5 million for the nine months ended
September 30, 2004, due primarily to substantially increased shipments to the
U.S. Military, a $5 million increase in sales to federal agencies, and a $9
million increase in international sales. The Sports Group's net sales for the
first nine months of 2004 increased 16% to approximately $5.4 million, as
compared to approximately $4.6 million for the first nine months of 2003.
Contributing to the increase in the Sports Group's net sales was the addition of
a high profile chain of drug stores, Walgreen and 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
approximately 27.8% for the nine months ended September 30, 2004 as compared to
approximately 27.6% for the nine months ended September 30, 2003.
The Company's selling, general and administrative expenses improved slightly as
a percentage of net sales. For the nine months ended September 30, 2004,
selling, general and administrative expenses were approximately $32.4 million
(13.0% of net sales), versus approximately $22.6 million (14.4% of net sales)
for the nine months ended September 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 $37.2 million (14.9% of net sales) for the nine months ended
September 30, 2004 versus approximately $20.7 million (13.2% of net sales) for
the nine months ended September 30, 2003.
Interest expense for nine months ended September 30, 2004 increased 7% to
approximately $1,047,000, compared to approximately $977,000 for the nine months
ended September 30, 2003. This increase was primarily the result of increased
borrowings under the Company's credit facility to fund the Company's operations,
new facility and continued growth.
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 nine months ended September 30, 2003.
14
Income before income taxes and minority interest of subsidiary increased
approximately 76% to approximately $36.2 million for the nine months ended
September 30, 2004, compared to approximately $20.5 million for the nine months
ended September 30, 2003. Income taxes for the nine months ended September 30,
2004 were approximately $13.9 million while income taxes for the nine months
ended September 30, 2003 were approximately $8.2 million. The effective tax rate
for the nine months ended September 30, 2004 was 38.3% as compared to 39.9% for
the nine months ended September 30, 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 $156,000 for the
nine months ended September 30, 2004. The total minority interest included in
the balance sheet as of September 30, 2004 was approximately $363,000, as
compared to approximately $207,000 as of December 31, 2003.
After the preferred stock dividends of approximately $270,000 for each of the
nine-month periods, income available to common stockholders was approximately
$21.9 million for the nine months ended September 30, 2004, or $0.49 per diluted
share, as compared with income available to common stockholders of approximately
$12.1 million or $0.28 per diluted share for the nine months ended September 30,
2003. The weighted average shares outstanding on a diluted basis for the nine
months ended September 30, 2004 were 45,614,473, as compared to 44,053,330 for
the nine months ended September 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 September
30, 2004 was approximately $99.0 million, representing an approximate 48%
increase over working capital at December 31, 2003 of approximately $66.8
million. This increase in working capital since December 31, 2003 primarily
reflects a $19.8 million increase in accounts receivable and a $27.2 million
increase in inventory reduced by a $5.1 million increase in accounts payable, a
$5.4 million increase in income taxes payable and a $2.3 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
15
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 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 nine months ended September 30, 2004 increased to
$1.7 million, as compared to approximately $614,000 for the nine months ended
September 30, 2003. The Company incurred increased 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 nine months ended September 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.
16
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 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
17
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 cited 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.
18
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 The Company hired an internal control specialist to review and revamp
the Company's internal control policies and procedures. The Company
engaged the firms Rachlin Cohen & Holtz LLP and Management Works Inc.
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 these
firms with copies of the updated policies and procedures and
flowcharts of the accounting and information technology 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 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
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
19
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.
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.
20
(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 August 5, 2004 to report the financial results for the three and
six months ended June 30, 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 November 3, 2004 DHB INDUSTRIES, INC.
(Registrant)
Signature Capacity Date
Chief Executive Officer November 3, 2004
/s/ DAVID H. BROOKS and Chairman of the Board
___________________
Chief Financial Officer, Director November 3, 2004
/s/ DAWN M. SCHLEGEL and Principal Accounting Officer
____________________
November 3, 2004
/s/ JEROME KRANTZ Director
____________________
November 3, 2004
/s/ GARY NADELMAN Director
____________________
21