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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________________
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED
March 31, 2005 Commission File No. 0-22429
DHB INDUSTRIES, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 11-3129361
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
400 POST AVENUE, SUITE 303, WESTBURY, NY 11590
(Address of principal executive offices)
Registrant's telephone number: (516) 997-1155
Former name, former address and former fiscal year, if changed since last
report:
Not applicable
Indicate by check mark whether the registrant (1) filed all reports required to
be filed by section 13 or 15(d) of the Exchange Act during the preceding 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes [ X ] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act.)
Yes [ X ] No [ ]
As of May 10, 2005, there were 45,337,575 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 March 31, 2005
(Unaudited) and December 31, 2004 3
Unaudited Condensed Consolidated Statements of Operations
For The Three Months Ended March 31, 2005 and 2004 4
Unaudited Condensed Consolidated Statements of Cash Flows
For The Three Months Ended March 31, 2005 and 2004 5
Notes to Unaudited Condensed Consolidated Financial Statements 6-11
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12-15
Item 3. Quantitative and Qualitative Disclosures about Market Risk 16
Item 4. Controls and Procedures 16-18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits 19
Signatures 20
2
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
DHB INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2005 (UNAUDITED) AND DECEMBER 31, 2004
(In thousands, except share and per share data)
March 31, December 31,
ASSETS 2005 2004
_________ ____________
Current assets
Cash and cash equivalents $ 84 $ 447
Accounts receivable, less allowance for doubtful accounts of
$732 and $702, respectively 45,910 47,560
Accounts receivable - related party 70 6,583
Inventories 102,930 85,973
Deferred income tax assets 652 483
Prepaid expenses and other current assets 1,329 1,220
________ ________
Total current assets 150,975 142,266
________ ________
Property and equipment, net 2,540 2,632
________ ________
Other assets
Deferred income tax assets 608 593
Deposits and other assets 446 366
________ ________
Total other assets 1,054 959
________ ________
Total assets $154,569 $145,857
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current maturities of long-term debt $ 8,000 $ 4,000
Accounts payable 15,351 8,014
Accrued expenses and other current liabilities 6,574 8,350
Income taxes payable 5,085 14,816
________ ________
Total current liabilities 35,010 35,180
________ ________
Long-term liabilities
Notes payable-bank 22,747 25,634
Term loan payable 10,000 6,500
Other liabilities 1,116 1,086
________ ________
Total liabilities 68,873 68,400
________ ________
Commitments and contingencies
Minority interest in consolidated subsidiary 495 431
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 45 45
authorized, 45,337,575 and 45,282,536 issued
Additional paid in capital 36,096 35,540
Retained earnings 49,059 41,440
________ ________
Total stockholders' equity 85,201 77,026
________ ________
Total liabilities and stockholders' equity $154,569 $145,857
======== ========
(See Notes to Condensed Consolidated Financial Statements)
3
DHB INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands, except share and per share data)
For the Three Months Ended
March 31,
2005 2004
___________ ___________
Net sales $ 85,465 $ 74,403
Cost of goods sold (includes related party purchases of
$9,339 and $3,302 respectively) 62,078 53,638
___________ ___________
Gross profit 23,387 20,765
Selling, general and administrative expenses 10,816 9,872
___________ ___________
Income before other income (expense) 12,571 10,893
___________ ___________
Other income (expense)
Interest expense (544) (299)
Other income 17 10
___________ ___________
Total other income (expense) (527) (289)
___________ ___________
Income before income taxes and minority interest 12,044 10,604
Income taxes 4,271 4,186
___________ ___________
Income before minority interest of subsidiary 7,773 6,418
Minority interest of subsidiary (64) (59)
___________ ___________
Net income 7,709 6,359
Dividend - preferred stock (90) (90)
___________ ___________
Income available to common stockholders $ 7,619 $ 6,269
=========== ===========
Earnings per common share:
Basic shares $ 0.17 $ 0.15
=========== ===========
Diluted shares $ 0.17 $ 0.14
=========== ===========
Weighted average shares outstanding:
Basic 45,293,980 40,743,784
Effect of convertible preferred 500,000 500,000
Warrants 317,926 3,898,249
___________ ___________
Diluted 46,111,906 45,142,033
=========== ===========
(See Notes to Condensed Consolidated Financial Statements)
4
DHB INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands, except share and per share data)
For the Three Months Ended
March 31,
CASH FLOWS FROM OPERATING ACTIVITIES 2005 2004
________ ________
Net income $ 7,709 $ 6,359
Adjustments to reconcile net income to net cash and cash equivalents
used in operating activities:
Depreciation and amortization 204 205
Amortization of deferred financing costs 6 36
Provision for doubtful accounts 30 27
Minority interest of subsidiary 64 59
Stock issued for services 369 --
Deferred income tax benefit (184) (31)
Changes in operating assets and liabilities
Accounts receivable 8,133 (4,963)
Inventories (16,957) (8,064)
Prepaid expenses and other current assets (109) 314
Deposits and other assets (86) 7
Accounts payable 7,337 (532)
Income taxes payable (9,731) 1,759
Accrued expenses and other current liabilities (1,776) 1,628
Other liabilities 30 28
________ ________
Net cash and cash equivalents used in operating activities (4,961) (3,168)
________ ________
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (112) (778)
________ ________
Net cash and cash equivalents used in investing activities (112) (778)
________ ________
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid on preferred stock (90) (90)
Payments notes payable - bank (66,333) (54,183)
Proceeds notes payable - bank 71,946 58,259
Payments on long-term debt term loan (1,000) --
Issuance costs of long-term debt -- (83)
Proceeds from the exercise of a warrant 187 80
________ ________
Net cash provided by financing activities 4,710 3,983
________ ________
Effect of foreign currency translation -- --
________ ________
Net increase (decrease) in cash and cash equivalents (363) 37
Cash and cash equivalents at beginning of the period 447 441
________ ________
Cash and cash equivalents at end of the period $ 84 $ 478
======== ========
(See Notes to Condensed Consolidated Financial Statements)
5
DHB INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
of DHB Industries, Inc. and subsidiaries (collectively "DHB" or the "Company")
as of March 31, 2005 and for the three months ended March 31, 2005 and 2004 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,
2004 filed with the SEC on March 17, 2005.
Stock Based Compensation
The Company accounts for stock-based compensation using the intrinsic
value method in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related Interpretations ("APB
No. 25"), and has adopted the disclosure provisions of Statement of Financial
Accounting Standards No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure, an amendment of FASB Statement No. 123" ("SFAS No.
148"). Under APB No. 25, compensation expense is only recognized when the market
value of the underlying stock at the date of grant exceeds the amount an
employee must pay to acquire the stock. Accordingly, no compensation expense has
been recognized in the Condensed Consolidated Financial Statements in connection
with employee stock warrant grants.
Stock issued for services is valued at fair value and is expensed as
the services are provided.
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.
6
The weighted-average warrant fair values and assumptions used to
estimate these values are as follows:
Warrants Issued During
The three months ended
March, 31,
2005 2004
____ ____
Risk-free interest rate 3.12% 3.12%
Expected volatility of common stock 170% 93.96%
Dividend yield 0.00% 0.00%
Expected option term 4.3 years 4.3 years
The Company's net income and earnings per share would have been reduced
to the pro forma amounts shown below if compensation cost had been determined
based on the fair value at the grant dates in accordance with SFAS No. 123 and
148, "Accounting for Stock-Based Compensation."
For the Three Months
Ended March 31,
2005 2004
______ ______
Net income $7,709 $6,359
Less dividend - preferred stock 90 90
______ ______
Income available to common stockholders, as reported 7,619 6,269
Deduct: employee stock compensation determined
under fair value based method for all awards,
net of related tax effect 8 216
______ ______
Pro forma $7,611 $6,053
______ ______
Basic earnings per common share
As reported $ 0.17 $ 0.15
Pro forma $ 0.17 $ 0.15
Diluted earnings per common share
As reported $ 0.17 $ 0.14
Pro forma $ 0.17 $ 0.13
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 2. SUPPLEMENTAL CASH FLOW INFORMATION
For the Three Months Ended
March 31,
2005 2004
_______ _______
Cash paid for:
Interest $ 500 $ 428
Taxes 14,307 3,924
Non-cash financing and investing activities:
Revolving credit loan refinanced to long-term debt $ 8,500 $12,500
7
NOTE 3. INVENTORIES
Inventories are stated at the lower of cost or market using the
first-in, first-out (FIFO) method and are summarized as follows:
March 31, December 31,
2005 2004
_________ ____________
Raw materials and supplies $ 37,615 $31,695
Work in process 15,207 18,815
Finished goods 50,108 35,463
________ _______
$102,930 $85,973
======== =======
NOTE 4. CREDIT AGREEMENT
On March 15, 2005, the Company amended its bank credit agreement (the
"Credit Agreement"), which increased the total borrowing limits from $45,000 to
$55,000 at that time. Pursuant to the Credit Agreement, the Company may borrow,
on a revolving basis, up to $37,000 on 85% of eligible accounts receivable (the
"Credit Facility"), and the Company borrowed a term loan in the principal amount
of $18,000, (repaying the $12.5 million dollar term loan), amortizing at the
rate of $2,000 per quarter commencing July 2005. This agreement will expire on
October 1, 2007. Previously, on March 15, 2004, the Company had amended its bank
credit agreement to increase the total borrowing limits from $35,000 to $45,000
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. Borrowings
under the Credit Agreement bear interest, at the Company's option, at the bank's
prime rate (5.75% at March 31, 2005) or LIBOR 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. At
March 31, 2005, the Company had a LIBOR loan outstanding on the credit facility
at a rate of 4.45%. 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 WARRANTS
No warrants were issued during the three months ended March 31, 2005
and 2004. During the three-month period ended March 31, 2005 and 2004 employees
exercised warrants to purchase 30,000 and 40,000 shares, respectively of the
Company's unregistered common stock at an average price of $6.26 and $2.00 per
share, respectively.
Warrants to purchase 170,561 and 450,000 shares of the Company's common
stock that were outstanding during the three months ended March 31, 2005 and
2004, respectively, were not included in the computation of diluted earnings per
share because their effect would have been anti-dilutive, since the strike
prices were above the average fair market value of the Company's stock price.
During the three months ended March 31, 2005, the Company issued 25,040
unregistered shares of its common stock in settlement of a lawsuit with a former
consultant. The value of this settlement was approximately $369,000 and is
included in selling general and administrative expenses. No unregistered shares
were issued during the three months ended March 31, 2004 other than the stock
warrant issuances described above.
8
NOTE 6. SEGMENT INFORMATION
The Company operates in two principal segments: ballistic-resistant
equipment and protective athletic and sports products. Net sales, income before
other income (expense), depreciation and amortization expense, interest expense,
income taxes, and identifiable assets for each of the Company's segments are as
follows:
For The Three Months
Ended March 31,
2005 2004
________ ________
NET SALES
Ballistic-resistant equipment $ 83,311 $ 72,563
Protective athletic & sports products 2,154 1,840
________ ________
Consolidated net sales $ 85,465 $ 74,403
======== ========
INCOME BEFORE OTHER INCOME (EXPENSE)
Ballistic-resistant equipment $ 15,622 $ 13,365
Protective athletic & sports products 317 317
Corporate and other (1) (3,368) (2,789)
________ ________
Consolidated income before other income (expense) $ 12,571 $ 10,893
======== ========
DEPRECIATION AND AMORTIZATION EXPENSE
Ballistic-resistant equipment $ 140 $ 140
Protective athletic & sports products 7 31
Corporate and other 57 34
________ ________
Consolidated depreciation and amortization expense $ 204 $ 205
======== ========
INTEREST EXPENSE
Ballistic-resistant equipment $ 544 $ 298
Protective athletic & sports products -- --
Corporate and other (2) -- 1
________ ________
Consolidated interest expense $ 544 $ 299
======== ========
INCOME BEFORE INCOME TAXES
Ballistic-resistant equipment $ 10,892 $ 10,118
Protective athletic & sports products 317 310
Corporate and other (2) 835 176
________ ________
Consolidated income before income tax expense $ 12,044 $ 10,604
======== ========
INCOME TAXES
Ballistic-resistant equipment $ 669 $ 615
Protective athletic & sports products -- --
Corporate and other (2) 3,602 3,571
________ ________
Consolidated income tax expense $ 4,271 $ 4,186
======== ========
9
March 31, December 31,
2005 2004
_________ ____________
IDENTIFIABLE ASSETS
Ballistic-resistant equipment $148,476 $138,370
Protective athletic & sports products 3,579 5,018
Corporate and other (2) 2,514 2,469
________ ________
Consolidated total assets $154,569 $145,857
======== ========
(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
On January 3, 2005, a class action lawsuit was filed against us in the
Circuit Court of the Seventeenth Judicial Circuit in Broward County, Florida by
a police organization and individual police officers, because of concerns
regarding the effectiveness and durability of body armor with high
concentrations of Zylon in the Company's bullet-resistant soft body armor
(vests). In February 2005, we reached a preliminary settlement with respect to
the class action lawsuit filed, subject to final court approval. The Company
does not expect this settlement to have a material adverse effect on its
financial position.
The Company is currently the subject of an investigation by the
Securities and Exchange Commission (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 related party transactions to assess the benefits to the Company
and the related party's compliance with its contractual obligations.
The Company is involved in other litigation, none of which it considers
to be material or believes would, if adversely determined, have a material
adverse effect on its 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 December 2003, the Financial Accounting Standards Board issued FASB
Interpretation Number 46-R ("FIN 46-R") "Consolidation of Variable Interest
Entities." FIN 46-R, which modifies certain provisions and effective dates of
FIN 46, sets forth criteria to be used in determining whether an investment in a
variable interest entity should be consolidated. These provisions are based on
the general premise that if a company controls another entity through interests
other than voting interests, that company should consolidate the controlled
entity. The Company believes that currently, it does not have any material
arrangements that meet the definition of a variable interest entity, which would
require consolidation.
10
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs - An
Amendment of ARB No. 43, Chapter 4" (SFAS No. 151). SFAS No. 151 requires all
companies to recognize a current-period charge for abnormal amounts of idle
facility expense, freight, handling costs and wasted materials. This statement
also requires that the allocation of fixed production overhead to the costs of
conversion be based on the normal capacity of the production facilities. SFAS
No. 151 will be effective for fiscal years beginning after June 15, 2005. The
Company does not expect the adoption of this statement to have a material effect
on its consolidated financial statements.
In December 2004, the FASB issued SFAS No.123(R), "Share-Based Payment"
(SFAS No. 123(R). This statement replaces SFAS No. 123 and supersedes APB 25.
SFAS 123 (R) requires all stock-based compensation to be recognized as an
expense in the financial statements and that such cost be measured according to
the fair value of stock options. SFAS 123 (R) will be effective for annual
periods beginning after June 15, 2005. While the Company currently provides the
pro forma disclosures required by SFAS No. 148 on a quarterly basis (see "Note 1
Stock Based Compensation"), it is currently evaluating the impact this statement
will have on its consolidated financial statements.
In December 2004, the FASB issued SFAS No. 153, "Exchanges on
Nonmonetary Assets - An Amendment of APB Opinion No. 29, Accounting for
Nonmonetary Transactions" (SFAS 153) SFAS eliminates the exception from fair
value measurement for nonmonetary exchanges of similar productive assets in
paragraph 21(b) of APB Opinion No. 29, "Accounting for Nonmonetary
Transactions," and replaces it with an exception for exchanges that do not have
commercial substance. SFAS 153 specifies that a nonmonetary exchange has
commercial substance if the future cash flows of the entity are expected to
change significantly as a result of the exchange. SFAS 153 is effective for
fiscal periods beginning after June 15, 2005. The Company does not expect the
adoption of this statement to have a material effect on its consolidated
financial statements.
In March 2005, the FASB issued Interpretation No. 47 ("FIN 47),
"Accounting for Conditional Asset Retirement Obligations", an interpretation of
FASB Statement No. 143, "Accounting for Asset Retirement Obligations." The
interpretation clarifies that the term conditional asset retirement obligation
refers to a legal obligation to perform an asset retirement activity in which
the timing and (or) method of settlement are conditional on a future event that
may or may not be within the control of the entity. An entity is required to
recognize a liability for the fair value of a conditional asset retirement
obligation if the fair value of the liability can be reasonably estimated. FIN
47 also clarifies when an entity would have sufficient information to reasonably
estimate the fair value of an asset retirement obligation. The effective date of
this interpretation is no later than the end of fiscal years ending after
December 15, 2005. The Company is currently investigating the effect, if any,
that FIN 47 would have on the Company's financial position, cash flows and
results of operations.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
We are a manufacturer and provider of bullet and projectile-resistant
garments, including fragmentation protective vests, and related accessories,
which are used domestically and internationally by military, law enforcement,
security and corrections personnel, as well as other governmental agencies. We
also manufacture and distribute protective athletic apparel and equipment,
including a wide variety of knee, ankle, elbow, wrist and back supports and
braces that assist serious athletes, weekend sports enthusiasts and general
consumers in their respective sports and everyday activities.
We are a holding company and we conduct our business through two
divisions, the DHB Armor Group and the DHB Sports Group. The Armor Group
represented approximately 98%, 97% and 96% of our consolidated revenues during
2004, 2003 and 2002, respectively. The balance of the consolidated revenues are
attributable to the Sports Group. Our products are sold both nationally and
internationally. 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 decrease in government spending or any 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, and health support products under its own
labels, private labels and house brands for major retailers.
We derive substantially all of our revenues from sales of our products.
As indicated in the financial information included in this report, we have
experienced substantial increases in our revenues in the past several years,
which we attribute primarily to demand from the U.S. military and federal, state
and local law enforcement for the products of the Armor Group. Our ability to
maintain recent revenue levels will be highly dependent on continued demand for
our body armor and projectile-resistant clothing. Although we do not foresee an
immediate material reduction in such demand, we have no assurance that
government agencies will not refocus their expenditures based on changed
circumstances or otherwise, that we will be able to diversify into alternate
markets or alternate products, or that we will be able to increase our market
share through acquisitions of other businesses.
Due to our growth, we have outgrown our small business status under
government procurement regulations. Although the loss of our small business
status makes us ineligible for certain set-asides under government contracting
regulations, we believe that our current size permits us to manage larger orders
and credibly bid on major procurement contracts under which small businesses
would be our subcontractors.
Our market share is highly dependent upon the quality of our products,
and our ability to deliver our products in a prompt and timely fashion. To meet
projected demand, and to maintain our ability to deliver quality products in a
timely manner, in April 2004, we moved into a new, expanded production facility
in Pompano Beach, Florida. Our current strategic focus is on quality and
delivery, which we believe are the key elements in obtaining additional and
repeat orders under our existing procurement contracts with the U.S. military
and other governmental agencies.
12
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2005, COMPARED TO THE THREE MONTHS ENDED MARCH 31,
2004
For the three months ended March 31, 2005, consolidated net sales were
approximately $85.5 million, an increase of 15% over consolidated net sales of
$74.4 million for the three months ended March 31, 2004. The Armor Group's net
sales increased nearly 15% from $72.6 million for the three months ended March
31, 2004 to $83.3 million for the three months ended March 31, 2005 due
primarily to substantially increased shipments to the United States military.
The Sports Group's net sales for the three months ended March 31, 2005 increased
17% to approximately $2.2 million, as compared to $1.8 million for the three
months ended March 31, 2004. Contributing to the increase in the Sports Group's
net sales was the addition of a west coast drug store chain, Longs Drug Stores,
to the Sports Group's customer base.
Gross profit for the quarter ended March 31, 2005 was approximately
$23.4 million (27.4% of net sales), as compared to approximately $20.8 million
(27.9% of net sales) for the three months ended March 31, 2004.
Selling, general and administrative expenses were $10.8 million or
12.7% of net sales for the three months ended March 31, 2005 versus $9.9 million
or 13.3% of net sales for the three months ended March 31, 2004. This decrease
as a percentage of sales is attributable to lower commission on the sales mix.
Driven primarily by the sales increases, operating income increased to $12.6
million for the first three months of 2005 versus $10.9 million for the first
three months of 2004.
Interest expense for the three months ended March 31, 2005 increased
81.9% to $544,000 compared to approximately $299,000 for the three months ended
March 31, 2004. This increase was due primarily to increased borrowings under
our line of credit. The primary use of this increased borrowings was to pay
$14.3 million in taxes during the quarter ended March 31, 2005. This amount
represents the balance of taxes due for the year ended December 31, 2004 and the
estimate for the first quarter of 2005. Cash paid for taxes of $3.9 million was
funded by the line of credit during the quarter ended March 31, 2004.
Income before taxes was approximately $12.0 million for the three
months ended March 31, 2005, compared to income before taxes of approximately
$10.6 million for the three months ended March 31, 2004. Income tax expense for
the three months ended March 31, 2005 were approximately $4.3 million while
income tax expense for the three months ended March 31, 2004 were approximately
$4.2 million. The effective tax rate for the first quarter of 2005 was 35.5% as
compared to 39.5% during the first quarter of 2004.
After the payment of preferred stock dividends of approximately $90,000
per quarter, income available to common stockholders was $7.6 million for the
three months ended March 31, 2005 or $0.17 per diluted share, as compared with
income available to common stockholders of $6.3 million or $0.14 per diluted
share for the three months ended March 31, 2004. The weighted average shares
outstanding on a diluted basis for the three months ended March 31, 2005 was
46,111,906 as compared to 45,142,033 for the three months ended March 31, 2004.
LIQUIDITY AND CAPITAL RESOURCES
We expect that our primary working capital requirements over the next
twelve months will be to assist our subsidiaries in financing their working
capital requirements. Our operating subsidiaries sell the majority of their
products on 30 to 90-day terms. We need working capital to finance the
receivables, manufacturing process and inventory. Working capital at March 31,
13
2005 was $116.0 million as compared to working capital of $107.1 million at
December 31, 2004. Although our working capital increased during 2005, cash used
in operations increased to approximately $5.0 million in the three months ended
March 31, 2005 compared to cash used in operations of $3.2 million in the three
months ended March 31, 2004. The main cause of our negative operating cash flow
is the substantial growth we have been experiencing.
The underlying drivers of operating cash flows are the inflows and
outflows of funds. Our cash inflows are principally cash collections from
customers. As a result of our growth, we have experienced increases in our
accounts receivable, which have caused our cash inflows from operations to lag
behind our net sales. However, during the three months ended March 31, 2005, we
had cash collections from customers of $88.9 million compared to net sales of
approximately $85.5 million. As a comparison, for the three months ended March
31, 2004 our cash collections of approximately $70.3 million lagged our net
sales of $74.4 million. Our cash outflows are principally manufacturing costs
plus the buildup of inventory to accommodate future growth and to secure certain
raw materials. As a result of our growth, our cash outflows related to
manufacturing cost plus increased inventory have outpaced our cost of goods
sold. Our cash outflows for manufacturing costs plus inventory buildup were
$81.6 million and $62.2 million for the three months ended March 31, 2005 and
2004, respectively, compared to cost of goods sold of approximately $62.0
million and $53.6 million for such periods, respectively.
On March 15, 2005, we amended our bank credit agreement, to increase
the total borrowing limit from $45 million to $55 million. Our credit agreement
includes a credit facility under which we may borrow, on a revolving basis, up
to $37 million on 85% of eligible accounts receivable. The credit agreement also
includes a term loan under which we borrowed the principal amount of $18 million
which we used to repay our $12.5 million term loan and which is amortized at the
rate of $2 million per quarter commencing July 2005. On March 15, 2004, we
amended our bank credit agreement to increase the total borrowing limit from $35
million to $45 million and we borrowed a term loan in the principal amount of
$12.5 million, which was amortized at the rate of $1,000 per quarter commencing
July 2004. Borrowings under the Credit Agreement bear interest, at our option,
at the bank's prime rate (5.75% at March 31, 2005) or LIBOR plus 1.75% per annum
on the credit facility and LIBOR plus 2.25% on the term loan. At March 31, 2005,
we had a LIBOR loan outstanding on our revolving credit facility with a rate of
4.45%. The borrowings under the credit agreement are collateralized by a first
security interest in substantially all of our assets.
Our credit facility includes both affirmative and negative covenants
customary for a financing of this nature. Among other provisions, our credit
facility requires us to maintain a (1) minimum tangible net worth, as defined,
(2) fixed charge coverage ratio, and (3) earnings before interest, taxes,
depreciation and amortization. Our Credit Facility has certain restrictive
covenants that limit our ability to pay dividends to our common stockholders or
repurchase treasury shares and which limit the total amount of our capital
expenditures to $2 million during any year. As described below, we do not
anticipate our capital expenditures to reach this $2 million limit. These
restrictive covenants require us to obtain prior approval from the bank before
paying common stock dividends or repurchasing shares. The credit facility has a
1% prepayment penalty through October 1, 2005. We believe that these restrictive
covenants do not have a material impact on our liquidity and capital resources.
Our capital expenditures in the three months ended March 31, 2005
decreased substantially to $112,000 as compared to $778,000 for the three months
ended March 31, 2004. During the three months ended March 31, 2004, we purchased
14
additional machinery, equipment, furniture and fixtures and leasehold
improvements to equip our new warehouse and administrative facility in Florida
for our Point Blank subsidiary and a new location for our corporate
headquarters. During the remainder of 2005, we currently anticipate
approximately $300,000 in capital expenditures to construct a new state of the
art ballistic testing range at Point Blank's Pompano Beach facility in addition
to our normal capital expenditures of approximately $800,000 for total
anticipated capital expenditures of approximately $1.1 million.
We believe that our existing credit line, together with funds generated
from operations, will be adequate to sustain our operations (including projected
capital expenditures) for the next 12 months. Historically, we have been
successful in obtaining increases in our revolving credit facility, as required;
in order to finance the increased working capital needs brought on by the
expansion of our business. However, we have no assurance that we will be able to
obtain further such increases if needed, and we may be required to explore other
potential sources of financing (including the issuance of equity securities and,
subject to the consent of our lender, other debt financing) if we continue to
experience escalating demand for our products.
CRITICAL ACCOUNTING POLICIES
The Company's management believes that its critical accounting policies
include:
REVENUE RECOGNITION - DHB recognizes revenue when it is realized or
realizable and has been earned. Product revenue is recognized when persuasive
evidence of an arrangement exists, the product has been delivered and legal
title and all risks of ownership have been transferred, written contract and
sales terms are complete, customer acceptance has occurred and payment is
reasonably assured. Returns are minimal and do not materially affect the
consolidated financial statements.
ESTIMATES - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets, liabilities and contingent assets and liabilities in the
financial statements and accompanying notes. Significant estimates inherent in
the preparation of the accompanying consolidated financial statements include
the carrying value of long-lived assets and allowances for receivables and
inventories. Actual results could differ from these estimates.
INVENTORIES-- Inventories are stated at the lower of cost (determined
on the first-in, first-out basis) or market.
INCOME TAXES - DHB uses the asset and liability approach to account for
income taxes. Under this method, deferred tax assets and liabilities are
recognized for the expected future tax consequences of differences between the
carrying amounts of assets and liabilities and their respective tax basis using
enacted tax rates in effect for the year in which the differences are expected
to reverse. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period when the change is enacted. Deferred
tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all of the deferred
tax assets will not be realized.
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EFFECT OF INFLATION AND CHANGING PRICES
We did not experience any material increases in raw material prices
during the three months ended March 31, 2005.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements
regarding future events and our future results that are based on our current
expectations, estimates, forecasts and projections about the industries in which
we operate and the beliefs and assumptions of our management. Words such as
"expects," "anticipates," "targets," "goals," "projects," "intends," "plans,"
"believes," "seeks," "estimates," variations of such words, and similar
expressions are intended to identify such forward-looking statements. These
forward-looking statements are only predictions that speak as of the date hereof
and are subject to risks, uncertainties and assumptions that are difficult to
predict. Therefore, actual results may differ materially and adversely from
those expressed in any forward-looking statements. Factors that might cause or
contribute to such differences include, but are not limited to, those discussed
in our Annual Report on Form10-K/A for the year ended December 31, 2004 and in
other reports that we have filed with the Securities and Exchange Commission.
You are cautioned not to place undue reliance on these forward-looking
statements that speak only as of the date hereof. We undertake no obligation to
revise or update publicly any forward-looking statements to reflect any change
in the expectations of our management with regard thereto or any change in
events, conditions, or circumstances on which any such statements are based.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not issue or invest in financial instruments or their derivatives
for trading or speculative purposes. Our market risk is limited to fluctuations
in interest rates as it pertains to our borrowings under our $55 million credit
facility. We can borrow at either the prime rate of interest or LIBOR plus
1.75%. Any increase in these reference rates could adversely affect our interest
expense. The change in the interest rate for 2005 was immaterial. The extent of
market rate risk associated with fluctuations in interest rates is not
quantifiable or predictable because of the volatility of future interest rates
and business financing requirements. However, given the small percentage change
in the past, we do not currently expect any changes in the interest rate to have
a material effect on our operating results. If interest rates increased 1%, then
the interest expense would increase approximately $407,000.
Aggregate maturities of our long-term debt are as follows:
For the years ended December 31, 2005
2005 $ 5,000,000
2006 8,000,000
2007 27,747,000
___________
$40,747,000
The Company estimated that the fair value of its long-term debt
approximates its carrying value.
Our international transactions are predominately denominated in U.S.
dollars, mitigating any market risk resulting from foreign currency exchange
fluctuations. We do not have any material sales, purchases, assets or
liabilities denominated in currencies other than the U.S. Dollar, and as such,
we are not subject to material foreign currency exchange rate risk.
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ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
We conducted an evaluation of the effectiveness of the design and
operation of our disclosure controls and procedures as of the end of the period
covered by this report. The disclosure controls and procedures evaluation was
conducted under the supervision and with the participation of management,
including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO).
Disclosure controls and procedures are controls and procedures that are designed
to ensure that information required to be disclosed in our reports filed under
the Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the rules and forms of the Securities and Exchange
Commission. Disclosure controls and procedures are also designed to ensure that
such information required to be disclosed in our reports filed under the
Exchange Act is accumulated and communicated to our management, including the
CEO and CFO, as appropriate to allow timely decisions regarding required
disclosure.
The evaluation of our disclosure controls and procedures included a
review of the controls' objectives and design, our implementation of the
controls and the effect of the controls on the information generated for use in
this report. This type of evaluation is performed on a quarterly basis so that
the conclusions of management, including the CEO and CFO, concerning the
effectiveness of the disclosure controls and procedures can be reported in our
periodic reports on Form 10-Q and Form 10-K. The overall goals of our evaluation
activities are to monitor our disclosure controls and procedures, and to modify
them as necessary. Our intent is to maintain our disclosure controls and
procedures as dynamic systems that change as conditions warrant.
Based upon the disclosure controls and procedures evaluation, our CEO
and CFO have concluded that, as of the end of the period covered by this report,
our disclosure controls and procedures were effective to ensure that information
required to be disclosed in our reports filed under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission's rules and forms and that information
required to be disclosed in our reports filed under the Exchange Act is
accumulated and communicated to our management, including the CEO and CFO, as
appropriate to allow timely decisions regarding required disclosure.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING.
As mentioned in our filing on Form 8-K dated April 14, 2005, as of
December 31, 2004, there existed certain significant deficiencies in our systems
of inventory valuation rendering such systems inadequate to accurately capture
cost of materials and labor components of certain work in progress and finished
goods inventory. During the three months ended March 31, 2005, we have worked to
strengthen our internal controls relating to the matters described above and
such efforts include: instituting additional controls, enforcing existing
policies and providing oversight with respect to insuring that we accurately
capture the cost of materials and labor components of certain work in process
and finished good inventory, hiring an additional inventory manager, and
continuing to interview candidates with the intention of hiring additional
personnel to provide additional support in implementing and improving our
system. Our management, including the CEO and the CFO, believes the results of
the corrective actions that we have initiated will be effective in addressing
the deficiency in internal controls described above. The attestation report of
Weiser LLP also identified what that firm considers to be two additional
weaknesses in internal controls: (1) failure of the Company to complete
consultation with Weiser LLP prior to filing Form 10-K for the year ended
December 31, 2004; and (2) a need to enhance and strengthen the Audit Committee
to improve the Committee's effectiveness. Although the Company does not believe
that Weiser LLP has a proper basis for its conclusions, the Company takes Weiser
LLP's views seriously and intends to explore opportunities to improve the
process of preparing its filings with the Securities and Exchange Commission and
the effectiveness of its Audit Committee.
17
Except as described above, there have not been any changes in our
internal control over financial reporting, as such term is defined in Rules
13a-15(f) and 15d-15(f) under the Exchange Act during our fiscal quarter ended
March 31, 2005 that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On January 3, 2005, a class action lawsuit was filed against us in the
Circuit Court of the Seventeenth Judicial Circuit in Broward County, Florida by
a police organization and individual police officers, because of concerns
regarding the effectiveness and durability of body armor with high
concentrations of Zylon in the Company's bullet-resistant soft body armor
(vests). In February 2005, we reached a preliminary settlement with respect to
the class action lawsuit filed, subject to final court approval. We do not
expect this settlement to have a material adverse effect on our financial
position.
We are currently the subject of an investigation by the Securities and
Exchange Commission with respect to certain related party transactions and
executive compensation matters regarding the Company and affiliates of Mr. David
H. Brooks (our Chief Executive Officer). The Company and Mr. Brooks are
cooperating with the Securities and Exchange Commission in this investigation.
In addition, the Audit Committee expects to periodically monitor the status and
performance of related party transactions to assess the benefits to the Company
and the related party's compliance with its contractual obligations.
We are involved in other litigation, none of which we consider to be
material to our business or believe would, if adversely determined, have a
material adverse effect on our 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
Not Applicable.
ITEM 5. OTHER INFORMATION
None.
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ITEM 6. 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.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed by the undersigned,
thereunto duly authorized.
Dated May 10, 2005 DHB INDUSTRIES, INC.
(Registrant)
By: /s/ DAVID H. BROOKS
____________________________
David H. Brooks
Chief Executive Officer
and Chairman of the Board
/s/ DAWN M. SCHLEGEL
____________________________
Dawn M. Schlegel
Chief Financial Officer and
Principal Accounting Officer
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