================================================================================ U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 _________________________ FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED March 31, 2004 Commission File No. 0-22429 DHB INDUSTRIES, INC. (Exact name of Registrant as specified in its charter) DELAWARE 11-3129361 (State or other jurisdiction (I.R.S. Employer of incorporation) Identification No.) 400 POST AVENUE, SUITE 303, WESTBURY, NY 11590 (Address of principal executive offices) Registrant's telephone number: (516) 997-1155 Former name, former address and former fiscal year, if changed since last report: Not applicable Indicate by check mark whether the registrant (1) filed all reports required to be filed by section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act.) Yes [ X ] No [ ] As of May 10, 2004, there were 40,812,136 shares of Common Stock, $.001 par value, outstanding. ================================================================================ 1 INDEX PART I. FINANCIAL INFORMATION PAGE Item 1. Financial Statements Condensed Consolidated Balance Sheets as of March 31, 2004 (Unaudited) and December 31, 2003 3 Unaudited Condensed Consolidated Statements of Operations For The Three Months Ended March 31, 2004 and 2003 4 Unaudited Condensed Consolidated Statements of Cash Flows For The Three Months Ended March 31, 2004 and 2003 5 Notes to Unaudited Condensed Consolidated Financial Statements 6-11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12-15 Item 3. Quantitative and Qualitative Disclosures about Market Risk 15 Item 4. Controls and Procedures 16-18 PART II. OTHER INFORMATION Item 1. Legal Proceedings 18-19 Item 2. Changes in Securities and Use of Proceeds 19 Item 3. Defaults Upon Senior Securities 19 Item 4. Submission of Matters to a Vote of Security Holders 19 Item 5. Other Information 19 Item 6. Exhibits and Reports on Form 8-K 19-20 Signatures 20 2 ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) DHB INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 2004 (UNAUDITED) AND DECEMBER 31, 2003 (In thousands, except share and per share data) March 31, December 31, 2004 2003 _________ ____________ ASSETS Current assets Cash and cash equivalents $ 478 $ 441 Accounts receivable, less allowance for doubtful accounts of $879 and $852, respectively 38,643 33,707 Inventories 62,817 54,753 Deferred income tax assets 372 372 Prepaid expenses and other current assets 1,204 1,518 ________ _______ Total current assets 103,514 90,791 ________ _______ Property and equipment, net 2,392 1,819 ________ _______ Other assets Deferred income tax assets 468 437 Deposits and other assets 421 381 ________ _______ Total other assets 889 818 ________ _______ Total assets $106,795 $93,428 ======== ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Current maturities of long-term debt $ 3,000 $ 2,000 Accounts payable 8,933 9,465 Accrued expenses and other current liabilities 8,497 6,869 Income taxes payable 7,394 5,635 ________ _______ Total current liabilities 27,824 23,969 ________ _______ Long-term liabilities Notes payable-bank 15,588 22,012 Term loan payable 9,500 Other liabilities 530 502 ________ _______ Total liabilities 53,442 46,483 ________ _______ Commitments and contingencies Minority interest in consolidated subsidiary 266 207 Stockholders' equity Convertible preferred stock, $0.001 par value, 5,000,000 shares 1 1 authorized, 500,000 shares of Series A, 12% convertible preferred stock issued and outstanding; liquidation preference $3,000 Common stock, $0.001 par value, 100,000,000 shares 41 41 authorized, 40,782,136 and 40,742,136 issued Additional paid in capital 35,464 35,384 Accumulated other comprehensive loss (53) (53) Retained earnings 17,634 11,365 ________ _______ Total stockholders' equity 53,087 46,738 ________ _______ Total liabilities and stockholders' equity $106,795 $93,428 ======== ======= (See Notes to Condensed Consolidated Financial Statements) 3 DHB INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (In thousands, except share and per share data) For the Three Months Ended March 31, _____________________________ 2004 2003 ___________ ___________ Net sales $ 74,403 $ 46,153 Cost of goods sold (includes related party purchases of $3,302, and $6,548, respectively) 53,638 33,185 ___________ ___________ Gross profit 20,765 12,968 Selling, general and administrative expenses 9,872 5,793 ___________ ___________ Income before other income (expense) 10,893 7,175 ___________ ___________ Other income (expense) Interest expense (299) (329) Proceeds from settlement of lawsuit -- 739 Other income 10 13 ___________ ___________ Total other income (expense) (289) 423 ___________ ___________ Income before income taxes and minority interest 10,604 7,598 Income taxes 4,186 2,579 ___________ ___________ Income before minority interest of subsidiary 6,418 5,019 Minority interest of subsidiary (59) -- ___________ ___________ Net income 6,359 5,019 Dividend - preferred stock (90) (90) ___________ ___________ Income available to common stockholders $ 6,269 $ 4,929 =========== =========== Earnings per common share: Basic shares $ 0.15 $ 0.12 =========== =========== Diluted shares $ 0.14 $ 0.12 =========== =========== Weighted average shares outstanding: Basic shares 40,743,784 40,413,746 Effect of convertible preferred 500,000 500,000 Warrants 3,898,249 1,871,742 ___________ ___________ Diluted shares 45,142,033 42,785,488 =========== =========== (See Notes to Condensed Consolidated Financial Statements) 4 DHB INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (In thousands, except share and per share data) For the Three Months Ended March 31, _________________________ 2004 2003 ________ _______ CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 6,359 $ 5,019 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization 205 132 Amortization of deferred financing costs 36 34 Provision for doubtful accounts 27 -- Minority interest of subsidiary 59 -- Deferred income tax (benefit) expense (31) 2,535 Changes in operating assets and liabilities Accounts receivable (4,963) (8,918) Inventories (8,064) (8,473) Prepaid expenses and other current assets 314 (120) Deposits and other assets 7 (68) Accounts payable (532) 2,320 Income taxes payable 1,759 -- Accrued expenses and other current liabilities 1,628 168 Other liabilities 28 30 ________ _______ Net cash used in operating activities (3,168) (7,341) ________ _______ CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property and equipment (778) (371) ________ _______ Net cash used in investing activities (778) (371) ________ _______ CASH FLOWS FROM FINANCING ACTIVITIES Dividends paid on preferred stock (90) (90) Net proceeds of notes payable- bank 4,076 7,529 Issuance costs of long-term debt (83) -- Principal payments on long-term debt -- (7) Proceeds from the issuance of common stock 80 -- ________ _______ Net cash provided by financing activities 3,983 7,432 ________ _______ Effect of foreign currency translation -- (2) ________ _______ Net increase (decrease) in cash and cash equivalents 37 (282) Cash and cash equivalents at beginning of the period 441 393 ________ _______ Cash and cash equivalents at end of the period $ 478 $ 111 ======== ======= (See Notes to Condensed Consolidated Financial Statements) 5 DHB INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share data) NOTE 1. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements of DHB Industries, Inc. and subsidiaries (collectively "DHB" or the "Company") as of March 31, 2004 and for the three months ended March 31, 2004 and 2003 have been prepared in accordance with accounting principles generally accepted in the United States of America ("US GAAP"). The unaudited financial statements include all adjustments, consisting only of normal and recurring adjustments, which, in the opinion of management, were necessary for a fair presentation of financial condition, results of operations and cash flows for such periods presented. However, these results of operations are not necessarily indicative of the results for any other interim period or for the full year. Certain information and footnote disclosures normally included in financial statements prepared in accordance with US GAAP have been omitted in accordance with published rules and regulations of the Securities and Exchange Commission (the "SEC"). These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's Form 10-K/A for the year ended December 31, 2003 filed with the SEC on March 30, 2004. NOTE 2. SUPPLEMENTAL CASH FLOW INFORMATION For the Three Months Ended March 31, ____________________ 2004 2003 _______ ____ Cash paid for: Interest $ 428 $321 Taxes 3,924 44 Non-cash financing and investing activities: Revolving credit loan refinanced to long-term debt $12,500 -- Property and equipment acquired under capital lease -- 20 NOTE 3. INVENTORIES Inventories are stated at the lower of cost or market using the first-in, first-out (FIFO) method and are summarized as follows: March 31, December 31, 2004 2003 _________ ____________ Raw materials and supplies $28,493 $21,750 Work in process 18,528 15,430 Finished goods 15,796 17,573 _______ _______ $62,817 $54,753 ======= ======= 6 DHB INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share data) NOTE 4. LONG-TERM DEBT On March 15, 2004, the Company amended its bank credit agreement (the "Credit Agreement"), to increase its borrowing limits from $35,000 to $45,000. Pursuant to the Credit Agreement, the Company may borrow, on a revolving basis, up to $32,500 on 85% of eligible accounts receivable (the "Credit Facility"), and the Company borrowed a secured term loan of $12,500, amortizing at the rate of $1,000 per quarter, commencing July 2004. This amended agreement will expire on October 1, 2007. Borrowings under the Credit Agreement bear interest, at the Company's option, at the bank's prime rate (4% at March 31, 2004) or LIBOR (1.11% at March 31, 2004) plus 1.75% per annum on the revolving Credit Facility and at the bank's prime rate or LIBOR plus 2.25% on the term loan. For 2003, the borrowings bore interest at the bank's prime rate or LIBOR plus 1.75% (3.145% at December 31, 2003). The borrowings under the Credit Agreement are collateralized by a first security interest in substantially all of the assets of the Company. NOTE 5. STOCK BASED COMPENSATION Warrants No warrants were issued during the three months ended March 31, 2004. During the three-month period ended March 31, 2004, employees exercised warrants to purchase 40,000 shares of the Company's unregistered common stock at an average price of $2.00 per share. During the three months ended March 31, 2003, the five members of the Board of Directors were each awarded 50,000 warrants exercisable at $1.41 per share for five years. In addition, during the three months ended March 31, 2003, the Board of Directors awarded key employees 45,000 warrants exercisable at $2.01 per share, which expire in February 2008. No warrants were exercised during the three months ended March 31, 2003. Warrants to purchase 450,000 and 1,325,857 shares of the Company's common stock that were outstanding during the three months ended March 31, 2004 and 2003, respectively, were not included in the computation of diluted earnings per share because their effect would have been anti-dilutive, since the strike prices were above the average fair market value of DHB's stock price. The Company accounts for stock-based compensation using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations ("APB No. 25"), and has adopted the disclosure provisions of Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure, an amendment of FASB Statement No. 123" ("SFAS No. 148"). Under APB No. 25, compensation expense is only recognized when the market value of the underlying stock at the date of grant exceeds the amount an employee must pay to acquire the stock. Accordingly, no compensation expense has been recognized in the Condensed Consolidated Financial Statements in connection with employee stock warrant grants. Stock issued for services is valued at fair value and is expensed as the services are provided. 7 DHB INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share data) NOTE 5. STOCK BASED COMPENSATION - (Continued) The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options and warrants which have no vesting restrictions and are fully transferable. In addition, the Black-Scholes option valuation model require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock warrants have characteristics significantly different from those of traded warrants and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock warrants. The weighted-average warrant fair values and assumptions used to estimate these values are as follows: Warrants Issued During 2004 2003 ______ ______ Risk-free interest rate 3.12% 2.86% Expected volatility of common stock 93.96% 98.44% Dividend yield 0.00% 0.00% Expected option term 4.3 years 5 years The Company's net income and earnings per share would have been reduced to the pro forma amounts shown below if compensation cost had been determined based on the fair value at the grant dates in accordance with SFAS No. 123 and 148, "Accounting for Stock-Based Compensation." For the Three Months Ended March 31, ____________________ 2004 2003 ______ ______ Net income $6,359 $5,019 Less dividend - preferred stock 90 90 ______ ______ Income available to common stockholders, as reported 6,269 4,929 Deduct: compensation determined under fair value based method for all awards, net of related tax effect 216 247 ______ ______ Pro forma $6,053 $4,682 ______ ______ Basic earnings per common share As reported $ 0.15 $ 0.12 Pro forma $ 0.15 $ 0.12 Diluted earnings per common share As reported $ 0.14 $ 0.12 Pro forma $ 0.13 $ 0.11 Pro forma compensation expense may not be indicative of pro forma expense in future years. For purposes of estimating the fair value of each warrant on the date of grant, the Company utilized the Black-Scholes option-valuation model. 8 DHB INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share data) NOTE 6. SEGMENT INFORMATION The Company operates in two principal segments: ballistic-resistant equipment and protective athletic and sports products. Net sales, income before other income (expense), depreciation and amortization expense, interest expense, income taxes, and identifiable assets for each of the Company's segments are as follows: For The Three Months Ended March 31, ____________________ 2004 2003 _______ _______ NET SALES Ballistic-resistant equipment $72,563 $44,619 Protective athletic & sports products 1,840 1,534 _______ _______ Consolidated net sales $74,403 $46,153 ======= ======= INCOME BEFORE OTHER INCOME (EXPENSE) Ballistic-resistant equipment $13,365 $ 7,995 Protective athletic & sports products 317 233 Corporate and other (1) (2,789) (1,053) _______ _______ Consolidated income before other income (expense) $10,893 $ 7,175 ======= ======= DEPRECIATION AND AMORTIZATION EXPENSE Ballistic-resistant equipment $ 140 $ 72 Protective athletic & sports products 31 14 _______ _______ 171 86 Corporate and other 34 46 _______ _______ Consolidated depreciation and amortization expense $ 205 $ 132 ==== ==== INTEREST EXPENSE Ballistic-resistant equipment $ 298 $ 284 Protective athletic & sports products -- -- _______ _______ 298 284 Corporate and other (2) 1 45 _______ _______ Consolidated interest expense $ 299 $ 329 ======= ======= INCOME BEFORE INCOME TAXES Ballistic-resistant equipment $10,118 $ 3,452 Protective athletic & sports products 310 196 _______ _______ 10,428 3,648 Corporate and other (2) 176 3,950 _______ _______ Consolidated income before income tax expense $10,604 $ 7,598 ======= ======= 9 DHB INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share data) NOTE 6. SEGMENT INFORMATION - (Continued) For The Three Months Ended March 31, _____________________________ 2004 2003 ________ _______ Income Taxes Ballistic-resistant equipment $ 615 $ 5 Protective athletic & sports products -- -- ________ _______ 615 5 Corporate and other (2) 3,571 2,574 ________ _______ Consolidated income tax expense $ 4,186 $ 2,579 ======== ======= March 31, December 31, 2004 2003 _________ ____________ Identifiable Assets Ballistic-resistant equipment $101,468 $88,503 Protective athletic & sports products 3,372 3,186 ________ _______ 104,840 91,689 Corporate and other (2) 1,955 1,739 ________ _______ Consolidated total assets $106,795 $93,428 ======== ======= (1) Corporate and other expenses includes corporate general and administrative expenses. (2) Corporate and other assets are principally deferred income tax assets and property and equipment. NOTE 7. CONTINGENCIES The Company is currently the subject of an investigation by the SEC, with respect to certain related party transactions between the Company and affiliates of Mr. David H. Brooks (the Company's Chief Executive Officer). The Company and Mr. Brooks are cooperating with the SEC in this investigation and the Audit Committee of the Company's Board of Directors has retained a forensic accounting firm to conduct an independent investigation with respect to these matters. In addition, the Audit Committee expects to periodically monitor the status and performance of these related party transactions to assess the relative benefits to the Company and the related party's compliance with its contractual obligations. The Company is involved in other litigation, none of which individually or in the aggregate is considered by management to be material to the Company's business or would, if adversely determined, have a material adverse effect on the Company's consolidated financial condition or operations. 10 DHB INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share data) NOTE 8. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during each reporting period. Actual results could differ from those estimates. NOTE 9. RECENTLY ISSUED ACCOUNTING STANDARDS In January 2003, the FASB issued Financial Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"), which clarifies the application of Accounting Research Bulletin No. 51, "Consolidated Financial Statements." FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not provide sufficient equity at risk for the entity to support its activities. In December 2003, the FASB revised certain elements of FIN 46. The FASB also modified the effective date of FIN 46. For all entities that were previously considered special purpose entities, FIN 46 should be applied in periods ending after December 15, 2004. Otherwise, FIN 46 is to be applied for registrants who file under Regulation S-X in periods ending after March 15, 2004. The adoption of FIN 46 did not have a material impact on the Company's consolidated financial position or results of operations. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" ("SFAS No. 150"). SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS No. 150 has not had, and is not expected to, have a material impact on the Company's consolidated financial position or results of operations. 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION The Company is a holding company, which currently conducts business through its wholly-owned subsidiaries through two divisions, the DHB Armor Group ("Armor Group") and the DHB Sports Group ("Sports Group"). The Armor Group represented approximately 97%, 96% and 95% of consolidated revenues of the Company during 2003, 2002 and 2001, respectively. The Company's products are sold both nationally and internationally. The Armor Group's sales are derived primarily from law enforcement agencies and military services. Sales to the U.S. military comprise the largest portion of the Armor Group's business, followed by sales to federal, state and local law enforcement agencies, including correctional facilities. Accordingly, any substantial increase or reduction in government spending or change in emphasis in defense and law enforcement programs could have a material effect on the Armor Group's business. The Sports Group manufactures and markets a variety of sports medicine, protective gear, health supports and magnetic therapy products under its own labels, private labels and house brands for major retailers. The Company derives substantially all of its revenues from sales of its products. As indicated in the financial information included in this report and in the Company's Form 10-K/A for the year ended December 31, 2003, the Company has experienced substantial increases in its revenues in the past several years, which have been attributable primarily to product demand from the U.S. military and federal, state and local law enforcement. The Company's ability to maintain these revenue levels will be highly dependent on continued demand for body armor and projectile-resistant clothing; and although the Company does not foresee an immediate material reduction in such demand, there is no assurance that governmental agencies will not refocus their expenditures based on changed circumstances or otherwise. The Company has outgrown its small business status under government procurement regulations. The Company believes it is now recognized by government agencies as having the ability to manage larger contracts. This allows the Company to competitively bid on large procurements and maintain support of small businesses as subcontractors. The Company's market share is highly dependent upon the quality of its products and its ability to deliver its products in a prompt and timely fashion. To meet projected demand, and to maintain its ability to deliver quality products in a timely manner, the Company has recently entered into a long-term lease for a new, expanded production facility in Pompano Beach, Florida. However, there are no assurances that, in the long term, demand for the Company's products will remain at recent levels, or that the Company will be able to diversify into alternative markets or alternative products, or to increase its market share through acquisitions of other businesses. Management's current strategic focus is on quality and delivery, which management believes are the key elements in obtaining additional and repeat orders under the Company's existing procurement contracts with the U.S. military and other governmental agencies. 12 RESULTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 2004, COMPARED TO THE THREE MONTHS ENDED MARCH 31, 2003 Primarily as a result of increased product demand at the Company's Armor Group, the Company attained its highest quarterly consolidated net sales level in its history for the three months ended March 31, 2004. For the three months, consolidated net sales were approximately $74.4 million, an increase of 61% over consolidated net sales of $46.2 million for the three months ended March 31, 2003. The Armor Group's net sales increased nearly 63% from $44.6 million for the three months ended March 31, 2003 to $72.6 million for the three months ended March 31, 2004 due primarily to substantial increased shipments to the United States military and a $6 million dollar increase in international sales. The Sports Group's net sales for the first quarter of 2004 increased 13% to $1.8 million, as compared to $1.6 million for the first quarter of 2003. Contributing to the increase in the Sports Group's net sales was the addition of a high profile West Coast chain of drug stores, Longs Drug Stores, to the Sports Group's customer base. Gross profit for the quarter ended March 31, 2004 was approximately $20.8 million (27.9% of net sales), as compared to approximately $13.0 million (28.1% of net sales) for the quarter ended March 31, 2003. The Company's selling, general and administrative expenses were approximately $9.9 million or 13.3% of net sales for the three months ended March 31, 2004, versus approximately $5.8 million or 12.6% of net sales for the three months ended March 31, 2003. The increase is attributable to increased selling expenses in conjunction with the increased sales volumes. The increase of 13.3% for the quarter ended March 31, 2004 is a significant improvement over the fourth quarter of 2003, in which selling, general and administrative expenses were approximately 20% of net sales and included significant non-direct operating expenses which have not carried forward into 2004. Management believes that selling, general and administrative expenses will be between 13.5% and 14.5% for 2004 as a whole. Driven primarily by the sales increases, operating income increased to approximately $10.9 million for the first three months of 2004 versus approximately $7.2 million for the first three months of 2003. Interest expense for the three months ended March 31, 2004 decreased 9.1% to $299,000 compared to approximately $329,000 for the three months ended March 31, 2003. This decrease was due primarily to the shareholder loan interest expense paid during the quarter ended March 31, 2003, which loan was repaid later in 2003. In March 2003, the Company signed a settlement agreement with its insurance agent, settling the lawsuit with its insurance agent for $1.0 million. The Company received approximately $739,000, which is net of the associated legal fees of $261,000. This $739,000 is included in total other income (expense) during the three months ended March 31, 2003. Income before taxes was approximately $10.6 million for the three months ended March 31, 2004, compared to income before taxes of approximately $7.6 million for the three months ended March 31, 2003. Income taxes for the three months ended 2004 were approximately $4.2 million while income taxes for the three months ended March 31, 2003 were approximately $2.6 million. The effective tax rate for the first quarter of 2004 was 39.5% as compared to 34% during the first quarter of 2003. The effective tax rate in 2003 was lower due to the utilization of certain net operating loss carryovers. 13 On December 19, 2003, DHB's subsidiary Point Blank Body Armor, Inc. ("Point Blank") issued to Hightower Capital Management, LLC ("Hightower") shares of common stock of Point Blank representing approximately .65% of the outstanding capital stock of Point Blank, in exchange for inventory. The minority interest's share of the consolidated subsidiary's income was $59,000 for the three months ended March 31, 2004. The total minority interest included in the balance sheet as of March 31, 2004 was $265,901 as compared to $207,018 as of December 31, 2003. After the preferred stock dividends of approximately $90,000 per quarter, income available to common stockholders was $6.2 million for the three months ended March 31, 2004 or $0.14 per diluted share, as compared with income available to common stockholders of $4.9 million or $0.12 per diluted share for the three months ended March 31, 2003. The weighted average shares outstanding on a diluted basis for the first three months of 2004 were 45,142,033 as compared to 42,785,488 for the first three months of 2003. LIQUIDITY AND CAPITAL RESOURCES The Company expects that its primary capital requirements over the next twelve months will be to assist its subsidiaries in financing their working capital requirements. The Company's operating subsidiaries sell the majority of their products on 30- to 90-day terms. Working capital is needed to finance the receivables, manufacturing process and inventory. Working capital at March 31, 2004 was $75.7 million, an approximate 13% increase over working capital at December 31, 2003 of approximately $66.8 million. This increase in working capital primarily reflects a $4.9 million increase in accounts receivable and an $8.0 million increase in inventory, reduced by a $1.0 million increase in current maturities of long-term debt, a $1.8 million increase in income taxes payable and a $1.6 million increase in accrued expenses. On March 15, 2004, the Company entered into an amendment to its existing $35 million credit agreement, increasing borrowing limits from $35 million to $45 million. Pursuant to the credit agreement, the Company may borrow, on a revolving basis, up to $32.5 million on 85% of eligible accounts receivable, and the Company borrowed a secured term loan of $12.5 million amortizing at the rate of $1 million per quarter commencing July 2004. This amended agreement will expire on October 1, 2007. Borrowings under the credit agreement are secured by substantially all of the Company's assets, and bear interest, at the Company's option, at the bank's prime rate or LIBOR plus 1.75% per annum on the revolving credit facility and at the bank's prime rate or LIBOR plus 2.25% on the term loan. Under the terms of the credit agreement, the Company can only pay dividends on common stock with the written consent of the lender. For 2003, the borrowings under the credit agreement bore interest at the bank's prime rate or LIBOR plus 1.75%. A portion of these funds was used to partially refinance higher interest debt. The remaining funds have been and will be used to meet increased demands for capital generated by the Company's growth. At March 31, 2004, the balance due under the credit facility was approximately $28.1 million. As of March 31, 2004, the Company would have been able to borrow the full $32.5 million under the amended revolving credit facility based upon asset-based availability. As anticipated with the expansion of the Company's facilities during 2004, the Company's capital expenditures in the first quarter of 2004 increased to $778,000 as compared to $371,000 during the first quarter of 2003. The Company anticipates increasing its capital expenditures in 2004 in connection with the expansion into the new 104,000 square foot facility in Pompano Beach, Florida. 14 The Company believes that its existing credit line, together with funds generated from operations, will be adequate to sustain its operations (including projected capital expenditures) through 2004. Historically, the Company has been successful in obtaining increases in its revolving credit facility, as required in order to finance the increased working capital needs brought on by the rapid and substantial expansion of the Company's business. However, there can be no assurance that the Company will be able to obtain further such increases if needed, and the Company may be required to explore other potential sources of financing (including the issuance of equity securities and, subject to the consent of the Company's lender, other debt financing) if the Company continues to experience escalating demand for its products. EFFECT OF INFLATION AND CHANGING PRICES The Company did not experience any measurable increases in raw material prices during the three months ended March 31, 2004. SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS This Quarterly Report contains certain forward-looking statements and information relating to the Company that is based on the beliefs of the Company's management, as well as assumptions made by and information currently available to the Company's management. When used in this document, the words "anticipate," "believe," "estimate," "expect," "going forward," and similar expressions, as they relate to the Company or Company management, are intended to identify forward-looking statements. Such statements reflect the current views of the Company with respect to future events and are subject to certain risks, uncertainties and assumptions, including, but not limited to: general business and economic conditions, the maintenance of the Company's military supply contacts, the level of governmental expenditures on law enforcement equipment, continued supplies of materials from critical vendors, the continued availability of insurance for the Company's products and other risks described in the Company's Annual Report on Form 10-K/A for the year ended December 31, 2003, and other reports and materials filed by the Company with the SEC. Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated or expected. Readers are cautioned not to place undue reliance on these forward-looking statements that speak only as of the date hereof. The Company undertakes no obligation to publish revised forward-looking statements to reflect the occurrence of unanticipated events or circumstances after the date hereof. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company does not issue or invest in financial instruments or their derivatives for trading or speculative purposes. The Company's market risk is limited to fluctuations in interest rates as it pertains to its borrowings under its credit facility. The Company can borrow at either the prime rate of interest or LIBOR plus 1.75% on the revolving credit facility, and the prime rate or LIBOR plus 2.25% on the term loan. Any increase in these reference rates could adversely affect the Company's interest expense. The Company does not have any material sales, purchases, assets or liabilities denominated in currencies other than the U.S. Dollar, and as such, is not subject to foreign currency exchange rate risk. 15 ITEM 4. CONTROLS AND PROCEDURES The Company carried out an evaluation, as required by Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rules 13a-14 and 15d-14 of the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company's periodic SEC filings. During the period covered by this report, the Company has continued to implement certain changes to its internal control over financial reporting as described below, which have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Disclosure controls and procedures are those controls and other procedures that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company's management, including the Company's principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. As disclosed in the Company's Form 8-K filed on August 27, 2003, Grant Thornton LLP, the Company's former independent accountants, informed the Company that they considered there to be certain deficiencies in the Company's internal control procedures that would be deemed to be a material weakness under standards established by the American Institute of Certified Public Accountants. Grant Thornton made this determination in connection with the preparation of the Company's consolidated financial statements as of and for the year ended December 31, 2002 for inclusion in the Company's Form 10-K/A, which was filed on July 24, 2003 to supplement the Company's Form 10-K filed on March 31, 2003. The opinion of Grant Thornton in the Form 10-K/A did not contain an adverse opinion or disclaimer of opinion and was not qualified or modified as to uncertainty, audit scope or accounting principles. The former independent accountants informed the Company and the Audit Committee of these deficiencies in a letter delivered on August 20, 2003. These deficiencies included the failure to disclose certain related party transactions in the Company's Form 10-K for the fiscal year ended December 31, 2002, the Company's reliance on substantial outside assistance from outside professionals in preparing the Company's financial statements, and understaffing in the Company's accounting and finance department. The Form 10-K/A filed by the Company on July 24, 2003 fully disclosed the related party transactions. In accordance with their fiduciary responsibilities, senior management and the Audit Committee directed the Company to dedicate resources and take additional steps to strengthen its control processes and procedures to ensure that these internal control deficiencies do not result in a material 16 misstatement in the Company's consolidated financial statements. Specifically, we have implemented or are preparing to implement the following additional procedures: o The Company briefed the Chairman and Chief Executive Officer on the requirement to disclose related party transactions. o The Company distributed a questionnaire to each of the Company's officers and directors specific to related party transactions; and the Company has pursued and will pursue more rigorous follow-up with its directors and executive officers regarding their responses to annual questionnaires used in preparing the Company's Form 10-K and proxy materials. o The Company developed a financial statement disclosure checklist to be completed by the Chief Financial Officer each time the Company prepares financial statements. o The Company has begun the preparation of its quarterly and annual financial statements sooner after the end of each fiscal quarter and fiscal year. The Company has undertaken an additional layer of internal review prior to delivering drafts to its outside professionals. o The Company continues to reinforce with its new auditors their ability to communicate with and obtain information from lower level personnel in the Company's accounting and finance department. o The Company will evaluate further delegation and allocation of responsibilities within its accounting and finance department to facilitate prompt availability of financial information. o Since the beginning of 2003, the Company hired new financial reporting personnel, including a Vice President of Finance for the Point Blank subsidiary and a staff accountant/assistant controller. The Company also hired a Controller in late 2002 for its PACA facility. o The Company continues to review, confirm and clarify with its personnel their specific functions and responsibilities to promote the orderly flow and availability of financial data and information. o During the second quarter of 2003, the Company hired an internal control specialist to review and revamp the Company's internal control policies and procedures. The Company engaged the firm Eisner LLP to assist management in complying with the internal control requirements under Section 404 of the Sarbanes-Oxley Act of 2002 to gain greater efficiency and effectiveness. The Company provided Eisner LLP with copies of the updated policies and procedures and flowcharts of the accounting and IT departments. The Company will continue to: (a) evaluate the effectiveness of its internal controls and procedures on an ongoing basis, (b) implement actions to enhance its resources and training in the area of financial reporting and disclosure responsibilities, and (c) review such actions with the Audit Committee and the Company's new independent accountants, Weiser LLP. The Company has discussed its corrective actions and plans with the Audit Committee and Weiser LLP. 17 The Company's management, including the Chief Executive Officer and Chief Financial Officer, does not expect that the Company's disclosure controls or its internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. The Company monitors its disclosure controls and internal controls and makes modifications as necessary; the Company's intent in this regard is that the disclosure controls and the internal controls will be maintained as dynamic systems that change (including with improvements and corrections) as conditions warrant. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On October 1, 2002, a shareholders' derivative action was commenced in the Supreme Court of the State of New York, County of Nassau, against the directors and officers of the Company and the Company as a nominal defendant, by Plumbers & Pipefitters Local 112 Pension Fund, derivatively on behalf of itself and all others similarly situated. This case was dismissed with prejudice on March 13, 2003, without liability to the Company or its officers or directors. Another suit brought on behalf of a second shareholder on similar grounds for breach of fiduciary duty, abuse of control, and constructive fraud was discontinued on April 20, 2004 with prejudice and without any liability to the Company. On or about October 30, 2002, the Company filed a lawsuit in the United States District Court for the Southern District of Florida against certain union leaders, claiming defamation, conspiracy to defame and tortuous interference with contractual and ongoing business relationships. The case was discontinued in April 2004 pursuant to the settlement agreement described below. In April 2004, the Company's Point Blank Body Armor, Inc. subsidiary reached a settlement with UNITE Union which ended the lengthy dispute between those parties regarding the employees working at Point Blank's Oakland Park production facility. This settlement resolved all disputes pending between UNITE and Point Blank. As part of the settlement, all proceedings, including unfair labor practice charges, complaints and representation petitions, pending before the National Labor Relations Board were withdrawn or dismissed. Further, Point 18 Blank recognized UNITE as the bargaining representative of those employees at its Oakland Park production facility. On April 19, 2004, the employees at the Oakland Park production facility ratified a three year collective bargaining agreement between UNITE and Point Blank. The Company is currently the subject of an investigation by the SEC with respect to certain related party transactions between the Company and affiliates of Mr. David H. Brooks (the Company's Chief Executive Officer). The Company and Mr. Brooks are cooperating with the SEC in this investigation and the Audit Committee of the Company's Board of Directors has retained a forensic accounting firm to conduct an independent investigation with respect to these matters. In addition, the Audit Committee expects to periodically monitor the status and performance of these related party transactions, to assess the relative benefits to the Company and the related party's compliance with its contractual obligations. The Company is involved in other litigation, none of which individually or in the aggregate is considered by management to be material to the Company's business or would, if adversely determined, have a material adverse effect on the Company's consolidated financial condition or operations. ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER REPURCHASES OF EQUITY SECURITIES Not Applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not Applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS 31.1 Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of the Chief Executive Officer Pursuant to 18 U.S.C. ss.1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of the Chief Financial Officer Pursuant to 18 U.S.C. ss.1350, as adopted pursuant to Section906 of the Sarbanes-Oxley Act of 2002. (b) REPORTS ON FORM 8-K 19 The Company filed the following Report on Form 8-K during the quarter ended March 31, 2004: Form 8-K filed March 15, 2004 to report the financial results for the year ended December 31, 2003. The Form 8-K included financial statements. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed by the undersigned, thereunto duly authorized. Dated May 10, 2004 DHB INDUSTRIES, INC. (Registrant) Signature Capacity Date _________ ________ ____ /s/ DAVID H. BROOKS Chief Executive Officer May 10, 2004 ______________________ and Chairman of the Board /s/ DAWN M. SCHLEGEL Chief Financial Officer, Director and May 10, 2004 ______________________ Principal Accounting Officer /s/ JEROME KRANTZ Director May 10, 2004 ______________________ /s/ GARY NADELMAN Director May 10, 2004 ______________________ 20