================================================================================ 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. ================================================================================ 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 ======== ======== <FN> (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. </FN> 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. 15 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. 16 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. 18 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. 19 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 20