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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________________
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED
September 30, 2005 Commission File No. 001-13112
DHB INDUSTRIES, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 11-3129361
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
400 POST AVENUE, SUITE 303, WESTBURY, NY 11590
(Address of principal executive offices)
Registrant's telephone number: (516) 997-1155
Former name, former address and former fiscal year,
if changed since last report:
Not applicable
Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes [ X ] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act.)
Yes [ X ] No [ ]
As of November 7, 2005, there were 45,337,575 shares of Common Stock, $.001 par
value, outstanding.
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INDEX
PART I. FINANCIAL INFORMATION Page
----
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 2005
(Unaudited) and December 31, 2004 3
Unaudited Condensed Consolidated Statements of Operations for
the Three Months and Nine Months Ended September 30, 2005
and 2004 4
Unaudited Condensed Consolidated Statements of Cash Flows For
the Nine Months Ended September 30, 2005 and 2004 5
Notes to Unaudited Condensed Consolidated Financial Statements 6-16
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 16-22
Item 3. Quantitative and Qualitative Disclosures about Market Risk 23
Item 4. Controls and Procedures 24-25
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 25-27
Item 2. Changes in Securities and Use of Proceeds 27
Item 3. Defaults Upon Senior Securities 27
Item 4. Submission of Matters to a Vote of Security Holders 27
Item 5. Other Information 27
Item 6. Exhibits 27
Signatures 28
2
ITEM 1. FINANCIAL STATEMENTS
DHB INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
September 30, December 31,
2005 2004
------------- ------------
(Unaudited)
ASSETS
Current assets
Cash and cash equivalents $ 5,488 $ 447
Accounts receivable, less allowance for doubtful accounts of
$4,695 and $702, respectively 30,953 47,560
Accounts receivable - related party -- 6,583
Inventories 75,944 85,973
Deferred income tax assets 23,231 483
Prepaid expenses and other current assets 2,452 1,220
-------- --------
Total current assets 138,068 142,266
-------- --------
Property and equipment, net 2,370 2,632
-------- --------
Other assets
Deferred income tax assets 1,092 593
Deposits and other assets 638 366
-------- --------
Total other assets 1,730 959
-------- --------
Total assets $142,168 $145,857
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current maturities of term loan payable $ 8,000 $ 4,000
Obligation to repurchase convertible preferred stock 3,000 --
Warranty payable 36,730 --
Accounts payable 7,462 8,014
Accrued expenses and other current liabilities 10,395 8,350
Income taxes payable 8,783 14,816
-------- --------
Total current liabilities 74,370 35,180
-------- --------
Long-term liabilities
Notes payable-bank -- 25,634
Term loan payable 7,000 6,500
Other liabilities 1,149 1,086
-------- --------
Total liabilities 82,519 68,400
-------- --------
Commitments and contingencies
Minority interest in consolidated subsidiary 297 431
Stockholders' equity
Convertible preferred stock, $0.001 par value, 5,000,000 shares
authorized, 500,000 shares of Series A, 12% convertible preferred
stock issued and outstanding; liquidation preference $3,000 -- 1
Common stock, $0.001 par value, 100,000,000 shares
authorized, 45,337,575 and 45,282,536 issued and outstanding 45 45
Additional paid in capital 72,628 35,540
Deferred compensation (28,237) --
Retained earnings 14,916 41,440
-------- --------
Total stockholders' equity 59,352 77,026
-------- --------
Total liabilities and stockholders' equity $142,168 $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 For the Nine Months Ended
September 30, September 30,
2005 2004 2005 2004
---------- ---------- ---------- ----------
Net sales $ 90,263 $ 89,410 $ 263,924 $ 249,879
Cost of goods sold (includes related party
purchases of $1,999, $6,290, $13,873, and
$20,799, respectively) 65,615 64,537 191,859 180,361
---------- ---------- ---------- ----------
Gross profit 24,648 24,873 72,065 69,518
Selling, general and administrative expenses 25,445 11,591 47,649 32,353
Cost of vest replacement program 60,000 -- 60,000 --
---------- ---------- ---------- ----------
Income (loss) before other income (expense) (60,797) 13,282 (35,584) 37,165
---------- ---------- ---------- ----------
Other income (expense)
Interest expense (525) (389) (1,714) (1,047)
Other income (loss) 6 41 33 55
---------- ---------- ---------- ----------
Total other income (expense) (519) (348) (1,681) (992)
---------- ---------- ---------- ----------
Income(loss) before income taxes and minority interest (61,316) 12,934 (37,265) 36,173
Income taxes (benefit) expense (19,407) 4,728 (10,877) 13,850
---------- ---------- ---------- ----------
Income (loss) before minority interest of subsidiary (41,909) 8,206 (26,388) 22,323
Minority interest of subsidiary 258 (58) 134 (156)
---------- ---------- ---------- ----------
Net (loss) income (41,651) 8,148 (26,254) 22,167
Dividend - convertible preferred stock (90) (90) (270) (270)
---------- ---------- ---------- ----------
Income (loss) available to common stockholders $ (41,741) $ 8,058 $ (26,524) $ 21,897
========== ========== ========== ==========
Earnings (loss) per common share:
Basic $ (0.92) $ 0.20 $ (0.59) $ 0.54
========== ========== ========== ==========
Diluted $ (0.92) $ 0.18 $ (0.59) $ 0.49
========== ========== ========== ==========
Weighted average shares outstanding:
Basic shares 45,312,536 40,891,896 45,302,437 40,814,675
Effect of convertible preferred stock -- 500,000 -- 500,000
Warrants -- 4,570,213 -- 4,299,798
---------- ---------- ---------- ----------
Diluted shares 45,312,536 45,962,109 45,302,437 45,614,473
========== ========== ========== ==========
(See Notes to Condensed Consolidated Financial Statements)
4
DHB INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands, except share and per share data)
For the Nine Months Ended
September 30,
2005 2004
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (26,254) $ 22,167
Adjustments to reconcile net income to net cash and cash
equivalents provided by (used in) operating activities:
Depreciation and amortization 620 708
Amortization of deferred financing costs 18 113
Provision for doubtful accounts (5,397) 49
Minority interest of subsidiary (134) --
Stock issued for services 369 156
Stock compensation expense 11,295 --
Deferred income tax (benefit) expense (23,248) (125)
Changes in operating assets and liabilities
Accounts receivable 28,587 (19,964)
Inventories 10,029 (27,217)
Prepaid expenses and other current assets (1,232) 20
Deposits and other assets (290) (31)
Warranty payable 36,730 --
Accounts payable (552) 5,135
Income taxes payable (6,033) 5,407
Accrued expenses and other current liabilities 2,045 2,347
Other liabilities 63 431
---------- ----------
Net cash provided by (used in) operating activities 26,616 (10,804)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (358) (1,735)
---------- ----------
Net cash used in investing activities (358) (1,735)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid on preferred stock (270) (270)
Payments on notes payable - bank (256,378) (183,862)
Proceeds of notes payable - bank 229,744 184,740
Proceeds of term loan 8,500 12,500
Issuance costs of long-term debt -- (83)
Payments on long-term debt (3,000) (1,000)
Proceeds upon the exercise of warrants 187 160
---------- ----------
Net cash provided (used) by financing activities (21,217) 12,185
---------- ----------
Net increase (decrease) in cash and cash equivalents 5,041 (354)
Cash and cash equivalents at beginning of the period 447 441
---------- ----------
Cash and cash equivalents at end of the period $ 5,488 $ 87
========== ==========
(See Notes to Condensed Consolidated Financial Statements)
5
DHB INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of DHB
Industries, Inc. and subsidiaries (collectively "DHB" or the "Company") as of
September 30, 2005 and for the three months and nine months ended September 30,
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 and amendments thereto for the year ended
December 31, 2004 filed with the SEC on March 17, 2005.
The Company received a comment letter from the Securities and Exchange
Commission dated August 18, 2005. The Company is in the process of researching
the issues raised and drafting an appropriate response. The condensed
consolidated financial statements and accompanying footnotes contained in this
Form 10-Q do not contain any adjustment, if any, that may result from the
resolution of the issues and questions contained in that comment letter.
NOTE 2. 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.
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:
DHB INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
NOTE 2. STOCK BASED COMPENSATION - (Continued)
Warrants Issued During
2005 2004
---- ----
Risk-free interest rate 3.70% 3.12%
Expected volatility of common stock 80.14% 93.96%
Dividend yield 0.00% 0.00%
Expected option term 4.96 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 For the Nine Months
Ended September 30, Ended September 30,
2005 2004 2005 2004
-------- ------ -------- -------
Net income (loss) $(41,651) $ 8,148 $(26,524) $22,167
Add: compensation expense included in net income
(loss) as reported
11,295 -- 11,295 --
Deduct: compensation determined under fair value
based method for all awards, net of related tax effect 12,196 22 12,658 1,630
-------- ------ -------- -------
Net income (loss) pro forma (42,552) 8,126 (27,887) 20,537
Less dividend - preferred stock 90 90 270 270
-------- ------ -------- -------
Income (loss) available to common stockholders,
pro forma $(42,642) $ 8,036 $(28,157) $20,267
-------- ------ -------- -------
Basic earnings per common share
As reported $ (0.92) $ 0.20 $ (0.59) $ 0.54
Pro forma $ (0.94) $ 0.20 $ (0.62) $ 0.50
Diluted earnings per common share
As reported $ (0.92) $ 0.18 $ (0.59) $ 0.49
Pro forma $ (0.94) $ 0.18 $ (0.62) $ 0.45
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.
7
DHB INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
NOTE 3. STOCK AND STOCK WARRANTS
Warrants
As previously disclosed, the CEO and Chairman this year exercised the
contractual right under his 2000 employment agreement to extend the agreement
for an additional 5-year term, expiring on July 1, 2010. As a result, pursuant
to the terms of the 2000 employment agreement, the CEO and Chairman was issued
on July 1, 2005 options to purchase 5,250,000 common shares with an exercise
price of $1.00 per share vesting 1,500,000 immediately and 750,000 on each
anniversary, thereafter. The intrinsic value of the warrants that vested
immediately was approximately $11,295 which was included as a non-cash
compensation expense during the third quarter ended September 30, 2005. The
intrinsic value of the remaining 3,750,000 shares is $28,237 and is recorded as
Additional paid in capital and deferred compensation in the equity section of
the balance sheet at September 30, 2005.
In addition, on July 29, 2005, the shareholders of the Company approved its 2005
Omnibus Stock Option Plan ("the 2005 Plan"). Pursuant to the 2005 Plan, our
officers, directors, employees and/or consultants and/or those of our
subsidiaries would be able to receive incentive stock options, non-qualified
stock options, restricted stock awards, deferred stock awards, bonus stock,
stock appreciation rights (SARs), dividend equivalents, and/or other stock-based
awards with respect to up to an aggregate of 2,500,000 shares of the Common
Stock. In each fiscal year during any part of which the 2005 Plan is in effect,
no participant may be granted: (i) options or stock appreciation rights with
respect to more than 1,000,000 shares or (ii) restricted stock performance
awards and/or other stock-based awards with respect to more than 1,000,000
shares. In addition, the maximum dollar value payable to any one participant
with respect to any performance period with respect to any performance awards is
$1,000,000 multiplied by the number of full years in the performance period.
Pursuant to this plan, the President of DHB was issued 300,000 warrants
exercisable at $7.66 per share, vesting 100,000 warrants per annum commencing
May 24, 2008, which expire May 24, 2010. Also issued to two key employees in
August 2005, were warrants to purchase 30,000 shares each exercisable at $7.11
per share vesting 10,000 warrants per annum, per person August 5, 2006, which
expire August 5, 2010.
During the quarter ended September 30, 2005, 550,000 of the warrants issued on
May 24, 2005 were cancelled. Still outstanding are 200,000 warrants exercisable
at $7.66 per share, vesting 100,000 warrants per annum commencing May 24, 2006,
which expire May 24, 2009. In addition the warrants issued on June 2, 2005 were
cancelled, (600,000 warrants with an exercise price of $7.69 expiring June 2,
2010, and vesting 100,000 warrants on September 2, 2005 and 100,000 warrants on
every anniversary date commencing June 2, 2006).
During the nine months ended September 30, 2004, the six members of the
Company's Board of Directors were issued 50,000 warrants each, exercisable at
$5.88 per share for five years. During the nine month periods ended September
30, 2005 and 2004, employees exercised warrants to purchase 30,000 and 80,000
shares, respectively of the Company's unregistered common stock at an average
price of $6.26 and $2.00 per share, respectively.
8
DHB INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
NOTE 3. STOCK WARRANTS - continued
During the three and nine months ended September 30, 2005, 525,000 warrants
outstanding 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. During the three and
nine months ended September 30, 2004 all outstanding warrants were included in
the computation of diluted earnings per share.
During the nine months ended September 30, 2005, the Company issued 25,040
unregistered shares of its common stock in a non-cash settlement of a lawsuit
with a former consultant. The value of this settlement was approximately $369
and is included in selling, general and administrative expenses during the
quarter ended March 31, 2005. No unregistered shares were issued during the nine
months ended September 30, 2004 other than the stock warrant issuances described
above.
The following table summarizes information regarding stock warrants outstanding
at September 30, 2005.
Weighted
Average Weighted
Number of Remaining Average Number of Weighted
Exercise Price Warrants Contractual Exercise Shares Average
Range Outstanding Life Price Exercisable Exercise Price
0 to $1.00 5,250,000 5.00 $1.00 1,500,000 $1.00
$1.01 to $1.50 -- -- $1.41 -- $1.41
$1.51 to $2.00 100,000 1.75 $2.00 100,000 $2.00
$2.01 to $2.50 5,000 3.10 $2.01 -- $2.01
$2.51 to $3.00 -- -- $3.00 -- $3.00
$3.01 and above 932,000 1.73 $6.86 350,000 $5.97
--------- ---- ----- --------- -----
Totals 6,287,000 5.00 $1.83 1,950,000 $1.89
========= ==== ===== ========= =====
NOTE 4. SUPPLEMENTAL CASH FLOW INFORMATION
For the Nine Months Ended
September 30,
2005 2004
------- ------
Cash paid for:
Interest $ 1,706 $ 1,069
Taxes 14,307 9,866
Non-cash financing and investing activities:
Revolving credit loan refinanced to long-term debt $ 8,500 $12,500
Obligation to repurchase convertible preferred stock 3,000 --
9
DHB INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
NOTE 5. INVENTORIES
Inventories are stated at the lower of cost or market using the first-in,
first-out (FIFO) method and are summarized as follows:
September 30 December 31,
2005 2004
------------ ------------
Raw materials and supplies $24,741 $31,695
Work in process 15,685 18,815
Finished goods 35,518 35,463
------- -------
$75,944 $85,973
======= =======
At September 30, 2005 the Company wrote off approximately $19,200,000 in
Zylon(R) inventory, as a result of the Company's voluntary Zylon(R) vest
replacement program announced in August 2005.
NOTE 6. OBLIGATION TO REPURCHASE CONVERTIBLE PREFERRED STOCK.
On January 14, 2002, the principal stockholder of the Company exchanged $3,000
of the indebtedness due him for 500,000 shares of Series A, 12% Convertible
Preferred Stock. The Series A, 12% Convertible Preferred Stock has a dividend
rate of $0.72 per share per annum, an amount equal to the interest that would
have been payable on the exchanged indebtedness. The shares of Series A, 12%
Convertible Preferred Stock are redeemable at the option of the Company on
December 15 of each year. At September 30, 2005, the Board of Directors has
approved the redemption of the Convertible Preferred Stock on December 15, 2005.
Therefore the convertible Preferred Stock is listed as an obligation under
current liabilities at the redemption amount equal to $6 per share, or $3,000.
NOTE 7. LONG-TERM DEBT
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.
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.
Borrowings under the Credit Agreement bear interest, at the Company's option, at
the bank's prime rate (6.75% at September 30, 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 September 30, 2005, the Company had a LIBOR loan
outstanding on the credit facility at a rate of 6.124%. The borrowings under the
Credit Agreement are collateralized by a first security interest in
substantially all of the assets of the Company.
10
DHB INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
NOTE 7. LONG-TERM DEBT - (continued)
On November 3, 2005, the Company amended its Credit Agreement, to exclude the
non-cash compensation charge and the Zylon(R) replacement charge from the
financial covenants calculations and issuing a waiver as of September 30, 2005
for failure to comply with such covenants as a result of the aforementioned
charges. The interest rate on the term loan was reduced from LIBOR plus 2.25%,
to LIBOR plus 1.75%. The amendment also allows the Company to purchase in the
open market in accordance with applicable law up to three million shares of the
Company's common stock provided there are no events of default and the share
purchase program shall not exceed $9 million to the extent the purchase price is
funded through the credit facility.
NOTE 8. SEGMENT INFORMATION
The Company operates in two principal segments: ballistic-resistant equipment,
and protective athletic and sports products. Net sales, income before other
income (expense), depreciation and amortization expense, interest expense,
income taxes, and identifiable assets for each of the Company's segments are as
follows:
For The Three Months For The Nine Months
Ended September 30, Ended September 30,
------------------------ -------------------
2005 2004 2005 2004
-------- -------- -------- --------
NET SALES
Ballistic-resistant equipment $ 87,420 $ 87,585 $256,467 $244,528
Protective athletic & sports products 2,843 1,825 7,457 5,351
-------- -------- -------- --------
Consolidated net sales $ 90,263 $ 89,410 $263,924 $249,879
======== ======== ======== ========
INCOME (LOSS) BEFORE OTHER INCOME (EXPENSE)
Ballistic-resistant equipment $(45,494) $ 15,773 $(15,052) $ 45,013
Protective athletic & sports products 176 260 712 879
Corporate and other (1) (15,479) (2,751) (21,244) (8,727)
-------- -------- -------- -------
Consolidated income before other income (expense) $(60,797) $ 13,282 $(35,584) $ 37,165
======== ======== ======== ========
DEPRECIATION AND AMORTIZATION EXPENSE
Ballistic-resistant equipment $143 $193 $ 424 $ 474
Protective athletic & sports products 6 33 20 94
Corporate and other 60 55 176 140
-------- -------- -------- --------
Consolidated depreciation and amortization expense $ 209 $ 281 $ 620 $ 708
======== ======== ======== ========
INTEREST EXPENSE
Ballistic-resistant equipment $ 406 $ 386 $ 1,593 $ 1,042
Protective athletic & sports products -- -- -- --
Corporate and other (1) 119 3 121 5
-------- -------- -------- --------
Consolidated interest expense $ 525 $ 389 $ 1,714 $ 1,047
======== ======== ======== ========
11
DHB INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
NOTE 8. SEGMENT INFORMATION - Continued
INCOME (LOSS) BEFORE INCOME TAXES AND MINORITY INTEREST
Ballistic-resistant equipment $(49,676) $ 10,590 $(28,586) $ 28,479
Protective athletic & sports products 176 260 713 873
Corporate and other (1) (11,816) 2,084 (9,392) 6,821
-------- -------- -------- --------
Consolidated income before income tax
(benefit) expense $(61,316) $ 12,934 $(37,265) $ 36,173
======== ======== ======== ========
INCOME TAX (BENEFIT) EXPENSE
Ballistic-resistant equipment $ 497 $ 935 $ 1,792 $ 2,143
Protective athletic & sports products 75 -- 76 --
Corporate and other (1) (19,979) 3,793 (12,745) 11,707
-------- -------- -------- --------
Consolidated income tax (benefit) expense $(19,407) $ 4,728 $(10,877) $ 13,850
======== ======== ======== ========
September 30, 2005 December 31, 2004
------------------ -----------------
IDENTIFIABLE ASSETS
Ballistic-resistant equipment $113,153 $138,370
Protective athletic & sports products 6,413 5,018
-------- --------
119,566 143,388
Corporate and other (2) 22,602 2,469
-------- --------
Consolidated total assets $142,168 $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 9. CONTINGENCIES
Since September 9, 2005, a number of purported class action lawsuits were filed
in the United States District Court for the Eastern District of New York against
the Company and certain of the Company's officers and directors. The actions
purport to be filed on behalf of purchasers of the Company's publicly traded
securities during the period from April 21, 2004 through August 29, 2005. The
complaints, which are substantially similar to one another, allege, among other
things, that the Company's public disclosures were false or misleading because
they did not disclose certain information. The lawsuits allege that DHB's body
armor products were defective and failed to meet the standards of its customers,
and that these alleged facts should have been publicly disclosed. The Company
has been served with a number of these complaints. No class has been certified
in the actions. The lawsuits seek compensatory damages plus interest and
attorneys' fees.
The Company believes that the lawsuits are baseless and intends to vigorously
defend against them. Because of their similarity, the Company believes that most
or all of the lawsuits will be consolidated into a single action and that the
Company will not be required to defend against all of the lawsuits individually.
The Company cannot predict the outcome of the lawsuits or whether the Company's
financial condition or results of operations may be materially affected as a
result of the lawsuits.
12
DHB INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
NOTE 9. CONTINGENCIES - continued
Since September 14, 2005, a number of derivative complaints were filed in the
United States District for the Eastern District of New York against certain
officers and directors of the Company and, in certain cases, Weiser LLP. The
allegations in the complaints are substantially similar and include the Company
as a nominal defendant. The complaints allege, among other things, that
defendants breached their fiduciary duties and engaged in fraud,
misrepresentation, insider trading, misappropriation of corporate information,
waste of corporate assets, abuse of control, and unjust enrichment, asserting
claims substantially similar to those asserted in the actions described above
under "Securities Litigation." The complaints seek monetary damages and various
forms of equitable and/or injunctive relief, restitution to the Company and
disgorgement of profits earned by defendants, and fees and costs.
The Company believes that the lawsuits are baseless and intends to vigorously
defend against them. Because of their similarity, the Company believes that most
or all of the lawsuits will be coordinated and/or consolidated into a single
action. The Company cannot predict the outcome of the lawsuits or whether the
Company's financial condition or results of operations may be materially
affected as a result of the lawsuits.
On or about August 29, 2005, Southern States Police Benevolent Association,
Inc., et al. ("Southern States") filed a Class Action Complaint against
Protective Apparel Corporation of America, Inc. and Point Blank Body Armor, Inc.
("Defendants"), alleging that the National Institute of Justice ("NIJ")
decertified all bullet resistant vests containing Zylon. Southern States further
alleged that the test results released by the NIJ demonstrated that all of
Defendants' Zylon-containing vests fail to comply with their certifications and
warranties. Southern States brought causes of action for breach of warranty on
label in vest, breach of warranty in warranty statement, breach of implied
warranty of merchantability, breach of implied warranty of fitness for a
particular purpose, and for injunctive relief.
On or about October 19, 2005, Defendants filed an answer and affirmative
defenses denying that Defendants are in breach of any warranty and denying that
injunctive relief is proper. On October 20, 2005, the Court entered a Consent
Order Certifying Class Action. The certified classes include all law enforcement
personnel and organizations, and other individuals, who purchased new ballistic
resistant soft body armor containing Zylon from the Defendants, except for
federal agencies and any persons who have been physically injured as a result of
defects in their vests. The parties are engaged in settlement negotiations. The
Company has recorded a $36.7 million reserve for this settlement during the
quarter ended September 30, 2005, which is part of the $60 million cost of the
vest replacement program.
13
DHB INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
NOTE 9. CONTINGENCIES - continued
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, alleging concerns regarding the
effectiveness and durability of body armor with high concentrations of Zylon in
the Company's bullet-resistant soft body armor (vests). Point Blank Body Armor
settled a class action lawsuit involving a total of less than 2,000 vests
containing a high concentration of Zylon. Pursuant to the settlement, class
members have been exchanging the vests for a choice of four other vests made by
the company. Class members have also been receiving two extra carriers, as well
as a 10 percent discount certificate. The final date for class members to submit
a claim form was August 21, 2005. This settlement did not have a material
adverse effect on its financial position.
The Company is 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, the Company's Chief Executive Officer and Chairman. The Company and
Mr. Brooks are cooperating with the Securities and Exchange Commission in this
investigation. In addition, the Audit Committee periodically monitors the
status, terms 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 10. COST OF VEST REPLACEMENT PROGRAM
The cost of the vest replacement program is a separate line item under selling,
general and administrative expenses, for a total pre-tax charge of $60,000,000,
or ($0.76) per diluted share after tax charge, as a result of the Company's
voluntary Zylon(R) vest replacement program announced in August 2005. The
composition of this charge is as follows: a $36,700,000 reserve for vests
containing Zylon(R), the write-off of approximately $19,200,000 in Zylon(R)
inventory, and a $4,100,000 increase in the accounts receivable allowance.
NOTE 11. 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.
14
DHB INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
NOTE 12. 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.
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 compensation be measured according to the
grant-date 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"), and it is currently evaluating the
impact this statement will have on its consolidated financial statements, the
impact to the financial statements could be material in light of the recent
wards of stock warrants and options to employees and the applicable vesting
schedules. (See Note 2)
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.
15
DHB INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
NOTE 12. RECENTLY ISSUED ACCOUNTING STANDARDS - (Continued)
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.
In May 2005, the FASB issued SFAS No. 154, "ACCOUNTING FOR CHANGES AND ERROR
CORRECTIONS, A REPLACEMENT OF APB OPINION NO. 20 AND FASB STATEMENT NO. 3" SFAS
154 applies to all voluntary changes in accounting principle and requires
retrospective application to prior periods' financial statements of changes in
accounting principle. This statement also requires that a change in
depreciation, amortization, or depletion method for long-lived, nonfinancial
assets be accounted for as a change in accounting estimate effected by a change
in accounting principle. SFAS 154 carries forward without change the guidance
contained in Opinion No. 20 for reporting the correction of an error in
previously issued financial statements and a change in accounting estimate. This
statement is effective for accounting changes and corrections of errors made in
fiscal years beginning after December 15, 2005. The Company does not expect the
adoption of this standard to have a material impact on its financial condition,
results of operations, or liquidity.
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. Our products
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.
16
We are a holding company and we conduct our business through
subsidiaries in 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 is attributable to the Sports Group. The Sports Group
represented approximately 3% and 2% of our consolidated revenues during the nine
months ended September 30, 2005 and 2004, respectively. 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 would 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.
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.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2005, COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 2004
For the three months ended September 30, 2005, consolidated net sales were
approximately $90.3 million, an increase of 1.0% over consolidated net sales of
approximately $89.4 million for the three months ended September 30, 2004. Gross
profit for the quarter ended September 30, 2005 remained nearly constant at
approximately $24.7 million (27.3% of net sales), as compared to approximately
$24.9 million (27.8% of net sales) for the quarter ended September 30, 2004.
17
The Company's selling, general and administrative expenses increased
significantly to $25.5 million or 28.2% of net sales, during the three months
ended September 30, 2005, versus approximately $11.6 million, or 13.0% of net
sales for the three months ended September 30, 2004. Selling, general and
administrative increased primarily as a result of $11.3 million non-cash
compensation expense associated with the warrants issue to the CEO/Chairman on
July 1, 2005 pursuant to an extension of his existing employment agreement. Also
increasing selling general and administrative expenses during the third quarter
of 2005 was a $587,000 increase in commissions as a result of the product mix,
increased licenses and fees of approximately $250,000 as a result of increased
General Service Administration sales, $547,000 of increased research and
development costs, as a result of the opening of our new state of the art
ballistic facility in Pompano Beach, and approximately a $800,000 increase in
professional and consulting fees as a result of the Zylon(R) replacement program
and related legal fees. The cost of the vest replacement program is a separate
line item under selling, general and administrative expenses, for a total
pre-tax charge of $60,000,000, or ($0.76) per diluted share after tax charge, as
a result of the Company's voluntary Zylon(R) vest replacement program announced
in August 2005. The composition of this charge is as follows: a $36,700,000
reserve for vests containing Zylon(R), the write-off of approximately
$19,200,000 in Zylon(R) inventory, and a $4,100,000 increase in the accounts
receivable allowance.
Driven primarily by the increase in selling, general and administrative expenses
and the cost of the vest replacement program, operating income decreased to a
loss of approximately $60.8 million (67% of net sales) for the third quarter of
2005 versus income of approximately $13.3 million (14.9% of net sales) for the
third quarter of 2004.
Interest expense for the three months ended September 30, 2005 increased 35% to
approximately $525,000, compared to approximately $389,000 for the three months
ended September 30, 2004. This increase is primarily the result of a $119,000
payment for interest for a line of credit to have funds available for a possible
acquisition during the third quarter.
Income (loss) before income taxes and minority interest of subsidiary was a loss
of approximately $61.3 million for the three months ended September 30, 2005,
compared to income before income taxes and minority interest of approximately
$12.9 million for the three months ended September 30, 2004. Income benefit for
the third quarter of 2005 was approximately $19.4 million while income tax
expense for the third quarter of 2004 was approximately $4.7 million. The
effective tax rate for the third quarter of 2005 was (31.7%) as compared to
36.6% during the third quarter of 2004.
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 (loss) was approximately
$(258,000) and $58,000 for the three months ended September 30, 2005 and 2004,
respectively.
18
After the preferred stock dividends of approximately $90,000 per quarter, the
loss available to common stockholders was approximately $41.7 million, or
$(0.92) per diluted share for the three months ended September 30, 2005 compared
to income available to common stockholders of approximately $8.1 million or
$0.18 per diluted share for the three months ended September 30, 2004. The
weighted average shares outstanding on a diluted basis for the three months
ended September 30, 2005 were 45,312,536, as compared to 45,962,109 for the
three months ended September 30, 2004.
NINE MONTHS ENDED SEPTEMBER 30, 2005, COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 2004
For the nine months ended September 30, 2005, consolidated net sales were
approximately $263.9 million, an increase of 5.6% over consolidated net sales of
approximately $249.9 million for the nine months ended September 30, 2004. The
Armor Group's net sales increased nearly 4.9% from $244.5 million for the nine
months ended September 30, 2004 to approximately $256.5 million for the nine
months ended September 30, 2005, due primarily to increased shipments to the
U.S. Military. The Sports Group's net sales for the nine months ended September
30, 2005 increased 39.4% to approximately $7.5 million, as compared to
approximately $5.4 million for the nine months ended September 30, 2004. The
primary reason for this increase was a new subcontracting contract for the
Sports Group to produce elbow pads for another company. Consolidated gross
profit percentage declined slightly to 27.3% for 2005 as compared to
approximately 27.8% for 2004.
The Company's selling, general and administrative expenses increased
significantly to $47.6 million or 18.1% of net sales, during the nine months
ended September 30, 2005, versus approximately $32.4 million, or 13.0% of net
sales for the nine months ended September 30, 2004. Selling, general and
administrative increased primarily as a result of $11.3 million non-cash
compensation expense associated with the warrants issue to the CEO/Chairman on
July 1, 2005 pursuant to an extension of his existing employment agreement. Also
increasing selling, general and administrative expenses was a $4 million
increase in research and development costs in the nine months ended September
30, 2005. The cost of the vest replacement program is a separate line item under
selling, general and administrative expenses, for a total pre-tax charge of
$60,000,000, or ($0.76) per diluted share after tax charge, as a result of the
Company's voluntary Zylon(R) vest replacement program announced in August 2005.
Driven primarily by the increase in selling, general and administrative expenses
and the cost of the vest replacement program, income (loss) before other income
(expense) decreased to a loss of approximately $37.3 million (14.1% of net
sales) for the nine months ended September 30, 2005 versus income of
approximately $36.2 million (14.5% of net sales) for the nine months ended
September 30, 2004.
Interest expense for the nine months ended September 30, 2005 increased 63.7% to
approximately $1.7 million, compared to approximately $1.0 million for the nine
months ended September 30, 2004. This increase was primarily the result of
increased borrowings under the Company's credit facility and a $119,000 payment
for interest for a line of credit to have funds available for a possible
acquisition during the third quarter.
19
Income (loss) before income taxes and minority interest was a loss of
approximately $37.3 million for the nine months ended September 30, 2005,
compared to income before taxes and minority interest of approximately $36.2
million for the nine months ended September 30, 2004. Income tax benefit for the
nine months ended September 30, 2005 was approximately $10.9 million while
income tax expense for the nine months ended September 30, 2004 was
approximately $13.9 million. The effective tax rate for the 2005 was 29.2% as
compared to 38.3% for 2004.
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 (loss) was approximately
$(134,000) and $156,000 for the nine months ended September 30, 2005 and 2004,
respectively. The total minority interest included in the balance sheet as of
September 30, 2005 was approximately $297,000 as compared to approximately
$431,000 as of December 31, 2004.
After the preferred stock dividends of approximately $270,000 for each of the
nine-month periods, income (loss) available to common stockholders was
approximately $(26.5) million for the nine months ended September 30, 2005, or
$(0.59) per diluted share, as compared with income available to common
stockholders of approximately $21.9 million, or $0.49 per diluted share, for the
nine months ended September 30, 2004. The weighted average shares outstanding on
a diluted basis for the nine months ended September 30, 2005 were 45,302,437, as
compared to 45,614,473 for the nine months ended September 30, 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 September
30, 2005 was $63.7 million as compared to working capital of $107.1 million at
December 31, 2004. The main factor in the decrease in the Company's working
capital was the reduction of the inventory as a result of the voluntary Zylon(R)
replacement program. However, the Company was able to generate a positive
towards cash flow of $26.6 million from operations for the nine months ended
September 30, 2005 as compared to cash used in operations $10.8 million for the
nine months of September 30, 2004. The primary factor for the improvement in
cash provided from operations is the decrease in accounts receivable, as the
accounts receivable days outstanding improved to 32 days at September 30, 2005
as compared to 58 days at December 31, 2004.
The underlying drivers of operating cash flows are the inflows and
outflows of funds. Our cash inflows are principally cash collections from
customers. Historically 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 nine months ended September 30,
2005, our cash collections from customers of approximately $286.8 million
exceeded our net sales of approximately $263.9 million. As a comparison, for the
nine months ended September 30, 2004, our cash collections of approximately
$234.3 lagged our net sales of $249.9 million. Our cash outflows are principally
20
manufacturing costs. 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
$231.6 million and $220.4 million for the nine months ended September 30, 2005
and 2004, respectively, compared to cost of goods sold of approximately $191.9
million and $180.4 million for such periods, respectively.
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. 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. Borrowings under the Credit Agreement bear interest, at the
Company's option, at the bank's prime rate (6.75% at September 30, 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 September 30, 2005, the Company had a
LIBOR loan outstanding on the credit facility at a rate of 6.124%. The
borrowings under the Credit Agreement are collateralized by a first security
interest in substantially all of the assets of the Company.
On November 3, 2005, the Company amended its Credit Agreement, to
exclude the non-cash compensation charge and the Zylon(R) replacement charge
from the financial covenants calculations and issuing a waiver as of September
30, 2005 for failure to comply with such covenants as a result of the
aforementioned charges. The interest rate on the term loan was reduced from
LIBOR plus 2.25%, to LIBOR plus 1.75%. The amendment also allows the Company to
purchase in the open market in accordance with applicable law up to three
million shares of the Company's common stock provided there are no events of
default and the share purchase program shall not exceed $9 million to the extent
the purchase price is funded through the credit facility.
The Board of Directors approved the redemption of the convertible
preferred stock, on December 15, 2005, the annual redemption date. This will
eliminate the preferred dividend of $90,000 per quarter from the Company's
financial statements.
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 (1) minimum tangible net worth, (2) a 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 that our
capital expenditures will 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. As noted above the Company has obtained
approval to repurchase up to 3 million shares. We believe that these restrictive
covenants do not currently have a material impact on our liquidity and capital
resources.
Our capital expenditures during the nine months ended September 30,
2005 decreased substantially to $358,000 as compared to $1,735,000 for the nine
months ended September 30, 2004. During the nine months ended September 30,
2004, we purchased additional machinery, equipment, furniture and fixtures and
21
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 spending
approximately $800,000 for total capital expenditures.
We believe that our existing credit line, together with funds generated
from operations, will be adequate to sustain our operations (including projected
capital expenditures) for the next 12 months. Historically, we have been
successful in obtaining increases in our revolving credit facility, as required,
in order to finance the increased working capital needs brought on by the
expansion of our business. However, we have no assurance that we will be able to
obtain further such increases if needed, and we may be required to explore other
potential sources of financing (including the issuance of equity securities and,
subject to the consent of our lender, other debt financing) if we continue to
experience escalating demand for our products.
CASH CONTRACTUAL OBLIGATIONS
The following table presents the Company's estimated cash requirements for
contractual obligations outstanding as of September 30, 2005:
Payments Due by Period
($ thousands)
Less Than More Than 5
1 Year 1-3 Years 4-5 Years Years Total
--------- --------- --------- ----------- -------
Contractual Obligations
Long-Term Debt $ 8,000 $ 7,000 $ -- $15,000
Employment Contracts 1,450 4,217 1,367 7,034
Consulting Agreements 60 -- -- -- 60
Obligation to purchase convertible
preferred stock 3,000 -- -- -- 3,000
-------
Operating Leases 2,048 5,781 3,009 1,880 12,718
------- ------- ------ ------ -------
Total Contractual Cash
Obligations $14,558 $16,998 $4,376 $1,880 $37,812
======= ======= ====== ====== =======
EFFECT OF INFLATION AND CHANGING PRICES
The Company did not experience any measurable increases in raw material prices
during the nine months ended September 30, 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
22
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 our bank's 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, annually.
Aggregate maturities of our long-term debt are as follows:
For the years ending September 30:
2005 $ 5,000,000
2006 8,000,000
2007 2,000,000
-----------
$15,000,000
The Company estimates that the fair value of its long-term debt
approximates its carrying value.
Our international transactions are predominately denominated in U.S.
dollars, mitigating any market risk resulting from foreign currency exchange
fluctuations. We do not have any material sales, purchases, assets or
liabilities denominated in currencies other than the U.S. Dollar, and as such,
we are not subject to material foreign currency exchange rate risk.
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ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
We conducted an evaluation of the effectiveness of the design and
operation of our disclosure controls and procedures as of the end of the period
covered by this report. The disclosure controls and procedures evaluation was
conducted under the supervision and with the participation of management,
including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO).
Disclosure controls and procedures are controls and procedures that are designed
to ensure that information required to be disclosed in our reports filed under
the Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the rules and forms of the Securities and Exchange
Commission. Disclosure controls and procedures are also designed to ensure that
such information required to be disclosed in our reports filed under the
Exchange Act is accumulated and communicated to our management, including the
CEO and CFO, as appropriate to allow timely decisions regarding required
disclosure.
The evaluation of our disclosure controls and procedures included a
review of the controls' objectives and design, our implementation of the
controls and the effect of the controls on the information generated for use in
this report. This type of evaluation is performed on a quarterly basis so that
the conclusions of management, including the CEO and CFO, concerning the
effectiveness of the disclosure controls and procedures can be reported in our
periodic reports on Form 10-Q and Form 10-K. The overall goals of our evaluation
activities are to monitor our disclosure controls and procedures, and to modify
them as necessary. Our intent is to maintain our disclosure controls and
procedures as dynamic systems that change as conditions warrant.
Based upon the disclosure controls and procedures evaluation, our CEO
and CFO have concluded that, as of the end of the period covered by this report,
our disclosure controls and procedures were effective to ensure that information
required to be disclosed in our reports filed under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission's rules and forms and that information
required to be disclosed in our reports filed under the Exchange Act is
accumulated and communicated to our management, including the CEO and CFO, as
appropriate to allow timely decisions regarding required disclosure.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING.
As mentioned in our filing on Form 8-K dated April 14, 2005, as of
December 31, 2004, there existed certain significant deficiencies in our systems
of inventory valuation rendering such systems inadequate to accurately capture
cost of materials and labor components of certain work in progress and finished
goods inventory. During the nine months ended September 30, 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 have been and will be effective in
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addressing the deficiency in internal controls described above. The attestation
report of our former auditors also identified what that firm considered to be
two additional weaknesses in internal controls: (1) failure of the Company to
complete consultation with the auditors 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 our former auditors had a proper basis for its conclusions, the
Company is exploring opportunities to improve the process of preparing its
filings with the Securities and Exchange Commission and the effectiveness of its
Audit Committee.
Except as described above, there have not been any changes in our
internal controls over financial reporting, as such term is defined in Rules
13a-15(f) and 15d-15(f) under the Exchange Act during the nine months ended
September 30, 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
Since September 9, 2005, a number of purported class action lawsuits
were filed in the United States District Court for the Eastern District of New
York against the Company and certain of the Company's officers and directors.
The actions purport to be filed on behalf of purchasers of the Company's
publicly traded securities during the period from April 21, 2004 through August
29, 2005. The complaints, which are substantially similar to one another,
allege, among other things, that the Company's public disclosures were false or
misleading because they did not disclose certain information. The lawsuits
allege that DHB's body armor products were defective and failed to meet the
standards of its customers, and that these alleged facts should have been
publicly disclosed. The Company has been served with a number of these
complaints. No class has been certified in the actions. The lawsuits seek
compensatory damages plus interest and attorneys' fees.
The Company believes that the lawsuits are baseless and intends to
vigorously defend against them. Because of their similarity, the Company
believes that most or all of the lawsuits will be consolidated into a single
action and that the Company will not be required to defend against all of the
lawsuits individually. The Company cannot predict the outcome of the lawsuits or
whether the Company's financial condition or results of operations may be
materially affected as a result of the lawsuits.
Since September 14, 2005, a number of derivative complaints were filed
in the United States District for the Eastern District of New York against
certain officers and directors of the Company and, in certain cases, Weiser LLP,
the Company's former auditor. The allegations in the complaints are
substantially similar and include the Company as a nominal defendant. The
complaints allege, among other things, that defendants breached their fiduciary
duties and engaged in fraud, misrepresentation, insider trading,
misappropriation of corporate information, waste of corporate assets, abuse of
control, and unjust enrichment, asserting claims substantially similar to those
asserted in the actions described above under "Securities Litigation."
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The complaints seek monetary damages and various forms of equitable and/or
injunctive relief, restitution to the Company and disgorgement of profits earned
by defendants, and fees and costs.
The Company believes that the lawsuits are baseless and intends to
vigorously defend against them. Because of their similarity, the Company
believes that most or all of the lawsuits will be coordinated and/or
consolidated into a single action. The Company cannot predict the outcome of the
lawsuits or whether the Company's financial condition or results of operations
may be materially affected as a result of the lawsuits.
On or about August 29, 2005, Southern States Police Benevolent
Association, Inc., et al. ("Southern States") filed a Class Action Complaint
against Protective Apparel Corporation of America, Inc. and Point Blank Body
Armor, Inc. ("Defendants"), alleging that the National Institute of Justice
("NIJ") decertified all bullet resistant vests containing Zylon. Southern States
further alleged that the test results released by the NIJ demonstrated that all
of Defendants' Zylon-containing vests fail to comply with their certifications
and warranties. Southern States brought causes of action for breach of warranty
on label in vest, breach of warranty in warranty statement, breach of implied
warranty of merchantability, breach of implied warranty of fitness for a
particular purpose, and for injunctive relief.
On or about October 19, 2005, Defendants filed an answer and
affirmative defenses denying that Defendants are in breach of any warranty and
denying that injunctive relief is proper. On October 20, 2005, the Court entered
a Consent Order Certifying Class Action. The certified classes include all law
enforcement personnel and organizations, and other individuals, who purchased
new ballistic resistant soft body armor containing Zylon from the Defendants,
except for federal agencies and any persons who have been physically injured as
a result of defects in their vests. The parties are engaged in settlement
negotiations. The Company has recorded a $36.7 million reserve for this
settlement during the quarter ended September 30, 2005, which is part of the $60
million cost of the vest replacement program.
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, alleging concerns
regarding the effectiveness and durability of body armor with high
concentrations of Zylon in the Company's bullet-resistant soft body armor
(vests). Point Blank Body Armor settled a class action lawsuit involving a total
of less than 2,000 vests containing a high concentration of Zylon. Pursuant to
the settlement, class members have been exchanging the vests for a choice of
four other vests made by the company. Class members have also been receiving two
extra carriers, as well as a 10 percent discount certificate. The final date for
class members to submit a claim form was August 21, 2005. This settlement did
not have a material adverse effect on its 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 and Chairman). The Company and Mr. Brooks
are cooperating with the Securities and Exchange Commission in this
investigation. In addition, the Audit Committee periodically monitors 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.
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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
During the nine month period ended September 30, 2005 and 2004 employees
exercised warrants to purchase 30,000 and 80,000 shares, respectively of the
Company's unregistered common stock at an average price of $6.26 and $2.00 per
share, respectively.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
On November 3, 2005, the Company amended its Credit Agreement, to exclude the
non-cash compensation charge and the Zylon(R) replacement charge from the
financial covenants calculations and issuing a waiver as of September 30, 2005
for failure to comply with such covenants as a result of the afore mentioned
charges. Pursuant to the Eight amendment these defaults were waived by LaSalle
Business Credit.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the DHB Industries, Inc. Annual Stockholders' Meeting on July 29, 2005, our
stockholders approved our 2005 Omnibus Equity Incentive plan.
Number of Shares
Voted Broker
Voted For Against Abstain Non-Votes
Proposal 1. To consider and vote
upon the Company's proposed 2005
Omnibus Equity Incentive Plan. 11,715,548 8,064,100 152,114 0
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
10.18 Lease agreement dated August 22, 2005 between DHB Industries Inc. and
A&B Holdings
10.19 Eighth Amendment to Loan and Security Agreement, dated November 3, 2005
31.1 Certification of the Chief Executive Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certification of the Chief Financial Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32.1 Certification of the Chief Executive Officer Pursuant to 18 U.S.C.
ss.1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
32.2 Certification of the Chief Financial Officer Pursuant to 18 U.S.C.
ss.1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed by the undersigned,
thereunto duly authorized.
Dated: November 9, 2005 DHB INDUSTRIES, INC.
(Registrant)
Signature Capacity Date
Chief Executive Officer November 9, 2005
/s/ David H. Brooks and Chairman of the Board
_______________________
Chief Financial Officer, November 9, 2005
/s/ Dawn M. Schlegel Director and Principal
_______________________ Accounting Officer
/s/ Jerome Krantz Director November 9, 2005
_______________________
/s/ Gary Nadelman Director November 9, 2005
_______________________
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