-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VJ2Mr+oil+MX3lf82N+SDrYRQZ0TsXhWxB87CHRSdXtuvM6WtV7wxsyYlFPLJ5Ou TCvtHqR+jE2cuwV/S7+ozg== 0001092306-03-000575.txt : 20031114 0001092306-03-000575.hdr.sgml : 20031114 20031114153102 ACCESSION NUMBER: 0001092306-03-000575 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20030930 FILED AS OF DATE: 20031114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DHB INDUSTRIES INC CENTRAL INDEX KEY: 0000899166 STANDARD INDUSTRIAL CLASSIFICATION: ORTHOPEDIC, PROSTHETIC & SURGICAL APPLIANCES & SUPPLIES [3842] IRS NUMBER: 113129361 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-13112 FILM NUMBER: 031004087 BUSINESS ADDRESS: STREET 1: 555 WESTBURY AVE CITY: CARLE PLACE STATE: NY ZIP: 11514 BUSINESS PHONE: 5169971155 MAIL ADDRESS: STREET 1: 555 WESTBURY AVE CITY: CARLE PLACE STATE: NY ZIP: 11514 FORMER COMPANY: FORMER CONFORMED NAME: DHB CAPITAL GROUP INC /DE/ DATE OF NAME CHANGE: 19960518 10-Q 1 form10q093003.txt FORM 10-Q DATED 09-30-03 ================================================================================ U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------- FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003 For the transition period from _________ to ___________ Commission File No. 0-22429 DHB INDUSTRIES, INC. (Exact name of Registrant as specified in its charter) DELAWARE 11-3129361 (State or other jurisdiction of incorporation) (I.R.S. Employer Identification No.) 555 WESTBURY AVENUE, CARLE PLACE, NEW YORK 11514 (Address of principal executive offices) Registrant's telephone number: (516) 997-1155 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 13, 2003, there were 40,594,746 shares of Common Stock, $.001 par value outstanding. ================================================================================ 1 INDEX PART I. FINANCIAL INFORMATION PAGE Item 1. Financial Statements Condensed Consolidated Balance Sheets as of September 30, 2003(Unaudited) and December 31, 2002 3 Unaudited Condensed Consolidated Statements of Operations For The Three and Nine Months Ended September 30, 2003 and 2002 4 Unaudited Condensed Consolidated Statements of Cash Flows For The Nine Months Ended September 30, 2003 and 2002 5 Notes to Unaudited Condensed Consolidated Financial Statements 6-12 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13-16 Item 3. Quantitative and Qualitative Disclosures about Market Risk 16 Item 4. Controls and Procedures 17-19 PART II. OTHER INFORMATION Item 1. Legal Proceedings 19-20 Item 2. Changes in Securities and Use of Proceeds 20 Item 3. Defaults Upon Senior Securities 20 Item 4. Submission of Matters to a Vote of Security Holders 20 Item 5. Other Information 20 Item 6. Exhibits and Reports on Form 8-K 20-21 Signatures 22 Certifications 23-26 2
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) DHB INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 2003 (UNAUDITED) AND DECEMBER 31, 2002 (In thousands, except share and per share data) September 30, December 31, ASSETS 2003 2002 ---- ---- Current assets Cash and cash equivalents $562 $393 Accounts receivable, less allowance for doubtful accounts of $1,064 and $1,070, respectively 26,492 22,904 Inventories 49,933 33,360 Deferred income tax assets 784 3,319 Prepaid expenses and other current assets 2,829 971 ------- ------- Total current assets 80,600 60,947 ------- ------- Property and equipment, net 1,823 1,620 ------- ------- Other assets Other investment 942 942 Deferred income tax assets -- 1,402 Deposits and other assets 414 460 ------- ------- Total other assets 1,356 2,804 ------- ------- Total assets $83,779 $65,371 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable $5,608 $5,368 Accrued expenses and other current liabilities 8,394 2,454 Capital lease obligation 1 -- ------- ------- Total current liabilities 14,003 7,822 ------- ------- Long term liabilities Notes payable-bank 25,638 24,354 Note payable - stockholder -- 1,500 Other liabilities 439 350 ------- ------- Total liabilities 40,080 34,026 ------- ------- Commitments and contingencies 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 1 1 Common stock, $0.001 par value, 100,000,000 shares authorized, 40,594,746 and 40,413,746 41 40 Additional paid in capital 35,108 34,792 Accumulated other comprehensive loss (54) (41) Retained earnings (accumulated deficit) 8,603 (3,447) ------- ------- Total stockholders' equity 43,699 31,345 ------- ------- Total liabilities and stockholders' equity $83,779 $65,371 ======= =======
(See Notes to Unaudited Condensed Consolidated Financial Statements) 3
DHB INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (In thousands, except share and per share data) For the Three Months For the Nine Months Ended September 30, Ended September 30, 2003 2002* 2003 2002* ---- ---- ---- ---- Net sales $54,417 $30,146 $157,095 $97,799 Cost of goods sold (includes related party purchases of $6,802, $1,905, $20,856, and $3,791 respectively) 39,599 21,005 113,785 69,166 ------- ------- -------- ------- Gross profit 14,818 9,141 43,310 28,633 Selling, general and administrative expenses 9,055 7,605 22,621 17,156 ------- ------- -------- ------- Income before other income (expense) 5,763 1,536 20,689 11,477 ------- ------- -------- ------- Other income (expense) Interest expense (306) (538) (977) (1,475) Proceeds from settlement of lawsuit -- -- 739 -- Other income 24 35 48 79 ------- ------- -------- ------- Total other income (expense) (282) (503) (190) (1,396) ------- ------- -------- ------- Income before income taxes 5,481 1,033 20,499 10,081 Income taxes 2,231 81 8,179 169 ------- ------- -------- ------- Net income 3,250 952 12,320 9,912 Dividend - preferred stock (90) -- (270) -- ------- ------- -------- ------- Income available to common stockholders $3,160 $ 952 $12,050 $ 9,912 ======= ======= ======== ======= Earnings per common share: Basic shares $0.08 $0.02 $0.30 $0.27 ===== ===== ===== ===== Diluted shares $0.07 $0.02 $0.27 $0.23 ===== ===== ===== ===== Weighted average shares outstanding: Basic shares 40,594,746 40,413,746 40,490,062 36,262,668 Effect of convertible preferred stock 500,000 500,000 500,000 500,000 Warrants 3,416,044 2,913,834 3,063,268 6,756,985 --------- --------- --------- --------- Diluted shares 44,510,790 43,827,580 44,053,330 43,519,653 ========== ========== ========== ==========
* - 2002 has been restated - see Note 2 (See Notes to Unaudited 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 Nine Months Ended September 30, CASH FLOWS FROM OPERATING ACTIVITIES 2003 2002 ---- ---- Income available to common stockholders $12,050 $ 9,912 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 432 377 Amortization of deferred financing costs 98 100 Stock issued for services 56 429 Deferred rent 89 119 Deferred income tax assets 3,938 -- Changes in operating assets and liabilities Accounts receivable (3,588) (2,652) Inventories (16,573) (8,731) Prepaid expenses and other current assets (1,858) 284 Deposits and other assets (53) 66 Accounts payable 240 (4,947) Accrued expenses and other current liabilities 5,939 1,893 --------- -------- Net cash provided by (used) in operating activities 770 (3,150) --------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from the disposition of assets -- 302 Purchases of property and equipment (614) (259) --------- -------- Net cash provided by (used in) investing activities (614) 43 --------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Net proceeds of notes payable- bank 1,283 6,417 Payments of note payable- stockholder (1,500) (8,500) Principal payments on long-term debt (19) (1,634) Proceeds from the issuance of common stock 261 6,333 Proceeds from the issuance of preferred stock -- 3,000 --------- -------- Net cash provided by financing activities 25 5,616 --------- -------- Effect of foreign currency translation (12) 5 --------- -------- Net increase in cash and cash equivalents 169 2,514 Cash and cash equivalents at beginning of the period 393 145 --------- -------- Cash and cash equivalents at end of the period $562 $2,659 ========= ======== Supplemental cash flow information Cash paid for: Interest $1,000 $1,474 ========= ======== Taxes $290 $71 ========= ======== Non-cash investing and financing activities Property and equipment acquired under capital lease $20 $-- ========= ========
(See Notes to Unaudited 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 interim condensed consolidated financial statements of DHB Industries, Inc. and subsidiaries (collectively "DHB" or the "Company") as of September 30, 2003 and for the three and nine months ended September 30, 2003 and 2002 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 ("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 for the year ended December 31, 2002 filed with the SEC on March 31, 2003, as amended on Form 10-K/A filed with the SEC on July 24, 2003. NOTE 2. RESTATEMENT During the fourth quarter of 2002, the Company recorded certain adjustments as described in Note 15 to the Company's consolidated financial statements contained in Form 10-K/A filed with the SEC on July 24, 2003. The effect of these adjustments on the condensed consolidated statements of operations for the first quarter of 2002 was a decrease in net income and no change in basic and diluted earnings per share. For the second and third quarters of 2002 there would have been a decrease in net income, basic earnings per share, and diluted earnings per share for each quarter. The Company has restated the three and nine months ended September 30, 2002, to show the effect of the adjustments on the condensed consolidated statements of operations. The first adjustment was an additional accrual to straight-line rent expense in accordance with SFAS No. 13 "Accounting for Leases," which increases the selling, general and administrative expenses by $39 for each of the first three quarters of 2002 for a total of $117 for the nine months ended September 30, 2002. In addition to straight-lining rent expense, the Company recorded in the fourth quarter of 2002 a $646 expense for the issuance of stock warrants to an unaffiliated outside consultant, of which $146 and $284 was applicable to the second and third quarter of 2002, respectively. The following table shows the consolidated net income as originally reported and restated for the each quarter of 2002. These adjustments increase selling, general and administrative expenses for the first quarter, second quarter and third quarter of 2002 and decreased the selling, general and administrative expenses for the fourth quarter of 2002. 6 DHB INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share data) NOTE 2. RESTATEMENT (Continued)
2002 ---------------------------------------------------------- 1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER Straight-lining rent expense $(39) $(39) $(39) $117 Stock based compensation - (146) (284) 430 ------------- -------------- ------------- --------------- Total adjustments (39) (185) (323) 547 As reported - net income 4,758 4,426 1,275 5,176 ------------- -------------- ------------- --------------- As restated net income $4,719 $4,241 $952 $5,723 ====== ====== ==== ====== Earnings per share Basic shares as originally reported $0.14 $0.12 $0.03 $0.13 Effect of adjustments 0.00 (0.01) (0.01) 0.01 ------------- -------------- ------------- --------------- Basic share as restated $0.14 $0.11 $0.02 $0.14 ------------- -------------- ------------- --------------- Diluted shares as originally reported $0.11 $0.11 $0.03 $0.12 Effect of adjustments 0.00 (0.01) (0.01) 0.01 ------------- -------------- ------------- --------------- Diluted shares as restated $0.11 $0.10 $0.02 $0.13 ------------- -------------- ------------- ---------------
NOTE 3. INVENTORIES Inventories are stated at the lower of cost or market using the first-in, first-out (FIFO) method and are summarized as follows: September 30, December 31, ------------- ------------ 2003 2002 ---- ---- Raw materials and supplies $17,082 $14,833 Work in process 12,623 9,116 Finished goods 20,228 9,411 ------ ----- $49,933 $33,360 ======= ======= NOTE 4 LONG TERM DEBT On September 24, 2001, the Company entered into a Loan and Security Agreement (the "Credit Agreement"), as amended on June 28, 2002, February 25, 2003 and effective August 30, 2003, which expires on October 1, 2004. Pursuant to the Credit Agreement, the Company may borrow up to the lesser of (i) $35,000 during the period commencing on February 18, 2003 and ending on December 31, 2003, and $25,000 at all times on and after January 1, 2004, or (ii) 85% of eligible accounts 7 DHB INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share data) NOTE 4 LONG TERM DEBT (Continued) receivable plus the lesser of $14,000 or certain percentages of eligible inventory, as defined. Borrowings under the Credit Agreement bear interest, at the Company's option, at the bank's prime rate or LIBOR plus 2 1/2% per annum (3.66% and 3.928% at September 30, 2003 and December 31, 2002, respectively). In June 2003, the Company repaid the entire $1,500 note payable to its majority shareholder. NOTE 5. STOCK BASED COMPENSATION Warrants In January 2003, the then five members of the Company's Board of Directors were each awarded 50,000 warrants exercisable at $1.41 per share for five years. In July 2003, the additional Board member was issued 50,000 warrants exercisable at $4.28 per share for five years. In addition, in February 2003, the Board of Directors awarded key employees a total of 35,000 warrants exercisable at $2.01 per share, which expire in February 2008. In July 2003, the Board of Directors awarded a key employee 33,000 warrants exercisable at $3.85 per share, which expire in July 2008. During the six months ended June 30, 2003, the Company also issued 15,000 shares of stock to an employee. During the nine months ended September 30, 2003, warrants were exercised to purchase 166,000 shares of the Company's common stock with aggregate proceeds of approximately $261. Warrants to purchase 508,000 and 200,000 shares of the Company's common stock that were outstanding at September 30, 2003 and 2002, respectively, were not included in the computation of diluted earnings per share because their effect would have been anti-dilutive, since the strike prices were above the average fair market value of DHB's stock price. The Company accounts for stock-based compensation using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations ("APB No. 25") and has adopted the disclosure provisions of Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure, an amendment of FASB Statement No. 123" ("SFAS No. 148"). Under APB No. 25, compensation expense is only recognized when the market value of the underlying stock at the date of grant exceeds the amount an employee must pay to acquire the stock. Accordingly, no compensation expense has been recognized in the condensed consolidated financial statements in connection with employee stock warrant grants. 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, option valuation models require the input of highly subjective assumptions including the 8 DHB INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share data) NOTE 5. STOCK BASED COMPENSATION - (Continued) expected stock price volatility. Because the Company's employee stock warrants have characteristics significantly different from those of traded warrants and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock warrants. The weighted-average warrant fair values and assumptions used to estimate these values are as follows: Grants Issued During 2003 2002 ---- ---- Risk-free interest rate 3.942% 4.67% Expected volatility of common stock 118.80% 94.55% Dividend yield 0.00% 0.00% Expected option term 5 years 5.14 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, 2003 2002* 2003 2002* ---- ---- ---- ---- Income available to common stockholders, as reported $3,160 $ 952 $12,050 $9,912 Deduct: compensation determined under fair value based method for all awards, net of related tax effect 439 665 656 665 ------ ----- ------- ------ Pro forma net income 2,721 287 13,394 9,247 ------ ----- ------- ------ Basic earnings per common share As reported $0.08 $0.02 $0.30 $0.27 Pro forma $0.07 $0.01 $0.28 $0.26 Diluted earnings per common share As reported $0.07 $0.02 $0.27 $0.23 Pro forma $0.06 $0.01 $0.26 $0.21
* - 2002 has been restated - see Note 2 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-pricing model. 9 DHB INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share data) NOTE 6. OTHER COMPREHENSIVE INCOME Accumulated other comprehensive income (loss) is comprised solely of foreign currency translation losses at September 30, 2003 and 2002. The components of other comprehensive income, net of taxes, were as follows:
Three months ended Nine months ended September 30, September 30, 2003 2002 2003 2002 ---- ---- ---- ---- Net income $3,250 $ 952 $12,320 $ 9,912 Other comprehensive income (loss): Foreign currency translation, net of tax (13) ( 13) (12) 5 ------ ----- ------- ------- Comprehensive income $3,237 $ 939 $12,308 $ 9,917 ====== ===== ======= =======
NOTE 7. SEGMENT INFORMATION The Company operates in two principal segments: Ballistic-resistant equipment and protective athletic/sports products. Net sales, income from operations, depreciation and amortization expense, interest expense, income before income taxes, 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, 2003 2002 2003 2002 ---- ---- ---- ---- NET SALES Ballistic-resistant equipment $ 52,962 $ 28,737 $152,485 $ 93,389 Protective athletic & sports products 1,455 1,409 4,610 4,410 -------- -------- -------- -------- Consolidated net sales $54,417 $30,146 $157,095 $97,799 ======= ======= ======== ======= INCOME FROM OPERATIONS Ballistic-resistant equipment $ 7,604 $ 2,671 $24,249 $13,827 Protective athletic & sports products 142 202 618 649 Corporate and other (1) (1,983) (1,337) (4,178) (2,999) -------- -------- -------- -------- Consolidated operating income $ 5,763 $ 1,536 $20,689 $11,477 ======= ======= ======= ======= DEPRECIATION AND AMORTIZATION EXPENSE Ballistic-resistant equipment $108 $ 64 $252 $231 Protective athletic & sports products 13 20 42 74 Corporate and other 46 19 138 72 ---- ---- ---- ---- Consolidated depreciation and amortization expense $167 $103 $432 $377 ==== ==== ==== ==== INTEREST EXPENSE Ballistic-resistant equipment $ 302 $ 229 $877 $558 Protective athletic & sports products -- -- -- -- Corporate and other (1) 4 309 100 917 ----- ----- ----- ------ Consolidated interest expense $ 306 $ 538 $ 977 $1,475 ===== ===== ===== ======
10 DHB INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share data) NOTE 7. SEGMENT INFORMATION (Continued)
For The Three Months For The Nine Months Ended September 30, Ended September 30, 2003 2002 2003 2002 ---- ---- ---- ---- INCOME BEFORE INCOME TAXES Ballistic-resistant equipment $4,478 $537 $13,474 $4,798 Protective athletic & sports products 110 165 516 1,583 Corporate and other (1) 893 331 6,509 3,700 ------ ------ ------- ------- Consolidated Income before income taxes $5,481 $1,033 $20,499 $10,081 ====== ====== ======= ======= INCOME TAXES Ballistic-resistant equipment $47 $ 9 $58 $18 Protective athletic & sports products 1 -- 1 -- Corporate and other (1) 2,183 72 8,120 151 ------ ---- ------ ---- Consolidated tax expense $2,231 $ 81 $8,179 $169 ====== ==== ====== ==== September 30, December 31, 2003 2002 ---- ---- IDENTIFIABLE ASSETS Ballistic-resistant equipment $77,826 $56,471 Protective athletic & sports products 3,530 2,907 ------- ------- 81,356 59,378 Corporate and other (2) 2,423 5,993 ------- ------- Consolidated net assets $83,779 $65,371 ======= ======= (1) Corporate and other expenses includes corporate general and administrative expenses. (2) Corporate and other assets are principally prepaid expenses, deferred income tax assets, other investment and property and equipment.
NOTE 8. CONTINGENCIES The Company is party to various claims, legal actions and complaints arising in the ordinary course of business. In the opinion of management, all such matters are without merit or are of such kind, or involve such amounts, that an unfavorable disposition would not have a material adverse effect on the consolidated financial position, results of operations or liquidity of the Company. Since March, the UNITE Union, as part of its unsuccessful organizing campaign, has filed eight unfair labor practice charges against the Company with the National Labor Relations Board ("NLRB"). The union has withdrawn five of these charges. The NLRB is currently investigating the remaining three charges. The Company is confident it has not breached any provision of the National Labor Relations Act. 11 DHB INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share data) NOTE 8. CONTINGENCIES - (Continued) On October 1, 2002, a shareholders' derivative action was commenced in the Supreme Court of the State of New York, County of Nassau, on behalf of the Company against the directors and officers of the Company and the Company as a nominal defendant, by Plumbers & Pipefitters Local 112 Pension Fund, derivatively on behalf of itself and all others similarly situated. This case was dismissed with prejudice on March 13, 2003, without liability to the Company or its officers or directors. The Company is seeking dismissal of a second shareholder derivative action brought by William Gosner against the Company on October 25, 2003 with essentially the same four separate causes of action of fiduciary duty, aiding and abetting breach of fiduciary duty, constructive fraud, and abuse of control that the Plumbers & Pipefitters Local 112 union Fund previously brought against the Company, that the Supreme Court, Naussau county, has already dismissed. Mr. Gosner is seeking declaratory and injunctive relief, compensatory and punitive damages, plaintiff costs and attorney fees. The Company maintains $10 million of directors' and officers' liability insurance covering this type of claim. On or about October 30, 2002, the Company filed a lawsuit in the United States District Court for the Southern District of Florida against certain union leaders, claiming defamation, conspiracy to defame and tortious interference with contractual and ongoing business relationships. The case is still in its preliminary stages, and the Company is vigorously pursuing this action. The Company has filed a lawsuit in the Supreme Court of the State of New York, County of Nassau, against its insurance carrier and an insurance agent, for negligence and breach of fiduciary duties as a result of damages the Company incurred during Hurricane Irene in October 1999. The Company is vigorously pursuing this action. On March 17, 2003, the Company entered into a settlement agreement with its insurance agent for a $1,000 payment to the Company. The Company received a cash payment of approximately $739, net of the associated legal fees of $261. The $739 received by the Company is included in other income during the nine months ended September 30, 2003. The lawsuit against the insurance carrier has been scheduled for arbitration in the winter of 2003. NOTE 9. 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 10. RECENTLY ISSUED ACCOUNTING STANDARDS In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" ("SFAS No. 150"). SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatory redeemable financial instruments of nonpublic entities. The adoption of SFAS No. 150 has not had and is not expected to have a material impact on the Company's consolidated financial position or results of operations. 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2003, COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 2002 Consolidated net sales for the quarter ended September 30, 2003 increased 80.5% to $54.4 million as compared to the consolidated net sales of $30.1 million for the quarter ended September 30, 2002. The Armor Group's revenue increased 84.3% to $53.0 million for the three months ended September 30, 2003 from approximately $28.7 million for the three months ended September 30, 2002. This increase was attributable to additional orders from the military as well as a 61.3% increase in sales to state and local law enforcement agencies. The Sports Group's revenue for the three months ended September 30, 2003 increased 3.3% to approximately $1.5 million over revenue of approximately $1.4 million for the three months ended September 30, 2002. The consolidated gross profit percentage for the quarter ended September 30, 2003 was 27.2% as compared to 30.3% for the quarter ended September 30, 2002. This decrease in the gross profit percentage reflects a change in the product mix as well as the additional costs associated with increasing and expediting the Company's sales orders to meet the accelerated demand of our customers, including overtime costs and freight and delivery charges. The Company expects the gross margins to remain between the range mentioned about in the next year. The Company's selling, general and administrative expenses as a percentage of sales improved to 16.6% of revenues for the three months ended September 30, 2003 as compared to 25.2% for the three months ended September 30, 2002, as restated. The Company did incur increased selling, general and administrative expenses during the third quarter of 2003 over the second quarter 2003 in conjunction with the resignation of its independent auditors, Grant Thornton LLP, and the legal and accounting fees associated with the Form 10-K/A filed on July 24, 2003 and the Form 8-Ks filed on August 27, September 2, and September 9, 2003. Selling, general and administrative expenses during the quarter ended September 30, 2002 increased primarily due to non-recurring expenses including sharply increased legal fees pertaining to the Company's successful defense of a patent infringement suit, legal and professional fees associated with a union organizing campaign relating to the Company's Point Blank Body Armor subsidiary, and $284,000 for Black-Scholes value for the issuance of stock warrants to an outside consultant. Operating income increased 275.2% in the third quarter of 2003 as compared to the 2002 period, driven primarily by the decrease in the percentage of selling, general and administrative expenses and the increased sales volumes. Operating income for the third quarter of 2003 was approximately $5.8 million versus approximately $1.5 million for the three months ended September 30, 2002. Interest expense for the three months ended September 30, 2003 was approximately $306,000, a 43.1% decrease from approximately $538,000 in the corresponding 2002 13 period. This decrease was due primarily to lower interest rates under the Company's revolving credit facility. Income before taxes increased by 430% to approximately $5.5 million for the three months ended September 30, 2003, as compared to approximately $1.0 million for the same period in 2002, as restated. Income taxes for the three months ended September 30, 2003 was $2.2 million as compared to $81,000 for the three months ended September 30, 2002. The Company's 2003 income taxes are higher as the effective tax rate was nominal in 2002 due to the utilization of net operating loss carryforwards. Income available to common stockholders was approximately $3.2 million or $0.07 per diluted share for the three months ended September 30, 2003 as compared with income available to common stockholders of $952,000 or $0.02 per diluted share for the three months ended September 30, 2002, as restated. The weighted average shares outstanding on a diluted basis for the three months ended September 30, 2003 were 44,510,790 as compared to 43,827,580 for the three months ended September 30, 2002. FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003, COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2002 For the first nine months of 2003, consolidated net sales reached $157 million, an increase of 60.6% over consolidated net sales of nearly $98 million for the first nine months of 2002. The Armor Group's revenue increased 63.3% from $93.4 million for the nine months ended September 30, 2002 to $152.5 million for the nine months ended September 30, 2003. This increase was attributable to an 83.2% increase in the Armor Group's military revenues as well as a 52.1% increase in revenues from state and local law enforcement agencies. The Sports Group's revenue for the nine months ended September 30, 2003 increased 4.5% to $4.6 million, compared to revenue of $4.4 million for the nine months ended September 30, 2002. This was attributable to the addition of Longs drug stores and the addtion of Wal-Mart stores in Canada to the Sports Group's customer base, and expanded numbers of products in Target stores for 2003. The gross profit percentage for the consolidated operations for the nine months ended September 30, 2003 was 27.6% as compared to 29.3% for the nine months ended September 30, 2002. The Company's selling, general and administrative expenses as a percentage of sales improved to 14.4% of revenues for the nine months ended September 30, 2003 as compared to 17.5% for the nine months ended September 30, 2002, as restated. Driven by the decrease in the percentage of selling, general and administrative expenses and coupled with the sales volume increases, operating income increased 80.3% to approximately $20.7 million for the nine months ended September 30, 2003 versus approximately $11.5 million for the nine months ended September 30, 2002. In March 2003, the Company signed a settlement agreement settling the lawsuit against its insurance agent for $1 million. The Company received a cash payment of approximately $739,000, which is net of the associated legal fees of $261,000. The Company still has pending its lawsuit against its insurance carrier for the majority of its loss arising from a hurricane. This case is 14 scheduled for arbitration during winter 2003. The $739,000 received from the insurance agent is included in other income for the nine months ended September 30, 2003. Interest expense for the nine months ended September 30, 2003 was approximately $977,000, a 33.8% decrease from the approximately $1,475,000 in corresponding 2002 period. This decrease was due primarily to lower interest rates under the Company's revolving credit facility. Income before taxes was approximately $20.5 million for the nine months ended September 30, 2003, a 103.3% increase as compared to approximately $10.1 million for the same period in 2002, as restated. Income taxes for the nine months ended September 30, 2003 was approximately $8.2 million as compared to $169,000 for the nine months ended September 30, 2002. The effective tax rate for 2003 is 40% while the effective tax rate was nominal in 2002 due to the utilization of net operating loss carryforwards. The Company recognized the deferred tax asset for the tax benefit of the net operating loss carryforwards during the fourth quarter of 2002, which was fully utilized during the three months ended March 31, 2003. Income available to common stockholders was approximately $12.1 million for the first nine months of 2003 or $0.27 per diluted share, as compared with income available to common stockholders of $9.9 million or $0.23 per diluted share for the first nine months of 2002, as restated. The weighted average shares outstanding on a diluted basis for the nine months ended September 30, 2003 were 44,053,330 as compared to 43,519,653 for the nine months ended September 30, 2002. LIQUIDITY AND CAPITAL RESOURCES The Company's sources of liquidity are borrowings under its credit agreement. The credit facility currently permits borrowings of up to $35 million, which decreases to $25 million by January 1, 2004. Borrowings under the Credit Agreement bear interest, at the Company's option, at the bank's prime rate or LIBOR plus 2 1/2% per annum (3.66% and 3.928% at September 30, 2003 and December 31, 2002, respectively). The Company plans to refinance this facility during the fourth quarter of 2003. The Company's primary capital requirements over the next twelve months are to assist its subsidiaries, Point Blank Body Armor, Inc., Protective Apparel Corporation of America (PACA) and NDL Products, Inc., in financing their working capital requirements. Working capital is required to finance the receivables, manufacturing process and inventory. Working capital at September 30, 2003 was approximately $66.6 million as compared to approximately $53.1 million at December 31, 2002. The current ratio is a measure of liquidity, which indicates the extent to which the current liabilities are covered. The current ratio is calculated by dividing current assets by current liabilities. The current ratio at September 30, 2003 was 5.8:1 as compared to 7.8:1 as of December 31, 2002. At September 30, 2003, stockholders' equity was approximately $43.7 million, up from $31.3 million as of December 31, 2002. On September 30, 2003, the balance due under the credit facility was approximately $25.6 million compared to approximately $28.3 million at June 30, 2003, approximately $31.9 million at March 31, 2003, and approximately $24.4 million at December 31, 2002. In June 2003, the Company repaid the entire $1.5 million note payable to its majority shareholder. For the nine months ended September 30, 2003, the Company's operations provided cash of $770,000 compared to cash used in operations of $3.2 million for the 15 nine months ended September 30, 2002. The biggest use of cash during the nine months ended September 30, 2003 was approximately $16.6 million to increase the Company's inventory levels since year-end in support of the Company's increased sales volumes. All of the components of inventory, raw materials, work in process and finished goods increased. However, the increase in finished goods outweighs the other components and represents increased orders to be shipped to the Armor Group's customers. The accounts receivable days outstanding were 46 days at September 30, 2003. Capital expenditures for the nine months ended September 30, 2003 were approximately $614,000 as compared to $259,000 for the nine months ended September 30, 2002. The primary reason for the increased capital expenditures is the result of the Company expanding its operations by adding an additional manufacturing facility for the Armor Group in Deerfield Beach, Florida. 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, 2003. The Company believes it will be able to increase prices on its products to meet future price increases in raw materials, if they occur. SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS This report contains certain forward-looking statements and information relating to the Company that are based on the beliefs of the Company's management as well as assumptions made by and information currently available to the Company's management. When used in this document, the words "anticipate," "believe," "estimate", "expect", "going forward", and similar expressions, as they relate to the Company or Company management, are intended to identify forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements reflect the current views of the Company with respect to future events and are subject to certain risks, uncertainties and assumptions, including, among others: risks associated with the uncertainty of future financial results, additional financing requirements, development of new products, government approval processes, the impact of competitive products or pricing, technological changes, and the effect of economic conditions; and continuing industry-wide pricing pressures and other industry conditions, as well as other risks and uncertainties, including without limitation those set forth in other sections of this Form 10-Q, in the Company's Annual Report on Form 10-K/A for the year ended December 31, 2002, and/or in the Company's other documents filed with the Securities and Exchange Commission, whether or not such documents are incorporated herein by reference. In assessing forward-looking statements, readers are urged to read carefully all such cautionary statements. The forward-looking statements in this Form 10-Q speak only as of the date of this Form 10-Q, and the Company disclaims any obligation or undertaking to update such statements. If one or more of these risks or uncertainties materialize, or if the underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated or expected. 16 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company does not issue or invest in financial instruments or their derivatives for trading or speculative purposes. The Company's market risk is limited to fluctuations in interest rates as it pertains to its borrowings under its revolving credit facility. The Company can borrow at either the bank's prime rate of interest or LIBOR plus 2.50 percent. Any increase in these reference rates could adversely affect the Company's interest expense. The Company does not have any material sales, purchases, assets or liabilities denominated in currencies other than the U.S. Dollar, and as such, is not subject to material foreign currency exchange rate risk. ITEM 4. CONTROLS AND PROCEDURES The Company carried out an evaluation, as required by Exchange Act Rule 13a-15(b), under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rules 13a-14 and 15d-14 of the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company's periodic Securities and Exchange Commission filings. During the period covered by this quarterly report, the Company has begun to implement certain changes its internal control over financial reporting as described below, which that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Disclosure controls and procedures are those controls and other procedures that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company's management, including the Company's principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. As disclosed in the Company's Form 8-K filed on August 27, 2003, Grant Thornton LLP ("Grant Thornton"), the Company's former independent accountants, informed the Company that they considered there to be certain deficiencies in the Company's internal control procedures that would be deemed to be a material weakness under standards established by the American Institute of Certified Public Accountants. Grant Thornton made this determination in connection with the preparation of the Company's consolidated financial statements as of and for the year ended December 31, 2002 for inclusion in the Company's Form 10-K/A, which was filed on July 24, 2003 to supplement the Company's Form 10-K filed on March 31, 2003. The opinion of Grant Thornton in the Form 10-K/A did not contain an adverse opinion or disclaimer of opinion and was not qualified or modified as to uncertainty, audit scope or accounting principles. 17 The former independent accountants informed the Company and the Audit Committee of these deficiencies in a letter delivered on August 20, 2003. These deficiencies included the failure to disclose certain related party transactions in the Company's Form 10-K for the fiscal year ended December 31, 2002, the Company's reliance on substantial outside assistance from outside professionals in preparing the Company's financial statements, and understaffing in the Company's accounting and finance department. The Form 10-K/A filed by the Company on July 24, 2003 fully disclosed the related party transactions. In response to these issues, senior management and the Audit Committee directed the Company to dedicate resources and take additional steps to strengthen its control processes and procedures to ensure that these internal control deficiencies do not result in a material misstatement in the Company's consolidated financial statements. Specifically, we have implemented or are preparing to implement the following additional procedures: o The Company briefed the Chairman and Chief Executive Officer on the requirement to disclose related party transactions. o The Company distributed a questionnaire to each of the Company's officers and directors specific to related party transactions; and the Company is considering more rigorous follow-up with its directors and executive officers regarding their responses to annual questionnaires used in preparing the Company's Form 10-K and proxy materials. o The Company developed a financial statement disclosure checklist to be completed by the Chief Financial Officer each time the Company prepares financial statements. o The Company intends to begin the preparation of its quarterly and annual financial statements sooner after the end of each fiscal quarter and fiscal year, and to undertake an additional layer of internal review prior to delivering drafts to its outside professionals. o The Company intends to reinforce with its new auditors their ability to communicate with and obtain information from lower level personnel in the Company's accounting and finance department. o The Company will evaluate further delegation and allocation of responsibilities within its accounting and finance department to facilitate prompt availability of financial information. o Since the beginning of the current fiscal year, the Company hired new financial reporting personnel, including a Corporate Treasurer, a Controller for the Point Blank subsidiary and a staff accountant/assistant controller. The Company also hired a Controller within the last twelve months for its PACA facility. o The Company intends to review, confirm and clarify with its personnel their specific functions and responsibilities to promote the orderly flow and availability of financial data and information o During the second quarter, the Company hired an internal control professional to review and revamp the Company's internal control policies and procedures. The Company also engaged the firm Eisner LLP to assist management in complying with the internal control requirements under Section 404 of the Sarbanes-Oxley Act of 2002 ("SOXA") to gain greater efficiency and effectiveness. The Company provided Eisner LLP with copies of the updated policies and procedures and flowcharts of the Accounting and IT departments. 18 The Company will continue to: (a) evaluate the effectiveness of its internal controls and procedures on an ongoing basis, (b) implement actions to enhance its resources and training in the area of financial reporting and disclosure responsibilities, and (c) review such actions with the Audit Committee and the Company's new independent accountants, Weiser LLP. The Company has discussed its corrective actions and plans with the Audit Committee and Weiser LLP. The Company separately has engaged the firm Eisner LLP to assist management in complying with the internal control requirements under Section 404 of SOXA to gain greater efficiency and effectiveness. Management estimates that this internal control evaluation will be completed in November 2003. The Company's management, including the Chief Executive Officer and Chief Financial Officer, does not expect that the Company's disclosure controls or its internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. The Company monitors its disclosure controls and internal controls and makes modifications as necessary; the Company's intent in this regard is that the disclosure controls and the internal controls will be maintained as dynamic systems that change (including with improvements and corrections) as conditions warrant. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company has filed a lawsuit on March 14, 2000 in the Supreme Court of the State of New York, County of Nassau, against its insurance carrier and an insurance agent, for negligence and breach of fiduciary duties as a result of damages the Company incurred during Hurricane Irene in October 1999. The Company is vigorously pursuing this action. On March 17, 2003, the Company entered into a settlement agreement with its insurance agent for a $1.0 million payment to the Company. The Company received a cash payment of approximately $739,000, which is net of the associated legal fees of $261,000. The $739,000 received by the Company is included in other income during the nine months ended September 30, 2003. The lawsuit against the insurance carrier has been scheduled for mediation in the winter of 2003. 19 Since March, the UNITE Union, as part of its unsuccessful organizing campaign, has filed eight unfair labor practice charges against the Company with the National Labor Relations Board ("NLRB"). The union has withdrawn five of these charges. The NLRB is currently investigating the remaining three charges. The Company is confident it has not breached any provision of the National Labor Relations Act. On October 1, 2002, a shareholders' derivative action was commenced in the Supreme Court of the State of New York, County of Nassau, on behalf of the Company against the directors and officers of the Company and the Company as a nominal defendant, by Plumbers & Pipefitters Local 112 Pension Fund, derivatively on behalf of itself and all others similarly situated. This case was dismissed with prejudice on March 13, 2003, without liability to the Company or its officers or directors. The Company is seeking dismissal of a second shareholder derivative action brought by William Gosner against the Company on October 25, 2003 with essentially the same four separate causes of action of fiduciary duty, aiding and abetting breach of fiduciary duty, constructive fraud, and abuse of control that the Plumbers & Pipefitters Local 112 union Fund previously brought against the Company, that the Supreme Court, Nassau county, has already dismissed. Mr. Gosner is seeking declaratory and injunctive relief, compensatory and punitive damages, plaintiff costs and attorney fees. The Company maintains $10 million of directors' and officers' liability insurance covering this type of claim. The Company is also involved in other litigation, which management considers to be routine and incidental to the Company's business. Management does not expect the results of any of these routine and incidental actions to have a material adverse effect on the Company's consolidated business, results of operations or financial condition. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS Not Applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not Applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (a) The Company's annual meeting of stockholders was held on August 15, 2003. (b) At the annual meeting, the Company's stockholders elected David H. Brooks, Gary Nadelman, Dawn M. Schlegel, Jerome Krantz, Cary Chasin and Barry Berkman as Directors for a one-year term, which expires at the annual meeting of stockholders in 2004. The following table represents the shareholders votes for ratification of the Board of Directors. NOMINEE FOR AGAINST ABSTAIN David Brooks 37,386,692 1,136,838 -0- Gary Nadelman 38,105,035 418,495 -0- Jerome Krantz 38,105,035 418,495 -0- Cary Chasin 37,539,717 983,813 -0- Dawn Schlegel 37,423,142 1,100,388 -0- Barry Berkman 38,209,735 313,795 -0- (c) At the annual meeting, the Company's stockholders ratified the appointment of Grant Thornton LLP as auditors of the Company for 2003. The holders of approximately 38,060,950 shares of Common Stock voted to ratify the appointment, the holders of 375,570 shares voted against the ratification, and the holders of 87,010 shares abstained. 20 ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (A) EXHIBITS 10.12 Third amendment to the Loan and Security Agreement 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 (B) REPORTS ON FORM 8-K The Company filed the following Report on Form 8-K during the quarter ended September 30, 2003: Form 8-K filed July 24, 2003 to report financial results for the quarterly period ended June 30, 2003. The Form 8-K included financial statements. Form 8-K filed August 27, 2003 as amended by Form8-K/A filed September 9, 2003, by Form 8-K/A #2 filed on October 16, 2003, and Form 8-K/A #3 filed on October 29, 2003; all regarding the resignation of the Company's former independent accountants, Grant Thornton LLP. 21 Form 8-K filed September 2, 2003 to report the engagement of Weiser LLP as the Company's new independent accountants. 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 13, 2003 DHB INDUSTRIES, INC. (Registrant) SIGNATURE CAPACITY DATE Chief Executive Officer November 13, 2003 /s/ DAVID H. BROOKS and Chairman of the Board ------------------- Chief Financial Officer and November 13, 2003 /s/ DAWN M. SCHLEGEL Principal Accounting Officer -------------------- 22 EX-10.12 3 exhibit10.txt THIRD AMENDMENT TO THE LOAN AND SECURITY ... EXHIBIT 10 EXECUTION COPY THIRD AMENDMENT (this "AMENDMENT"), dated as of August 30, 2003, to LOAN AND SECURITY AGREEMENT, dated as of September 24, 2001 (as amended, modified or supplemented from time to time, the "LOAN AGREEMENT"), by and among LASALLE BUSINESS CREDIT, LLC, a Delaware limited liability company, successor by merger to LASALLE BUSINESS CREDIT, INC., a Delaware corporation ("LASALLE"), and PROTECTIVE APPAREL CORPORATION OF AMERICA, a New York corporation ("PACA"), POINT BLANK BODY ARMOR, INC., a Delaware corporation ("POINT BLANK"), and NDL PRODUCTS, INC., a Florida corporation ("NDL", and with PACA and Point Blank, collectively, the "BORROWERS" and each, a "BORROWER"), and DHB INDUSTRIES, INC., a Delaware corporation (f/k/a DHB Capital Group, Inc., the "PARENT"). Terms which are capitalized in this Amendment and not otherwise defined shall have the meanings ascribed to such terms in the Loan Agreement. WHEREAS, the Borrowers and Parent have requested that LaSalle extend the period during which the Maximum Revolving Loan Limit of $35,000,000 shall be in effect; and WHEREAS, LaSalle has consented to such request, on the terms and subject to the satisfaction of the conditions contained in this Amendment; NOW, THEREFORE, in consideration of the foregoing, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: SECTION ONE . AMENDMENT. Upon the satisfaction of the conditions set forth in SECTION TWO hereof, Section 2(a) of the Loan Agreement shall be and is hereby amended as of August 30, 2003 by deleting in its entirety clause (y) of the proviso found immediately after clause (iv) thereof, and substituting in lieu thereof the following new clause (y): "(y) the Revolving Loan Limit with respect to Revolving Loans made to all Borrowers, at any one time outstanding, shall in no event exceed the following applicable amount: (I) Thirty-Five Million Dollars ($35,000,000) during the period commencing on February 18, 2003 and ending on (and including) December 31, 2003 and (II) Twenty-Five Million Dollars ($25,000,000) at all times on and after January 1, 2004 (such amount, as in effect on any date of determination, the "Maximum Revolving Loan Limit")." SECTION TWO . CONDITIONS PRECEDENT. This Amendment is subject to the satisfaction of all of the following conditions, the satisfaction of each of which is a condition precedent to the effectiveness of this Amendment, except to the extent waived in writing by LaSalle. (A) LaSalle shall have received each of the following, which shall be in form and substance reasonably satisfactory to it: (i) this Amendment, duly executed by each Borrower and Parent, and by David H. Brooks; and (ii) a Certificate of the Secretary or Assistant Secretary of each Borrower and of Parent (A) relating to the adoption of resolutions by each such Borrower's and Parent's respective Board of Directors approving this Amendment and the other documents executed or delivered in connection herewith by such party, (B) certifying that no amendments have been made to each such Borrower's or Parent's Certificate of Incorporation, as amended, other than the Certificate of Designations and Preferences executed on December 14, 2001, and each such Borrower's or Parent's by-laws, as amended, since September 24, 2001, and (C) further certifying the names and incumbency of officers of each such Borrower and of Parent authorized to sign this Amendment and all other documents executed or delivered in connection herewith, and the names and validity of signatures of such officers. (B) All representations and warranties set forth in the Loan Agreement (except for such inducing representations and warranties that were only required to be true and correct as of a prior date) shall be true and correct in all material respects on and as of the effective date hereof, and no Default or Event of Default shall have occurred and be continuing. (C) No event or development shall have occurred since December 31, 2002 which event or development has had or is reasonably likely to have a Material Adverse Effect. (D) LaSalle shall have received a certificate from each Borrower and Parent, executed by the chairman of each such party, as to the truth and accuracy of paragraphs (b) and (c) of this SECTION TWO. (E) All corporate and legal proceedings and all documents and instruments executed or delivered in connection with this Amendment shall be satisfactory in form and substance to LaSalle and its counsel, and LaSalle and its counsel shall have received all information and copies of all documents which it or its counsel may have reasonably requested in connection herewith and the matters contemplated hereunder, such documents, when requested by them, to be certified by appropriate corporate authorities. (F) There shall be no action, suit or proceeding pending or to any Borrower's or Parent's knowledge overtly threatened against any Borrower or Parent before any court (including any bankruptcy court), arbitrator or 2 governmental or administrative body or agency which challenges or relates to the consummation of this Amendment or the other transactions contemplated herein. (G) LaSalle shall have received such further agreements, consents, instruments and documents as may be necessary or proper in the reasonable opinion of LaSalle and its counsel to carry out the provisions and purposes of this Amendment. SECTION THREE . REPRESENTATIONS AND WARRANTIES. Each Borrower and Parent each hereby represents and warrants (which representations and warranties shall survive the execution and delivery hereof) to LaSalle that: (A) Each Borrower and Parent has the corporate or other power, authority and legal right to execute, deliver and perform this Amendment and the other instruments, agreements, documents and transactions contemplated hereby to which it is a party, and has taken all actions necessary to authorize the execution, delivery and performance of this Amendment and the other instruments, agreements, documents to which it is a party and the transactions contemplated hereby and thereby; (B) No consent of any Person (including, without limitation, stockholders or creditors of any Borrower or Parent, as the case may be) other than LaSalle, and no consent, permit, approval or authorization of, exemption by, notice or report to, or registration, filing or declaration with, any governmental authority is required in connection with the execution, delivery and performance by each Borrower and Parent, or the validity or enforceability against such parties, of this Amendment and the other instruments, agreements, documents and transactions contemplated hereby to which they are a party; (C) This Amendment has been duly executed and delivered on behalf of each Borrower and Parent by their respective duly authorized officers, and constitutes the legal, valid and binding obligation of such Borrower and Parent, enforceable in accordance with its terms, except to the extent that such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium and similar laws affecting the rights of creditors generally or equitable remedies (whether arising in a proceeding at law or in equity); (D) No Borrower or Parent is in material default under any indenture, mortgage, deed of trust, agreement or other instrument to which it is a party or by which it may be bound. Neither the execution and delivery of this Amendment, nor the consummation of the transactions herein contemplated, nor compliance with the provisions hereof will (i) violate any law or regulation, or (ii) result in or cause a violation by any Borrower or Parent of any order or decree of any court or government instrumentality, or (iii) conflict with, or result in the breach of, or constitute a default under, any indenture, mortgage, deed of trust, material agreement or other material instrument to which each such Borrower or Parent is a party or by which any of them may be bound, or (iv) result in the creation or imposition of any lien, charge, or encumbrance upon any of the property of each such Borrower or Parent, except in favor of LaSalle, to secure the Liabilities, or (v) violate any provision of the Certificate of Incorporation, By-Laws or any capital stock or similar equity instrument of each such Borrower or Parent; (E) No Default or Event of Default has occurred and is continuing on the date hereof; 3 (F) Since the date of Parent's consolidated and consolidating financial statements for the twelve (12) month period ended December 31, 2002, no change or event has occurred which has had or is reasonably likely to have a Material Adverse Effect; (G) Upon execution of this Amendment and the satisfaction of the conditions set forth in SECTION TWO hereof, each of Parent and each Borrower, each in its capacity as Guarantor under the Loan Agreement, agrees that the term "Liabilities" shall include any and all Liabilities arising under the Loan Agreement, as amended by this Amendment, including but not limited to any and all Revolving Loans resulting from the extension of the period during which the Maximum Revolving Loan Limit of $35,000,000 shall be in effect, and all interest accruing on such Revolving Loans; (H) Parent and its Subsidiaries, taken as a whole, are, and after giving effect to the transactions contemplated by this Amendment, will be, solvent, able to pay its debts as they become due, has capital sufficient to carry on its business, now owns property having a value both at fair valuation and at present fair saleable value greater than the amount required to pay its debts, and will not be rendered insolvent by the execution and delivery of this Amendment or any of the other agreements or instruments being executed in connection herewith or by completion of the transactions contemplated hereunder or thereunder. SECTION FOUR GENERAL PROVISIONS. (A) Except as herein expressly amended, the Loan Agreement and all other agreements, documents, instruments and certificates executed in connection therewith, are ratified and confirmed in all respects and shall remain in full force and effect in accordance with their respective terms. (B) All references in the Other Agreements to the Loan Agreement shall mean the Loan Agreement as amended hereby and as hereafter amended, supplemented or modified from time to time. From and after the date hereof, all references in the Loan Agreement to "this Agreement," "hereof," "herein," or similar terms, shall mean and refer to the Loan Agreement as amended by this Amendment. (C) This Amendment may be executed by the parties hereto individually or in combination, in one or more counterparts, each of which shall be an original and all which shall constitute one and the same agreement. (D) This Amendment shall be governed and controlled by the internal laws of the State of New York. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 4 IN WITNESS WHEREOF, LaSalle, each Borrower, each Guarantor, each DHB Subsidiary and Parent have caused this Amendment to be duly executed by their respective officers thereunto duly authorized as of the day and year first above written. DHB ARMOR GROUP, INC. LASALLE BUSINESS CREDIT, LLC, successor by merger to LaSalle Business Credit, Inc. By: /s/ DAVID BROOKS By: ________________________________ _________________________________ Name: David Brooks Name:Michael F. Aliberto, III, Title: Chairman Title: Vice President DHB SPORTS GROUP, INC. PROTECTIVE APPAREL CORPORATION OF AMERICA By: /s/ DAVID BROOKS By: /s/ DAVID BROOKS ________________________________ _________________________________ Name: David Brooks Name: David Brooks Title: Chairman Title: Chairman LANXIDE ARMOR PRODUCTS, INC. POINT BLANK BODY ARMOR, INC. By: /s/ DAVID BROOKS By: /s/ DAVID BROOKS ________________________________ _________________________________ Name: David Brooks Name: David Brooks Title: Chairman Title: Chairman ORTHOPEDIC PRODUCTS, INC. NDL PRODUCTS, INC. By: /s/ DAVID BROOKS By: /s/ DAVID BROOKS ________________________________ _________________________________ Name: David Brooks Name: David Brooks Title: Chairman Title: Chairman DHB INDUSTRIES INC. By: /s/ DAVID BROOKS _________________________________ Name: David Brooks Title: Chairman ACKNOWLEDGED AND CONSENTED TO: ________________________________ /s/ DAVID H. BROOKS 5 EX-31.1 4 exhibit31-1.txt CERTIFICATION OF CEO CERTIFICATION OF CHIEF EXECUTIVE OFFICER EXHIBIT 31.1 I, David H. Brooks, Chairman and Chief Executive Officer of the Company, certify that: 1. I have reviewed this quarterly report on Form 10-Q of DHB Industries, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 13, 2003 /s/ DAVID H. BROOKS - ------------------------------------ David H. Brooks Chairman and Chief Executive Officer EX-31.2 5 exhibit31-2.txt CERTIFICATION OF CFO CERTIFICATION OF CHIEF FINANCIAL OFFICER EXHIBIT 31.2 I, Dawn M. Schlegel, Chief Financial Officer of the Company, certify that: 1. I have reviewed this quarterly report on Form 10-Q of DHB Industries, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 13, 2003 /s/ DAWN M. SCHLEGEL - ----------------------- Dawn M. Schlegel Chief Financial Officer EX-32.1 6 exhibit32-1.txt CERTIFICATION OF CEO EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of DHB Industries, Inc. (the "Company") on Form 10-Q for the period ended September 30, 2003 as filed with the Securities and Exchange Commission on or about the date hereof (the "Report"), I, David H. Brooks, Chairman and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: November 13, 2003 By: /s/ DAVID H. BROOKS ------------------------------ David H. Brooks Chairman and Chief Executive Officer This certification accompanies this Report on Form 10-Q pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by such Act, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. EX-32.2 7 exhibit32-2.txt CERTIFICATION OF CFO EXHIBIT 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of DHB Industries, Inc. (the "Company") on Form 10-Q for the period ended September 30, 2003 as filed with the Securities and Exchange Commission on or about the date hereof (the "Report"), I, Dawn M. Schlegel, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: November 13, 2003 By: /s/ DAWN M. SCHLEGEL ------------------------------ Dawn M. Schlegel Chief Financial Officer This certification accompanies this Report on Form 10-Q pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by such Act, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. -----END PRIVACY-ENHANCED MESSAGE-----