-----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, RNEHxYVqyMEFtLcQqFFVluFs8b3m81VqVeMzYkb/LFdGt7YvWHbKYvn8xS9jJvK8 dJAVNRq4YsP7MlxnEWurVw== 0001092306-05-000395.txt : 20050808 0001092306-05-000395.hdr.sgml : 20050808 20050808172406 ACCESSION NUMBER: 0001092306-05-000395 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20050630 FILED AS OF DATE: 20050808 DATE AS OF CHANGE: 20050808 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: 051006762 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 form10q063005.txt FORM 10-Q DATED 06-30-05 ======================================================================= 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 June 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 of (I.R.S. Employer Identification No.) incorporation) 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 August 5, 2005, there were 45,377,575 shares of Common Stock, $.001 par value, outstanding. ====================================================================== INDEX PART I. FINANCIAL INFORMATION PAGE Item 1. Financial Statements Condensed Consolidated Balance Sheets as of June 30, 2005 (Unaudited) and December 31, 2004 3 Unaudited Condensed Consolidated Statements of Operations for the Three Months and Six Months Ended June 30, 2005 and 2004 4 Unaudited Condensed Consolidated Statements of Cash Flows For the Six Months Ended June 30, 2005 and 2004 5 Notes to Unaudited Condensed Consolidated Financial Statements 6-13 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13-19 Item 3. Quantitative and Qualitative Disclosures about Market Risk 19 Item 4. Controls and Procedures 20-21 PART II. OTHER INFORMATION Item 1. Legal Proceedings 21 Item 2. Changes in Securities and Use of Proceeds 21 Item 3. Defaults Upon Senior Securities 22 Item 4. Submission of Matters to a Vote of Security Holders 22 Item 5. Other Information 22 Item 6. Exhibits 22 Signatures 23 2 ITEM 1. FINANCIAL STATEMENTS
DHB INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share data) June 30, 2005 December 31, ---- ASSETS (UNAUDITED) 2004 ----------- ---- Current assets Cash and cash equivalents $62 $447 Accounts receivable, less allowance for doubtful accounts of $762 and $702, respectively 37,640 47,560 Accounts receivable - related party 6,583 Inventories 101,353 85,973 Deferred income tax assets 615 483 Prepaid expenses and other current assets 1,771 1,220 ------- ------- Total current assets 141,441 142,266 ------- ------- Property and equipment, net 2,477 2,632 ------- ------- Other assets Deferred income tax assets 580 593 Deposits and other assets 1,122 366 ------- ------- Total other assets 1,702 959 ------- ------- Total assets $145,620 $145,857 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Current maturities of term loan payable $8,000 $4,000 Accounts payable 10,891 8,014 Accrued expenses and other current liabilities 7,160 8,350 Income taxes payable 5,373 14,816 ------- ------- Total current liabilities 31,424 35,180 ------- ------- Long-term liabilities Notes payable-bank 10,708 25,634 Term loan payable 9,000 6,500 Other liabilities 1,134 1,086 ------- ------- Total liabilities 52,266 68,400 ------- ------- Commitments and contingencies Minority interest in consolidated subsidiary 555 431 Stockholders' equity Convertible preferred stock, $0.001 par value, 5,000,000 shares 1 1 authorized, 500,000 shares of Series A, 12% convertible preferred stock issued and outstanding; liquidation preference $3,000 Common stock, $0.001 par value, 100,000,000 shares 45 45 authorized, 45,337,575 and 45,282,536 issued and outstanding Additional paid in capital 36,096 35,540 Retained earnings 56,657 41,440 ------- ------- Total stockholders' equity 92,799 77,026 ------- ------- Total liabilities and stockholders' equity $145,620 $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 Six Months Ended June 30, June 30, 2005 2004 2005 2004 ------ ------ ------ ---- Net sales $88,196 $86,066 $173,661 $160,469 Cost of goods sold (includes related party purchases of $2,535, $4,917, $11,874, and $8,219, respectively) 64,166 62,186 126,244 115,824 ------ ------ ------- ------- Gross profit 24,030 23,880 47,417 44,645 Selling, general and administrative expenses 11,388 10,890 22,204 20,762 ------ ------ ------- ------- Income before other income (expense) 12,642 12,990 25,213 23,883 ------ ------ ------- ------- Other income (expense) Interest expense (645) (359) (1,189) (658) Other income 10 4 27 14 ------ ------ ------- ------- Total other income (expense) (635) (355) (1,162) (644) ------ ------ ------- ------- Income before income taxes and minority interest 12,007 12,635 24,051 23,239 Income taxes 4,259 4,936 8,530 9,122 ------ ------ ------- ------- Income before minority interest of subsidiary 7,748 7,699 15,521 14,117 Minority interest of subsidiary (60) (39) (124) (98) ------ ------ ------- ------- Net income 7,688 7,660 15,397 14,019 Dividend - convertible preferred stock (90) (90) (180) (180) ------ ------ ------- ------- Income available to common stockholders $7,598 $7,570 $15,217 $13,839 ====== ====== ======= ======= Earnings per common share: Basic $0.17 $0.19 $0.34 $0.34 ===== ===== ===== ===== Diluted $0.17 $0.17 $0.33 $0.31 ===== ===== ===== ===== Weighted average shares outstanding: Basic shares 45,300,796 40,808,345 45,297,388 40,776,064 Effect of convertible preferred stock 500,000 500,000 500,000 500,000 Warrants 220,705 4,430,932 269,315 4,164,590 ------- --------- ------- --------- Diluted shares 46,021,501 45,739,277 46,066,703 45,440,654 ========== ========== ========== ==========
(See Notes to Condensed Consolidated Financial Statements) 4
DHB INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (In thousands, except share and per share data) For the Six Months Ended June 30, 2005 2004 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net income $15,397 $14,019 Adjustments to reconcile net income to net cash and cash equivalents provided by (used in) operating activities: Depreciation and amortization 412 427 Amortization of deferred financing costs 12 74 Provision for doubtful accounts 60 84 Minority interest of subsidiary 124 98 Stock issued for services 369 -- Deferred income tax (benefit) expense (119) (34) Changes in operating assets and liabilities Accounts receivable 16,443 (25,164) Inventories (15,380) (19,589) Prepaid expenses and other current assets (551) (108) Deposits and other assets (768) (28) Accounts payable 2,877 3,207 Income taxes payable (9,443) 4,183 Accrued expenses and other current liabilities (1,190) 3,196 Other liabilities 48 210 -------- -------- Net cash provided by (used in) operating activities 8,291 (19,425) -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property and equipment (257) (1,633) -------- -------- Net cash used in investing activities (257) (1,633) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Dividends paid on preferred stock (180) (180) Payments on notes payable - bank (157,364) (117,370) Proceeds of notes payable - bank 142,438 125,692 Proceeds of term loan 8,500 12,500 Issuance costs of long-term debt -- (83) Payments on long-term debt (2,000) -- Proceeds upon the exercise of warrants 187 160 -------- -------- Net cash provided by financing activities (8,419) 20,719 -------- -------- Net increase (decrease) in cash and cash equivalents (385) (339) Cash and cash equivalents at beginning of the period 447 441 -------- -------- Cash and cash equivalents at end of the period $ 62 $102 ======== ========
(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 June 30, 2005 and for the three months and six months ended June 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. 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. 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, 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. The weighted-average warrant fair values and assumptions used to estimate these values are as follows: 6 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 3.60% 3.12% Expected volatility of common stock 79.03% 93.96% Dividend yield 0.00% 0.00% Expected option term 4.44 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 Six Months Ended June 30, Ended June 30, 2005 2004 2005 2004 ---- ---- ---- ---- Net income $7,688 $7,660 $15,397 $14,019 Deduct: compensation determined under fair value based method for all awards, net of related tax effect 454 1,392 461 1,608 ------ ------ ------- ------ Net income pro forma 7,234 6,268 14,936 12,411 Less dividend - preferred stock 90 90 180 180 ------ ------ ------- ------ Income available to common stockholders, pro forma $7,144 $6,178 $14,756 $12,231 ------ ------ ------- ------ Basic earnings per common share As reported $0.17 $0.19 $0.34 $0.34 Pro forma $0.16 $0.15 $0.33 $0.30 Diluted earnings per common share As reported $0.17 $0.17 $0.33 $0.31 Pro forma $0.16 $0.14 $0.32 $0.27
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 WARRANTS Warrants On May 24, 2005 the Board of Directors awarded three key employees a total of 750,000 warrants exercisable at $7.66 per share, vesting 210,000 warrants per annum commencing May 24, 2006, which expire May 24, 2009. In addition on June 2, 2005, the Board of Directors issued a key executive 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 six months ended June 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 six month period ended June 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. Subsequent to June 30, 2005, options to purchase 5,250,000 common shares were issued to the CEO and Chairman, pursuant to the terms of his 2000 employment agreement, with an exercise price of $1.00 per share vesting 1,500,000 immediately and 750,000 on each anniversary. The intrinsic value of the warrants that vested immediately was approximately $11,295,000 which will be included as a non-cash compensation expense during the third quarter ended 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 During the three and six months ended June 30, 2005 and 2004, all outstanding warrants were included in the computation of diluted earnings per share. During the six months ended June 30, 2005, the Company issued 25,040 unregistered shares of its common stock in settlement of a lawsuit with a former consultant. The value of this non-cash settlement was approximately $369,000 and is included in selling, general and administrative expenses during the quarter ended March 31, 2005. No unregistered shares were issued during the six months ended June 30, 2004 other than the stock warrant issuances described above. 8 DHB INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share data) NOTE 4. SUPPLEMENTAL CASH FLOW INFORMATION For the Six Months Ended June 30, Cash paid for: 2005 2004 ---- ---- Interest $1,189 $644 Taxes 18,053 5,883 Non-cash financing and investing activities: Revolving credit loan refinanced to long-term debt $12,500 $12,500 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: June 30, December 31, 2005 2004 ------ ---- Raw materials and supplies $33,987 $31,695 - Work in process 22,776 18,815 Finished goods 44,590 35,463 ------ ------ $101,353 $85,973 ======== ======= NOTE 6. 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. Previously, on March 15, 2004, the Company had amended its bank credit agreement to increase the total borrowing limits from $35,000 to $45,000 and the Company borrowed a term loan in the principal amount of $12,500, amortizing at the rate of $1,000 per quarter commencing July 2004. Borrowings under the Credit Agreement bear interest, at the Company's option, at the bank's prime rate (6.25% at June 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 June 30, 2005, the Company had a LIBOR loan outstanding on the credit facility at a rate of 5.66%. The borrowings under the Credit Agreement are collateralized by a first security interest in substantially all of the assets of the Company. 9 DHB INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share data) NOTE 7. 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 Six Months Ended June 30, Ended June 30, NET SALES 2005 2004 2005 2004 - --------- ---- ---- ---- ---- Ballistic-resistant equipment $85,746 $84,375 $169,052 $156,938 Protective athletic & sports products 2,450 1,691 4,609 3,531 ------- ------- -------- -------- Consolidated net sales $88,196 $86,066 $173,661 $160,469 ======= ======= ======== ======== INCOME BEFORE OTHER INCOME (EXPENSE) Ballistic-resistant equipment $14,819 $15,874 $30,441 $29,239 Protective athletic & sports products 220 303 537 620 Corporate and other (1) (2,397) (3,187) (5,765) (5,976) ------- ------- ------- ------- Consolidated income before other income (expense) $12,642 $12,990 $25,213 $23,883 ======= ======= ======= ======= DEPRECIATION AND AMORTIZATION EXPENSE Ballistic-resistant equipment $143 $141 $282 $281 Protective athletic & sports products 7 30 14 61 Corporate and other 59 51 116 85 ---- ---- ---- ---- Consolidated depreciation and amortization expense $209 $222 $412 $427 ==== ==== ==== ==== INTEREST EXPENSE Ballistic-resistant equipment $ 644 $ 359 $ 1,187 $ 657 Protective athletic & sports products -- -- -- -- Corporate and other (1) 1 -- 2 1 ---- ---- ------ ---- Consolidated interest expense $645 $359 $1,189 $658 ==== ==== ====== ==== INCOME BEFORE INCOME TAXES AND MINORITY INTEREST Ballistic-resistant equipment $10,198 $7,770 21,090 17,888 Protective athletic & sports products 220 303 537 613 Corporate and other (1) 1,589 4,562 2,424 4,738 ----- ----- ----- ----- Consolidated income before income tax expense $12,007 $12,635 $24,051 $23,239 ======= ======= ======= ======= INCOME TAXES Ballistic-resistant equipment $ 626 $ 594 $ 1,296 $ 1,209 Protective athletic & sports products -- -- -- -- Corporate and other (1) 3,633 4,342 7,234 7,913 ----- ----- ----- ----- Consolidated income tax expense $4,259 $4,936 $8,530 $9,122 ====== ====== ====== ======
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 June 30, 2005 December 31, 2004 ------------- ----------------- IDENTIFIABLE ASSETS Ballistic-resistant equipment $138,779 $138,370 Protective athletic & sports products 3,950 5,018 ------- -------- 142,729 143,388 Corporate and other (2) 2,891 2,469 ------- -------- Consolidated total assets $145,620 $145,857 ======== ======== (1) Corporate and other expenses include corporate general and administrative expenses. (2) Corporate and other assets are principally deferred income tax assets and property and equipment. NOTE 8. CONTINGENCIES On January 3, 2005, a class action lawsuit was filed against us in the Circuit Court of the Seventeenth Judicial Circuit in Broward County, Florida by a police organization and individual police officers, 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). In February 2005, we reached a preliminary settlement with respect to the class action lawsuit filed, subject to final court approval. The Company does not expect this settlement to have a material adverse effect on its financial position and has set up a reserve in accrued expenses for the approximate cost of the settlement. 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 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. 11 DHB INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share data) NOTE 10. 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. 12 DHB INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share data) NOTE 10. 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. 13 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 six months ended June 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 JUNE 30, 2005, COMPARED TO THE THREE MONTHS ENDED JUNE 30, 2004 For the three months ended June 30, 2005 consolidated net sales were approximately $88.2 million, an increase of 2.4% over consolidated net sales of approximately $86.1 million for the three months ended June 30, 2004. The Armor Group's net sales increased nearly 2% from $84.4 million for the three months ended June 30, 2005 to approximately $85.7 million for the three months ended June 30, 2004, due primarily to increased shipments to the U.S. Military. The 14 Sports Group's net sales for the three months ended June 30, 2005 increased 47.0% to approximately $2.5 million, as compared to $1.7 million for the three months ended June 30, 2004. The primary reason for this increase is a new subcontracting contract for the Sports Group to produce elbow pads for another company. Gross profit for the quarter ended June 30, 2005 was approximately $24.03 million (27.2% of net sales), as compared to approximately $23.9 million (27.7% of net sales) for the quarter ended June 30, 2004. The Company's selling, general and administrative expenses were approximately $11.4 million, or 12.9% of net sales for the three months ended June 30, 2005, versus approximately $10.9 million, or 12.7% of net sales for the three months ended June 30, 2004. Selling, general and administrative expenses will increase in the third quarter by approximately $11.3 million, as a result of the non-cash compensation expense associated with the warrants issued during this period. Driven primarily by the slight decrease in gross profit, operating income decreased slightly to approximately $12.6 million (14.3% of net sales) for the second quarter of 2005 versus approximately $13.0 million (15.1% of net sales) for the second quarter of 2004. Interest expense for the three months ended June 30, 2005 increased 79.7% to approximately $645,000, compared to approximately $359,000 for the three months ended June 30, 2004. This increase is primarily the result of increased borrowing under the Company's credit facility to fund the Company's operations and continued growth. Income before income taxes and minority interest of subsidiary was approximately $12.0 million for the three months ended June 30, 2005, compared to income before taxes of approximately $12.6 million for the three months ended June 30, 2004. Income taxes for the second quarter of 2005 were approximately $4.3 million while income taxes for the second quarter of 2004 were approximately $4.9 million. The effective tax rate for the second quarter of 2005 was 34.5% as compared to 39.0% during the second 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 was approximately $60,000 and $39,000 for the three months ended June 30, 2005 and 2004, respectively. After the preferred stock dividends of approximately $90,000 per quarter, income available to common stockholders was approximately $7.6 million for each of the three month periods ended June 30, 2005 and 2004, or $0.17 per diluted share. The weighted average shares outstanding on a diluted basis for the three months ended June 30, 2005 were 46,021,501, as compared to 45,739,277 for the three months ended June 30, 2004. SIX MONTHS ENDED JUNE 30, 2005, COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2004 For the first half of 2005, consolidated net sales were approximately $173.7 million, an increase of 8.2% over consolidated net sales of approximately $160.5 million for the first half of 2004. The Armor Group's net sales increased nearly 7.8% from $156.9 million for the six months ended June 30, 2004 to approximately $169.1 million for the six months ended June 30, 2005, due primarily increased shipments to the U.S. Military. The Sports Group's net sales for the first half 15 of 2005 increased 31.4% to approximately $4.6 million, as compared to approximately $3.5 million for the first half of 2004. The primary reason for this increase is 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 the first half of 2005 as compared to approximately 27.8% for the first half of 2004. The Company's selling, general and administrative expenses decreased slightly as a percentage of net sales. For the six months ended June 30, 2005, selling, general and administrative expenses were approximately $22.2 million (12.8% of net sales), versus approximately $20.8 million (12.9% of net sales) for the six months ended June 30, 2004. Selling, general and administrative expenses will increase in the third quarter by approximately $11.3 million, as a result of the non-cash compensation expense associated with the warrants issued during this period. Driven primarily by the slight decline in gross profit margins, income before other income (expense) decreased as a percent of sales to approximately $25.2 million (14.5% of net sales) for the six months ended June 30, 2005 versus approximately $23.9 million (14.9% of net sales) for the six months ended June 30, 2004. Interest expense for the six months ended June 30, 2005 increased 80.7% to approximately $1.2 million (1.0% of net sales), compared to approximately $658,000 (0.5% of net sales) for the six months ended June 30, 2004. This increase is primarily the result of increased borrowings under the Company's credit facility. Income before income taxes was approximately $24.1 million for the six months ended June 30, 2005, compared to income before taxes of approximately $23.2 million for the six months ended June 30, 2004. Income taxes for the six months ended June 30, 2005 were approximately $8.5 million while income taxes for the six months ended June 30, 2004 were approximately $9.1 million. The effective tax rate for the first six months of 2005 was 35.5% as compared to 39.3% for the first six months 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 was approximately $124,000 and $98,000 for the six months ended June 30, 2005 and 2004, respectively. The total minority interest included in the balance sheet as of June 30, 2005 was approximately $555,000 as compared to approximately $431,000 as of December 31, 2004. After the preferred stock dividends of approximately $180,000 for each of the six-month periods, income available to common stockholders was approximately $15.2 million for the six months ended June 30, 2005, or $0.33 per diluted share, as compared with income available to common stockholders of approximately $13.8 million, or $0.30 per diluted share, for the six months ended June 30, 2004. The weighted average shares outstanding on a diluted basis for the six months ended June 30, 2005 were 46,066,703, as compared to 45,440,654 for the six months ended June 30, 2004. 16 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 June 30, 2005 was $110.0 million as compared to working capital of $107.1 million at December 31, 2004. In addition to our increase in working capital during 2005, there was positive cash of $8.291 million provided from operations for the six months ended June 30, 2005 as compared to cash used in operations for $19.425 for the six months of June 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 39 days at June 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 six months ended June 30, 2005, our cash collections from customers of approximately $188.6 million exceeded our net sales of approximately $173.7 million. As a comparison, for the six months ended June 30, 2004, our cash collections of approximately $138.0 lagged our net sales of $160.5 million. Our cash outflows are principally manufacturing costs plus the buildup of inventory to accommodate future growth and to secure certain raw materials. As a result of our growth, our cash outflows related to manufacturing cost plus increased inventory have outpaced our cost of goods sold. Our cash outflows for manufacturing costs plus inventory buildup were $163.5 million and $142.3 million for the three months ended June 30, 2005 and 2004, respectively, compared to cost of goods sold of approximately $126.2 million and $115.8 million for such periods, respectively. On March 15, 2005, we amended our bank credit agreement, to increase the total borrowing limit from $45 million to $55 million. Our credit agreement includes a credit facility under which we may borrow, on a revolving basis, up to $37 million on 85% of eligible accounts receivable. The credit agreement also includes a term loan under which we borrowed the principal amount of $18 million which we used to repay our $12.5 million term loan and which is amortized at the rate of $2 million per quarter commencing July 2005. On March 15, 2004, we amended our bank credit agreement to increase the total borrowing limit from $35 million to $45 million and we borrowed a term loan in the principal amount of $12.5 million, which was amortized at the rate of $1 million per quarter commencing July 2004. Borrowings under the Credit Agreement bear interest, at our option, at the bank's prime rate (6.25% at June 30, 2005) or LIBOR plus 1.75% per annum on the credit facility, and LIBOR plus 2.25% on the term loan. At June 30, 2005, we had a LIBOR loan outstanding on our revolving credit facility with a rate of 5.66%. The borrowings under the credit agreement are collateralized by a first security interest in substantially all of our assets. Our credit facility includes both affirmative and negative covenants customary for a financing of this nature. Among other provisions, our credit facility requires us to maintain a (1) minimum tangible net worth, (2) fixed charge coverage ratio, and (3) earnings before interest, taxes, depreciation and amortization. Our credit facility has certain restrictive covenants that limit our ability to pay dividends to our common stockholders or repurchase treasury shares and which limit the total amount of our capital expenditures to $2 17 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. The credit facility has a 1% prepayment penalty through October 1, 2005. We believe that these restrictive covenants do not have a material impact on our liquidity and capital resources. Our capital expenditures during the six months ended June 30, 2005 decreased substantially to $257,000 as compared to $1,890,000 for the six months ended June 30, 2004. During the six months ended June 30, 2004, we purchased additional machinery, equipment, furniture and fixtures and leasehold improvements to equip our new warehouse and administrative facility in Florida for our Point Blank subsidiary and a new location for our corporate headquarters. During the remainder of 2005, we currently anticipate spending approximately $300,000 in capital expenditures to construct a new state of the art ballistic testing range at Point Blank's Pompano Beach facility in addition to our normal capital expenditures of approximately $800,000, for total anticipated capital expenditures of approximately $1.1 million. We believe that our existing credit line, together with funds generated from operations, will be adequate to sustain our operations (including projected capital expenditures) for the next 12 months. Historically, we have been successful in obtaining increases in our revolving credit facility, as required, in order to finance the increased working capital needs brought on by the expansion of our business. However, we have no assurance that we will be able to obtain further such increases if needed, and we may be required to explore other potential sources of financing (including the issuance of equity securities and, subject to the consent of our lender, other debt financing) if we continue to experience escalating demand for our products. CASH CONTRACTUAL OBLIGATIONS The following table presents the Company's estimated cash requirements for contractual obligations outstanding as of June 30, 2005:
PAYMENTS DUE BY PERIOD ($ THOUSANDS) Less Than 1-3 Years 4-5 Years More Than 5 CONTRACTUAL OBLIGATIONS 1 Year Years Total --------- --------- --------- ----------- -------- Long-Term Debt $5,000 $8,000 $14,707 $-- $27,707 Employment Contracts 2,100 6,167 1,929 10,196 Consulting Agreements 105 -- -- -- 105 Operating Leases 2,036 5,753 3,005 1,880 12,674 ------ ------- ------- ------ -------- Total Contractual Cash Obligations $9,241 $19,920 $19,641 $1,880 $50,682 ====== ======= ======= ====== =======
EFFECT OF INFLATION AND CHANGING PRICES The Company did not experience any measurable increases in raw material prices during the six months ended June 30, 2005. 18 SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q contains forward-looking statements regarding future events and our future results that are based on our current expectations, estimates, forecasts and projections about the industries in which we operate and the beliefs and assumptions of our management. Words such as "expects," "anticipates," "targets," "goals," "projects," "intends," "plans," "believes," "seeks," "estimates," variations of such words, and similar expressions are intended to identify such forward-looking statements. These forward-looking statements are only predictions that speak as of the date hereof and are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in our Annual Report on Form10-K/A for the year ended December 31, 2004 and in other reports that we have filed with the Securities and Exchange Commission. You are cautioned not to place undue reliance on these forward-looking statements that speak only as of the date hereof. We undertake no obligation to revise or update publicly any forward-looking statements to reflect any change in the expectations of our management with regard thereto or any change in events, conditions, or circumstances on which any such statements are based. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We do not issue or invest in financial instruments or their derivatives for trading or speculative purposes. Our market risk is limited to fluctuations in interest rates as it pertains to our borrowings under our $55 million credit facility. We can borrow at either the prime rate of interest or LIBOR plus 1.75%. Any increase in these reference rates could adversely affect our interest expense. The change in the interest rate for 2005 was immaterial. The extent of market rate risk associated with fluctuations in interest rates is not quantifiable or predictable because of the volatility of future interest rates and business financing requirements. However, given the small percentage change in the past, we do not currently expect any changes in the interest rate to have a material effect on our operating results. If interest rates increased 1%, then the interest expense would increase approximately $407,000, annually. Aggregate maturities of our long-term debt are as follows: For the years ending June 30: 2005 $5,000,000 2006 8,000,000 2007 14,707,000 ---------- $27,707,000 =========== 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. 19 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 six months ended June 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 20 the corrective actions that we have initiated will be effective in 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 intends to explore opportunities to improve the process of preparing its filings with the Securities and Exchange Commission and the effectiveness of its Audit Committee. Except as described above, there have not been any changes in our internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act during the six months ended June 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 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). In February 2005, we reached a preliminary settlement with respect to the class action lawsuit filed, subject to final court approval. We do not expect this settlement to have a material adverse effect on our financial position. We are currently the subject of an investigation by the Securities and Exchange Commission with respect to certain related party transactions and executive compensation matters regarding the Company and affiliates of Mr. David H. Brooks (our Chief Executive Officer 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. 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 six month period ended June 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. 21 ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not Applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At the DHB Industries, Inc. Annual Stockholders' Meeting on May 6, 2005, our stockholders elected each of the director nominees, ratified the selection of our independent auditors, and did not approve our 2005 Omnibus Equity Incentive plan. Proposal 1. To elect six directors to hold office during the year following the Annual Meeting and until their successors are elected and qualified. Number of Voting Shares ----------------------- Voted For Withheld --------- -------- David Brooks 34,971,075 9,091,892 Gary Nadelman 40,481,770 3,581,197 Jerome Krantz 40,373,283 3,689,684 Cary Chasin 40,525,193 3,537,774 Dawn Schlegel 36,281,423 7,781,544 Barry Berkman 41,482,945 2,580,022 Larry Ellis 42,103,775 1,959,192
Number of Shares ---------------- Voted For Voted Against Abstain Broker Non-Votes --------- ------------- ------- ---------------- Proposal 2. To ratify the appointment of Rachlin Cohen & Holtz as independent auditors for the Company for 2005. 42,772,916 1,121,596 168,411 168,455 Proposal 3. To consider and vote upon the Company's proposed 2005 Omnibus Equity 9,518,333 10,765,063 140,144 23,779,571 Incentive Plan.
ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS 31.1 Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of the Chief Executive Officer Pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of the Chief Financial Officer Pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 22 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 August 3, 2005 DHB INDUSTRIES, INC. (Registrant) Signature Capacity Date --------- -------- ---- Chief Executive Officer August 3, 2005 /s/ DAVID H. BROOKS and Chairman of the Board ------------------- Chief Financial Officer, Director and August 3, 2005 /s/ DAWN M. SCHLEGEL Principal Accounting Officer - -------------------- August 3, 2005 /s/ JEROME KRANTZ Director ----------------- August 3, 2005 /s/ GARY NADELMAN Director ----------------- 23 EX-31.1 2 ex31-1.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 quarterly 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 quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures 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 quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: August 3, 2005 /s/ DAVID H. BROOKS - ------------------------------------- David H. Brooks President and Chief Executive Officer EX-31.2 3 ex31-2.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 quarterly 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 quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures 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 quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: August 3, 2005 /s/ DAWN M. SCHLEGEL - ----------------------- Dawn M. Schlegel Chief Financial Officer EX-32.1 4 ex32-1.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 June 30, 2004 as filed with the Securities and Exchange Commission on 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: August 3, 2005 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 5 ex32-2.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 June 30, 2004 as filed with the Securities and Exchange Commission on 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: August 3, 2005 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-----