-----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, ThY1pZb+kUWPk3Vva4qTTu7H0dDH9ms4tGT7GDG9Nzza00tVGNWoOp/CCF70rgC/ LEm86Q9WL3JfxHoBSYMAHA== 0001092306-05-000563.txt : 20051109 0001092306-05-000563.hdr.sgml : 20051109 20051109171129 ACCESSION NUMBER: 0001092306-05-000563 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20050930 FILED AS OF DATE: 20051109 DATE AS OF CHANGE: 20051109 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: 051190980 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 dhb10q.txt FORM 10-Q 09-30-05 ================================================================================ 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 September 30, 2005 Commission File No. 001-13112 DHB INDUSTRIES, INC. (Exact name of Registrant as specified in its charter) DELAWARE 11-3129361 (State or other jurisdiction (I.R.S. Employer of incorporation) Identification No.) 400 POST AVENUE, SUITE 303, WESTBURY, NY 11590 (Address of principal executive offices) Registrant's telephone number: (516) 997-1155 Former name, former address and former fiscal year, if changed since last report: Not applicable Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act.) Yes [ X ] No [ ] As of November 7, 2005, there were 45,337,575 shares of Common Stock, $.001 par value, outstanding. ================================================================================ INDEX PART I. FINANCIAL INFORMATION Page ---- Item 1. Financial Statements Condensed Consolidated Balance Sheets as of September 30, 2005 (Unaudited) and December 31, 2004 3 Unaudited Condensed Consolidated Statements of Operations for the Three Months and Nine Months Ended September 30, 2005 and 2004 4 Unaudited Condensed Consolidated Statements of Cash Flows For the Nine Months Ended September 30, 2005 and 2004 5 Notes to Unaudited Condensed Consolidated Financial Statements 6-16 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 16-22 Item 3. Quantitative and Qualitative Disclosures about Market Risk 23 Item 4. Controls and Procedures 24-25 PART II. OTHER INFORMATION Item 1. Legal Proceedings 25-27 Item 2. Changes in Securities and Use of Proceeds 27 Item 3. Defaults Upon Senior Securities 27 Item 4. Submission of Matters to a Vote of Security Holders 27 Item 5. Other Information 27 Item 6. Exhibits 27 Signatures 28 2
ITEM 1. FINANCIAL STATEMENTS DHB INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share data) September 30, December 31, 2005 2004 ------------- ------------ (Unaudited) ASSETS Current assets Cash and cash equivalents $ 5,488 $ 447 Accounts receivable, less allowance for doubtful accounts of $4,695 and $702, respectively 30,953 47,560 Accounts receivable - related party -- 6,583 Inventories 75,944 85,973 Deferred income tax assets 23,231 483 Prepaid expenses and other current assets 2,452 1,220 -------- -------- Total current assets 138,068 142,266 -------- -------- Property and equipment, net 2,370 2,632 -------- -------- Other assets Deferred income tax assets 1,092 593 Deposits and other assets 638 366 -------- -------- Total other assets 1,730 959 -------- -------- Total assets $142,168 $145,857 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Current maturities of term loan payable $ 8,000 $ 4,000 Obligation to repurchase convertible preferred stock 3,000 -- Warranty payable 36,730 -- Accounts payable 7,462 8,014 Accrued expenses and other current liabilities 10,395 8,350 Income taxes payable 8,783 14,816 -------- -------- Total current liabilities 74,370 35,180 -------- -------- Long-term liabilities Notes payable-bank -- 25,634 Term loan payable 7,000 6,500 Other liabilities 1,149 1,086 -------- -------- Total liabilities 82,519 68,400 -------- -------- Commitments and contingencies Minority interest in consolidated subsidiary 297 431 Stockholders' equity Convertible preferred stock, $0.001 par value, 5,000,000 shares authorized, 500,000 shares of Series A, 12% convertible preferred stock issued and outstanding; liquidation preference $3,000 -- 1 Common stock, $0.001 par value, 100,000,000 shares authorized, 45,337,575 and 45,282,536 issued and outstanding 45 45 Additional paid in capital 72,628 35,540 Deferred compensation (28,237) -- Retained earnings 14,916 41,440 -------- -------- Total stockholders' equity 59,352 77,026 -------- -------- Total liabilities and stockholders' equity $142,168 $145,857 ======== ======== (See Notes to Condensed Consolidated Financial Statements)
3
DHB INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (In thousands, except share and per share data) For the Three Months Ended For the Nine Months Ended September 30, September 30, 2005 2004 2005 2004 ---------- ---------- ---------- ---------- Net sales $ 90,263 $ 89,410 $ 263,924 $ 249,879 Cost of goods sold (includes related party purchases of $1,999, $6,290, $13,873, and $20,799, respectively) 65,615 64,537 191,859 180,361 ---------- ---------- ---------- ---------- Gross profit 24,648 24,873 72,065 69,518 Selling, general and administrative expenses 25,445 11,591 47,649 32,353 Cost of vest replacement program 60,000 -- 60,000 -- ---------- ---------- ---------- ---------- Income (loss) before other income (expense) (60,797) 13,282 (35,584) 37,165 ---------- ---------- ---------- ---------- Other income (expense) Interest expense (525) (389) (1,714) (1,047) Other income (loss) 6 41 33 55 ---------- ---------- ---------- ---------- Total other income (expense) (519) (348) (1,681) (992) ---------- ---------- ---------- ---------- Income(loss) before income taxes and minority interest (61,316) 12,934 (37,265) 36,173 Income taxes (benefit) expense (19,407) 4,728 (10,877) 13,850 ---------- ---------- ---------- ---------- Income (loss) before minority interest of subsidiary (41,909) 8,206 (26,388) 22,323 Minority interest of subsidiary 258 (58) 134 (156) ---------- ---------- ---------- ---------- Net (loss) income (41,651) 8,148 (26,254) 22,167 Dividend - convertible preferred stock (90) (90) (270) (270) ---------- ---------- ---------- ---------- Income (loss) available to common stockholders $ (41,741) $ 8,058 $ (26,524) $ 21,897 ========== ========== ========== ========== Earnings (loss) per common share: Basic $ (0.92) $ 0.20 $ (0.59) $ 0.54 ========== ========== ========== ========== Diluted $ (0.92) $ 0.18 $ (0.59) $ 0.49 ========== ========== ========== ========== Weighted average shares outstanding: Basic shares 45,312,536 40,891,896 45,302,437 40,814,675 Effect of convertible preferred stock -- 500,000 -- 500,000 Warrants -- 4,570,213 -- 4,299,798 ---------- ---------- ---------- ---------- Diluted shares 45,312,536 45,962,109 45,302,437 45,614,473 ========== ========== ========== ========== (See Notes to Condensed Consolidated Financial Statements)
4
DHB INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (In thousands, except share and per share data) For the Nine Months Ended September 30, 2005 2004 ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ (26,254) $ 22,167 Adjustments to reconcile net income to net cash and cash equivalents provided by (used in) operating activities: Depreciation and amortization 620 708 Amortization of deferred financing costs 18 113 Provision for doubtful accounts (5,397) 49 Minority interest of subsidiary (134) -- Stock issued for services 369 156 Stock compensation expense 11,295 -- Deferred income tax (benefit) expense (23,248) (125) Changes in operating assets and liabilities Accounts receivable 28,587 (19,964) Inventories 10,029 (27,217) Prepaid expenses and other current assets (1,232) 20 Deposits and other assets (290) (31) Warranty payable 36,730 -- Accounts payable (552) 5,135 Income taxes payable (6,033) 5,407 Accrued expenses and other current liabilities 2,045 2,347 Other liabilities 63 431 ---------- ---------- Net cash provided by (used in) operating activities 26,616 (10,804) ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property and equipment (358) (1,735) ---------- ---------- Net cash used in investing activities (358) (1,735) ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES Dividends paid on preferred stock (270) (270) Payments on notes payable - bank (256,378) (183,862) Proceeds of notes payable - bank 229,744 184,740 Proceeds of term loan 8,500 12,500 Issuance costs of long-term debt -- (83) Payments on long-term debt (3,000) (1,000) Proceeds upon the exercise of warrants 187 160 ---------- ---------- Net cash provided (used) by financing activities (21,217) 12,185 ---------- ---------- Net increase (decrease) in cash and cash equivalents 5,041 (354) Cash and cash equivalents at beginning of the period 447 441 ---------- ---------- Cash and cash equivalents at end of the period $ 5,488 $ 87 ========== ========== (See Notes to Condensed Consolidated Financial Statements)
5 DHB INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share data) NOTE 1. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements of DHB Industries, Inc. and subsidiaries (collectively "DHB" or the "Company") as of September 30, 2005 and for the three months and nine months ended September 30, 2005 and 2004 have been prepared in accordance with accounting principles generally accepted in the United States of America ("US GAAP"). The unaudited financial statements include all adjustments, consisting only of normal and recurring adjustments, which, in the opinion of management, were necessary for a fair presentation of financial condition, results of operations and cash flows for such periods presented. However, these results of operations are not necessarily indicative of the results for any other interim period or for the full year. Certain information and footnote disclosures normally included in financial statements prepared in accordance with US GAAP have been omitted in accordance with published rules and regulations of the Securities and Exchange Commission (the "SEC"). These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's Form 10-K and amendments thereto for the year ended December 31, 2004 filed with the SEC on March 17, 2005. The Company received a comment letter from the Securities and Exchange Commission dated August 18, 2005. The Company is in the process of researching the issues raised and drafting an appropriate response. The condensed consolidated financial statements and accompanying footnotes contained in this Form 10-Q do not contain any adjustment, if any, that may result from the resolution of the issues and questions contained in that comment letter. NOTE 2. STOCK BASED COMPENSATION The Company accounts for stock-based compensation using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations ("APB No. 25"), and has adopted the disclosure provisions of Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure, an amendment of FASB Statement No. 123" ("SFAS No. 148"). Under APB No. 25, compensation expense is only recognized when the market value of the underlying stock at the date of grant exceeds the amount an employee must pay to acquire the stock. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options and warrants which have no vesting restrictions and are fully transferable. In addition, the Black-Scholes option valuation model requires the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock warrants have characteristics significantly different from those of traded warrants and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock warrants. 6 The weighted-average warrant fair values and assumptions used to estimate these values are as follows: DHB INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share data) NOTE 2. STOCK BASED COMPENSATION - (Continued) Warrants Issued During 2005 2004 ---- ---- Risk-free interest rate 3.70% 3.12% Expected volatility of common stock 80.14% 93.96% Dividend yield 0.00% 0.00% Expected option term 4.96 years 4.3 years The Company's net income and earnings per share would have been reduced to the pro forma amounts shown below if compensation cost had been determined based on the fair value at the grant dates in accordance with SFAS No. 123 and 148, "Accounting for Stock-Based Compensation."
For the Three Months For the Nine Months Ended September 30, Ended September 30, 2005 2004 2005 2004 -------- ------ -------- ------- Net income (loss) $(41,651) $ 8,148 $(26,524) $22,167 Add: compensation expense included in net income (loss) as reported 11,295 -- 11,295 -- Deduct: compensation determined under fair value based method for all awards, net of related tax effect 12,196 22 12,658 1,630 -------- ------ -------- ------- Net income (loss) pro forma (42,552) 8,126 (27,887) 20,537 Less dividend - preferred stock 90 90 270 270 -------- ------ -------- ------- Income (loss) available to common stockholders, pro forma $(42,642) $ 8,036 $(28,157) $20,267 -------- ------ -------- ------- Basic earnings per common share As reported $ (0.92) $ 0.20 $ (0.59) $ 0.54 Pro forma $ (0.94) $ 0.20 $ (0.62) $ 0.50 Diluted earnings per common share As reported $ (0.92) $ 0.18 $ (0.59) $ 0.49 Pro forma $ (0.94) $ 0.18 $ (0.62) $ 0.45
Pro forma compensation expense may not be indicative of pro forma expense in future years. For purposes of estimating the fair value of each warrant on the date of grant, the Company utilized the Black-Scholes option-valuation model. 7 DHB INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share data) NOTE 3. STOCK AND STOCK WARRANTS Warrants As previously disclosed, the CEO and Chairman this year exercised the contractual right under his 2000 employment agreement to extend the agreement for an additional 5-year term, expiring on July 1, 2010. As a result, pursuant to the terms of the 2000 employment agreement, the CEO and Chairman was issued on July 1, 2005 options to purchase 5,250,000 common shares with an exercise price of $1.00 per share vesting 1,500,000 immediately and 750,000 on each anniversary, thereafter. The intrinsic value of the warrants that vested immediately was approximately $11,295 which was included as a non-cash compensation expense during the third quarter ended September 30, 2005. The intrinsic value of the remaining 3,750,000 shares is $28,237 and is recorded as Additional paid in capital and deferred compensation in the equity section of the balance sheet at September 30, 2005. In addition, on July 29, 2005, the shareholders of the Company approved its 2005 Omnibus Stock Option Plan ("the 2005 Plan"). Pursuant to the 2005 Plan, our officers, directors, employees and/or consultants and/or those of our subsidiaries would be able to receive incentive stock options, non-qualified stock options, restricted stock awards, deferred stock awards, bonus stock, stock appreciation rights (SARs), dividend equivalents, and/or other stock-based awards with respect to up to an aggregate of 2,500,000 shares of the Common Stock. In each fiscal year during any part of which the 2005 Plan is in effect, no participant may be granted: (i) options or stock appreciation rights with respect to more than 1,000,000 shares or (ii) restricted stock performance awards and/or other stock-based awards with respect to more than 1,000,000 shares. In addition, the maximum dollar value payable to any one participant with respect to any performance period with respect to any performance awards is $1,000,000 multiplied by the number of full years in the performance period. Pursuant to this plan, the President of DHB was issued 300,000 warrants exercisable at $7.66 per share, vesting 100,000 warrants per annum commencing May 24, 2008, which expire May 24, 2010. Also issued to two key employees in August 2005, were warrants to purchase 30,000 shares each exercisable at $7.11 per share vesting 10,000 warrants per annum, per person August 5, 2006, which expire August 5, 2010. During the quarter ended September 30, 2005, 550,000 of the warrants issued on May 24, 2005 were cancelled. Still outstanding are 200,000 warrants exercisable at $7.66 per share, vesting 100,000 warrants per annum commencing May 24, 2006, which expire May 24, 2009. In addition the warrants issued on June 2, 2005 were cancelled, (600,000 warrants with an exercise price of $7.69 expiring June 2, 2010, and vesting 100,000 warrants on September 2, 2005 and 100,000 warrants on every anniversary date commencing June 2, 2006). During the nine months ended September 30, 2004, the six members of the Company's Board of Directors were issued 50,000 warrants each, exercisable at $5.88 per share for five years. During the nine month periods ended September 30, 2005 and 2004, employees exercised warrants to purchase 30,000 and 80,000 shares, respectively of the Company's unregistered common stock at an average price of $6.26 and $2.00 per share, respectively. 8 DHB INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share data) NOTE 3. STOCK WARRANTS - continued During the three and nine months ended September 30, 2005, 525,000 warrants outstanding were not included in the computation of diluted earnings per share because their effect would have been anti-dilutive, since the strike prices were above the average fair market value of DHB's stock price. During the three and nine months ended September 30, 2004 all outstanding warrants were included in the computation of diluted earnings per share. During the nine months ended September 30, 2005, the Company issued 25,040 unregistered shares of its common stock in a non-cash settlement of a lawsuit with a former consultant. The value of this settlement was approximately $369 and is included in selling, general and administrative expenses during the quarter ended March 31, 2005. No unregistered shares were issued during the nine months ended September 30, 2004 other than the stock warrant issuances described above. The following table summarizes information regarding stock warrants outstanding at September 30, 2005.
Weighted Average Weighted Number of Remaining Average Number of Weighted Exercise Price Warrants Contractual Exercise Shares Average Range Outstanding Life Price Exercisable Exercise Price 0 to $1.00 5,250,000 5.00 $1.00 1,500,000 $1.00 $1.01 to $1.50 -- -- $1.41 -- $1.41 $1.51 to $2.00 100,000 1.75 $2.00 100,000 $2.00 $2.01 to $2.50 5,000 3.10 $2.01 -- $2.01 $2.51 to $3.00 -- -- $3.00 -- $3.00 $3.01 and above 932,000 1.73 $6.86 350,000 $5.97 --------- ---- ----- --------- ----- Totals 6,287,000 5.00 $1.83 1,950,000 $1.89 ========= ==== ===== ========= =====
NOTE 4. SUPPLEMENTAL CASH FLOW INFORMATION
For the Nine Months Ended September 30, 2005 2004 ------- ------ Cash paid for: Interest $ 1,706 $ 1,069 Taxes 14,307 9,866 Non-cash financing and investing activities: Revolving credit loan refinanced to long-term debt $ 8,500 $12,500 Obligation to repurchase convertible preferred stock 3,000 --
9 DHB INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share data) NOTE 5. INVENTORIES Inventories are stated at the lower of cost or market using the first-in, first-out (FIFO) method and are summarized as follows: September 30 December 31, 2005 2004 ------------ ------------ Raw materials and supplies $24,741 $31,695 Work in process 15,685 18,815 Finished goods 35,518 35,463 ------- ------- $75,944 $85,973 ======= ======= At September 30, 2005 the Company wrote off approximately $19,200,000 in Zylon(R) inventory, as a result of the Company's voluntary Zylon(R) vest replacement program announced in August 2005. NOTE 6. OBLIGATION TO REPURCHASE CONVERTIBLE PREFERRED STOCK. On January 14, 2002, the principal stockholder of the Company exchanged $3,000 of the indebtedness due him for 500,000 shares of Series A, 12% Convertible Preferred Stock. The Series A, 12% Convertible Preferred Stock has a dividend rate of $0.72 per share per annum, an amount equal to the interest that would have been payable on the exchanged indebtedness. The shares of Series A, 12% Convertible Preferred Stock are redeemable at the option of the Company on December 15 of each year. At September 30, 2005, the Board of Directors has approved the redemption of the Convertible Preferred Stock on December 15, 2005. Therefore the convertible Preferred Stock is listed as an obligation under current liabilities at the redemption amount equal to $6 per share, or $3,000. NOTE 7. LONG-TERM DEBT On March 15, 2005, the Company amended its bank credit agreement (the "Credit Agreement"), which increased the total borrowing limits from $45,000 to $55,000. Pursuant to the Credit Agreement, the Company may borrow, on a revolving basis, up to $37,000 on 85% of eligible accounts receivable (the "Credit Facility"), and the Company borrowed a term loan in the principal amount of $18,000 (repaying the $12.5 million dollar term loan), amortizing at the rate of $2,000 per quarter commencing July 2005. This agreement will expire on October 1, 2007. Borrowings under the Credit Agreement bear interest, at the Company's option, at the bank's prime rate (6.75% at September 30, 2005) or LIBOR plus 1.75% per annum on the Credit Facility, and at the bank's prime rate or LIBOR plus 2.25% on the term loan. At September 30, 2005, the Company had a LIBOR loan outstanding on the credit facility at a rate of 6.124%. The borrowings under the Credit Agreement are collateralized by a first security interest in substantially all of the assets of the Company. 10 DHB INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share data) NOTE 7. LONG-TERM DEBT - (continued) On November 3, 2005, the Company amended its Credit Agreement, to exclude the non-cash compensation charge and the Zylon(R) replacement charge from the financial covenants calculations and issuing a waiver as of September 30, 2005 for failure to comply with such covenants as a result of the aforementioned charges. The interest rate on the term loan was reduced from LIBOR plus 2.25%, to LIBOR plus 1.75%. The amendment also allows the Company to purchase in the open market in accordance with applicable law up to three million shares of the Company's common stock provided there are no events of default and the share purchase program shall not exceed $9 million to the extent the purchase price is funded through the credit facility. NOTE 8. SEGMENT INFORMATION The Company operates in two principal segments: ballistic-resistant equipment, and protective athletic and sports products. Net sales, income before other income (expense), depreciation and amortization expense, interest expense, income taxes, and identifiable assets for each of the Company's segments are as follows:
For The Three Months For The Nine Months Ended September 30, Ended September 30, ------------------------ ------------------- 2005 2004 2005 2004 -------- -------- -------- -------- NET SALES Ballistic-resistant equipment $ 87,420 $ 87,585 $256,467 $244,528 Protective athletic & sports products 2,843 1,825 7,457 5,351 -------- -------- -------- -------- Consolidated net sales $ 90,263 $ 89,410 $263,924 $249,879 ======== ======== ======== ======== INCOME (LOSS) BEFORE OTHER INCOME (EXPENSE) Ballistic-resistant equipment $(45,494) $ 15,773 $(15,052) $ 45,013 Protective athletic & sports products 176 260 712 879 Corporate and other (1) (15,479) (2,751) (21,244) (8,727) -------- -------- -------- ------- Consolidated income before other income (expense) $(60,797) $ 13,282 $(35,584) $ 37,165 ======== ======== ======== ======== DEPRECIATION AND AMORTIZATION EXPENSE Ballistic-resistant equipment $143 $193 $ 424 $ 474 Protective athletic & sports products 6 33 20 94 Corporate and other 60 55 176 140 -------- -------- -------- -------- Consolidated depreciation and amortization expense $ 209 $ 281 $ 620 $ 708 ======== ======== ======== ======== INTEREST EXPENSE Ballistic-resistant equipment $ 406 $ 386 $ 1,593 $ 1,042 Protective athletic & sports products -- -- -- -- Corporate and other (1) 119 3 121 5 -------- -------- -------- -------- Consolidated interest expense $ 525 $ 389 $ 1,714 $ 1,047 ======== ======== ======== ======== 11 DHB INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share data) NOTE 8. SEGMENT INFORMATION - Continued INCOME (LOSS) BEFORE INCOME TAXES AND MINORITY INTEREST Ballistic-resistant equipment $(49,676) $ 10,590 $(28,586) $ 28,479 Protective athletic & sports products 176 260 713 873 Corporate and other (1) (11,816) 2,084 (9,392) 6,821 -------- -------- -------- -------- Consolidated income before income tax (benefit) expense $(61,316) $ 12,934 $(37,265) $ 36,173 ======== ======== ======== ======== INCOME TAX (BENEFIT) EXPENSE Ballistic-resistant equipment $ 497 $ 935 $ 1,792 $ 2,143 Protective athletic & sports products 75 -- 76 -- Corporate and other (1) (19,979) 3,793 (12,745) 11,707 -------- -------- -------- -------- Consolidated income tax (benefit) expense $(19,407) $ 4,728 $(10,877) $ 13,850 ======== ======== ======== ======== September 30, 2005 December 31, 2004 ------------------ ----------------- IDENTIFIABLE ASSETS Ballistic-resistant equipment $113,153 $138,370 Protective athletic & sports products 6,413 5,018 -------- -------- 119,566 143,388 Corporate and other (2) 22,602 2,469 -------- -------- Consolidated total assets $142,168 $145,857 ======== ======== (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 9. CONTINGENCIES Since September 9, 2005, a number of purported class action lawsuits were filed in the United States District Court for the Eastern District of New York against the Company and certain of the Company's officers and directors. The actions purport to be filed on behalf of purchasers of the Company's publicly traded securities during the period from April 21, 2004 through August 29, 2005. The complaints, which are substantially similar to one another, allege, among other things, that the Company's public disclosures were false or misleading because they did not disclose certain information. The lawsuits allege that DHB's body armor products were defective and failed to meet the standards of its customers, and that these alleged facts should have been publicly disclosed. The Company has been served with a number of these complaints. No class has been certified in the actions. The lawsuits seek compensatory damages plus interest and attorneys' fees. The Company believes that the lawsuits are baseless and intends to vigorously defend against them. Because of their similarity, the Company believes that most or all of the lawsuits will be consolidated into a single action and that the Company will not be required to defend against all of the lawsuits individually. The Company cannot predict the outcome of the lawsuits or whether the Company's financial condition or results of operations may be materially affected as a result of the lawsuits. 12 DHB INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share data) NOTE 9. CONTINGENCIES - continued Since September 14, 2005, a number of derivative complaints were filed in the United States District for the Eastern District of New York against certain officers and directors of the Company and, in certain cases, Weiser LLP. The allegations in the complaints are substantially similar and include the Company as a nominal defendant. The complaints allege, among other things, that defendants breached their fiduciary duties and engaged in fraud, misrepresentation, insider trading, misappropriation of corporate information, waste of corporate assets, abuse of control, and unjust enrichment, asserting claims substantially similar to those asserted in the actions described above under "Securities Litigation." The complaints seek monetary damages and various forms of equitable and/or injunctive relief, restitution to the Company and disgorgement of profits earned by defendants, and fees and costs. The Company believes that the lawsuits are baseless and intends to vigorously defend against them. Because of their similarity, the Company believes that most or all of the lawsuits will be coordinated and/or consolidated into a single action. The Company cannot predict the outcome of the lawsuits or whether the Company's financial condition or results of operations may be materially affected as a result of the lawsuits. On or about August 29, 2005, Southern States Police Benevolent Association, Inc., et al. ("Southern States") filed a Class Action Complaint against Protective Apparel Corporation of America, Inc. and Point Blank Body Armor, Inc. ("Defendants"), alleging that the National Institute of Justice ("NIJ") decertified all bullet resistant vests containing Zylon. Southern States further alleged that the test results released by the NIJ demonstrated that all of Defendants' Zylon-containing vests fail to comply with their certifications and warranties. Southern States brought causes of action for breach of warranty on label in vest, breach of warranty in warranty statement, breach of implied warranty of merchantability, breach of implied warranty of fitness for a particular purpose, and for injunctive relief. On or about October 19, 2005, Defendants filed an answer and affirmative defenses denying that Defendants are in breach of any warranty and denying that injunctive relief is proper. On October 20, 2005, the Court entered a Consent Order Certifying Class Action. The certified classes include all law enforcement personnel and organizations, and other individuals, who purchased new ballistic resistant soft body armor containing Zylon from the Defendants, except for federal agencies and any persons who have been physically injured as a result of defects in their vests. The parties are engaged in settlement negotiations. The Company has recorded a $36.7 million reserve for this settlement during the quarter ended September 30, 2005, which is part of the $60 million cost of the vest replacement program. 13 DHB INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share data) NOTE 9. CONTINGENCIES - continued On January 3, 2005, a class action lawsuit was filed against us in the Circuit Court of the Seventeenth Judicial Circuit in Broward County, Florida by a police organization and individual police officers, alleging concerns regarding the effectiveness and durability of body armor with high concentrations of Zylon in the Company's bullet-resistant soft body armor (vests). Point Blank Body Armor settled a class action lawsuit involving a total of less than 2,000 vests containing a high concentration of Zylon. Pursuant to the settlement, class members have been exchanging the vests for a choice of four other vests made by the company. Class members have also been receiving two extra carriers, as well as a 10 percent discount certificate. The final date for class members to submit a claim form was August 21, 2005. This settlement did not have a material adverse effect on its financial position. The Company is currently the subject of an investigation by the Securities and Exchange Commission, with respect to certain related party transactions and executive compensation matters regarding the Company and affiliates of Mr. David H. Brooks, the Company's Chief Executive Officer and Chairman. The Company and Mr. Brooks are cooperating with the Securities and Exchange Commission in this investigation. In addition, the Audit Committee periodically monitors the status, terms and performance of related party transactions to assess the benefits to the Company and the related party's compliance with its contractual obligations. The Company is involved in other litigation, none of which it considers to be material or believes would, if adversely determined, have a material adverse effect on its financial condition or operations. NOTE 10. COST OF VEST REPLACEMENT PROGRAM The cost of the vest replacement program is a separate line item under selling, general and administrative expenses, for a total pre-tax charge of $60,000,000, or ($0.76) per diluted share after tax charge, as a result of the Company's voluntary Zylon(R) vest replacement program announced in August 2005. The composition of this charge is as follows: a $36,700,000 reserve for vests containing Zylon(R), the write-off of approximately $19,200,000 in Zylon(R) inventory, and a $4,100,000 increase in the accounts receivable allowance. NOTE 11. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during each reporting period. Actual results could differ from those estimates. 14 DHB INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share data) NOTE 12. RECENTLY ISSUED ACCOUNTING STANDARDS In December 2003, the Financial Accounting Standards Board issued FASB Interpretation Number 46-R ("FIN 46-R") "Consolidation of Variable Interest Entities." FIN 46-R, which modifies certain provisions and effective dates of FIN 46, sets forth criteria to be used in determining whether an investment in a variable interest entity should be consolidated. These provisions are based on the general premise that if a company controls another entity through interests other than voting interests, that company should consolidate the controlled entity. The Company believes that currently, it does not have any material arrangements that meet the definition of a variable interest entity, which would require consolidation. In November 2004, the FASB issued SFAS No. 151, "Inventory Costs - An Amendment of ARB No. 43, Chapter 4" (SFAS No. 151). SFAS No. 151 requires all companies to recognize a current-period charge for abnormal amounts of idle facility expense, freight, handling costs and wasted materials. This statement also requires that the allocation of fixed production overhead to the costs of conversion be based on the normal capacity of the production facilities. SFAS No. 151 will be effective for fiscal years beginning after June 15, 2005. The Company does not expect the adoption of this statement to have a material effect on its consolidated financial statements. In December 2004, the FASB issued SFAS No.123(R), "Share-Based Payment" (SFAS No. 123(R). This statement replaces SFAS No. 123 and supersedes APB 25. SFAS 123 (R) requires all stock-based compensation to be recognized as an expense in the financial statements and that such compensation be measured according to the grant-date fair value of stock options. SFAS 123 (R) will be effective for annual periods beginning after June 15, 2005. While the Company currently provides the pro forma disclosures required by SFAS No. 148 on a quarterly basis (see "Note 1 Stock Based Compensation"), and it is currently evaluating the impact this statement will have on its consolidated financial statements, the impact to the financial statements could be material in light of the recent wards of stock warrants and options to employees and the applicable vesting schedules. (See Note 2) In December 2004, the FASB issued SFAS No. 153, "Exchanges on Nonmonetary Assets - - An Amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions" (SFAS 153) SFAS eliminates the exception from fair value measurement for nonmonetary exchanges of similar productive assets in paragraph 21(b) of APB Opinion No. 29, "Accounting for Nonmonetary Transactions," and replaces it with an exception for exchanges that do not have commercial substance. SFAS 153 specifies that a nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS 153 is effective for fiscal periods beginning after June 15, 2005. The Company does not expect the adoption of this statement to have a material effect on its consolidated financial statements. 15 DHB INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share data) NOTE 12. RECENTLY ISSUED ACCOUNTING STANDARDS - (Continued) In March 2005, the FASB issued Interpretation No. 47 ("FIN 47), "Accounting for Conditional Asset Retirement Obligations", an interpretation of FASB Statement No. 143, "Accounting for Asset Retirement Obligations." The interpretation clarifies that the term conditional asset retirement obligation refers to a legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. An entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated. FIN 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. The effective date of this interpretation is no later than the end of fiscal years ending after December 15, 2005. The Company is currently investigating the effect, if any, that FIN 47 would have on the Company's financial position, cash flows and results of operations. In May 2005, the FASB issued SFAS No. 154, "ACCOUNTING FOR CHANGES AND ERROR CORRECTIONS, A REPLACEMENT OF APB OPINION NO. 20 AND FASB STATEMENT NO. 3" SFAS 154 applies to all voluntary changes in accounting principle and requires retrospective application to prior periods' financial statements of changes in accounting principle. This statement also requires that a change in depreciation, amortization, or depletion method for long-lived, nonfinancial assets be accounted for as a change in accounting estimate effected by a change in accounting principle. SFAS 154 carries forward without change the guidance contained in Opinion No. 20 for reporting the correction of an error in previously issued financial statements and a change in accounting estimate. This statement is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company does not expect the adoption of this standard to have a material impact on its financial condition, results of operations, or liquidity. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION We are a manufacturer and provider of bullet and projectile-resistant garments, including fragmentation protective vests, and related accessories. Our products are used domestically and internationally by military, law enforcement, security and corrections personnel, as well as other governmental agencies. We also manufacture and distribute protective athletic apparel and equipment, including a wide variety of knee, ankle, elbow, wrist and back supports and braces that assist serious athletes, weekend sports enthusiasts and general consumers in their respective sports and everyday activities. 16 We are a holding company and we conduct our business through subsidiaries in two divisions, the DHB Armor Group and the DHB Sports Group. The Armor Group represented approximately 98%, 97% and 96% of our consolidated revenues during 2004, 2003 and 2002, respectively. The balance of the consolidated revenues is attributable to the Sports Group. The Sports Group represented approximately 3% and 2% of our consolidated revenues during the nine months ended September 30, 2005 and 2004, respectively. Our products are sold both nationally and internationally. Sales to the U.S. military comprise the largest portion of the Armor Group's business, followed by sales to federal, state and local law enforcement agencies, including correctional facilities. Accordingly, any substantial increase or decrease in government spending or any change in emphasis in defense and law enforcement programs would have a material effect on the Armor Group's business. The Sports Group manufactures and markets a variety of sports medicine, protective gear, and health support products under its own labels, private labels and house brands for major retailers. We derive substantially all of our revenues from sales of our products. As indicated in the financial information included in this report, we have experienced substantial increases in our revenues in the past several years, which we attribute primarily to demand from the U.S. military and federal, state and local law enforcement for the products of the Armor Group. Our ability to maintain recent revenue levels will be highly dependent on continued demand for our body armor and projectile-resistant clothing. Although we do not foresee an immediate material reduction in such demand, we have no assurance that government agencies will not refocus their expenditures based on changed circumstances or otherwise, that we will be able to diversify into alternate markets or alternate products, or that we will be able to increase our market share through acquisitions of other businesses. Due to our growth, we have outgrown our small business status under government procurement regulations. Although the loss of our small business status makes us ineligible for certain set-asides under government contracting regulations, we believe that our current size permits us to manage larger orders and credibly bid on major procurement contracts under which small businesses would be our subcontractors. To maintain our ability to deliver quality products in a timely manner, in April 2004, we moved into a new, expanded production facility in Pompano Beach, Florida. Our current strategic focus is on quality and delivery, which we believe are the key elements in obtaining additional and repeat orders under our existing procurement contracts with the U.S. military and other governmental agencies. RESULTS OF OPERATIONS THREE MONTHS ENDED SEPTEMBER 30, 2005, COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 2004 For the three months ended September 30, 2005, consolidated net sales were approximately $90.3 million, an increase of 1.0% over consolidated net sales of approximately $89.4 million for the three months ended September 30, 2004. Gross profit for the quarter ended September 30, 2005 remained nearly constant at approximately $24.7 million (27.3% of net sales), as compared to approximately $24.9 million (27.8% of net sales) for the quarter ended September 30, 2004. 17 The Company's selling, general and administrative expenses increased significantly to $25.5 million or 28.2% of net sales, during the three months ended September 30, 2005, versus approximately $11.6 million, or 13.0% of net sales for the three months ended September 30, 2004. Selling, general and administrative increased primarily as a result of $11.3 million non-cash compensation expense associated with the warrants issue to the CEO/Chairman on July 1, 2005 pursuant to an extension of his existing employment agreement. Also increasing selling general and administrative expenses during the third quarter of 2005 was a $587,000 increase in commissions as a result of the product mix, increased licenses and fees of approximately $250,000 as a result of increased General Service Administration sales, $547,000 of increased research and development costs, as a result of the opening of our new state of the art ballistic facility in Pompano Beach, and approximately a $800,000 increase in professional and consulting fees as a result of the Zylon(R) replacement program and related legal fees. The cost of the vest replacement program is a separate line item under selling, general and administrative expenses, for a total pre-tax charge of $60,000,000, or ($0.76) per diluted share after tax charge, as a result of the Company's voluntary Zylon(R) vest replacement program announced in August 2005. The composition of this charge is as follows: a $36,700,000 reserve for vests containing Zylon(R), the write-off of approximately $19,200,000 in Zylon(R) inventory, and a $4,100,000 increase in the accounts receivable allowance. Driven primarily by the increase in selling, general and administrative expenses and the cost of the vest replacement program, operating income decreased to a loss of approximately $60.8 million (67% of net sales) for the third quarter of 2005 versus income of approximately $13.3 million (14.9% of net sales) for the third quarter of 2004. Interest expense for the three months ended September 30, 2005 increased 35% to approximately $525,000, compared to approximately $389,000 for the three months ended September 30, 2004. This increase is primarily the result of a $119,000 payment for interest for a line of credit to have funds available for a possible acquisition during the third quarter. Income (loss) before income taxes and minority interest of subsidiary was a loss of approximately $61.3 million for the three months ended September 30, 2005, compared to income before income taxes and minority interest of approximately $12.9 million for the three months ended September 30, 2004. Income benefit for the third quarter of 2005 was approximately $19.4 million while income tax expense for the third quarter of 2004 was approximately $4.7 million. The effective tax rate for the third quarter of 2005 was (31.7%) as compared to 36.6% during the third quarter of 2004. On December 19, 2003, DHB's subsidiary Point Blank Body Armor, Inc. ("Point Blank") issued to Hightower Capital Management, LLC ("Hightower") shares of common stock of Point Blank representing approximately .65% of the outstanding capital stock of Point Blank, in exchange for inventory. The minority interest's share of the consolidated subsidiary's income (loss) was approximately $(258,000) and $58,000 for the three months ended September 30, 2005 and 2004, respectively. 18 After the preferred stock dividends of approximately $90,000 per quarter, the loss available to common stockholders was approximately $41.7 million, or $(0.92) per diluted share for the three months ended September 30, 2005 compared to income available to common stockholders of approximately $8.1 million or $0.18 per diluted share for the three months ended September 30, 2004. The weighted average shares outstanding on a diluted basis for the three months ended September 30, 2005 were 45,312,536, as compared to 45,962,109 for the three months ended September 30, 2004. NINE MONTHS ENDED SEPTEMBER 30, 2005, COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2004 For the nine months ended September 30, 2005, consolidated net sales were approximately $263.9 million, an increase of 5.6% over consolidated net sales of approximately $249.9 million for the nine months ended September 30, 2004. The Armor Group's net sales increased nearly 4.9% from $244.5 million for the nine months ended September 30, 2004 to approximately $256.5 million for the nine months ended September 30, 2005, due primarily to increased shipments to the U.S. Military. The Sports Group's net sales for the nine months ended September 30, 2005 increased 39.4% to approximately $7.5 million, as compared to approximately $5.4 million for the nine months ended September 30, 2004. The primary reason for this increase was a new subcontracting contract for the Sports Group to produce elbow pads for another company. Consolidated gross profit percentage declined slightly to 27.3% for 2005 as compared to approximately 27.8% for 2004. The Company's selling, general and administrative expenses increased significantly to $47.6 million or 18.1% of net sales, during the nine months ended September 30, 2005, versus approximately $32.4 million, or 13.0% of net sales for the nine months ended September 30, 2004. Selling, general and administrative increased primarily as a result of $11.3 million non-cash compensation expense associated with the warrants issue to the CEO/Chairman on July 1, 2005 pursuant to an extension of his existing employment agreement. Also increasing selling, general and administrative expenses was a $4 million increase in research and development costs in the nine months ended September 30, 2005. The cost of the vest replacement program is a separate line item under selling, general and administrative expenses, for a total pre-tax charge of $60,000,000, or ($0.76) per diluted share after tax charge, as a result of the Company's voluntary Zylon(R) vest replacement program announced in August 2005. Driven primarily by the increase in selling, general and administrative expenses and the cost of the vest replacement program, income (loss) before other income (expense) decreased to a loss of approximately $37.3 million (14.1% of net sales) for the nine months ended September 30, 2005 versus income of approximately $36.2 million (14.5% of net sales) for the nine months ended September 30, 2004. Interest expense for the nine months ended September 30, 2005 increased 63.7% to approximately $1.7 million, compared to approximately $1.0 million for the nine months ended September 30, 2004. This increase was primarily the result of increased borrowings under the Company's credit facility and a $119,000 payment for interest for a line of credit to have funds available for a possible acquisition during the third quarter. 19 Income (loss) before income taxes and minority interest was a loss of approximately $37.3 million for the nine months ended September 30, 2005, compared to income before taxes and minority interest of approximately $36.2 million for the nine months ended September 30, 2004. Income tax benefit for the nine months ended September 30, 2005 was approximately $10.9 million while income tax expense for the nine months ended September 30, 2004 was approximately $13.9 million. The effective tax rate for the 2005 was 29.2% as compared to 38.3% for 2004. On December 19, 2003, DHB's subsidiary Point Blank Body Armor, Inc. ("Point Blank") issued to Hightower Capital Management, LLC ("Hightower") shares of common stock of Point Blank representing approximately .65% of the outstanding capital stock of Point Blank, in exchange for inventory. The minority interest's share of the consolidated subsidiary's income (loss) was approximately $(134,000) and $156,000 for the nine months ended September 30, 2005 and 2004, respectively. The total minority interest included in the balance sheet as of September 30, 2005 was approximately $297,000 as compared to approximately $431,000 as of December 31, 2004. After the preferred stock dividends of approximately $270,000 for each of the nine-month periods, income (loss) available to common stockholders was approximately $(26.5) million for the nine months ended September 30, 2005, or $(0.59) per diluted share, as compared with income available to common stockholders of approximately $21.9 million, or $0.49 per diluted share, for the nine months ended September 30, 2004. The weighted average shares outstanding on a diluted basis for the nine months ended September 30, 2005 were 45,302,437, as compared to 45,614,473 for the nine months ended September 30, 2004. LIQUIDITY AND CAPITAL RESOURCES We expect that our primary working capital requirements over the next twelve months will be to assist our subsidiaries in financing their working capital requirements. Our operating subsidiaries sell the majority of their products on 30 to 90-day terms. We need working capital to finance the receivables, manufacturing process and inventory. Working capital at September 30, 2005 was $63.7 million as compared to working capital of $107.1 million at December 31, 2004. The main factor in the decrease in the Company's working capital was the reduction of the inventory as a result of the voluntary Zylon(R) replacement program. However, the Company was able to generate a positive towards cash flow of $26.6 million from operations for the nine months ended September 30, 2005 as compared to cash used in operations $10.8 million for the nine months of September 30, 2004. The primary factor for the improvement in cash provided from operations is the decrease in accounts receivable, as the accounts receivable days outstanding improved to 32 days at September 30, 2005 as compared to 58 days at December 31, 2004. The underlying drivers of operating cash flows are the inflows and outflows of funds. Our cash inflows are principally cash collections from customers. Historically as a result of our growth, we have experienced increases in our accounts receivable, which have caused our cash inflows from operations to lag behind our net sales. However, during the nine months ended September 30, 2005, our cash collections from customers of approximately $286.8 million exceeded our net sales of approximately $263.9 million. As a comparison, for the nine months ended September 30, 2004, our cash collections of approximately $234.3 lagged our net sales of $249.9 million. Our cash outflows are principally 20 manufacturing costs. As a result of our growth, our cash outflows related to manufacturing cost plus increased inventory have outpaced our cost of goods sold. Our cash outflows for manufacturing costs plus inventory buildup were $231.6 million and $220.4 million for the nine months ended September 30, 2005 and 2004, respectively, compared to cost of goods sold of approximately $191.9 million and $180.4 million for such periods, respectively. On March 15, 2005, the Company amended its bank credit agreement (the "Credit Agreement"), which increased the total borrowing limits from $45,000 to $55,000. Pursuant to the Credit Agreement, the Company may borrow, on a revolving basis, up to $37,000 on 85% of eligible accounts receivable (the "Credit Facility"), and the Company borrowed a term loan in the principal amount of $18,000 (repaying the $12.5 million dollar term loan), amortizing at the rate of $2,000 per quarter commencing July 2005. This agreement will expire on October 1, 2007. Borrowings under the Credit Agreement bear interest, at the Company's option, at the bank's prime rate (6.75% at September 30, 2005) or LIBOR plus 1.75% per annum on the Credit Facility, and at the bank's prime rate or LIBOR plus 2.25% on the term loan. At September 30, 2005, the Company had a LIBOR loan outstanding on the credit facility at a rate of 6.124%. The borrowings under the Credit Agreement are collateralized by a first security interest in substantially all of the assets of the Company. On November 3, 2005, the Company amended its Credit Agreement, to exclude the non-cash compensation charge and the Zylon(R) replacement charge from the financial covenants calculations and issuing a waiver as of September 30, 2005 for failure to comply with such covenants as a result of the aforementioned charges. The interest rate on the term loan was reduced from LIBOR plus 2.25%, to LIBOR plus 1.75%. The amendment also allows the Company to purchase in the open market in accordance with applicable law up to three million shares of the Company's common stock provided there are no events of default and the share purchase program shall not exceed $9 million to the extent the purchase price is funded through the credit facility. The Board of Directors approved the redemption of the convertible preferred stock, on December 15, 2005, the annual redemption date. This will eliminate the preferred dividend of $90,000 per quarter from the Company's financial statements. Our credit facility includes both affirmative and negative covenants customary for a financing of this nature. Among other provisions, our credit facility requires us to maintain (1) minimum tangible net worth, (2) a fixed charge coverage ratio, and (3) earnings before interest, taxes, depreciation and amortization. Our credit facility has certain restrictive covenants that limit our ability to pay dividends to our common stockholders or repurchase treasury shares and which limit the total amount of our capital expenditures to $2 million during any year. As described below, we do not anticipate that our capital expenditures will reach this $2 million limit. These restrictive covenants require us to obtain prior approval from the bank before paying common stock dividends or repurchasing shares. As noted above the Company has obtained approval to repurchase up to 3 million shares. We believe that these restrictive covenants do not currently have a material impact on our liquidity and capital resources. Our capital expenditures during the nine months ended September 30, 2005 decreased substantially to $358,000 as compared to $1,735,000 for the nine months ended September 30, 2004. During the nine months ended September 30, 2004, we purchased additional machinery, equipment, furniture and fixtures and 21 leasehold improvements to equip our new warehouse and administrative facility in Florida for our Point Blank subsidiary and a new location for our corporate headquarters. During the remainder of 2005, we currently anticipate spending approximately $800,000 for total capital expenditures. We believe that our existing credit line, together with funds generated from operations, will be adequate to sustain our operations (including projected capital expenditures) for the next 12 months. Historically, we have been successful in obtaining increases in our revolving credit facility, as required, in order to finance the increased working capital needs brought on by the expansion of our business. However, we have no assurance that we will be able to obtain further such increases if needed, and we may be required to explore other potential sources of financing (including the issuance of equity securities and, subject to the consent of our lender, other debt financing) if we continue to experience escalating demand for our products. CASH CONTRACTUAL OBLIGATIONS The following table presents the Company's estimated cash requirements for contractual obligations outstanding as of September 30, 2005:
Payments Due by Period ($ thousands) Less Than More Than 5 1 Year 1-3 Years 4-5 Years Years Total --------- --------- --------- ----------- ------- Contractual Obligations Long-Term Debt $ 8,000 $ 7,000 $ -- $15,000 Employment Contracts 1,450 4,217 1,367 7,034 Consulting Agreements 60 -- -- -- 60 Obligation to purchase convertible preferred stock 3,000 -- -- -- 3,000 ------- Operating Leases 2,048 5,781 3,009 1,880 12,718 ------- ------- ------ ------ ------- Total Contractual Cash Obligations $14,558 $16,998 $4,376 $1,880 $37,812 ======= ======= ====== ====== =======
EFFECT OF INFLATION AND CHANGING PRICES The Company did not experience any measurable increases in raw material prices during the nine months ended September 30, 2005. SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q contains forward-looking statements regarding future events and our future results that are based on our current expectations, estimates, forecasts and projections about the industries in which we operate and the beliefs and assumptions of our management. Words such as "expects," "anticipates," "targets," "goals," "projects," "intends," "plans," "believes," "seeks," "estimates," variations of such words, and similar expressions are intended to identify such forward-looking statements. These forward-looking statements are only predictions that speak as of the date hereof 22 and are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in our Annual Report on Form10-K/A for the year ended December 31, 2004 and in other reports that we have filed with the Securities and Exchange Commission. You are cautioned not to place undue reliance on these forward-looking statements that speak only as of the date hereof. We undertake no obligation to revise or update publicly any forward-looking statements to reflect any change in the expectations of our management with regard thereto or any change in events, conditions, or circumstances on which any such statements are based. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We do not issue or invest in financial instruments or their derivatives for trading or speculative purposes. Our market risk is limited to fluctuations in interest rates as it pertains to our borrowings under our $55 million credit facility. We can borrow at either our bank's prime rate of interest or LIBOR plus 1.75%. Any increase in these reference rates could adversely affect our interest expense. The change in the interest rate for 2005 was immaterial. The extent of market rate risk associated with fluctuations in interest rates is not quantifiable or predictable because of the volatility of future interest rates and business financing requirements. However, given the small percentage change in the past, we do not currently expect any changes in the interest rate to have a material effect on our operating results. If interest rates increased 1%, then the interest expense would increase approximately $407,000, annually. Aggregate maturities of our long-term debt are as follows: For the years ending September 30: 2005 $ 5,000,000 2006 8,000,000 2007 2,000,000 ----------- $15,000,000 The Company estimates that the fair value of its long-term debt approximates its carrying value. Our international transactions are predominately denominated in U.S. dollars, mitigating any market risk resulting from foreign currency exchange fluctuations. We do not have any material sales, purchases, assets or liabilities denominated in currencies other than the U.S. Dollar, and as such, we are not subject to material foreign currency exchange rate risk. 23 ITEM 4. CONTROLS AND PROCEDURES EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES We conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. The disclosure controls and procedures evaluation was conducted under the supervision and with the participation of management, including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO). Disclosure controls and procedures are controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Disclosure controls and procedures are also designed to ensure that such information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to our management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. The evaluation of our disclosure controls and procedures included a review of the controls' objectives and design, our implementation of the controls and the effect of the controls on the information generated for use in this report. This type of evaluation is performed on a quarterly basis so that the conclusions of management, including the CEO and CFO, concerning the effectiveness of the disclosure controls and procedures can be reported in our periodic reports on Form 10-Q and Form 10-K. The overall goals of our evaluation activities are to monitor our disclosure controls and procedures, and to modify them as necessary. Our intent is to maintain our disclosure controls and procedures as dynamic systems that change as conditions warrant. Based upon the disclosure controls and procedures evaluation, our CEO and CFO have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective to ensure that information required to be disclosed in our reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to our management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING. As mentioned in our filing on Form 8-K dated April 14, 2005, as of December 31, 2004, there existed certain significant deficiencies in our systems of inventory valuation rendering such systems inadequate to accurately capture cost of materials and labor components of certain work in progress and finished goods inventory. During the nine months ended September 30, 2005, we have worked to strengthen our internal controls relating to the matters described above and such efforts include: instituting additional controls, enforcing existing policies and providing oversight with respect to insuring that we accurately capture the cost of materials and labor components of certain work in process and finished good inventory, hiring an additional inventory manager, and continuing to interview candidates with the intention of hiring additional personnel to provide additional support in implementing and improving our system. Our management, including the CEO and the CFO, believes the results of the corrective actions that we have initiated have been and will be effective in 24 addressing the deficiency in internal controls described above. The attestation report of our former auditors also identified what that firm considered to be two additional weaknesses in internal controls: (1) failure of the Company to complete consultation with the auditors prior to filing Form 10-K for the year ended December 31, 2004; and (2) a need to enhance and strengthen the Audit Committee to improve the Committee's effectiveness. Although the Company does not believe that our former auditors had a proper basis for its conclusions, the Company is exploring opportunities to improve the process of preparing its filings with the Securities and Exchange Commission and the effectiveness of its Audit Committee. Except as described above, there have not been any changes in our internal controls over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act during the nine months ended September 30, 2005 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Since September 9, 2005, a number of purported class action lawsuits were filed in the United States District Court for the Eastern District of New York against the Company and certain of the Company's officers and directors. The actions purport to be filed on behalf of purchasers of the Company's publicly traded securities during the period from April 21, 2004 through August 29, 2005. The complaints, which are substantially similar to one another, allege, among other things, that the Company's public disclosures were false or misleading because they did not disclose certain information. The lawsuits allege that DHB's body armor products were defective and failed to meet the standards of its customers, and that these alleged facts should have been publicly disclosed. The Company has been served with a number of these complaints. No class has been certified in the actions. The lawsuits seek compensatory damages plus interest and attorneys' fees. The Company believes that the lawsuits are baseless and intends to vigorously defend against them. Because of their similarity, the Company believes that most or all of the lawsuits will be consolidated into a single action and that the Company will not be required to defend against all of the lawsuits individually. The Company cannot predict the outcome of the lawsuits or whether the Company's financial condition or results of operations may be materially affected as a result of the lawsuits. Since September 14, 2005, a number of derivative complaints were filed in the United States District for the Eastern District of New York against certain officers and directors of the Company and, in certain cases, Weiser LLP, the Company's former auditor. The allegations in the complaints are substantially similar and include the Company as a nominal defendant. The complaints allege, among other things, that defendants breached their fiduciary duties and engaged in fraud, misrepresentation, insider trading, misappropriation of corporate information, waste of corporate assets, abuse of control, and unjust enrichment, asserting claims substantially similar to those asserted in the actions described above under "Securities Litigation." 25 The complaints seek monetary damages and various forms of equitable and/or injunctive relief, restitution to the Company and disgorgement of profits earned by defendants, and fees and costs. The Company believes that the lawsuits are baseless and intends to vigorously defend against them. Because of their similarity, the Company believes that most or all of the lawsuits will be coordinated and/or consolidated into a single action. The Company cannot predict the outcome of the lawsuits or whether the Company's financial condition or results of operations may be materially affected as a result of the lawsuits. On or about August 29, 2005, Southern States Police Benevolent Association, Inc., et al. ("Southern States") filed a Class Action Complaint against Protective Apparel Corporation of America, Inc. and Point Blank Body Armor, Inc. ("Defendants"), alleging that the National Institute of Justice ("NIJ") decertified all bullet resistant vests containing Zylon. Southern States further alleged that the test results released by the NIJ demonstrated that all of Defendants' Zylon-containing vests fail to comply with their certifications and warranties. Southern States brought causes of action for breach of warranty on label in vest, breach of warranty in warranty statement, breach of implied warranty of merchantability, breach of implied warranty of fitness for a particular purpose, and for injunctive relief. On or about October 19, 2005, Defendants filed an answer and affirmative defenses denying that Defendants are in breach of any warranty and denying that injunctive relief is proper. On October 20, 2005, the Court entered a Consent Order Certifying Class Action. The certified classes include all law enforcement personnel and organizations, and other individuals, who purchased new ballistic resistant soft body armor containing Zylon from the Defendants, except for federal agencies and any persons who have been physically injured as a result of defects in their vests. The parties are engaged in settlement negotiations. The Company has recorded a $36.7 million reserve for this settlement during the quarter ended September 30, 2005, which is part of the $60 million cost of the vest replacement program. On January 3, 2005, a class action lawsuit was filed against us in the Circuit Court of the Seventeenth Judicial Circuit in Broward County, Florida by a police organization and individual police officers, alleging concerns regarding the effectiveness and durability of body armor with high concentrations of Zylon in the Company's bullet-resistant soft body armor (vests). Point Blank Body Armor settled a class action lawsuit involving a total of less than 2,000 vests containing a high concentration of Zylon. Pursuant to the settlement, class members have been exchanging the vests for a choice of four other vests made by the company. Class members have also been receiving two extra carriers, as well as a 10 percent discount certificate. The final date for class members to submit a claim form was August 21, 2005. This settlement did not have a material adverse effect on its financial position. We are currently the subject of an investigation by the Securities and Exchange Commission with respect to certain related party transactions and executive compensation matters regarding the Company and affiliates of Mr. David H. Brooks (our Chief Executive Officer and Chairman). The Company and Mr. Brooks are cooperating with the Securities and Exchange Commission in this investigation. In addition, the Audit Committee periodically monitors the status and performance of related party transactions to assess the benefits to the Company and the related party's compliance with its contractual obligations. 26 We are involved in other litigation, none of which we consider to be material to our business or believe would, if adversely determined, have a material adverse effect on our financial condition or operations. ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER REPURCHASES OF EQUITY SECURITIES During the nine month period ended September 30, 2005 and 2004 employees exercised warrants to purchase 30,000 and 80,000 shares, respectively of the Company's unregistered common stock at an average price of $6.26 and $2.00 per share, respectively. ITEM 3. DEFAULTS UPON SENIOR SECURITIES On November 3, 2005, the Company amended its Credit Agreement, to exclude the non-cash compensation charge and the Zylon(R) replacement charge from the financial covenants calculations and issuing a waiver as of September 30, 2005 for failure to comply with such covenants as a result of the afore mentioned charges. Pursuant to the Eight amendment these defaults were waived by LaSalle Business Credit. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At the DHB Industries, Inc. Annual Stockholders' Meeting on July 29, 2005, our stockholders approved our 2005 Omnibus Equity Incentive plan. Number of Shares Voted Broker Voted For Against Abstain Non-Votes Proposal 1. To consider and vote upon the Company's proposed 2005 Omnibus Equity Incentive Plan. 11,715,548 8,064,100 152,114 0 ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS 10.18 Lease agreement dated August 22, 2005 between DHB Industries Inc. and A&B Holdings 10.19 Eighth Amendment to Loan and Security Agreement, dated November 3, 2005 31.1 Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of the Chief Executive Officer Pursuant to 18 U.S.C. ss.1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of the Chief Financial Officer Pursuant to 18 U.S.C. ss.1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 27 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed by the undersigned, thereunto duly authorized. Dated: November 9, 2005 DHB INDUSTRIES, INC. (Registrant) Signature Capacity Date Chief Executive Officer November 9, 2005 /s/ David H. Brooks and Chairman of the Board _______________________ Chief Financial Officer, November 9, 2005 /s/ Dawn M. Schlegel Director and Principal _______________________ Accounting Officer /s/ Jerome Krantz Director November 9, 2005 _______________________ /s/ Gary Nadelman Director November 9, 2005 _______________________ 28 EX-10 2 ex10-18.txt EXHIBIT 10.18 EXHIBIT 10.18 LEASE AGREEMENT THIS LEASE entered into as of the 22ND day of AUGUST, 05 by and between A & B Holdings, Inc., whose mailing address is P.O. Box 1379 LaFollette, TN 37766, ("LESSOR"), and D.H.B. Industries, Inc. or Subsidiary maintaining its corporate offices at 400 Post Ave., Suite 303, Westbury, NY 11590 , (hereinafter referred to as the "LESSEE"). ARTICLE 1. PREMISES Lessor hereby leases to Lessee, and Lessee hereby leases from Lessor, approximately 60,060 square feet of warehouse/manufacturing space in its "as is" condition situated in Campbell County, State of Tennessee, bearing the address of 179 Mine Lane, Caryville, Tennessee and more particularly described in Exhibit A, said exhibit being attached to and made a part of this Lease, referred to as the "Premises", together with all rights, privileges, easements and appurtenances belonging or pertaining to the Premises and other improvements situated upon the Premises to have and to hold, pursuant to the terms and conditions of this Lease. The premises shall include the driveway, parking area and land surrounding the improvements as shown on Exhibit A. Lessee agrees to maintain and keep in good repair the heating and air conditioning system. ARTICLE 2. TERM The term of this Lease shall be FIVE (5) years and shall commence on APRIL 15, 2006 and continue through APRIL 14, 2011, both dates inclusive, unless such dates are revised by mutual written agreement of the parties. ARTICLE 3. USE Lessee shall have the right to use and occupy the Premises for warehouse/manufacturing space. Lessor warrants that this use of the Premises is not in conflict with any applicable zoning or use restrictions. ARTICLE 4. RENT Lessee shall pay Lessor at P.O. Box 1379, LaFollette, TN 37766, or at such other place as the Lessor shall from time to time designate in writing, a Base Rent equal to the sum of $ 2.00 per square foot per year for a total annual rent of $120,120.00. The monthly rent of $10,010.40 will be paid monthly, in advance, on the first day of the month. 1 ARTICLE 5. TRADE FIXTURES AND BUILDING ALTERATION All fixtures, appliances, furniture, and any other personal property which the Lessee may install in or upon the Premises shall remain the personal property of Lessee, and shall in no way be considered attached to or a part of the realty, and same may be removed by the Lessee during or at the expiration or other termination of this Lease or any extension or renewal; provided, however, Lessee shall repair any physical damage caused to the Premises occasioned by the removal. Lessee shall not make any alterations to Lessor's building or to the Premises without the prior written consent of Lessor. Lessee shall not make any alterations to Lessor premises without the prior written consent of Lessor, such consent may not be unreasonably withheld. ARTICLE 6. ASSIGNMENT AND SUBLETTING Lessee shall not assign or sublet this Lease without the prior written consent of the Lessor. No such agreement shall operate to relieve the Lessee of its obligations imposed under this Lease. ARTICLE 7. SURRENDER OF PREMISES Lessee, at its own cost and expense, shall, on expiration of this Lease remove from the Premises all personal property belonging to it. Lessee shall repair all damage to the Premises caused by such removal, and restore the Premises to the condition they were in prior to the installation of any property so removed. Lessee shall, on expiration of the Lease, surrender and deliver the Premises in good condition, ordinary wear and tear, damage by the elements, fire or act of God, excepted. Lessee shall at the same time return to Lessor all keys to the Premises. Promptly upon the termination of this Lease, whether by term as herein provided or otherwise, a joint physical survey and written inspection report on the Premises shall be made to determine whether any damages, other than ordinary wear and tear occurred to the same while this Lease was in effect, and to reflect the then present condition. Such report shall be signed by both parties, and each party shall return a manually signed copy of the report to the other. This signed report shall be conclusive evidence as to the condition of the Premises on the date the Lease was terminated and possession of the Premises was actually or constructively returned to the Lessor. In the event of any dispute as to the contents of the report or the condition of the Premises, the parties will endeavor to resolve such dispute in an equitable and amicable manner, and if necessary, by submitting it to binding arbitration. In the event no survey is performed and a report rendered by the parties within thirty (30) consecutive days from the date of termination of this Lease, it shall be conclusively presumed that the Premises, at the time of surrender, was in good order, condition and repair. ARTICLE 8. LESSOR'S REMEDIES If Lessee shall fail to observe or perform any of its obligations under this Lease, and shall fail to cure such default within thirty (30) days after written notice form Lessor giving notice of such default, or if Lessee shall be adjudicated bankrupt, become insolvent or make an assignment for the benefit of creditors, then in any of such cases Lessor may, at its option and upon thirty (30) days written notice to Lessee, terminate this Lease. In the event of such termination, Lessor shall have the right to enter immediately upon the Premises and take full and exclusive possession of the Premises. The Lessor shall have the right, at its option, without declaring the Lease void, to sublet the 2 Premises and collect the rents. Should Lessor be unable to relet the Premises after reasonable efforts to do so, or should such monthly rental after relet be less than the rental Lessee was obligated to pay under this lease, then Lessee shall pay the amount of such rental deficiency to Lessor. A partial receipt for rent in arrears shall not operate as a waiver of any forfeiture which may have occurred before that time. The thirty (30) day cure period will be extended by Lessor for such time as is necessary to cure the default so long as Lessee promptly commences efforts to cure the default and continues such efforts with reasonable diligence. Lessee shall also be responsible to pay to Lessor its reasonable costs and expenses, including but not limited to reasonable attorney's fees, in retaking or reletting the Premises. Any installment of rent or additional rent herein required to be paid by Lessee which is received after the 25th day of the month by Lessor will include an additional late payment equal to ten percent (10%) of the rent or additional rent due. ARTICLE 9. HOLDOVER If the Lessee shall remain on the Premises after the expiration of this Lease, and if at such time the Parties shall have failed to negotiate a renewal or extension of this Lease, then Lessor shall have the option of pursuing its remedies in law and equity relative to Lessee's holdover. In the alternative Lessor, by giving written notice to Lessee at least 30 days prior to any rent increase, may interpret Lessee's holdover as an offer to rent the Premises on a month-to-month tenancy, at a monthly basic rental equal to one hundred ten percent (110%) of the monthly basic rental. Such rental shall be payable in advance, and acceptance of such rental payment by Lessor shall constitute acceptance by Lessor of Lessee's offer to rent the premises on a month-to-month tenancy, and in such event all terms and conditions contained in this Lease shall be in full force and effect for each succeeding calendar month after Lessor's acceptance of the basic monthly rental payment. Any such holdover on a monthly basis may be terminated by either party by giving thirty (30) days written notice of termination. Said notice must be thirty (30) days before the beginning of the next rental period. ARTICLE 10. INDEMNIFICATION LESSEE'S INDEMNIFICATION: The Lessee agrees to indemnify save and hold harmless Lessor from and against any and all losses, damages, claims, suits or actions, judgments and cost which may arise or grow out of any injury to or death of persons, or damages to property, arising out of or attributable to the negligent acts or omission of Lessee, its agents, servants, employees or invitee while on the Premises, except for injury to or death of persons, or damage to property, arising out of or attributable to the failure of the Lessor to fulfill its obligations as required under this Lease. In no event shall Lessee be liable for consequential, incidental or special damages. No provisions of this Article shall in any way inure to the benefit of any third person so as to constitute any such person a third party beneficiary of this Lease or of any one or more of the terms hereof, or otherwise give rise to any cause of action in any person not a party thereto. 3 LESSOR'S DISCLAIMER OF LIABILITY: Lessor shall not be liable for loss of or damage to any property of Lessee, nor for any loss of or damage to any property of others resulting from any cause whatsoever nature, unless caused by or due to any act or omission of Lessor, its agents contractors (of whatever tier), servants, employees or invitee. No provision of this Article shall in any way inure to the benefit of any third person so as to constitute any such person a third party beneficiary of this Lease or of any one or more of the terms hereof, or otherwise give rise to any cause of action in any person not a party hereto. INDEMNIFICATION: Lessor represents, covenants, warrants to and with Lessee to defend, indemnify, save and hold harmless Lessee, its parent and their respective directors, officers, employees, agents and assigns, from and against any and all suits, causes of action, legal or administrative proceedings, claims, demands, liabilities, losses, damages, awards, judgments, costs, attorneys' fees, and all expenses of whatever kind or nature (including expenses to enforce this indemnity), now existing or which may hereafter arise, exist, result from, or caused by any physical or environmental condition or human health risk, upon, over, under or affecting the Premises, which is inherent in the Premises, other than those physical or environmental conditions or human health risks which directly result from or are caused by the operations and activities of the Lessee while occupying the Premises during the term of this Lease, or for any such obligation arising after notice of such condition is given by Lessor to Lessee. This provision shall survive the termination of this Lease. ARTICLE 11. WASTE AND NUISANCE Neither party shall commit or suffer to be committed any waste on or about the Premises, nor shall either party maintain, commit or permit the maintenance or commission of any nuisance on the Premises or use the Premises for any unlawful purpose. Each party shall indemnify and hold harmless the other from and against all liability arising out of, as a result of, or in connection with the other party's illegal or unlawful use of the Premises. ARTICLE 12. HAZARDOUS WASTE Lessee agrees not to place or permit to be placed on the premises any hazardous waste or hazardous substance, except in accordance with all State, Local, and Federal regulations, nor will Lessee release or permit the release of any hazardous waste or hazardous substance on the premises. In the event that Lessee places or permits to be placed on the premises any hazardous waste or hazardous substance, or in the event that Lessee releases or permits the release of any hazardous waste or hazardous substance on the premises, Lessee will bear all costs, liabilities, damages, fines, penalties and expense arising or resulting from the clean up, neutralization, removal or remediation of ant such hazardous waste or hazardous substance. Lessee further agrees to indemnify, defend, and hold Lessor harmless from and against any and all claims, demands, liabilities, damages, suits, acts, judgements, fines, penalties, loss, costs and expense (including, without limitation, attorney's fees) arising or resulting from, or incurred by Lessor as a result (either directly or indirectly), of, Lessee placing or permitting to be placed, or releasing or permitting the release of a hazardous waste or hazardous substance on the premises, whether during the term of the Lease or thereafter. The term "hazardous substance" as used herein shall include both "hazardous waste" and "petroleum," and all terms as used herein shall have the same meaning and definition as set forth in UNITED STATES CODE, Title 42, and TENNESSEE CODE ANNOTATED, S 68-46-101, ET SEQ. Lessor warrants and represents to the best of Lessor's knowledge that there is no hazardous waste at, on, or under the premises at the present time. 4 ARTICLE 13. QUIET POSSESSION Lessor shall, on the commencement date of the term of this Lease, place Lessee in quiet possession of the Premises and shall secure Lessee in the quiet possession of the Premises against all persons claiming the same during the entire Lease term, or any extension thereof. ARTICLE 14. RIGHT TO OFFER FOR LET Lessor shall be permitted, during the one hundred eighty (180) days preceding the termination of this Lease, to keep or exhibit on the Premises a reasonable sign for display indicating the Premises are available for rental. ARTICLE 15. INSURANCE Lessee agrees to maintain public liability insurance of at least $1,000,000 per individual injury, $2,000,000 aggregate and $1,000,000 property damage liability for any one occurrence naming the Lessor as additional named insured. Also, it is agreed that the Lessee shall furnish $2,000,000 of insurance in an "all risk" policy to insure the building and property with no greater than $5,000.00 deductible and any damage will be paid to Lessor by the insurance company plus any deductible will be paid by the Lessee to the Lessor. All insurance provided for in this lease shall be in effect under enforceable policies issued by insurers of recognized responsibility and licensed to do business in this state at least 15 days prior to the expiration date of any policy, the original renewal policy for such insurance shall be delivered by Lessee to Lessor. Upon Lessor's request, Lessee shall provide Lessor with certifications that the coverage set forth herein is in effect. Within 15 days after the premium on any policy shall become due and payable, the Lessor shall be furnished with satisfactory evidence of its payment. If the Lessor so requires, the policies of insurance provided for, shall be payable to the holder of any mortgage, as the interest of such holder may appear, pursuant to a standard mortgage clause. All such policies shall, to the extent obtainable provide that any loss shall be payable to the Lessor or to the holder of any mortgage notwithstanding any act of negligence of the Lessee which might otherwise result if forfeiture of such insurance. All such policies shall contain agreement by the insurers that such policies shall not be canceled without at least thirty (30) days prior written notice to the Lessor and to the holder of any mortgage to whom loss hereunder may be payable. Lessee will carry at Lessee's own expense insurance coverage on all equipment, fixtures and appliances. WAIVER OF SUBROGATION: Lessor and Lessee hereby agree to release each other from all liability, be it for negligence or otherwise, in connection with any and all insurable losses covered by any insurance policies which either party carries with respect to the Premises, or any interest or property therein. This provision is enforceable only to the extent that such a loss is collected upon under said insurance policies. Moreover, this release is conditioned upon the inclusion I the policy or policies of a provision whereby any such release shall not adversely affect said polices or prejudice any right of the releasers to recover hereunder. 5 ARTICLE 16. CONDITION OF PREMISES Except as otherwise provided elsewhere in this Lease, Lessor covenants to keep, or cause to be kept in good order, repair and condition, the foundation, roof and exterior walls, unless such repairs or maintenance is required as a result of Lessee's abusive use of the Premises, provided however, Lessor shall have no obligation to clean or clear floors, driveways, sidewalks, parking areas, or loading docks and Lessee shall be responsible for cleaning or clearing such areas. Lessee is responsible for all maintenance of landscaping, including all grassed areas. Lessee shall notify Lessor of any condition existing at the Premises which requires repair and which is the responsibility of Lessor, hereunder, and Lessor shall have a reasonable period thereafter within which to perform the necessary repairs. Lessee shall, at all times during the Lease and at its own cost and expense, repair, replace, and maintain in a good, safe, and substantial condition, all interior portions of the building and any improvements, additions, and alterations thereto including the HVAC System on the Premises, and shall use all reasonable precaution to prevent waste, damage, or injury to the Premises. Lessor shall transfer any new equipment warranties which are provided by suppliers or manufacturers. ARTICLE 17. FIRE AND OTHER CASUALTY If the Premises shall be so damaged by fire, the elements, casualty, public disorder, any act, authorized or unauthorized, on the part of any governmental authority, or for any other cause or happening so as to be substantially destroyed, then this Lease shall terminate, and any unearned rent paid in advance by Lessee shall be refunded to it. In the event of partial damage, Lessee shall receive a refund of any unearned rent as to that portion of the Premises rendered untenantable, and further there shall be an abatement of future rental in proportion to that portion of the Premises which remain untenantable prior to repair or restoration. If Lessor shall fail to start to restore the Premises within thirty days, Lessee may terminate this Lease upon giving five (5) days written notice. ARTICLE 18. CONDEMNATION In the event that the Premises in whole or in part are taken or condemned for a temporary or permanent public or quasi-public use so as to substantially destroy the use of the Premises, Lessee may, at its option, terminate this Lease and receive a refund of any rental paid in advance. Lessor and Lessee shall each be entitled to receive and retain such separate awards as may be allocated to their respective interests in any condemnation proceedings. The termination of this Lease shall not affect the rights of the respective parties to such awards. 6 ARTICLE 19. LESSOR'S RIGHT OF ENTRY Upon reasonable notice from Lessor, but not less than 48 hours, Lessee shall permit Lessor and its agents to enter upon the Premises at all reasonable times for the purpose of inspecting same, or for the purpose of maintaining the Premises or making repairs or alterations. ARTICLE 20. UTILITIES AND TAXES Lessor shall, during the term herein demised or any extended term pay, and Lessee shall reimburse, all real property taxes and/or any in lieu of tax payment costs. Such costs shall be invoiced annually by Lessor to Lessee and due upon receipt. If said payment is not received by Lessor within thirty (30) days of due date, Lessee will be in default of said lease, and Lessor is entitled to pursue the remedies as outlined in ARTICLE 8, LESSOR'S REMEDIES. Lessee shall, during the term pay all assessments, water and sewer rents, rates and charges, charges for public utilities, excises, levies, and all other license and permit fees and other governmental charges, general and special, ordinary and extraordinary, unforeseen and foreseen, of any kind and nature whatsoever which at any time during the term or extended term of this Lease may be assessed, levied, imposed upon, or due or become due and payable out of or in respect of or become a lien on, the Premises or any part thereof or any appurtenance thereto, for any period during the term of this Lease. ARTICLE 21. SUCCESSOR'S RIGHTS AND OBLIGATIONS It is understood and agreed that the covenants and agreements contained in this Lease shall be binding upon and inure to the respective successors and assigns of the parties. ARTICLE 22. ENTIRE AGREEMENT This Lease embodies the entire agreement of the parties and no understandings or agreements, verbal or otherwise, exist between the parties except as expressly set forth in this Lease. The provisions of the Lease may only be modified or changed by mutual written agreement signed by an authorized representative of Lessor and Lessee. ARTICLE 23. WAIVER Failure of either party to insist upon the strict performance of any provision of this Lease or to exercise any right or remedy shall not be deemed a general waiver of any right or remedy, or of any existing or subsequent breach or default, and the election by either party of any particular remedy or default shall not be deemed exclusive of any other, and all rights and remedies of both parties be cumulative. ARTICLE 24. HEADINGS The headings as to the contents of particular Articles are in no way to be construed as a part of this Lease or as a limitation on the scope of the particular Articles to which they refer. 7 ARTICLE 25. LIENS A. The Lessee covenants and agrees with the Lessor that the Lessor may encumber its title to the Premises with a mortgage, irrespective of the existence of this Lease. Lessee shall have no power or authority to mortgage or otherwise encumber its interest in this Lease. B. The Lessee shall never, under any circumstances, have the power to subject the present or residual interests of the Lessor in the Premises or any improvements thereof, to any mechanic or materialman's lien or other liens of any kind. All persons who may hereafter during the life of this Lease furnish work, labor, services or materials to the Premises, by or through the Lessee, must look wholly to the interests of the Lessee, and not to that of the Lessor. C. Lessee consents to the assignment of the Lease from Lessor to any Lender or Mortgagee ("the lender"). During the time of any such assignment to the Lender, the parties agree that the Lease shall not be modified or amended without the prior written consent of the Lender. Lessor will provide notice of any such assignment to Lessee including the assignee's name and address. In the event of a default by Lessor under the Lease, Lessee agrees to give the Lender prompt written notice of such default at the same time such notice is given to Lessor. The notice and cure periods shall be the same as afforded Lessor under the Lease and shall run successive to those periods afforded Lessor. D. Lessor shall have the right to transfer, assign, mortgage or convey in whole or in part the Premises, land upon which it is situated, and any and all of its rights under this Lease, and nothing herein shall be construed as a restriction upon Lessor's so doing. This Lease and all rights of the Lessor hereunder are subject and subordinate to any deeds of trust, mortgage or other instruments of security which do now or may hereafter cover the Building and the land or any interest of Lessor therein, and to any and all advances made on the security thereof, and to any and all increases, renewals, modifications, consolidations, replacements and extensions of any such deeds of trust, mortgages or instruments of security. This provision is hereby declared to be self- operative and no further instrument shall be required to effect such subordination of this Lease. Lessor will insure that each such instrument to which this is to be subordinate provides that Lessee's possession shall not be disturbed so long as Lessee is not in default hereunder, not withstanding any default by Lessor under such instrument. Lessee shall execute any necessary instruments in this regard. ARTICLE 26. NOTICES Any notices required or desired to be given to the parties shall be sent by certified mail, return receipt requested to the following addresses: If to Lessor: A & B Holdings, Inc. Attn: B. Chris Arnold P.O. Box 1379 LaFollette, TN 37766-1379 If to Lessee: D.H.B. Industries, Inc. Attn: Dawn Schlegel 400 Post Ave., Suite 303 Westbury, NY 11590 8 ARTICLE 27. ESTOPPEL CERTIFICATE Lessee will from time to time and on a reasonable number of occasions upon not less than thirty (30) days prior request by Lessor, execute, acknowledge and deliver to Lessor a statement in writing executed by Lessee certifying that the Lease is unmodified and in full effect or if there have been modifications, that this Lease is in full effect or as modified, setting forth such modifications; the dates to which the rent has been paid and either stating that to the knowledge of the signer of the said statement that default exists or specifying each such default of which the signer may have knowledge. It is intended that any such statement executed by Lessee may be relied upon by any prospective purchaser or mortgagee or existing mortgagee of the building or land upon which it is situated. ARTICLE 28. MEMORANDUM OF LEASE Each party agrees upon the request of the other party to execute and deliver a memorandum of this Lease in recordable form for recording in the Campbell County registrar's office, setting forth the existence of the Lease, Lease term, and renewal terms. 9 IN WITNESS THEREOF, the parties hereto have executed this Lease as of the day and year first above written. WITNESS: LESSOR: David A. Winchester BY: B. Chris Arnold _________________________ ________________________________ ITS: Pres. ______________________________ WITNESS: LESSEE: David A. Winchester BY: Pat Lennex _________________________ ________________________________ ITS: President, Paca _______________________________ CORPORATE ACKNOWLEDGEMENT STATE OF Tenn __________________________________: : ss COUNTY OF Campell __________________________________: On this the 22 day of Aug , 2005 , before me appeared B. Chris Arnold to me personally known, who being by me duly sworn, did say that he is the President of the Lessor and that said instrument was signed and sealed in behalf of said corporation by authority of its Board of Directors, and said acknowledged said instrument to be the free act and deed of said corporation. Witness my hand and official seal at office, this 22 day of Aug , 2005. My Commission expires: 3-27-06 notary public Lillian H. Winchester CORPORATE ACKNOWLEDGEMENT STATE OF Tenn. __________________________________: : ss COUNTY OF Campbell __________________________________: On this the 22 day of Aug , 2005 , before me appeared Pat Lennex to me personally known, who being by me duly sworn, did say that he is the Pres of Lessee , and that said instrument was signed and sealed in behalf of said partners by authority of its Partnership Agreement and said acknowledged said instrument to be the free act and deed of said corporation. Witness my hand and official seal at office, this 22 day of Aug , 2005. My Commission expires: 3-27-06 notary public Lillian H. Winchester 10 EX-10 3 ex10-19.txt EXHIBIT 10.19 EXHIBIT 10.19 EXECUTION COPY EIGHTH AMENDMENT AND WAIVER (this "AMENDMENT"), dated as of November 3, 2005, 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 herein shall have the meanings ascribed to such terms in the Loan Agreement. WHEREAS, the Borrowers and Parent have requested that LaSalle (i) agree to the modification of certain terms and provisions contained in the Loan Agreement, (ii) waive certain covenant violations as Events of Default under the Loan Agreement and (iii) permit the proceeds of Revolving Loans to be used to purchase outstanding shares of common stock of the Parent; 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. AMENDMENTS. Effective upon the satisfaction of the conditions set forth in Section Four hereof, the Loan Agreement shall be and is hereby amended as follows: (A) SECTION 1. DEFINITIONS. (i) The following new definitions are inserted into Section 1 of the Loan Agreement in alphabetical order: "Non-Cash Compensation Charge" shall mean the non-cash expense incurred by Parent and the Borrowers in the aggregate amount of $11,300,000 relating to the compensation of certain key employees, officers or directors of Parent and the Borrowers in the form of distributions to such persons of options to purchase shares of capital stock in Parent. "Treasury Stock Buyback" shall mean the purchase in the open market by Parent, in cash, of up to three million (3,000,000) shares of common stock of Parent, which stock, when so repurchased, shall be accounted for on the Parent's balance sheet as a reduction in the aggregate amount of outstanding shares of common stock of Parent and a corresponding decrease in paid-in-capital of Parent. "Zylon Charge" shall mean (i) a write-off of "Zylon" inventory in the aggregate amount of Twenty Million Dollars ($20,000,000) on the consolidated balance sheet of Parent and the Borrowers (the "Zylon Inventory") and (ii) the establishment of a $40,000,000 reserve account on the consolidated balance sheet of Parent and the Borrowers corresponding to the anticipated costs and expenses to be incurred by Parent and the Borrowers in replacing the Zylon Inventory. (B) SECTION 2. LOANS. (i) The first sentence of Section 2(d)(ii) of the Loan Agreement is deleted in its entirety and the following is substituted in lieu thereof: ""REPAYMENT OF TERM LOAN. The Term Loan shall be repaid as follows: (a) beginning on and including July 1, 2004, in consecutive quarterly installments, each in the amount of One Million and No/100 Dollars ($1,000,000) and each payable on the first day of each quarter; (b) beginning on and including July 1, 2005, in consecutive quarterly installments, each in the amount of Two Million and No/100 Dollars ($2,000,000) and each payable on the first day of each quarter; and (c) beginning on and including January 1, 2006, in consecutive quarterly installments, each in the amount of Three Million and No/100 Dollars ($3,000,000) and each payable on the first day of each quarter; provided, that the entire outstanding principal balance of the Term Loan shall be repaid on the earliest to occur of: (i) the last day of the Original Term; (ii) the date of termination of this Agreement pursuant to Section 10 hereof; (iii) the date on which the due date of the Liabilities is accelerated pursuant to Section 16 hereof; or (iv) the date any mandatory prepayment thereof shall be required pursuant to Section 2(d)(iv) hereof." (C) SECTION 4. INTEREST, FEES AND CHARGES. (i) Clause (b) of Section 4(a)(i) is deleted in its entirety and the following is substituted in lieu thereof: "(b) from and after November 1, 2005, portions of the Term Loan borrowed as Prime Rate Loans shall bear interest at the Prime Rate in effect from time to time, and" -2- (ii) Clause (b) of Section 4(a)(ii) is deleted in its entirety and the following is substituted in lieu thereof: "(b) from and after November 1, 2005, portions of the Term Loan borrowed as LIBOR Rate Loans shall bear interest at one and three-quarters percent (1.75%) in excess of the LIBOR Rate for the applicable Interest Period and" (D) SECTION 14. FINANCIAL COVENANTS. Clauses (a)(i), (a)(ii), (b) and (c) of Section 14 of the Loan Agreement are deleted in their entirety and the following are substituted in lieu thereof: "(A) TANGIBLE NET WORTH. (i) The Tangible Net Worth of Parent and its Subsidiaries, on a consolidated basis, shall not at any time be less than Forty-Five Million and No/100 Dollars ($45,000,000); provided, however, that solely for purposes of calculating such Tangible Net Worth, the amount of each of the Zylon Charge, the Non-Cash Compensation Charge and the Treasury Stock Buyback shall each be excluded. (ii) Each Borrower shall at all times maintain a minimum Tangible Net Worth of at least One Dollar. (B) FIXED CHARGE COVERAGE. Parent and the Borrowers shall not permit the ratio of EBITDA to Fixed Charges for any fiscal quarter (determined as of the end of such fiscal quarter), commencing with the fiscal quarter ending on or about March 31, 2004, in each case together with the immediately preceding three fiscal quarters, to be less than 2.00 : 1.00; provided, however, that solely for purposes of calculating compliance with this covenant as to any test period, no effect shall be given to the Zylon Charge, the Non-Cash Compensation Charge and the Treasury Stock Buyback. (C) CONSOLIDATED EBITDA. Parent and the Borrowers shall not permit EBITDA for any fiscal quarter (determined as of the end of such fiscal quarter), commencing with the fiscal quarter ending on or about March 31, 2004, to be less than Four Million Five Hundred Thousand and No/100 Dollars ($4,500,000); provided, however, that solely for purposes of calculating compliance with this covenant as to any test period, no effect shall be given to the Zylon Charge, the Non-Cash Compensation Charge and the Treasury Stock Buyback." -3- SECTION TWO. WAIVER. Parent and the Borrowers have notified LaSalle that after giving effect to the Zylon Charge and the Non-Cash Compensation Charge, Parent and its Subsidiaries are not and will not be in compliance with: (a) the minimum Tangible Net Worth covenant set forth in Section 14(a) of the Loan Agreement; (b) the required ratio of EBITDA to Fixed Charges set forth in Section 14(b) of the Loan Agreement for the period of four fiscal quarters ending on September 30, 2005; and (c) the required minimum EBITDA covenant set forth in Section 14(c) of the Loan Agreement for the fiscal quarter ending September 30, 2005. Such failure to comply with such financial covenants constitutes an Event of Default under Section 15(b) of the Loan Agreement (and each such Event of Default is referred to herein as a "Designated Event of Default"). Effective as of the date of this Amendment, subject to satisfaction of the conditions contained in Section Four hereof, LaSalle hereby waives as an Event of Default each Designated Event of Default. LaSalle has not waived, is not hereby waiving, and has no intention of waiving, any Event of Default which may have occurred on or prior to the date hereof, whether or not continuing on the date hereof, or which may occur on or after the date hereof (whether the same or similar to any Designated Event of Default), other than the Designated Events of Default, and upon the occurrence of any Event of Default, whether or not continuing on the date hereof, or which may occur on or after the date hereof (whether the same or similar to any Designated Event of Default), LaSalle shall have, and hereby specifically reserves, the right, in its discretion, to exercise any and all of its rights and remedies under the Loan Agreement, and any of the Other Agreements, applicable law or otherwise. SECTION THREE. CONSENT. Effective upon the satisfaction of the conditions precedent set forth in Section Four hereof, LaSalle hereby (a) consents to the consummation of the Treasury Stock Buyback so long as, both before and immediately after giving effect to any Treasury Stock Buyback, no Default or Event of Default shall have occurred and be continuing and (b) waives any restrictions contained in the Loan Agreement which may otherwise preclude the consummation of the Treasury Stock Buyback; provided, that (x) the aggregate amount of shares purchased pursuant to the Treasury Stock Buyback shall not exceed Three Million shares (3,000,000) and (y) the aggregate amount of proceeds of Revolving Loans used to consummate the Treasury Stock Buyback shall not exceed Nine Million Dollars ($9,000,000). SECTION FOUR. CONDITIONS PRECEDENT. This Amendment shall become effective on the date when all of the following conditions, the satisfaction of each of which is a condition precedent to the effectiveness of this Amendment, shall have occurred or shall have been waived in writing by LaSalle. (A) LaSalle shall have received and reviewed 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 consented to in writing by David H. Brooks, DHB Armor Group, Inc., DHB Sports Group, Inc., Lanxide Armor Products, Inc. and Orthopedic Products, Inc.; -4- (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 Parent's Certificate of Designations and Preferences executed on December 14, 2001 and Point Blank's Certificate of Amendment dated December 31, 2004, 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; and (iii) 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. (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 (other than each Designated Event of Default) shall have occurred and be continuing. (C) No event or development shall have occurred since December 31, 2003 which event or development has had or is reasonably likely to have a Material Adverse Effect. (D) 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 governmental or administrative body or agency which challenges or relates to the consummation of this Amendment or the other transactions contemplated herein. SECTION FIVE. REPRESENTATIONS, WARRANTIES AND COVENANTS. Each Borrower and Parent hereby represents, warrants and covenants (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 -5- 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) After giving effect to this Amendment, 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 each of this Amendment, nor the consummation of the transactions herein contemplated, nor compliance with the provisions hereof will violate any law or regulation, or result in or cause a violation by any Borrower or Parent of any order or decree of any court or government instrumentality, or 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 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 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) After giving effect to this Amendment, no Default or Event of Default (other than a Designated Event of Default) shall have occurred and is continuing; (F) Since the date of Parent's consolidated and consolidating financial statements for the Fiscal Year ended December 31, 2003, no change or event has occurred which has had or is reasonably likely to have a Material Adverse Effect; and (G) 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 instruments being executed in connection herewith or by completion of the transactions contemplated hereunder or thereunder. -6- SECTION SIX. 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. (E) Nothing contained in this Amendment shall be deemed to constitute a waiver of any Default or Event of Default, other than the Designated Events of Default, whether or not LaSalle has knowledge thereof. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] -7- IN WITNESS WHEREOF, LaSalle, each Borrower 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. LASALLE BUSINESS CREDIT, LLC By: /s/ MICHAEL F. ALIBERTO __________________________________________ Name: Michael F. Aliberto, III Title: First Vice President PROTECTIVE APPAREL CORPORATION OF AMERICA POINT BLANK BODY ARMOR, INC. NDL PRODUCTS, INC. DHB INDUSTRIES, INC. By: /s/ DAVID H. BROOKS __________________________________________ Name: David H. Brooks Title: Chairman of each of the above companies ACKNOWLEDGED AND CONSENTED TO: /s/ DAVID H. BROOKS ________________________________________ David H. Brooks DHB ARMOR GROUP, INC. DHB SPORTS GROUP, INC. LANXIDE ARMOR PRODUCTS, INC. ORTHOPEDIC PRODUCTS, INC. By: /s/ DAVID H. BROOKS _____________________________________ Name: David H. Brooks Title: Chairman of each of the above companies SIGNATURE PAGE TO EIGHTH AMENDMENT EX-31 4 ex31-1.txt EXHIBIT 31.1 EXHIBIT 31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER I, David H. Brooks, Chairman and Chief Executive Officer of DHB Industries, Inc., 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 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13(a)-15(f) and 15d-15(f)) 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) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) 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 d) 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. 5. The registrant's other certifying officer 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 9, 2005 /s/ DAVID H. BROOKS ________________________________________ David H. Brooks Chairman and Chief Executive Officer EX-31 5 ex31-2.txt EXHIBIT 31.2 EXHIBIT 31.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER I, Dawn M. Schlegel, Chief Financial Officer of DHB Industries, Inc., 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 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13(a)-15(f) and 15d-15(f)) 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) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) 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 d) 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. 5. The registrant's other certifying officer 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 9, 2005 /s/ DAWN M. SCHLEGEL ___________________________ Dawn M. Schlegel Chief Financial Officer EX-32 6 ex32-1.txt EXHIBIT 32.1 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 nine months ended September 30, as filed with the Securities and Exchange Commission (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 9, 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 7 ex32-2.txt EXHIBIT 32.2 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 Annual Report of DHB Industries, Inc. (the "Company") on Form 10-Q for the nine months ended September 30, 2005 as filed with the Securities and Exchange Commission (the "Report"), I, Dawn 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 9, 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-----