Back to GetFilings.com
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from_______ to________
Commission File No. 01-13112
DHB INDUSTRIES, INC.
_______________________________
(Name of issuer in its charter)
DELAWARE 11-3129361
____________________________ ___________________
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
400 POST AVE SUITE 303, WESTBURY, NEW YORK 11590
________________________________________________
(Address of principal executive offices)
Issuer's telephone number: (516) 997-1155
Securities registered under Section 12(b) of the Exchange Act:
COMMON STOCK, $0.001 PAR VALUE
(Title of Class)
Securities registered under Section 12(g) of the Exchange Act: None
Indicate by check mark whether the issuer (1) has filed all reports required to
be filed by section 13 or 15(d) of the Exchange Act during the past 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 if disclosure of delinquent filers in response to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in the definitive proxy or information
statements incorporated by Reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [ X]No [ ] .
Aggregate market value of the voting stock held by non-affiliates computed by
reference to the price at which the stock sold, or the average bid and asked
price of such stock, as of March 1, 2004: $198,055,855.
Number of shares outstanding of the issuer's common equity, as of March 1, 2004
(Exclusive of securities convertible into common equity): 40,742,136
DOCUMENTS INCORPORATED BY REFERENCE: None
1
PART I
ITEM 1. BUSINESS
GENERAL
DHB Industries, Inc., a Delaware corporation, was organized in 1992
("DHB" or the "Company") and, is a holding company comprised of two divisions:
DHB Armor Group ("Armor Group") and DHB Sports Group ("Sports Group"). The Armor
Group consists of Point Blank Body Armor, Inc. ("Point Blank") and Protective
Apparel Corporation of America ("PACA"). DHB Armor Group develops, manufactures
and distributes bullet and projectile-resistant garments, bullet-resistant and
fragmentation vests, and related ballistic accessories. The Sports Group, which
consists of NDL Products, Inc. ("NDL"), manufactures and distributes protective
athletic apparel and equipment, including elbow, breast, hip, groin, knee, shin
and ankle supports and braces, as well as a line of therapy products. The Armor
Group represented approximately 97%, 96% and 95% of consolidated revenues of the
Company during 2003, 2002 and 2001, respectively.
The Company's executive offices are located at 400 Post Avenue, Suite
303, Westbury, New York 11590 and its telephone number is 516-997-1155. The
Company's website is www.dhbindustries.com. The Company's manufacturing
facilities are located in Oakland Park and Deerfield Beach, Florida and
Jacksboro, Tennessee. As announced in December 2003, the Company plans to add a
new 104,000 square foot manufacturing facility in Pompano Beach, Florida during
the second quarter of 2004. The Company also has a sales office in Alexandria,
Virginia.
The Company reincorporated in Delaware in 1995 and changed its name
from DHB Capital Group Inc. to DHB Industries, Inc. in July 2001. The Company's
common stock trades on the American Stock Exchange where it began trading on
February 1, 2002 under the ticker symbol "DHB".
DHB ARMOR GROUP
OVERVIEW
In 2003, DHB recorded the most successful year in the 11-year history
of the Company. DHB posted record operating results, as operating income in 2003
increased 88% to a record $26,016,000 as compared to $13,823,000 for 2002.
Additionally, when comparing income available to common stockholders for 2003
with 2002, it is worth noting that income available to common stockholders in
2003 was fully taxed at 42%, whereas 2002 income available to common
stockholders actually was increased due to a $3.7 million tax benefit.
DHB's Armor Group continues to expand upon its position as the dominant
leader in the US protective body armor industry. Point Blank and PACA brands are
considered by many to be among the finest body armor products in the world. The
market for its products domestically continues to grow and the Company is
encountering a greater demand for its products in the international markets.
Sales to the United States Department of Defense more than doubled in
2003 while sales to state and local law enforcement agencies grew by 61%. The
Company is currently providing the majority of Outer Tactical Vests ("OTVs") to
the US military. Its Interceptor OTV has been credited with saving the lives of
numerous US soldiers that have served in Iraq and Afghanistan. In November 2003,
the Company announced that it received a $60 million purchase order from the
U.S. Department of Defense for Point Blank's "Interceptor" Outer Tactical Vest
(OTV). The Company believes this is the largest single order for body armor ever
issued by the U.S. Department of Defense.
The Company's backlog of firm orders as of March 1, 2004 is
approximately $132 million, up from approximately $57 million at the same point
last year.
PRODUCTS AND MARKETS. The Armor Group principally manufactures three
types of body armor: concealable armor, which is worn beneath the user's
clothing and is designed to protect against less serious ballistic threats;
tactical armor, which is worn externally and is designed to protect against more
2
and modular concealable / tactical armor, which allows the wearer to customize
the armor for either concealed or tactical use. The Armor Group's products are
sold to state and local agencies predominantly through a network of
distributors. Products are also sold directly by the Armor Group to federal and
military. All Armor Group products are manufactured and tested to the applicable
National Institute of Justice ("NIJ") standards and/or military specifications.
The Armor Group's contract with the U.S. Department of Defense to
manufacture and supply "Interceptor" OTVs continues to expand and is integral to
the Company's continued growth and success. The Interceptor was designed as a
continually upgradeable modular, soft body armor system for the U.S. military.
The Armor Group has now delivered over 550,000 Interceptors to the U.S. Marine
Corps, U.S. Army, and U.S. Air Force. The Interceptor was worn by American
service men and women in both Operations Iraqi Freedom and Enduring Freedom and
is credited with saving the lives of U.S. military personnel in both operations.
The Armor Group has developed and received military approval for a total of 5
ballistic models of the Interceptor and provides different models to different
branches of the U.S. military. Through this diversification of the Interceptor
ballistic armor packages, the Armor Group has been able to deliver the
Interceptor at a much higher rate of production and overcome ballistic fiber
shortages.
In addition to the Interceptor, the Armor Group manufactures a number
of other protective armor systems for military use. Fragmentation armor, such as
the Combat Vehicle Crewman from Point Blank and the Warfighter from PACA, is
designed to military specifications and offers protection against materials and
velocities associated with the fragmentation of explosive devices such as
grenades, mortars, artillery shells and ballistic projectiles. During 2003, the
Armor Group delivered the P3ICE Countermine Ensemble for the U.S. Army
Countermine program. During the fourth quarter, the Armor Group also completed
first article requirements for the Combat Vehicle Crewman ("CVC") Program and
began to deliver the first quantities to the military depots.
During 2003, the Armor Group increased the sales of its tactical body
armor to law enforcement and federal government communities throughout the U.S.
It also continued to offer department-specific modifications to standard
products, resulting in the development of the BAT Vest, the Light Assault Vest,
and the Warfighter. By providing customized tactical armor, the Armor Group was
able to increase its market share specifically in the tactical market in both
the law enforcement and the federal government communities.
The Armor Group developed in 2003 an extensive ballistic fragmentation
blanket program to address the need for protection against fragmentation during
military troop movements in convoys and during ambushes. This enabled the U.S.
military to respond quickly to these threats and provide its service men and
women with additional protection. This product has been well received, and the
volume of sales has increased during the fourth quarter of 2003 and the first
quarter of 2004.
The Armor Group's extensive lines of body armor products also include
tactical police jackets, military field jackets, executive vests, K-9
protection, fragmentation and close-quarter-battle systems.
During 2003, the Armor Group's government and international liaison
office located in the Crystal City complex, within close proximity to the
Pentagon in Washington, D.C., developed special accounts with customized
products available for immediate delivery for the military, domestic and
3
international law enforcement communities. This office provides an optimal
support for our efforts to grow our sales in the federal, military and
international markets. In addition, the Armor Group's government and
international office is working to build relationships with various
international and government customers.
RAW MATERIALS AND MANUFACTURING. The Armor Group manufactures all of
its bullet, fragmentation and projectile-resistant products. Research and
development efforts are designed to ensure that the raw materials are combined
to suit particular applications. The primary woven fabrics used in the
manufacture of the ballistic-resistant products include Kevlar(TM), Twaron(TM),
Zylon(TM). Primary shield products include GoldFlex(TM), Dyneema(TM) and Spectra
Flex(TM). Substantially all of the raw materials used in the manufacturing of
ballistic-resistant garments are made from fabrics, which are patented by major
corporations and purchased from four independent weaving or manufacturing
companies. If any of the manufacturers ceases to produce these products for any
reason, an alternative fabric would have to be selected and ballistic tests
would need to be performed. Until this was done, the Company's sale of ballistic
resistant products would be severely curtailed and the Company's financial
condition would be materially adversely affected. If any of these manufacturers
cease to produce these fabrics, there can be no assurance that the Company will
be able to identify alternate fabrics with comparable performance. In an attempt
to neutralize the possibility that the Company will be unable to obtain
sufficient raw materials to produce its products in the quantities demanded by
its customers, the Armor Group has cross-certified several product lines using
competitive raw materials. This has given the Armor Group the ability to largely
overcome the shortfall of raw materials and continue to meet all customer needs.
RESEARCH AND DEVELOPMENT. The Armor Group's internal employee research
and development team has combined 100+ years of ballistic research and
development experience, including more than 40 years of experience in an NIJ
certification environment. Many of the Company's research and development
personnel previously held positions of responsibility with other companies
within the industry. Research and development expenses are included in selling,
general and administrative expenses as incurred and for the years ended December
31, 2003, 2002 and 2001 were $10.8 million, $4.2 million and $2.3 million,
respectively.
PATENTS AND TRADEMARKS. The Company holds numerous patents and
trademarks registered in the United States for various products. A number of
these patents are of considerable value and are believed to be critical to the
Company's business. During 2003, no challenges to our patents and trademarks
have arisen and the Company has no reason to believe that any such challenge
will arise in the future. The Company has numerous patents pending for unique,
futuristic protective armor designs and integrated technologies, and was issued
eight additional trademarks during 2003. Two of the patents pending were granted
full patent status during the fourth quarter of 2003 and the first quarter of
2004.
CUSTOMERS. The Armor Group's products are sold domestically to U.S.
military, to United States law enforcement agencies, corrections and
distributors and are sold internationally to governments and distributors. Sales
to the U.S. military directly or as a subcontractor accounted for 63%, 57% and
62% of the Armor Group's revenues for the years ended December 31, 2003, 2002
and 2001, respectively. Sales directly and indirectly to domestic state and
local law enforcement agencies, security and intelligence agencies, and federal
and state correctional facilities, accounted for 22%, 26% and 22%, of the Armor
Group's revenues in the years ended December 31, 2003, 2002 and 2001,
respectively.
4
Certain sales by the Armor Group to federal agencies are made pursuant
to standard purchasing contracts of a type issued by the General Services
Administration ("GSA") that is commonly referred to as a "GSA Schedule". GSA
Schedule contracts accounted for approximately 60%, 16%, and 14% of the Armor
Group's sales for the years ended December 31, 2003, 2002 and 2001,
respectively. The Armor Group's current GSA contracts expire on July 31, 2006.
With the exception of the U.S. Government, no customer accounted for
10% or more of the Company's revenues in 2003, 2002 and 2001.
MARKETING AND DISTRIBUTION. The Armor Group employs 20 customer support
representatives and 15 sales representatives under the direction of 5 sales
managers. These personnel are responsible for marketing the Armor Group's
products to federal, state and local law enforcement agencies in the United
States. Sales to such law enforcement agencies are made primarily through
distributorships established by the sales team. However, in areas in which there
are no suitable distributors, the Armor Group fills orders directly.
GOVERNMENT AND INDUSTRY REGULATIONS AND STANDARDS. Bullet and
fragmentation garments and accessories manufactured and sold by the Armor Group
are not currently the subject of government regulations. However, law
enforcement agencies and the military specify certain standards of performance,
such as NIJ standards for bullet-resistant vests in several categories. In
addition, the NIJ has established a voluntary standard for testing
stab-resistant armor. The Armor Group regularly submits its vests to independent
laboratories for testing under these standards.
COMPETITION. The ballistic-resistant garment business is highly
competitive and fragmented. The Company estimates the number of United States
manufacturers are approximately 20. Since there are no published reports
concerning the market, and most companies are privately held, management is
unable to estimate the size of the market. Nevertheless, the Company believes
that the Armor Group is the largest manufacturer of ballistic-resistant garments
in the United States.
The Armor Group believes that the principal elements of competition in
the sale of ballistic-resistant garments are on time delivery, quality products
and customer service. The Company believes that the Armor Group enjoys a
favorable reputation in the industry with over 30 years of supplying federal,
state and municipal governments and agencies.
BACKLOG. As of March 1, 2004, the Armor Group had a backlog of
approximately $132 million. Backlog at any one date is not a reliable indicator
of future sales. In addition to its backlog, the Armor Group often receives
contract awards for municipal orders that may be extended over a period of time.
The actual dollar amount of products to be delivered pursuant to these and
similar contracts cannot be accurately predicted and is generally excluded from
reported backlog.
POTENTIAL PRODUCT LIABILITY. The products manufactured or distributed
by the Armor Group are used as protective devices in situations that could
result in serious injuries or death, including injuries that may result from the
failure of such products. The Armor Group maintains product liability insurance
for PACA and Point Blank in the amount of $21,000,000 each per occurrence, and
$22,000,000 in the aggregate, less a deductible of $100,000 for each company.
Point Blank International, the Company's foreign sales arm, maintains product
5
liability insurance in the amount of $2,000,000 for each occurrence, with a
$5,000 deductible. There is no assurance that these amounts would be sufficient
to cover the payment of any potential claim. In addition, there is no assurance
that this or any other insurance coverage will continue to be available, or, if
available, that Point Blank, PACA and Point Blank International would be able to
obtain such insurance at a reasonable cost. Any substantial uninsured loss would
have to be paid out of the subject subsidiary's assets, as applicable, and may
have a material adverse effect on the Company's financial condition and results
of operations on a consolidated basis. The inability to obtain product liability
coverage may prohibit Point Blank, PACA or Point Blank International in the
future from bidding for orders from certain governmental customers. Many
governmental agencies currently require such insurance coverage, and any such
inability to bid for government contracts as a result of insufficient insurance
coverage would have a materially adverse effect on the Company's financial
condition and results of operations on a consolidated basis.
EMPLOYEES. As of March 1, 2004, the Armor Group employed approximately
675 full-time employees. There was one operating officer, 32 employees in
supervisory capacities, 541 employees in manufacturing, shipping and
warehousing, 13 employees in quality control, 38 employees in customer service
and sales, 6 employees in technical/research development, and 44 employees in
office and administration. In the opinion of management, the Armor Group
maintains a satisfactory relationship with its employees.
DHB SPORTS GROUP
PRODUCTS AND MARKETS. The Sports Group, which consists of NDL Products,
Inc.("NDL") manufactures and distributes protective apparel and equipment,
including elbow, breast, hip, groin, knee, shin and ankle supports and braces,
as well as line of therapy products. The Sports Group also offers private label
or house brand programs to major retailers and large wholesalers along with
specific OEM programs to outside brands that service the same markets.
Currently, the Sports Group manufactures and markets products under the
brands NDL(TM), GRID(TM), MagneSystems(TM), FLEX-AID(TM), and Doctor Bone
Savers(TM). The Sports Group markets its product to a variety of distribution
points with an emphasis on major retailers. The Sports Group's various brands
are offered to the customer by mass merchandisers, chain drug stores, food
chains, independent sporting goods and pharmacy retailers, catalog sellers,
wholesalers and e-commerce websites. The Sports Group customer list includes
retail and wholesale establishments such as Wal-Mart, Target, Meijer and Longs
Drug Stores. Two customers, Wal-Mart and Target, collectively accounted for 68%,
61% and 61% of the Sports Group's revenues for the years ended December 31,
2003, 2002 and 2001, respectively.
The Sports Group has negotiated private label programs with three of
the major wholesalers to the retail trade: Amerisource, Cardinal Health and
CDMA. These wholesalers currently service their 10,000 store networks with their
Brite Life(TM), Leader(TM) and Quality Choice Brands(TM) of health support
products.
The Sports Group is a member of NACDS (National Association of Chain
Drug Stores), and PLMA (Private Label Manufacturers Association).
POTENTIAL PRODUCT LIABILITY. The products manufactured or distributed
by the Sports Group are used as protective devices in situations that could
result in serious injuries or death, including injuries that may result from the
failure of such products. The Sports Group maintains product liability insurance
6
in the amount of $21,000,000 per occurrence, and $22,000,000 in the aggregate,
less a deductible of $100,000. There is no assurance that these amounts would be
sufficient to cover the payment of any potential claim. In addition, there is no
assurance that this or any other insurance coverage will continue to be
available, or, if available, that the Sports Group would be able to obtain such
insurance at a reasonable cost. Any substantial uninsured loss would have to be
paid out of the Sports Group's assets and may have a material adverse effect on
the Company's financial condition and results of operations on a consolidated
basis.
EMPLOYEES. As of December 31, 2003 the Sports Group employed
approximately 105 full-time employees. There was one officer, 4 employees in
supervisory capacities, 92 employees in manufacturing, shipping and warehousing,
2 employees in sales and customer service, and 6 employees in office support.
All of the Sports Group's employees are employed full-time. In the opinion of
management, the Sports Group's relationship with its employees is satisfactory.
The Sports Group also has more than 50 independent sales representatives who,
together with the sales executives, are responsible for sales throughout the
United States, Western Europe, Asia, the Middle East and Latin America. The
Sports Group has in-house sales support and state-of-the-art EDI order and
invoicing capabilities.
SEGMENT INFORMATION
As described in detail above, the Company operates in two principal
segments: ballistic-resistant equipment and protective athletic and sports
products. Financial information on the Company's business segments (in
thousands) is as follows:
2003 2002 2001
________ ________ _______
NET SALES
Ballistic-resistant equipment $224,152 $124,860 $93,506
Protective athletic & sports products 5,859 5,492 4,520
________ ________ _______
230,011 130,352 98,026
Less inter-segment sales -- (5) (11)
________ ________ _______
Consolidated net sales $230,011 $130,347 $98,015
======== ======== =======
INCOME FROM OPERATIONS
Ballistic-resistant equipment $ 33,618 $ 17,534 $15,029
Protective athletic & sports products 426 563 94
Corporate and other (1) (8,028) (4,274) (2,344)
________ ________ _______
Consolidated operating from operations $ 26,016 $ 13,823 $12,779
======== ======== =======
DEPRECIATION AND AMORTIZATION EXPENSE
Ballistic-resistant equipment $ 350 $ 289 $ 223
Protective athletic & sports products 64 86 157
________ ________ _______
414 375 380
Corporate and other 150 88 98
________ ________ _______
Consolidated depreciation and amortization
expense $ 564 $ 463 $ 478
======== ======== =======
7
2003 2002 2001
________ ________ _______
INTEREST EXPENSE
Ballistic-resistant equipment $ 1,238 $ 935 $ 463
Protective athletic & sports products -- -- 77
________ ________ _______
1,238 935 540
Corporate and other (2) 106 710 1,973
________ ________ _______
Consolidated interest expense $ 1,344 $ 1,645 $ 2,513
======== ======== =======
INCOME TAXES (BENEFIT)
Ballistic-resistant equipment $ 14,341 $ 22 $ 143
Protective athletic & sports products 182 2 --
________ ________ _______
14,523 24 143
Corporate and other (2) (3,425) (3,696) 32
________ ________ _______
Consolidated tax (benefit) expense $ 11,098 $ (3,672) $ 175
======== ======== =======
IDENTIFIABLE ASSETS
Ballistic-resistant equipment $ 88,503 $ 56,471
Protective athletic & sports products 3,186 2,907
________ ________
91,689 59,378
Corporate and other (2) 1,739 5,993
________ ________
Consolidated assets $ 93,428 $ 65,371
======== ========
Foreign sales accounted for 1%, 2% and 2% of the total revenues for the years
ended December 31, 2003, 2002 and 2001, respectively. Foreign identifiable
assets accounted for 0%, 1% and 1% of the total assets at December 31, 2003,
2002 and 2001, respectively.
(1) Corporate and other includes corporate general and administrative expenses.
(2) Corporate assets are principally deferred income tax assets and property and
equipment.
AVAILABLE INFORMATION
The Company's Internet address/website is www.dhbindustries.com. As of
the date of this Annual Report on Form 10-K, the Company makes available free of
charge on its website materials filed or furnished by the Company under the
Securities Exchange Act of 1934 as soon as reasonably practicable after such
materials are filed with or furnished to the Securities and Exchange Commission.
The Company will voluntarily provide electronic copies (or a reasonable number
of paper copies) of its filings free of charge upon request.
ITEM 2. PROPERTIES
CORPORATE HEADQUARTERS. In February 2004, the Company relocated its
corporate headquarters to a 3,952 square foot leased office located at 400 Post
Avenue Suite 303, Westbury, New York. The lease expires on February 28, 2010.
8
PACA. The Company leases a 60,060 square foot manufacturing facility
with administrative offices at 179 Mine Lane, Jacksboro, Tennessee 37757, for
its subsidiary, PACA. The lease expires on April 15, 2006.
NDL/POINT BLANK FACILITY. Point Blank leases a 67,000 square foot
office and manufacturing facility (the "Oakland Park Facility") located at 4031
N.E. 12th Terrace, Oakland Park, Florida 33334, from V.A.E. Enterprises LLC
("V.A.E."), a limited liability company controlled by Mrs. Terry Brooks, wife of
Mr. David H. Brooks, and beneficially owned by Mr. and Mrs. Brooks' minor
children. NDL Products occupies a portion of the space in the Oakland Park
facility. The lease expires on December 31, 2010. Management believes that the
terms of the lease are no less favorable to the Company than terms that would
have been obtained at the time of the lease from an unrelated third party.
POINT BLANK-MILITARY FACILITY. In January 2003, the Company leased a
51,246 square foot manufacturing facility with administrative offices in
Deerfield Beach, Florida, to expand Point Blank's military production. The lease
expires on April 30, 2008.
POINT BLANK-ADDITIONAL FACILITY. In December 2003, the Company leased a
new 104,000 square foot manufacturing facility with administrative offices in
Pompano Beach, Florida, to expand Point Blank's production. The lease expires on
April 30, 2014.
NDL WAREHOUSE. On October 1, 2002, the Company entered into a two-year
lease for a 31,500 square foot warehouse adjacent to the Oakland Park Facility
from an unrelated third party. This warehouse is located at 1201 NE 38th Street,
Oakland Park, Florida.
DC OFFICE. In May 2002, the Company opened a 2,192 square foot
government and international liaison sales office at 1215 Jefferson Davis
Highway, Arlington, Virginia. The lease expires on April 30, 2006.
POINT BLANK INTERNATIONAL FACILITY. Point Blank International leases a
5,700 square foot office and warehouse facility located at Rue Leon Frederiq,
14, 4020 Liege, Belgium. This space is rented on a month-to-month basis.
ITEM 3. LEGAL PROCEEDINGS
The Company filed a lawsuit in the Supreme Court of the State of New
York, County of Nassau, against its insurance carrier and an insurance agent,
for negligence and breach of fiduciary duties as a result of the damages the
Company incurred during Hurricane Irene in October 1999. During 2003, the
Company entered into settlement agreements with its insurance agent and
insurance carrier for a total payment of $1,009,000 to the Company, net of legal
fees, which is included in the financial statements for the year ended December
31, 2003 in other income.
On October 1, 2002, a shareholders' derivative action was commenced in
the Supreme Court of the State of New York, County of Nassau, against the
directors and officers of the Company and the Company as a nominal defendant, by
Plumbers & Pipefitters Local 112 Pension Fund, derivatively on behalf of itself
and all others similarly situated for breach of fiduciary duty, abuse of control
and constructive fraud and is seeking an unspecified amount in damages. This
case was dismissed with prejudice on March 13, 2003, without liability to the
Company or its officers or directors. The Company is seeking dismissal of
another suit brought on behalf of a second
9
shareholder on similar grounds. The Company maintains $10 million of directors
and officers' liability insurance covering this type of claim.
On or about October 30, 2002, the Company filed a lawsuit in the United
States District Court for the Southern District of Florida against certain union
leaders, claiming defamation, conspiracy to defame and tortious interference
with contractual and ongoing business relationships. The case is still in its
preliminary stages.
The Company is currently the subject of an investigation by the
Securities and Exchange Commission with respect to certain related party
transactions between the Company and affiliates of Mr. David H. Brooks (the
Company's Chief Executive Officer) (See Item 13 - Certain Relationships and
Related Transactions"). The Company is cooperating with the SEC in this
investigation, and the Audit Committee of the Company's Board of Directors has
retained an independent forensic accounting firm to conduct an independent
investigation with respect to these matters. In addition, the Audit Committee
expects to continue periodically to monitor the status and performance of the
related party transactions, to assess the relative benefits to the Company, and
the related party's compliance with its contractual obligations.
The Company is involved in other litigation, none of which is
considered by management to be material to the Company's business or would, if
adversely determined, have a material adverse effect on the Company's financial
condition or operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS: No matter was
submitted during the fourth quarter of the fiscal year covered by this Report to
a vote of security holders which is required to be disclosed pursuant to the
instructions contained in the form for this Report.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The common stock of the Company began trading on the American Stock
Exchange on February 1, 2002 under the symbol DHB. Previously, the Company was
trading on the OTC Bulletin Board under the symbol DHBT. The following table
shows the high and low prices of the Company's common stock for each quarter in
the two-year period ended December 31, 2003.
LOW HIGH
2003 4th Quarter $3.87 $8.25
3rd Quarter 3.80 4.95
2nd Quarter 2.18 4.60
1st Quarter 1.35 2.70
2002 4th Quarter 1.27 2.33
3rd Quarter 1.69 4.69
2nd Quarter 4.05 7.24
1st Quarter 5.50 8.10
The Company pays cash dividends on its Series A, 12% convertible
preferred stock (the "Preferred Stock"). The 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 shareholder indebtedness from which the Preferred Stock was
converted (See "Certain Transactions" below). The Company has not paid any
dividends on its common stock in the last three fiscal years.
10
The Company presently retains its income from earnings and anticipates
that its future earnings will be retained to finance the expansion of its
business. Any determination to pay cash dividends on the Company's common stock
in the future will be at the discretion of the Board of Directors after taking
into account various factors, including financial condition, results of
operations, current and anticipated cash needs, and restrictions, if any, under
the Company's credit agreements. The Company's current credit facility prohibits
the payment of dividends on the Company's common stock without the lender's
prior written consent.
On March 1, 2004, there were 117 holders of record of the Company's
common stock. However, the number of holders of record includes brokers and
other depositories for the accounts of others. The Company estimates that as of
that date, there were approximately 5,300 beneficial owners of its common stock.
In 2003, the Company issued 248,390 unregistered shares of common stock
pursuant to the exercise of warrants, for which the Company received aggregate
proceeds of approximately $426,555. The Company also issued 80,000 shares of
unregistered common stock for services. In addition, the Company issued to the
then current directors a total of 250,000 unregistered five-year common stock
purchase warrants exercisable at $1.41 per share. In May 2003, the Company
issued 15,000 shares of unregistered common stock to a salesman pursuant to his
employment contract. In July 2003, the Company issued 50,000 unregistered
five-year common stock purchase warrants exercisable at $4.33 per share to the
newest independent board member. Also during 2003, the Company issued to key
employees 35,000 and 33,000 unregistered five-year common stock purchase
warrants exercisable at $2.01 and $3.85 per share, respectively. See "Executive
Compensation-Stock Warrants" below. Also during 2003, the Company issued and
subsequently canceled 10,000 warrants to an employee.
On January 14, 2002, the principal stockholder of the Company exchanged
$3 million 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. Shares of the Series A,
12% Convertible Preferred Stock are convertible, on a one-to-one basis, at the
option of the holder, into shares of common stock. The shares of Series A, 12%
Convertible Preferred Stock are redeemable at the option of the Company on
December 15 of each year.
In 2002, the Company issued 8,931,832 unregistered shares of common
stock pursuant to the exercise of warrants, for which the Company received
aggregate proceeds of approximately $6,324,000; 5,593,751 of such shares were
issued to Mr. and Mrs. David H. Brooks pursuant to "cashless exercises". The
Company also issued 275,000 unregistered common stock purchase warrants to its
investor relations firm; these warrants have an exercise price of $4.95 per
share and expire on June 4, 2006. In addition, the Company issued to directors
and executive officers a total of 200,000 unregistered five-year common stock
purchase warrants exercisable at $7.11 per share. Also during 2002, the Company
issued and canceled 150,000 warrants to an employee.
In 2001, the Company issued 111,000 unregistered shares of common stock
for services to attorneys, consultants and other service providers; the
aggregate value of the services rendered for these issuances was $355,230. In
September 2001, the Company sold 225,000 shares of unregistered common stock in
a private placement to companies (accredited investors) affiliated with Morton
Cohen, then a director of the Company, for proceeds of $506,250. In December
2001, a private investor exercised a warrant for 150,000 shares of unregistered
common stock at $3.00 per share, for total proceeds to the Company of $450,000.
All of the aforementioned issuances of unregistered securities were
made by the Company pursuant to and in reliance upon Section 4(2) of the
Securities Act of 1933, relating to transactions not involving a public
offering, and, in the case of the 2001 private placement, Regulation D
promulgated under the Securities Act of 1933.
11
As of December 31, 2003, the Company had outstanding options/warrants,
and shares available for future grants of options/warrants under its equity
plan, as follows:
Equity Compensation Plan Information
Number of securities remaining
Number of securities to be Weighted-average available for future issuance
issued upon exercise of exercise price of under equity compensation
outstanding options, outstanding options, plans (excluding securities
Plan category warrants and rights warrants and rights reflected in column (a))
_____________ __________________________ ____________________ ______________________________
(a) (b) (c)
Equity compensation plans
approved by security
holders 5,123,000 $1.51 -0-
Equity compensation plans not
approved by security
holders -0- -- -0-
_________ __________
Total 5,123,000 -0-
ITEM 6. SELECTED FINANCIAL DATA
THE INDEPENDENT AUDITOR'S REPORT OF GRANT THORNTON, LLP IS NOT ATTACHED
TO THIS ANNUAL REPORT ON FORM 10-K BECAUSE THE CHANGE OF THE COMPANY'S
ACCOUNTANTS IN AUGUST 2003 AND THE COMPANY'S IMPLEMENTATION OF ADDITIONAL
DISCLOSURE CONTROLS AND PROCEDURES, EACH AS DISCLOSED IN THIS ANNUAL REPORT ON
FORM 10-K, DELAYED CERTAIN ACCOUNTING DETERMINATIONS UNTIL VERY LATE IN THE
AUDIT PROCESS, WHICH GAVE GRANT THORNTON, LLP INSUFFICIENT TIME TO COMPLETE ITS
REVIEW OF THE ANNUAL REPORT ON FORM 10-K AND ISSUE ITS REPORT IN TIME TO INCLUDE
ITS REPORT IN THE ANNUAL REPORT ON FORM 10-K. THE COMPANY INTENDS TO FILE GRANT
THORNTON'S REPORT IN AN AMENDED ANNUAL REPORT ON FORM 10-K AS SOON AS IT IS
RECEIVED.
The selected consolidated financial data set forth below for the years
ended December 31, 2003, 2002, 2001, 2000 and 1999, were derived from the
audited consolidated financial statements of the Company. The data set forth
below should be read in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the Consolidated Financial
Statements and related Notes appearing elsewhere in this Form 10-K.
INCOME STATEMENT DATA (IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
2003 2002 2001 2000 1999
________ ________ ________ ________ ________
Net sales $230,011 $130,347 $ 98,015 $ 70,018 $ 35,141
Cost of goods sold 166,670 92,621 71,639 49,359 27,566
________ ________ ________ ________ ________
Gross profit 63,341 37,726 26,376 20,659 7,575
Selling, general and administrative expenses 37,325 23,903 13,597 12,460 17,446
________ ________ ________ ________ ________
Income (loss) before other income (expense) 26,016 13,823 12,779 8,199 (9,871)
Interest expense (1,344) (1,645) (2,513) (2,743) (2,908)
Other income (expense) 1,605 130 42 341 (9,561)
________ ________ ________ ________ ________
Income (loss) before discontinued operations 26,277 12,308 10,308 5,797 (22,340)
Discontinued operations -- -- -- 340 (9,714)
________ ________ ________ ________ ________
Income (loss) before income taxes 26,277 12,308 10,308 6,137 (32,054)
Income tax (benefit) expense 11,098 (3,672) 175 130 67
________ ________ ________ ________ ________
Income (loss) before minority interest 15,179 15,980 10,133 6,007 (32,121)
Minority interest (7) -- -- -- --
________ ________ ________ ________ ________
Net income (loss) 15,172 15,980 10,133 6,007 (32,121)
Dividend - preferred stock (360) (345) -- -- --
________ ________ ________ ________ ________
Income available to common stockholders $ 14,812 $ 15,635 $ 10,133 $ 6,007 $(32,121)
======== ======== ======== ======== ========
12
Earnings per share
Basic $ 0.36 $ 0.42 $ 0.32 $ 0.19 $ (1.24)
Diluted $ 0.34 $ 0.37 $ 0.28 $ 0.18 $ (1.09)
BALANCE SHEET DATA (IN THOUSANDS) 2003 2002 2001 2000 1999
________ ________ ________ ________ ________
Working capital $ 66,822 $ 53,125 $ 20,472 $ 7,497 $ 2,047
Total assets 93,428 65,371 40,896 28,056 23,300
Total current liabilities 23,969 7,822 16,585 16,949 5,153
Long-term liabilities 22,514 26,204 19,305 16,062 16,280
Stockholders' equity (deficit) 46,738 31,345 5,006 (4,955) (10,186)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE INDEPENDENT AUDITOR'S REPORT OF GRANT THORNTON, LLP IS NOT ATTACHED
TO THIS ANNUAL REPORT ON FORM 10-K BECAUSE THE CHANGE OF THE COMPANY'S
ACCOUNTANTS IN AUGUST 2003 AND THE COMPANY'S IMPLEMENTATION OF ADDITIONAL
DISCLOSURE CONTROLS AND PROCEDURES, EACH AS DISCLOSED IN THIS ANNUAL REPORT ON
FORM 10-K, DELAYED CERTAIN ACCOUNTING DETERMINATIONS UNTIL VERY LATE IN THE
AUDIT PROCESS, WHICH GAVE GRANT THORNTON, LLP INSUFFICIENT TIME TO COMPLETE ITS
REVIEW OF THE ANNUAL REPORT ON FORM 10-K AND ISSUE ITS REPORT IN TIME TO INCLUDE
ITS REPORT IN THE ANNUAL REPORT ON FORM 10-K. THE COMPANY INTENDS TO FILE GRANT
THORNTON'S REPORT IN AN AMENDED ANNUAL REPORT ON FORM 10-K AS SOON AS IT IS
RECEIVED.
The following analysis of the Company's financial condition and results
of operations should be read in conjunction with the financial statements,
including the notes thereto, contained elsewhere in this Form 10-K.
GENERAL
The Company is a holding company, which currently conducts business
through its wholly-owned subsidiaries through two divisions, the DHB Armor Group
and the DHB Sports Group. The Armor Group represented approximately 97%, 96% and
95% of consolidated revenues of the Company during 2003, 2002 and 2001,
respectively. The Company's products are sold both nationally and
internationally. The Armor Group's sales are derived primarily from law
enforcement agencies and military services. 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 reduction in government spending or
change in emphasis in defense and law enforcement programs could have a material
effect on the Armor Group's business. The Sports Group manufactures and markets
a variety of sports medicine, protective gear, health supports and magnetic
therapy products under its own labels, private labels and house brands for major
retailers.
The Company derives substantially all of its revenues from sales of its
products. As indicated in the financial information included in this report, the
Company has experienced substantial increases in its revenues in the past
several years, which has been attributable primarily to product demand from the
U.S. military and federal, state and local law enforcement. The Company's
ability to maintain these revenue levels will be highly dependent on continued
demand for body armor and projectile-resistant clothing; and although the
Company does not foresee an immediate material reduction in such demand, there
is no assurance that governmental agencies will not refocus their expenditures
based on changed circumstances or otherwise.
Due to its growth, the Company has out grown its small business status
under government procurement regulations. The Company is now recognized as
having the ability to manage larger contracts. This allows the Company to
competively bid on large procurements and maintain support of small businesses
as subcontractors.
13
The Company's market share is highly dependent upon the quality of its
products, and its ability to deliver its products in a prompt and timely
fashion. To meet projected demand, and to maintain its ability to deliver
quality products in a timely manner, the Company has recently entered into a
long-term lease for a new, expanded production facility in Pompano Beach,
Florida. However, there is no assurance that, in the long term, demand for the
Company's products will remain at recent levels, or that the Company will be
able to diversify into alternate markets or alternate products, or to increase
its market share through acquisitions of other businesses. Management's current
strategic focus is on quality and delivery, which management believes are the
key elements in obtaining additional and repeat orders under to the Company's
existing procurement contracts with the U.S. military and other governmental
agencies.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002.
Consolidated net sales for the year ended December 31, 2003 increased
76.5% to $230.0 million as compared to a $130.3 million for the prior comparable
periods. The Armor Group's revenues increased 79.5% to $224.2 million for the
year ended December 31, 2003 from approximately $124.9 million for the year
ended December 31, 2002. This increase was attributable to a 103.3% increase in
orders from the military as well as a 61.2% increase in sales to state and local
law enforcement agencies. In recognition of the increased focus on homeland
security and the war on terrorism, the number of officers and agents has
increased over the past two years and there has been increased funding to help
equip these officers and agents, which has led to increased demand for our
products. The Sports Group's revenues for the year ended December 31, 2003
increased 7.2% to approximately $5.9 million as compared to approximately $5.5
million for the year ended December 31, 2002. The increase in the Sports Group's
revenues was attributable to the addition of Wal-Mart stores in Canada to its
customer base, the addition of Long Drugs stores as a distribution network and
an expanded number of products in Target stores during 2003. The consolidated
gross profit percentage for the year ended December 31, 2003 was 27.5% as
compared to 28.9% for the year ended December 31 2002. This decrease in the
gross profit percentage reflects a change in the product mix as well as the
additional costs associated with increasing and expediting the Company's sales
orders to meet the accelerated demand of our customers, including overtime costs
and freight and delivery charges.
The Company's selling, general and administrative expenses as a
percentage of sales improved to 16.2% of revenues for the year ended December
31, 2003 as compared to 18.3% for the year ended December 31, 2002. The Company
incurred higher than normal selling, general and administrative expenses during
the year ended December 31, 2003 over the prior comparable period due to $2.7
million in bonuses paid to key employees and executives to compensate them for
their contribution to the success of the Company. These bonuses were
approximately 1% of revenues for the year ended December 31, 2003. Also adding
to the selling, general and administrative expenses for year ended December 31,
2003 was the legal and accounting fees associated with the Form 10-K/A filed on
July 24, 2003 and the resignation of the Company's independent auditors, Grant
Thornton LLP, and the associated Form 8-Ks filed on August 27, September 2,
September 9, November 24, and December 1, 2003. During the fourth quarter of
14
2003, the Company also retained an Agent (a Related Party) to expand its
overseas opportunities, and paid a consulting fee of $634,000. Research and
development expenditures increased 157% to approximately $10.8 million for the
year ended December 31, 2003, as compared to $4.2 million for the prior
comparable year. The primary reason for this increase is associated with the
testing costs for the military, which increased with the significant volume
increase from the military, and the addition of two new programs for testing
verification of incoming raw materials and the development of new law
enforcement techniques for a more in depth analysis of performance. Selling,
general and administrative expenses during the year ended December 31, 2002
included certain non-recurring expenses, including sharply increased legal fees
pertaining to the Company's successful defense of a patent infringement suit,
legal and professional fees associated with the union organizing campaign
relating to the Company's Point Blank Body Armor subsidiary, and $646,000 in
non- cash compensation charges for the issuance of stock warrants to an outside
consultant. Operating income increased 88.4% to approximately $26.0 million
during the year ended December 31, 2003 as compared to approximately $13.8
million in the prior comparable period, driven primarily by increased sales
volume along with the decrease in the percentage of selling, general and
administrative expenses. Operating margins increased to 11.4% in 2003 from 9.4%
in 2002.
Interest expense for the year ended December 31, 2003 was approximately
$1.3 million, an 18.8% decrease from approximately $1.6 million for the prior
comparable period . This decrease was due primarily to lower interest rates
under the Company's revolving credit facility and the repayment of the
shareholder loan. Included in other expenses is a $904,000 non-cash write off of
the Company's long-term investment in non-marketable securities of a private
company to its net realizable value. Also included in other income was the gain
on the sale of approximately a 1% interest in the Company's Point Blank
subsidiary. In December 2003 as part of this transaction, the Company received
inventory as consideration for the sale of Point Blank Stock, with an
approximate fair value of $1.65 million. The shares of Point Blank Stock had a
book value of $200,000, realizing a gain of $1.45 million in December 2003. In
2003, the Company settled its lawsuit with its insurance agent and insurance
carrier, for losses incurred from Hurricane Irene in 1999, for which the Company
received net of legal fees, approximately $1,009,000 during the year ended
December 31, 2003 which is included in Other Income.
Income before taxes increased by 113.8% to approximately $26.3 million
for the year ended December 31, 2003, as compared to approximately $12.3 million
for the prior comparable period. Income taxes for the year ended December 31,
2003 were approximately $11.1 million as compared to approximately $3.7 million
income tax benefit for the year ended December 31, 2002. The Company's effective
tax rate was 42.2% for 2003, as compared to (29.8%) for 2002; the effective tax
rate was nominal in 2002 due to the utilization of net operating loss
carryforwards.
Income available to common stockholders was approximately $14.8 million
or $0.34 per diluted share for the year ended December 31, 2003, as compared to
approximately $15.6 million or $0.37 per diluted share for the year ended
December 31, 2002. The weighted average shares outstanding on a diluted basis
for the year ended December 31, 2003 were 44,196,802 as compared to 42,304,254
for the year ended December 31, 2002.
YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001.
Consolidated net sales for the year ended December 31, 2002 increased
33.0% to $130.3 million compared to net sales of $98.0 million for the year
ended December 31, 2001. Due to the emphasis on homeland security and various
military actions occurring throughout 2002, the Armor Group's revenue increased
15
33.5% to $124.8 million compared to $93.5 million for 2001. The Sports Group's
revenues increased by 22.1% to $5.5 million for the year ended 2002 versus $4.5
million for 2001. Gross profit margin for the year ended December 31, 2002 was
28.9% compared to 26.9% in 2001, primarily as a result of the increase in
revenues as well as volume purchase discounts which the Company was able to
utilize during 2002. Selling, general and administrative expenses as a
percentage of sales increased to 18.3% of 2002 revenues as compared to 13.9% of
revenues in 2001. The selling, general and administrative expenses increased
from $13.6 million in 2001 to $23.9 million in 2002, primarily as a result of
increased legal fees in the successful defense of a patent infringement case and
legal and professional fees associated with the union organizing campaign
targeting DHB's subsidiary, including the associated security, public relations
and legal fees arising out of the defense of the organizing effort. Also
included in selling, general and administrative expenses for 2002 were a
$646,000 non-cash compensation charge and $255,000 in additional rental expenses
in conjunction with the accounting principal of straight-line rent expense over
the life of the lease. Primarily as a result of the increased selling, general
and administrative expenses, operating margin decreased from 13.0% in 2001 to
10.6% in 2002.
Interest expense for the year ended December 31, 2002 was approximately
$1.6 million, down nearly $900,000 from the $2.5 million of interest expense for
the year ended December 31, 2001. This decrease is the result of lower interest
rates under the Company's credit facility, combined with the repayment of $5.5
million of shareholder indebtedness and the conversion of $3 million of
shareholder indebtedness into preferred stock. Although the total amount owed
under the credit facility increased, the overall cost of capital decreased
during 2002.
The Company had net operating loss (NOL) carryforwards of approximately
$7.4 million available to offset income in future years. The benefit to the
Company is the reduction of the cash tax payments such NOL carryforwards offset.
Because the Company had three solid years of growth and projected profitability
in 2003, it was considered more likely than not that the Company would be able
to utilize this benefit prior to its expiration in 2019. Therefore, in 2002, the
Company recognized a deferred income tax benefit of approximately $3.7 million
related to temporary differences that will result in deductible amounts in
future years and the net operating loss carryforwards bringing the total
deferred tax asset at December 31, 2002 to $4.7 million. The deferred tax asset
was broken down into the current portion of $3.3 million and the long-term
portion of $1.4 million for temporary timing differences in book to tax income.
The income tax expense for 2001 was nominal and was offset by the NOL, so that
only state and franchise taxes were expensed.
Net income was approximately $16.0 million for 2002, which was reduced
by the $345,000 preferred stock dividend paid to bring the income available to
common stockholders to $15.6 million or $0.37 cents per fully diluted share,
compared to income of $10.1 million for the year ended December 31, 2001 or
$0.28 per fully diluted share. The fully diluted shares outstanding for the
years ended December 31, 2002 and 2001 were 42,304,254 and 36,775,910,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company's expects that its primary capital requirements over the
next twelve months will be to assist its subsidiaries in financing their working
capital requirements. The Company's operating subsidiaries sell the majority of
their products on 30 to 90-day terms. Working capital is needed to finance the
receivables, manufacturing process and inventory. Working capital at December
31, 2003 was approximately $66.8 million as compared to working capital of
16
approximately $53.1 million at December 31, 2002. This increase in working
capital primarily reflects a $10.6 million increase in accounts receivable, and
$21.4 million increase in inventory reduced by $6.9 million increase in income
taxes payable, and $4.0 million increase in accounts payable. The Company's
operations provided cash of $2.6 million for the year ended December 31, 2003 as
compared to cash used in operation of ($15.1) million for the comparable prior
year period.
On March 15, 2004, the Company entered into an amendment to its exiting
$35 million credit agreement increasing borrowing limits from $35 million to $45
million. Pursuant to the Credit Agreement, the Company may borrow, on a
revolving basis, up to $32.5 million on 85% of eligible accounts receivable, and
the Company borrowed a secured term loan of $12.5 million amortizing at the rate
of $1 million per quarter commencing July 2004. This amended agreement will
expire on October 1, 2007. Borrowings under the Credit Agreement are secured by
substantially all of the Company's assets, and bear interest, at the Company's
option, at the bank's prime rate or LIBOR plus 1.75% per annum on the revolving
credit facility and at the bank's prime rate or LIBOR plus 2.25% on the term
loan. Under the terms of the Credit Agreement, the Company can only pay
dividends on common stock with the written consent of the lender. For 2003, the
borrowings under the prior credit agreement bore interest at the bank's prime
rate or LIBOR plus 1.75%. A portion of these funds was used to partially
refinance higher interest debt. The remaining funds have been and will be used
to meet increased demands for capital generated by the Company's rate of growth.
At December 31, 2003, the balance due under the credit facility was
approximately $24.0 million under the new facility, the Company would be able to
borrow up to $45 million based upon availability to fund its working capital
needs in the future.
The Company's capital expenditures in 2003 increased to $741,000, as
compared to approximately $367,000 during 2002. This Increase is attributable to
the addition of a second Florida location for the Company's Point Blank
subsidiary. The Company anticipates increasing its capital expenditures in 2004
to help further the growth of the Company in connection with the expansion into
the new facility.
The Company believes that its existing credit line, together with funds
generated from operations, will be adequate to sustain its operations (including
projected capital expenditures) through 2004. Historically, the Company has been
successful in obtaining increases in its revolving credit facility, as required
in order to finance the increased working capital needs brought on by the rapid
and substantial expansion of the Company's business. However, there can be no
assurance that the Company will be able to obtain further such increases if
needed, and the Company may be required to explore other potential sources of
financing (including the issuance of equity securities and, subject to the
consent of the Company's lender, other debt financing) if the Company continues
to experience escalating demand for its products.
17
CASH CONTRACTUAL OBLIGATIONS
The following table presents the Company's estimated cash requirements for
contractual obligations outstanding as of December 31, 2003:
PAYMENTS DUE BY PERIOD
($ IN THOUSANDS)
Less
than 1-3 4-5 After
Contractual Obligations 1 year years years 5 years Total
_______________________ ______ _______ ______ _______ _______
Long-Term Debt $2,000 $22,514 $ -- $ -- $24,514
Employment Contracts 675 725 -- -- 1,400
Operating Leases 1,698 4,360 4,269 7,557 17,884
______ _______ ______ _______ _______
Total Contractual Cash
Obligations $4,373 $27,599 $4,269 $ 7,557 $43,798
====== ======= ====== ======= =======
CRITICAL ACCOUNTING POLICIES
The Company's management believes that its critical accounting polices
include:
REVENUE RECOGNITION - DHB recognizes revenue when it is realized or
realizable and has been earned. Product revenue is recognized when persuasive
evidence of an arrangement exists, the product has been delivered and legal
title and all risks of ownership have been transferred, written contract and
sales terms are complete, customer acceptance has occurred and payment is
reasonably assured. Returns are minimal and do not materially affect the
consolidated financial statements.
ESTIMATES - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets, liabilities and contingent assets and liabilities in the
financial statements and accompanying notes. Significant estimates inherent in
the preparation of the accompanying consolidated financial statements include
the carrying value of long-lived assets and allowances for receivables and
inventories. Actual results could differ from these estimates.
INCOME TAXES - DHB uses the asset and liability approach to account for
income taxes. Under this method, deferred tax assets and liabilities are
recognized for the expected future tax consequences of differences between the
carrying amounts of assets and liabilities and their respective tax basis using
enacted tax rates in effect for the year in which the differences are expected
to reverse. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period when the change is enacted. Deferred
tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all of the deferred
tax assets will not be realized.
OTHER INVESTMENT - DHB had a cost-based investment in a non-publicly
traded company. During 2003, a decline in the value of this cost-based
investment below cost that was deemed other than temporary was charged to
earnings, resulting in a loss on investment of $904,000.
18
NEW ACCOUNTING STANDARDS
New Accounting Standards
In November 2002, the FASB issued Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
including Indirect Guarantees of Indebtedness of Others," which expands
previously issued accounting guidance and disclosure requirements for
certain guarantees. The Interpretation requires an entity to recognize
an initial liability for the fair value of an obligation assumed by
issuing a guarantee. The provision for initial recognition and
measurement of the liability will be applied on a prospective basis to
guarantees issued or modified after December 31, 2002. This
Interpretation did not have a material impact on the Company's
consolidated financial position or results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting
for Stock-Based Compensation - Transition and Disclosure- an amendment
of FASB Statement No. 123," which provides optional transition guidance
for those companies electing to voluntarily adopt the accounting
provisions of SFAS No. 123. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS 123 to require prominent disclosures in
both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the
method used on reported results. The Company has not changed its method
of accounting for stock-based employee compensation.
In January 2003, the FASB issued Interpretation No. 46
"Consolidation of Variable Interest Entities," which clarifies the
application of Accounting Research Bulletin No. 51, "Consolidated
Financial Statements." Interpretation 46 requires certain variable
interest entities to be consolidated by the primary beneficiary of the
entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not provide
sufficient equity at risk for the entity to support its activities.
In December 2003, the FASB concluded to revise certain elements of Fin
46. The FASB also modified the effective date of Fin 46. Fin 46 is to
be applied for registrants who file under regulation S-X in periods
ending after March 15, 2004. The Company is currently assessing the
application of Fin 46 on its financial statement.
In May 2003, the FASB issued SFAS No. 150, "Accounting for
Certain Financial Instruments with Characteristics of both Liabilities
and Equity" ("SFAS No. 150"). SFAS No. 150 establishes standards for
how an issuer classifies and measures certain financial instruments
with characteristics of both liabilities and equity. The Standard
requires that an issuer classify a financial instrument that is within
its scope as a liability (or an asset in some circumstances). SFAS No.
150 is effective for financial instruments entered into or modified
after May 31, 2003, and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003, except for
mandatory redeemable financial instruments of nonpublic entities. The
adoption of SFAS No. 150 has not had and is not expected to have a
material impact on the Company's consolidated financial position or
results of operations.
YEAR-END TRANSACTION
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 .0065 of the outstanding capital
stock of Point Blank in consideration of which Hightower had transferred and
delivered to Point Blank on December 19, 2003 certain inventories of Ballastic
Plates and other goods usable in Point Blank's business. The inventory received
by Point Blank had an aggregate list price of $1,650,000, equal to the appraised
value of the shares of Point Blank issued to Hightower (such appraisal having
been performed by an independent business appraiser). Simultaneously, DHB
contributed to Point Blank shares of common stock of DHB's subsidiary NDL
Products, Inc. ("NDL") having an aggregate appraised value equal to 10% of the
appraised value of Point Blank (such appraisal of NDL having been performed by
the same independent business appraiser as performed the appraisal of Point
Blank), in consideration of which Point Blank issued to DHB a number of shares
of common stock of Point Blank having an equivalent appraised value. DHB has
retained rights of first refusal and rights to repurchase the shares of Point
Blank issued to Hightower, either at the offered price (in the event of a
proposed sale by Hightower) or at fair market value (in the event of termination
of the business relationship between Point Blank and Hightower). The book value
of Point Blank shares was approximately $200,000, which resulted in a $1,450,000
gain on the sale of the stock of Point Blank which is included in other income
for the year ended December 31, 2003. Hightower's minority interest in the
income of Point Blank was approximately $7,000 for the year ended December 31,
2003.
In conjunction with the foregoing transactions, Point Blank entered
into a marketing and consulting agreement with an affiliate of Hightower,
pursuant to which such affiliate agreed, in consideration of a cash payment of
$634,000, to assist Point Blank in the marketing, sales and distribution of
Point Blank's body armor products in Asia, Saudi Arabia, Turkey and Jordan.
Through March 1, 2004, the Company has received product orders for new
international customers in these territories totaling approximately $6 million.
The Company incurred approximately $136,000 of appraisal, accounting
and legal fees to consummate these transactions.
19
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report contains certain forward-looking statements and
information relating to the Company that is based on the beliefs of the
Company's management, as well as assumptions made by and information currently
available to the Company's management. When used in this document, the words
"anticipate," "believe," "estimate," "expect," "going forward," and similar
expressions, as they relate to the Company or Company management, are intended
to identify forward-looking statements. Such statements reflect the current
views of the Company with respect to future events and are subject to certain
risks, uncertainties and assumptions, including, but not limited to: general
business and economic conditions, the maintenance of the Company's military
supply contacts, the level of governmental expenditures on law enforcement
equipment, continued supplies of materials from critical vendors, the continued
availability of insurance for the Company's products and other risks described
in this Annual Report on Form 10-K under the heading "Risk Factors" and other
reports and materials filed with the Securities and Exchange Commission. Should
one or more of these risks or uncertainties materialize, or should the
underlying assumptions prove incorrect, actual results may vary materially from
those described herein as anticipated, believed, estimated or expected. Readers
are cautioned not to place undue reliance on these forward-looking statements
that speak only as of the date hereof. The Company undertakes no obligation to
publish revised forward-looking statements to reflect the occurrence of
unanticipated events or circumstances after the date hereof.
RISK FACTORS
The Company's business, operations and financial condition are subject
to various risks. Several material risks are described below, and you should
take these risks and other set forth in this Annual Report on Form 10-K and in
other materials we file with the Securities and Exchange Commission into account
in evaluating us or any investment decision involving us. This section does not
describe all risks applicable to us, our industry or our business, and it is
intended only as a summary of certain material risk factors. In this section,
the Company is referred to using "us, ""our," "we" or similar words and our
stockholders are referred to as "you."
THE PRODUCTS WE SELL ARE INHERENTLY RISKY AND COULD GIVE RISE TO PRODUCT
LIABILITY AND OTHER CLAIMS FOR WHICH WE MAY NOT BE ABLE TO OBTAIN ADEQUATE
INSURANCE.
The products that we manufacture are typically used in applications and
situations that involve high levels of risk of personal injury. Failure to use
our products for their intended purposes, failure to use them properly, their
malfunction, or, in some limited circumstances, even correct use of our
products, could result in serious bodily injury or death. We cannot assure that
our insurance coverage would be sufficient to cover the payment of any potential
claim. In addition, we cannot assure you that our current insurance or any other
insurance coverage will continue to be available or, if available, that we will
be able to obtain it at a reasonable cost. Our cost of obtaining insurance
coverage has risen substantially since September 11, 2001. Any material
uninsured loss could have a material adverse effect on our business, financial
condition and results of operations.
20
MANY OF OUR CUSTOMERS HAVE FLUCTUATING BUDGETS, WHICH MAY CAUSE
SUBSTANTIAL FLUCTUATIONS IN OUR RESULTS OF OPERATIONS.
Customers for our products include federal, state, municipalities,
foreign, military, law enforcement and other governmental agencies. Government
tax revenues and budgetary constraints, which fluctuate from time to time, can
affect budgetary allocations for these customers. Many domestic and foreign
government agencies have in the past experienced budget deficits that have led
to decreased spending in defense, law enforcement and other military and
security areas. Our results of operations may be subject to substantial
period-to-period fluctuations because of these and other factors affecting
military, law enforcement and other governmental spending. A reduction of
funding for federal, state, municipal, foreign and other governmental agencies
could have a material adverse effect on sales of our products and our business,
financial condition and results of operations. For example, our sales have
increased due to the U.S. military operations in Iraq and Afghanistan. We can
provide no assurance that these increases will be maintained after the
completion of those operations.
OUR BUSINESS IS SUBJECT TO VARIOUS LAWS AND REGULATIONS FAVORING THE U.S.
GOVERNMENT'S CONTRACTUAL POSITION, AND OUR FAILURE TO COMPLY WITH SUCH LAWS AND
REGULATIONS COULD HARM OUR OPERATING RESULTS AND PROSPECTS.
As a contractor to the U.S. government, we must comply with laws and
regulations relating to the formation, administration and performance of the
federal government contracts that affect how we do business with our clients and
may impose added costs on our business. These rules generally favor the U.S.
government's contractual position. For example, these regulations and laws
include provisions that subject contracts we have been awarded to protest or
challenge by unsuccessful bidders and unilateral termination, reduction or
modification by the government. The accuracy and appropriateness of certain
costs and expenses used to substantiate our direct and indirect costs for the
U.S. government under both cost-plus and fixed-price contracts are subject to
extensive regulation and audit by the Defense Contract Audit Agency, an arm of
the U.S. Department of Defense. Responding to governmental audits, inquiries or
investigations may involve significant expense and divert management's
attention. Our failure to comply with these or other laws and regulations could
result in contract termination, suspension or debarment from contracting with
the federal government, civil fines and damages and criminal prosecution and
penalties, any of which could have a material adverse effect on our business,
financial condition and results of operations.
THERE ARE LIMITED SOURCES FOR SOME OF OUR RAW MATERIALS, WHICH MAY SIGNIFICANTLY
CURTAIL OUR MANUFACTURING OPERATIONS.
The raw materials used by our Armor Group in the manufacturing of our
ballistic-resistant products include Kevlar(TM), Twaron(TM) and Zylon(TM) and
our primary shield products include GoldFlex(TM), Dyneema(TM) and Spectra
Flex(TM). Substantially all of the raw materials used in the manufacturing of
ballistic-resistant garments consist of fabrics which are patented by major
corporations and which are purchased from four independent weaving or
manufacturing companies. During 2002 and 2003, shortages of required raw
materials have limited our production capacity. If any of the manufacturers
cease to produce these products or such shortages persist or get worse, we may
be required to use other fabrics. There can be no assurance that, if any of
these manufacturers cease to produce these fabrics, the Company will be able to
identify alternate fabrics with comparable performance.
OUR STOCK PRICE IS VOLATILE.
The market price and trading volume of our common stock has been subject to
significant volatility and this trend may continue. The general economic,
political and stock market conditions that may affect the market prices of our
common stock are beyond our control. The market price of our common stock at any
particular time may not remain the market price in the future. The value of our
common stock may decline regardless of our operating performance or prospects.
Factors affecting our market price include (but are not limited to) variations
in our operating results, and whether we have achieved our key business targets,
the limited number of shares of our common stock available for purchase or sales
in the public markets, sales or purchases of large blocks of our stock, changes
in, or our failure to meet, our earnings estimates, changes in securities
analysts; buy/sell recommendations, differences between our reported results and
those expected by investors and securities analysts and announcements of new
contracts by us or our competitors. In the past, securities class action
litigation has been instituted against companies following periods of volatility
in the market price of their securities. Any such litigation, if instituted
against us, could result in substantial costs and a diversion of management's
attention and resources.
GROWTH IN OUR OPERATIONS MAY STRAIN OUR RESOURCES, AND IF WE FAIL TO
SUCCESSFULLY MANAGE OUR GROWTH, OUR BUSINESS COULD BE HARMED.
The increase in orders for body armor for military personnel as well as the
introduction of new products, is placing, and will continue to place, a
significant strain on our operational, financial and managerial resources and
personnel. Any failure to effectively manage growth could have material adverse
effects on our business, operating results and financial condition.
21
ITEM 7A. QUANTITATIVE AND QUALTITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not issue or invest in financial instruments or their
derivatives for trading or speculative purposes. The Company's market risk is
limited to fluctuations in interest rates as it pertains to its borrowings under
its $45 million credit facility. The Company can borrow at either the prime rate
of interest or LIBOR plus 1.75%. Any increase in these reference rates could
adversely affect the Company's interest expense. The Company does not have any
material sales, purchases, assets or liabilities denominated in currencies other
than the U.S. Dollar, and as such, is not subject to material foreign currency
exchange rate risk.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
THE INDEPENDENT AUDITOR'S REPORT OF GRANT THORNTON, LLP IS NOT ATTACHED
TO THIS ANNUAL REPORT ON FORM 10-K BECAUSE THE CHANGE OF THE COMPANY'S
ACCOUNTANTS IN AUGUST 2003 AND THE COMPANY'S IMPLEMENTATION OF ADDITIONAL
DISCLOSURE CONTROLS AND PROCEDURES, EACH AS DISCLOSED IN THIS ANNUAL REPORT ON
FORM 10-K, DELAYED CERTAIN ACCOUNTING DETERMINATIONS UNTIL VERY LATE IN THE
AUDIT PROCESS, WHICH GAVE GRANT THORNTON, LLP INSUFFICIENT TIME TO COMPLETE ITS
REVIEW OF THE ANNUAL REPORT ON FORM 10-K AND ISSUE ITS REPORT IN TIME TO INCLUDE
ITS REPORT IN THE ANNUAL REPORT ON FORM 10-K. THE COMPANY INTENDS TO FILE GRANT
THORNTON'S REPORT IN AN AMENDED ANNUAL REPORT ON FORM 10-K AS SOON AS IT IS
RECEIVED.
SEE INDEX TO CONSOLIDATED FINANCIAL STATEMENTS APPEARING IN THE
CONSOLIDATED FINANCIAL STATEMENTS ANNEXED HERETO.
SUPPLEMENTAL QUARTERLY FINANCIAL DATA (UNAUDITED, IN THOUSANDS EXCEPT FOR PER
SHARE DATA)
FIRST SECOND THIRD FOURTH
FISCAL 2003 QUARTER QUARTER QUARTER QUARTER
___________ ___________ ___________ ___________
Net sales $ 46,153 $ 56,525 $ 54,417 $ 72,916
Cost of goods sold 33,185 41,001 39,599 52,885
___________ ___________ ___________ ___________
Gross profit 12,968 15,524 14,818 20,031
Selling, general and admin expense 5,793 7,773 9,055 14,704
___________ ___________ ___________ ___________
Operating income 7,175 7,751 5,763 5,327
Other income (expense), net 423 (331) (282) 451
___________ ___________ ___________ ___________
Income before income taxes 7,598 7,420 5,481 5,778
Income taxes 2,579 3,369 2,231 2,919
___________ ___________ ___________ ___________
Income before minority interest 5,019 4,051 3,250 2,859
Minority interest -- -- -- (7)
___________ ___________ ___________ ___________
Net income 5,019 4,051 3,250 2,852
Dividend - preferred stock (90) (90) (90) (90)
___________ ___________ ___________ ___________
Income available to common stockholders $ 4,929 $ 3,961 $ 3,160 $ 2,762
=========== =========== =========== ===========
Earnings per share
Basic $ 0.12 $ 0.10 $ 0.08 $ 0.07
=========== =========== =========== ===========
Diluted $ 0.12 $ 0.09 $ 0.07 $ 0.06
=========== =========== =========== ===========
Weighted average shares outstanding
Basic shares 40,413,746 40,458,867 40,594,746 40,687,774
=========== =========== =========== ===========
Diluted shares 42,785,488 44,235,879 44,510,790 45,049,051
=========== =========== =========== ===========
RESTATED RESTATED RESTATED RESTATED
FISCAL 2002*(RESTATED) FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
___________ ___________ ___________ ___________
Net sales $ 33,636 $ 34,014 $ 30,146 $ 32,548
Cost of goods sold 24,182 23,977 21,005 23,455
___________ ___________ ___________ ___________
Gross profit 9,454 10,037 9,141 9,093
Selling, general and admin expense 4,267 5,283 7,605 6,747
___________ ___________ ___________ ___________
Operating income 5,187 4,754 1,536 2,346
Other income (expense), net (441) (452) (503) (119)
___________ ___________ ___________ ___________
Income before income taxes 4,746 4,302 1,033 2,227
Income taxes 27 61 81 (3,841)
___________ ___________ ___________ ___________
Net income 4,719 4,241 952 6,068
Dividend - preferred stock -- -- -- (345)
___________ ___________ ___________ ___________
Income available to common stockholders
$ 4,719 $ 4,241 $ 952 $ 5,723
=========== =========== =========== ===========
22
Earnings per share
Basic $ 0.14 $ 0.11 $ 0.02 $ 0.14
=========== =========== =========== ===========
Diluted $ 0.11 $ 0.10 $ 0.02 $ 0.13
=========== =========== =========== ===========
Weighted average shares outstanding
Basic shares 31,486,391 36,789,796 40,413,746 40,413,746
=========== =========== =========== ===========
Diluted shares 41,722,903 41,024,916 43,827,580 42,641,615
=========== =========== =========== ===========
* - During the fourth quarter of 2002, the Company recorded certain adjustments
as described in Note 15 to the Company's consolidated financial statements
contained in Form 10-K/A filed with the SEC on July 24, 2003. The effect of
these adjustments on the condensed consolidated statements of operations for the
first quarter of 2002 was a decrease in net income and no change in basic and
diluted earnings per share. For the second and third quarters of 2002 there
would have been a decrease in net income, basic earnings per share, and diluted
earnings per share for each quarter. The Company has restated the three and nine
months ended September 30, 2002, to show the effect of the adjustments on the
condensed consolidated statements of operations. The first adjustment was an
additional accrual to straight-line rent expense in accordance with SFAS No. 13
"Accounting for Leases," which increases the selling, general and administrative
expenses by $39 for each of the first three quarters of 2002 for a total of $117
for the nine months ended September 30, 2002. In addition to straight-lining
rent expense, the Company recorded in the fourth quarter of 2002 a $646 expense
for the issuance of stock warrants to an unaffiliated outside consultant, of
which $146 and $284 was applicable to the second and third quarters of 2002,
respectively. These adjustments increased selling, general and administrative
expenses for the first quarter, second quarter and third quarter of 2002 and
decreased the selling, general and administrative expenses for the fourth
quarter of 2002.
FIRST SECOND THIRD FOURTH
FISCAL 2001 QUARTER QUARTER QUARTER QUARTER
___________ ___________ ___________ ___________
Net sales $ 20,175 $ 23,514 $ 24,009 $ 30,317
Cost of good sold 15,223 17,309 17,280 21,827
___________ ___________ ___________ ___________
Gross profit 4,952 6,205 6,729 8,490
Selling, general and admin expense 3,304 3,090 3,282 3,921
___________ ___________ ___________ ___________
Operating income 1,648 3,115 3,447 4,569
Other income (expense) (619) (678) (627) (547)
___________ ___________ ___________ ___________
Income before income taxes 1,029 2,437 2,820 4,022
Income taxes 6 134 27 8
___________ ___________ ___________ ___________
Net income $ 1,023 $ 2,303 $ 2,793 $ 4,014
=========== =========== =========== ===========
Earnings per share
Basic $ 0.03 $ 0.07 $ 0.09 $ 0.13
=========== =========== =========== ===========
Diluted $ 0.03 $ 0.07 $ 0.08 $ 0.11
=========== =========== =========== ===========
Weighted average shares outstanding
Basic shares 31,230,898 31,316,940 31,411,180 31,168,088
=========== =========== =========== ===========
Diluted shares 36,760,623 35,923,088 35,666,896 36,567,864
=========== =========== =========== ===========
23
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On August 20, 2003, the Company was notified that Grant Thornton LLP
("Grant Thornton") had decided to resign as the Company's independent
accountant. Grant Thornton had served as the Company's independent accountants
since May 29, 2002. Prior to May 29, 2002, Paritz & Company P.A. served as the
Company's independent accountants since January 23, 1998. Paritz & Company P.A.
issued their report on the Company's financial statements for the year ended
December 31, 2001. Grant Thornton issued their report on the Company's financial
statements for the year ended December 31, 2002.
For the Company's 2002 fiscal year, the opinion of Grant Thornton did
not contain an adverse opinion or disclaimer of opinion and was not qualified or
modified as to uncertainty, audit scope or accounting principles. During the
Company's 2002 fiscal year and through August 20, 2003, there were no
disagreements with Grant Thornton on any matter of accounting principles or
practices, financial statement disclosure or auditing scope or procedure, which
disagreement, if not resolved to the satisfaction of Grant Thornton, would have
caused Grant Thornton to make reference to the subject matter of the
disagreement in connection with its reports.
During the Company's most recent fiscal years and through August 20,
2003, there were no "reportable events" as listed in Item 304(a)(1)(v)(A)-(D) of
Regulation S-K adopted by the Securities and Exchange Commission except that
Grant Thornton notified the Company on August 20, 2003 that, in connection with
its audit of the Company's consolidated financial statements for the year ended
December 31, 2002 for filing with the Company's Form 10-K/A, it identified
certain deficiencies involving internal control it considered to be significant
deficiencies that, in the aggregate, constituted material weaknesses under
standards established by the American Institute of Certified Public Accountants.
These deficiencies included the failure to disclose certain related party
transactions in the Company's Form 10-K for the fiscal year ended December 31,
2002, the Company's reliance on substantial outside assistance from outside
professionals in preparing the Company's financial statements, and understaffing
in the Company's accounting and finance department. The Company filed its Form
10-K for the fiscal year ended December 31, 2002 on March 31, 2003. The Company
subsequently amended this Form 10-K on July 24, 2003 to fully disclose related
party transactions. After further review, Grant Thornton reissued their audit
report in the Company's Form 10-K/A, which states that the Company's
consolidated financial statements presented fairly, in all material respects,
the consolidated financial position of the Company and its subsidiaries as of
December 31, 2002 and the consolidated results of its operations and
consolidated cash flows for the year ended December 31, 2002, in conformity with
accounting principles generally accepted in the United States.
Grant Thornton formally notified the Company of these deficiencies on
the date of their resignation. The Company's Audit Committee did not discuss
these deficiencies with Grant Thornton before their resignation. The Company has
authorized Grant Thornton to discuss the subject matter of each material
weakness identified with the successor auditor subsequently engaged as the
principal accountant to audit the Company's financial statements. The Company's
Board of Directors engaged Weiser LLP as the Company's new independent
accountants, and the Company filed a Form 8-K on September 2, 2003, when this
selection was made.
24
ITEM 9A. CONTROLS AND PROCEDURES
The Company carried out an evaluation, as required by Exchange Act Rule
13a-15(b), under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures (as defined in Rules 13a-14 and 15d-14 of the
Exchange Act) as of the end of the period covered by this report. Based upon
that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures are effective in
timely alerting them to material information relating to the Company (including
its consolidated subsidiaries) required to be included in the Company's periodic
Securities and Exchange Commission filings. During the period covered by this
report, the Company has begun to implement certain changes to its internal
control over financial reporting as described below, which have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
Disclosure controls and procedures are those controls and other procedures that
are designed to ensure that information required to be disclosed by the Company
in the reports that it files or submits under the Exchange Act is recorded,
processed, summarized and reported, within the time periods specified in the
Securities and Exchange Commission's rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by the Company in the reports
that it files or submits under the Exchange Act is accumulated and communicated
to the Company's management, including the Company's principal executive officer
and principal financial officer, as appropriate to allow timely decisions
regarding required disclosure.
As disclosed in the Company's Form 8-K filed on August 27, 2003, Grant Thornton,
the Company's former independent accountants, informed the Company that they
considered there to be certain deficiencies in the Company's internal control
procedures that would be deemed to be a material weakness under standards
established by the American Institute of Certified Public Accountants. Grant
Thornton made this determination in connection with the preparation of the
Company's consolidated financial statements as of and for the year ended
December 31, 2002 for inclusion in the Company's Form 10-K/A, which was filed on
July 24, 2003 to supplement the Company's Form 10-K filed on March 31, 2003. The
opinion of Grant Thornton in the Form 10-K/A did not contain an adverse opinion
or disclaimer of opinion and was not qualified or modified as to uncertainty,
audit scope or accounting principles.
The former independent accountants informed the Company and the Audit Committee
of these deficiencies in a letter delivered on August 20, 2003. These
deficiencies included the failure to disclose certain related party transactions
in the Company's Form 10-K for the fiscal year ended December 31, 2002, the
Company's reliance on substantial outside assistance from outside professionals
in preparing the Company's financial statements, and understaffing in the
Company's accounting and finance department. The Form 10-K/A filed by the
Company on July 24, 2003 fully disclosed the related party transactions.
In accordance with their fiduciary responsibilities, senior management and the
Audit Committee directed the Company to dedicate resources and take additional
steps to strengthen its control processes and procedures to ensure that these
internal control deficiencies do not result in a material misstatement in the
25
Company's consolidated financial statements. Specifically, we have implemented
or are preparing to implement the following additional procedures:
o The Company briefed the Chairman and Chief Executive
Officer on the requirement to disclose related party
transactions.
o The Company distributed a questionnaire to each of the
Company's officers and directors specific to related party
transactions; and the Company has pursued and will pursue
more rigorous follow-up with its directors and executive
officers regarding their responses to annual
questionnaires used in preparing the Company's Form 10-K
and proxy materials.
o The Company developed a financial statement disclosure
checklist to be completed by the Chief Financial Officer
each time the Company prepares financial statements.
o The Company has begun the preparation of its quarterly and
annual financial statements sooner after the end of each
fiscal quarter and fiscal year. The Company has undertaken
an additional layer of internal review prior to delivering
drafts to its outside professionals.
o The Company continues to reinforce with its new auditors
their ability to communicate with and obtain information
from lower level personnel in the Company's accounting and
finance department.
o The Company will evaluate further delegation and
allocation of responsibilities within its accounting and
finance department to facilitate prompt availability of
financial information.
o Since the beginning of 2003, the Company hired new
financial reporting personnel, including a Vice President
of Finance for the Point Blank subsidiary and a staff
accountant/assistant controller. The Company also hired a
Controller in late 2002 for its PACA facility.
o The Company continues to review, confirm and clarify with
its personnel their specific functions and
responsibilities to promote the orderly flow and
availability of financial data and information.
o During the second quarter of 2003, the Company hired an
internal control specialist to review and revamp the
Company's internal control policies and procedures. The
Company engaged the firm Eisner LLP to assist management
in complying with the internal control requirements under
Section 404 of the Sarbanes-Oxley Act of 2002 to gain
greater efficiency and effectiveness. The Company provided
Eisner LLP with copies of the updated policies and
procedures and flowcharts of the Accounting and IT
departments.
The Company will continue to: (a) evaluate the effectiveness of its
internal controls and procedures on an ongoing basis, (b) implement actions to
enhance its resources and training in the area of financial reporting and
disclosure responsibilities, and (c) review such actions with the Audit
Committee and the Company's new independent accountants, Weiser LLP. The Company
has discussed its corrective actions and plans with the Audit Committee and
Weiser LLP.
The Company's management, including the Chief Executive Officer and
Chief Financial Officer, does not expect that the Company's disclosure controls
or its internal controls will prevent all errors and all fraud. A control
26
system, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control system are met.
Further, the design of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be considered relative
to their costs. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within the Company have been detected. These
inherent limitations include the realities that judgments in decision-making can
be faulty, and that breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by management override of the
control. The design of any system of controls also is based in part upon certain
assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions. Over time, controls may become inadequate because of changes
in conditions, or the degree of compliance with the policies or procedures may
deteriorate. Because of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and not be detected.
The Company monitors its disclosure controls and internal controls and
makes modifications as necessary; the Company's intent in this regard is that
the disclosure controls and the internal controls will be maintained as dynamic
systems that change (including with improvements and corrections) as conditions
warrant.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The Directors serve for a term of one year following their election at
the Annual Meeting of Stockholders, and until their successors have been elected
and qualified. The officers serve at the discretion of the Board of Directors.
Set forth below is certain information regarding the Company's current Directors
and executive officers:
DAVID H. BROOKS, age 49, has served as the Chairman or Co-Chairman of
the Company since its inception in 1992. Mr. Brooks has served as the Chief
Executive Officer of the Company since July 2000, having previously served in
that capacity prior to September 1998. Mr. Brooks also serves as Chairman of the
Board, President and a Director of Brooks Industries of L.I., Inc., a privately
held venture capital firm.
JEROME KRANTZ, age 48, has been a director of the Company since July
2000. Mr. Krantz has been the owner and President of Krantz Financial Group for
over five years and has over 20 years of experience in the insurance and
financial industry. Mr. Krantz is a chartered life underwriter, a chartered
financial consultant and a registered investment advisor. Mr. Krantz currently
serves as Chairman of the Audit and Compensation Committees of the Board of
Directors.
DAWN M. SCHLEGEL, age 34, has been the Chief Financial Officer of the
Company since September 1999. Mrs. Schlegel has also served as Treasurer and
Secretary of the Company since September 1999, and was elected a Director as of
July 2000. Prior thereto, Mrs. Schlegel was the Accounting Manager for the
Company's operations and finances since 1996. Prior to joining the Company, Mrs.
Schlegel was a Senior Accountant with Israeloff, Trattner & Co. CPAs, P.C., a
certified public accounting firm, for more than five years.
27
GARY NADLEMAN, age 51, has been a director of the Company since July
2001. Since 2002, Mr. Nadelman has been a partner in a company which
manufactures ladies' sportswear under the labels Erik Stewart and Caryn Vallone.
Immediately prior thereto, he was the President of Synari, Inc., a manufacturer
of women's sportswear and other apparel, for more than five years. Mr. Nadelman
has over 20 years of experience in the apparel industry. Mr. Nadelman currently
serves on the Audit and Compensation Committees of the Board of Directors.
CARY CHASIN, age 56, has been a Director of the Company since October
2002. Mr. Chasin has been an advertising executive at DSA Community Publishing
for three years. Immediately prior thereto, he owned and operated an apparel
retail store. He was an employee of the Company from November 1999 through April
2000, working on special projects including the closing of the hard armor
division. He has over 30 years' experience in owning and operating apparel
retail, manufacturing and importing businesses. Mr. Chasin is a member of the
Audit and Compensation committees of the Board of Directors.
BARRY BERKMAN, age 63, has been a Director of the Company since
February 2003. Mr. Berkman has been a partner with Berkman Bottger & Rodd, a New
York law firm, for more than five years, and he is a member of the American Bar
Association.
SANDRA L. HATFIELD, age 50, has been Chief Operating Officer of the
Company since December 2000. From October 1996 until December 2000, she served
as President of Point Blank. For more than five years before that, she was the
Vice President of Production at PACA.
AUDIT COMMITTEE. Effective January 31, 2000, the Securities and
Exchange Commission adopted new rules and amendments to current rules relating
to the disclosure of information about companies' audit committees. In addition,
the SEC recommends that audit committees adopt written charters. Our Audit
Committee has adopted a charter, a copy of which was included as Appendix A to
the Company's 2002 proxy statement. In 2003, our Audit Committee was comprised
of three directors, Jerome Krantz, Gary Nadelman, and Cary Chasin, who are not
officers or employees of the Company. They are all considered "independent"
under Section 121(A) of the listing standards of the American Stock Exchange.
The Board of Directors determined that Jerome Krantz, a certified financial
planner and registered investment advisor, is an "audit committee financial
expert," and he is independent of management.
The primary function of the Audit Committee is to assist the Board of
Directors in fulfilling its oversight responsibilities. The primary duties and
responsibilities of the Audit Committee include: (i) monitoring the integrity of
the Company's financial reporting process and systems of internal controls, (ii)
monitoring the independence and performance of