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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, 2004
[ ] 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 [X ].
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 June 30, 2004: $586,672,648.*
Number of shares outstanding of the issuer's common equity, as of March 1, 2005
(Exclusive of securities convertible into common equity): 45,282,536.
DOCUMENTS INCORPORATED BY REFERENCE: None
* Excludes 6,634,799 shares of Common Stock held by directors, executives
officers and stockholders whose beneficial ownership exceeds 10% of the shares
outstanding. Exclusion of shares held by any person should not be construed to
indicate that such person possesses the power, direct or indirect, to direct or
cause the direction of the management or policies of the Registrant, or that
such person is controlled by or under common control of the Registrant.
PART I
ITEM 1. BUSINESS
GENERAL
We are a leading manufacturer and provider of bullet and
projectile-resistant garments, and fragmentation protective vests, slash and
stab protective armor, and related ballistic accessories, which are used
domestically and internationally by military, law enforcement, security and
corrections personnel, as well as governmental agencies. We also manufacture and
distribute protective athletic apparel and equipment, including a wide variety
of knee, ankle, elbow, wrist and back supports and braces that assist serious
athletes, weekend sports enthusiasts, and general consumers in their respective
sports and everyday activities. We are organized as a holding company with two
divisions: the DHB Armor Group (the "Armor Group") and DHB Sports Group (the
"Sports Group"). The Armor Group represents approximately 98%, 97% and 96% of
our consolidated revenues during 2004, 2003, and 2002, respectively. The balance
of the consolidated revenues are attributable to the Sports Group. The Sports
Group manufactures and sells a variety of sports medicine health supports and
protective products. We sell our products directly through our corporate sales
force and a network of over 215 distributors and sales agents.
We were incorporated as a Delaware corporation in 1992 and changed our
name from DHB Capital Group Inc. to DHB Industries, Inc. in July 2001. Our
executive offices are located at 400 Post Avenue, Suite 303, Westbury, New York
11590, our telephone number is 516-997-1155, and our website is
www.dhbindustries.com. Information set forth on our website is not incorporated
by reference into this filing and, unless otherwise indicated, is not
incorporated by reference into any of our filings. Our common stock trades on
the American Stock Exchange under the ticker symbol "DHB." Throughout this Form
10-K DHB Industries, Inc. is referred to using terms such as the "Company",
"DHB", "us," "our," "we" or similar words.
DHB ARMOR GROUP
PRODUCTS AND MARKETS.
We manufacture and sell a wide variety of body armor through the Armor
Group under the brand names Point BlankTM and Protective Apparel Corporation of
America (PACATM). Our body armor is designed to protect individuals from bodily
injury from different threats including threats from either bullets, knives
and/or other sharp instruments and explosive shrapnel. Our products provide
varying levels of protection based on the type and configuration of the body
armor and its intended purpose.
We principally manufacture and market three types of body armor:
o Concealable Armor, which is typically worn beneath the user's
clothing and is designed to protect against handgun ballistic
threats;
o Tactical Armor, which is worn externally and is designed to protect
against handgun and rifles ballistic threats and can be customized
to meet the specific needs of the user; and
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o Military Armor, which is manufactured to military standards specific
to their mission.
Our armor products are sold to U.S. government agencies and the U.S.
military through direct sales and to state and local agencies predominantly
through a network of distributors. International sales are handled through
international distributors and agents as well as salaried sales staff. All of
our armor products are manufactured and tested to the applicable National
Institute of Justice ("NIJ") standards and/or military specifications.
In 1998, the U.S. Army and Marine Corps procured the "InterceptorTM"
Outer Tactical Vest ("OTV") system which is a soft armor vest for fragmentation
protection and has pouches where hard ceramic armor plates can be inserted into
the soft vest to provide ballistic protection over vital organs as well as
accessories that can be added or removed to meet specific threat requirements.
We designed the InterceptorTM as a continually upgradeable modular, soft body
armor system specifically for the U.S. military. The system includes removable
yoke/collar, throat and groin protection that can be customized by the wearer to
the threat. In 2004, DHB developed for the U.S. Marines Corps. an Armor
Protection Enhancement System ("A.P.E.S"). This modular system is designed to
enhance the current InterceptorTM OTV by providing equivalent protection to
areas previously not covered by the InterceptorTM which includes the under arm,
shoulder, and upper arms. Also during 2004, we developed a similar product for
the US Army called "Deltoid Auxiliary Protection System ("D.A.P.S."). In June of
2004, we were awarded a $239 million three-year contract from the U.S. Army for
D.A.P.S. The InterceptorTM system was first extensively used in combat in
Afghanistan during Operation Enduring Freedom, where it was credited in reducing
the number of life-threatening wounds. During Operation Iraqi Freedom, the
InterceptorTM system was widely deployed among U.S. combat forces. The
InterceptorTM is the standard issue soft body armor approved for use by U.S.
Army, Marine Corps and Air Force ground forces. On December 23, 2004, the U.S
Army awarded us the body armor contract to supply the U.S. Army with
InterceptorTM OTVs. The contract value is estimated at approximately $189
million over three years to produce up to 360,000 InterceptorTM vests.
Since 1998, the Company has delivered over 850,000 InterceptorTM OTVs
to the U.S. Army, Marine Corps and Air Force. We manufacture and supply the
InterceptorTM to the U.S. military through contracts with the U.S. Department of
Defense ("DOD") and off the General Service Administration (the "GSA") schedule.
We have developed seven ballistic models of the InterceptorTM that have been
approved by the U.S. military and are customized for use by different branches.
Extensive procurement actions by DOD are underway to equip the ground forces
that could be deployed in combat with the InterceptorTM OTV system.
In addition to the InterceptorTM, we manufacture a number of other
protective armor systems for military use. Fragmentation armor, such as the
Combat Vehicle Crewman system and the Warfighter system are designed to military
specifications and offer protection against fragmentation of explosive devices
such as grenades, mortars, artillery shells and ballistic projectiles. The Light
Assault Vest ("LAV"), developed in 2003 and marketed in 2004, serves the needs
of the Special Operations Community. The LAV provides ballistic and
fragmentation protection, load carrying capabilities, and immediate, single pull
ejection for specialized maneuvers. During 2004, the Armor Group has also
developed a ballistic fragmentation blanket program to address the need for
protection against roadside bombs, improvised explosive devices ("IEDs") and
other fragmentation threats occurring during military troop
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movements and ambushes. Our blanket system is designed to optimize its
survivability under high threat conditions.
During 2004, we increased sales of our body armor to the state and
local law enforcement community by 19%. By working with our customers to make
department-specific modifications to our standard products, we have achieved
additional sales and developed patent pending features. See "Patent and
Trademarks." Through our collaborative relationship with customers, we seek to
increase sales by developing customer loyalty and providing additional value
beyond our standard products through customization. The majority of our
concealable vests sold to state and local law enforcement officers and to
federal agencies are individually sized to provide the optimal fit and
protection. Our customer relationships also help us with our product development
efforts. We developed our Basic Assault Vest ("BAT"), Light Assault Vest ("LAV")
and Warfighter system, in part, through our efforts to customize products for
specific customers.
Our corrections body armor products are designed primarily for use by
personnel in corrections facilities and by other law enforcement employees who
are primarily exposed to threats from knives and other sharp instruments. These
vests are constructed with special, blended fabrics, stainless steel and
titanium, and flexible woven fabrics and are available in both concealable and
tactical models. The first front opening tactical vest, The Rock, was patented
in 2004 and offers modularity, concealability, and the ability for tactical
upgrades.
Our lines of body armor products also include tactical police jackets,
military field jackets, executive vests for special agents, corrections vests,
K-9 protection, fragmentation and close-quarter-battle systems.
RAW MATERIALS AND MANUFACTURING.
The Armor Group manufactures all of its bullet, fragmentation and
projectile-resistant products. Most of the raw materials used in the manufacture
of our ballistic-resistant garments consist of fabrics, which are patented by
major corporations and purchased from four independent weaving or manufacturing
companies. The primary woven fabrics used in the manufacture of the
ballistic-resistant products include Kevlar(TM), a patented product of E.I. du
Pont de Nemours Co. Inc., Twaron(TM), a patented product of Akzo-Nobel Fibers;
B.V. SpectraTM a patented product of Honeywell, Inc. and Zylon(TM), a patented
product of Toyobo Co., Ltd. Our primary shield products include GoldFlex(TM) and
Spectra Flex(TM), patented products of Honeywell, Inc., and Dyneema(TM), a
patented product of DSM Dyneema B.V.
We have letters of commitment with our raw materials suppliers that
guarantee a steady supply of ballistic fibers. These letters are required by our
contracts with the DOD. We also have such letters of commitment relating to
other, non-DOD contracts. Our letters of commitment are legally enforceable and
include a commitment to supply raw materials for the duration of our contracts.
Our DOD-related letters of commitment provide that the supplier will provide us
with raw materials at a fixed price for the life of the DOD contract. Our
letters of commitment that are related to non-DOD contracts do not have fixed
pricing terms; rather, we have the right to purchase raw materials at the
suppliers' published prices.
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We believe our relationships with the suppliers of our raw materials
are good. If any of the manufacturers of any of these fabrics cease production
for any reason, we have the capability to substitute alternative fabrics. Should
these materials become unavailable for any reason, we may be unable to replace
them with materials of like weight and strength. Thus, if our supply of any of
these materials were reduced or cut off or if there was a price increase in the
prices of these materials, our manufacturing operations and our financial
condition could be adversely affected. In order to provide flexibility in the
availability of raw materials, we have cross-certified several fabrics with
competitive raw materials. Further, in an attempt to avoid shortages of raw
materials, we seek to maintain an inventory of ballistic fabrics that is based
on the availability of such fabrics rather than our short-term projected
manufacturing requirements. This policy increases our inventory carrying costs
but has helped avoid manufacturing disruptions.
From 2002 through 2004, shortages of required raw materials limited our
ability to fully meet the demand for our products. We mitigated the impact of
these raw materials shortages by using a variety of ballistic fibers
(hybridization), instead of relying on a single fiber in our products. Even when
using a variety of fibers, however, the impact of shortages was not completely
eliminated due to limits on the availability of individual ballistic fibers.
During the period from 2002 through 2004, shortages of raw materials limited
total production capacity. The availability of raw materials placed an upper
limit on the amount of product that we could produce, and demand for our product
exceeded that amount.
PATENTS AND TRADEMARKS.
Intellectual property rights that apply to our various products include
patents, copyrights, trade secrets and trademarks. We maintain an active program
to protect our investment in technology by enforcing our intellectual property
rights. We have filed over 19 patent applications in the U.S., these patents
have a duration through 2024 . We currently have numerous patents pending for
our protective armor designs and integrated technologies. While our patents are
an important element of our success, our business as a whole is not materially
dependent on any one patent. Specifically, we have one U.S. patent covering our
modular front opening body armor commercial product with a duration of 16 years
that is important to our business. Approximately 10% of our domestic market
revenue is dependent on products that incorporate these patents and pending
patent applications.
To distinguish our products from those of our competitors, we have
obtained certain trademarks and trade names for our products, and we maintain
advertising programs to promote our brands and identify our products. In total,
we hold 22 trademarks of which 7 were issued during 2004.
We also protect certain details about our products and strategies as
trade secrets; keeping confidential the information that we believe provides us
with a competitive advantage. We have ongoing programs designed to maintain the
confidentiality of such information.
CUSTOMERS.
Our products are sold domestically to the U.S. military, state and
local law enforcement agencies, correctional facilities, federal agencies and
distributors and are sold internationally to governments and distributors. Sales
to the U.S. military, directly or as a subcontractor accounted for 76%, 64% and
57% of our Armor Group's revenues for the years ended December 31, 2004, 2003
and 2002, respectively. InterceptorTM OTV's sales accounted for approximately
59% of the military sales or 44% of consolidated net sales. Sales directly and
5
indirectly to domestic state and local law enforcement agencies, security and
intelligence agencies, distributors and federal and state correctional
facilities, accounted for 21%, 35% and 42% of the Armor Group's revenues in the
years ended December 31, 2004, 2003 and 2002, respectively.
Certain of our sales to federal agencies are made pursuant to standard
purchasing contracts of a type issued by the GSA, that are commonly referred to
as GSA Schedules. GSA Schedule contracts accounted for approximately 33%, 12%,
and 16% of the Armor Group's revenues for the years ended December 31, 2004,
2003 and 2002, respectively. Our current GSA Schedule contract expires on July
31, 2006 but is renewable for terms of five years by mutual agreement of the
parties.
Our contracts with the U.S. government are all firm fixed price
contracts. Therefore, there is no portion of our business that is subject to
renegotiation of profits at the election of government. However, U.S. government
contracting regulations and mandatory clauses in government contracts provide
the government with the right unilaterally to terminate the contract for the
convenience of the government. U.S. government contracts that are subject to
this right of unilateral termination or reduction in scope constituted 45%, 47%
and 48% of our corporate revenues in 2004, 2003 and 2002, respectively.
With the exception of the U.S. government, no customer accounted for
10% or more of our corporate revenues in 2004, 2003 or 2002.
MARKETING AND DISTRIBUTION.
Due to the success of the InterceptorTM OTV System with the U.S.
military, performance in the industry and our advertising efforts, our products
and brands are widely recognized in the military, law enforcement and
corrections communities. We seek to build a reputation as the premier provider
of technologically advanced body armor to these communities.
We employ 19 customer support representatives and 30 sales
representatives under the direction of 4 sales managers. These personnel are
responsible for marketing our products to federal, state and local law
enforcement agencies in the United States. We sell to law enforcement agencies
primarily through distributorships established by our sales team. However, in
areas in which there are no suitable distributors, we fill orders through direct
contract awards or through internal customer service representatives. Our strong
relationship with our distributors is the cornerstone of our marketing strategy.
We believe our distributors profit from our reputation and the quality of our
products. We continuously work to strengthen our distribution network through
advertising and additions to our product line.
We have established a government and international liaison office near
the Pentagon in Washington, D.C. This office makes direct sales to international
and governmental customers that can visit this office to examine our products
prior to purchase. The sales representatives in this office seek to build
relationships with various international and government customers as well as
potential distributors and international agents.
6
GOVERNMENT AND INDUSTRY REGULATIONS AND STANDARDS.
The ballistic and fragmentation resistant garments and accessories that
we manufacture and sell are not currently the subject of government regulation
domestically. Sales of NIJ Level III and Level IV armor require an export
license for shipment to our international customers. However, our contracts with
governmental entities are subject to rules, regulations and approvals applicable
to government contractors and we are subject to routine audits to assure our
compliance with these requirements. Our failure to comply with these contract
terms and contracting rules or regulations could expose us to substantial
penalties, including the loss of these contracts and disqualification as a U.S.
government contractor. A number of our employees involved with certain of our
government contracts are required to maintain specified levels of security
clearances. Further, law enforcement agencies and the U.S. military specify
certain standards of performance, such as NIJ standards for bullet-resistant
vests in several categories, and the NIJ has established a voluntary standard
for testing stab-resistant armor, which is often a requirement for the sales of
correctional armor. We regularly submit our vests to independent laboratories
for testing under these standards.
COMPETITION.
The ballistic-resistant garment business is highly competitive and
fragmented. We estimate the number of competitive United States manufacturers at
approximately 20. We compete by combining high quality products with on time
delivery and personalized customer service. Our principal competitors include
Armor Holdings, Inc. and Second Chance Body Armor, Inc. Since there are no
published reports concerning the market, and many companies are privately held,
we are unable to estimate the size of the market.
We believe that the following are competitive strengths that provide us
an advantage in our target markets:
o Execution and Customer Service -- We believe that the key
competitive factor in marketing and selling our products is order
execution and on-time delivery of products. Our products are
critically important to the safety of military and law enforcement
personnel and reliable on-time delivery is essential. We believe
that our ability to execute orders and deliver our products on time
backed by knowledgeable and professional customer service is a key
competitive advantage.
o Government Relationships-- A majority of our revenues are dependent
upon U.S. government contracts. We believe that the close
relationships our management and sales teams have developed with the
military, federal, state and local agencies that use our products
gives us and our products the credibility to effectively compete for
contracts.
o Product and Brand Recognition-- We have sought to develop a
favorable reputation through over 30 years of supplying the U.S.
military, federal, state and municipal governments and agencies. Due
to the success of our products, especially the InterceptorTM OTV,
and our efforts to promote our brands, we believe our products and
trademarks are widely recognized and favorably viewed within our
target markets. Because our products are used in life-threatening
situations, we believe that trust in the manufacturer is a key
element in the purchasing decision for our products. We believe that
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familiarity with our name and products gives us an advantage in this
regard.
o Broad Product Lines--We have full product lines of protective
apparel and accessories for use by military, law enforcement and
corrections personnel to provide a wide range of protection against
various threat levels. Our full product lines and their modular
design and easy customization encourage customer loyalty due to the
modularity and compatibility of our various products.
o Network of Distributors--We have spent many years developing and
training a network of distributors throughout the U.S. The
effectiveness of our state and local government marketing efforts is
substantially dependent upon the professionalism and motivation of
our distribution network. We are fully committed to the distributor
network and provide support through education and training, sales
and marketing assistance, and accessibility, which results in our
strong distributor network.
o Market Position in Body Armor-- In December 2004, the U.S. Army
awarded us with the exclusive contract to provide them with our
InterceptorTM OTV . We believe that the favorable reception by the
U.S. Army of the InterceptorTM provides us an advantage as the U.S.
Army has sought to equip more and more servicemen and women and
consequently more of such servicemen and women depend upon our
products for their personal safety.
BACKLOG.
The Armor Group had a backlog of orders that we believe are firm of
approximately $415 million and $132 million as of March 1, 2005 and 2004,
respectively. Backlog at any one date is not a reliable indicator of future
sales. In addition to our backlog, we often receive 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 we generally exclude it from reported
backlog.
POTENTIAL PRODUCT LIABILITY.
Our products are used as protective devices in situations that could
result in serious injuries or death, including injuries that may result from the
failure of our products. We maintain product liability insurance for the Armor
Group in the amount of $21,000,000 per occurrence, and $22,000,000 in the
aggregate, less a deductible of $100,000 for each of our Armor Group
subsidiaries. We have 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 we will be able to obtain such insurance at a reasonable cost.
Any substantial uninsured loss would have to be paid out of our assets, as
applicable, and may have a material adverse effect on our financial condition
and results of operations on a consolidated basis. If we are unable to obtain
product liability coverage we may be prohibited from bidding for orders from
certain government customers. Many governmental agencies currently require such
insurance coverage, and any
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inability to bid for government contracts as a result of insufficient insurance
coverage would have a material adverse effect on our financial condition and
results of operations.
DHB SPORTS GROUP
PRODUCTS AND MARKETS.
We manufacture and sell a variety of sports medicine, health supports
and protective products. Our products include a wide variety of knee, ankle,
elbow, wrist and back supports and braces that assist serious athletes, weekend
sports enthusiasts and general consumers in their respective sports and everyday
activities. Currently, we manufacture and market athletic products under the
brands NDLTM, GRIDTM, MagneSystemsTM, FLEX-AIDTM, and Doctor Bone Savers TM. We
market our products to a variety of distribution points with an emphasis on
major retailers. Our various brands and private label programs are offered to
the consumers through mass merchandisers, chain drug stores, food chains,
independent sporting goods retailers, independent pharmacies, catalogs,
wholesalers, and e-commerce. Our customer list includes retail establishments
such as Wal-Mart, Walgreen's, Longs Drug Stores, Target, and Meijer. We also
have established private label programs with large wholesalers to the retail
trade such as AmerisourceBergen, Cardinal Health, Chain Drug Consortium and
Chain Drug Marketing Association. Two customers, Wal-Mart and Target,
collectively accounted for 66%, 68% and 61% of our Sports Group revenues for the
years ended December 31, 2004, 2003 and 2002, respectively.
RAW MATERIALS AND MANUFACTURING.
Approximately 75% of the health supports we manufacture are made from
neoprene fabric as compared to the brown elastic fabric. During 2004, we
outsourced the production of our braces to a subcontractor in Taiwan for
approximately 47% of the Sports Group's annual purchases. Neoprene is a readily
available fabric and to date we have not experienced any shortage of this
fabric.
POTENTIAL PRODUCT LIABILITY.
Our products 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. We maintain product liability insurance for the Sports
Group in the amount of $21,000,000 per occurrence, and $22,000,000 in the
aggregate, less a deductible of $100,000. We have 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 we would be able to obtain such
insurance at a reasonable cost. Any substantial uninsured loss would have to be
paid out of our assets and may have a material adverse effect on our financial
condition and results of operations.
RESEARCH AND DEVELOPMENT
Our research and development program is a key element in our efforts to
maintain and improve our position in the market for protective body armor. Our
research and development team has an aggregate of over 100 years of ballistic
research and development experience, including more than 40 years of experience
with NIJ certification requirements. Many of our research and development
personnel previously held positions of responsibility with other companies
within the industry. Our research and development consists of our own sponsored
efforts and government-funded efforts under our fixed-price government
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contracts. Our collaborative efforts to customize our products for specific
customers are an important part of our research and development process, and
have resulted in several new products such as D.A.P.S. and ballistic blankets.
Our research and development expenses (materials, salaries, and
ballistic testing) are included in selling, general and administrative expenses
as incurred and for the years ended December 31, 2004, 2003 and 2002 were $9.7
million, $10.8 million and $4.2 million, respectively.
ENVIRONMENTAL REGULATION
We are subject to various federal, state and local laws and regulations
governing the use, discharge and disposal of hazardous material. Compliance with
current laws and regulations has not had and is not expected to have a material
adverse effect on our financial condition. It is possible, however, that
environmental issues may arise in the future that the Company cannot currently
predict and which may have a material adverse effect on the Company's business
or financial condition.
EMPLOYEES
As of March 1, 2005, we employed approximately 875 full-time employees
in the Armor Group. There was one operating officer, 32 employees in supervisory
capacities, 680 employees in manufacturing, shipping and warehousing, 67
employees in quality control, 46 employees in customer service and sales, 5
employees in technical/research development, and 44 employees in office and
administration. We believe that we have a satisfactory relationship with our
Armor Group employees.
As of March 1, 2005, we employed approximately 75 full-time employees
in our Sports Group. There was one officer, 3 employees in supervisory
capacities, 66 employees in manufacturing, shipping and warehousing, 1 employee
in sales and customer service, and 4 employees in office support. All of these
employees are employed full-time. We believe that our relationship with our
Sports Group employees is satisfactory. We also have more than 40 independent
sales representatives who, together with the sales executives, are responsible
for sales throughout the Untied States, Western Europe, Asia, the Middle East
and Latin America.
SEGMENT INFORMATION
As described in detail above, we operate in two principal segments:
ballistic-resistant protective equipment and protective athletic and sports
products. Financial information on our business segments (in thousands) is as
follows:
Net Sales 2004 2003 2002
- --------- -------- -------- --------
Ballistic-resistant equipment $333,029 $224,152 $124,860
Protective athletic & sports products 7,051 5,859 5,492
-------- -------- --------
340,080 230,011 130,352
Less inter-segment sales (5) -- (5)
-------- -------- --------
Consolidated net sales $340,075 $230,011 $130,347
======== ======== ========
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2004 2003 2002
-------- -------- --------
Income before other income (expense)
Ballistic-resistant equipment $ 61,290 $ 33,618 $ 17,534
Protective athletic & sports products 1,017 426 563
Corporate and other (1) (12,736) (8,028) (4,274)
-------- -------- --------
Consolidated income before other income (expense)
$ 49,571 $ 26,016 $ 13,823
======== ======== ========
Depreciation and Amortization Expense
Ballistic-resistant equipment $ 662 $ 350 $ 289
Protective athletic & sports products 119 64 86
-------- -------- --------
781 414 375
Corporate and other 197 150 88
-------- -------- --------
Consolidated depreciation and amortization expense
$ 978 $ 564 $ 463
======== ======== ========
Interest Expense
Ballistic-resistant equipment $ 1,367 $ 1,238 $ 935
Protective athletic & sports products -- -- --
-------- -------- --------
1,367 1,238 935
Corporate and other (2) 7 106 710
-------- -------- --------
Consolidated interest expense $ 1,374 $ 1,344 $ 1,645
======== ======== ========
Expenditures for additions to long lived assets
Additions to property and equipment
Ballistic-resistant equipment $ 1,147 $ 592 $ 250
Protective athletic & sports products -- 57 35
Corporate and other 644 92 82
-------- -------- --------
$ 1,791 $ 741 $ 367
======== ======== ========
Income Taxes (Benefit)
Ballistic-resistant equipment $ 15,227 $ 14,341 $ 22
Protective athletic & sports products -- 182 2
-------- -------- --------
15,227 14,523 24
Corporate and other (2) 2,346 (3,425) (3,696)
-------- -------- --------
Consolidated tax (benefit) expense $ 17,573 $ 11,098 $(3,672)
======== ======== ========
Identifiable Assets
Ballistic-resistant equipment $138,370 $ 88,503 $ 56,471
Protective athletic & sports products 5,018 3,186 2,907
-------- -------- --------
143,388 91,689 59,378
Corporate and other (2) 2,469 1,739 5,993
-------- -------- --------
Consolidated assets $145,857 $ 93,428 $ 65,371
======== ======== ========
Foreign sales accounted for 3%, 1% and 2% of the total revenues for the years
ended December 31, 2004, 2003 and 2002, respectively. The Company did not have
any foreign identifiable assets in 2004 and 2003. There were no foreign
identifiable assets during 2004 and 2003. Foreign identifiable assets accounted
for 1% of the total assets as of December 31, 2002.
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(1) Corporate and other includes corporate general, administrative
expenses.
(2) Corporate assets are principally deferred income tax
assets and property and equipment.
AVAILABLE INFORMATION.
Our internet address is www.dhbindustries.com. As of the date of this
Annual Report on Form 10-K, we make available free of charge on our website
materials that we file or furnish 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. Information set forth on our website
is not incorporated by reference into this filing and, unless otherwise
indicated, is not incorporated by reference into any of our filings. We will
voluntarily provide electronic copies (or a reasonable number of paper copies)
of our filings free of charge upon request.
ITEM 2. PROPERTIES
CORPORATE HEADQUARTERS. In February 2004, we relocated our 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.
POINT BLANK FACILITY. In December 2003, the Company leased a 104,000
square foot manufacturing facility with administrative offices in Pompano Beach,
Florida, to expand the production of the Point Blank subsidiary of our Armor
Group. The lease expires on April 30, 2014.
POINT BLANK-MILITARY FACILITY. In January 2003, we 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.
PACA. We lease a 60,060 square foot manufacturing facility with
administrative offices at 179 Mine Lane, Jacksboro, Tennessee 37757, for our
subsidiary, Protective Apparel Corporation of America ("PACA"). The lease
expires on April 15, 2006.
NDL/POINT BLANK FACILITY. We lease a 67,000 square foot office and
manufacturing facility located at 4031 N.E. 12th Terrace, Oakland Park, Florida
for Point Blank and our Sports Group. Until July 2004, we leased this facility
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. In July 2004, the building was sold to an
unrelated third party, Cabot Industries Value Fund LP, from which we now lease
the facility from under the same terms. The lease expires on December 31, 2010.
WASHINGTON DC OFFICE. In May 2002, we 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.
ITEM 3. LEGAL PROCEEDINGS
On January 3, 2005, a class action lawsuit was filed against us in the
Circuit Court of the Seventeenth Judicial Circuit in Broward County, Florida by
a police organization and individual police officers, because of concerns
12
regarding the effectiveness and durability of body armor with high
concentrations of Zylon in the Company's bullet-resistant soft body armor
(vests). In February 2005, we reached a preliminary settlement with respect to
the class action lawsuit filed, subject to final court approval. The Company
does not expect this settlement to have a material adverse effect on its
financial position.
We are currently the subject of an investigation by the Securities and
Exchange Commission (the "SEC"), with respect to certain related party
transactions and executive compensation matters regarding DHB and affiliates of
Mr. David H. Brooks (the Company's Chief Executive Officer). DHB and Mr. Brooks
are cooperating with the SEC in this investigation. In addition, the Audit
Committee expects to periodically monitor the status and performance of these
related party transactions to assess the relative benefits to the Company and
the related party's compliance with its contractual obligations.
We are involved in other litigation, none of which we consider to be
material to our business or believe would, if adversely determined, have a
material adverse effect on our financial condition or operations.
(b) ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
At the DHB Industries, Inc. Annual Stockholders' Meeting on
December 30, 2004, our stockholders elected each of the director nominees,
ratified the selection of our independent auditors, and because there was not a
quorum for the proposal, did not approve our 2004 Omnibus Equity Incentive plan.
1. To elect six directors to hold office during
the year following the Annual Meeting and
until their successors are elected and qualified Number of Shares
----------------
Voted For Voted Against Withheld
---------- ------------- --------
David Brooks 38,907,659 2,054,089 -0-
Gary Nadelman 40,383,648 578,100 -0-
Jerome Krantz 40,427,542 534,206 -0-
Cary Chasin 40,392,607 569,141 -0-
Dawn Schlegel 39,012,272 1,949,476 -0-
Barry Berkman 40,564,943 396,805 -0-
Number of Shares
Voted Broker
Voted For Against Abstain Non-Votes
--------- --------- ------- ---------
2. To ratify the appointment of Weiser
LLP as independent auditors for the
Company for 2004. 40,758,676 153,398 49,673 95,751
3. To consider and vote upon the
Company's proposed 2004 Omnibus
Equity Incentive Plan. 15,924,956 3,060,114 269,281 21,803,147
13
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is listed on the American Stock Exchange under the
symbol DHB. 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, 2004:
Low High
------ ------
2004 4th Quarter $13.47 $20.56
3rd Quarter 11.23 17.05
2nd Quarter 7.65 16.05
1st Quarter 5.29 7.41
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
Since we issued our Series A, 12% convertible preferred stock (the
"Preferred Stock") on January 12, 2002, we have paid cash dividends on the
Preferred Stock each quarter at a rate of $0.18 per share per quarter ($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). We have not paid any dividends on our common
stock in the last three fiscal years.
We currently retain our income from earnings and anticipate that our
future earnings will be retained to finance the expansion of our 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 our credit
agreements. Our current credit facility prohibits the payment of dividends on
our common stock without the lender's prior written consent.
On March 1, 2005, there were 1,750 holders of record of our Company's
common stock. However, the number of holders of record includes brokers and
other depositories for the accounts of others. We estimate that as of that date,
there were approximately 22,000 beneficial owners of our common stock.
In 2004, the Company issued to each of the then six board members
50,000 unregistered five year common stock warrants exercisable at $5.88 per
share. These warrants may either be exercised at the option of the holder for
14
cash or pursuant to a cashless exercise based upon the five prior business days'
stock price. On November 29, 2004, the members of the Board of Directors and
Sandra L. Hatfield, the Company's Chief Operating Officer, exercised 4,555,000
common stock warrants pursuant to a cashless exercise yielding 4,261,799 shares
of common stock. Included in the above mentioned warrants is the exercise by
David H. Brooks, the Company's Chief Executive Officer of 3,875,000 warrants
yielding 3,669,757 shares of common stock, Dawn Schlegel, the Company's Chief
Financial Officer of 205,000 warrants yielding 177,006 shares of common stock,
and Sandra L. Hatfield, the Company's Chief Operating Officer of 200,000
warrants yielding 180,119 shares of common stock. In addition, on December 28,
2004, Sandra L. Hatfield, the Company's Chief Operating Officer, exercised an
additional warrant of 100,000 shares pursuant to a cashless exercise yielding
89,426 shares of common stock. Employees exercised warrants for 63,895 shares
with aggregate proceeds of $110,000. A former member of the Board of Directors
exercised a warrant for 25,000 shares of common stock with aggregate proceeds of
$50,000. An outside consultant exercised a warrant pursuant to a cashless
provision yielding 100,280 shares of common stock.
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.
As of December 31, 2004, 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.... 507,000 $5.00 0
Equity compensation plans not
approved by security
holders.... 0 -- -0-
Total ............ 507,000 $5.00 0
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data set forth below for the years
ended December 31, 2004, 2003, 2002, 2001 and 2000, 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.
15
Income Statement Data (in thousands, except for per share data)
2004 2003 2002 2001 2000
-------- -------- -------- ------- -------
Net sales $340,075 $230,011 $130,347 $98,015 $70,018
Cost of goods sold 245,940 166,670 92,621 71,639 49,359
-------- -------- -------- ------- -------
Gross profit 94,135 63,341 37,726 26,376 20,659
Selling, general and administrative expenses 44,564 37,325 23,903 13,597 12,460
-------- -------- -------- ------- -------
Income (loss) before other income (expense) 49,571 26,016 13,823 12,779 8,199
Interest expense (1,374) (1,344) (1,645) (2,513) (2,743)
Other income (expense) 35 1,605 130 42 341
-- ----- --- -- ---
Income (loss) before discontinued operations 48,232 26,277 12,308 10,308 5,797
Discontinued operations -- -- -- -- 340
-------- -------- -------- ------- -------
Income (loss) before income taxes 48,232 26,277 12,308 10,308 6,137
Income tax (benefit) expense 17,573 11,098 (3,672) 175 130
-------- -------- -------- ------- -------
Income (loss) before minority interest 30,659 15,179 15,980 10,133 6,007
Minority interest (224) (7) -- -- --
-------- -------- -------- ------- -------
Net income (loss) 30,435 15,172 15,980 10,133 6,007
-------- -------- -------- ------- -------
Dividend - preferred stock (360) (360) (345) -- --
-------- -------- -------- ------- -------
Income available to common stockholders $ 30,075 $ 14,812 $ 15,635 $10,133 $ 6,007
======== ======== ======== ======= =======
Earnings per share
Basic $ 0.73 $ 0.36 $ 0.42 $ 0.32 $ 0.19
Diluted $ 0.67 $ 0.34 $ 0.37 $ 0.28 $ 0.18
Balance Sheet Data (in thousands) 2004 2003 2002 2001 2000
- --------------------------------- -------- -------- -------- ------- -------
Working capital $105,086 $ 66,822 $ 53,125 $20,472 $ 7,497
Total assets 145,857 93,428 65,371 40,896 28,056
Total current liabilities 35,180 23,969 7,822 16,585 16,949
Long-term liabilities 33,220 22,514 26,204 19,305 16,062
Stockholders' equity (deficit) 77,026 46,738 31,345 5,006 (4,955)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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
We are a manufacturer and provider of bullet and
projectile-resistant garments, and fragmentation protective vests, and related
ballistic accessories, which are used domestically and internationally by
military, law enforcement, security and corrections personnel, as well as
governmental agencies. We also manufacture and distribute protective athletic
apparel and equipment, including a wide variety of knee, ankle, elbow, wrist and
back supports and braces that assist serious athletes, weekend sports
enthusiasts and general consumers in their respective sports and everyday
activities.
16
We are organized as a holding company that currently conducts business
through its subsidiaries through two divisions, the DHB Armor Group and the DHB
Sports Group. The Armor Group represented approximately 98%, 97% and 96% of
consolidated revenues of the Company during 2004, 2003 and 2002, respectively.
The Company's products are sold both nationally and internationally. Sales to
the U.S. military comprise the largest portion of the Armor Group's business,
followed by sales to federal, state and local law enforcement agencies,
including correctional facilities. Accordingly, any substantial increase or
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, and health supports products under its own labels, private
labels and house brands for major retailers.
We derive substantially all of our revenues from sales of our products.
As indicated in the financial information included in this report, 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 outgrown its small business status
under government procurement regulations. Although the loss of our small
business status makes us ineligible for certain set-asides under government
contracting regulations, we believe that our current size suggests our ability
to manage larger orders and allows us to credibly bid on major procurement
contracts under which small businesses would be our subcontractors.
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 in April 2004, moved into 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 the Company's existing procurement
contracts with the U.S. military and other governmental agencies.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2004 COMPARED TO YEAR ENDED DECEMBER 31, 2003.
Consolidated net sales for the year ended December 31, 2004 increased
47.9% to approximately $340.1 million as compared to approximately $230.0
million for the year ended December 31, 2003. The Armor Group's revenues
increased 48.6% to $333.0 million for the year ended December 31, 2004 from
approximately $224.2 million for the year ended December 31, 2003. This increase
was attributed to a 76.7% increase in sales to the US military and 19.4%
increase in sales to state and local law enforcement agencies. Sales to the US
military were approximately $254.7 million for the year ended December 31, 2004
compared to $144.1 million for the year ended December 31, 2003. Sales to state
17
and local law enforcement agencies either directly or through distributors
increased to $59.2 million for the year ended December 31, 2004 versus $49.6
million for the year ended December 31, 2003. In recognition of the increased
focus on homeland security and the war on terrorism, the number of law
enforcement officers and agents has increased over the past three years and
there has been increased funding to help equip these officers and agents, which
has led to increased demand for our products. International sales increased to
$9.8 million during the year ended December 31, 2004 as compared to $900,000 for
the year ended December 31, 2003. The Sports Group's sales increased 20% to $7.0
million for the year ended December 31, 2004 compared to $5.9 million for the
year ended December 31, 2003. This increase is attributable to increased
revenues from Target and the addition of Longs and Walgreen drug stores to its
customer base during 2004.
Gross profit increased to $94.1 million for 2004 as compared to $63.3
million in 2003. However as a percentage of net sales, gross profit remained
nearly constant with the gross profit percentage of 27.7% in 2004 and 27.5% in
2003.
Selling, general and administrative expenses decreased as a percentage
of net sales to 13.1% or approximately $44.6 million for 2004 as compared to
16.2% or approximately $37.3 million for 2003. The main cause of this decrease
as a percentage of net sales is the reduction of $1.97 million in research and
development expenditures during 2004. Research and development material expenses
were 2.5% of sales or approximately $8.5 million during 2004 as compared to 4.5%
or approximately $10.4 million for 2003. The Company anticipates that research
and development costs will remain at 2 to 3% of revenue in 2005. During 2004,
the Company paid a total of $4.8 million in bonuses (1.4% of net sales) to its
executives and supervisors as compared to $2.7 million (1.2% of net sales) in
2003.
Interest expense for 2004 was approximately $1.4 million versus
approximately $1.3 million for 2003 as a result of the Company utilizing the
Libor option on more of its outstanding debt, and therefore decreasing its
average interest percentage it was paying, even though its borrowings had
increased. Total other income (expense) decreased $1.6 million during 2004 to a
total other expense of $1.3 million compared to other income of $261,000 during
2003. During 2003, the Company received income from the settlement of its
lawsuit with its insurance company and insurance agent of approximately $1.0
million. Also included in other income during 2003 was the $1.45 million gain on
the sale of a .0065% interest of its subsidiary to an unrelated third party
during December 2003. In addition, during 2003, the Company wrote down the value
of its investment in non-marketable securities for a loss of $904,000.
Income tax expense in 2004 increased to approximately $17.6 million as
compared to approximately $11.1 million for 2003. Current taxes increased to
$17.3 million or 35.9% of income before taxes as compared to 27.3% or
approximately $7.2 million for 2003. This increase is attributable to higher tax
brackets as the Company continues to grow and the utilization of net operating
loss carryovers during 2003. The full utilization of the net operating loss
carryovers during 2003 caused the deferred tax expense to go down to $268,000 in
2004 versus $3.9 million for 2003. The Company's effective tax rate was 38.5%
during 2004 as compared to 42.2% during 2003. This decrease in the effective tax
rate is attributable among other items to an over accrual of taxes in 2003 as it
relates to the Hightower transaction with the sale of the minority interest of
Point Blank.
Income available to common stockholders was approximately $30.1 million
for the year ended December 31, 2004, a 103% increase as compared to
approximately $14.8 million for the year ended December 31, 2003. Diluted
earnings per share increased 97% to $0.67 for 2004 as compared to $0.34 for
18
2003. The weighted average shares outstanding on a diluted basis for the year
ended December 31, 2004 were 45,735,023 as compared to 44,196,802 for the year
ended December 31, 2003.
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 $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 $124.8 million for the year
ended December 31, 2002. This increase was attributable to a 103.3% increase to
$144.1 million in sales (including approximately $152 million for InterceptorTM
OTVs or 59% of the military sales) from the military as well as a 61.2% increase
to $49.6 million 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 a new chain of drug stores, Long Drugs stores, 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. During the
fourth quarter of 2003, the Company also retained an agent 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 11%
in 2002.
19
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.
LIQUIDITY AND CAPITAL RESOURCES
The Company 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, 2004 was approximately $107.1 million as compared to working capital of
approximately $66.8 million at December 31, 2003. The accounts receivable days
outstanding increased to 58 days at December 31, 2004 as compared to 54 days at
December 31, 2003 as a result of higher receivables from state and local law
enforcement which typically pay a little slower. Although the working capital of
the Company increased during 2004, the cash used from operations increased to
approximately $10 million compared to cash provided from operations of
approximately $2.6 million during 2003. The main cause of the negative operating
cash flow is the substantial growth the Company has been experiencing. The
underlying drivers of operating cash flows are the inflows and outflows of
funds.
Inflows are principally cash collections from customers. As a result of
the Company's continued and rapid growth, the Company has been experiencing
increases in its accounts receivable, thus causing cash inflows from operations
to lag behind net sales. Cash collections from customers approximated $325
million and $207 million for the years ended December 31, 2004 and 2003,
respectively, compared to net sales of approximately $340 million and $230
million respectively, for the comparable years. The outflows are principally
20
manufacturing costs plus the buildup of the inventory to accommodate future
growth. Therefore, the Company's cash outflows related to manufacturing cost
plus increasing inventory values outpaced the cost of goods sold. Cash outflows
for manufacturing costs plus inventory buildup approximated $305 million and
$165 million for the years ended December 31, 2004 and 2003, respectively,
compared to cost of goods sold of approximately $245 million and $167 million,
respectively, for comparable years.
On March 15, 2005, the Company amended its bank credit agreement (the
"Credit Agreement"), which increased the total borrowing limits from $45 million
to $55 million at that time. Pursuant to the Credit Agreement, the Company may
borrow, on a revolving basis, up to $37.5 million on 85% of eligible accounts
receivable (the "Credit Facility"), and the Company borrowed a term loan in the
principal amount of $18 million (repaying the $12.5 million dollar term loan),
amortizing at the rate of $2 million per quarter commencing July 2005. This
amended Credit Agreement will expire on October 1, 2007. On March 15, 2004, the
Company again amended the Credit Agreement, to increase the revolving credit
borrowing limit to $45.5 million and the Company borrowed a term loan in the
principal amount of 12.5 million amortizing at the rate of $1 million per
quarter commencing July 1, 2004. Borrowings under the Credit Agreement bear
interest, at the Company's option, at the bank's prime rate (5.25% at December
31, 2004) or LIBOR (2.3% at December 31, 2004) plus 1.75% per annum on the
Credit Facility and at the bank's prime rate or LIBOR (2.50130% at December 31,
2004) plus 2.25% on the term loan. For 2003, the borrowings bore interest at the
bank's prime rate or LIBOR plus 1.75% (3.145% at December 31, 2003). The
borrowings under the Credit Agreement are collateralized by a first security
interest in substantially all of the assets of the Company.
The Credit Facility includes both affirmative and negative covenants
customary for a financing of this nature. The Credit Facility among other
things, requires the Company to maintain a minimum (1) tangible net worth, as
defined, (2) fixed charge coverage ratio, and (3) earnings before interest,
taxes, depreciation and amortization. The Credit Facility has certain
restrictive covenants that limit the Company's ability to pay dividends to its
common stockholders, repurchase treasury shares, and limits the total amount of
capital expenditures to $2 million during any given year. The Company does not
anticipate capital expenditures to reach the $2 million limit as described
below. These restrictive covenants require the Company to obtain prior approval
with the bank before paying common stock dividends or repurchasing treasury
shares. Currently the Credit Facility has a 1% prepayment penalty through
October 1, 2005. The Company believes that these restrictive covenants do not
have a material impact on the Company's liquidity and capital resources.
The Company's capital expenditures in 2004 increased approximately
$1.06 million to approximately $1.8 million as compared to approximately
$741,000 during 2003. This increase is attributable to the additional machinery,
equipment, furniture and fixtures and leasehold improvements with the new
warehouse and administrative facility in Florida for the Company's Point Blank
subsidiary and a new location for the Company's corporate headquarters. During
2005, the Company currently anticipates spending approximately $300,000 in
capital expenditures to construct a new state of the art ballistic testing range
in its Point Blank's Pompano Beach facility in addition to our normal capital
expenditures of approximately $800,000 for total anticipated capital
expenditures of approximately $1.1 million.
The Company believes that its existing credit line, together with funds
generated from operations, will be adequate to sustain its operations (including
projected capital expenditures) through 2005. Historically, the Company has been
21
successful in obtaining increases in its revolving credit facility, as required
in order to finance the increased working capital needs brought on by the rapid
and substantial expansion of the Company's business. However, there can be no
assurance that the Company will be able to obtain further such increases if
needed, and the Company may be required to explore other potential sources of
financing (including the issuance of equity securities and, subject to the
consent of the Company's lender, other debt financing) if the Company continues
to experience escalating demand for its products.
OFF-BALANCE SHEET ARRANGEMENTS
As of December 31, 2004, we did not have any significant
off-balance-sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC
Regulation S-K.
CASH CONTRACTUAL OBLIGATIONS
The following table presents the Company's estimated cash requirements for
contractual obligations outstanding as of December 31, 2004:
Payments Due by Period
($ In thousands)
Less
than 1-3 4-5 After
Contractual Obligations 1 year years years 5 years Total
Long-Term Debt $ 4,000 $32,134 $-- $ -- $36,134
Employment Contracts 363 -- -- 363
Operating Leases 1,983 5,840 6,058 -- 13,881
------- ------- ------ ---- -------
Total Contractual Cash
Obligations $ 6,346 $37,974 $6,058 $ -- $50,378
======= ======= ====== ==== =======
CRITICAL ACCOUNTING POLICIES
The Company's management believes that its critical accounting policies
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.
INVENTORIES-- Inventories are stated at the lower of cost (determined
on the first-in, first-out basis) or market.
22
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.
Judgments and estimates underlying the Company's accounting policies
vary based on the nature of the judgment and estimate. The company uses
judgments and estimates in order to determine its allowance for doubtful
accounts, which relates to the Company's revenue critical accounting policy. The
allowance for doubtful accounts is determined through analysis of the aging of
the accounts receivable at the date of the financial statements, assessments of
collectibles based on an evaluation of historic and anticipated trends, the
financial condition of customers and an evaluation of the impact of economic
conditions. The Company also uses judgments and estimates to determine the
valuation allowances on its deferred tax assets to establish reserves for income
taxes, each of which relate to the Company's income taxes critical accounting
policy. The Company bases these estimates on projections of future earnings,
effective tax rates and the impact of economic conditions. These judgments and
estimates are based upon empirical data as applied to present facts and
circumstances. Judgments and estimates are susceptible to change because the
projections that they are based upon do not always turn out to be correct or
unanticipated issues arise that are not considered in the Company's assumptions.
NEW ACCOUNTING STANDARDS
In December 2003, the Financial Accounting Standards Board issued FASB
Interpretation Number 46-R "Consolidation of Variable Interest Entities." FIN
46-R, which modifies certain provisions and effective dates of FIN 46, sets
forth criteria to be used in determining whether an investment is a variable
interest entity should be consolidated. These provisions are based on the
general premise that if a company controls another entity through interests
other than voting interests, that company should consolidate the controlled
entity. The Company believes that currently, it does not have any material
arrangements that meet the definition of a variable interest entity, which would
require consolidation.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs - An
Amendment of ARB NO. 43, Chapter 4" (SFAS No. 151). SFAS No. 151 requires all
companies to recognize a current-period for abnormal amount of idle facility
expense, freight, handling costs and wasted materials. This statement also
requires that the allocation of fixed production overhead to the costs of
conversion be based on the normal capacity of the production facilities. SFAS
No. 151 will be effective for fiscal year beginning after June 15, 2005. The
Company does not expect the adoption of this statement to have a material effect
on its consolidated financial statements.
23
In December 2004, the FASB issued SFAS No.123(R), "Share-Based Payment"
(SFAS No. 123(R)). This statement replaces SFAS No. 123 and supersedes APB 25.
SFAS 123\(R) requires all stock-based compensation to be recognized as an
expense in the financial statements and that such cost be measured according to
the fair value of stock options. SFAS 123 (R) will be effective for quarterly
periods beginning after June 15, 2005. While the Company currently provides the
pro forma disclosures required by SFAS No. 148 on a quarterly basis (see Note 1
(k) - Stock Based Compensation"), it is currently evaluating the impact this
statement will have on its consolidated financial statements.
In December 2004, the FASB issued SFAS No. 153, "Exchanges on
Nonmonetary Assets - An Amendment of APB Option No. 29, Accounting for
Nonmonetary Transactions" (SFAS 153) SFAS eliminates the exception from fair
value measurement for nonmonetary exchanges of similar productive assets in
paragraph 21(b) of APB Option No. 29, "Accounting for Nonmentary Transactions,"
and replaces it with an exception for exchanges that do not have commercial
substance. SFAS 153 specifies that a nonmonetary exchange has commercial
substance if the future cash flows of the entity are expected to change
significantly as a result of exchange. SFAS 153 is effective for fiscal periods
beginning after June 15, 2005. The Company does not expect the adoption of this
statement to have a material effect on its consolidated financial statements.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements
regarding future events and our future results that are based on our current
expectations, estimates, forecasts and projections about the industries in which
we operate and the beliefs and assumptions of our management. Words such as
"expects," "anticipates," "targets," "goals," "projects," "intends," "plans,"
"believes," "seeks," "estimates," variations of such words, and similar
expressions are intended to identify such forward-looking statements. These
forward-looking statements are only predictions that speak as of the date hereof
and are subject to risks, uncertainties and assumptions that are difficult to
predict. Therefore, actual results may differ materially and adversely from
those expressed in any forward-looking statements. Factors that might cause or
contribute to such differences include, but are not limited to, those discussed
below, elsewhere in this Form 10-K and in other reports that we have filed with
the Securities and Exchange Commission. You are cautioned not to place undue
reliance on these forward-looking statements that speak only as of the date
hereof. We undertake no obligation to revise or update publicly any
forward-looking statements to reflect any change in the expectations of our
management with regard thereto or any change in events, conditions, or
circumstances on which any such statements are based.
RISK FACTORS
Our business, operations and financial condition are subject to
various risks. Several material risks are described below, and you should take
these risks and others set forth in this Annual Report on Form 10-K and in other
reports and materials that 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.
24
OUR BUSINESS IS MATERIALLY DEPENDENT UPON RAW MATERIALS THAT HAVE BEEN
SUBJECT TO SHORTAGES OVER THE PAST TWO YEARS.
A substantial majority of our revenues and net income is dependent upon
the sale of the ballistic-resistant products of our Armor Group. The raw
materials used by our Armor Group in the manufacturing of our
ballistic-resistant products include Kevlar(TM), Twaron(TM) Spectra(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 our ballistic-resistant products consist of fabrics which are
patented by major corporations which are purchased from four independent weaving
or manufacturing companies. Accordingly, we have limited sources of such
required raw materials for our ballistic-resistant products. During 2002 and
2003, shortages of such required raw materials limited the quantity of products
of our Armor Group that we could produce, and demand for such products exceeded
that amount. Although we were able to partially mitigate the impact of these raw
materials shortages by using a variety of ballistic fibers, instead of one type
of fiber, the impact of the shortages was not completely eliminated because
there are also limits on the availability of ballistic fiber blends. In response
to these shortages, we have adopted a policy of purchasing such materials based
on their availability rather than our immediate need for such materials. This
policy is designed to mitigate the effects of any future shortages; however, it
will also increase our inventory carrying costs. Further, notwithstanding our
efforts to increase our inventory of required raw materials, if any of these
manufacturers cease to produce these products or shortages persist or worsen, we
may be required to use other fabrics in our ballistic-resistant products. In
such event, we have no assurance that we would be able to identify alternate
fabrics with comparable performance. We expect any material future shortages of
required raw materials to have a material adverse effect on our business,
financial condition and results of operations.
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 you
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 the terrorist attacks of
September 11, 2001. Any material uninsured loss could have a material adverse
effect on our business, financial condition and results of operations.
A SUBSTANTIAL PORTION OF OUR REVENUE IS DEPENDENT ON OUR U.S MILITARY
BUSINESS AND A LOSS OR DECREASE IN SUCH BUSINESS WOULD HAVE A MATERIAL ADVERSE
EFFECT ON US.
Our U.S. military contracts account for a significant portion of our
revenue. The U.S. military funds these contracts in annual increments. These
contracts require subsequent authorization and appropriation that may not occur
or that may be greater than or less than the total amount of the contract.
25
Changes in the U.S. military budget, spending allocations and the timing of such
spending could adversely affect our ability to receive future contracts. None of
our contracts with the U.S. military has a minimum purchase commitment, and the
U.S. military generally has the right to cancel its contracts unilaterally
without prior notice. The loss of, or a significant reduction in, U.S. military
business for ballistic-resistant products could have a material adverse effect
on our business, financial condition, results of operations and liquidity.
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 U.S. government. The accuracy and appropriateness of certain
costs and expenses used to substantiate our direct and indirect costs for the
U.S. government under our 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.
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
26
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 sale 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.
INCREASES IN THE PRICES PAID FOR RAW MATERIALS MAY ADVERSELY EFFECT OUR
PROFIT MARGINS.
In the event we experience significant increases in the prices paid for
our raw materials, we may be unable to completely pass through, either in
whole or in part, such increases in the cost of raw materials to our
customers. In the event we are so unable to pass through all or a portion of
such price increases to our customers, our profit margin on such products may
be reduced.
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 change in the interest rate
for 2004 was immaterial. The extent of market rate risk associated with
fluctuations in interest rates is not quantifiable or predictable because of the
volatility of future interest rates and business financing requirements.
However, given the small percentage change in the past, the Company does not
expect any changes in the interest rate to have a material effect on its
operating results. International transactions are predominately denominated in
U.S. dollars, mitigating any market risk resulting from foreign currency
exchange fluctuations. 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.
27
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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
QUARTER QUARTER QUARTER QUARTER
----------- ----------- ----------- -----------
FISCAL 2004
Net sales $ 74,403 $ 86,066 $ 89,410 $ 90,196
Cost of goods sold 53,638 62,186 64,537 65,579
----------- ----------- ----------- -----------
Gross profit 20,765 23,880 24,873 24,617
Selling, general and admin expense 9,872 10,890 11,591 12,211
----------- ----------- ----------- -----------
Operating income 10,893 12,990 13,282 12,406
Other income (expense), net (289) (355) (348) (347)
----------- ----------- ----------- -----------
Income before income taxes 10,604 12,635 12,934 12,059
Income taxes 4,186 4,936 4,728 3,723
----------- ----------- ----------- -----------
Income before minority interest 6,418 7,699 8,206 8,336
Minority interest (59) (39) (58) (68)
----------- ----------- ----------- -----------
Net income 6,359 7,660 8,148 8,268
Dividend - preferred stock (90) (90) (90) (90)
----------- ----------- ----------- -----------
Income available to common stockholders $ 6,269 $ 7,570 $ 8,058 $ 8,178
=========== =========== =========== ===========
Earnings per share
Basic shares $ 0.15 $ 0.19 $ 0.20 $ 0.19
=========== =========== =========== ===========
Diluted shares $ 0.14 $ 0.17 $ 0.18 $ 0.18
=========== =========== =========== ===========
Weighted average shares outstanding
Basic shares 40,743,784 40,808,345 40,891,896 42,410,791
=========== =========== =========== ===========
Diluted shares 45,142,033 45,739,277 45,962,109 46,082,240
=========== =========== =========== ===========
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
=========== =========== =========== ===========
28
FISCAL 2002*(RESTATED) Restated* Restated* Restated* Restated*
----------- ----------- ----------- -----------
First Second Third Fourth
Quarter Quarter Quarter Quarter
Net sales $ 33,639 $ 34,014 $ 30,146 $ 32,548
Cost of goods sold 24,184 23,977 21,005 23,455
----------- ----------- ----------- -----------
Gross profit 9,454 10,037 9,141 9,093
Selling, general and admin expense 4,268 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
=========== =========== =========== ===========
Earnings per share
Basic $ 0.14 $ 0.11 $ 0.03 $ 0.14
=========== =========== =========== ===========
Diluted $ 0.11 $ 0.10 $ 0.03 $ 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
=========== =========== =========== ===========
29
* - 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 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.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
In August 2003, Grant Thornton resigned as our independent accountants.
Grant Thornton audited our financial statements for the fiscal year ended
December 31, 2002, which were included in our Form 10-K/A for the fiscal year
ended December 31, 2002 and our Form 10-K/A for the fiscal year ended December
31, 2003. Grant Thornton has not withdrawn its opinion, however, in consultation
with Grant Thornton, we have decided to have our financial statements for the
fiscal year ended December 31, 2002 that are included in this Form 10-K audited
by Rachlin, Cohen & Holtz LLP.
ITEM 9A. CONTROLS AND PROCEDURES
Attached as exhibits to this Form 10-K are certifications of our Chief
Executive Officer (CEO) and Chief Financial Officer (CFO), which are required in
accordance with Rule 13a-14 of the Securities Exchange Act of 1934, as amended
(the Exchange Act). This "Controls and Procedures" section includes information
concerning the controls and controls evaluation referred to in the
certifications.
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
We conducted an evaluation