10-K/A 1 d10ka.htm FORM 10-K/A Form 10-K/A
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K/A

(Amendment No. 1)

 

þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2006

or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File No. 001-13112

POINT BLANK SOLUTIONS, INC.

(Exact name of registrant as specified in its charter)

 

Delaware   11-3129361

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

2102 SW 2ND St.

Pompano Beach, Florida

  33069
(Address of principal executive offices)   (Zip Code)

(954) 630 0900

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12 (b) of the Act: None

Securities registered pursuant to Section 12 (g) of the Act: Common Stock, $0.001 Par Value

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    YES  ¨    NO  þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    YES  ¨    NO  þ

Indicate by check mark whether the issuer (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  ¨    NO  þ

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  ¨            Accelerated filer  þ            Non-accelerated filer  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act).    YES  ¨    NO  þ

The aggregate market value of the voting and non-voting stock held by non-affiliates computed by reference to the price at which the stock was last sold, or the average bid and asked price of such stock, as of the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $185,486,170. This disclosure excludes 15,696,836 shares of Common Stock held by directors, executives, officers and our former Chairman and Chief Executive Officer and his wife. 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.

The number of shares of Common Stock outstanding as of September 26, 2007 was 51,027,535.

DOCUMENTS INCORPORATED BY REFERENCE

None

 

 

 


Table of Contents

TABLE OF CONTENTS

 

PART I   

Item 1.      BUSINESS

   2

Item 1A.  RISK FACTORS

   8

Item 1B.  UNRESOLVED STAFF COMMENTS

   13

Item 2.      PROPERTIES

   14

Item 3.      LEGAL PROCEEDINGS

   15

Item 4.      SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

   17
PART II   

Item 5.      MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

   18

Item 6.      SELECTED FINANCIAL DATA

   23

Item 7.      MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

   65

Item 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

   79

Item 8.      FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

   79

Item 9.      CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

   80

Item 9A.  CONTROLS AND PROCEDURES

   80

Item 9B.  OTHER INFORMATION

   87
PART III   

Item 10.   DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

   88

Item 11.   EXECUTIVE COMPENSATION

   93

Item 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

   107

Item 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

   108

Item 14.   PRINCIPAL ACCOUNTANT FEES AND SERVICES

   111
PART IV   

Item 15.   EXHIBITS AND FINANCIALS STATEMENT SCHEDULES

   112


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AMENDMENT NO. 1 EXPLANATORY NOTE

This amendment on Form 10-K/A (the “Form 10-K/A”) amends our annual report for the fiscal years ended December 31, 2006 and December 31, 2005, originally filed with the Securities and Exchange Commission (“SEC”) on October 1, 2007 (the “Form 10-K”). We are filing this Form 10-K/A to present certain restated condensed consolidated financial information for interim periods during 2005 and 2004 and further explain certain elements of the restated consolidated balance sheets dated as of December 31, 2004 and 2003. This Form 10-K/A also contains additional information in certain footnotes to the financial statements and Management’s Discussion and Analysis and includes non-material revisions to the presentation of the Company’s financial statements.

This Form 10-K/A continues to speak as of the date of the Form 10-K and no attempt has been made in this Form 10-K/A to modify or update disclosures in the Form 10-K except as noted above. This Form 10-K/A does not reflect events occurring after the filing of the Form 10-K or modify or update any related disclosures and information not affected by the amendment is unchanged and reflects the disclosure made at the time of the filing of the Form 10-K with the SEC. In particular, any forward-looking statements included in this Form 10-K/A represent management’s view as of the filing date of the Form 10-K. Accordingly, this Form 10-K/A should be read in conjunction with any documents incorporated by reference therein and our filings made with the SEC subsequent to the filing of the Form 10-K, including any amendments to those filings.

EXPLANATORY NOTE

This Annual Report on Form 10-K includes consolidated financial statements for our years ended December 31, 2006 and 2005. In addition, this Annual Report on Form 10-K contains our restated consolidated financial statements for the years ended December 31, 2004 and 2003. This Annual Report also includes restated selected financial data for the years ended December 31, 2002 and 2001.

The restated financial information contained within this Annual Report on Form 10-K reflects the correction of errors made in the application of U.S. generally accepted accounting principles (“GAAP”). For a discussion of the significant restatement adjustments and the background leading to the adjustments, see Note 2—“Restatements” to the consolidated financial statements included in Item 8 of this Annual Report.

We have not amended our prior annual reports on Form 10-K or quarterly reports on Form 10-Q for the periods affected by the restatement adjustments. The consolidated financial statements and related financial information contained in such reports are superseded by the information in this Annual Report on Form 10-K and the consolidated financial statements and related financial information contained in such previously filed reports should not be relied upon.

 

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PART I

 

Item 1. BUSINESS

General

Unless stated to the contrary, or unless the context otherwise requires, references to “DHB,” “the Company,” “we,” “our” or “us” in this report include DHB Industries, Inc. and subsidiaries.

We are a leading manufacturer and provider of bullet- and projectile-resistant garments, 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 government agencies. We also manufacture and distribute sports medicine, health support and other products, including a 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. All products are sold through contracts, a corporate sales force, sales agents and a network of distributors. We were incorporated in 1994.

Recent Developments

Regulatory Investigations

We are cooperating with investigations by the U.S. Securities and Exchange Commission (the “SEC”) and the United States Attorney’s Office for the Eastern District of New York. These investigations concern:

 

   

executive compensation issues involving David H. Brooks (“Mr. Brooks”), our former Chairman and Chief Executive Officer, Sandra Hatfield (“Ms. Hatfield”), our former Chief Operating Officer, and Dawn Schlegel (“Ms. Schlegel”), our former Chief Financial Officer;

 

   

related party transactions with our former Chairman and Chief Executive Officer, his family members and entities controlled by him or his family members;

 

   

accounting errors and irregularities resulting in misstatements in our books and records and in our publicly filed consolidated financial statements;

 

   

material weaknesses in internal controls; and

 

   

income and payroll tax issues.

See Item 3—LEGAL PROCEEDINGS for a discussion of investigations. The investigations stem from accounting irregularities and disclosure issues in the consolidated financial statements for the years ended December 31, 2004 and 2003, as well as quarterly financial reports for those years and for the first three quarters of 2005. As a result of the irregularities, we did not file a 10-K for the year ended December 31, 2005, nor did we file any interim reports on Form 10-Q for any of the quarters beyond September 30, 2005.

Investigation by the Civil Division of the Department of Justice

In addition to the investigations described above, we are cooperating with an industry-wide investigation by the Civil Division of the U.S. Department of Justice into the manufacture and sale of body armor products containing Zylon, a ballistic yarn produced by an unrelated company. We are producing documents and witnesses for interviews in this investigation. We cannot reasonably predict the outcome of this investigation.

De-listing from American Stock Exchange

As a result of delayed filing of required reports with the SEC, we failed to satisfy certain of the continued listing standards of the American Stock Exchange (AMEX). On August 29, 2006, our stock was de-listed from the AMEX. Since August 29, 2006, our Common Stock has been quoted on the Pink Sheets Electronic Quotation Service (the “Pink Sheets”).

 

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Withdrawal of Reliance on 2004 and 2003 Consolidated Financial Statements

On August 17, 2006, the Executive Committee of our Board of Directors concluded that our previously issued consolidated financial statements for the fiscal years ended December 31, 2004 and December 31, 2003, and the related financial information for those periods and interim periods, should no longer be relied upon.

On March 31, 2006, while under previous management, we announced that our quarterly reports on Form 10-Q for the first three quarters of 2005 also should not be relied upon. We conducted an analysis of our historical information and records. Discrepancies were noted with respect to the reasonableness of estimates and accuracy of reported sales, cost of sales, inventory, gross profit, and income levels in fiscal years 2003 and 2004. Further, our management concluded that the materiality of these inaccuracies with respect to inventory, gross profit, and net income values reported in these prior periods required a restatement of our consolidated financial statements for the years ended December 31, 2004 and 2003.

In the process of making its determination with regard to historical financial statements, the Executive Committee also considered the conclusions of our interim financial management that our existing internal controls over financial reporting did not provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP.

Changes to Controls and Procedures

As more fully explained in Item 9A—CONTROL AND PROCEDURES, we have taken and continue to take steps to establish an appropriate system of internal controls and to assess the impact of the aforementioned accounting irregularities. Among the steps taken are the following:

 

   

The replacement of our Chief Executive Officer (“CEO”), Chief Financial Officer (“CFO”) and certain directors with new senior management and several new independent directors;

 

   

The hiring of new accounting and financial management, as well as other key management personnel;

 

   

The design and implementation of comprehensive new accounting and internal control policies and procedures;

 

   

The assessment and quantification of the magnitude of the accounting irregularities and preparation of restated consolidated financial statements for those periods affected; and

 

   

The extensive use of outside independent counsel and consultants to advise us in our remediation program.

Products and Markets

We manufacture and sell a variety of body armor products through our subsidiaries Point Blank Body Armor, Inc. (Point Blank) and Protective Apparel Corporation of America (PACA). We also produce and sell a variety of sports medicine, health support and other products through our subsidiary NDL Products, Inc. (NDL).

Our body armor products and related accessories protect individuals from bodily injury and death from multiple threats including bullets, knives, other sharp instruments and shrapnel fragments. We design, build and sell advanced systems that safeguard our users from specific threats. Our designs fall into two general categories based on mission and operating environment. Our products are designed for military and commercial customers.

Our military models are built to meet military specifications and undergo a rigorous test program that involves first article tests as well as routine performance testing at independent U.S. laboratories. Although we sell some vests to other government agencies, our principal customer for these vests is the U.S. military. The Armed Forces and other federal agencies purchase our products directly or through the U.S. General Services Administration (GSA).

 

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In 1998, the U.S. Army and Marine Corps procured our InterceptorTM Outer Tactical Vest (OTV) system, which is a soft armor vest with pouches for hard armor plates for added ballistic protection over vital organs. 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 address the threat faced.

In 2004, we developed for the U.S. Marines Corps an Armor Protection Enhancement System. This modular system is designed to enhance the current InterceptorTM OTV by providing equivalent protection to areas previously not covered by the InterceptorTM including the underarm, 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.). 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. Through September 30, 2007, we have sold over 750,000 D.A.P.S.

We manufacture and supply the InterceptorTM to the U.S. military through contracts with the U.S. Department of Defense (DOD) and pursuant to the GSA Schedule, a standard purchasing contract issued by the GSA. We developed seven ballistic models of the InterceptorTM that we customize to meet mission requirements and delivered over 1.3 million InterceptorTM OTVs to the U.S. Army.

In 2006, we designed, produced and began marketing the Enhanced Side Ballistic Insert (E.S.B.I.) to be used with the InterceptorTM OTV. We developed this new system to defeat an adaptive enemy and evolving threat. Since its initial introductions, we sold over 550,000 E.S.B.I.

We manufacture and distribute a large variety of standard and specialized commercial products. Our commercial models are principally sold to law enforcement, federal agencies and other government agencies. We test these and our other vests in our own advanced technology center as well as independent U.S. test laboratories to ensure that we meet or exceed National Institute of Justice (NIJ) standards. We sell products to our customers through direct sales and an extensive network of distributors.

The majority of our concealable vests are sold to state and local law enforcement and to federal agencies. These vests are individually sized to provide the optimal fit and protection. We also make corrections body armor products that are used by personnel in corrections facilities and other law enforcement employees who are exposed to threats primarily from knives and other sharp instruments. These vests are constructed with special blended fabrics, stainless steel, titanium and flexible woven fabrics, and are available in both concealable and tactical models. In 2004, we patented the first front opening tactical vest, The Rock, which offers modularity and concealment as well as capacity for tactical upgrades. Our body armor products also include tactical police jackets, unique vests for special agents, corrections vests and K-9 protection.

Our sports medicine, health support and other products include a variety of knee, ankle, elbow, wrist and back supports and braces, along with athletic tape, support bandages, and hot/cold therapy products that assist serious athletes, weekend sports enthusiasts and general consumers in their respective sports and everyday activities. A small percentage of the sports medicine, health supports and protective product sales are protective knee and elbow pads sold to the U.S. military pursuant to marketing and distribution methods discussed above.

Our health support products sell under the brand FLEX-AIDTM, along with various private labels or store brands. Apart from sales to the military, we market these products to a variety of distribution points with an emphasis on major retailers and wholesalers. The store brand and private label programs are offered to consumers through mass merchandisers, chain drug stores, food chains, independent sporting goods retailers, independent pharmacies, catalogs, wholesalers and e-commerce. Our customer list includes national retail establishments and established wholesalers in the healthcare industry.

 

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Research and Development

Our research and development program is a key element in our effort to maintain and improve our position in the market for protective body armor. We are constantly exploring new and innovative solutions to the threats encountered by our customers. It is our goal to be the industry leader in research and development.

To further research and development goals, we opened our new Technology Center in 2005. The Technology Center has allowed us to refine our testing and evaluation of new ballistic materials and allows us to develop and evaluate products and materials in a shorter period of time than was previously possible.

Our two ballistic test laboratories are equipped to perform testing of both standard and unusual ballistic and fragmentation threats that exceed NIJ and international requirements. This commitment to research and development allows for the rapid development of products to meet the evolving needs of the marketplace.

Research and development personnel have an aggregate of over 100 years of ballistic research and development experience, including more than 40 years of experience with NIJ certification requirements. Many research and development personnel previously held positions of responsibility with other companies in the industry. Research and development projects consist of internally-funded efforts as well as government-funded efforts under fixed price government contracts. Collaborative efforts to customize products for specific customers are an important part of the research and development process, resulting in several new products such as D.A.P.S., E.S.B.I. and ballistic blankets.

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, 2006, 2005, 2004 and 2003 were approximately $1.7 million, $1.7 million, $1.3 million and $0.4 million, respectively.

Raw Materials and Manufacturing

We manufacture all of our bullet-, fragmentation- and projectile-resistant products. Most of the raw materials used in the manufacture of ballistic-resistant garments consist of fabrics, which are patented by major corporations and purchased from weaving companies.

We have letters of commitment with our raw materials suppliers that provide 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. The letters of commitment are legally enforceable and include a commitment to supply raw materials for the duration of the 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. The letters of commitment that are related to non-DOD contracts give us the right to purchase raw materials at the suppliers’ published prices.

If any of the manufacturers of any of these ballistic fibers ceases production for any reason, we have the capability to substitute fabrics containing alternative fibers. Should the fabrics originally used and the respective alternatives become unavailable for any reason, we may be unable to replace them with materials of like weight and strength. Thus, if the supply of any of these materials were reduced or cut off or if there were a price increase for 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 as well as our short-term projected manufacturing requirements. This policy may increase our inventory carrying costs but has helped avoid manufacturing disruptions and in our view has become a marketplace advantage.

From 2003 through 2006, shortages of required raw materials limited our ability to fully meet 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,

 

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the impact of shortages was not completely eliminated due to limits on the availability of individual ballistic fibers. During the period from 2004 through 2006, shortages of raw materials limited our 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.

We presently outsource the production of a majority of our NDL braces to a subcontractor in China. During 2006, approximately 65% of our sports and health sales were produced by this subcontractor. This subcontractor produces braces that are sold through our retail and wholesale distribution points. We have quality control procedures in place to ensure that the subcontractor’s work and materials conform to our quality standards.

Patents and Trademarks

Intellectual property rights that apply to 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 hold six U.S. patents with varying expiration dates through 2024. We also have numerous patents pending for our protective armor designs and integrated technologies. While patents are an important element of protecting market share, our business as a whole is not materially dependent on any one patent.

To distinguish our products from those of our competitors, we have obtained certain trademarks and trade names for our products, and maintain advertising programs to promote our brands and identity. In total, we hold 30 trademarks.

We also protect certain details about our products and strategies as trade secrets, keeping confidential the information that is believed to provide us a competitive advantage. Ongoing programs designed to maintain the confidentiality of such information are enforced.

Customers

Products are sold domestically to the U.S. military, state and local law enforcement agencies, correctional facilities, federal agencies and distributors. Sales to the U.S. military or federal law enforcement agencies, directly or through a subcontractor, accounted for 84%, 87%, 81% and 80% of our revenues for the years ended December 31, 2006, 2005, 2004 and 2003, respectively. The remainder of our sales is primarily to domestic state and local law enforcement agencies, security and intelligence agencies, distributors, federal and state correctional facilities and, for our NDL braces, to major retailers.

With the exception of the U.S. government, no customer accounted for 10% or more of our total revenues in 2006, 2005, 2004 or 2003.

Backlog

As of December 31, 2006, we had orders in place on our major contracts for sales totaling approximately $136 million, all of which were delivered in 2007. As of July 31, 2007, the backlog of sales orders in place was approximately $70 million. These contracts are all firm fixed price contracts with the U.S. military and our other customers, none of which 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 to unilaterally terminate contracts for the convenience of the government. To date, the U.S. government has not unilaterally terminated any order made under an existing contract, and we do not consider this right to terminate to be an impediment to our sales to the U.S. government.

Marketing and Distribution

Due to the acceptance of the InterceptorTM OTV system by the U.S. military, performance in the industry, and related marketing efforts, our products and brands are recognized in the military, law enforcement and corrections communities. We seek to enhance our reputation as a premier provider of technologically advanced body armor to these communities through aggressive marketing and efficient distribution.

 

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We employ customer support representatives and sales representatives under the direction of our Head of Global Sales. 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, orders are filled through direct contract awards or through internal customer service representatives. Strong relationships with our distributors are critical to this marketing strategy. We focus on protecting our distribution network through advertising and additions to our product line.

Certain sales to federal agencies are made pursuant to standard purchasing contracts of a type issued by the GSA, and are commonly referred to as GSA Schedules. Participation in the GSA is viewed as a key component to accessing sales to government entities.

Given the high percentage of sales to U.S. government entities and the importance of these continued sales to our revenue stream, we maintain a government and international liaison office in Washington, D.C. This office facilitates direct sales to governmental customers and potential international customers who can visit the office to examine products prior to purchase. Further, our representatives in this office focus on building relationships with various government customers and potential international customers as well as potential distributors and international agents.

Government and Industry Regulations and Standards

Ballistic and fragmentation resistant garments and accessories 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 international customers. 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. 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 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 sales of correctional armor. We regularly submit vests to independent laboratories for testing under these standards.

Competition

The ballistic-resistant garment business is highly competitive and fragmented. We compete by combining high quality products with on-time delivery and personalized customer service. Our principal competitors include a number of regionalized manufacturers, including BAE Systems, Inc., Ceramic Protection Corporation and U.S. Armor Corporation. Because there are no published reports concerning the market, and many competing companies are privately held, we are unable to estimate the size of the market.

We focus on the following competitive strategies to maintain and improve our market and competitive position:

Execution and customer service—We focus on order execution and on-time delivery of products. Products offered are critically important to the safety of military and law enforcement personnel and reliable on-time delivery is essential. Our ability to execute orders and deliver products on time, backed by knowledgeable and professional customer service, has provided a key competitive advantage.

Understanding government needs—A majority of our revenues are dependent upon U.S. government contracts. The close relationships our management and sales personnel have developed with the military, federal, state and local agencies that use our products allow us to design products that respond to government needs and provide the credibility to effectively compete for contracts.

 

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Product and brand recognition—We seek to maintain a favorable reputation through years of supplying the U.S. military, federal, state and local governments and agencies with recognized models that are sold under a defined brand.

Broad product lines—We sell a full product line 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.

A proud and motivated workforce—Our employees understand the importance of our products in saving lives, and their commitment to the consistency and quality of our products represents an important group mission—to protect and enhance the lives of the users of our products.

Network of distributors—We have spent many years developing and training a network of distributors throughout the U.S. The effectiveness of our marketing effort is substantially dependent upon the professionalism and motivation of our distribution network. We provide support through education and training, sales and marketing assistance and accessibility, all of which are designed to strengthen this network.

Employees

As of September 26, 2007, we had approximately 1,200 full-time employees. The employee population is made up of our officers, group or area supervisors, manufacturing, shipping and warehousing, quality control, customer service, sales, technical/research and development, and office and administration personnel. Approximately 70 employees are represented by a union and participate in collective bargaining.

We also contract with various independent sales representatives who, together with our sales executives, are responsible for sales throughout the U.S.

We believe we have a satisfactory relationship with our employees and independent sales representatives.

Available Information

Our most recent Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports may be viewed or downloaded electronically, free of charge, from our website: http://www.dhbindustries.com as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Please note, however, that with the exception of Current Reports and this Annual Report, we have not filed periodic reports with the SEC for periods after September 30, 2005, and we have previously cautioned that financial information contained in our Annual Reports for the fiscal years ending December 31, 2004 and December 31, 2003, and our Quarterly Reports for the interim periods during such years and the first three quarter of 2005, should not be relied upon. In addition, you may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. To obtain information on the operation of the Public Reference Room, you may call the SEC at 1-800-SEC-0330. Our recent press releases are also available to be viewed or downloaded electronically at http://www.dhbindustries.com. We will also provide electronic copies of our SEC filings free of charge on request. Any information posted on or linked from our website is not incorporated by reference into this Annual Report on Form 10-K. The SEC maintains an Internet site at http://www.sec.gov that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC. We are domiciled in the United States of America and have no significant foreign revenue.

 

Item 1A. RISK FACTORS

The risks and uncertainties described below are not the only risks and uncertainties that we face. Additional risks and uncertainties not currently known or currently deemed not to be material also may impair business operations. If any of the following risks actually occur, our business, results of operations and financial condition could be adversely affected.

 

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We are subject to ongoing investigations, which could require us to pay substantial fines or other penalties or subject us to other sanctions. We cannot predict the outcome or the timing of developments in these matters.

We are subject to ongoing investigations by the SEC and other regulatory authorities. These investigations stem from alleged accounting irregularities associated with our financial statements for the years ended December 31, 2004 and 2003 and interim periods during 2005. While we are presently cooperating fully with the above-mentioned ongoing investigations, we cannot predict when the investigations will be completed or the timing of any other developments, nor can we predict what the results of these matters may be.

We are also subject to an industry-wide investigation by the Civil Division of the U.S. Department of Justice into the manufacture and sale of body armor products containing Zylon, a ballistic yarn produced by an unrelated company. We cannot reasonably predict the outcome of this investigation.

We are a defendant in a securities class action and shareholder derivative action.

On July 13, 2006, we signed a Memorandum of Understanding to settle a securities class action and a shareholder derivative action. A Stipulation of Settlement, dated as of November 30, 2006, which contains the terms of the settlement initially outlined in the Memorandum of Understanding, was executed on behalf of the parties and submitted to the United States District Court, Eastern District of New York for its approval on December 15, 2006, and received preliminary approval on July 3, 2007. See Item 3—LEGAL PROCEEDINGS. The class would receive $34.9 million in cash and 3,184,713 shares of our Common Stock under the settlement, which is subject to final court approval. The derivative action is being settled in consideration of the adoption of certain corporate governance provisions and payment of $0.3 million in legal fees and expenses to the lead counsel in the derivative action. That settlement also is subject to final court approval. There can be no assurance whether or when the court will grant final approval of the proposed settlements. Also, if the court does not grant final approval of the proposed settlement, we cannot predict what the ultimate outcome of this matter will be.

We face continuing risks in connection with the restatement of our financial statements for the years ended December 31, 2004 and 2003, as discussed in Note 2 of the Consolidated Financial Statements.

These risks include:

 

   

The risk that, notwithstanding our efforts to date to identify and remedy all material errors in those financial statements, we may discover other errors in those financial statements in the future; and

 

   

the risk that the cost of identifying and remedying those errors will be high.

We have identified a number of material weaknesses in our internal control over financial reporting, which could continue to impact negatively our ability to report our results of operations and financial condition accurately and in a timely manner.

As required by Section 404 of the Sarbanes-Oxley Act of 2002, our management has conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2006. We identified a number of material weaknesses in our internal control over financial reporting and concluded that, as of December 31, 2006, we did not maintain effective control over financial reporting based in part on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. For a detailed description of these material weaknesses, see Item 9A—CONTROLS AND PROCEDURES. Each of the material weaknesses results in more than a remote likelihood that a material misstatement of our annual or interim financial statements will not be prevented or detected. As a result, we must perform extensive additional work to obtain reasonable assurance regarding the reliability of our financial statements. Even with this additional work, given the number of material weaknesses identified, there is a risk of additional errors not being prevented or detected, which could result in additional restatements. Moreover, other material weaknesses may be identified.

 

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We have extensive work remaining to remedy the material weaknesses in our internal control over financial reporting.

We are in the process of remedying the identified material weaknesses, and this work will continue during 2007 and perhaps beyond. For a detailed description of these remedial efforts, see Item 9A—CONTROLS AND PROCEDURES. There can be no assurance as to when all of the material weaknesses will be remedied. Until the remedial efforts are completed, management will continue to devote significant time and attention to these efforts, which may be to the detriment of our operations. We will continue to incur expenses associated with the additional procedures and resources required to prepare our consolidated financial statements. Certain of the remedial actions, such as hiring additional qualified personnel to implement reconciliation and review procedures, will be ongoing and will result in us incurring additional costs even after the material weaknesses are remedied. As a result, our financial condition and results of operation may be negatively affected by the cost of these remediation measures.

If internal control over financial reporting remains ineffective, our business and future prospects may suffer.

If we are unsuccessful in implementing or following our remediation plan, or fail to update our internal control over financial reporting as our business evolves or to integrate acquired businesses into our controls system, we may not be able to timely or accurately report our financial condition, results of operations or cash flows or to maintain effective disclosure controls and procedures. If we are unable to report financial information in a timely and accurate manner or to maintain effective disclosure controls and procedures, we could be subject to, among other things, regulatory or enforcement actions by the SEC and a general loss of investor confidence, any one of which could adversely affect our business prospects and the market value of our Common Stock.

Further, there are inherent limitations to the effectiveness of any system of controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. We could face additional litigation exposure and additional SEC enforcement or other regulatory action if further restatements were to occur or other accounting-related problems emerge. In addition, any future restatements or other accounting-related problems may adversely affect our financial condition, results of operations and cash flows.

Our business is materially dependent upon raw materials that have been subject to shortages in recent years.

A substantial majority of revenues and net income is dependent upon the sale of our ballistic-resistant products. Substantially all of the raw materials used in the manufacturing of ballistic-resistant products consist of fabrics containing fibers that are patented by major corporations and are purchased from weaving companies. Accordingly, we have limited sources of such required raw materials for our ballistic-resistant products. In recent years, shortages of such required raw materials limited the quantity of products that we could produce, and demand for such products exceeded that amount. Although we were able to mitigate partially the impact of these shortages by using a variety of ballistic fibers instead of one type of fiber, the impact of these shortages was not completely eliminated because there are 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 reduce the effects of any future shortages; however, it increases our inventory carrying costs. Further, notwithstanding efforts to increase inventory of required raw materials, if any of these manufacturers cease to produce these needed materials or shortages persist or worsen, we may be required to use other fabrics in our ballistic-resistant products. In such event, there is no assurance that we would be able to identify alternate fabrics with comparable performance and comparable cost. We expect any material future shortages of required raw materials to have a material adverse effect on our business, financial condition, results of operations and liquidity.

 

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Increases in the price paid for raw materials may adversely affect profit margins.

If we experience significant increases in the prices paid for raw materials, we may be unable to pass through to our customers such increases in cost of raw materials. If we are unable to pass through all or a portion of such cost increases to our customers, profit margins on such products may be reduced. Fixed price contracts are especially susceptible to having profit margins reduced by increases in the price of raw materials.

Our products are used in situations that are inherently risky. Accordingly, we may face product liability and other claims exposure 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 these products for their intended purposes, failure to use them properly, their malfunction and, in some circumstances, even correct use of these products could result in serious bodily injury or death. We cannot guarantee that our insurance coverage would be sufficient to cover the payment of any potential claim. 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. In addition, we cannot guarantee that our current insurance or any other insurance coverage will continue to be available or, if available, that it will be obtainable at a reasonable cost. The cost of obtaining insurance coverage has risen substantially due to increased sales levels and increased volatility within the reinsurance industry. Any material uninsured loss could have a material adverse effect on our business, financial condition, results of operations and liquidity. If we are unable to obtain product liability coverage we may be prohibited from bidding for orders from certain government customers because many governmental agencies currently require such insurance coverage. Any 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.

We are engaged in a highly competitive marketplace, which demands that producers continue to develop new products. Our business will be adversely affected if we are not able to continue to develop new and competitive products.

We face a number of well-financed competitors. In order to remain competitive, we must continue to develop innovative products that meet the needs of our customers.

We may have difficulty protecting our proprietary technology.

Intellectual property and proprietary technology are important to the success of our business. It is difficult to monitor all possible misappropriations and unauthorized access to our intellectual property and technology. Further, litigation involving these matters can be costly, with no guarantee of ultimate success. Dissemination or dilution of the aforementioned property and technology could have an adverse effect on our business, financial condition, results of operations and liquidity.

A substantial portion of our revenue is dependent on U.S. military business, and a decrease in such business could have a material adverse effect on us.

U.S. military contracts account for the majority of our revenue. The U.S. military funds its contracts in increments based on annual authorization and appropriation, as well as supplemental bills passed by Congress and approved by the President, which may not be enacted or may provide funding that is greater than or less than the amount of the contract. Changes in the U.S. military’s budget, spending allocations or the timing of such spending could adversely affect our ability to receive future contracts. Our contracts with the U.S. military do not have a minimum purchase commitment, and the U.S. military generally has the right to cancel our contracts unilaterally with limited notice. A significant reduction in U.S. military expenditures for ballistic-resistant products would have a material adverse effect on our business, financial condition and results of operations.

 

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Many of our customers have fluctuating budgets, which may cause substantial fluctuations in our results of operations.

Customers for our products include federal, state, municipal, 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, results of operations and liquidity. 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, or a reduction of forces serving in, 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 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 U.S. government customers 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 direct and indirect costs for the U.S. government under contracts are subject to extensive regulation and audit by the Defense Contract Audit Agency, an arm of the DOD. Responding to governmental audits, inquiries or investigations may involve significant expense and divert our management’s attention from our business operations. 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, results of operations and liquidity.

Growth of operations may strain resources and if we fail to successfully manage growth, our business could be adversely affected.

Increased orders for body armor for military personnel as well as the introduction of new products have placed, and may continue to place, a 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, financial condition and liquidity.

Environmental issues could adversely affect our business.

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 we cannot currently predict and which may have a material adverse effect on our business or financial condition.

 

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Our stock price is volatile.

The market price and trading volume of our Common Stock is 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 value of our Common Stock may decline regardless of our operating performance or prospects. Factors affecting 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 stock, changes in, or failure to meet, earnings estimates, changes in securities analysts’ buy/sell recommendations, differences between 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. We are presently a defendant in such litigation. Additionally, we are being investigated by the SEC and the U.S. Department of Justice. The outcome of these investigations could result in increased volatility of the market price of our Common Stock. See Item 3—LEGAL PROCEEDINGS.

Our stock is quoted on the Pink Sheets, which may decrease the liquidity of our Common Stock.

On August 29, 2006, the AMEX de-listed our Common Stock because we were not able to file certain periodic reports with the SEC in a timely manner. Since that time our Common Stock has been quoted on the Pink Sheets under the symbol “DHBT.PK.” Broker-dealers often decline to trade in Pink Sheet stocks given that the market for such securities is often limited, the stocks are more volatile, and the risk to investors is greater. Consequently, selling our Common Stock can be difficult because smaller quantities of shares can be bought and sold, transactions can be delayed and securities analyst and news media coverage of our Company may be reduced. These factors could result in lower prices and larger spreads in the bid and ask prices for shares of our Common Stock as well as lower trading volume. Although we intend to apply for the listing of our Common Stock on a national securities exchange once we are current in our periodic reporting obligations with the SEC, we cannot guarantee that we will be successful in those efforts. Investors should realize that they may be unable to sell shares of our Common Stock that they purchase. Accordingly, investors must be able to bear the financial risk of losing their entire investment in our Common Stock.

Our Common Stock may be subject to penny stock rules, which may make it more difficult for our stockholders to sell their Common Stock.

Broker-dealer practices in connection with transactions in “penny stocks” are regulated by certain penny stock rules adopted by the SEC. Penny stocks generally are equity securities with a price of less than $5.00 per share. The penny stock rules require a broker-dealer, prior to purchase or sale of a penny stock not otherwise exempt from the rules, to deliver to the customer a standardized risk disclosure document that provides information about penny stocks and the risk in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction, and monthly account statements showing the market value of each penny stock held in the customer account. In addition, the penny stock rules generally require that, prior to a transaction in a penny stock, the broker-dealer make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market of a stock that becomes subject to the penny stock rules.

 

Item 1B. UNRESOLVED STAFF COMMENTS

We have received written comments from the staff of the Division of Corporation Finance of the SEC (the “Staff”) relating to our Form 10-K for the fiscal year ended December 31, 2004, our Form 10-Q for the period ended June 30, 2005 and our Form 10-Q for the period ended September 30, 2005. The remaining comments

 

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relate principally to our accounting treatment of: (i) transactions where we provided raw materials to Tactical Armor Products, Inc. for use in the manufacture of our products; (ii) cashless exercise provisions for stock options; and (iii) certain inventory charges. We have agreed with the Staff’s comments relating to these matters and we are addressing them through the financial statements and restated financial statements included in this Annual Report on Form 10-K. For a discussion of the effects of certain corrections on our accompanying restated consolidated balance sheets and consolidated statements of operations, cash flows and stockholders’ equity for the years ended December 31, 2004 and 2003 and a discussion of the nature of the adjustments made to the balances, please see Note 2 to our consolidated financial statements included in this Annual Report on Form 10-K.

In addition, the Staff’s comments included a request that we file our June 2004 and December 2004 contracts with the U.S. Army as exhibits to this Annual Report on Form 10-K. By letter dated September 7, 2007, we informed the Staff that we are contacting the appropriate U.S. Army officers to obtain complete copies of both contracts and to seek permission from the U.S. Army to publicly file these contracts or portions thereof. Accordingly, as of the date of this Annual Report on Form 10-K, this Staff comment remains unresolved.

 

Item 2. PROPERTIES

Our general policy is to lease, rather than own, our business locations. Our lease agreements require us to pay our proportionate share of taxes, common area expenses, insurance and related costs of the rental properties. Our management believes that the properties we occupy are, in general, suitable and adequate for the purposes for which they are used. The leased facilities consist of the following:

Corporate Headquarters and Manufacturing Facility

We lease a 104,000 square foot manufacturing facility with administrative offices at 2102 SW 2nd Street, Pompano Beach, Florida. During 2006, our corporate headquarters were moved to this location. The lease expires on April 30, 2014, and we may renew the lease for five years, at our option.

Other Manufacturing Facilities

We also lease the following manufacturing facilities:

 

 

 

A 61,772 square foot manufacturing facility with administrative offices at 600 SW 12th Avenue, Deerfield Beach, Florida. The lease expires on April 30, 2013.

 

   

A 60,060 square foot manufacturing facility with administrative offices at 179 Mine Lane, Jacksboro, Tennessee. The lease expires on August 11, 2011.

 

   

A 67,000 square foot office and manufacturing facility located at 4031 N.E. 12th Terrace, Oakland Park, Florida. The lease expires on December 31, 2010.

Sales Offices

We lease the following sales office facilities:

 

   

A 2,192 square foot government and international liaison sales office at 1667 K Street NW, Suite 650, Washington, DC. The lease expires on April 30, 2011, and we may renew the lease for five years, at our option.

 

 

 

A 3,300 square foot sales office at 1830 SW 2nd Street, Pompano Beach, Florida. The lease expires on April 8, 2008, and we may renew the lease for four years, at our option.

 

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Item 3. LEGAL PROCEEDINGS

SEC Investigation

We are cooperating with investigations by the SEC and the United States Attorney’s Office for the Eastern District of New York. These investigations concern (1) executive compensation issues involving our former Chairman and CEO, our former COO and our former CFO; (2) related party transactions with our former Chairman and CEO, his family members and entities controlled by him or his family members; (3) accounting errors and irregularities resulting in misstatements in our books and records and in our publicly filed financial statements; (4) material weaknesses in internal controls; and (5) income and payroll tax issues. These investigations stem from accounting irregularities and disclosure issues in the consolidated financial statements for the years ended December 31, 2004 and 2003, as well as in the quarterly financial reports for those years and for the first three quarters of 2005. As a result of the impact of these irregularities, we did not file a 10-K for the year ended December 31, 2005, nor did we file any interim reports on Form 10-Q for any of the quarters beyond September 30, 2005.

We are in the process of implementing a comprehensive remediation plan. We cannot reasonably predict either the timing of the completion of these investigations or their outcome and the effects of their outcome on us.

Investigation by the Civil Division of the Department of Justice

In addition to the investigations described above, we are cooperating with an industry-wide investigation by the Civil Division of the U.S. Department of Justice into the manufacture and sale of body armor products containing Zylon, a ballistic yarn produced by an unrelated company. We are producing documents and witnesses for interviews in this investigation. We cannot reasonably predict the outcome of this investigation.

Securities Class Action and Shareholder Derivative Action

During the third and second quarters of 2005, a number of purported class action lawsuits were filed in the United States District Court for the Eastern District of New York against us and certain of our officers and directors. The actions were filed on behalf of purchasers of our publicly traded securities during the period from April 21, 2004 though August 29, 2005. The complaints, which were substantially similar to one another, allege, among other things, that our public disclosures were false or misleading. The lawsuits alleged that our body armor products were defective and failed to meet the standards of our customers, and that these alleged facts should have been publicly disclosed. The lawsuits were ultimately consolidated into a single class action.

During the same time frame, a number of derivative complaints were filed, also in the United States District Court for the Eastern District of New York, against certain of our officers and directors, and in certain cases our former auditors. The complaints, which were substantially similar to one another, allege, among other things, that the defendants breached their fiduciary duties and engaged in fraud, misrepresentation, misappropriation of corporate information, waste of corporate assets, abuse of control and unjust enrichment. The lawsuits were ultimately consolidated into a single shareholder derivative action.

On July 13, 2006, we signed a Memorandum of Understanding to settle the class action and the derivative action. Under the Memorandum of Understanding, the class action would be settled, subject to court approval, for $34.9 million in cash and 3,184,713 shares of our Common Stock. The derivative action also would be settled, subject to court approval, in consideration of the adoption of certain corporate governance provisions and the payment of $0.3 million in legal fees and expenses to the lead counsel in the derivative action.

On July 31, 2006, we completed the funding of, and deposited into escrow the $22.3 million portion of the cash settlement to be provided by us, which was funded by certain transactions entered into by us and our former Chairman and CEO. Our directors’ and officers’ liability insurers funded the remaining portion of the cash settlement, $12.9 million, pursuant to buyouts of the policies. In addition to the cash portion, the settlement called for the issuance of 3,184,713 shares of our Common Stock.

 

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Of the settlement amounts funded on July 31, 2006, we obtained $7.5 million from the proceeds of the exercise by our former Chairman and CEO of a warrant held by him to acquire 3,000,000 shares of our Common Stock at an exercise price of $2.50 per share. The warrant, granted to our former Chairman and CEO pursuant to a warrant agreement dated July 1, 2005, originally had an exercise price of $1.00 per share and originally vested and became exercisable with respect to 750,000 shares on each of July 1, 2007, 2008, 2009 and 2010. As part of the settlement, and pursuant to a warrant exercise agreement described below between us and our former Chairman and CEO, the warrants were accelerated and the exercise price was increased to $2.50 per share. If the settlement is not approved, we are required to cause to be paid to our former Chairman and CEO from the settlement funds being held in escrow $4.5 million, which is the difference between the warrant exercise price of $1.00 per share set forth in the Warrant Agreement and the elevated exercise price of $2.50, multiplied by the 3,000,000 shares involved. Pursuant to the Memorandum of Understanding, the remaining $14.8 million of the amount paid by us for the settlement was funded by our former Chairman and CEO through a purchase in a private placement transaction of 3,007,099 shares of our Common Stock at a price of $4.93 per share. In the event the settlement is not approved, our former Chairman and CEO has the right to sell some or all of these shares back to us in exchange for the amount he paid.

In order to complete the transactions contemplated in the Memorandum of Understanding, on July 31, 2006, we entered into the following agreements with our former Chairman and CEO:

 

   

a release agreement and contractual undertakings;

 

   

a securities purchase agreement;

 

   

a warrant exercise agreement; and

 

   

a registration rights agreement.

Pursuant to the release agreement, our former Chairman and CEO resigned from his position as a member of our Board of Directors and from all other positions held by him in the Company or any of our subsidiaries or affiliates. These resignations were effective July 31, 2006. The release agreement contains general releases from us to our former Chairman and CEO and from him to us. If, however, the settlement is not approved by the court on the same material terms as referred to in the Memorandum of Understanding or if the settlement otherwise does not become effective despite the reasonable best efforts of the parties, the general releases become null and void. Additionally, the former Chairman and CEO agreed to pay all taxes attributable to personal income received by him from the Company, including any fines, penalties or back taxes incurred by us as a result of such income.

Pursuant to the terms of the securities purchase agreement, we sold 3,007,099 shares of our Common Stock directly to our former Chairman and CEO at a price of $4.93 per share. We received proceeds of $14.8 million from this sale, which were used to partially fund the above-mentioned settlement.

Pursuant to the warrant exercise agreement, we permitted our former Chairman and CEO to exercise warrants to purchase 3,000,000 shares of Common Stock that would otherwise not have been exercisable until 2007, 2008, 2009 and 2010, and increased the exercise price of the warrants from $1.00 per share to $2.50 per share.

The registration rights agreement provides for us to register for resale under the Securities Act of 1933, as amended, the shares acquired by our former Chairman and CEO pursuant to the securities purchase agreement and warrant exercise agreement described above. We are not obligated to file a registration statement until after such time as we become current in our filing obligations under the Securities Exchange Act of 1934, as amended.

The Company has agreed to use commercially reasonable efforts to file, and to maintain the effectiveness, of a registration statement related to both the 3,007,099 shares issued in the private placement transaction, as well as the 3,000,000 shares underlying the warrants exercised by the Company’s former Chairman and CEO. In particular, the Company has agreed to use its best efforts to file a registration statement within 30 days following the date upon which the Company becomes current with its reporting obligations under the Securities Exchange Act of 1934 and to have the registration statement declared effective by the SEC within 90-120 days thereafter. However, the Company is not subject to any specified monetary penalties or make whole payments if the Company is unable to meet these deadlines. Accordingly, the Company does not have a registration payment arrangement within the scope of Financial Accounting Standards Board Staff Position EITF 00-19-2, and has not recorded any provisions for potential damages in the event the Company is unable to comply with the aforementioned timing.

A Stipulation of Settlement, dated as of November 30, 2006, which contains the terms of the settlement initially outlined in the Memorandum of Understanding, was executed on behalf of the parties, and first submitted to the United States District Court, Eastern District of New York for its approval on December 15, 2006.

 

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In July of 2007, the United States District Court, Eastern District of New York, granted the lead plaintiffs’ motion for preliminary approval of the above-described settlements of the class action and derivative action. The court has scheduled a hearing for October 5, 2007, to consider and determine whether to grant final approval of the settlement. There can be no assurance that the court will grant final approval of the settlement.

Zylon Voluntary Replacement Program

In 2005, we incurred a cost of $19.2 million associated with increasing reserves to cover potential liability in connection with class action lawsuits filed against certain of our subsidiaries, as well as other companies in the body armor industry, relating to allegations of defective body armor products containing Zylon, a ballistic yarn produced by an unrelated company. The class action lawsuits against us and our subsidiaries were settled without monetary damages with us agreeing to participate in a voluntary vest exchange program. We believe that we have established adequate reserves for any further costs associated with replacing these vests and do not anticipate that the cost of this program will affect future years’ operating results.

 

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None

 

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PART II

 

Item 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market for Common Stock and Dividends

Our Common Stock currently trades in the over-the-counter market and is quoted on the Pink Sheets under the symbol “DHBT.PK.” Previously, it traded on the AMEX, from which it was de-listed on August 29, 2006. The following table shows the range of high and low bid information on the Pink Sheets or the high and low prices on the AMEX for our Common Stock for each quarter in the three-year period ended December 31, 2006. Over-the-counter market quotations from the Pink Sheets reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.

 

            Low      High

2006

   Fourth Quarter      $ 2.09      $ 3.14
   Third Quarter      $ 0.50      $ 3.80
   Second Quarter      $ 1.57      $ 5.02
   First Quarter      $ 4.36      $ 5.43

2005

   Fourth Quarter      $ 2.76      $ 5.03
   Third Quarter      $ 3.51      $ 9.48
   Second Quarter      $ 6.50      $ 9.79
   First Quarter      $ 8.62      $ 19.08

2004

   Fourth Quarter      $ 13.00      $ 22.70
   Third Quarter      $ 10.78      $ 17.40
   Second Quarter      $ 7.42      $ 16.45
   First Quarter      $ 5.05      $ 7.50

As of September 15, 2007, there were approximately 125 holders of record of our Common Stock.

On January 12, 2002, we issued shares of Series A, 12% Convertible Preferred Stock, to Mr. Brooks, which we redeemed on December 15, 2005. During that period, we paid cash dividends on the preferred stock each quarter at a rate of $0.18 per share ($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. No dividends have been paid on our Common Stock during the last four fiscal years.

We currently retain our income from earnings and anticipate that future earnings will also be retained to finance the expansion of our business. Any determination to pay cash dividends on our Common Stock in the future will be at the discretion of our Board of Directors after taking into account various factors, including financial condition, results of operations, current and anticipated cash needs, and restrictions under our credit agreements. Our current credit facility prohibits the payment of dividends on our Common Stock without our lender’s prior written consent.

Warrants to Purchase Shares of our Common Stock

On July 29, 2005, our stockholders approved our 2005 Omnibus Equity Incentive Plan (the “2005 Plan”), which was previously adopted by our Board of Directors. Pursuant to the 2005 Plan, our Compensation Committee is authorized to award options or warrants to purchase up to a total of 2,500,000 shares of our Common Stock to the officers, directors, employees, consultants and other persons who provide services to us or any of our affiliates. Prior to 2005, awards were made under our 1995 Stock Option Plan, which expired ten years from its inception.

 

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On July 13, 2007, our Compensation Committee recommended to our Board of Directors for approval, and the Board approved and adopted, our 2007 Omnibus Equity Incentive Plan (the “2007 Plan”), pursuant to which the Compensation Committee is authorized to award options or warrants to purchase up to a total of 1,250,000 shares of our Common Stock to selected officers, employees, consultants and other persons who render service to us.

We made all of the aforementioned issuances of unregistered securities 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, 2006, we had outstanding options/warrants to purchase shares of our Common Stock, and shares of Common Stock available for future grants of options/warrants under our equity plans, as follows.

Equity Compensation Plan Information (as of December 31, 2006)

 

Plan category

   Number of securities to be
issued upon exercise of
outstanding options,
warrants and rights
    Weighted-average
exercise price of
outstanding options,
warrants and rights
   Number of securities remaining
available for future issuance
under equity compensation
plans (excluding securities

reflected in column (a))
     (a)     (b)    (c)

Equity compensation plans approved by security holders

   1,797,204     $ 4.98    1,272,330

Equity compensation plans not approved by security holders

   800,000 (1)   $ 2.82    —  
                 

Total

   2,597,204     $ 4.32    1,272,330

 

(1) Granted by the Executive Committee of the Board of Directors in connection with new employment agreements.

Stock Buy-back

The following table sets forth information regarding our purchase of issued and outstanding stock.

 

Issuer Purchases of Equity Securities

Period

   Total number of
shares
purchased
   Average
price paid
per share
   Total number of
shares
purchased as
part of publicly
announced
plans or
programs
   Maximum
number of
shares that may
yet be
purchased
under the plans
or programs

October 2005

   755,300    $ 3.97    0    0

November 2005

   513,800      3.71    0    0

December 2005

   661,600      4.24    0    0

January, 2006

   655,000    $ 4.78    0    0

Stockholder Rights Plan

On October 6, 2006, our Board of Directors declared a dividend of one preferred share purchase right for each outstanding share of our Common Stock. The dividend distribution was paid on October 10, 2006 (the “record date”) to stockholders of record at the close of business on that date. Each right entitles the registered holder to purchase from us one one-thousandth of a share of our Series B Junior Participating Preferred Stock, par value $0.001 per share (the “preferred stock”) at a price of $15.00 per one one-thousandth of a share of preferred stock (the “purchase price”), subject to adjustment. The description and terms of the rights are set forth in a Rights Agreement dated October 6, 2006, as the same may be amended from time to time (the “Rights Agreement”) between us and American Stock Transfer & Trust Company, as rights agent.

 

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Until the earlier to occur of (i) the close of business on the tenth business day following the date of public announcement or the date on which we first have notice or determine that a person or group of affiliated or associated persons (other than the Company, any subsidiary of the Company or any employee benefit plan of the Company, or certain “grandfathered persons” described below) has acquired, or obtained the right to acquire, 15% or more of the outstanding shares of our voting stock without our prior written consent executed on our behalf by our duly authorized officer following express approval by action of at least a majority of the members of our Board of Directors then in office (the “stock acquisition date”) or (ii) the close of business on the tenth business day (or such later date as may be determined by action of the Board of Directors but not later than the stock acquisition date) following the commencement of a tender offer or exchange offer, without our prior written consent, by a person (other than the Company, any subsidiary of the Company or an employee benefit plan of the Company) which, upon consummation, would result in such party’s control of 15% or more of our voting stock (the earlier of the dates in clause (i) or (ii) above being called the “distribution date”), the rights will be evidenced, with respect to any Common Stock certificate outstanding as of the record date, by such Common Stock certificate. For purposes of the Rights Agreement, a grandfathered person is a person who, as of the close of business on October 10, 2006, together with all affiliates and associates, was the beneficial owner of more than 15% of the outstanding shares of our voting stock; provided, that such person together with all affiliates and associates does not increase its or their percentage ownership of the outstanding shares of our voting stock by more than one (1) percentage point without our prior written consent.

The Rights Agreement provides that, until the distribution date (or earlier redemption or expiration of the rights), the rights will be transferred with and only with our Common Stock, new Common Stock certificates issued after the record date upon transfer or new issuances of Common Stock will contain notation incorporating the Rights Agreement by reference. Until the distribution date (or earlier redemption, exchange or expiration of the rights), the surrender for transfer of any certificate for shares of Common Stock outstanding as of the record date, even without such notation or a copy of this summary of rights, will also constitute the transfer of the rights associated with the Common Stock represented by such certificate. As soon as practicable following the distribution date, separate certificates evidencing the rights (“rights certificates”) will be mailed to holders of record of the Common Stock as of the close of business on the distribution date, and such separate certificate alone will then evidence the rights.

The rights are not exercisable until the distribution date. The rights will expire, if not previously exercised, on October 10, 2016 (the “final expiration date”), unless the final expiration date is extended or unless the rights are earlier redeemed or exchanged by us.

The purchase price payable, the number of shares of preferred stock or other securities or property issuable upon exercise of the rights are subject to adjustment from time to time to prevent dilution (i) in the event of a stock dividend on, or subdivision, combination or reclassification of, the preferred stock, (ii) upon the grant to holders of the preferred stock of certain rights or warrants to subscribe for or purchase preferred stock at a price, or securities convertible into preferred stock with a conversion price, less than the then-current market price of the preferred stock or (iii) upon the distribution to holders of the preferred stock of evidences of indebtedness or assets (excluding regular periodic cash dividends or dividends payable in preferred stock) or of subscription rights or warrants (other than those referred to above).

The number of outstanding rights and the number of one one-thousandths of a share of preferred stock issuable upon exercise of each right are also subject to adjustment in the event of a stock split of our Common Stock or a stock dividend on our Common Stock payable in shares of our Common Stock or subdivisions, consolidations or combinations of our Common Stock occurring, in any such case, prior to the distribution date.

Shares of preferred stock purchasable upon exercise of the rights will not be redeemable and will be junior to any of other series of preferred stock we may issue (unless otherwise provided in the terms of such stock). Each share of preferred stock will have a preferential dividend in an amount equal to 1,000 times any dividend declared on each share of Common Stock. In the event of liquidation, the holders of the preferred stock will

 

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receive a preferred liquidation payment of equal to the greater of $1,000 and 1,000 times the payment made per share of Common Stock. Each share of preferred stock will have 1,000 votes, voting together with our Common Stock. In the event of any merger, consolidation or other transaction in which shares of Common Stock are converted or exchanged, each share of preferred stock will be entitled to receive 1,000 times the amount and type of consideration received per share of Common Stock. The rights of the preferred stock as to dividends, liquidation and voting, and in the event of mergers and consolidations, are protected by customary antidilution provisions.

If any person or group (other than the Company, any subsidiary of the Company or any employee benefit plan of the Company or certain grandfathered persons) acquires 15% or more of our outstanding voting stock without the prior written consent of our Board of Directors, each right, except those held by such persons, would entitle each holder of a right to acquire such number of shares of our Common Stock as shall equal the result obtained by multiplying the then current purchase price by the number of one one-thousandth of a share of preferred stock for which each right is then exercisable and dividing that product by 50% of the then current per share market price of our Common Stock.

If any person or group (other than the Company, any subsidiary of the Company or any employee benefit plan of the Company or certain grandfathered persons) acquires more than 15% but less than 50% of our outstanding Common Stock without the prior written consent of our Board of Directors, each right, except those held by such persons, may be exchanged by the Board of Directors for one-half of a share of our Common Stock. The exercise of the rights is also subject to suspension under certain circumstances to enable us to register the shares being issued upon exercise under the Securities Act of 1933, as amended. We are not currently able to file a registration statement as we are not in compliance with our periodic filing requirements under SEC rules and regulations.

If we were acquired in a merger or other business combination transaction where the Company is not the surviving corporation or where our Common Stock is exchanged or changed or 50% or more of our assets or earning power is sold in one or several transactions without the prior written consent of our Board of Directors, each right would entitle the holders thereof (except for the acquiring person) to receive such number of shares of the acquiring company’s common stock as shall be equal to the results obtained by multiplying the then current purchase price by the number of one one-thousandths of a share of preferred stock for which a right is then exercisable and dividing that product by 50% of the then current market price per share of the common stock of the acquiring company on the date of such merger or other business combination transaction.

Effective October 12, 2006, we filed a Certificate of Designation, Preferences and Rights of Series B Junior Participating Preferred Stock with the Secretary of the State of Delaware. Our Board of Directors authorized the filing of this certificate at a meeting of the Board of Directors pursuant to the designation and reservation of 70,000 shares of our preferred stock as Series B Junior Participating Preferred Stock in connection with the Rights Agreement.

 

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Stock Performance

The graph below compares the cumulative total stockholder return on our Common Stock for the last six full fiscal years with the cumulative total returns on the S&P 500 Index and the “peer group” companies listed below for the same period. The graph assumes that $1,000 was invested on January 2, 2001, in each of our Common Stock, the S&P 500 Index and an index compiled by us tracking the peer group companies listed below. The comparisons in the graph below are based on historical data, with our Common Stock prices based on the closing price on the AMEX or last bid information quoted on the Pink Sheets on the dates indicated, and are not intended to forecast the possible future performance of our Common Stock.

Our “peer group,” as determined by management, consists of:

 

   

Ceradyne, Inc.;

 

   

Mine Safety Appliances Company;

 

   

Armor Holdings, Inc.; and

 

   

Force Protection, Inc.

LOGO

 

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Item 6. SELECTED FINANCIAL DATA

ANNUAL SELECTED CONSOLIDATED FINANCIAL INFORMATION

The selected consolidated financial data set forth below for the years ended December 31, 2006, 2005, 2004, 2003, 2002 and 2001 were derived from our consolidated financial statements. The data set forth below should be read in conjunction with Item 7—MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS and our Consolidated Financial Statements and related Notes appearing elsewhere in this Annual Report on Form 10-K.

Income Statement Data (in thousands, except for per share data)

 

      2006     2005     Restated
2004
    Restated
2003
    Restated
2002
    Restated
2001

Net sales

   $ 254,105     $ 343,561     $ 322,276     $ 206,375     $ 118,029     $ 87,664

Cost of goods sold

     196,154       282,653       265,607       177,066       80,303     $ 61,288

Gross profit

     57,951       60,908       56,669       29,309       37,726       26,376

Selling, general and administrative expenses

     42,539       57,223       37,461       29,478       27,245       17,124

Legal settlements and investigations

     13,886       27,246       943       —         —         —  

Employment tax withholding obligation

     4,407       2,358       28,981       737       —         —  

Income (loss) before other income (expense)

     (2,881 )     (25,919 )     (10,716 )     (906 )     10,481       9,252

Interest expense

     1,946       1,798       1,371       1,410       1,645       2,513

Other (income) expense

     (127 )     (551 )     190       1,925       130       42

Income (loss) before income taxes

     (4,954 )     (28,268 )     (11,897 )     (391 )     8,966       6,781

Income taxes (benefit) expense

     286       (250 )     (2,800 )     3,585       (3,672 )     175

Income (loss) before minority interest

     (5,240 )     (28,018 )     (9,097 )     (3,976 )     12,638       6,606

Less minority interest of subsidiary

     82       122       48       (1 )     —         —  

Net income (loss)

     (5,322 )     (28,140 )     (9,145 )     (3,975 )     12,638       6,606

Dividend—preferred stock (related party)

     —         (345 )     (360 )     (360 )     (345 )     —  

Income (loss) available to common stockholders

     (5,322 )     (28,485 )     (9,505 )     (4,335 )     12,293       6,606

Earnings per common share:

            

Basic

     ($0.12 )     ($0.63 )     ($0.23 )     ($0.11 )   $ 0.33     $ 0.21

Diluted

     ($0.12 )     ($0.63 )     ($0.23 )     ($0.11 )   $ 0.29     $ 0.18

Earnings per contingently redeemable share:

            

Basic and Diluted

     $0.00       —         —         —         —         —  

Balance Sheet Data (in thousands)

            

Working capital

   $ 19,349     $ 1,592     $ 44,299     $ 48,755     $ 53,125     $ 20,472

Total assets

     148,199       125,537       109,204       69,304       65,371       40,896

Total current liabilities

     126,776       121,300       62,168       18,273       7,822       16,585

Long-term liabilities

     852       1,484       26,318       22,549       26,204       19,305

Contingently redeemable common stock

     19,326       —         —         —         —         —  

Stockholders’ equity

     992       2,582       20,669       28,483       31,345       5,006

QUARTERLY SELECTED CONDENSED CONSOLIDATED FINANCIAL INFORMATION

Restated 2005 and 2004 quarterly condensed consolidated balance sheets, statements of operations and cash flows including reconciliations of adjustments from previously reported to restated financial information.

The effects of the corrections on the accompanying condensed quarterly consolidated balance sheets, condensed quarterly consolidated statements of operations and condensed quarterly statements of cash flows as of and for the years ended December 31, 2005 and 2004 and a discussion of the nature of the adjustments made to the balances are as follows.

Inventory valuation

During the years ended December 31, 2005 and 2004, certain inventory items were valued at amounts that exceeded their manufactured costs.

Following is an overview of the components of the adjustments shown in the schedules below:

 

  1. Work in process for commercial products was inappropriately valued using a percentage of ending sales prices, which overstated the related inventory.

 

  2. Rebates were credited to revenues and not captured as a reduction of inventory costs.

 

  3. Work in process for military products was overvalued in 2005 and 2004.

 

  4. Finished goods for all periods included inconsistent costing, primarily in connection with military products.

 

  5. The inventory records consisted of Excel worksheets and other documents that were not centrally controlled. This led to a lack of consistency and accountability and increased the level of confusion and inaccuracy. We were not able to locate any historical bills of materials for inventory valuation purposes.

Reserves for inventories

Under GAAP, inventories should be valued at the lower of cost or market. During the years ended December 31, 2005 and 2004, the Company did not value its inventories at the lower of cost or market. There were certain levels of excess and obsolete inventories for which provisions should have been recorded, but were not.

Following is an overview of the material components of the adjustments shown in the schedules below:

 

  1. Certain operating subsidiaries did not have any stated policy regarding evaluation of excess and obsolete inventories. Moreover, the Company did not find any evidence of such an evaluation being performed.

 

  2. Over time, design and certification specifications changed, but consideration of those changes and their impact on inventories were not documented.

Rebates

The Company received rebates from certain vendors that were recorded as revenue during the years ended December 31, 2005 and 2004. GAAP requires that such rebates be recorded as reductions of inventory cost and recognized as a component of cost of sales when the related inventory is sold.

Sales to TAP

The Company used Tactical Armor Products, Inc. (TAP) to serve as a subcontractor to assemble hard armor plates. While some of the transfers of raw materials to TAP were correctly accounted for, other transfers of raw materials during the years ended December 31, 2005 and 2004 were recorded as sales; this caused both sales and cost of sales to be incorrectly “grossed-up” by the amount of those transfers that were recorded as sales.

Cost of Sales

During the years ended December 31, 2005 and 2004, the Company inappropriately classified certain cost of sales as either research and development expense or marketing expense.

Fixed Assets

Certain assets were paid for by the Company and were recorded in the Company’s fixed asset register and depreciated over time. However, title documents for those assets may be in the name of persons or entities other than the Company (e.g., certain vehicles).

 

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Deferred Rent

GAAP requires that rent expense for operating leases be recognized on a straight-line basis. The Company erred in computing the deferred rent and related rent expense for the years ended December 31, 2005 and 2004.

Payroll Taxes

During the years ended December 31, 2005 and 2004, withholding taxes for bonuses paid and the exercise of stock options and warrants were not withheld and paid to the taxing authorities as required. The Company has now recorded liabilities for its potential obligations for federal and state payroll withholding taxes, plus penalties.

Revenue Cut-off

The Company did not consider certain product shipments made at the end of each accounting period with terms of FOB destination. To conform to GAAP, such shipments should not be recognized as revenue until received by customers.

Minority Interest

There were errors in computing the amount of minority interest recorded. The errors resulted from incorrect valuation of the initial minority interest, as well as the impact of the other errors discussed in this note.

True-up of Miscellaneous Accounts

The Company identified numerous miscellaneous errors in the recording of operating expenses.

Income taxes

The previously reported provisions for income taxes for 2005 and 2004 were adjusted based on the corrected amounts, when appropriate, of previously reported earnings before income taxes as well as to take into consideration nondeductible stock based compensation, penalties, meals and entertainment expenses and officers compensation in excess of the annual Internal Revenue Code Section 162(m) limitation for performance based plans.

Stock Based Compensation

The Company did not use third party intermediary brokers to assist with “cashless exercises” for exercise of warrants by certain employees, meaning that variable accounting should have been employed under APB Opinion No. 25 and related standards. However, the Company did not consider the impact of variable accounting for those awards, which should have resulted in revaluing the warrants and recording stock compensation charges (or credits) based on changes in the intrinsic value of the awards. Also, certain individuals and professional firms received warrants for services rendered. The Company incorrectly accounted for issuance of those warrants using the intrinsic value method, not the fair value method required by Statement of Financial Accounting Standards No. 123R.

 

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POINT BLANK SOLUTIONS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (as restated)

( In thousands, except share data)

(Unaudited)

 

     2005  
     March 31     June 30     September 30  

ASSETS

      

Current assets:

      

Cash and cash equivalents

   $ 84     $ 62     $ 5,488  

Accounts receivable, less allowance for doubtful accounts of $631, $934, and $918 respectively

     45,710       37,102       34,373  

Accounts receivable - related party

     70       —         —    

Inventories, net

     43,081       41,693       26,639  

Deferred income tax assets

     22,633       27,645       33,081  

Income tax receivable

     4,700       3,363       —    

Prepaid expenses and other current assets

     1,346       1,776       2,677  
                        

Total current assets

     117,624       111,641       102,258  
                        

Property and equipment, net

     2,295       2,164       2,036  
                        

Other assets:

      

Deferred income tax assets

     653       615       17  

Deposits and other assets

     446       1,122       638  
                        

Total other assets

     1,099       1,737       655  
                        

Total assets

   $ 121,018     $ 115,542     $ 104,949  
                        

LIABILITIES AND STOCKHOLDERS’ EQUITY

      

Current liabilities:

      

Note payable – bank , current portion

   $ 8,000     $ 8,000     $ 8,000  

Obligation to purchase convertible preferred stock

     —         —         3,000  

Accounts payable

     15,291       10,830       7,401  

Accrued expenses and other current liabilities

     6,150       6,633       8,885  

Vest replacement program obligation

     —         —         9,711  

Income taxes payable

     —         —         888  

Employment tax withholding obligation

     31,368       31,368       31,368  
                        

Total current liabilities

     60,809       56,831       69,253  

LONG TERM LIABILITIES

      

Note payable - bank

     32,747       19,708       7,000  

Other liabilities

     682       688       696  
                        

Total liabilities

     94,238       77,227       76,949  
                        

Minority interest in consolidated subsidiary

     62       100       85  

Commitments and Contingencies

      

Stockholders’ equity

      

Convertible preferred stock $0.001 par value, 5,000,000 shares authorized, 500,000 shares of Series A, 12% convertible preferred stock issued and outstanding; liquidation preference $3,000

     3,000       3,000       —    

Common stock, $0.001 par value, 100,000,000 shares authorized, 45,322,576, 45,337,576 and 45,337,576 shares issued and outstanding, respectively

     45       45       45  

Additional paid in capital

     64,339       64,817       79,832  

Accumulated deficit

     (40,666 )     (29,647 )     (51,962 )
                        

Total stockholders’ equity

     26,718       38,215       27,915  
                        

Total liabilities and stockholders’ equity

   $ 121,018     $ 115,542     $ 104,949  
                        

 

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POINT BLANK SOLUTIONS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (as restated)

( In thousands, except share data)

(Unaudited)

 

     2004  
     March 31     June 30     September 30  

ASSETS

      

Current assets:

      

Cash and cash equivalents

   $ 478     $ 102     $ 87  

Accounts receivable, less allowance for doubtful accounts of $879, $936, and $901 respectively

     38,985       59,677       55,221  

Inventories, net

     29,089       33,579       34,850  

Income tax receivable

     134       —         —    

Prepaid expenses and other current assets

     1,201       1,579       1,498  
                        

Total current assets

     69,887       94,937       91,656  
                        

Property and equipment, net

     2,100       2,655       2,498  
                        

Other assets:

      

Deferred income tax assets

     4,799       8,065       11,367  

Deposits and other assets

     421       418       382  
                        

Total other assets

     5,220       8,483       11,749  
                        

Total assets

   $ 77,207     $ 106,075     $ 105,903  
                        

LIABILITIES AND STOCKHOLDERS’ EQUITY

      

Current liabilities:

      

Note payable – bank , current portion

   $ 3,000     $ 4,000     $ 4,000  

Accounts payable

     8,933       12,672       14,600  

Accrued expenses and other current liabilities

     8,340       11,079       11,000  

Income taxes payable

     —         1,846       3,427  

Employment tax witholding obligation

     737       737       737  
                        

Total current liabilities

     21,010       30,334       33,764  

LONG TERM LIABILITIES

      

Note payable - bank

     15,588       32,334       24,890  

Term loan-bank

     9,500       8,500       7,500  

Other liabilities

     567       594       619  
                        

Total liabilities

     46,665       71,762       66,773  
                        

Minority interest in consolidated subsidiary

     39       59       94  

Commitments and Contingencies

      

Stockholders’ equity

      

Convertible preferred stock $0.001 par value, 5,000,000 shares authorized, 500,000 shares of Series A, 12% convertible preferred stock issued and outstanding; liquidation preference $3,000

     3,000       3,000       3,000  

Common stock, $0.001 par value, 100,000,000 shares authorized, 40,742,136, 40,822,136 and 40,922,416 shares issued and outstanding, respectively

     41       41       41  

Additional paid in capital

     63,597       63,745       63,763  

Accumulated deficit

     (36,135 )     (32,532 )     (27,768 )
                        

Total stockholders’ equity

     30,503       34,254       39,036  
                        

Total liabilities and stockholders’ equity

   $ 77,207     $ 106,075     $ 105,903  
                        

 

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POINT BLANK SOLUTIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (as restated)

FOR THE PERIODS ENDED

(In thousands, except per share data)

(Unaudited)

 

     Three months ended March 31,     Three months ended June 30,    Three months ended September 30,  
     2005    2004     2005    2004    2005     2004  

Net sales

   $ 84,083    $ 70,436     $ 88,075    $ 82,384    $ 88,881     $ 87,814  

Cost of goods sold

     67,750      58,018       66,369      67,549      86,198       72,311  
                                             

Gross profit

     16,333      12,418       21,706      14,835      2,683       15,503  
                                             

Selling, general and administrative expenses

     9,927      11,310       9,670      9,556      24,738       8,399  
                                             

Operating income ( loss)

     6,406      1,108       12,036      5,279      (22,055 )     7,104  
                                             

Interest expense

     493      275       599      325      459       342  

Other income

     —        (8 )     —        —        —         (25 )
                                             

Total other expense

     493      267       599      325      459       317  

Income (loss) before income tax (benefit) expense

     5,913      841       11,437      4,954      (22,514 )     6,787  

Income tax (benefit) expense

     323      202       290      1,239      (274 )     1,898  
                                             

Income (loss) before minority interest of subsidiary

     5,590      639       11,147      3,715      (22,240 )     4,889  

Less minority interest of subsidiary

     14      37       38      22      (15 )     35  
                                             

Net income (loss)

     5,576      602       11,109      3,693      (22,225 )     4,854  

Dividend - preferred stock (related party)

     90      90       90      90      90       90  
                                             

Income (loss) available to common stockholders

   $ 5,486    $ 512     $ 11,019      3,603    $ (22,315 )   $ 4,764  
                                             

Basic earnings (loss) per common share

   $ 0.12    $ 0.01     $ 0.24    $ 0.09    $ (0.49 )   $ 0.12  
                                             

Diluted earnings (loss) per common share

   $ 0.12    $ 0.01     $ 0.24    $ 0.09    $ (0.49 )   $ 0.12  
                                             

 

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POINT BLANK SOLUTIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (as restated)

FOR THE PERIODS ENDED

(In thousands, except per share data)

(Unaudited)

 

     Six months ended June 30,
     2005    2004

Net sales

   $ 172,158    $ 152,821

Cost of goods sold

     134,119      125,568
             

Gross profit

     38,039      27,253
             

Selling, general and administrative expenses

     19,597      20,867
             

Operating income

     18,442      6,386
             

Interest expense

     1,092      591
             

Income before income tax expense

     17,350      5,795

Income tax expense

     613      1,441
             

Income before minority interest of subsidiary

     16,737      4,354

Less minority interest of subsidiary

     52      59
             

Net income

     16,685      4,295

Dividend - preferred stock (related party)

     180      180
             

Income available to common stockholders

   $ 16,505    $ 4,115
             

Basic earnings per common share

   $ 0.36    $ 0.10
             

Diluted earnings per common share

   $ 0.36    $ 0.10
             

 

28


Table of Contents

POINT BLANK SOLUTIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (as restated)

FOR THE PERIODS ENDED

(In thousands, except per share data)

(Unaudited)

 

     Nine months ended September 30,  
     2005     2004  

Net sales

   $ 261,040     $ 240,635  

Cost of goods sold

     220,317       197,878  
                

Gross profit

     40,723       42,757  
                

Selling, general and administrative expenses

     44,335       29,266  
                

Operating income ( loss)

     (3,612 )     13,491  
                

Interest expense

     1,552       941  

Other income

     —         (33 )
                

Total other expense

     1,552       908  
                

Income (loss) before income tax expense

     (5,164 )     12,583  

Income tax expense

     339       3,339  
                

Income (loss) before minority interest of subsidiary

     (5,503 )     9,244  

Less minority interest of subsidiary

     37       95  
                

Net income (loss)

     (5,540 )     9,149  

Dividend - preferred stock (related party)

     270       270  
                

Income (loss) available to common stockholders

   $ (5,810 )   $ 8,879  
                

Basic earnings (loss) per common share

   $ (0.13 )   $ 0.22  
                

Diluted earnings (loss) per common share

   $ (0.13 )   $ 0.22  
                

 

29


Table of Contents

Point Blank Solutions, Inc.

Condensed Consolidated Statements of Cash Flows (as restated)

For the periods ended

(In thousands)

(Unaudited)

 

     Three months ended
March 30,
    Six months ended
June 30,
    Nine months ended
September 30,
 
     2005     2004     2005     2004     2005     2004  

Cash flows from operating activities

            

Net cash provided by (used in) operating activities

   $ (5,012 )   $ (1,364 )   $ 8,240     $ (17,621 )   $ 26,565     $ (9,000 )
                                                

Cash flows from investing activities

            

Proceeds from sale (purchases) of property and equipment

     (112 )     (778 )     (257 )     (1,633 )     (358 )     (1,735 )
                                                

Net cash used in investing activities

     (112 )     (778 )     (257 )     (1,633 )     (358 )     (1,735 )
                                                

Cash flows from financing activities

            

Bank overdraft

     —         (1,804 )     —         (1,804 )     —         (1,804 )

Dividends paid on preferred stock (related party)

     (90 )     (90 )     (180 )     (180 )     (270 )     (270 )

Net proceeds (repayments) on notes payable-bank

     4,613       4,076       (8,426 )     20,822       (21,134 )     12,378  

Issuance costs of term loan payable

     —         (83 )     —         (83 )     —         (83 )

Net proceeds from exercise of stock warrants

     187       80       187       160       187       160  
                                                

Net cash provided by (used in) financing activities

     4,710       2,179       (8,419 )     18,915       (21,217 )     10,381  
                                                

Net increase (decrease) in cash and cash equivalents

     (414 )     37       (436 )     (339 )     4,990       (354 )

Cash and cash equivalents at beginning of year

     498       441       498       441       498       441  
                                                

Cash and cash equivalents at end of period

   $ 84     $ 478     $ 62     $ 102     $ 5,488     $ 87  
                                                

 

30


Table of Contents

POINT BLANK SOLUTIONS, INC.

CONDENSED CONSOLIDATED BALANCE SHEET

MARCH 31, 2005

(In thousands, except share data)

(Unaudited)

 

     As Reported    Restatement
Adjustments
    Subtotal     Effects of
Adoption of
SFAS 123R
    Restated  

ASSETS

           

Current assets:

           

Cash and cash equivalents

   $ 84    $ —       $ 84     $ —       $ 84  

Accounts receivable, less allowance for doubtful
accounts of $631

     45,910      (200 )     45,710       —         45,710  

Accounts receivable – related party

     70      —         70       —         70  

Inventories, net

     102,930      (59,849 )     43,081       —         43,081  

Deferred income tax assets

     652      21,981       22,633       —         22,633  

Income tax receivable

     0      4,700       4,700       —         4,700  

Prepaid expenses and other current assets

     1,329      17       1,346       —         1,346  
                                       

Total current assets

     150,975      (33,351 )     117,624       —         117,624  
                                       

Property and equipment, net

     2,540      (245 )     2,295       —         2,295  
                                       

Other assets:

           

Deferred income tax assets

     608      45       653       —         653  

Deposits and other assets

     446      —         446       —         446  
                                       

Total other assets

     1,054      45       1,099       —         1,099  
                                       

Total assets

   $ 154,569    $ (33,551 )   $ 121,018     $ —       $ 121,018  
                                       

LIABILITIES AND STOCKHOLDERS’ EQUITY

           

Current liabilities:

           

Note payable – bank

   $ 8,000    $ —       $ 8,000     $ —       $ 8,000  

Accounts payable

     15,351      (60 )     15,291       —         15,291  

Accrued expenses and other current liabilities

     6,574      (424 )     6,150       —         6,150  

Income taxes payable

     5,085      (5,085 )     —         —         —    

Employment tax withholding obligation

     —        31,368       31,368       —         31,368  
                                       

Total current liabilities

     35,010      25,799       60,809       —         60,809  

LONG TERM LIABILITIES

           

Notes payable - bank

     32,747      —         32,747       —         32,747  

Other liabilities

     1,116      (434 )     682       —         682  
                                       

Total liabilities

     68,873      25,365       94,238       —         94,238  
                                 

Minority interest in consolidated subsidiary

     495      (433 )     62       —         62  

Commitments and contingencies

           

Stockholders’ equity:

           

Convertible preferred stock $0.001 par value, 5,000,000 shares authorized, 500,000 shares of Series A, 12% convertible preferred stock issued and outstanding; liquidation preference $3,000

     1      2,999       3,000       —         3,000  

Common stock, $0.001 par value, 100,000,000 shares authorized, 45,322,576 shares issued and outstanding

     45      0       45       —         45  

Additional paid in capital

     36,096      87,760       123,856       (59,517 )     64,339  

Retained earnings (accumulated deficit)

     49,059      (149,242 )     (100,183 )     59,517       (40,666 )
                                       

Total stockholders’ equity

     85,201      (58,483 )     26,718     $ —         26,718  
                                       

Total liabilities and stockholders’ equity

   $ 154,569    $ (33,551 )   $ 121,018     $ —       $ 121,018  
                                       

 

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Table of Contents

Balance Sheet as of March 31, 2005

Restatement Adjustments

(In thousands)

(Unaudited)

 

Accounts Receivable

  

Adjustments - Adjust balances to agree to supporting documentation

   $ (200 )
        

Inventory, net

  

Inventory Valuation - Certain inventory items were valued at costs that exceeded their
actual manufactured cost

   $ (36,723 )

Inventory Reserve - Adjustment to inventory to lower of cost or market and establish
reserves for obsolete inventory as required by GAAP

     (23,126 )
        

Total

   $ (59,849 )
        

Deferred income tax assets, current

  

Deferred Taxes - Record deferred tax impact of errors

   $ 21,981  
        

Prepaid expense and other current assets

  

Adjustments - Adjust balances to agree to supporting documentation

   $ 17  
        

Property and equipment, net

  

Adjustments - Write-off unlocated assets

   $ (245 )
        

Deferred income tax assets

  

Adjustments - Record deferred tax impact of errors

   $ 45  
        

Accounts payable

  

Adjustments - Adjust balances to agree to supporting documentation

   $ (60 )
        

Accrued expenses and other current liabilities

  

Adjustments - Adjust various expenses including commissions and professional fees

   $ (424 )
        

Income tax payable/receivable

  

Income Taxes Payable - Record current income tax benefit

   $ 9,785  
        

 

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Table of Contents

Employment tax withholding obligation

  

Employment Tax Withholding Charge - Record expense for withholding taxes in
connection with paid bonuses and exercise of warrants

   $ 31,368  
        

Other liabilities

  

Adjustments - Correct miscellaneous liabilities including deferred rent

   $ (434 )
        

Minority interest in consolidated subsidiary

  

Minority Interest in Subsidiary - Correct recording of minority interest

   $ (433 )
        

Convertible preferred stock

  

Convertible Preferred Stock - Recorded preferred stock at its redemption value

   $ 2,999  
        

Additional paid in capital

  

Stock Based Compensation — Correct errors in connection of recording grants of stock warrants
as required by GAAP, effect on periods prior to 2005

   $ 95,838  

Stock Based Compensation — Correct errors in connection of recording grants of stock warrants
as required by GAAP, effect to 2005 earnings

     (5,079 )

Convertible Preferred Stock - Recorded preferred stock at its redemption value

     (2,999 )
        

Total

   $ 87,760  
        

Retained earnings

  

Adjustments to earnings - periods prior to 2005

   $ (149,242 )
        

 

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Table of Contents

POINT BLANK SOLUTIONS, INC.

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

FOR THE THREE MONTHS ENDED MARCH 31, 2005

(In thousands, except per share data)

(Unaudited)

 

     As Reported     Restatement
Adjustments
    Subtotal    Effects of
Adoption of
SFAS 123R
    Restated

Net sales

   $ 85,465     $ (1,382 )   $ 84,083    $ —       $ 84,083

Cost of goods sold

     62,078       5,672       67,750      —         67,750
                                     

Gross profit

     23,387       (7,054 )     16,333      —         16,333
                                     

Selling, general and administrative expenses

     10,816       (5,976 )     4,840      5,087       9,927
                                     

Operating income

     12,571       (1,078 )     11,493      (5,087 )     6,406
                                     

Interest expense

     544       (51 )     493      —         493

Other income

     (17 )     17       —        —         —  
                                     

Total other expense

     527       (34 )     493      —         493
                                     

Income before income tax expense

     12,044       (1,044 )     11,000      (5,087 )     5,913

Income tax expense

     4,271       (3,948 )     323      —         323
                                     

Income before minority interest of subsidiary

     7,773       2,904       10,677      (5,087 )     5,590

Less minority interest of subsidiary

     64       (50 )     14      —         14
                                     

Net income

     7,709       2,954       10,663      (5,087 )     5,576

Dividend - preferred stock (related party)

     90       —         90      —         90
                                     

Income available to common stockholders

   $ 7,619     $ 2,954     $ 10,573    $ (5,087 )   $ 5,486
                                     

Basic earnings per common share

   $ 0.17            $ 0.12
                     

Diluted earnings per common share

   $ 0.17            $ 0.12
                     

 

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Table of Contents

Statement of Operations

For the three months ended March 31, 2005

Restatement Adjustments

(In thousands)

(Unaudited)

 

Net sales

  

Rebates – Reclassification of rebates from vendors were recorded in sales instead of a reduction in cost of inventory

   $ (1,252 )

Sales Cut-off – Correct errors recording FOB sales; GAAP requires FOB shipments to be recognized when received by the customer

     (130 )
        

Total

   $ (1,382 )
        

Cost of goods sold

  

Inventory Valuation — Certain inventory items were valued at costs that exceeded their actual manufactured cost

   $ 408  

Inventory Reserve — Adjustment to inventory to lower of cost or market and establish reserves for obsolete inventory as required by GAAP

     (4,994 )

Rebates — Reclassification of rebates from vendors were recorded in sales instead of a reduction in cost of inventory in error

     1,252  

Research & Development — Reclassification of costs charged to R & D expense

     (2,350 )

Rent — Adjustment to deferred rent expense to properly allocate rent payments

     12  
        

Total

   $ (5,672 )
        

Income taxes

  

Income Taxes — Correct current and deferred income tax benefit - provision

   $ 3,948  
        

Selling, General and administrative expenses

  

Stock Based Compensation — Correct errors in connection of recording grants of stock warrants as required by GAAP

   $ 5,079  

Research & Development — Reclassification of costs charged to R & D expense

     2,350  

Employment tax withholding charge — Record expense for taxes in connection with paid bonuses and exercise of warrants

     (1,649 )

Miscellaneous — Correct miscellaneous errors

     83  

Rent — Adjustment to deferred rent expense to properly allocate rent payments

     5  

Unlocated Difference — Unreconciled variance between the Company’s records and the previously filed interim financial statements

     108  
        
   $ 5,976  
        

Minority Interest

  

Minority Interest — Correct minority interest in earnings

   $ 50  
        

Interest expense

  

Miscellaneous — Correct miscellaneous errors

   $ (51 )
        

Other (income) expense

  

Miscellaneous — Correct miscellaneous errors

   $ 17  
        

 

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Table of Contents

Point Blank Solutions, Inc.

Condensed Consolidated Statement Of Cash Flows

For the three months ended March 31, 2005

(In thousands)

(Unaudited)

 

     As
Reported
    Restatement
Adjustments
    Restated  

Cash flows from operating activities

      

Net cash used in operating activities

   $ (4,961 )   $ (51 )     (5,012 )
                        

Cash flows from investing activities

      

Proceeds from sale of property and equipment

     (112 )     —         (112 )
                        

Net cash used in investing activities

     (112 )     —         (112 )
                        

Cash flows from financing activities

      

Dividends paid on preferred stock (related party)

     (90 )     —         (90 )

Net proceeds (repayments) of notes payable – bank

     4,613       —         4,613  

Net proceeds from exercise of stock warrants

     187       —         187  
                        

Net cash provided by (used in) financing activities

     4,710       —         4,710  
                        

Net decrease in cash and cash equivalents

     (363 )     (51 )     (414 )

Cash and cash equivalents at beginning of year

     447       51       498  
                        

Cash and cash equivalents at end of period

   $ 84     $     $ 84  
                        

 

36


Table of Contents

POINT BLANK SOLUTIONS, INC.

CONDENSED CONSOLIDATED BALANCE SHEET

JUNE 30, 2005

(In thousands, except share data)

(Unaudited)

 

     As Reported    Restatement
Adjustments
    Subtotal     Effects of
Adoption of
SFAS 123R
    Restated  

ASSETS

           

Current assets:

           

Cash and cash equivalents

   $ 62    $ —       $ 62     $ —       $ 62  

Accounts receivable, less allowance for doubtful accounts of $934

     37,640      (538 )     37,102       —         37,102  

Inventories, net

     101,353      (59,660 )     41,693       —         41,693  

Deferred income tax assets

     615      27,030       27,645       —         27,645  

Income tax receivable

     —        3,363       3,363       —         3,363  

Prepaid expenses and other current assets

     1,771      5       1,776       —         1,776  
                                       

Total current assets

     141,441      (29,800 )     111,641       —         111,641  
                                       

Property and equipment, net

     2,477      (313 )     2,164       —         2,164  
                                       

Other assets:

           

Deferred income tax assets

     580      35       615       —         615  

Deposits and other assets

     1,122      —         1,122       —         1,122  
                                       

Total other assets

     1,702      35       1,737       —         1,737  
                                       

Total assets

   $ 145,620    $ (30,078 )   $ 115,542     $ —       $ 115,542  
                                       

LIABILITIES AND STOCKHOLDERS’ EQUITY

           

Current liabilities:

           

Note payable – bank

   $ 8,000    $ —         8,000       —       $ 8,000  

Accounts payable

     10,891      (61 )     10,830       —         10,830  

Accrued expenses and other current liabilities

     7,160      (527 )     6,633       —         6,633  

Income taxes payable

     5,373      (5,373 )     0       —         0  

Employment tax withholding obligation

     —        31,368       31,368       —         31,368  
                                       

Total current liabilities

     31,424      25,407       56,831       —         56,831  

LONG TERM LIABILITIES

           

Notes payable - bank

     19,708      —         19,708       —         19,708  

Other liabilities

     1,134      (446 )     688       —         688  
                                       

Total liabilities

     52,266      24,961       77,227       —         77,227  
                                       

Minority interest in consolidated subsidiary

     555      (455 )     100       —         100  

Commitments and contingencies

           

Stockholders’ equity

           

Convertible preferred stock $0.001 par value, 5,000,000 shares authorized, 500,000 shares of Series A, 12% convertible preferred stock issued and outstanding; liquidation preference $3,000

     1      2,999       3,000       —         3,000  

Common stock, $0.001 par value, 100,000,000 shares authorized, 45,337,576 shares issued and outstanding

     45      —         45       —         45  

Additional paid in capital

     36,096      87,668       123,764       (58,947 )     64,817  

Retained earnings (accumulated deficit)

     56,657      (145,251 )     (88,594 )     58,947       (29,647 )
                                       

Total stockholders’ equity

     92,799      (54,584 )     38,215       —         38,215  
                                       

Total liabilities and stockholders’ equity

   $ 145,620    $ (30,078 )   $ 115,542     $ —       $ 115,542  
                                       

 

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Table of Contents

Balance Sheet as of June 30, 2005

Restatement Adjustments

(In thousands)

(Unaudited)

 

Accounts Receivable

  
Adjustments - Adjust balances to agree to supporting documentation    $ (538 )
        

Inventory, net

  
Inventory Valuation- Certain inventory items were valued at costs that exceeded their actual manufactured cost    $ (35,828 )
Inventory Reserve - Adjustment to inventory to lower of cost or market and establish reserves for obsolete inventory as required by GAAP      (23,832 )
        

Total

   $ (59,660 )
        

Deferred income tax assets, current

  
Deferred taxes - Record deferred tax impact of errors    $ 27,030  
        

Income taxes receivable

  
Income taxes receivable - Properly record receivable    $ 3,363  
        

Prepaid expense and other current assets

  
Adjustments - Adjust balances to agree to supporting documentation    $ 5  
        

Deferred income tax assets

  
Adjustments - Record deferred tax impact of errors    $ 35  
        

Property and equipment, net

  
Adjustments - Write-off assets that cannot be located    $ (313 )
        

Accounts payable

  
Adjustments - Adjust balances to agree to supporting documentation    $ (61 )
        

Accrued expenses and other current liabilities

  
Adjustments - Adjust various expenses including commissions and professional fees    $ (527 )
        

 

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Table of Contents

Income tax payable/receivable

  

Income Taxes Payable - Record current income tax benefit

   $ 8,736  
        

Employment tax withholding obligation

  
Employment Tax Withholding charge - Record expense for withholding taxes in connection with paid bonuses and exercise of warrants    $ 31,368  
        

Other liabilities

  

Adjustments - Correct miscellaneous liabilities including deferred rent

   $ (446 )
        

Minority interest in consolidated subsidiary

  

Minority Interest in Subsidiary - Correct recording of minority interest

   $ (455 )
        

Convertible preferred stock

  

Convertible Preferred Stock - Recorded preferred stock at its redemption value

   $ 2,999  
        

Additional paid in capital

  
Stock Based Compensation - Correct errors in connection of recording grants of stock warrants as required by GAAP    $ 90,667  
Convertible Preferred Stock - Recorded preferred stock at its redemption value      (2,999 )
        

Total

   $ 87,668  
        

Retained earnings

  

Adjustments to earnings

   $ (145,251 )
        

 

39


Table of Contents

POINT BLANK SOLUTIONS, INC.

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2005

(In thousands, except per share data)

(Unaudited)

 

    Three months Ended June 30,   Six months Ended June 30,
    As Reported     Adjustments     Subtotal   Effects of
Adoption of
SFAS 123R
    Restated   As Reported     Adjustments     Subtotal   Effects of
Adoption of
SFAS 123R
    Restated

Net sales

  $ 88,196     $ (121 )   $ 88,075     —       $ 88,075   $ 173,661     $ (1,503 )   $ 172,158     —       $ 172,158

Cost of goods sold

    64,166       2,203       66,369     —         66,369     126,244       7,875       134,119     —         134,119
                                                                       

Gross profit

    24,030       (2,324 )     21,706     —         21,706     47,417       (9,378 )     38,039     —         38,039
                                                                       

Selling, general and administrative expenses

    11,388       (2,288 )     9,100     570       9,670     22,204       (8,264 )     13,940     5,657       19,597
                                                                       

Operating income

    12,642       (36 )     12,606     (570 )     12,036     25,213       (1,114 )     24,099     (5,657 )     18,442
                                                                       

Interest expense

    645       (46 )     599     —         599     1,189       (97 )     1,092     —         1,092

Other income

    (10 )     10       —       —           (27 )     27       0     —      
                                                                       

Total other income

    635       (36 )     599     —         599     1,162       (70 )     1,092     —         1,092
                                                                       

Income before income tax expense

    12,007       —         12,007     (570 )     11,437     24,051       (1,044 )     23,007     (5,657 )     17,350

Income taxes expense

    4,259       (3,969 )     290     —         290     8,530       (7,917 )     613     —         613
                                                                       

Income before minority interest of subsidiary

    7,748       3,969       11,717     (570 )     11,147     15,521       6,873       22,394     (5,657 )     16,737

Less minority interest of subsidiary

    60       (22 )     38     —         38     124       (72 )     52     —         52
                                                                       

Net income

    7,688       3,991       11,679     (570 )     11,109     15,397       6,945       22,342     (5,657 )     16,685

Dividend-preferred stock (related party)

    90       —         90     —         90     180       —         180     —         180
                                                                       

Income available to common stockholders

  $ 7,598     $ 3,991     $ 11,589   $ (570 )   $ 11,019   $ 15,217     $ 6,945     $ 22,162   $ (5,657 )   $ 16,505
                                                                       

Basic earnings per common share

  $ 0.17           $ 0.24   $ 0.34           $ 0.36
                                       

Diluted earnings per common share

  $ 0.17           $ 0.24   $ 0.33           $ 0.36
                                       

 

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Table of Contents

Statement of Operations

Restatement Adjustments

(In thousands)

(Unaudited)

 

     Three months ended
June 30, 2005
    Six months ended
June 30, 2005
 

Net sales

    

Rebates — Reclassification of rebates from vendors were recorded in sales instead of a reduction in cost of inventory

   $ (84 )   $ (1,336 )

Sales Cut-off — Correct errors recording FOB sales. GAAP requires FOB shipments to be recognized when received by the customer

     —         (130 )

Unlocated Difference — Unreconciled variance between the Company’s records and the previously filed interim financial statements

     (37 )     (37 )
                

Total

   $ (121 )   $ (1,503 )
                

Costs of goods sold

    

Inventory Valuation — Certain inventory items were valued at costs that exceeded their actual manufactured cost.

   $ 701     $ 1,109  

Inventory Reserve — Adjustment to inventory to lower of cost or market and establish reserves for obsolete inventory as required by GAAP

     (594 )     (5,588 )

Rebates — Reclassification of rebates from vendors were recorded in sales instead of a reduction in cost of inventory.

     84       1,336  

Research & Development — Reclassification of costs charged to R & D expense

     (2,400 )     (4,750 )

Rent — Adjustment to deferred rent expense to properly allocate rent payments.

     6       18  
                

Total

   $ (2,203 )   $ (7,875 )
                

Selling, general administrative expenses

    

Stock Based Compensation — Correct errors in connection of recording grants of stock warrants as required by GAAP.

   $ 94     $ 5,173  

Research & Development — Reclassification of costs charged to R & D expense

     2,400       4,750  

Employment tax withholding charge — Record expense for taxes in connection with paid bonuses and exercise of warrants.

     —         (1,649 )

Miscellaneous — Correct miscellaneous errors

     175       258  

Rent — Adjustment to deferred rent expense to properly allocate rent payments.

     3       8  

Unlocated Difference — Unreconciled variance between the Company’s records and the previously filed interim financial statements

     (384 )     (276 )
                

Total

   $ 2,288     $ 8,264  
                

Income taxes (benefit) expenses

    

Income Taxes — Correct current and deferred income tax benefit-provision

   $ 3,969     $ 7,917  
                

Minority interest

    

Minority Interest — Correct minority interest in earnings

   $ 22     $ 72  
                

Interest expense

    

Miscellaneous — Correct miscellaneous errors

   $ (46 )   $ (97 )
                

Other (income) expense

    

Miscellaneous — Correct miscellaneous errors

   $ 10     $ 27  
                

 

41


Table of Contents

Point Blank Solutions, Inc.

Condensed Consolidated Statement of Cash Flows

For the six months ended June 30, 2005

(In thousands)

(Unaudited)

 

     As
Reported
    Restatement
Adjustments
    Restated  

Cash flows from operating activities

      

Net cash provided by operating activities

   $ 8,291     $ (51 )   $ 8,240  
                        

Cash flows from investing activities

      

Proceeds from sale of property and equipment

     (257 )     —         (257 )
                        

Net cash used in investing activities

     (257 )     —         (257 )
                        

Cash flows from financing activities

      

Dividends paid on preferred stock (related party)

     (180 )     —         (180 )

Net proceeds (repayments) of notes payable – bank

     (8,426 )     —         (8,426 )

Net proceeds from exercise of stock warrants

     187       —         187  
                        

Net cash used in financing activities

     (8,419 )     —         (8,419 )
                        

Net decrease in cash and cash equivalents

     (385 )     (51 )     (436 )

Cash and cash equivalents at beginning of year

     447       51       498  
                        

Cash and cash equivalents at end of period

   $ 62     $     $ 62  
                        

 

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Table of Contents

POINT BLANK SOLUTIONS, INC.

CONDENSED CONSOLIDATED BALANCE SHEET

SEPTEMBER 30, 2005

(In thousands, except share data)

(Unaudited)

 

     As Reported    Restatement
Adjustments
    Subtotal     Effects of
Adoption of
SFAS 123R
    Restated  

ASSETS

           

Current assets:

           

Cash and cash equivalents

   $ 5,488    $ —       $ 5,488     $ —       $ 5,488  

Accounts receivable, less allowance for doubtful accounts of $918

     30,953      3,420       34,373       —         34,373  

Inventories, net

     75,944      (49,305 )     26,639       —         26,639  

Deferred income tax assets

     23,231      9,850       33,081       —         33,081  

Prepaid expenses and other current assets

     2,452      225       2,677       —         2,677  
                                       

Total current assets

     138,068      (35,810 )     102,258       —         102,258  
                                       

Property and equipment, net

     2,370      (334 )     2,036       —         2,036  
                                       

Other assets:

           

Deferred income tax assets

     1,092      (1,075 )     17       —         17  

Deposits and other assets

     638      —         638       —         638  
                                       

Total other assets

     1,730      (1,075 )     655       —         655  
                                       

Total assets

   $ 142,168    $ (37,219 )   $ 104,949     $ —       $ 104,949  
                                       

LIABILITIES AND STOCKHOLDERS’ EQUITY

           

Current liabilities:

           

Note payable – bank

   $ 8,000    $ —       $ 8,000       —       $ 8,000  

Obligation to purchase convertible preferred stock

     3,000      —         3,000       —         3,000  

Vest replacement program obligation

     36,730      (27,019 )     9,711       —         9,711  

Accounts payable

     7,462      (61 )     7,401       —         7,401  

Accrued expenses and other current liabilities

     10,395      (1,510 )     8,885       —         8,885  

Income taxes payable

     8,783      (7,895 )     888       —         888  

Employment tax withholding obligation

     —        31,368       31,368       —         31,368  
                                       

Total current liabilities

     74,370      (5,117 )     69,253       —         69,253  

LONG TERM LIABILITIES

           

Notes payable - bank

     7,000      —         7,000       —         7,000  

Other liabilities

     1,149      (453 )     696       —         696  
                                       

Total liabilities

     82,519      (5,570 )     76,949       —         76,949  
                                       

Minority interest in consolidated subsidiary

     297      (212 )     85       —         85  

Commitments and contingencies

           

Stockholders’ equity

           

Common stock, $0.001 par value, 100,000,000 shares authorized, 45,337,576 shares issued and outstanding

     45      —         45       —         45  

Additional paid in capital

     44,391      92,287       136,678       (56,846 )     79,832  

Retained earnings (accumulated deficit)

     14,916      (123,724 )     (108,808 )     56,846       (51,962 )
                                       

Total stockholders’ equity

     59,352      (31,437 )     27,915       —         27,915  
                                       

Total liabilities and stockholders’ equity

   $ 142,168    $ (37,219 )   $ 104,949     $ —       $ 104,949  
                                       

 

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Table of Contents

Balance Sheet as of September 30, 2005

Restatement Adjustments

(In thousands)

(Unaudited)

 

Accounts Receivable

  

Vest replacement program - Adjustment to allowance of doubtful accounts

   $ 4,112  

Vest replacement program - Adjustment to receivables associated with vest replacement program

     144  

Adjustments - Adjust balances to agree to supporting documentation

     (836 )
        

Total

   $ 3,420  
        

Inventory, net

  

Inventory Valuation - Certain inventory items were valued at costs that exceeded their actual manufactured cost

   $ (32,690 )

Inventory Reserve - Adjustment to inventory to lower of cost or market and establish reserves for obsolete inventory as required by GAAP

     (24,109 )

Vest replacement program - Adjust inventory for overstatement of initial charge previously recorded

     16,609  

Vest replacement program - Adjust inventory reserve for overstatement of initial charge previously recorded

     (9,115 )
        

Total

   $ (49,305 )
        

Deferred income tax assets, current

  

Deferred taxes - Record deferred tax impact of errors

   $ 9,850  
        

Prepaid expense and other current assets

  

Adjustments - Correct miscellaneous prepaid expenses

   $ 225  
        

Property and equipment, net

  

Adjustments - Write-off assets that cannot be located

   $ (334 )
        

Deferred income tax assets

  

Adjustments - Record deferred tax impact of errors

   $ (1,075 )
        

Warranty payable

  

Vest replacement program - Correct accrued expenses for vest replacement charge

   $ (27,519 )

Vest replacement program -Adjust accrual for SG&A expense associated with vest replacement charge

     500  
        

Total

   $ (27,019 )
        

Accounts payable

  

Adjustments - Adjust balances to agree to supporting documentation

   $ (61 )
        

 

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Table of Contents

Accrued expenses and other current liabilities

  

Adjustments - Correct various accrued expenses

   $ (1,200 )

Adjustments - Adjust various expenses including commissions and professional fees

     (310 )
        

Total

   $ (1,510 )
        

Income tax payable/receivable

  

Income Taxes Payable - Record current income tax benefit

   $ (7,895 )
        

Employment tax withholding obligation

  

Employment Tax Withholding charge - Record expense for withholding taxes in connection with paid bonuses and exercise of warrants

   $ 31,368  
        

Other liabilities

  

Adjustments - Correct miscellaneous liabilities including deferred rent

   $ (453 )
        

Minority interest in consolidated subsidiary

  

Minority Interest in Subsidiary - Correct recording of minority interest

   $ (212 )
        

Additional paid in capital

  

Stock Based Compensation - Correct errors in connection of recording grants of stock warrants as required by GAAP

   $ 92,287  
        

Retained earnings

  

Adjustments to earnings

   $ (123,724 )
        

 

45


Table of Contents

POINT BLANK SOLUTIONS, INC.

CONSOLIDATED STATEMENT OF OPERATIONS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2005

(In thousands, except per share data)

(Unaudited)

 

    Three Months Ended September 30,     Nine Months Ended September 30,  
    As Reported     Adjustments     Subtotal     Effects of
Adoption of
SFAS 123R
    Restated     As Reported     Adjustments     Subtotal   Effects of
Adoption of
SFAS 123R
    Restated  

Net sales

  $ 90,263     $ (1,382 )   $ 88,881       —       $ 88,881     $ 263,924     $ (2,884 )   $ 261,040     —       $ 261,040  

Cost of goods sold

    65,615       20,583       86,198       —         86,198       191,859       28,458       220,317     —         220,317  
                                                                             

Gross profit

    24,648       (21,965 )     2,683       —         2,683       72,065       (31,342 )     40,723     —         40,723  
                                                                             

Selling, general and administrative expenses

    25,445       (2,808 )     22,637       2,101       24,738       47,649       (11,072 )     36,577     7,758       44,335  

Cost of vest replacement program

    60,000       (60,000 )     —         —         —         60,000       (60,000 )     —       —         —    
                                                                             

Operating income

    (60,797 )     40,843       (19,954 )     (2,101 )     (22,055 )     (35,584 )     39,730       4,146     (7,758 )     (3,612 )
                                                                             

Interest expense

    525       (66 )     459       —         459       1,714       (162 )     1,552     —         1,552  

Other income

    (6 )     6       —         —         —         (33 )     33       —       —         —    
                                                                             

Total other expense

    519       (60 )     459       —         459       1,681       (129 )     1,552     —         1,552  
                                                                             

Loss before income tax (benefit) expense

    (61,316 )     40,903       (20,413 )     (2,101 )     (22,514 )     (37,265 )     39,859       2,594     (7,758 )     (5,164 )

Income taxes (benefit) expense

    (19,407 )     19,133       (274 )     —         (274 )     (10,877 )     11,216       339     —         339  
                                                                             

Loss before minority interest of subsidiary

    (41,909 )     21,770       (20,139 )     (2,101 )     (22,240 )     (26,388 )     28,643       2,255     (7,758 )     (5,503 )

Less minority interest of subsidiary

    (258 )     243       (15 )     —         (15 )     (134 )     171       37     —         37  
                                                                             

Net Loss

    (41,651 )     21,527       (20,124 )     (2,101 )     (22,225 )     (26,254 )     28,472       2,218     (7,758 )     (5,540 )

Dividend - preferred stock (related party)

    90       —         90       —         90       270       —         270     —         270  
                                                                             

Loss available to common stockholders

  $ (41,741 )   $ 21,527     $ (20,214 )   $ (2,101 )   $ (22,315 )   $ (26,524 )   $ 28,472     $ 1,948   $ (7,758 )   $ (5,810 )
                                                                             

Basic loss per common share

  $ (0.92 )         $ (0.49 )   $ (0.59 )         $ (0.13 )
                                           

Diluted loss per common share

  $ (0.92 )         $ (0.49 )   $ (0.59 )         $ (0.13 )
                                           

 

46


Table of Contents

Statement of Operations

Restatement Adjustments

(In thousands)

(Unaudited)

 

     Three months ended
September 30, 2005
    Nine months ended
September 30, 2005
 

Net sales

    

Rebates — Reclassification of rebates from vendors were recorded in sales instead of a reduction in cost of inventory

   $ (1,371 )   $ (2,707 )

Sales Cut-off — Correct errors recording FOB sales. GAAP requires FOB shipments to be recognized when received by the customer

     —         (130 )

Unlocated Difference — Unreconciled variance between the Company’s records and the previously filed interim financial statements

     (11 )     (47 )
                

Total

   $ (1,382 )   $ (2,884 )
                

Gross Profit

    

Inventory Valuation — Certain inventory items were valued at costs that exceeded their actual manufactured cost in error.

   $ 1,267     $ 2,376  

Inventory Reserve — Adjustment to inventory to lower of cost or market and establish reserves for obsolete inventory as required by GAAP

     (594 )     (6,182 )

Rebates — Reclassification of rebates from vendors were recorded in sales instead of a reduction in cost of inventory

     1,371       2,707  

Research & Development — Reclassification of costs charged to R & D expense

     (3,400 )     (8,150 )

Rent — Adjustment to deferred rent expense to properly allocate rent payments.

     6       24  

Vest Replacement Program — Record the cost of vest replacement program as a cost of goods sold

     (19,233 )     (19,233 )
                

Total

   $ (20,583 )   $ (28,458 )
                

Selling, general and administrative expenses

    

Stock Based Compensation — Correct errors in connection of recording grants of stock warrants as required by GAAP.

   $ (1,620 )   $ 3,553  

Research & Development — Reclassification of costs charged to R & D expense in error

     3,400       8,150  

Employment tax withholding charge — Record expense for taxes in connection with paid bonuses and exercise of warrants.

       (1,649 )

Professional Fees — Correct for classification of expenses associated with administering the vest replacement program

     500       500  

Miscellaneous — Correct miscellaneous errors and record reclassifications

     725       983  

Rent — Adjustment to deferred rent expense to properly allocate rent payments.

     3       11  

Minority Interest — Correct minority interest in earnings

     (243 )     (171 )

Unlocated Difference — Unreconciled variance between the Company’s records and the previously filed interim financial statements

     43       (305 )
                

Total

   $ 2,808     $ 11,072  
                

Cost of Vest Replacement program

    

Vest Replacement program — Correct the cost of vest replacement program recorded as an operating cost

   $ 60,000     $ 60,000  
                

Income taxes (expense) benefit

    

Income Taxes — Correct current and deferred income tax benefit - provision

   $ (19,133 )   $ (11,216 )
                

Minority interest

    

Minority Interest — Correct minority interest in earnings

   $ (243 )   $ (171 )
                

Interest expense

    

Miscellaneous — Correct miscellaneous errors

   $ (66 )   $ (162 )
                

Other (income) expense

    

Miscellaneous — Correct miscellaneous errors

   $ 6     $ 33  
                

 

47


Table of Contents

Point Blank Solutions, Inc.

Condensed Consolidated Statement of Cash Flows

For the nine months ended September 30, 2005

(In thousands)

(Unaudited)

 

     As
Reported
    Restatement
Adjustments
    Restated  

Cash flows from operating activities

      

Net cash provided by operating activities

   $ 26,616     $ (51 )   $ 26,565  
                        

Cash flows from investing activities

      

Purchases of property and equipment

     (358 )     —         (358 )
                        

Net cash used in investing activities

     (358 )     —         (358 )
                        

Cash flows from financing activities

      

Dividends paid on preferred stock (related party)

     (270 )     —         (270 )

Payment of note payable, net

     (21,134 )     —         (21,134 )

Net proceeds from exercise of stock warrants

     187       —         187  
                        

Net cash used in financing activities

     (21,217 )     —         (21,217 )
                        

Net increase in cash and cash equivalents

     5,041       (51 )     4,990  

Cash and cash equivalents at beginning of year

     447       51       498  
                        

Cash and cash equivalents at end of period

   $ 5,488     $     $ 5,488