U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A
AMENDMENT NO. 2
[X] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the quarterly period ended June 30, 2004
[_] Transition report under Section 13 or 15(d) of the Exchange Act for the
transition period from ___ to ___
Commission file number: 1-9009
Defense Industries International, Inc.
-----------------------------------------------------------------
(Exact Name of Small Business Issuer as Specified in Its Charter)
Nevada 84-1421483
------ ----------
(State of Incorporation) (I.R.S. Employer Identification No.)
Industrial Zone Erez, P.O. Box 779, Ashkelon 78101, Israel
-----------------------------------------------------------------
(Address of Principal Executive Offices)
(011) 972-7-689-1611
-----------------------------------------------------------------
(Issuer's Telephone Number, Including Area Code)
-----------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Check whether the issuer: (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Yes [X] No [_]
APPLICABLE ONLY TO CORPORATE ISSUERS
As of August 12, 2004 the Issuer had 25,350,000 shares of Common Stock,
$.0001 par value per share, outstanding.
Transitional Small Business Disclosure Format (check one):
Yes [_] No [X]
Explanatory Note
This Amendment No. 2 to Form 10-QSB for the period ending June 30, 2004 is
being filed to correct formatting problems which occurred in the Form 10-QSB and
Amendment No. 1. For the convenience of the reader, the entire document is being
refiled. In addition, the exhibits numbers of exhibits 99.3 and 99.4 have been
changed to 32.1 and 32.2.
DEFENSE INDUSTRIES INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX
PAGE
PART I - FINANCIAL INFORMATION:
Item 1 Condensed Consolidated Balance Sheets as of June 30, 2004
(Unaudited) and December 31, 2003 1-2
Condensed Consolidated Statements of Operations and Other Comprehensive Income (Loss) for the
Three and Six Months Ended June 30, 2004 and 2003 (Unaudited) 3
Condensed Consolidated Statements of Cash Flows
For the Three and Six Months Ended June 30, 2004 and 2003 (Unaudited) 4
Notes to Condensed Consolidated Financial Statements (Unaudited) 5-7
Item 2 Management's Discussion and Analysis of Financial Condition and Results 8
of Operations
Item 3 Controls and Procedures 17
PART II - OTHER INFORMATION:
Item 4 Submission of Matters to a Vote of Shareholders 17
Item 6 Exhibits and Reports on Form 8-K 17
Signatures 18
DEFENSE INDUSTRIES INTERNATIONAL, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
PART I - FINANCIAL INFORMATION
ITEM 1.
ASSETS
June 30,
2004 December 31,
(Unaudited) 2003
---------- ----------
CURRENT ASSETS
Cash and cash equivalents $ 808,790 $ 784,026
Trade accounts receivable, net of allowance for doubtful
accounts of $81,586 and $68,345 respectively 2,507,755 1,912,747
Trade accounts receivable - related parties, net 334,092 322,373
Inventory 2,202,635 2,115,825
Investment in marketable securities 708,989 704,046
Deferred taxes 45,874 45,353
Other assets 413,039 422,489
---------- ----------
Total Current Assets 7,021,174 6,306,859
---------- ----------
PROPERTY, PLANT AND EQUIPMENT, NET 1,645,069 1,662,902
---------- ----------
OTHER ASSETS
Deposits for the severance of employer-employee relations 432,404 437,963
Deferred taxes, long-term 233,903 232,713
Intangible assets 35,023 41,105
---------- ----------
Total Other Assets 701,330 711,781
---------- ----------
TOTAL ASSETS $9,367,573 $8,681,542
========== ==========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
1
DEFENSE INDUSTRIES INTERNATIONAL, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
June 30, 2004 December 31,
(Unaudited) 2003
----------- -----------
CURRENT LIABILITIES
Trade accounts payable $ 636,926 $ 730,562
Short-term debt 765,657 719,642
Current portion of long-term debt 413,030 489,524
Other liabilities 1,085,030 603,514
----------- -----------
Total Current Liabilities 2,900,643 2,543,242
----------- -----------
LONG-TERM LIABILITIES
Long-term portion of debt 707,394 728,678
Provision for the severance of employer-employee relations 281,349 290,573
Minority interest 868,611 852,914
----------- -----------
Total long-term Liabilities 1,857,354 1,872,165
----------- -----------
TOTAL LIABILITIES 4,757,997 4,415,407
----------- -----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Preferred stock, $.0001 par value, 50,000,000 shares authorized, none
issued and outstanding -- -
Common stock, $.0001 par value, 250,000,000 shares authorized, 25,350,000
issued and outstanding 2,535 2,535
Additional paid-in capital 1,711,450 1,711,450
Retained earnings 3,200,115 2,767,781
Accumulated other comprehensive loss (304,524) (215,631)
----------- -----------
Total Shareholders' Equity 4,609,576 4,266,135
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 9,367,573 $ 8,681,542
=========== ===========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
2
DEFENSE INDUSTRIES INTERNATIONAL, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER
COMPREHENSIVE INCOME (LOSS)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2004 AND 2003
(UNAUDITED)
For the For the
Three Three For the Six For the Six
Months Months Months Months
Ended June Ended June Ended June Ended June
30, 2004 30, 2003 30, 2004 30, 2003
------------ ------------ ------------ ------------
NET REVENUES $ 2,826,725 $ 1,952,258 $ 6,572,804 $ 5,120,402
COST OF SALES 1,972,198 1,404,574 4,752,038 3,678,386
------------ ------------ ------------ ------------
GROSS PROFIT 854,527 547,684 1,820,766 1,442,016
------------ ------------ ------------ ------------
OPERATING EXPENSES
Selling 270,437 193,595 391,356 382,271
General and administrative 376,892 370,705 683,589 694,053
------------ ------------ ------------ ------------
Total Operating Expenses 647,329 564,300 1,074,945 1,076,324
------------ ------------ ------------ ------------
INCOME FROM OPERATIONS 207,198 (16,616) 745,821 365,692
OTHER INCOME (EXPENSE)
Financial (expense), net (38,313) (87,140) (62,795) (157,893)
Other income - net 31,709 26,015 58,907 26,015
------------ ------------ ------------ ------------
Total Other Income (Expense) (6,604) (61,125) (3,888) (131,878)
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES 200,594 (77,741) 741,933 233,814
Less: Income tax (Expense) benefit (89,363) 4,334 (283,701) (124,913)
------------ ------------ ------------ ------------
INCOME BEFORE MINORITY INTEREST 111,231 (73,407) 458,232 108,901
Minority interest loss (income) (28,121) 1,012 (25,898) (7,184)
------------ ------------ ------------ ------------
NET INCOME(LOSS) $ 83,110 $ (72,395) $ 432,334 $ 101,717
------------ ------------ ------------ ------------
OTHER COMPREHENSIVE INCOME (LOSS)
Foreign currency translation gain (loss), net
of minority interest portion 29,588 71,689 (88,893) 109,547
Unrealized gain on available-for-sale
securities --- 118,060 --- 114,858
------------ ------------ ------------ ------------
Other comprehensive income (loss) before tax 29,588 189,749 (88,893) 224,405
Income tax (expense) benefit related to items
of other comprehensive income (11,541) (68,310) 31,112 (80,786)
------------ ------------ ------------ ------------
TOTAL OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX 18,047 121,439 (57,781) 143,619
------------ ------------ ------------ ------------
COMPREHENSIVE INCOME $ 101,157 $ 49,044 $ 374,553 $ 245,336
============ ============ ============ ============
Net income per share - basic and diluted $ --- $ --- $ 0.02 $ ---
============ ============ ============ ============
Weighted average number of shares outstanding
during the period - basic and diluted 25,350,000 25,350,000 25,350,000 25,350,000
============ ============ ============ ============
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
DEFENSE INDUSTRIES INTERNATIONAL, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003
(UNAUDITED)
For The Six For The Six
Months Ended Months Ended
June 30, 2004 June 30, 2003
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 432,334 $ 101,717
Adjustments to reconcile net income to net cash provided by (used
in) operating activities:
Depreciation and amortization 145,557 146,785
Provision for doubtful accounts 3,411 ---
Net realized and unrealized gain on marketable securities (59,024) (26,015)
Stock issued for services --- 43,000
Minority interest in income of subsidiary 25,898 7,184
Decrease (increase) in deposits for employee severance 5,559 (71,974)
(Increase) decrease in deferred taxes (1,711) 107,543
Increase in trade accounts receivable (610,139) (312,930)
Decrease (increase) in other assets 9,450 (54,576)
Increase in inventory (86,810) (390,553)
Decrease in trade accounts payable (93,634) (182,815)
Increase (decrease) in other liabilities 481,516 (111,683)
(Decrease) increase in provision for the severance of
employer-employee relations (9,224) 46,406
--------- ---------
Net Cash Provided By (Used in) Operating Activities 243,183 (697,911)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (131,906) (52,187)
Proceeds from sale of marketable securities 146,419 183,839
Purchases of marketable securities (110,804) (204,743)
Funds advanced on behalf of shareholder --- 380,986
--------- ---------
Net Cash (Used in) Provided By Investing Activities (96,291) 307,895
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term debt, net 46,015 339,171
Payments on long-term debt (243,720) (74,102)
Proceeds from long term loans 177,896 ---
--------- ---------
Net Cash (Used In) Provided By Financing Activities (19,809) 265,069
--------- ---------
EFFECT OF CHANGES IN EXCHANGE RATES ON CASH (102,319) 64,795
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 24,764 (60,152)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 784,026 831,820
--------- ---------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 808,790 $ 771,668
========= =========
INTEREST PAID $ 71,341 $ 97,292
========= =========
TAXES PAID $ 72,257 $ 101,149
========= =========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
4
DEFENSE INDUSTRIES INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
(A) BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements are presented
in United States dollars under accounting principles generally accepted in
the United States of America.
(B) PRINCIPLES OF CONSOLIDATION
The condensed consolidated financial statements include the accounts of
Defense Industries International, Inc. and its wholly owned subsidiaries,
Export Erez, USA, Inc., Export Erez, Ltd., Mayotex, Ltd. and Dragonwear
Trading Ltd. and its 76% owned subsidiary Achidatex Nazareth Elite
(collectively, the "Company"). The minority interest represents the
minority shareholders' proportionate share of Achidatex.
All intercompany accounts and transactions have been eliminated in
consolidation.
(C) USE OF ESTIMATES
The preparation of condensed consolidated financial statements in
conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and assumptions
that effect the reported amounts of assets and liabilities and disclose the
nature of contingent assets and liabilities at the date of the condensed
consolidated financial statements and the reported amounts of revenues and
expenses during the reporting periods. Actual results could differ from
those estimates.
(D) PER SHARE DATA
Basic net income per common share is computed based on the weighted average
number of common shares outstanding during the period. Diluted net income
per common share is computed based on the weighted average number of common
shares and common stock equivalents outstanding during the period. There
were no common stock equivalents outstanding during the periods presented.
Accordingly, a reconciliation between basic and diluted earnings per share
is not presented.
(E) INTERIM CONSOLIDATED FINANCIAL STATEMENTS
The condensed consolidated financial statements as of and for the three and
six months ended June 30, 2004 and 2003 are unaudited. In the opinion of
management, such condensed consolidated financial statements include all
adjustments (consisting only of normal recurring accruals) necessary for
the fair presentation of the consolidated financial position and the
consolidated results of operations. The consolidated results of operations
for the six months ended June 30, 2004 and 2003 are not necessarily
indicative of the results to be expected for the full year. The
consolidated balance sheet information as of December 31, 2003 was derived
from the audited consolidated financial statements included in the
Company's annual report Form 10-KSB. The interim condensed consolidated
financial statements should be read in conjunction with that report.
5
DEFENSE INDUSTRIES INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(F) RECENT ACCOUNTING PRONOUNCEMENTS
In March 2004, the U.S. Securities and Exchange Commission's Office of the
Chief Accountant and the Division of Corporate Finance released Staff
Accounting bulletin ("SAB") No. 105, "Loan Commitments Accounted for as
Derivative Instruments". This bulletin contains specific guidance on the
inputs to a valuation-recognition model to measure loan commitments
accounted for at fair value, and requires that fair-value measurement
include only differences between the guaranteed interest rate in the loan
commitment and market interest rate, excluding any expected future cash
flows related to the customer relationship or loan servicing. In addition,
SAB105 requires the disclosure of the accounting policy for loan
commitments, including methods and assumptions used to estimate the fair
value of loan commitments, and any associated hedging strategies. SAB 105
is effective for derivative instruments entered into subsequent to March
31, 2004 and should also be applied to existing instruments as appropriate.
The Company has not yet completed its evaluation of SAB 105, but does not
anticipate a material impact on the financial statements.
NOTE 2 INVENTORY
Inventory consisted of the following:
June 30, 2004 December 31, 2003
---------- ----------
Raw materials $1,317,051 $1,175,453
Work in process 598,416 796,100
Finished goods 287,168 144,272
---------- ----------
$2,202,635 $2,115,825
========== ==========
NOTE 3 SEGMENT INFORMATION AND CONCENTRATIONS
The Company has two strategic business units: the civilian market and the
military market. The military market is further broken down between local
and export sales in order to better analyze trends in sales and profit
margins. The Company does not allocate assets between segments because
several assets are used in more than one segment and any allocation would
be impractical.
6
DEFENSE INDUSTRIES INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(A) SALES AND INCOME FROM OPERATIONS:
Civilian Military
Local Military Local Export Consolidated
---------- ---------- ---------- ----------
June 30, 2004
Net Sales $ 539,195 $1,130,164 $4,903,445 $6,572,804
Income from operations 86,306 156,254 503,261 745,821
June 30, 2003
Net Sales $1,205,687 $1,496,634 $2,418,081 $5,120,402
Income from operations 76,252 95,563 193,877 365,692
(B) SINGLE CUSTOMERS EXCEEDING 10% OF SALES:
For the Six For the Six
Months Ended Months Ended
June 30, 2004 June 30, 2003
------------- -------------
Sales
Customer A (Military Local) $ - $1,103,142
Customer B (Military Export) $2,822,264 $ 642,235
NOTE 4 DEBT
On May 31, 2004, the Company executed two promissory notes with a financial
institution, each for $88,948 for aggregate proceeds of $177,896. Payments
on the notes are due monthly through January 2009. Interest on the notes is
also due monthly and accrues at LIBOR plus 1.2% annually.
NOTE 5 COMMITMENTS AND CONTINGENCIES
There presently exists the possibility that the Israel Government will
decide to evacuate the Erez Industrial Zone as part of a proposed plan to
evacuate the entire Gaza Strip. The Company has begun to search for
alternative locations to conduct its operations should this event occur.
The Company believes that it will be able to quickly locate a suitable
alternative location to conduct its operations, if and when an evacuation
of the Gaza Strip occurs. If needed, the Company can shift the major part
of its operation in the Erez Industrial Zone to its Achidatex subsidiary.
The Company, along with other companies, is in the process of forming a
group to retain counsel to represent the group for negotiations with the
Israel Government regarding this matter. The Company believes that, at a
minimum, it will be compensated for the actual expenses incurred in
connection with the potential relocation.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS INFORMATION SHOULD BE READ IN CONJUNCTION WITH THE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS AND NOTES INCLUDED IN ITEM 1 OF PART I OF THIS
QUARTERLY REPORT AND THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS AND NOTES
THERETO AND MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2003 CONTAINED IN OUR 2003
ANNUAL REPORT ON FORM 10-KSB. THE DISCUSSION AND ANALYSIS WHICH FOLLOWS MAY
CONTAIN TREND ANALYSIS AND OTHER FORWARD-LOOKING STATEMENTS WITHIN THE MEANING
OF SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934 WHICH REFLECT OUR CURRENT
VIEWS WITH RESPECT TO FUTURE EVENTS AND FINANCIAL RESULTS. THESE INCLUDE
STATEMENTS REGARDING OUR EARNINGS, PROJECTED GROWTH AND FORECASTS, AND SIMILAR
MATTERS THAT ARE NOT HISTORICAL FACTS.
WE REMIND SHAREHOLDERS THAT FORWARD-LOOKING STATEMENTS ARE MERELY
PREDICTIONS AND THEREFORE ARE INHERENTLY SUBJECT TO UNCERTAINTIES AND OTHER
FACTORS THAT COULD CAUSE THE FUTURE RESULTS TO DIFFER MATERIALLY FROM THOSE
DESCRIBED IN THE FORWARD-LOOKING STATEMENTS
CRITICAL ACCOUNTING POLICIES
We have identified the following policies as critical to the understanding
of our condensed consolidated financial statements. The preparation of our
condensed consolidated financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the condensed consolidated financial statements and the reported amounts of
sales and expenses during the reporting periods. Our condensed consolidated
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America.
REVENUES AND REVENUE RECOGNITION. Revenues from sales of products are
recognized under the completed contract method upon shipment to customers. The
contracts are short term, generally under two months. We provide a warranty on
goods ranging from three to four years. Our policy is to consider the
establishment of a reserve for warranty expenses. Based upon historical
experience of no warranty claims, we have not established a reserve at June 30,
2004. If we change any of our assumptions with regard to our recognition of
revenues under the completed contract method of revenue recognition, or if there
is a change with respect to warranties expenses, our financial position and
results of operations may change materially.
FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS. The functional currency of
Export Erez, Ltd., Mayotex Ltd., and Achidatex Nazareth Elite is the New Israeli
Shekel, or NIS. The functional currency of Dragonwear Trading Ltd. is the Cyprus
Pound, or CYP. The financial statements of Dragonwear are translated into NIS.
The financial statements for all of these entities are then translated into U.S.
dollars from NIS at period-end exchange rates as to assets and liabilities and
average exchange rates as to revenues and expenses. Capital accounts are
translated at their historical exchange rates when the capital transactions
occurred. Foreign currency transaction gains or losses from transactions
denominated in currencies other than NIS are recognized in net income in the
period the gain or loss occurs. Any change in exchange rates may have a material
impact on our financial position and results of operations.
8
INVENTORIES. Inventories are valued at the lower of cost or market value
using the first-in first-out method. The cost includes expenses of freight-in
transportation. The specific identification method is used for finished goods
since all orders are custom orders for customers. Inventories write-offs and
write-down provisions are provided to cover risks arising from slow-moving items
or technological obsolescence. Any change in our assumptions with respect to the
need to write-off or write-down the value of our inventories may have a material
affect on our financial position or results of operations.
PROPERTY, PLANT AND EQUIPMENT. Fixed assets are stated at cost less
accumulated depreciation. Depreciation is computed using the straight-line
method over the estimated useful lives of three to twenty-five years. These
long-lived assets are generally evaluated on an individual basis in making a
determination as to whether such assets are impaired. Periodically, we review
our long-lived assets for impairment based on estimated future non-discounted
cash flows attributed to the assets. In the event such cash flows are not
expected to be sufficient to recover the recorded value of the assets, the
assets are written down to their estimated fair values. The use of different
assumptions with respect to the expected cash flows from our assets and other
economic variables may lead to different conclusions regarding the
recoverability of our assets' carrying values and to the potential need to
record an impairment loss for our long - lived assets.
OVERVIEW
Defense Industries International, Inc. is a manufacturer and global
provider of military and civilian protective personal equipment and supplies.
Our products are used by military, law enforcement, border patrol enforcement,
and other special security forces, corporations, non-governmental organizations
and individuals throughout the world.
Our principal products include body armor, bulletproof clothing and combat
vests, bomb disposal suits, battle pouches and combat harness units, flak
jackets, ballistic helmets, dust protectors, padded coats, sleeping bags,
weapons straps and belts, dry storage units, liquid logistics products, ceramic
ballistic plates, ballistic wall coverings, tents, vehicle covers and
lightweight vehicle armor kits for trucks and vans. Our recently introduced
minefield protection shoes are now being evaluated by governmental authorities.
Products under development include stab-resistant solutions and polyethylene
ballistic plates. We are continuing to upgrade our lightweight vehicle armor
kits.
Our strategic objective is to be a leading global provider of military and
civilian personal protective equipment and supplies. We intend to realize our
strategic objective through the following:
o CAPITALIZE ON EXPOSURE TO MILITARY PROBLEMS. We believe that the
events of September 11, 2001, the subsequent "War on Terrorism", the
increasing likelihood of military conflicts abroad, and recent actual
events where lives have been saved due to the performance of armor
systems, are all likely to result in additional interest in our
products.
9
o EXPAND DISTRIBUTION, NETWORKS AND PRODUCT OFFERINGS. We expect to
continue to leverage our distribution network by expanding our range
of branded law enforcement equipment through the acquisition of niche
defensive security products manufacturers and by investing in the
development of new and enhanced products which complement our existing
offerings. A broader product line will strengthen our relationships
with distributors and enhance our brand appeal with military, law
enforcement and other end users.
o PURSUE STRATEGIC ACQUISITIONS. We intend to selectively pursue
strategic acquisitions that complement and/or expand our product
offerings, provide access to new geographic markets, and provide
additional distribution channels and new customer relations.
OTHER MATERIAL CONSIDERATIONS
The Israeli Government is considering the removal of Israeli residents from
the Erez Industrial Zone as part of its current plans for the West Bank, but has
not made any decisions as to the actual evacuation of the zone as of the date of
this report. Nevertheless, if evacuation is mandated we would be required to
relocate the activities of one of our subsidiaries. The operations would likely
be moved to a local governmental recognized development zone. Companies located
in development zones are entitled to significant governmental benefits.
We, together with the majority of the businesses located in Erez Industrial
Zone, have agreed to engage a leading local law firm to negotiate the terms of
our compensation with the Israeli Government, if and when such an event takes
place. We believe that at the minimum we would be compensated for the actual
expenses incurred in connection with the subsidiary relocation.
THREE MONTHS ENDED JUNE 30, 2004 COMPARED WITH THREE MONTHS ENDED JUNE 30, 2003
RESULTS OF OPERATIONS
NET REVENUES AND GROSS PROFIT MARGIN. Net Revenues for the three months
ended June 30, 2004 were $2,826,725 compared to $1,952,258 for the same period
in 2003, an increase of 44.8%. This increase was due to increased export
military sales. The increase in the export business is partially attributable to
the sales of our ballistic plates, blankets and lightweight vehicle armor kits
that were recently introduced as new product offerings. This increase in net
revenues was partially offset by the continued weakness in sales to the local
market.
10
The following table sets forth the breakdown of sales by segment for the
three months ended June 30, 2004 and 2003.
Three Months Ended June 30,
---------------------------
2004 2003
------------ ------------
Sales to the local civilian market $ 282,108 $ 784,155
Sales to the local military market 688,147 497,887
Export military sales 1,856,470 670,216
The trend of increased export sales is expected to continue into the third
quarter. We anticipate that our total sales in the third quarter will exceed our
sales the same quarter in 2003.
Gross profit for the three months ended June 30, 2004 was $854,527 compared
to $547,684 for the same period in 2003. This increase in gross profit is
primarily attributable to the increase in overall sales.
Our gross profit margin for the three months ended June 30, 2004 was 30.2%
compared to 28.0% for the same period in 2003. This increase is attributable to
the increase in overseas sales which in this quarter were characterized by
higher margins compared to local sales. The relatively high margins were offset
by: (i) the approximately 5% increase in the ratio between the Euro (which is
the currency used for the majority of our raw material purchases) and the U.S.
dollar (which is the principal currency for our sales); and (ii) the increased
local competition arising from shrinkage in the market. We do not anticipate any
major change to our gross margin percentage during the remainder of 2004.
Our cost of sales for the three months ended June 30, 2004 was $1,972,198
compared to $1,404,547 for the same the same period in 2003. This increase is a
result of the increase in sales.
GENERAL AND ADMINISTRATIVE EXPENSES AND SELLING EXPENSES. General and
administrative expenses for three months ended June 30, 2004 increased slightly
to $376,892 from $370,705 for the same period in 2003. Selling expenses for the
three months ended June 30, 2004 were $270,437 compared to $193,595 for the same
period in 2003. This increase is primarily due to payment of a higher rate of
commissions on export sales transactions. We anticipate no material change in
our general and administrative expenses or selling expenses in the third
quarter.
INCOME TAX EXPENSE. Our income tax expense (benefit) for the three months
ended June 30, 2004 was $89,363 as compared to ($4,333) for the comparable
period in 2003. Our effective tax rate was 44.5% in the 2004 period.
FINANCIAL EXPENSES. We had financial expenses, net of $38,313 for the three
months ended June 30, 2004 as compared to $87,140 for the same period in 2003.
The decrease is attributable to a decrease in financing expenditures due to a
decrease in prevailing interest rates in Israel.
11
OTHER INCOME (EXPENSE), NET. We had other income, net for the three months
ended June 30, 2004 of $31,709 as compared to other income of $26,015 for the
same period in 2003.The increase in other income, net is attributable to profits
from our marketable securities.
MINORITY INTEREST. Minority interest in the profits and losses of one of
our consolidated subsidiaries represents the minority shareholders' share of the
profits or losses in such majority owned subsidiary. For the three months ended
June 30, 2004, we recognized and recorded minority share in our profit of
$28,121 compared to minority share in our loss of $1,012 for the same period in
2003.
SIX MONTHS ENDED JUNE 30, 2004 COMPARED WITH SIX MONTHS ENDED JUNE 30, 2003
RESULTS OF OPERATIONS
NET REVENUES AND GROSS PROFIT MARGIN. Net Revenues for the six months ended
June 30, 2004 were $6,572,804 compared to $5,120,402 for the same period in
2003, an increase of 28.4%. This increase resulted from an increase in our
export military sales. The increase in the export business is partially
attributable to our sales of ballistic plates, blankets and lightweight vehicle
armor kits that were recently introduced as new product offerings. This increase
in export sales was partially offset by the continued weakness of sales to the
local market.
The following table sets forth the breakdown of sales by market for the six
months ended June 30, 2004 and 2003.
Six Months Ended June 30,
---------------------------
2004 2003
------------ ------------
Sales to the local civilian market $ 539,195 $1,205,687
Sales to the local military market 1,130,164 1,496,634
Export military sales 4,903,445 2,418,081
Gross profit for the six months ended June 30, 2004 was $1,820,766 compared
to $1,442,016 for the same period in 2003. This increase in gross profit is
primarily attributable to the increase in export sales.
Gross profit margin for the six months ended June 30, 2004 was 27.7%
compared to 28.2% for the same period in 2003.
Our cost of sales for the six months ended June 30, 2004 increased to
$4,752,038 compared to $3,678,386 for the same the same period in 2003, due to
the increase in overall sales.
GENERAL AND ADMINISTRATIVE EXPENSES AND SELLING EXPENSES. General and
administrative expenses for six months ended June 30, 2004 were $683,589
compared to $694,053 for the same period in 2003, as a result of our recently
implemented budget policy. Selling expenses for the six months ended June 30,
2004 were $391,356 compared to $382,271 for the same period in 2003.
12
INCOME TAX EXPENSE. Our income tax expense for the six months ended June
30, 2004 was $283,701 as compared to $124,913 for the comparable period in 2003.
Our effective tax rate was 38.2% in the 2004 period compared to 53.4% in 2003.
This decrease in the effective tax rate was due to lower levels of
non-deductible expenses for taxes.
FINANCIAL EXPENSES. We had financial expenses, net of $62,795 for the six
months ended June 30, 2004 as compared to financial expenses, net of $157,893
for the same period in 2003. The decrease is attributable to decrease in
financing expenditures due to a decrease in prevailing interest rates in Israel.
OTHER INCOME (EXPENSE), NET. We had other income, net for the six months
ended June 30, 2004 of $58,907 as compared to $26,015 for the same period in
2003. The increase in other income, net is attributable to profits from our
marketable securities.
MINORITY INTEREST. Minority interest in the profits and losses of one of
our consolidated subsidiaries represents the minority shareholders' share of the
profits or losses in such majority owned subsidiary. For the six months ended
June 30, 2004, we recognized and recorded minority share in our profit of
$25,898 compared to minority share in our profit of $7,184 for the same period
in 2003.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2004, we had $808,790 in cash and cash equivalents and our
working capital was $4,120,531. Our current activities are financed by short and
long-term bank loans offset by short-term deposits. Our decision to incur
additional short-term debt was based on our consideration of the prevailing
yields on our deposits, which are generally in foreign currency generated from
receipts from overseas sales, compared to the cost of short-term loans.
Net cash provided by operating activities was $243,183 for the six months
ended June 30, 2004. This was primarily attributable to our net income of
$432,334 and a $481,516 increase in other liabilities, prepaid payments by
customers, accrued employees expenses, accrued taxes expenses and other accrued
expenses, which was offset among other things by a $610,139 increase in trade
accounts receivable, a $93,634 decrease in trade accounts payable and a $86,810
increase in inventory.
The increase in accounts receivable at June 30, 2004 from December 31,
2003, was primarily the result of the increased level of export sales. The
increase in inventory at June 30, 2004 compared to December 31, 2003 was also
due to the increased level of sales and our forecast of future sales.
Net cash used for investing activities was $96,291 for the six months ended
June 30, 2004. During the six months ended June 30, 2004, $35,615 of net cash
was provided from sales and purchases of marketable securities and $131,906 was
used to purchase property, plant and equipment.
Net cash used for financing activities was $19,809 for the six months ended
June 30, 2004, compared to net cash provided by financing activities of $265,069
for the six months ended June 30, 2003. During the 2004 period we made $243,720
in payments on our long term debt that was substantially offset by net proceeds
from short term debt and long term loans. In the 2003 period we incurred
$339,171 in short term debt and made $74,102 payments on our long term debt.
13
During the reminder of 2004 and 2005, we plan to increase our research and
development efforts, primarily with respect to stab-resistant solutions,
mine-protective shoes, floatable ballistic vests, ballistic protection based on
ceramic glass, ballistic concrete reinforcement, and modified ballistic wall
coverings. We estimate total research and development expenses for the reminder
of 2004 will be approximately $250,000 and will increase to $350,000 in 2005. We
plan to finance our future research and development through an equity offering
or other financing. If we are unsuccessful in securing sufficient funds, we will
fund our research and development from our working capital and cash flow, at a
slower pace of development.
We believe that we have sufficient funds to fund our operations during the
remainder of 2004.
MARKET RISK
At June 30, 2004 and December 31, 2003, we held cash and cash equivalents
in the aggregate amount of $808,790 and $784,026, respectively. Most of these
amounts were deposited with Israeli banks. Under Israeli law, the Bank of Israel
insures all bank deposits without limits on the amount. Therefore, we do not
anticipate losses in respect to these items.
Our exposure from export sales are managed by the receipt of letters of
credit or advance payments from our overseas customers or limited open accounts
based on previous experience with a specific customer. The majority of our local
sales are made to government institutions and private industry in Israel.
Consequently, we believe the exposure to credit risks relating to trade
receivables is limited.
We perform ongoing credit evaluations of our customers and generally do not
require collateral. An appropriate allowance for doubtful accounts is included
in trade accounts receivable.
FOREIGN CURRENCY EXCHANGE RISK
We develop products in Israel and sell them in South America, Asia and
several European countries. As a result, our financial results could be affected
by factors such as changes in foreign currency exchange rates or weak economic
conditions in foreign markets.
Our foreign currency exposure with respect to our sales is mitigated, and
we expect it will continue to be mitigated, through salaries, materials and
support operations, in which part of these costs are denominated in NIS.
During 2004, the NIS revalued approximately 9.4% against the U.S. dollar.
Among the factors contributing to the revaluation are the low interest rate for
US$ investments compared to the higher interest rate for NIS investments. The
inflation in Israel was approximately 1.4% for the six month ended June 2004
compared to an annual deflation of 1.9% in 2003.
14
Since most of our sales are quoted in U.S. dollars, and a portion of our
expenses are incurred in NIS, our results may be adversely affected by a change
in the rate of inflation in Israel or if such change in the rate of inflation is
not offset, or is offset on a lagging basis, by a corresponding devaluation of
the NIS against the U.S. dollar and other foreign currencies.
We did not enter into any foreign exchange contracts in 2003 or the first
six months of 2004.
CONTRACTUAL OBLIGATIONS
The following table summarizes our contractual obligations and commercial
commitments as of June 30, 2004.
Contractual Obligations Payments due by Period
------------------------------------ ---------------------------------------------------------------------
more than 5
Total less than 1 year 2-3 years 4-5 years years
---------- ---------- ---------- ---------- ----------
Long-term debt obligations $1,120,424 $ 413,030 $ 529,250 $ 178,144 --
Capital (finance) lease obligations -- -- -- -- --
Operating lease obligations 127,400 116,600 10,800 -- --
Purchase obligations -- -- -- -- --
Other long-term liabilities
reflected on the Company's
balance sheet under U.S. GAAP -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Total $1,247,824 $ 529,630 $ 540,050 $ 178,144 --
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION AND RISK FACTORS
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. WORDS SUCH AS "ANTICIPATE,"
"EXPECT," "INTEND," "PLAN," "BELIEVE," "SEEK," "OUTLOOK" AND "ESTIMATE" AS WELL
AS SIMILAR WORDS AND PHRASES SIGNIFY FORWARD-LOOKING STATEMENTS. OUR
FORWARD-LOOKING STATEMENTS ARE NOT GUARANTEES OF FUTURE RESULTS AND CONDITIONS
AND IMPORTANT FACTORS, RISKS AND UNCERTAINTIES MAY CAUSE OUR ACTUAL RESULTS TO
DIFFER MATERIALLY FROM THOSE EXPRESSED IN OUR FORWARD-LOOKING STATEMENTS. THESE
UNCERTAINTIES AND OTHER FACTORS INCLUDE, BUT ARE NOT LIMITED TO, THE FOLLOWING:
15
o Our products are used in applications that are inherently risky and could
give rise to product liability and other claims arising from the design,
manufacture or sale of such goods. If we are found to be liable in such
claim we may be required to pay substantial damages and our insurance costs
may increase significantly. Moreover, our insurance coverage may not be
sufficient to cover the payment of any potential claim. As a result of such
claim, insurance coverage will may not be available for us. The inability
to obtain product liability coverage would prohibit us from bidding for
orders from certain governmental customers.
o Our failure or inability to comply with extensive government regulation to
which we are subject could materially restrict our operations and subject
us to substantial penalties.
o Our significant international operations subject us to financial and
regulatory risks.
o Currency exchange rate fluctuations in the world markets in which we
conduct business could have a material adverse effect on our business,
results of operations and financial condition.
o Reduction in military budgets worldwide may cause a reduction in our
revenues.
o Sales of our products are subject to governmental procurement procedures
and practices; termination, reduction or modification of contracts with our
customers, and especially with the government of Israel, or a substantial
decrease in our customers' budgets may adversely affect on us.
o The loss of one or more of our key customers would result in a loss of a
significant amount of our revenues.
o Our markets are highly competitive. Inability to compete effectively will
adversely affect us.
o Limited sources for some of our raw materials may significantly curtail our
manufacturing operations.
o Our resources may be insufficient to manage the demands imposed by any
future growth.
o Technological advances, the introduction of new products, and new design
and manufacturing techniques could adversely affect our operations unless
we are able to adapt to the resulting change in conditions.
o We may need to raise additional capital in the future, which may not be
available to us.
o Conditions in Israel affect our operations and may limit our ability to
produce and sell our products, which could decrease our revenues.
o The economic conditions in Israel have not been stable in recent years.
16
o Some of our directors, officers and employees are obligated to perform
annual military reserve duty in Israel. We cannot assess the potential
impact of these obligations on our business.
o Our shares of common stock are thinly traded.
o We are subject to the penny stock rules. These rules may adversely effect
trading in our common shares.
o We do not intend to pay dividends.
ITEM 3. CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management,
including our chief executive officer and chief financial officer, we carried
out an evaluation of the effectiveness of the design and operation of our
company's disclosure controls and procedures pursuant to Rule 13a-14 of the
Securities Exchange Act of 1934. Based upon that evaluation, our chief executive
officer and chief financial officer concluded that our disclosure controls and
procedures were effective as of the end of the period covered by this quarterly
report.
There have been no significant changes in our internal controls or other
factors which could significantly affect internal controls subsequent to the
date we carried out the evaluation.
It should be noted that any system of controls, however well designed and
operated, can provide only reasonable, and not absolute, assurance that the
objectives of the system are met. In addition, the design of any control system
is based in part upon certain assumptions about the likelihood of future events.
Because of these and other inherent limitations of control systems, there can be
no assurance that any design will succeed in achieving its stated goals under
all potential future conditions.
PART II - OTHER INFORMATION
DEFENSE INDUSTRIES INTERNATIONAL, INC. AND SUBSIDIARIES
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
31.1 Certification by Chief Executive Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certification by Chief Financial Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32.1 Certification by Chief Executive Officer Pursuant to 18 U.S.C. Section
1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
32.2 Certification by Chief Financial Officer Pursuant to 18 U.S.C. Section
1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
(B) REPORTS ON FORM 8-K FILED DURING THE LAST QUARTER OF THE PERIOD COVERED BY
THIS REPORT:
None
17
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
DEFENSE INDUSTRIES INTERNATIONAL, INC.
(Registrant)
/S/ Joseph Postbinder
-------------------------
Name: Joseph Postbinder
Chief Executive Officer
/S/ Tsippy Moldovan
-------------------------
Name: Tsippy Moldovan
Chief Financial Officer
Date: August 13, 2004.
18