U.S. SECURITIES EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
( ) TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For Quarter Ended: Commission File Number: 000-30105
June 30, 2002
DEFENSE INDUSTRIES INTERNATIONAL, INC.
--------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
NEVADA 84-1421481
------------------ ------------------------------
(State or other jurisdiction of (IRS Employer Identification
incorporation or organization) Number)
Industrial Zone Erez
P.O. Box 779
Ashkelon, Israel 78101
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(Address of Principal Executive Offices) (Zip Code)
011-972-8-689-1611
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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 filing requirements
for the past 90 days.
Yes X No___
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The number of shares of Common Stock, no par value per share, outstanding as of
June 30, 2002 is 25,400,000.
Transitional Small Business Disclosure Format (check one): Yes__ No X
---
-1-
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DEFENSE INDUSTRIES INTERNATIONAL, INC.
(FORMERLY PAWNBROKERS EXCHANGE, INC.)
AND SUBSIDIARIES
CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
AS OF JUNE 30, 2002
-2-
DEFENSE INDUSTRIES INTERNATIONAL, INC.
(FORMERLY PAWNBROKERS EXCHANGE, INC.) AND SUBSIDIARIES
CONTENTS
PAGES 4 - 5 CONDENSED CONSOLIDATED BALANCE SHEETS AS OF JUNE 30,
2002 (UNAUDITED) AND DECEMBER 31, 2001
PAGE 6 CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND
COMPREHENSIVE INCOME (LOSS) FOR THE THREE AND SIX MONTHS
ENDED JUNE 30, 2002 AND 2001 (UNAUDITED)
PAGE 7 CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN
SHAREHOLDERS' EQUITY FOR THE SIX MONTHS ENDED JUNE 30,
2002 (UNAUDITED)
PAGE 9 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE
SIX MONTHS ENDED JUNE 30, 2002 AND 2001 (UNAUDITED)
PAGES 10 - 19 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
-3-
DEFENSE INDUSTRIES INTERNATIONAL, INC.
(FORMERLY PAWNBROKERS EXCHANGE, INC.) AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
December 31,
June 30, 2002 2001
(Unaudited) (As Restated)
--------------- --------------
CURRENT ASSETS
Cash and cash equivalents $ 540,054 $ 781,996
Trade accounts receivable, net 1,692,195 2,461,671
Trade accounts receivable - related parties, net 140,728 181,059
Shareholder note receivable 400,000 -
Other receivables and debit balances 410,610 274,840
Inventories 1,945,054 1,956,072
Deferred taxes 105,219 97,761
--------------- --------------
Total Current Assets 5,233,860 5,753,399
--------------- --------------
PROPERTY, PLANT AND EQUIPMENT, NET 1,826,348 1,951,147
--------------- --------------
OTHER ASSETS
Investment in marketable securities 521,526 616,105
Deposits for the severance of employer-employee relations 384,536 472,421
Deferred taxes, long-term 278,847 400,689
Intangible assets 52,099 61,452
--------------- --------------
Total Other Assets 1,237,008 1,550,667
--------------- --------------
Total assets $ 8,297,216 $ 9,255,213
------------
=============== ==============
-4-
DEFENSE INDUSTRIES INTERNATIONAL, INC.
(FORMERLY PAWNBROKERS EXCHANGE, INC.) AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
December 31,
June 30, 2002 2001
(Unaudited) (As Restated)
--------------- --------------
CURRENT LIABILITIES
Short-term bank credit $ 693,560 $ 894,981
Trade accounts payable 1,092,729 1,551,470
Current portion of long-term debt 349,525 371,344
Other accounts payable and credit balances 963,307 1,011,062
--------------- --------------
Total Current Liabilities 3,099,121 3,828,857
--------------- --------------
LONG-TERM LIABILITIES
Long-term loans 650,045 1,295,440
Long-term loan - related party - 47,432
Provision for the severance of employer-employee relations 418,884 431,522
Minority interest 600,445 572,106
--------------- --------------
Total Long-Term Liabilities 1,669,374 2,346,500
--------------- --------------
Total liabilities 4,768,495 6,175,357
--------------- --------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common stock, no par value, 300,000,000 shares authorized,
25,400,000 and 21,000,000 issued and outstanding,
respectively 2,069,485 1,147,485
Retained earnings 3,018,499 2,396,616
Accumulated other comprehensive loss (680,263) (464,245)
Deferred consulting fees (879,000) -
--------------- --------------
Total Shareholders' Equity 3,528,721 3,079,856
--------------- --------------
Total liabilities and shareholders' equity $ 8,297,216 $ 9,255,213
------------------------------------------
=============== ==============
-5-
DEFENSE INDUSTRIES INTERNATIONAL, INC.
(FORMERLY PAWNBROKERS EXCHANGE, INC.) AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND
COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
For the For the
Three Three For the For the
Months Months Six Months Six Months
Ended June Ended June Ended June Ended June
30, 2002 30, 2001 30, 2002 30, 2001
------------ ------------ ------------ ------------
REVENUES $ 2,692,415 $ 942,188 $ 5,313,635 $ 2,039,258
Cost of sales and processing 1,663,279 616,126 3,267,108 1,373,989
------------ ------------ ------------ ------------
Gross profit 1,029,136 326,062 2,046,527 665,269
------------ ------------ ------------ ------------
OPERATING EXPENSES
Selling expenses 228,016 40,292 322,683 101,897
General and administrative expenses 333,121 182,296 599,165 264,568
------------ ------------ ------------ ------------
TOTAL OPERATING EXPENSES 561,137 222,588 921,848 366,465
------------ ------------ ------------ ------------
INCOME FROM OPERATIONS 467,999 103,474 1,124,679 298,804
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE)
Financial income (expense), net (33,144) (41,012) (66,295) (30,046)
Other income - net 11,915 31,116 12,920 49,028
------------ ------------ ------------ ------------
TOTAL OTHER INCOME (EXPENSE) (21,229) (9,896) (53,375) 18,982
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES 446,770 93,578 1,071,304 317,786
Income tax expense 185,888 14,766 408,081 97,743
------------ ------------ ------------ ------------
INCOME BEFORE MINORITY INTEREST 260,882 78,812 663,223 220,043
Minority interest (18,254) (7,313) (41,340) (7,313)
------------ ------------ ------------ ------------
NET INCOME $ 242,628 $ 71,499 $ 621,883 $ 212,730
------------ ------------ ------------ ------------
OTHER COMPREHENSIVE INCOME (LOSS)
Foreign currency translation gain
(loss), net of minority interest
translation loss 10,272 15,702 (163,128) (58,142)
Unrealized gain (loss) on
available-for-sale securities (61,260) 31,023 (52,890) (93,982)
------------ ------------ ------------ ------------
Other comprehensive income (loss) (50,988) 46,725 (216,018) (152,124)
before tax
Income tax (expense) benefit related
to items of other comprehensive
income 18,356 (16,821) 77,766 54,765
------------ ------------ ------------ ------------
TOTAL OTHER COMPREHENSIVE INCOME
(LOSS), NET OF TAX (32,632) 29,904 (138,252) (97,359)
------------ ------------ ------------ ------------
COMPREHENSIVE INCOME (LOSS) $ 209,996 $ 101,403 $ 483,631 $ 115,371
---------------------------
============ ============ ============ ============
Net income per ordinary share - basic
and diluted $ 0.01 $ 0.00 $ 0.03 $ 0.01
============ ============ ============ ============
Weighted average number of shares
outstanding during the period -
basic and diluted 25,149,171 20,099,993 23,314,917 20,025,407
============ ============ ============ ============
-6-
DEFENSE INDUSTRIES INTERNATIONAL, INC.
(FORMERLY PAWNBROKERS EXCHANGE, INC.) AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2002
(UNAUDITED)
Accumulated
Other
Common Stock Retained Deferred Consulting Comprehensive
Shares Amount Earnings Fees Income (Loss) Total
------------ ----------- ------------ ------------ --------------- -------------
Balance, January 1, 2002
(as previously reported) 21,000,000 $ 1,147,485 $ 2,468,669 $ - (464,245) $ 3,151,909
Prior period adjustment - error
in depreciation expense - - (72,053) - - (72,053)
------------ ----------- ------------ ------------ --------------- -------------
Balance, January 1, 2002 (as
restated) 21,000,000 1,147,485 2,396,616 - (464,245) 3,079,856
Common stock transferred in
recapitalization 4,000,000 - - - - -
Common stock issued for services 400,000 922,000 - (879,000) - 43,000
Foreign currency translation loss - - - - (163,128) (163,128)
Unrealized loss on available for
sale securities - - - - (52,890) (52,890)
Net income 2002 - - 621,883 - - 621,883
------------ ----------- ------------ ------------ --------------- -------------
BALANCE, JUNE 30, 2002 25,400,000 $ 2,069,485 $ 3,018,499 $ (879,000) (680,263) $ 3,528,721
---------------------- ============ =========== ============ ============ =============== =============
-7-
DEFENSE INDUSTRIES INTERNATIONAL, INC.
(FORMERLY PAWNBROKERS EXCHANGE, INC.) AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For The For The
Six Months Six Months
Ended June Ended June
30, 2002 30, 2001
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 621,883 $ 212,730
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 140,983 55,431
Stock issued for services 43,000 -
Minority interest in income of subsidiary 28,339 -
Gain from sale of fixed assets - (15,377)
Decrease (increase) in deposits for employee severance 87,885 1,426
Decrease (increase) in deferred taxes 114,384 221
Decrease (increase) in trade accounts receivable 809,806 (337,345)
Decrease (increase) in other receivables and debit balances (135,769) 4,486
Decrease (increase) in inventory 11,018 22,860
Increase (decrease) in trade accounts payable (458,741) (51,457)
Increase (decrease) in other accounts payable and credit
balances (47,755) 109,082
Increase (decrease) in provision for employee severance (12,638) 7,676
------------ ------------
Net Cash Provided By Operating Activities 1,202,395 9,733
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (58,312) (60,927)
Proceeds from sale of property and equipment 3,167 17,392
Investment in marketable securities (17,421) (18,397)
Cash acquired in acquisition of Achidatex - 39,147
Funds advanced on behalf of shareholder (400,000) -
Advances related to acquisition, net - 56,820
Loan to subsidiary - (480,000)
------------ ------------
Net Cash Used in Investing Activities (472,566) (445,965)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term bank credit, net (201,421) 515,141
Payments on long term debt (667,214) (10,885)
Loan payable - related party (47,432) -
------------ ------------
Net Cash Provided By (Used In) Financing Activities (916,067) 504,256
------------ ------------
Effect of exchange rate changes on cash (55,704) (33,315)
------------ ------------
Net increase (decrease) in cash and cash equivalents (241,942) 34,709
Cash and cash equivalents - beginning of period 781,996 663,295
------------ ------------
Cash and cash equivalents - end of period $ 540,054 $ 698,004
-----------------------------------------
============ ============
INTEREST PAID $ 69,546 $ 43,665
============ ============
TAXES PAID $ 59,521 $ 59,407
============ ============
-8-
DEFENSE INDUSTRIES INTERNATIONAL, INC.
(FORMERLY PAWNBROKERS EXCHANGE, INC.) AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING ACTIVITIES:
On March 25, 2002, the Company issued 21,000,000 shares of common stock to
acquire Export Erez USA, Inc.
On April 8, 2002, the Company issued 100,000 shares of common stock for
consulting services aggregating $172,000 of which $43,000 has been expensed and
$129,000 has been deferred at June 30, 2002.
On April 30, 2002, the Company issued 300,000 shares of common stock under a
consulting agreement valued at $750,000. No consulting services have been
performed to date in connection with this agreement and the entire amount has
been deferred.
-9-
DEFENSE INDUSTRIES INTERNATIONAL, INC.
(FORMERLY PAWNBROKERS EXCHANGE, 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 for 2002 include the
accounts of Defense Industries International, Inc. (formerly Pawnbrokers
Exchange, Inc. (see Note 7)) 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.
The consolidated financial statements for 2001 include the accounts of
Export Erez, USA, Inc. and its wholly owned subsidiaries, Export Erez,
Ltd., Mayotex, Ltd. and Dragonwear Trading Ltd. and its 76% owned
subsidiary Achidatex Nazareth Elite from June 18, 2001, the date of
acquisition (See Note 5).
All intercompany accounts and transactions have been eliminated in
consolidation.
(C) Use of Estimates
The preparation of financial statements in conformity with Accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that effect the reported
amounts of assets and liabilities and disclose the nature of contingent
assets and liabilities at the date of the 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
common shares outstanding during the year. Diluted net income per common
share is computed based on the weighted average common shares and common
stock equivalents outstanding during the year. The computation of weighted
average common shares outstanding gives retroactive effect to the
recapitalization discussed in Note 4. There were no common stock
equivalents outstanding because the exercise price of the common stock
equivalents exceeded the average market price of the stock. Accordingly, a
reconciliation between basic and diluted earnings per share is not
presented.
-10-
(E) Interim Consolidated Financial Statements
The condensed consolidated financial statements as of June 30, 2002 and for
the three and six months ended June 30, 2002 and 2001 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 three and six months ended June 30, 2002 and 2001 are
not necessarily indicative of the results to be expected for the full year.
The condensed consolidated balance sheet information as of December 31,
2001 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.
(F) Prior Period Adjustment
The accompanying condensed consolidated balance sheet as of December 31,
2001 has been restated to correct an error for the understatement of
depreciation expense during 2001. The effect of the restatement was to
decrease net income for 2001 by $72,053. Retained earnings and property,
plant and equipment, net in the December 31, 2001 consolidated balance
sheet and retained earnings in the consolidated statement of changes in
shareholders' equity have been restated for the effects of the prior period
adjustment.
NOTE 2 INVENTORY
Inventory consisted of the following:
June 30, 2002 December 31, 2001
-------------- -----------------
Raw materials $ 1,325,855 $ 1,166,086
Work in process 276,717 491,237
Finished goods 342,481 298,749
-------------- -------------
$ 1,945,054 $ 1,956,072
============== =============
NOTE 3 SHAREHOLDER LOAN RECEIVABLE
On January 15, 2002, the Company loaned $400,000 to the Company's
controlling shareholder. The note is for a term of eleven months maturing
December 15, 2002, bears interest of 8% and requires quarterly prepaid
interest payments only. Interest on this loan was not paid until August
2002 and approximately $10,000 of interest income has been accrued for the
period ended June 30, 2002.
-11-
DEFENSE INDUSTRIES INTERNATIONAL, INC.
(FORMERLY PAWNBROKERS EXCHANGE, INC.) AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4 SHAREHOLDERS' EQUITY
(A) Recapitalization
On March 25, 2002, Pawnbrokers Exchange, Inc. ("PEI"), a reporting public
company with no assets, liabilities or operations at that time, consummated
a share exchange agreement (the "Agreement") with Export Erez USA, Inc.,
("Export USA") a company incorporated in Delaware whereby all of the
shareholders in Export USA had their shares converted into 21,000,000
shares or 84% of the common stock of PEI.
Under generally accepted accounting principles, a company whose
stockholders receive over fifty percent of the stock of the surviving
entity in a business combination is considered the acquirer for accounting
purposes. Accordingly, the transaction was accounted for as an acquisition
of the Company and a recapitalization of Export USA. The condensed
consolidated financial statements subsequent to the acquisition include the
following: (1) the balance sheet consists of the net assets of the Company
at historical costs (zero at the acquisition date) and the net assets of
Export USA at historical cost. (2) the statement of operations consists of
the operations of Export USA for the period presented and the operations of
the Company from the recapitalization date.
As a result of the recapitalization, $1,146,169 was reclassified from
additional paid-in capital to common stock in the accompanying June 30,
2002 balance sheet. For comparative purposes, $1,146,169 was reclassified
from additional paid-in capital to common stock in the accompanying
December 31, 2001 balance sheet in order to conform to the June 30, 2002
presentation.
(B) Issuances of Common Stock
On April 8, 2002, the Company entered into a one-year agreement with a
consultant whereby the Company issued 100,000 shares of common stock in
return for future consulting services. The 100,000 shares were valued at
$172,000, the fair market value of the common stock on the grant date based
on the prevailing market price. Consulting expense of $43,000 was
recognized as of June 30, 2002 and $129,000 is reflected as a deferred
consulting expense component of equity.
On April 30, 2002, the Company entered into a one-year agreement with a
consultant whereby the Company issued 300,000 shares of common stock in
return for future consulting services. The 300,000 shares were valued at
$750,000 the fair market value of the common stock on the grant date based
on the prevailing market price. The contract is in dispute and no services
have been performed to date. Counsel for the Company is confident that the
Company will prevail and receive its 300,000 shares back. Therefore, no
consulting expense was recognized as of June 30, 2002 and $750,000 is
reflected as a deferred consulting expense component of equity.
-12-
DEFENSE INDUSTRIES INTERNATIONAL, INC.
(FORMERLY PAWNBROKERS EXCHANGE, INC.) AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 5 BUSINESS COMBINATION
Effective June 18, 2001, the Company acquired 76% of the total common stock
of Achidatex Nazareth Elite (1977) Ltd. ("Achidatex"). Accordingly, the
results of operations of Achidatex are included in the condensed
consolidated financial statements for the six months ended June 30, 2002.
For comparative purposes, following are the summarized unaudited pro forma
condensed consolidated results of operations for the six months ended June
30, 2001, assuming the acquisition had taken place at the beginning of
2001. The unaudited pro forma results are not necessarily indicative of
future earnings or earnings that would have been reported had the
acquisition been completed when assumed.
Net revenues $ 5,157,674
Income before income taxes $ 683,574
Income tax expense (benefit) $ (607,530)
Minority interest, net of tax $ 264,368
Net income $ 1,026,736
Net income per share $ 0.05
NOTE 6 SEGMENT INFORMATION
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.
Civilian Military Military
Local Local Export Consolidated
---------- ----------- ----------- ------------
June 30, 2002
Net Sales $ 2,011,659 $ 2,506,343 $ 795,633 $ 5,313,635
Income from
operations 560,312 392,739 171,628 1,124,679
June 30, 2001
Net Sales $ 960,620 $ 804,102 $ 274,536 $ 2,039,258
Income from
operations 177,604 94,086 27,114 298,804
-13-
DEFENSE INDUSTRIES INTERNATIONAL, INC.
(FORMERLY PAWNBROKERS EXCHANGE, INC.) AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 7 SUBSEQUENT EVENT
Effective July 8, 2002, the Company changed its corporate domicile from the
State of Utah to the State of Nevada (the "re-incorporation"). In order to
accomplish the re-incorporation, the Company merged with and into its
wholly-owned subsidiary, Defense Industries International, Inc., a Nevada
corporation. As a result of the re-incorporation, the Company's name was
effectively changed from Pawnbrokers Exchange, Inc. to Defense Industries
International, Inc. Each share of Pawnbrokers capital stock issued and
outstanding on the effective date was converted into and exchanged for one
share of Defense Industries capital stock. Defense Industries is authorized
to issue 250,000,000 shares of $.0001 par value common stock and 50,000,000
shares of $.0001 par value preferred stock.
-14-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Cautionary Statement Pursuant to Safe Harbor Provisions of the Private
Securities Litigation Reform Act of 1995:
This Quarterly Report on Form 10-QSB for the quarterly period ended June 30,
2002 contains "forward-looking" statements within the meaning of Section 27A of
the Securities Act of 1933, as amended, including statements that include the
words "believes", "expects", "anticipates", or similar expressions. These
forward-looking statements may include, among others, statements of
expectations, beliefs, future plans and strategies, anticipated events or
trends, and similar expressions concerning matters that are not historical
facts. The forward-looking statements in this Quarterly Report on Form 10-QSB
for the quarterly period ended June 30, 2002 involve known and unknown risks,
uncertainties and other factors that could the cause actual results, performance
or achievements of the Company to differ materially from those expressed in or
implied by the forward-looking statements contained herein.
OVERVIEW
The strategic objective of Defense Industries International, Inc. is to be the
leading global provider of personal military and civilian protective equipment
and supplies. We intend to realize our strategic objective through the
following:
-Pursue Strategic Acquisitions: We intend to selectively pursue
acquisitions that enhance our product lines and geographic presence in an effort
to consolidate our highly fragmented industry and to create a more diverse and
global reach for our company in the marketplace.
-Focus on Internal Growth: We intend to focus on internal expansion of our
businesses, thereby placing our company in a position to offer an even more
comprehensive portfolio of products to satisfy all of our customers' protective
equipment needs.
-Capitalize On Increased Demand for Company Products. As a result of the
terrorist attacks on September 11, 2001, and other recent world events, an
increased emphasis on safety and protection now exists worldwide. This has
translated into increased spending on personal military and civilian protective
equipment and supplies. We expect a continued increase in volume for our current
government programs and expect to participate in other existing and future
government programs that require our products. We also expect a continued
increase in sales to the growing civilian market for our products.
-Expand Marketing Efforts: In the wake of the terrorist attacks of
September 11, 2001, and other recent world events, a greater global recognition
regarding the need for our products has materialized. We intend to capitalize on
this increased interest in our products by broadening our marketing efforts in
an attempt to create better global brand and recognition awareness of our
company and our products.
-Expand Distribution Network and Product Offerings: We intend to widen our
distribution network through strategic acquisitions and the development of new
products. We believe that a broader product line will enable us to strengthen
our relationship with existing customers and attract new customers at the same
time.
RESULTS OF OPERATIONS
Three Months Ended June 30, 2002 Compared to Three Months Ended June 30,2001
----------------------------------------------------------------------------
SALES AND GROSS PROFIT MARGIN
Sales in the three months ended June 30, 2002 increased to $2,692,415 or
185.8% from $942,188 for the same three months in 2001. We attribute this
increase in sales to the acquisition of Achidatex, Ltd. in June 2001, and the
increased demand for our products. The breakdown of sales for the three months
ended June 30 is as follows:
2002 ($) 2001 ($)
-------- ---------
Sales to the local market-civilian 1,034,046 474,474
Sales to the local market-military 1,119,535 287,481
Export sales-military 538,835 180,233
Totals $ 2,692,416 942,188
-15-
Gross profit for the three months ended June 30, 2002 increased to
$1,029,136 or 215.7% from $326,062 for the same three months in 2001. This
increase in gross profit is explained partly by the acquisition of Achidatex,
Ltd. in June 2001, and the increased demand for our products. The gross margin
for the three months ended June 30, 2002 improved to 38% as compared to 34.6%
for the same three months in 2001.
The cost of production for the three months ended June 30, 2002 was
$1,663,279 compared to $616,126 for the same three months in 2001. This change
in cost of production is explained partly by the acquisition of Achidatex, Ltd..
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative costs in the three months ended June 30, 2002
were $333,121 compared to $182,296 for the same three months in 2001. This
change is explained partly by the acquisition of Achidatex, Ltd.
INCOME TAX EXPENSE
Income tax expense for the three months ended June 30, 2002 was $185,888 or
41.6% of income before income taxes, as compared to $14,766 or 15.8% of income
before income taxes for the three months ended June 30,2001.
The effective income tax rate increased in 2002 as compared to 2001 as a
result of several factors. Certain stock-based non-cash operating expenses
incurred in 2002 at the US holding company level were not deductible against the
income generated at the Israel subsidiaries for income tax purposes. In
addition, depreciation expense with respect to fixed assets of approximately
$1,441,000 acquired in conjunction with the acquisition of a 76% interest in
Achidatex Nazareth Elite (1977) Ltd. effective June 18, 2001 is not deductible
against income generated in Israel for income tax purposes. Depreciation expense
with respect to these fixed assets was approximately $36,000 for the three
months ended June 30, 2002. There was no similar depreciation expense for the
three months ended June 30, 2001.
FINANCIAL INCOME / (EXPENSES), NET
Financial income (expense), net in the three months ended June 30, 2002
were $33,144 compared to $41,012 for the same three months in 2001.
Six Months Ended June 30, 2002 Compared to Six Months Ended June 30, 2001
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SALES AND GROSS PROFIT MARGIN
Sales in the six months ended June 30, 2002 increased to $5,313,635 from
$2,039,258 for the same six months in 2001. We attribute this increase in sales
to the acquisition of Achidatex, Ltd. and increased demand for our products. The
breakdown of sales for the six months ended June 30 is as follows:
2002 ($) 2001 ($)
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Sales to the local market-civilian 2,011,659 960,620
Sales to the local market-military 2,506,343 804,102
Export sales-military 795,633 274,536
Totals $ 5,313,635 2,039,258
Sales to the local market increased by 109.4% This increase in sales is
explained partly by the acquisition of Achidatex, Ltd. and the increased demand
for our products. The gross margin for the six months ended June 30, 2002
improved to 39% as compared to 33% for the same six months in 2001.
Gross profit for the six months ended June 30, 2002 increased to $2,046,527
from $665,269 for the same six months in 2001. This increase in gross profit is
explained partly by the acquisition of Achidatex and increased demand for our
products.
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The cost of production in the six months ended June 30, 2002 was $3,267,108
compared to $1,373,989 for the same six months in 2001. This change in cost of
production is explained partly by the acquisition of Achidatex and increased
demand for our products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative costs in the six months ended June 30, 2002 were
$599,165 compared to $264,568 for the same six months in 2001. This change is
explained partly by the acquisition of Achidatex, Ltd. and the increased demand
for our products.
Unfulfilled open orders at June 30, 2002 totaled $3,000,000 and are
scheduled for filling within the next three months.
INCOME TAX EXPENSE
Income tax expense for the six months ended June 30, 2002 was $408,081 or
38.1% of income before income taxes, as compared to $97,743 or 30.8% of income
before income taxes for the six months ended June 30, 2001.
The effective income tax rate increased in 2002 as compared to 2001 as a
result of several factors. Certain stock-based non-cash operating expenses
incurred in 2002 at the US holding company level were not deductible against the
income generated at the Israel subsidiaries for income tax purposes. In
addition, depreciation expense with respect to fixed assets of approximately
$1,441,000 acquired in conjunction with the acquisition of a 76% interest in
Achidatex Nazareth Elite (1977) Ltd. effective June 18, 2001 is not deductible
against income generated in Israel for income tax purposes. Depreciation expense
with respect to these fixed assets was approximately $72,000 for the six
months ended June 30, 2002. There was no similar depreciation expense for the
six months ended June 30, 2001.
FINANCIAL INCOME / (EXPENSES), NET
Financial income (expense), net in the six months ended June 30, 2002 were
$66,295 compared to $30,046 for the same three months in 2001.
LIQUIDITY AND CAPITAL RESOURCES
Our current activities are financed by short and long term bank loans
balanced by short term deposits. The decision regarding the amount of the short
term loans was derived from considerations of the yield on the deposit which is
generally in foreign currency (receipts from overseas sales), compared to the
cost of short term loans. We have positive working capital (current assets less
current liabilities). Long term loans derived from acquisition of Achidatex,
Ltd. their due spread over five years.
During this year and the year following, we anticipate increasing our
research and development of certain items, primarily, ballistic helmets,
stab-resistant fabric, ceramic ballistic plates, ballistic wall covering and
one-way protective windows. We anticipate total research and development
expenses for 2002 and 2003 to be approximately $1,950,000 and $750,000
respectively. We anticipate that in the year 2003 research and development
expenses will drop to approximately $350,000. The development of these products
will be with staff engineers. With respect to ballistic helmets, we anticipate
that these products will be approximately in 20% production by the end of this
year, increasing to full production by the year 2005. We anticipate that in
order to fund the research and development for these products, we may effect an
offering of our equity securities. If we are unable to effect an offering of our
securities, we may fund our research and development through our operating
funds. In such event, the timing of our anticipated research and development and
subsequent production schedule would be slowed.
RECENT ACCOUNTING PRONOUNCEMENTS AND CRITICAL ACCOUNTING POLICIES
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.
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PRINCIPLES OF CONSOLIDATION
The condensed consolidated financial statements for 2002 include the accounts of
Defense Industries International, Inc. (formerly Pawnbrokers Exchange, Inc. (see
Note 7)) 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.
The consolidated financial statements for 2001 include the accounts of Export
Erez, USA, Inc. and its wholly owned subsidiaries, Export Erez, Ltd., Mayotex,
Ltd. and Dragonwear Trading Ltd. and its 76% owned subsidiary Achidatex Nazareth
Elite from June 18, 2001, the date of acquisition (See Note 5).
All intercompany accounts and transactions have been eliminated in
consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with Accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that effect the reported amounts of assets and
liabilities and disclose the nature of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting periods. Actual results could differ from those
estimates.
PER SHARE DATA
Basic net income per common share is computed based on the weighted average
common shares outstanding during the year. Diluted net income per common share
is computed based on the weighted average common shares and common stock
equivalents outstanding during the year. The computation of weighted average
common shares outstanding gives retroactive effect to the recapitalization
discussed in Note 4. There were no common stock equivalents outstanding because
the exercise price of the common stock equivalents exceeded the average market
price of the stock. Accordingly, a reconciliation between basic and diluted
earnings per share is not presented.
INTERIM CONSOLIDATED FINANCIAL STATEMENTS
The condensed consolidated financial statements as of June 30, 2002 and for the
three and six months ended June 30, 2002 and 2001 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 three and
six months ended June 30, 2002 and 2001 are not necessarily indicative of the
results to be expected for the full year. The condensed consolidated balance
sheet information as of December 31, 2001 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.
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PRIOR PERIOD ADJUSTMENT
The accompanying condensed consolidated balance sheet as of December 31, 2001
has been restated to correct an error for the understatement of depreciation
expense during 2001. The effect of the restatement was to decrease net income
for 2001 by $72,053. Retained earnings and property, plant and equipment, net in
the December 31, 2001 consolidated balance sheet and retained earnings in the
consolidated statement of changes in shareholders' equity have been restated for
the effects of the prior period adjustment.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities and Use of Proceeds.
On April 8, 2002 the Company entered into a one year agreement with a
consultant whereby the Company issued 100,000 shares of unregistered common
stock in return for future consulting services.
On April 30, 2002 the Company entered into a one year agreement with a
consultant whereby the Company issued 300,000 shares of unregistered common
stock in return for future consulting services. The contract is in dispute.
Counsel for the Company is confident that the Company will prevail in
receive its 300,000 shares back. (See Note 4 - Shareholders' Equity {B}
Issuances of Common Stock).
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
In June 2002, a majority of the shareholders representing 21,000,000 shares
of the 25,000,000 shares outstanding of the common stock as of May 30,
2002, consented in writing to: (1)a change of domicile merger to effect a
transfer of the Company's domicile from the State of Utah to the State of
Nevada; and (2) adoption of a Stock Option Plan. Reference is made to the
information contained in our Definitive Information Statement made pursuant
to Section 14(C) of the Securities Exchange Act of 1934, filed with the
Securities & Exchange Commission on June 14, 2002.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
99.1 Sarbanes-Oxley Certification
(b) Reports on Form 8-K:
None.
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant
has caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
Dated: August 14, 2002
DEFENSE INDUSTRIES INTERNATIONAL, INC.
By: /s/ Joseph Fostbinder
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Name: Joseph Fostbinder
Title: President
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