U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the quarterly period ended September 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 November 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]
DEFENSE INDUSTRIES INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX
PAGE
PART I - FINANCIAL INFORMATION:
Item 1. Condensed Consolidated Balance Sheets as of September 30, 2004
(Unaudited) and December 31, 2003 1-2
Condensed Consolidated Statements of Operations and Other
Comprehensive Income (Loss) for the Three and Nine Months
Ended September 30, 2004 and 2003 (Unaudited) 3
Condensed Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2004
and 2003 (Unaudited) 4
Notes to Condensed Consolidated Financial Statements
(Unaudited) 5-8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Item 3. Controls and Procedures 18
PART II - OTHER INFORMATION:
Item 4. Submission of Matters to a Vote of Shareholders 18
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
DEFENSE INDUSTRIES INTERNATIONAL, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
PART I - FINANCIAL INFORMATION
ITEM 1.
ASSETS
September
30, 2004 December 31,
(Unaudited) 2003
---------- ----------
CURRENT ASSETS
Cash and cash equivalents $ 581,861 $ 784,026
Trade accounts receivable, net of allowance for doubtful
accounts of $89,084 and $68,345, respectively 2,915,028 1,912,747
Trade accounts receivable - related parties, net 391,899 322,373
Inventory 2,324,532 2,115,825
Investment in marketable securities 697,949 704,046
Deferred taxes 47,969 45,353
Other assets 464,882 422,489
---------- ----------
Total Current Assets 7,424,120 6,306,859
---------- ----------
PROPERTY, PLANT AND EQUIPMENT, NET 1,607,466 1,662,902
---------- ----------
OTHER ASSETS
Deposits for the severance of employer-employee relations 431,590 437,963
Deferred taxes, long-term 45,610 232,713
Intangible assets 32,630 41,105
---------- ----------
Total Other Assets 509,830 711,781
---------- ----------
TOTAL ASSETS $9,541,416 $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
September
30, 2004 December 31,
(Unaudited) 2003
----------- -----------
CURRENT LIABILITIES
Trade accounts payable $ 754,801 $ 730,562
Short-term debt 498,673 719,642
Current portion of long-term debt 414,400 489,524
Accrued expenses 499,467 272,103
Other liabilities 515,317 331,411
----------- -----------
Total Current Liabilities 2,682,658 2,543,242
----------- -----------
LONG-TERM LIABILITIES
Long-term portion of debt 803,572 728,678
Provision for the severance of employer-employee relations 299,641 290,573
Minority interest 883,562 852,914
----------- -----------
Total long-term Liabilities 1,986,775 1,872,165
----------- -----------
TOTAL LIABILITIES 4,669,433 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 3,449,523 2,767,781
Accumulated other comprehensive loss (291,525) (215,631)
----------- -----------
Total Shareholders' Equity 4,871,983 4,266,135
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 9,541,416 $ 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 NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(UNAUDITED)
For the For the
Three Three
Months Months For the Nine For the Nine
Ended Ended Months Ended Months Ended
September September September September
30, 2004 30, 2003 30, 2004 30, 2003
------------ ------------ ------------ ------------
NET REVENUES $ 3,181,111 $ 1,960,300 $ 9,753,915 $ 7,080,702
COST OF SALES 2,027,699 1,464,340 6,779,737 5,142,726
------------ ------------ ------------ ------------
GROSS PROFIT 1,153,412 495,960 2,974,178 1,937,976
------------ ------------ ------------ ------------
OPERATING EXPENSES
Selling 222,231 210,417 613,587 592,688
General and administrative 367,941 335,160 1,051,530 1,029,214
------------ ------------ ------------ ------------
TOTAL OPERATING EXPENSES 590,172 545,577 1,665,117 1,621,902
------------ ------------ ------------ ------------
INCOME FROM OPERATIONS 563,240 (49,617) 1,309,061 316,074
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE)
Financial (expense), net (47,787) (42,699) (110,582) (200,592)
Other income (expense) - net (39,947) 71,275 18,960 97,290
------------ ------------ ------------ ------------
Total Other Income (Expense) (87,734) 28,576 (91,622) (103,302)
------------ ------------ ------------ ------------
INCOME (EXPENSE) BEFORE INCOME TAXES 475,506 (21,041) 1,217,439 212,772
Less: Income tax expense (benefit) 212,583 (59,827) 496,284 65,086
------------ ------------ ------------ ------------
INCOME BEFORE MINORITY INTEREST 262,923 38,786 721,155 147,686
Minority interest (income) loss (13,515) 2,102 (39,413) (5,082)
------------ ------------ ------------ ------------
NET INCOME $ 249,408 $ 40,888 $ 681,742 $ 142,604
============ ============ ============ ============
OTHER COMPREHENSIVE INCOME (LOSS)
Foreign currency translation gain (loss), net of
minority interest portion 6,275 83,692 (82,618) 193,239
Unrealized gain (loss) on available-for-sale securities - (109,730) - 5,128
------------ ------------ ------------ ------------
Other comprehensive income (loss) before tax 6,275 (26,038) (82,618) 198,367
Income tax (expense) benefit related to items of other
comprehensive income (2,196) 9,374 28,916 (71,412)
------------ ------------ ------------ ------------
TOTAL OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX 4,079 (16,664) (53,702) 126,955
------------ ------------ ------------ ------------
COMPREHENSIVE INCOME $ 253,487 $ 24,224 $ 628,040 $ 269,559
============ ============ ============ ============
Net income per share - basic and diluted $ 0.01 $ - $ 0.03 $ 0.01
============ ============ ============ ============
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 NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(UNAUDITED)
For The Nine For The Nine
Months Ended Months Ended
September 30, September 30,
2004 2003
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 681,742 $ 142,604
Adjustments to reconcile net income to net cash provided by
used in operating activities:
Depreciation and amortization 211,125 222,187
Provision for doubtful accounts 13,470 7,064
Net realized and unrealized gain on marketable securities (17,950) (97,290)
Decrease (increase) in deferred taxes 184,487 (11,240)
Gain on sale of property, plant and equipment (1,109) ---
Stock issued for services --- 43,000
Minority interest in income of subsidiary 39,413 5,082
CHANGES IN OPERATING ASSESTS AND LIABILITIES:
Decrease (increase) in deposits for employee severance 6,373 (48,578)
Increase in trade accounts receivable (1,085,278) (201,870)
Increase in other assets (42,393) (117,697)
Increase in inventory (208,707) (759,943)
Decrease in trade accounts payable 24,241 106,170
Increase in accrued expenses 227,364 3,352
Increase (decrease) in other liabilities 183,906 (88,740)
Increase (decrease) in provision for the severance of
employer-employee relations 9,068 (21,353)
----------- -----------
Net Cash Provided By (Used In) Operating Activities 225,752 (817,252)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (161,077) (66,128)
Proceeds from sale of marketable securities 201,948 781,685
Proceeds from sale of property, plant and equipment 1,109 ---
Purchases of marketable securities (194,086) (759,366)
Funds advanced on behalf of shareholder --- 380,986
----------- -----------
Net Cash (Used In) Provided By Investing Activities (152,106) 337,177
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term debt, net (220,969) 252,335
Payments on long-term debt (373,821) (268,489)
Proceeds from long term loans 401,598 ---
----------- -----------
Net Cash Used In Financing Activities (193,192) (16,154)
----------- -----------
EFFECT OF CHANGES IN EXCHANGE RATES ON CASH (82,619) 138,937
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (202,165) (357,292)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 784,026 831,820
----------- -----------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 581,861 $ 474,528
=========== ===========
INTEREST PAID $ 97,039 $ 147,308
=========== ===========
TAXES PAID $ 137,781 $ 112,895
=========== ===========
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
AS OF SEPTEMBER 30, 2004
(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
nine months ended September 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 nine months ended September 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
AS OF SEPTEMBER 30, 2004
(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 consolidated financial statements.
NOTE 2 INVENTORY
Inventory consisted of the following:
September December
30,2004 31, 2003
---------- ----------
Raw materials $1,447,014 $1,175,453
Work in process 638,614 796,100
Finished goods 238,904 144,272
---------- ----------
$2,324,532 $2,115,825
========== ==========
NOTE 3 LONG-TERM LOANS
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%. As of September 30, 2004,
the balance of the notes was $171,271 of which $33,199 was short-term.
6
DEFENSE INDUSTRIES INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2004
(UNAUDITED)
On August 6, 2004, the Company executed another promissory note with a
financial institution for aggregate proceeds of $223,110. Payments on the
note are due monthly through September 2009. Interest on the note is also
due monthly and accrues at LIBOR plus 1.25%. As of September 30, 2004, the
balance of the note was $220,023 of which $48,727 was short-term.
NOTE 4 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.
(A) SALES AND INCOME FROM OPERATIONS:
Civilian Military Military
Local Local Export Consolidated
---------- ---------- ---------- ----------
September 30, 2004
Net sales $1,194,140 $1,489,255 $7,070,520 $9,753,915
Income from operations 176,851 277,123 855,087 1,309,061
September 30, 2003
Net sales $1,923,639 $2,155,768 $3,001,295 $7,080,702
Income from operations 73,140 89,664 153,270 316,074
(B) SINGLE CUSTOMERS EXCEEDING 10% OF SALES:
For the Nine For the Nine
Months Ended Months Ended
September 30, September 30,
2004 2003
---------- ----------
Sales
Customer A (Military Local) $ --- $1,484,357
Customer B (Military Export) $3,973,159 $ ---
NOTE 5 COMMITMENTS AND CONTINGENCIES
As part of its current plans for the West Bank, the Israeli Government has
determined to remove Israeli residents from the Erez Industrial Zone, where
one of the Company's subsidiaries is currently located. The Company intends
to move the operations of its subsidiary to a local governmental recognized
development zone. Companies located in development zones are entitled to
significant governmental benefits.
7
DEFENSE INDUSTRIES INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2004
(UNAUDITED)
The Company is currently negotiating a lease of approximately 15,000 square
foot space in an industrial building in Shderot, a local governmental
recognized development zone, which is owned by Mr. Fostbinder, the
Company's Chief Executive Officer and Chairmen of its board of directors.
In the event the Company enters into such a lease, this space will
accommodate part of the operations of the subsidiary currently located in
the Erez Industrial Zone, and the remainder of its operations will be
relocated to the Company's facilities in the Nazareth Elite industrial
area, in accordance with a sub lease agreement with one of the Company's
subsidiaries.
The cost of relocating these operations is indeterminable at this time. The
Company does not believe the relocation will materially impact its
consolidated financial statements.
8
DEFENSE INDUSTRIES INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2004
(UNAUDITED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS O F 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 September
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.
9
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.
10
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
As part of its current plans for the West Bank, the Israeli Government has
determined to remove Israeli residents from the Erez Industrial Zone, where one
of our subsidiaries is currently located. We intend to move the operations of
our subsidiary to a local governmental recognized development zone. Companies
located in development zones are entitled to significant governmental benefits.
We are currently negotiating a lease of approximatley 15,000 square foot
space in an industrial building in Shderot, a local governmental recognized
development zone, which is owned by Mr. Fostbinder, our Chief Executive Officer
and Chairmen of the board of directors. In the event we enter such a lease, this
space will accommodate part of the operations of our subsidiary currently
located in the Erez Industrial Zone, and the remainder of its operations will be
relocated to our facilities in the Nazareth Elite industrial area, in accordance
with a sub lease agreement with one of our other subsidiaries.
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. We believe that at the minimum we
will be compensated for the actual expenses incurred in connection with the
subsidiary relocation.
THREE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED WITH THREE MONTHS ENDED SEPTEMBER
30, 2003
RESULTS OF OPERATIONS
NET REVENUES AND GROSS PROFIT MARGIN. Net Revenues for the three months
ended September 30, 2004 increased to $3,181,111 from $1,960,300 in the same
period in 2003, an increase of 62.3%. This increase was due to increased export
military sales including, sales of our recently introduced new products:
ballistic plates, blankets and lightweight vehicle armor kits. This increase in
net revenues was partially offset by the continued weakness in sales to the
local market.
11
The following table sets forth the breakdown of sales by segment for the
three months ended September 30, 2004 and 2003.
Three Months Ended September 30,
--------------------------------
2004 2003
---------- ----------
Sales to the local civilian market $ 654,945 $ 717,952
Sales to the local military market 359,091 659,134
Export military sales 2,167,075 583,214
---------- ----------
Total $3,181,111 $1,960,300
The trend of increased export sales is expected to continue into the fourth
quarter. This expectation is based, among other things, on the fact that we have
broaden our export customers basis.
We anticipate that our total sales in the fourth quarter will exceed our
sales results in the same period in 2003.
Gross profit for the three months ended September 30, 2004 was $1,153,412
compared to $495,960 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 September 30, 2004 was
36.3% compared to 25.3% 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 the margins obtained on local sales.
The relatively high margins were offset by: (i) the approximately 6% 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 the decrease
in the local market size. 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 September 30, 2004 was
$2,027,699 compared to $1,464,340 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 September 30, 2004 increased
slightly to $367,941 from $335,160 for the same period in 2003. Selling expenses
for the three months ended September 30, 2004 were $222,231 compared to $210,417
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, and a moderate
increase in our selling expenses in the fourth quarter.
12
INCOME TAX EXPENSE. Our income tax expense for the three months ended
September 30, 2004 was $212,583 as compared to a tax benefit of $59,827 for the
comparable period in 2003. Our effective tax rate was 44.7% in the 2004 period.
FINANCIAL EXPENSES. We had financial expenses, net of $47,787 for the three
month ended September 30, 2004 as compared to $42,699 for the same period in
2003. The increase is attributable to a change in the US currency exchange rate
which resulted in a decrease of our income from foreign currency deposits.
OTHER INCOME (EXPENSE), NET. We had other expenses, net for the three
months ended September 30, 2004 of $39,947 as compared to other income of
$71,275 for the same period in 2003. The decrease in other income, net is
attributable to losses 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
September 30, 2004, we recognized and recorded minority share in our profit of
$13,515 compared to minority share in our loss of $2,102 for the same period in
2003.
NINE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 2003
RESULTS OF OPERATIONS
NET REVENUES AND GROSS PROFIT MARGIN. Net Revenues for the nine months
ended September 30, 2004 increased to $9,753,915 from $7,080,702 in the same
period in 2003, an increase of 37.8%. This increase was due to increased export
military sales including, sales of our recently introduced new products:
ballistic plates, blankets and lightweight vehicle armor kits. This increase in
net revenues was partially offset by the continued weakness in sales to the
local market.
The following table sets forth the breakdown of sales by market for the
nine months ended September 30, 2004 and 2003.
Nine Months Ended September30,
------------------------------
2004 2003
---------- ----------
Sales to the local civilian market $1,194,140 $1,923,639
Sales to the local military market 1,489,255 2,155,768
Export military sales 7,070,520 3,001,295
---------- ----------
Total $9,753,915 $7,080,702
Gross profit for the nine months ended September 30, 2004 was $2,974,178
compared to $1,937,976 for the same period in 2003. This increase in gross
profit is primarily attributable to the increase in overall sales.
13
Gross profit margin for the nine months ended September 30, 2004 was 30.5%
compared to 27.4% for the same period in 2003.
Our cost of sales for the nine months ended September 30, 2004 increased to
$6,779,737 compared to $5,142,726 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 nine months ended September 30, 2004 were $1,051,530
compared to $1,029,214 for the same period in 2003. This slight increase is a
result of the growth in our activities. Selling expenses for the nine months
ended September 30, 2004 were $613,587 compared to $592,688 for the same period
in 2003.
INCOME TAX EXPENSE. Our income tax expense for the nine months ended
September 30, 2004 was $496,284 as compared to $65,086 for the comparable period
in 2003. Our effective tax rate was 40.8% in the 2004 period compared to 30.6%
in 2003. This increase in the effective tax rate was attributable to tax imposed
on our company due to cancellation of a tax benefit accrued in the previous year
($49,951).
FINANCIAL EXPENSES. We had financial expenses, net of $110,582 for the nine
month ended September 30, 2004 as compared to financial expenses, net of
$200,592 for the same period in 2003. The decrease is attributable to a decrease
in prevailing interest rates in Israel and to the reduction in our bank
liabilities.
OTHER INCOME (EXPENSE), NET. We had other income, net for the nine months
ended September 30, 2004 of $18,960 as compared to $97,290 for the same period
in 2003. The decrease in other income, net is attributable to the decrease in
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 nine months ended
September 30, 2004, we recognized and recorded a minority share in our profit of
$39,413 compared to minority share in our profit of $5,082 for the same period
in 2003.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2004, we had $581,861 in cash and cash equivalents and
our working capital was $4,741,462. 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 $225,752 for the nine months
ended September 30, 2004. This was primarily attributable to our net income of
$681,742 and a $411,270 increase in other liabilities, non-cash activities of
$395,612, prepaid payments by customers, accrued employees expenses, accrued
taxes expenses and other accrued expenses, which was offset by among other
things by a $1,085,278 increase in trade accounts receivable, a $24,241 decrease
in trade accounts payable and a $208,707 increase in inventory.
14
The increase in accounts receivable at September 30, 2004 from December 31,
2003, was primarily the result of increased level of export sales. The increase
in inventory at September 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 $152,106 for the nine months
ended September 30, 2004. During the nine months ended September 30, 2004,
$7,862 of net cash was provided from sales and purchase of marketable securities
and $161,077 was used to purchase property, plant and equipment.
Net cash used for financing activities was $193,192 for the nine months
ended September 30, 2004. During the nine months ended September 30, 2004, we
increased our long term debt by $27,777, net.
During the remander of 2004 and into 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 $50,000 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 in 2005 at a slower pace of development, from
our working capital and cash flow.
We believe that our existing capital resources are sufficient to fund our
operations through 2005.
NEW ACCOUNTING PRONOUNCEMENT
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. We have
not yet completed our evaluation of SAB 105, but do not anticipate a material
impact on the consolidated financial statements.
MARKET RISK
At September 30, 2004 and December 31, 2003, we held cash and cash
equivalents in the aggregate amount of $581,861 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.
15
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 devaluated approximately 2.35% against the U.S.
dollar. Among the factors contributing to the devaluation are the low interest
rate for US investments compared to the higher interest rate for Israeli
investments. The inflation in Israel was approximately 1.19% for the nine months
ended September 30, 2004 compared to an annual deflation of 1.9% in 2003.
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
nine months of 2004.
CONTRACTUAL OBLIGATIONS
The following table summarizes our contractual obligations and commercial
commitments as of September 30, 2004.
Contractual Obligations Payments due by Period
----------------------- ----------------------
Total less than 1 year 2 -3 years 4 -5 years more than 5 years
---------- ---------- ---------- ---------- ----------
Long-term debt obligations $1,217,973 $ 414,400 $ 564,064 $ 234,231 $ 5,278
Capital (finance) lease obligations -- -- -- -- --
Operating lease obligations 98,275 92,875 5,400 -- --
Purchase obligations -- -- -- -- --
Other long-term liabilities
reflected on the Company's
balance sheet under U.S. GAAP -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Total $1,316,248 $ 507,275 $ 569,464 $ 234,231 $ 5,278
16
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:
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.
17
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.
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.
PART II - OTHER INFORMATION
DEFENSE INDUSTRIES INTERNATIONAL, INC. AND SUBSIDIARIES
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
None.
18
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
19
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: November 15, 2004
20