UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON DC 20549
----------
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934.
For the fiscal year ended December 31, 2004
or
[_] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
OF 1934.
For the transition period from ___________________ to ________________
COMMISSION FILE NUMBER 000-30105
DEFENSE INDUSTRIES INTERNATIONAL, INC.
(Name of Small Business Issuer in Its Charter)
Nevada 84-1421483
(State or other Jurisdiction of Incorporation) (I.R.S. Employer Identification No.)
8 Brisel Street
Industrial Zone Sderot,
Israel 87711
(Address of Principal Executive Offices) (Zip Code)
(011) 972-7-689-1611
(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock .0001 Par Value
(Title of Class)
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 Company was required to file such reports), and (2) has
been subject to such filing requirements for past 90 days.
Yes [X] No [_]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will be
contained to the best of Company's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB. [X]
Issuer's revenue for its most recent fiscal year: $12,036,404
The aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the average bid and asked price of
such stock as reported by OTC.BB on April 14, 2005 $4,800,195.
As of March 23, 2005 the Registrant had 25,350,000 shares of Common Stock,
par value 0.0001 outstanding.
Transitional Small Business Disclosure Format
Yes [_] No [X]
2
Defense Industries International, Inc.
FORM 10-KSB
INDEX
PAGE
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PART I 1
Item 1. Description of Business 1
Item 2. Description of Properties 22
Item 3. Legal Proceedings 23
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 5. Market for Company's Common Equity and Related Stockholder Matters 23
Item 6. Management's Discussion and Analysis of Financial Condition and Results of Operations 25
Item 7. Financial Statements 30
Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 31
Item 8A. Controls and Procedures 31
Item 8B. Other Information 31
PART II 31
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with
Section 16(A) of the Exchange Act 32
Item 10. Executive Compensation 34
Item 11. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters 35
Item 12. Certain Relationships and Related Transactions 36
Item 13. Exhibits 36
Item 14. Principal Accounting Fees and Services 37
SIGNATURES 39
PART I
This Annual Report on Form 10-KSB contains various "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and
within the Private Securities Litigation Reform Act of 1995, as amended. Such
forward-looking statements reflect our current view with respect to future
events and financial results. Forward-looking statements usually include the
verbs, "anticipates," "believes," "estimates," "expects," "intends," "plans,"
projects," "understands" and other verbs suggesting uncertainty. We remind
readers that forward-looking statements are merely predictions and therefore
inherently subject to uncertainties and other factors and involve known and
unknown risks that could cause the actual results, performance, levels of
activity, or our achievements, or industry results, to be materially different
from any future results, performance, levels of activity, or our achievements
expressed or implied by such forward-looking statements. Readers are cautioned
not to place undue reliance on these forward-looking statements, which speak
only as of the date hereof. We undertake no obligation to publicly release any
revisions to these forward-looking statements to reflect events or circumstances
after the date hereof or to reflect the occurrence of unanticipated events
We have attempted to identify additional significant uncertainties and
other factors affecting forward-looking statements in the Risk Factor section
which appears in Item 1-Business.
ITEM 1. DESCRIPTION OF BUSINESS.
GENERAL
We are a manufacturer and global provider of personal military and civilian
protective 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 main products include body armor, bomb disposal suits, bullet proof
vests and jackets, ballistic wall coverings, bullet proof ceramic and
polyethylene panels, V.I.P. car armoring and lightweight armor kits for
vehicles, personal military equipment, dry storage systems, liquid logistic
products, tents and other camping and travel gear.
From time to time we have provided bulletproof vests developed by us to
laboratories in the United States for testing, and following the tests, the
products were deemed to have met the American National Institute of Justice
(NIJ) standards. The American NIJ standards are the accepted standards worldwide
for bulletproof vests and compliance with these standards has enabled us to
enter into the North American market as well as other new markets for our
bulletproof vests. Similarly, we have submitted our ballistic ceramic plates for
testing by German laboratories and following the tests, the products were deemed
to have met the German qualification standard. Obtaining this standard has
enabled us to enter the German and other European markets for these products.
During 2004, we redesigned our website and established a new domain,
www.defense-industries.com. The information on our website is not incorporated
by reference into this annual report.
We also established our position as a provider of vehicle armor kits for
the U.S. and Israeli markets.
COMPANY HISTORY
Our predecessor was incorporated in the State of Utah on July 9, 1997 as
Pawnbrokers Exchange, Inc., or Pawnbrokers Exchange. On May 8, 2001, Pawnbrokers
Exchange formed a wholly owned subsidiary, Pawnbrokers Exchange No. One, Inc., a
Utah corporation, or Pawnbrokers No. One, and pursuant to a distribution
agreement, on May 30, 2001, transferred all of its properties, assets and
business operations, subject to liabilities, to this subsidiary.
On March 25, 2002, Pawnbrokers Exchange, Export Erez USA, Inc., a Delaware
corporation, or Export Erez, and all of the stockholders of Export Erez entered
into a share exchange agreement pursuant to which Pawnbrokers Exchange acquired
100% of the outstanding securities of Export Erez, and the stockholders of
Export Erez became the controlling stockholders of Pawnbrokers Exchange,
acquiring approximately 84% of its outstanding voting securities. In connection
with the share exchange, Pawnbrokers Exchange declared an 8 for 1 dividend on
its outstanding securities that required a mandatory exchange of stock
certificates by the holders in order to receive the dividend.
Following the closing of the share exchange, and in consideration of the
assumption and indemnification of Pawnbrokers Exchange and Export Erez from and
against any and all liabilities, Michael Vardakis, the then president of
Pawnbrokers Exchange, received all of the outstanding securities of Pawnbrokers
No. One and Pawnbrokers Exchange continued the business of Export Erez.
On July 8, 2002, Pawnbrokers Exchange changed its corporate domicile from
the State of Utah to the State of Nevada, through a merger with its wholly owned
subsidiary, Defense Industries International, Inc., or Defense Industries , a
Nevada corporation organized on July 1, 2002. As part of the reincorporation,
Pawnbrokers Exchange changed its name to Defense Industries. Each issued and
outstanding share of Pawnbrokers Exchange capital stock was converted into and
exchanged for one share of Defense Industries common 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.
ORGANIZATION
We are a holding company whose subsidiaries include Export Erez USA, Inc.,
or Export Erez, and Rizzo Inc. Export Erez is a holding company whose
subsidiaries include Export Erez, Ltd., a wholly owned subsidiary, Mayotex,
Ltd., or Mayotex, a wholly owned subsidiary , Dragonwear Trading Ltd., or
Dragonwear, a wholly owned subsidiary and Achidatex Nazareth Elite (1977) Ltd.,
or Achidatex, a majority owned subsidiary.
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Export Erez Ltd. was incorporated in Israel on January 23, 1983 under the
name R.T.V. Ltd., and changed its name to Export Erez Ltd. on April 25, 1987.
Export Erez Ltd. is principally engaged in the design, production and marketing
of personal military and civilian protective equipment and supplies such as body
armor, bomb disposal suits, bulletproof vests, and associated heavy fabric
products, such as battle pouches and combat harness units, tents and other
camping equipment.
Mayotex Ltd. was incorporated in Israel on March 7, 1990. Mayotex is
engaged in weaving, processing, dyeing, cutting and sewing of fabric to make the
heavy-duty and bulletproof fabrics used by Export Erez Ltd. in manufacturing its
finished products and goods, and in VIP car armoring and lightweight vehicle
armor kits production.
Dragonwear Trading Ltd. was incorporated in Cyprus in October 2000 and is
engaged in trading textile products.
Achidatex Nazareth Elite (1977) Ltd. was incorporated in Israel on August
2, 1977 as a limited liability company under the Israeli Companies Ordinance.
Export Erez acquired 76% of Achidatex shares on June 18, 2001, from Mr. Avraham
Hatzor, Mr. Fredy Davidovitz and Mr. Shmuel Davidovitz, which individuals retain
24% of the outstanding Achidatex shares. Achidatex is a leading manufacturer of
ballistic shields, long term storage systems, liquid logistic products, combat
flak jackets, tents and other personal military and civilian protective
equipment and supplies.
On February 28, 2005, we acquired all of the outstanding shares of Rizzo
Inc. a California corporation, a company incorporated under the laws of
California, and doing business under the name Owen Mills Company. Owen Mills
specializes in military and industrial sewing of marine and ballistic fabric
products. The acquisition of Owen Mills provides us with the ability to
manufacture many of our products in the U.S.
STRATEGY
Our strategy is to capitalize on our significant research and development
capabilities and the strength of our brand identity and achieve greater
economies of scale. Due to ever-present international tensions we believe that
the demand for our products will continue to grow. We expect to address this
growth by offering a comprehensive array of high quality branded security
products to meet the needs of our customers around the world. We intend to
enhance our leadership position in the industry through additional strategic
acquisitions and by creating a broad portfolio of products and services to
satisfy all of our customers' increasingly complex security products needs. The
following elements define our growth strategy.
o CAPITALIZE ON EXPOSURE TO MILITARY PROBLEMS. We believe that the
events of September 11, 2001, the subsequent "War on Terrorism," the
continuing conflict in Iraq, the increasing likelihood of military
conflicts abroad, and recent events where lives have been saved due to
the performance of armor systems, are all likely to result in
additional interest in our products.
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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. We believe that 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. In addition to our recent acquisition
of Owen Mills, we intend to continue 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.
PRODUCTS
We target our product to four principal markets: the international military
and defense market, the civilian market, the industrial market and to animal
owners.
Our military products include body armor, bulletproof and stab-resistant
clothing, combat vests, bomb disposal suits, battle pouch and combat harness
units, flak jackets, ballistic helmets, dust protectors, padded coats, sleeping
bags, weapons straps and belts, dry storage systems, liquid logistics products,
ceramic and UHMW polyethylene ballistic plates, ballistic wall coverings, tents,
vehicle covers and lightweight vehicle armor kits. Products currently under
development include, sophisticated stab-resistant solutions, lighter
polyethylene ballistic plates and new lightweight vehicle armor kits.
Our second product group is intended for the civilian market, including law
enforcement, border patrol enforcement, prison forces, special security forces,
corporations, non-governmental organizations and individuals worldwide. Our
civilian market products include adaptations of our military products,
heavy-duty clothing and other types of sporting and camping equipment and
clothing including, tents and sleeping bags. This product group includes armor
for VIP luxury cars.
Our industrial market products include special industrial fabrics and cloth
tapes. We also offer products that are intended for sale to animal owners, that
include dog collars, leashes, equestrian equipment and protective equipment.
The following table details our current product line and target markets:
PRODUCT DESCRIPTION TARGET MARKETS GEOGRAPHICAL MARKET
------------------- -------------- -------------------
Dust protectors and various covers Military International
Padded coats Military, civilian International
Protective vests and flak jackets Military, civilian International
Cooling jackets Military International
Overalls Military International
Vests Military, civilian International
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PRODUCT DESCRIPTION TARGET MARKETS GEOGRAPHICAL MARKET
------------------- -------------- -------------------
Sleeping bags Military, civilian International
Carriers for grenade launchers Military International
Bags and totes Military International
Tents Military, civilian International
Camp beds Military, civilian International
Collapsible storage containers Military, civilian International
Evacuation stretchers Military, civilian International
Personal belts and weapon straps Military International
Woven fabrics: canvas, corduroy, nylon, aramid Military, civilian, industrial International
Ballistic wall coverings Military, civilian, industrial International
Ballistic plates and panels Military, civilian International
Car armor Civilian Israel
Lightweight vehicle armor kits Military, civilian International
Range of woven tapes Military, civilian, industrial International
Bags for horseback riders Civilian International
Horse blankets and saddles Civilian International
Collars, harnesses and leads Civilian International
Protective vests for horseback riders Civilian International
Leg protectors Civilian International
Long term storage systems Military, industrial International
Regular/digital colored printed truck coveringS Civilian International
We continue to improve our existing products and to develop new products
for the military and the civilian markets, including mine protective shoes,
stab-resistant solutions, floatable ballistic vest, improved armored car blast
protection materials, ballistic concrete reinforcement and modified ballistic
wall coverings. We are also developing a new generation of complex products for
protective vests used by security forces and armies all over the world.
PRODUCT QUALITY
We have established a reputation for producing premium quality products
that represent the cutting-edge in design and technological development. Through
on going research and development efforts we believe that we are setting the
standards for personal defense related products. Our manufacturing facilities
meet American EQNET and the International ISO 9001; the United States Armed
Forces MIL-STD-105D and MIL-I-45208A standards; the German Armed Forces and NATO
AQAP standards; and the NIJ standards, NIJ 0101.03 and NIJ 0101.04, for
"Ballistic Resistance of Personal Body Armor" that are accepted worldwide
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PRODUCTION
We develop, manufacture and assemble our own products in Israel and the
United States. Our production facilities in Israel are located in Erez
Industrial Zone, Sderot, Nazareth, and Ashdod. Our production facility in the
United States is located in Van Nuys, California. We believe that we distinguish
ourselves from our competition by our ability to manufacture the various
components of our products and by the fact that we generally do not rely on
other manufacturers. Our production process begins with the manufacture of
fabrics and other basic components of our products and ends with quality control
inspections of completed goods and products.
During 2004, the Israeli Government decided to evacuate the Erez
Industrial Zone in the Gaza Strip where part of our operations were located. We
own facilities, lease other facilities and maintain equipment and inventory
within this area. The Israeli Government's initial decision to evacuate the Gaza
Strip was backed by resolutions to compensate the Israeli Gaza Strip settlers as
well as business and property owners in the Gaza Strip and in the Erez
Industrial Zone. While the Israeli Government has not yet decided on the date of
the evacuation, there is no doubt that it will evacuate the area, or that it
will come to an agreement with the business and property owners for their
compensation. The compensation is mentioned in the "Evacuation Law" resolution
that was adopted by the Israeli Parliament, however, the amount of the
compensation will be negotiable.
During the last half of 2004, we prepared for the eventual evacuation by
merging existing production facilities. We moved a "light cut and sew" operation
from the Erez Industrial Zone to Sderot as well as some of our webbing equipment
to Nazareth. The Erez Industrial Zone activity will continue in operation and
inventories will continue to be maintained there until the evacuation occurs.
Due to the Company's anticipation that it will be reimbursed for all costs
related to the evacuation of the Erez Industrial Zone and the fact that the
facility is still operating and the equipment will be relocated, no impairment
or accrued liabilities have been recorded at December 31, 2004.
Our production facilities have the capability of independently weaving,
cutting, sewing, gluing, welding and assembling products and integrating
systems. If workloads require, we use the services of sub-contractors, mainly
for obtaining raw materials and sewing. We use sub-contractors for metal work,
cloth coating work, dyeing and finishing, and digital printing.
In connection with our production activities, we have established five
principal departments: research and development, technical design, mechanics
processing, product assembly and quality control.
TRANSPORTATION AND DISTRIBUTION
Our manufacturing plants are located in Israel and in the State of
California. Israel's marine transportation routes are well-developed,
accordingly, we have no logistic difficulty in distributing our products and in
most cases our products reach their destination within two to three weeks,
depending on the arrangements with the customer. Products for export are shipped
as F.O.B. or C.I.F. Consignments are sent by sea or air, depending on the nature
of the order and the urgency of supply.
6
To date, our U.S. facility only serves U.S. based customers and we have no
difficulties in distributing our products inside the U.S.
COMPETITION
The ballistic-resistant and body armor industry is highly competitive and
fragmented throughout the world. In the United States the great majority of
manufacturers are privately held companies, ranging from small limited product
companies to large multinational corporations. We estimate that there are
approximately twenty U.S.-based companies that compete in the body armor
industry. The principal elements of competition are performance, price,
innovative design, and quality. Name recognition and reputation are highly
important in each country where products are sold. We believe that our products
are highly competitive and well regarded, evidenced by our ability to sell to
customers such as the United States Military, Israeli Defense Forces, NATO and
many foreign governments. We also believe that we distinguish ourselves from our
competition by (i) our ability to manufacture the various components of our
products, (ii) the fact that we generally do not rely on other manufacturers and
(iii) the diversification and range of our product lines.
Barriers to entry for new companies entering the body armor industry are
low, consequently, creating fierce competition. We believe that establishing a
good reputation significantly enhances the competitive position of the
industry's long-standing manufacturers. However, name and product reputation
take many years to develop. In the U.S. civilian market, (law enforcement,
border patrol forces, prison forces and specialty forces) our products are less
known than that of our competitors. We intend to use our highly regarded
reputation in the international markets coupled with the reputation and the US
manufacturing facilities of our recently acquired U.S.- based subsidiary, Owen
Mills, to expand our U.S. presence and to achieve greater market penetration.
Although industry statistics are difficult to quantify, we believe that the
number of active police officers has increased significantly in the past few
years. In 2004, there were more than 800,000 law enforcement personnel and over
20,000 law enforcement agencies in the United States. We expect that
governmental reaction to terrorist attacks will increase the market for our
products. The United States has established the Office of Homeland Security that
is developing a homeland security infrastructure and is devoting significant
resources to this effort.
Our proprietary products such as dry storage systems, ballistic wall
coverings and liquid logistic products encounter significantly less competition
than the traditional body armor product line.
A rising prison population has increased the demand for law enforcement
security products. Companies must provide competitively priced and highly
flexible protective equipment to compete in this arena. In a prison environment
an additional required feature for protective equipment is that it be stab
resistant. We believe that our newly developed stab-resistant fabrics will
facilitate our penetration of this market in 2005, with our stab-resistant
solutions and bulletproof clothing.
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In the civilian market, we are aware of approximately twenty major
companies manufacturing similar products worldwide. A number of major
manufacturers with greater resources than ours compete for the same market. In
2005, we intend to increase our marketing efforts for our products over the
Internet, and to market our products through distributors who concentrate on the
civilian market.
Our major competitor in sales to the Israeli Ministry of Defense is
Rabintex. Our competitors in the Israeli civilian market are other Israeli
companies as well as a number of importers. Internationally, our competitors in
the defense market include companies such as Point Blank, Safari Land of
Ontario, California, Armor Holdings and A.B.A. in the United States, L.B.A. in
England, Indigo in Spain, Systema Compositi in Italy, Hellenic Arms Industries
in Greece and Barman in Sweden. Each of these competitors offer a more limited
product line than we do.
RAW MATERIALS
We use a mixture of aramid fabrics that we both weave ourselves and acquire
from other manufacturers, and non-woven uni-directional polyethylene sheets as
the basic component of our ballistic protection products. As a result, our
protective equipment provides maximum protection with minimum weight and we
believe that it is highly competitive. We obtain our supplies on the basis of an
open letter of credit, specialized documentary credit, and in the case of
suppliers with whom we have dealt with for years, on open account. We have
long-term relationships with some of our suppliers, and we believe that these
suppliers are stable and do not anticipate any disruption in the steady supply
of materials that we require. A disruption in the supply of materials could have
an adverse impact on our operating results.
Our products are made from raw materials produced in Israel and abroad
including, specialized composite materials such as Kevlar(R) produced by DuPont
Company, Twaron(R) produced by Twaron Teijn Ltd., Dyneema(R) produced by D.S.M.
Ltd. and Spectra(R) and Gold Flex(R) produced by Honeywell. We also use other
specialized materials produced by different manufacturers such as specialized
glass mixed with polycarbonate and various resins.
DuPont's Kevlar(R) brand fiber was initially introduced in 1965 and was the
first material identified for use in the modern generation of concealable body
armor. Kevlar(R) is a man-made organic fiber, with a combination of properties
allowing high strength, low weight and high chemical and flame resistant.
Through the years DuPont has continued to develop and design new generations of
this high-performance fabric.
Spectra(R) fiber, manufactured by Honeywell, is an ultra-high-strength
polyethylene fiber. It has one of the highest strength-to-weight ratios of any
man-made fiber. Honeywell uses its Spectra(R) fiber to make its patented Spectra
Shield(R). Additional fibers that we use in the manufacture of body armor are
Goldflex(R), Twaron(R), and Dyneema(R),. These state-of-the-art fibers are
continuously being improved and advanced, which increases the possibility of
superior new products entering the market.
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As a result of the continuing conflict in Iraq, there was a worldwide
increase in demand in 2004 for the raw materials used in our products. The
suppliers increased their production only partially, resulting in market
shortages. As a result, there were significant extensions in the regular
delivery schedules and raw material prices increased. We anticipate that this
trend will continue in 2005.
SEASONALITY
Sales of our military and security clothing products and industrial
products are not seasonal in nature. We generally experience a slight increase
in sales of our camping equipment during the second quarter and in sales of our
protective clothing during the fourth quarter.
MARKETING AND SALES
Our sales and marketing strategies revolve principally around developing a
reputable brand identity and ongoing customer relationships in addition to
continuously improving the quality of our products and offering innovative new
products. Specifically, our marketing strategy is designed to penetrate various
markets by complying with stringent quality standards instituted in targeted
countries.
Below are some of the steps we are taking in order to penetrate new markets
with our next generation of products:
o Locate domestic entities to market our products.
o Actively participate in tenders and bids for contracts in military,
police and civilian markets worldwide. We are currently negotiating
for contract bids with the governments and governmental agencies in
Turkey, Mexico, Ecuador, Paraguay, Uruguay, Guatemala, Cyprus,
Bulgaria and the USA and with the United Nations.
o Actively participate in international exhibitions of military and
police security equipment. We have participated in the FIDAE 2004 Air
Show in Chile and the 2005 Law Enforcement Exhibition in Mexico, and
will participate in the Milipol 2005 Exhibition in Paris.
o Advertise on the Internet.
o Advertise in professional publications.
o Appear in international databases, such as Kompass, various "yellow
page" directories and other directories.
o Distribute brochures describing procedures and product offerings.
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Our local marketing group is divided into two sections. One section
specializes in locating and submitting government bids and the second section
specializes in marketing to the civilian sector. Separate offices in Sderot and
Nazareth Elite handle the local civilian marketing. Each of these offices deals
with a different geographical regions and a different line of products.
Our export marketing is handled by a free-lance marketing consultant and a
group of in-house employees. Although he works almost exclusively for us, we do
not have a formal written relationship with our marketing consultant. This
marketing team carries out market surveys, market segmentation and searches for
new markets for our products, as well as for new engagements with the
international business community. The consultant is paid commissions that are
determined in advance according to the scope and nature of the transaction.
CUSTOMERS
We have a worldwide customer base, including in the United States, Israel,
the Mediterranean, Europe, Latin America, South America, Africa and Asia. In
2004, we sold approximately 69% of our products to our international customers
with the balance sold in Israel. The primary end users of our products can be
divided into three main groups: (i) military defense and security forces, (ii)
civilian defense customers and (iii) civilian customers.
MILITARY DEFENSE AND SECURITY FORCES. We provide this group with personal
military and protective equipment such as body armor, bomb disposal suits,
bullet proof vests and jackets, ballistic helmets and plates, battle pouch and
combat harness units, backpacks, dry storage systems, liquid logistics systems,
clothing, tents, vehicle covers and sleeping bags. These items must meet certain
"human engineering" requirements to provide comfort as well as maximum
protection, to prevent penetration by bullets and knives, and to protect from
fire, collisions and other hazards.
CIVILIAN DEFENSE CUSTOMERS. This group includes members of civilian
security forces such as law enforcement, prison forces, private security firms,
airport security, personal bodyguards, and event security guards. The
requirements of these customers for protective equipment are similar to those of
military defense and security forces. However, since they primarily work in a
civilian environment the products must meet certain aesthetic standards and the
protective features need to be as unobtrusive as possible.
CIVILIAN CUSTOMERS. This group includes campers, hikers, pet owners and
horse owners. We provide this group with equipment such as sleeping bags, tents,
backpacks, and clothing adapted for specific needs such as mountain climbing,
hiking and camping in all types of climates, horseback riding equipment and
animal accessories. This customer group also includes those civilians in need of
covers for cars, trucks, buses and other large vehicles.
Due to the sensitive nature of our business and the products we supply, we
are often required to sign non-disclosure agreements with our military defense
and security forces customers which preclude us from identifying them in this
report. Our two largest customers, located in Israel and in the United States,
accounted for approximately 43.6% of our total sales for the year ended December
31, 2004.
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BACKLOG
At December 31, 2004, we had unfilled customer orders of approximately $3.5
million. This backlog is a result of our successful penetration of the export
markets and the commencement of manufacturing of our lightweight vehicle armor
kits. In 2004, the Israeli Ministry of Defense reduced its purchases from
Israeli companies. The Israeli Ministry of Finance anticipates an increase of
approximately 3.8% in the national gross production during the year 2005.
PATENTS AND TRADEMARKS
We hold several patents from various countries for our ballistic wall
coverings, dry storage systems and mine protective shoes. Achidatex holds the
following patents and trademarks as follows:
o U.S. patent No. 6,212,840 - Retrofit Blast Protection for walls and
windows frames of a structure.
o U.S. patent No. 5,309,684 - Multipurpose Dry Storage System.
o German patent No. 94 11 142.1 correlated to the U.S. patent No.
5,309,684 - Multipurpose Dry Storage System.
o U.S. patent application No. 10/098,344 - Minefield shoe.
o German patent application No. 03005442.3 - Minefield shoe and methods
for manufacture thereof.
o U.S. trade name registration - "ergonatic - anatomic and ergonomic
design", for bulletproof vests.
o U.S. trade name registration - "ACHIDATEX", for the Retrofit Blast
Protection for the walls and window frames of a structure.
REGULATION
Our operations are subject to extensive regulation by the U.S. and Israeli
authorities and to various laws and judicial and administrative decisions
imposing requirements and restrictions on part or all of our operations.
The U.S. National Institute of Justice (NIJ) established standards for
"Ballistic Resistance of Personal Body Armor" that are accepted worldwide. The
NIJ issues performance standards that clearly specify a minimum performance
level for each attribute that is critical for the equipment's intended use. This
coveted compliance standard has gained global acceptance as a benchmark for
evaluation of the effectiveness of a given body armor model. The NIJ body
armor-testing program relies on voluntary participation by manufacturers.
However, many police departments require that armor be tested and be found to be
in compliance with NIJ standards before they purchase the armor. Four of our
ballistic material combinations have been tested by NIJ certified ballistic
laboratories and were found to comply with NIJ Standard 0101.03 and 0101.04. As
a result, these four ballistic combinations have been approved to carry NIJ
labels.
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Our manufacturing practices have obtained ISO 9001 certification. This
international certification harmonizes and establishes standards for quality
manufacturing throughout the world. Over the years, ISO standards have expanded
beyond the quality system and now confirm conformity in environmental issues,
safety and occupational health. This voluntary certification process is designed
to provide consistency in manufacturing processes and quality control.
Other quality control standards pertaining to our manufacturing facilities
consist of the following:
o MIL-STD-105D, MIL-I-45208A (for the United States Armed Forces); and
o AQAP (for the German Armed Forces and NATO)
In order to participate in bids of the Israeli Ministry of Defense and
other governments, companies must follow various rules and procedures. The
bidder must be registered as a recognized supplier. The bidder must have
government certification, and is authorized to participate in bids only to the
limit of its approved security classification. Under Israeli bid regulations
goods produced in Israel are given priority over foreign bidders. The bidder
must keep to contractual schedules and milestones and the goods must pass final
quality control tests before delivery. There are no special taxes on bids apart
from the Israeli value added tax.
Since our business is highly regulated, the laws, rules and regulations
applicable to our business are subject to regular modification and change.
Future laws, rules or regulations may be adopted, making compliance much more
difficult or expensive, and may otherwise adversely affect our business or
prospective business.
RESEARCH AND DEVELOPMENT
We are currently developing new products for military and civilian markets,
including mine protective shoes, stab-resistant solutions, floatable ballistic
vests, ballistic protection based on ceramic glass, ballistic concrete
reinforcement and modified ballistic wall coverings. We are also developing a
new generation of products for protective vests used by security forces and
armies. The vests provide greater protection with minimum weight and maximum
flexibility.
In each of the years ended December 31, 2003 and 2004, we spent
approximately $120,000 on research and development, which expenses have been
charged to operations.
In 2005 and 2006, 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 in each of 2005 and 2006 will
increase to approximately $250,000. 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 efforts at a slower pace of development from our working capital and
cash flow.
12
ENVIRONMENTAL LAWS
We are unaware of any environmental laws that are applicable to us that
will require us to spend any material amounts to achieve compliance.
EMPLOYEES
As of March 15, 2005, we had 169 full-time employees. We had 140 employees
in Israel and 29 employees in the United States. We believe our relationship
with our employees is good. Our employees are not represented by a collective
bargaining organization and we have not experienced any work stoppages.
RISK FACTORS
INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK AND
UNCERTAINTY. YOU SHOULD CAREFULLY CONSIDER THE RISKS AND UNCERTAINTIES DESCRIBED
BELOW BEFORE INVESTING IN OUR ORDINARY SHARES. OUR BUSINESS, PROSPECTS,
FINANCIAL CONDITION AND RESULTS OF OPERATIONS COULD BE ADVERSELY AFFECTED DUE TO
ANY OF THE FOLLOWING RISKS. IN THAT CASE, THE VALUE OF OUR ORDINARY SHARES COULD
DECLINE, AND YOU COULD LOSE ALL OR PART OF YOUR INVESTMENT.
RISKS RELATED TO OUR BUSINESS AND OUR INDUSTRY
THE PRODUCTS WE SELL ARE USED IN APPLICATIONS THAT ARE INHERENTLY RISKY AND
COULD GIVE RISE TO PRODUCT LIABILITY AND OTHER CLAIMS.
The products that we manufacture are typically used in applications and
situations that involve high levels of risk of personal injury. Failure to use
our products for their intended purposes, failure to use them properly, their
malfunction, or, in some limited circumstances, even correct use of our
products, could result in serious bodily injury or death. Our main products
include personal military and civilian protective equipment and supplies such as
body armor, bomb disposal suits, ballistic wall coverings, bulletproof vests,
and associated heavy fabric products, such as battle pouches and combat harness
units, dry storage systems, liquid logistic products, tents and other camping
and travel gear.
The manufacture and sale of certain of our products may be the subject of
product liability claims arising from the design, manufacture or use 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 as a
result. Also, a significant or extended lawsuit, such as a class action, could
also divert significant amounts of management's time and attention. We cannot
assure you that our insurance coverage would be sufficient to cover the payment
of any potential claim. In addition, we cannot assure you that this or any other
insurance coverage will continue to be available or, if available, that we will
be able to obtain it at a reasonable cost. Any material uninsured loss could
have a material adverse effect on our business, financial condition and results
of operations. In addition, the inability to obtain product liability coverage
would prohibit us from bidding for orders from certain governmental customers
since, at present, many bids from governmental entities require such coverage,
and any such inability would have a material adverse effect on our business,
financial condition and results of operations.
13
WE ARE SUBJECT TO EXTENSIVE GOVERNMENT REGULATION AND OUR FAILURE OR INABILITY
TO COMPLY WITH THESE REGULATIONS COULD MATERIALLY RESTRICT OUR OPERATIONS AND
SUBJECT US TO SUBSTANTIAL PENALTIES.
We are subject to extensive regulation by governmental authorities and are
subject to various laws and judicial and administrative decisions imposing
requirements and restrictions on our operations. Furthermore, we have material
contracts with governmental entities and are subject to rules, regulations and
approvals applicable to government contractors. We are also subject to routine
audits to assure our compliance with these requirements. In addition, a number
of our employees are required to obtain specified levels of security
classification. Our business may suffer if we or our employees are unable to
obtain the security classifications that are needed to perform services
contracted for the Israeli Ministry of Defense, one of our major customers. Our
failure to comply with these contract terms, rules or regulations could expose
us to substantial penalties, including the loss of these contracts and
disqualification as a government contractor of certain governments.
WE HAVE SIGNIFICANT INTERNATIONAL OPERATIONS AND ARE THEREFORE SUBJECT TO
ADDITIONAL FINANCIAL AND REGULATORY RISKS.
While our principal executive offices are located in Israel, 69% of our
sales in 2004, 45% of our sales in 2003 and 24% of our sales in 2002 were
generated from exports. We are seeking to increase the level of our
international business activity. Our overseas operations are subject to various
risks, including; foreign import controls (which may be arbitrarily imposed and
enforced and which could preclude sales to certain customers).
One component of our strategy is to expand our operations into selected
international markets. Military procurement, for example, has traditionally been
international in scope. Countries in which we are actively marketing include
Turkey, Cyprus, Chile, Mexico, Guatemala, India, Peru, Singapore and Brazil. We,
however, may be unable to execute our business model in these markets or new
markets. Further, foreign providers of competing products and services may have
a substantial advantage over us in attracting consumers and businesses in their
country due to earlier established businesses in that country, greater knowledge
with respect to the cultural differences of consumers and businesses residing in
that country and/or their focus on a single market.
In pursuing our international expansion strategy, we face several
additional risks, including:
o reduced protection of intellectual property rights in some countries;
14
o licenses, tariffs and other trade barriers;
o longer sales and payment cycles;
o greater difficulties in collecting accounts receivable;
o potential adverse tax consequences;
o laws and business practices favoring local competition;
o costs and difficulties of doing business and customizing products for
foreign countries;
o compliance with a wide variety of complex foreign laws and treaties;
o political and economic instability; and
o variance and unexpected changes in local laws and regulations
We may operate in areas where local government policies regarding foreign
entities and the local tax and legal regimes are often uncertain, poorly
administered and in a state of flux. We cannot be certain that we are in
compliance with, or will be protected by, all relevant local laws at any given
point in time. A subsequent determination that we failed to comply with relevant
local laws and taxation regimes could have a material adverse effect on our
business, financial condition and results of operations.
One or more of these factors could adversely effect our future
international operations and, consequently, could have a material adverse effect
on our business, financial condition and results of operation.
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.
We may be adversely affected by fluctuations in currency exchange rates.
While our revenues are generally denominated in U.S. dollars, a significant
portion of our expenses is incurred in NIS and Euro. We do not currently engage
in any currency hedging transactions intended to reduce the effect of
fluctuations in foreign currency exchange rates on our results of operations. If
we were to determine that it was in our best interests to enter into any hedging
transactions in the future, there can be no assurance that we will be able to do
so or that such transactions, if entered into, will materially reduce the effect
of fluctuations in foreign currency exchange rates on our results of operations.
In addition, if for any reason exchange or price controls or other restrictions
on the conversion of foreign currencies into NIS were imposed, our business
could be adversely affected.
15
There can be no assurance such fluctuations in the future will not have a
material adverse effect on revenues from international sales, and consequently,
on our business, operating results and financial condition.
REDUCTION IN MILITARY BUDGETS WORLDWIDE MAY CAUSE A REDUCTION IN OUR REVENUES,
WHICH WOULD ADVERSELY AFFECT OUR BUSINESS, OPERATING RESULTS AND FINANCIAL
CONDITION.
A significant portion of our revenues is derived from the sale of products
to military markets. These revenues, on a consolidated basis, totaled
approximately $10.4 million, or 86.5% of our revenues in 2004, $6.7 million, or
74.7% of our revenues in 2003 and $7.5 million, or 70.7% of revenues in 2002.
The military budgets of a number of countries may be reduced in the future.
Declines in government military budgets may result in reduced demand for our
products. This would result in reduction in our revenues and adversely affect
our business, results of operations and financial condition.
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 OUR BUSINESS, OPERATING
RESULTS AND FINANCIAL CONDITION.
Our military products are sold primarily to government agencies and
authorities, many of which have complex and time-consuming procurement
procedures. A long period of time often elapses from the time we begin marketing
a product until we actually sell that product to a particular customer. In
addition, our sales to government agencies, authorities and companies are
directly affected by those customers' budgetary constraints and the priority
given in their budgets to the procurement of our products.
The termination, reduction or modification of our contracts or subcontracts
with the Government of Israel in the event of change in requirements, policies
or budgetary constraints would have an adverse effect on our business, operating
results and financial condition.
WE DEPEND ON SALES TO KEY CUSTOMERS AND THE LOSS OF ONE OR MORE OF OUR KEY
CUSTOMERS WOULD RESULT IN A LOSS OF A SIGNIFICANT AMOUNT OF OUR REVENUES.
A significant portion of our revenues is derived from a small number of
customers. Our two largest customers accounted for 38.3% of our total sales for
the year ended December 31, 2003 and 43.6% of our total sales for the year ended
December 31, 2004.
We anticipate that a significant portion of our future revenues will
continue to be derived from sales to a small number of customers. Although we
are attempting to expand the number of our customers, if our principal customers
do not continue to purchase products from us at current levels or if such
customers are not retained and we are not able to derive sufficient revenues
from sales to new customers to compensate for their loss, our revenues would be
reduced and adversely affect our business, financial condition and results of
operations.
16
OUR MARKETS ARE HIGHLY COMPETITIVE AND IF WE ARE UNABLE TO COMPETE EFFECTIVELY,
WE WILL BE ADVERSELY AFFECTED.
The markets in which we operate are highly competitive with a large number
of competitors ranging from small businesses to multinational corporations.
Competitors who are larger, better financed and better known than us may compete
more effectively than we can. In order to stay competitive in our industry, we
must keep pace with changing technologies and client preferences.
If we are unable to differentiate our products from those of our
competitors, our revenues may decline. In addition, our competitors have
established relationships among themselves or with third parties to increase
their ability to address client needs. As a result, new competitors or alliances
among competitors may emerge and compete more effectively than we can. There is
also a significant industry trend towards consolidation, which may result in the
emergence of companies which are better able to compete against us.
THERE ARE LIMITED SOURCES FOR SOME OF OUR RAW MATERIALS AND ANY SHORTAGE MAY
SIGNIFICANTLY CURTAIL OUR MANUFACTURING OPERATIONS.
The raw materials that we use in manufacturing ballistic resistant garments
and cars armoring include: Kevlar(R) produced by Dupont Ltd., Twaron(R) produced
by Twaron Teijn Ltd., Dyneema(R) produced by DSM Ltd. and Spectra(R) and Gold
Flex(R) produced by Honeywell. We purchase these materials in the form of woven
cloth from independent weaving companies. In the event DuPont or its licensee in
Europe cease for any reason to produce or sell Kevlar(R) to us, we would utilize
the other ballistic resistant materials as a substitute. However, none of them
is expected to become a complete substitute for Kevlar(R) in the near future. We
enjoy a good relationship with our suppliers for these materials. If our supply
of any of these materials were materially reduced or cut off, or if there were a
material increase in the prices of these materials, our manufacturing operations
could be adversely affected and our costs increased, and our business, financial
condition and results of operations would be materially adversely affected.
WE MAY BE UNABLE TO COMPLETE OR INTEGRATE ACQUISITIONS EFFECTIVELY, IF AT ALL,
AND AS A RESULT MAY INCUR UNANTICIPATED COSTS OR LIABILITIES OR OPERATIONAL
DIFFICULTIES.
We intend to grow through the acquisition of businesses and assets that
will complement our current businesses. We cannot be certain that we will be
able to identify attractive acquisition targets, obtain financing for
acquisitions on satisfactory terms or successfully acquire identified targets.
Furthermore, we may have to divert our management's attention and our financial
and other resources from other areas of our business. Our inability to implement
our acquisition strategy successfully may hinder the expansion of our business.
Because we depend in part on acquiring new businesses and assets to develop
and offer new products, failure to implement our acquisition strategy may also
adversely affect our ability to offer new products in line with industry trends.
17
We may not be successful in integrating acquired businesses into our
existing operations. Integration may result in unanticipated liabilities or
unforeseen operational difficulties, which may be material, or require a
disproportionate amount of management's attention. Acquisitions may result in us
incurring additional indebtedness or issuing preferred stock or additional
common stock. Competition for acquisition opportunities in the industry may
rise, thereby increasing our cost of making acquisitions or causing us to
refrain from making further acquisitions.
OUR RESOURCES MAY BE INSUFFICIENT TO MANAGE THE DEMANDS IMPOSED BY ANY FUTURE
GROWTH.
Expansion of our operations, may place significant demands on our
management, administrative, operating and financial resources. Growth of our
customer base, the types products offered and the geographic markets served can
place a significant strain on our resources. In addition, we cannot easily
identify and hire personnel qualified both in the provision and marketing of our
security services and products. Our future performance and profitability will
depend in large part on our ability to attract and retain additional management
and other key personnel, our ability to implement successful enhancements to our
management, accounting and information technology systems, and our ability to
adapt those systems, as necessary, to respond to growth in our business.
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.
Our future success and competitive position depend to a significant extent
upon our proprietary technology. We must make significant investments to
continue to develop and refine our technologies. We will be required to expend
substantial funds for and commit significant resources to the conduct of
continuing research and development activities, the engagement of additional
engineering and other technical personnel, the purchase of advanced design,
production and test equipment, and the enhancement of design and manufacturing
processes and techniques. Our future operating results will depend to a
significant extent on our ability to continue to provide design and
manufacturing services for new products that compare favorably on the basis of
time to market, cost and performance with the design and manufacturing
capabilities. The success of new design and manufacturing services depends on
various factors, including utilization of advances in technology, innovative
development of new solutions for customer products, efficient and cost-effective
services, timely completion and delivery of new product solutions and market
acceptance of customers' end products. Because of the complexity of some of our
products, we may experience delays from time to time in completing the design
and manufacture of new product solutions. In addition, there can be no assurance
that any new product solutions will receive or maintain customer or market
acceptance. If we were unable to design and manufacture solutions for new
products of our customers on a timely and cost-effective basis, such inability
could have a material adverse effect on our business, financial condition and
results of operations.
18
WE MAY NEED TO RAISE ADDITIONAL CAPITAL IN THE FUTURE, WHICH MAY NOT BE
AVAILABLE TO US.
We may need to raise additional funds for a number of uses, including:
o maintaining and expanding research and development;
o implementing marketing and sales activities for our products;
o hiring additional qualified personnel; and
o supporting an increased level of operations.
We may not be able to obtain additional funds on acceptable terms or at
all. If we cannot raise needed funds on acceptable terms, we may be required to
delay, scale back or eliminate some aspects of our operations and we may not be
able to:
o develop new products;
o enhance our existing products;
o remain current with evolving industry standards;
o take advantage of future opportunities; or
o respond to competitive pressures or unanticipated requirements.
If adequate funds are not available to us, our business, results of
operations and financial condition will be materially and adversely affected.
Any equity or debt financings, if available at all, may cause dilution to our
then-existing shareholders and may increase our financing expenses. If
additional funds are raised through the issuance of equity securities, the net
tangible book value per share of our ordinary shares would decrease and the
percentage ownership of then current shareholders would be diluted.
COMPLIANCE WITH CHANGING REGULATION OF CORPORATE GOVERNANCE AND PUBLIC
DISCLOSURE MAY RESULT IN ADDITIONAL EXPENSES.
Changing laws, regulations and standards relating to corporate governance
and public disclosure, including the Sarbanes-Oxley Act of 2002 and new
Securities and Exchange Commission regulations, are creating uncertainty for
companies such as ours. We are committed to maintaining high standards of
corporate governance and public disclosure. As a result, we intend to invest
reasonably necessary resources to comply with evolving standards, and this
investment may result in increased general and administrative expenses and a
diversion of management time and attention from revenue-generating activities to
compliance activities, which could harm our operating results and business
prospects.
19
RISK FACTORS RELATED TO OUR COMMON STOCK
OUR SHARES OF COMMON STOCK ARE THINLY TRADED, SO YOU MAY BE UNABLE TO SELL AT OR
NEAR "ASK" PRICES OR AT ALL IF YOU NEED TO SELL YOUR SHARES TO RAISE MONEY OR
OTHERWISE DESIRE TO LIQUIDATE YOUR SHARES.
Our shares of common stock are "thinly-traded" on the OTCBB, meaning that
the number of persons interested in purchasing our common stock at or near ask
prices at any given time may be relatively small or non-existent. This situation
is attributable to a number of factors, including the fact that we are a small
company which is relatively unknown to stock analysts, stock brokers,
institutional investors and others in the investment community that generate or
influence sales volume, and that even if we came to the attention of such
persons, they tend to be risk-averse and would be reluctant to follow an
unproven development stage company such as ours or purchase or recommend the
purchase of our shares until such time as we became more seasoned and viable. As
a consequence, there may be periods of several days or more when trading
activity in our shares is minimal or non-existent. We cannot give you any
assurance that a broader or more active public trading market for our common
stock will develop or be sustained, or that current trading levels will be
sustained. Due to these conditions, we can give you no assurance that you will
be able to sell your shares at or near ask prices or at all if you need money or
otherwise desire to liquidate your holdings.
WE ARE SUBJECT TO THE PENNY STOCK RULES AND THESE RULES MAY ADVERSELY EFFECT
TRADING IN OUR COMMON STOCK.
Until our shares qualify for inclusion in the NASDAQ system, the public
trading, if any, of the our common stock will be on the OTC Bulletin Board. As a
result, an investor may find it more difficult to dispose of, or to obtain
accurate quotations as to the price of, the common stock offered. Our common
stock is subject to provisions of Section 15(g) and Rule 15g-9 of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), commonly referred to as
the "penny stock rule." Section 15(g) sets forth certain requirements for
transactions in penny stocks, and Rule 15g-9(d) incorporates the definition of
"penny stock" that is found in Rule 3a51-1 of the Exchange Act. The SEC
generally defines "penny stock" to be any equity security that has a market
price less than $5.00 per share, subject to certain exceptions. If our common
stock is deemed to be a penny stock, trading in the shares will be subject to
additional sales practice requirements on broker-dealers who sell penny stock to
persons other than established customers and accredited investors. The
definition of "Accredited Investors" includes among others, persons with assets
in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 together
with their spouse. For transactions covered by these rules, broker-dealers must
make a special suitability determination for the purchase of such security and
must have the purchaser's written consent to the transaction prior to the
purchase. Additionally, for any transaction involving a penny stock, unless
exempt, the rules require the delivery, prior to the first transaction, of a
risk disclosure document, prepared by the SEC, relating to the penny stock
market. A broker-dealer also must disclose the commissions payable to both the
broker-dealer and the registered representative, and current quotations for the
securities. Finally, monthly statements must be sent disclosing recent price
information for the penny stocks held in an account and information on the
limited market in penny stocks. Consequently, these rules may restrict the
ability of a broker-dealer to trade and/or maintain a market in our common stock
and may affect the ability of the our shareholders to sell their shares.
20
WE DO NOT INTEND TO PAY DIVIDENDS.
We have never paid cash dividends to our shareholders. Any future dividend
policy will be determined by the board of directors, subject to the applicable
law, and will be based upon conditions then existing, including our results of
operations, financial condition, current and anticipated cash needs, contractual
restrictions and other conditions as the board of directors may deem relevant.
We currently intend to retain future earnings, if any, to finance operations and
expand our business and, therefore, do not expect to pay any dividends in the
foreseeable future.
RISKS RELATING TO OUR LOCATION IN ISRAEL
CONDUCTING BUSINESS IN ISRAEL ENTAILS SPECIAL RISKS.
Our principal operations and facilities are located in Israel, and our
directors, executive officers and other key employees are also located primarily
in the State of Israel. Accordingly, we are directly influenced by the
political, economic and military conditions affecting Israel. Specifically, we
could be adversely affected by any major hostilities involving Israel, a full or
partial mobilization of the reserve forces of the Israeli army, the interruption
or curtailment of trade between Israel and its present trading partners, and a
significant downturn in the economic or financial condition of Israel.
Since the establishment of the State of Israel in 1948, a number of armed
conflicts have taken place between Israel and its Arab neighbors, and a state of
hostility, varying from time to time in intensity and degree, has led to
security and economic problems for Israel. Since September 2000, there has been
a marked increase in violence, civil unrest and hostility, including armed
clashes, between the State of Israel and the Palestinians, and acts of terror
have been committed inside Israel and against Israeli targets in the West Bank
and Gaza. There is no indication as to how long the current hostilities will
last or whether there will be any further escalation. Any further escalation in
these hostilities or any future armed conflict, political instability or
violence in the region may have a negative effect on our business condition,
harm our results of operations and adversely affect our share price.
Furthermore, there are a number of countries that restrict business with Israel
or Israeli companies. Restrictive laws or policies of those countries directed
towards Israel or Israeli businesses has had, and may in the future continue to
have, an adverse impact on our operations, our financial results or the
expansion of our business. No predictions can be made as to whether or when a
final resolution of the area's problems will be achieved or the nature thereof
and to what extent the situation will impact Israel's economic development or
our operations.
MOST 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.
21
Our directors, officers and employees who are male adult citizens and
permanent residents of Israel under the age of 48 are, unless exempt, obligated
to perform annual military reserve duty and are subject to being called to
active duty at any time under emergency circumstances. We cannot assess the full
impact of these requirements on our workforce or business if conditions should
change, and we cannot predict the effect on us of any expansion or reduction of
these obligations.
THE ECONOMIC CONDITIONS IN ISRAEL HAVE NOT BEEN STABLE IN RECENT YEARS.
In recent years Israel has been going through a period of recession in
economic activity, resulting in low growth rates and growing unemployment. Our
operations could be adversely affected if the economic conditions in Israel
continue to deteriorate. In addition, due to significant economic measures
proposed by the Israeli Government, there have been several general strikes and
work stoppages in 2003 and 2004, affecting all banks, airports and ports. These
strikes have had an adverse effect on the Israeli economy and on business,
including our ability to deliver products to our customers.
ITEM 2. DESCRIPTION OF PROPERTIES.
Our executive offices, are located in 8 Brisel Street, Industrial Zone,
Sderot. Our manufacturing, production and distribution facilities are scattered
over several locations in Israel as follows:
Nazareth Industrial Area: the production activities of our subsidiary,
Achidatex are located in a 6,000 square meter building in Nazareth Industrial
Area which is owned by affiliated party. The annual rental expense for this
facility was $180,000 in 2004. The lease expires in December 2008. Since the
beginning of 2005, following the decision of the Israeli Government to remove
Israeli residents from the Erez Industrial Zone, we have relocated the major
production activities of our subsidiary Export Erez Ltd. form Erez Industrial
Area to this facility. The rent for 2005 will be allocated equally between those
two subsidiaries.
Petah-Tikva: Achidatex leases approximately 300 square meters for its
executive offices in Petah-Tikva at annual rental expense of $21,600 in 2004.
The lease expires in December 2005.
Erez Industrial Area: Export Erez leased 2,500 square meter space in Erez
Industrial Area, for its sewing operations and for its storage, in a building
that belongs to Mr. Joseph Postbinder, our Chief Executive Officer and Chairmen
of our board of directors. Our annual rental expense for this building was
$85,500 in 2004. This lease was extended in 2005 for 2,000 of the 2,500 square
meter space, and the annual rental expense for this building in 2005 will be
reduced to $68,400. The lease expires on December 31, 2005. Export Erez leases
an additional 400 square meters, in the same building, from a non affiliated
party, at an annual rental expense of $19,200 in 2004. That lease also expires
on December 31, 2005. In addition, Export Erez Ltd. owns an approximately 1,400
square meter building in the Erez Industrial Area which is not encumbered by any
mortgage or debt. It uses this building for its molding and webbing
manufacturing.
22
Netivot Industrial Area: Mayotex leased 380 square meters for its
production activities in Netivot Industrial Area. Our annual rental expense for
this facility was $10,000 in 2004. The lease for this facility expired in
December 31, 2004.
Industrial Area of Ashdod: Mayotex leases a 230 square meter space in the
Industrial Area of Ashdod for its car armor installations. The annual rental
expense for this space was $12,000 in 2004. The lease expires on December 31,
2005.
Industrial Area of Sderot: as of January 2, 2005, Mayotex leases an
approximately 1,250 square meter space in the Industrial Area of Sderot
primarily for its cut and sew operations. The lease expires on December 31, 2005
and is renewable for an additional one year term. The annual rental expense for
this space will be $43,884 in 2005.
Van Nuys, California: as of September 1, 2003, Owen Mills leases an
approximately 9,000 square feet space in Van Nuys, California for its operations
. The lease expires on August 31, 2008. The annual rental expense for this space
is $54,000.
We believe that all the above mentioned properties are adequately covered
by insurance.
ITEM 3. LEGAL PROCEEDINGS.
We are not a party to any pending or to the best of our knowledge, any
threatening legal proceedings. None of our directors, officers or affiliates, or
owner of record of more than five percent (5%) of our shares, or any affiliate
of any such director, officer or security holder is a party adverse to us or has
a material interest adverse to us in reference to a pending litigation.
During 2003, we found out that a competitor, also located in Israel, had
allegedly sold products using the our name and logo without our permission to a
customer located in Mexico. We engaged counsel in Mexico and also reported the
incident to the Israeli police. In 2004, several of the managers and key
personnel of the competitor were arrested or held for investigation. We have not
determined what further actions, if any, we will take regarding this matter.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to the shareholders for approval during the
fourth quarter of fiscal 2004.
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
MARKET INFORMATION
Our common stock is traded on the Over-The-Counter Bulletin Board under the
symbol "DFNS.OB". The table below contains the high and low bid closing prices
of our common stock as reported on the OTCBB for the time periods indicated. The
quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commissions and may not represent actual transactions.
23
PRICE RANGE
---------------
FISCAL YEAR ENDED DECEMBER 31, 2004 HIGH LOW
----------------------------------- ---- ----
First Quarter $ 0.33 $ 0.19
Second Quarter 0.80 0.22
Third Quarter 0.51 0.33
Fourth Quarter 1.32 0.42
FISCAL YEAR ENDED DECEMBER 31, 2003 HIGH LOW
----------------------------------- ---- ----
First Quarter $0.870 $0.320
Second Quarter 0.430 0.190
Third Quarter 0.300 0.185
Fourth Quarter 0.270 0.170
SHAREHOLDERS
OTC Transfer Agent, located at 231 E 2100 S, Salt Lake City, Utah is the
registrar and transfer agent for our common stock. As of March 8, 2005, there
were 25,350,000 shares of our common stock outstanding and we had approximately
38 shareholders of record.
DIVIDENDS
We have never declared or paid any cash dividends on our common stock and
we do not anticipate paying any cash dividends in the foreseeable future. We
currently intend to retain future earnings, if any, for the finance of our
operations and the expansion of our business. Any future dividend policy will be
determined by our board of directors, subject to the applicable law, and will be
based upon conditions then existing, including our results of operations,
financial condition, current and anticipated cash needs, contractual
restrictions and other conditions as the board of directors may deem relevant.
COMPENSATION PLANS
We currently do not have any compensation plans under which our securities
are authorized for issuance.
We have an employment agreement with Mr. Baruch Tosh, our President,
pursuant to which, Mr. Tosh is entitled to additional compensation of 1.5% of
the growth in our total sales since 2002. Mr. Tosh, at his option, may receive
shares of common stock in lieu of cash. As of December 31, 2004, Mr. Tosh was
entitled to compensation in the amount of $21,102, or to 42,204 shares of our
common stock, having a fair value of $48,957 which was accrued and included in
other current liabilities, in lieu of such compensation. As of March 23, 2005
Mr. Tosh had not received such compensation.
24
SALES OF UNREGISTERED SECURITIES
On April 8, 2002, we entered into a one-year agreement with Global
Guarantee Corporation, whereby we 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 expenses of $43,000 and $129,000 were
recognized during 2003 and 2002, respectively. The issuance of shares was made
pursuant to an exemption from registration under Rule 506 of the Securities Act
of 1933.
PURCHASE OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATES
We did not purchase any of our securities in the market during 2004. In
2003, we resolved a dispute with Liviakis Financial Communication, Inc, and
pursuant to the terms of the settlement 300,000 shares of our shares of common
stock were returned to us.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
THE FOLLOWING IS MANAGEMENT'S DISCUSSION AND ANALYSIS OF CERTAIN
SIGNIFICANT FACTORS WHICH HAVE AFFECTED OUR FINANCIAL POSITION AND OPERATING
RESULTS DURING THE PERIODS INCLUDED IN THE ACCOMPANYING CONSOLIDATED FINANCIAL
STATEMENTS, AS WELL AS INFORMATION RELATING TO THE PLANS OF OUR CURRENT
MANAGEMENT.
CRITICAL ACCOUNTING POLICIES
We have identified the following policies as critical to the understanding
of our financial statements. The preparation of our 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 consolidated financial statements and the
reported amounts of sales and expenses during the reporting periods. An area
where significant judgments are made is inventory valuation and actual results
could differ materially from these estimates. Our consolidated financial
statements have been prepared in accordance with accounting principles generally
accepted in the United States.
REVENUES AND REVENUE RECOGNITION. Revenues from sales of products are
recognized upon shipment to customers. 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 December 31, 2003 and 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.
25
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
United States dollars from NIS at quarter-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.
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 write-down the value of our inventories may have material
affect on our financial position or results of operations. We review our
inventories once in each quarter.
PROPERTY 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, primarily the
discount rate, 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.
RECENT ACCOUNTING PRONOUNCEMENTS
In November 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No 151, "Inventory Costs".
SFAS No. 151. amends the guidance in Accounting Research Bulletin ("ARB") No. 43
Chapter 4 Inventory Pricing, to require items such as idle facility costs,
excessive spoilage, double freight and rehandling costs to be expensed in the
current period, regardless if they are abnormal amounts or not. SFAS No. 151.
will become effective for us in the first quarter of 2006. The adoption of SFAS
No. 151 is not expected to have a material impact on our financial condition,
results of operations, or cash flows.
In December 2004, the FASB issued SFAS No.153, Exchanges of Non-monetary
Assets, an amendment of Accounting Principles Board ("APB") Opinion No.29. The
guidance in APB Opinion No.29, Accounting for Non-Monetary Transactions, is
based on the principle that exchanges of non-monetary assets should be measure
based on value of the assets exchanged. APB 29 included certain exceptions to
that principle. SFAS 153 amends APB 29 to eliminate the exception for
non-monetary exchanges of similar productive assets and replaces it with a
general exception for exchanges of non-monetary assets that do not have
commercial substance. A non-monetary exchange has commercial substance if the
future cash flows of the entity are expected to change significantly as a result
of the exchange. SFAS 153 is effective for non-monetary assets exchanges
occurring in fiscal periods beginning after June 15, 2005.
26
We do not expect that the adoption of SFAS 153 will have a material effect
on our financial position or results of operation.
In December 2004, the FASB issued SFAS No. 123 (R), "Share-Based Payment".
SFAS No. 123 (R) revises SFAS No. 123, "Accounting for Stock-Based Compensation"
and supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees".
SFAS No. 123 (R) focuses primarily on the accounting for transactions in which
an entity obtains employee services in share-based payment transactions. SFAS
No. 123 (R) requires companies to recognize in this statement of operations the
cost of employee services received in exchange for awards of equity instruments
based on the grant-date fair value of those awards (with limited exceptions).
SFAS No. 123 (R) is effective as of the first interim or annual reporting period
that begins after June 15, 2005 for issuers who are not small business issuers
and after December 15, 2005 for small business issuers. Accordingly, the Company
will adopt SFAS No. 123 (R) in its quarter ending March 31, 2006. The Company is
currently evaluating the provisions of SFAS No. 123 (R) and has not yet
determined the impact, if any, that SFAS No. 123 (R) will have on its financial
statement presentation or disclosures.
YEAR ENDED DECEMBER 31, 2004 COMPARED TO YEAR ENDED DECEMBER 31, 2003
SALES AND GROSS PROFIT MARGIN
Net revenues in the year ended December 31, 2004 increased by 33.2% to
$12,036,404 compared to $9,031,963 for the same period in 2003. Net sales to the
local market in 2004 decreased by 25.5% to $3,730,617 from $5,001,825 in 2003.
The increase in net revenues is attributable to the 106.1% increase in export
sales in 2004 to $8,305,787 from $4,030,138 in 2003. We attribute the increase
in export sales to the successful implementation of our growth plan with our
focus on the international markets. The breakdown of net sales by segment for
the years ended December 31, 2003 and 2004 is as follows:
Year ended December 31
---------------------------
Segment information 2004 2003
--------------------- ----------- -----------
Local market-civilian $ 1,636,027 $ 2,286,137
Local market-military 2,094,590 2,715,688
Export market-military 8,305,787 4,030,138
----------- -----------
Total $12,036,404 $ 9,031,963
=========== ===========
27
Year ended December 31
---------------------
Income from segment 2004 2003
---------------------- -------- --------
Local market-civilian $ 81,015 $ 85,591
Local market-military 149,972 93,815
Export market-military 641,755 120,556
-------- --------
Total $872,742 $299,962
======== ========
Gross profit for the year ended December 31, 2004 increased by 25.1% to
$3,224,449 from $2,576,648 for the year ended December 31, 2003. This increase
in gross profit is principally attributable to the increase in total sales. We
do not anticipate any major changes to our gross profit margins in 2005.
The cost of production in the year ended December 31, 2004 was $8,811,955
or 73.2% of the sales, compared to $6,455,315 or 71.5% of sales for the year
ended December 31, 2003. This change in cost of production is explained by the
increase in overseas sales, which generally consist of products that are more
expensive to produce, the approximately 8% increase in the ratio between the
Euro (which is the currency used for the majority of our raw material purchases)
and the US Dollar (which is the principal currency for our sales), and the local
market shrinkage, resulting in an increase in local competition and lower
margins in that market. We believe that 2005 will be characterized by an
increased demand worldwide for raw materials, that may result in significant
extensions in the regular delivery schedules and an increase in raw material
prices which will likely effect our cost of production. We cannot assure you
that we will be able to increase our prices sufficiently to recover these
additional costs
SELLING EXPENSES
Selling expenses for 2004 were $862,267, similar to $862,155 in 2003. The
stability in our selling expenses was achieved due to lower commission payments
on sales to a major export customer.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative costs for the year ended December 31, 2004
increased to $1,489,440 from $1,414,531 for the year ended December 31, 2003.
This moderate increase is a result of our closely monitoring general and
administrative expenses. We do not anticipate any material change in our general
and administrative expenses in 2005.
FINANCIAL EXPENSE
Financial expense net for the year ended December 31, 2004 was $157,505
compared to $240,815 for the year ended December 31, 2003. This decrease is
attributed mainly to the decrease the interest rates.
28
INCOME TAX EXPENSES
Income tax expense for the year ended December 31, 2004 increased by 258.3%
to $338,754 from $94,554 for the year ended December 31, 2003. Our effective
income tax rate was 44.4% and 41.5% for the years ended December 31, 2004 and
2003, respectively. The increase in the effective income tax rate was due to
prior year's tax expenses of $31,062 that were presented in the prior year as a
deferred tax asset, and in this year was recognized as a tax expenses.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2004, we had $505,013 in cash and cash equivalents,
$808,102 in marketable securities and working capital of $4,344,566 as compared
to $784,026 in cash and cash equivalents, $704,046 in marketable securities and
$3,763,618 in working capital at December 31, 2003. The increase in working
capital in 2004 is mainly due to our profitable operations in the year. Accounts
receivable were increased by $672,781, inventory was increased by $693,194,
trade accounts payable increased by $295,601 and other payables increased by
$403,445.
One of the principal factors affecting our working capital is the payment
cycle on our sales. Payment for goods shipped is generally received from 60 to
90 days after shipment. Any material change in the aging of our accounts
receivable could have an adverse effect on our working capital.
In 2004, net cash provided from operating activities was $226,378, as
compared to $833,543 used in operating activities in 2003. During 2004, of this
amount, $381,169 was attributable to net income, $672,781 was attributable to an
increase in trade accounts receivable, $174,691 was attributable to a decrease
in deferred taxes, $20,164 was attributable to a decrease in other assets,
$693,194 was attributable to an increase in inventory, $295,601 was attributable
to an increase in trade accounts payable, $403,445 was attributable to a
decrease in other liabilities and depreciation of $286,011.
In 2004, net cash used by investing activities was $399,425, as compared to
$290,639 provided by investing activities in 2003. In 2004, net cash used by
financing activities was $158,999, as compared to $313,962 provided by financing
activities in 2003. We dedicated a part of the funds derived from our net income
to the purchase of property and equipment and for increase inventory to support
our increase in sales.
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. Long term loans arising from the acquisition of
Achidatex were originally amortized over a five year period on a straight line
basis at the rate of 10% per year. On May 21, 2003, this loan was amended
whereby all amounts would be repaid as of February 18, 2005, which payment was
made on a timely basis. We believe that we have sufficient working capital to
sustain our current level of operations for the next year.
We anticipate that our research and development expenses for each of 2005
and 2006 will increase to approximately $250,000. If we are unable to effect a
financing that will provide for research and development and other corporate
purposes, we will fund our research and development through our operating funds.
In such event, the pace of our anticipated research and development and
subsequent production schedule would be delayed.
29
INFLATION AND SEASONALITY
During the past three years we encountered a moderate rate of inflation,
6.5% in 2002, (1.9)% in 2003 and 1.2% in 2004, which affected our purchases of
raw material and employee wages.
Seasonality has not had a material affect on our operations.
MARKET RISK
At December 31, 2004 and 2003, we held cash and cash equivalents, in the
aggregate amount of $505,013 and $784,026, respectively, and 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 deposits.
OFF-BALANCE SHEET ARRANGEMENTS
None.
ITEM 7. FINANCIAL STATEMENTS.
The following financial statements are filed as a part of this report
immediately following the signature page, beginning at page 40, Index to
Consolidated Financial Statements.
1. Report of Independent Registered Public Accounting Firm.
2. Consolidated Balance Sheets as of December 31, 2004 and December 31,
2003.
3. Consolidated Statements of Income and Comprehensive Income for the
years ended December 31, 2004 and December 31, 2003.
4. Consolidated Statements of Changes in Shareholders' Equity for the
years ended December 31, 2004 and 2003.
5. Consolidated Statements of Cash Flows for the years ended December 31,
2004 and December 31, 2003.
6. Notes to Consolidated Financial Statements as of December 31, 2004 and
2003.
30
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 8A. CONTROLS AND PROCEDURES.
Our management, including our chief executive officer and chief financial
officer, evaluated the effectiveness of our disclosure controls and procedures
(as defined in Exchange Act Rule 13a-15(e)) as of the end of the period covered
by this annual report on Form 10-KSB. Based upon that evaluation, our chief
executive officer and chief financial officer have concluded that, as of such
date, our disclosure controls and procedures were effective to ensure that
information required to be disclosed by our company in reports that we file or
submit under the U.S. Securities Exchange Act of 1934, as amended, is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms and that such information
was made known to them by others within the company, as appropriate to allow
timely decisions regarding required disclosure.
All internal control systems, no matter how well designed, have inherent
limitations. Therefore, even those systems determined to be effective may not
prevent or detect misstatements and can provide only reasonable assurance with
respect to financial statement preparation and presentation. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
ITEM 8B. OTHER INFORMATION.
None.
PART II
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT.
Set forth below are the name, age, principal position and a biographical
description of each of our directors executive officers and key management
personnel as of December 31, 2004. Our board of directors is comprised of only
one class. All of our directors will serve until the next annual meeting of
stockholders and until their successors are elected and qualified, or until
their earlier death, retirement, resignation or removal. Executive officers
serve at the discretion of the board of directors, and are appointed to serve
until the first board of directors meeting following the annual meeting of
stockholders.
NAME AGE POSITION HELD
---- --- -------------
Joseph Postbinder 58 Chief Executive Officer and Chairman of the Board of Directors
Baruch Tosh 49 President
31
NAME AGE POSITION HELD
---- --- -------------
Meira Postbinder 59 Vice President of Finance, Secretary, Treasurer and Director
Dan Zarchin 57 Vice President of Marketing and International, Business Development and Director
Tsippy Moldovan 48 Chief Financial Officer and Director
Avraham Hatzor 60 Chief Operations Officer and Director
General Richard D. Hearney 65 Director
Motti Hassan 54 Director
JOSEPH POSTBINDER, has served as Chairman of our board of directors since
March 2002 and as our Chief Executive Officer since March 1, 2003 and as Chief
Executive Officer of Export Erez Ltd. (formerly R.T.V. Ltd.) since July 1983. He
also serves as Chief Executive Officer of Mayotex Ltd. and Achidatex Nazareth
Elite (1977) Ltd. Mr. Postbinder has a technical background in fine mechanics.
Mr. Postbinder has managed Export Erez (formerly R.T.V.) and Mayotex since he
founded those companies in 1983 and 1990, respectively.
BARUCH TOSH, has served as our President since March 1, 2003. Mr. Tosh
joined us on March 1, 2003. From March 1998 to December 31, 2002, Mr. Tosh
served as the Business Development Manager of FMS Enterprises Ltd., Israel, an
Israeli company that produces woven aramid fabrics, unidirectional shields and
plates/panels for ballistic protection. Mr. Tosh holds a B.Sc. degree in
Mechanical Engineering from Ben Gurion University, Beer-Sheva, Israel and a
Diploma in Business Administration from The Technion, Israel Institute of
Technology, Haifa, Israel.
MEIRA POSTBINDER, has served as our Vice President of Financing and a
director of Export Erez Ltd. since June 6, 1996.
DAN ZARCHIN, has served as our Manager of Marketing and International
Business Development since March 2002 and as a director since March 2002. Mr.
Zarchin has provided counseling services through his company, Zarchin
Consultants, Tel-Aviv, Israel, since 1981, and has provided us with consulting
services since March 1991. Mr. Zarchin holds a B.A. degree in Textile
Engineering from the College of Textile Science of Philadelphia, Pennsylvania
and a Masters of Business Administration from Tel-Aviv University, Israel.
TSIPPY MOLDOVAN, has served as our Chief Financial Officer and as our
director since March 2002. Prior to that Mrs. Moldovan served as our Deputy Vice
President of Finance. Since September 1, 1987 Mrs. Moldovan serves as the Deputy
Managing Director of Finance of Export Erez. Mrs. Moldovan attended Buchnich
Accounting School in Ashkelon, Israel and completed course work in economics and
management accounting from Mishlav School, Tel Aviv, Israel.
AVRAHAM HATZOR, has served as our Chief Operations Officer and director
since May 1, 2002. For the past 24 years Mr. Hatzor has served as the co-manager
of Achidatex and as the Managing Director of Achidatex for the past nine years.
Mr. Hatzor studied electronics at a technical high school and served for seven
years in the IDF including for a period as a civilian advisor.
32
GENERAL RICHARD D. HEARNEY has served as our director since December 16,
2004. In 2002, General Hearney founded RDM Strategies. From 2000 to 2002, he
served as President and CEO of Business Executives for National Security (BENS),
an organization of US business leaders. Prior to that, he served as Vice
President of the Military Aircraft and Missile Systems Group for the Boeing
Company. General Hearney retired from military service in 1996 as the Assistant
Commandant of the Marine Corps. During his military career, General Hearney held
command positions at the squadron, air group and air wing level. He served as
Deputy Commander, 1st Marine Expeditionary Force, during Desert Shield and
Desert Storm. General Hearney also held numerous senior staff assignments,
including Deputy Director for Operations, U.S. European Command and Deputy Chief
of Staff for Requirements, Programs and Aviation, Headquarters Marine Corps.
MOTTI HASSAN, has served as our director since October 30, 2002. Mr. Hassan
is an electronics engineer. Mr. Hassan served in the Israeli Army as a system
engineer for 15 years until July 2000 when he retired and joined a private
company in the field of professional video as a sales and business development
manager. Mr. Hassan holds a B.Sc. degree in Electronic Engineering from the Ben
Gurion University, Beer Sheva, Israel.
Mr. Peter Zoltan, who has served as our director since October 30, 2002,
resigned from our board due to personal reasons on November 29, 2004.
EMPLOYMENT AGREEMENTS
We have an employment agreement with Mr. Baruch Tosh, our President,
pursuant to which, Mr. Tosh is entitled to additional compensation of 1.5% of
the growth in our total sales since 2002. Mr. Tosh, at his option, may receive
shares of common stock in lieu of cash.
FAMILY RELATIONSHIPS
Joseph Postbinder and Meira Postbinder are husband and wife.
AUDIT COMMITTEE FINANCIAL EXPERT
Since we are an OTC Bulletin Board company, we are not required to
establish an audit committee or to have an audit committee financial expert to
serve on such committee. We hope to comply with those requirements in the
future.
SECTION 16(A) BENEFICIAL OWNERSHIP COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
our executive officers, directors and persons who own more than 10% of a
registered class of our equity securities to file with the Securities and
Exchange Commission initial statements of beneficial ownership, reports of
changes in ownership and annual reports concerning their ownership of common
stock and other of our equity securities on Forms 3, 4 and 5, respectively.
Executive officers, directors and greater than 10% shareholders are required by
Commission regulations to furnish us with copies of all Section 16(a) reports
they file.
33
When reviewing the Forms 3, 4 and 5 filed, we found that one officer and
one director failed to file on a timely basis reports on Form 3 required by
Section 16(a) of the Securities Exchange Act of 1934, as amended. We also found
that the Form 3 filed by our Chief Executive Officer and chairman of the board
of directors, inadvertently failed to mention that the he is also a greater than
10% shareholder. To the best of our knowledge (based solely upon a review of the
Form 3, 4 and 5 filed), no other officer, director or 10% beneficial shareholder
failed to file on a timely basis any reports required by Section 16(a) of the
Securities Exchange Act of 1934, as amended.
CODE OF ETHICS
We have adopted a Code of Ethics for Executive and Financial Officers, a
code of ethics that applies to our chief executive officer, chief financial
officer, corporate controller and other finance organization employees, and a
Code of Conduct, which applies to all of our employees. The Code of Ethics and
the Code of Conduct are publicly available on our website at
www.defense-industries.com. Written copies are available upon request. If we
make any substantive amendments to the Code of Ethics or the Code of Conduct or
grant any waivers, including any implicit waiver, from a provision of these
codes to our chief executive officer, chief financial officer or corporate
controller, we will disclose the nature of such amendment or waiver on our
website.
ITEM 10. EXECUTIVE COMPENSATION
The following summary compensation table sets forth the compensation earned
by our Chief Executive Officer. None of our executive s received compensation
for the fiscal year 2003 in excess of $100,000. Our directors do not receive
compensation for their services on the board of directors or any committee
thereof. All of our directors are reimbursed for their expenses for each board
of directors meeting attended.
At December 31, 2004 we did not have any equity compensation plans, beside
the employment agreement with Mr. Tosh, our President.
Summary Compensation Table
ANNUAL COMPENSATION LONG-TERM COMPENSATION
---------------------------- ----------------------------------------------------
AWARDS PAYOUTS
----------------------- ------------------------
SECURITIES
OTHER ANNUAL RESTRICTED UNDER-LYING LTIP ALL OTHER
NAME AND SALARY BONUS COMPENSATION STOCK AWARD(S) OPTIONS/SARS PAYOUTS COMPENSATION
PRINCIPAL POSITION YEAR ($) ($) ($) ($) (#) ($) ($)
(a) (b) (c) (d) (f) (f) (g) (h) (i)
------------------ ------- ------- ------ -------- -------- -------- -------- ------------
Joseph Postbinder 2003 $45,906 0 0 0 0 0 0
Joseph Postbinder 2004 $46,889 0 0 0 0 0 0
34
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table sets forth the number of shares of common stock
beneficially owned as of March 8, 2005 by (i) those persons or groups known to
us who will beneficially own more than 5% of our common stock; (ii) each
director; (iii) each executive officer whose compensation exceeded $100,000 in
the fiscal year ended December 31, 2004; and, (iv) all directors and executive
officers as a group. The information is determined in accordance with Rule
13(d)-3 promulgated under the Exchange Act based upon information furnished by
persons listed or contained in filings made by them with the Securities and
Exchange Commission by information provided by such persons directly to us.
Except as indicated, the stockholders listed below possess sole voting and
investment power with respect to their shares.
Number of
Ordinary Percentage of
Shares Outstanding
Beneficially Ordinary
Name (1) Owned (2) Shares (3)
-------- --------- ----------
Joseph Postbinder (5) 19,440,212 76.7
Baruch Tosh - 0
Meira Postbinder(5) 9,788 *
Dan Zarchin - 0
Tsippy Moldovan 55,000 *
Avraham Hatzor (4) 262,500 1.0
General Richard D. Hearney - -
Motti Hassan - -
All officers and directors as a group ([ ] persons) 19,867,500 78.4%
* Less than 1% percent
----------
(1) The addresses of Joseph Postbinder, Baruch Tosh, Meira Postbinder, Dan
Zarchin, Tsippy Moldovan, Avraham Hatzor , General Richard D. Hearney and Motti
Hassan are c/o Defense Industries International, Inc., 8 Brisel Street,
Industrial Zone Sderot, Israel.
(2) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities. Ordinary shares relating to options currently
exercisable or exercisable within 60 days of the date of this table, are deemed
outstanding for computing the percentage of the person holding such securities
but are not deemed outstanding for computing the percentage of any other person.
Except as indicated by footnote, and subject to community property laws where
applicable, the persons named in the table above have sole voting and investment
power with respect to all shares shown as beneficially owned by them.
(3) Based upon 25,350,000 shares outstanding.
(4) Includes 239,477 shares held through Achidatex and 23,023 shares are
held directly.
(5) Joseph Postbinder is the spouse of Meira Postbinder.
35
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
FACILITY LEASE
We lease approximately 2,000 square meters of a building in the Erez
Industrial Area from Mr. Joseph Postbinder, our Chief Executive Officer and
Chairman of the board of directors. Our annual rental expense for this building
was $85,500 in 2004 when the lease was for 2,500 square meters. In 2005 the
rental expense is reduced to $68,400. We believe that our rental expense for
this building was fair under the circumstances and that our rent is
approximately 20% below prevailing fair market prices.
Under a lease agreement effective since January 1, 2001, we lease an
industrial building located in the Nazareth Industrial Zone. The lease expired
in December 31, 2004 and was renewed until December 31, 2008. The annual rental
payments were approximately $180,000 in 2004. This building is owned by a
related party, a company owned by the shareholders of Achidatex, Mr. Avraham
Hatzor, Mr. Fredy Davidovitz , Mr, Shmuel Davidovitz and a company owned by Mr.
Postbinder. We believe that our rental expenses for this building is fair under
the circumstances and that our rent is approximately 30% below prevailing fair
market prices.
ITEM 13. EXHIBITS
The following is a list of exhibits filed as part of this Annual Report on
Form 10-KSB. Where so indicated by footnote, exhibits that were previously filed
are incorporated by reference.
Exhibit
Number Description
------ -----------
3.1 Certificate of Incorporation, incorporated herein by reference from the filing on Form 10-KSB for the
year ended December 31, 2001.
3.2 Certificate of Amendment to the Certificate of Incorporation, incorporated herein by reference from the
Filing on Schedule 14C, filed with the Commission on December 30, 2002.
4.1 Share Exchange Agreement, dated March 25, 2002, incorporated herein by reference from the filing on
Form 8-K filed with the Commission on April 14, 2002.
10.1 Form of Settlement and Release Agreement
10.2 Translation of Employment Agreement with Mr. Tosh
23.1 Subsidiaries of the Company
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the
Securities Exchange Act, as amended.
31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the
Securities Exchange Act, as amended.
36
Exhibit
Number Description
------ -----------
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
FEES PAID TO INDEPENDENT PUBLIC ACCOUNTANTS
The following table sets forth, for each of the years indicated, the fees
paid to our independent public accountants and the percentage of each of the
fees out of the total amount paid to the accountants.
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
2003 2004
----------------------- --------------------------
SERVICES RENDERED FEES PERCENTAGES FEES PERCENTAGES
----------------- ---------- ----------- ---------- -----------
Audit (1) $61,000 100% $76,000 100%
Audit-related (2) - - - -
Tax (3) - - - -
Other (4) - - - -
Total $61,000 100% $76,000 100%
----------
(1) Audit fees consist of services that would normally be provided in
connection with statutory and regulatory filings or engagements, including
services that generally only the independent accountant can reasonably
provide.
PRE-APPROVAL POLICIES AND PROCEDURES
Our board of directors has adopted a policy and procedures for the
pre-approval of audit and non-audit services rendered by our independent public
accountants, Weinberg & Company, P.A.. The policy generally pre-approves certain
specific services in the categories of audit services, audit-related services,
and tax services up to specified amounts, and sets requirements for specific
case-by-case pre-approval of discrete projects, those which may have a material
effect on our operations or services over certain amounts. Pre-approval may be
given as part of the board of directors' approval of the scope of the engagement
of our independent auditor or on an individual basis. The pre-approval of
services may be delegated to one or more of the board of directors' members, but
the decision must be presented to the board of directors at its next scheduled
meeting. The policy prohibits retention of the independent public accountants to
perform the prohibited non-audit functions defined in Section 201 of the
Sarbanes-Oxley Act or the rules of the SEC, and also considers whether proposed
services are compatible with the independence of the public accountants.
37
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Company
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
DEFENSE INDUSTRIES INTERNATIONAL, INC.
Dated: April 15, 2005 /S/ Joseph Postbinder
---------------------
Joseph Postbinder
Chairman and Chief Executive Officer
In accordance with the Securities Exchange Act of 1934, this Report has
been signed below on April 15, 2004 by the following persons on behalf of the
Registrant and in the capacities indicated.
/S/ Joseph Postbinder
---------------------
Joseph Postbinder
Chairman and Chief Executive Officer
/S/ Baruch Tosh
---------------
Baruch Tosh
President
/S/ Meira Postbinder
--------------------
Meira Postbinder
Vice President of Finance and Director
/S/ Tsippy Moldovan
-------------------
Tsippy Moldovan
Chief Financial Officer and Director
/S/ Avraham Hatzor
------------------
Avraham Hatzor
Chief Operations Officer and Director
/S/ Dan Zarchin
---------------
Dan Zarchin
Director
/S/ General Richard D. Hearney
------------------------------
General Richard D. Hearney
Director
/S/ Motti Hassan
----------------
Motti Hassan
Director
38
DEFENSE INDUSTRIES INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2004 AND 2003
DEFENSE INDUSTRIES INTERNATIONAL, INC. AND SUBSIDIARIES
CONTENTS
--------
PAGE F - 1 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
PAGES F - 2 - F - 3 CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2004 AND 2003
PAGE F - 4 CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31,
2004 AND 2003
PAGE F - 5 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31,
2004 AND 2003
PAGE F - 6 CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
PAGES F - 7 - F - 28 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2004 AND 2003
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of:
Defense Industries International, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Defense
Industries International, Inc. and Subsidiaries (the "Company") as of December
31, 2004 and 2003 and the related consolidated statements of income and
comprehensive income, changes in shareholders' equity and cash flows for the
years then ended. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above, present
fairly, in all material respects, the consolidated financial position of Defense
Industries International, Inc. and Subsidiaries as of December 31, 2004 and 2003
and the consolidated results of their operations and their cash flows for the
years then ended, in conformity with accounting principles generally accepted in
the United States of America.
WEINBERG & COMPANY, P.A.
Boca Raton, Florida
March 25, 2005
F - 1
DEFENSE INDUSTRIES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2004 AND 2003
ASSETS
2004 2003
---------- ----------
CURRENT ASSETS
Cash and cash equivalents $ 505,013 $ 784,026
Accounts receivable, net of allowance for doubtful accounts of $105,927 and
$68,345, respectively 2,495,861 1,912,747
Accounts receivable - related parties, net 374,458 322,373
Inventories 2,809,019 2,115,825
Investments in marketable securities 808,102 704,046
Deferred taxes 43,049 45,353
Other current assets 402,325 422,489
---------- ----------
Total Current Assets 7,437,827 6,306,859
---------- ----------
PROPERTY, PLANT AND EQUIPMENT, NET 1,761,842 1,662,902
---------- ----------
OTHER ASSETS
Deposits for the severance of employer-employee relations 483,334 437,963
Deferred taxes, long-term 60,326 232,713
Intangible assets, net 31,337 41,105
---------- ----------
Total Other Assets 574,997 711,781
---------- ----------
TOTAL ASSETS $9,774,666 $8,681,542
========== ==========
The accompanying notes are an integral part of the consolidated
financial statements.
F - 2
DEFENSE INDUSTRIES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2004 AND 2003
LIABILITIES AND SHAREHOLDERS' EQUITY
2004 2003
----------- -----------
CURRENT LIABILITIES
Accounts payable $ 1,026,162 $ 730,561
Short-term debt 652,913 719,642
Current portion of long-term debt 407,227 489,524
Other current liabilities 1,006,959 603,514
----------- -----------
Total Current Liabilities 3,093,261 2,543,241
----------- -----------
LONG-TERM LIABILITIES
Long-term portion of debt 731,442 728,678
Provision for the severance of employer-employee relations 336,101 290,573
Minority interest 902,771 852,914
----------- -----------
Total Long-Term Liabilities 1,970,314 1,872,165
----------- -----------
TOTAL LIABILITIES 5,063,575 4,415,406
----------- -----------
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 3,148,950 2,767,781
Accumulated other comprehensive loss (151,844) (215,631)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 4,711,091 4,266,136
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 9,774,666 $ 8,681,542
=========== ===========
The accompanying notes are an integral part of the consolidated
financial statements.
F - 3
DEFENSE INDUSTRIES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
2004 2003
------------ ------------
NET REVENUES $ 12,036,404 $ 9,031,963
COST OF SALES 8,811,955 6,455,315
------------ ------------
GROSS PROFIT 3,224,449 2,576,648
------------ ------------
OPERATING EXPENSES
Selling 862,267 862,155
General and administrative 1,489,440 1,414,531
------------ ------------
Total Operating Expenses 2,351,707 2,276,686
------------ ------------
INCOME FROM OPERATIONS 872,742 299,962
------------ ------------
OTHER INCOME (EXPENSE)
Financial expense, net (157,505) (240,815)
Other income, net 46,438 168,715
------------ ------------
Total Other Expense (111,067) (72,100)
------------ ------------
INCOME BEFORE INCOME TAXES 761,675 227,862
Less: income tax expense 338,745 94,554
------------ ------------
Income before minority interest 422,930 133,308
Less: minority interest 41,761 5,337
------------ ------------
NET INCOME 381,169 127,771
------------ ------------
OTHER COMPREHENSIVE INCOME
Foreign currency translation gain, net of minority interest gain of $8,097 and $29,488,
respectively 63,787 237,150
Unrealized gain on available-for-sale securities - 5,128
------------ ------------
Other comprehensive gain before tax 63,787 242,278
Income tax expense related to items of other comprehensive income (22,325) (87,220)
------------ ------------
TOTAL OTHER COMPREHENSIVE INCOME, NET OF TAX 41,462 155,058
------------ ------------
COMPREHENSIVE INCOME $ 422,631 $ 282,829
============ ============
Net income per share - basic and diluted $ 0.02 $ 0.01
============ ============
Weighted average number of shares outstanding - basic and diluted 25,350,000 25,350,000
============ ============
The accompanying notes are an integral part of the consolidated
financial statements.
F - 4
DEFENSE INDUSTRIES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
Common Stock Additional
Common Stock To Be Issued Paid-In
Shares Amount Shares Amount Capital
---------- ---------- ---------- ---------- ----------
Balance, December 31, 2002 25,100,000 $ 2,510 250,000 $ 25 $1,711,450
Issuance of common stock 250,000 25 (250,000) (25) -
Foreign currency translation gain - - - - -
Unrealized gain on available for sale
securities - - - - -
Amortization of deferred consulting
expense - - - - -
Net income - - - - -
---------- ---------- ---------- ---------- ----------
Balance, December 31, 2003 25,350,000 2,535 - - 1,711,450
Foreign currency translation gain - - - - -
Net income - - - - -
---------- ---------- ---------- ---------- ----------
BALANCE, DECEMBER 31, 2004 25,350,000 $ 2,535 - $ - $1,711,450
========== ========== ========== ========== ==========
Accumulated
Other Deferred
Retained Comprehensive Consulting
Earnings Loss Expense Total
---------- ---------- ---------- ----------
Balance, December 31, 2002 $2,640,010 $ (457,909) $ (43,000) $3,853,086
Issuance of common stock - - - -
Foreign currency translation gain - 237,150 - 237,150
Unrealized gain on available for sale
securities - 5,128 - 5,128
Amortization of deferred consulting
expense - - 43,000 43,000
Net income 127,771 - - 127,771
---------- ---------- ---------- ----------
Balance, December 31, 2003 2,767,781 (215,631) - 4,266,135
Foreign currency translation gain - 63,787 - 63,787
Net income 381,169 - - 381,169
---------- ---------- ---------- ----------
BALANCE, DECEMBER 31, 2004 $3,148,950 $ (151,844) $ - $4,711,091
========== ========== ========== ==========
The accompanying notes are an integral part of the consolidated
financial statements.
F - 5
DEFENSE INDUSTRIES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
2004 2003
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 381,169 $ 127,771
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization 286,011 298,608
Provision for doubtful accounts 37,582 10,104
Deferred consulting expense recognized from stock issued for services - 43,000
Deferred taxes 174,691 46,931
Minority interest in income of subsidiary 41,761 5,537
Net realized and unrealized gain on marketable securities (47,111) (143,436)
Gain from sale of fixed assets (1,117) (7,546)
Changes in operating assets and liabilities:
Increase in accounts receivable (672,781) (70,140)
Decrease (increase) in inventories (693,194) (380,859)
Decrease (increase) in other current assets 20,164 (235,621)
Decrease (increase) in deposits for employee relations (45,371) (23,613)
Decrease in accounts payable 295,601 (252,242)
Decrease in other current liabilities 403,445 (144,674)
Decrease in provision for the severance of employer-employee relations 45,528 (107,363)
----------- -----------
Net Cash Provided By (Used In) Operating Activities 226,378 (833,543)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (355,211) (85,037)
Proceeds from sale of property, plant and equipment 1,117 25,134
Proceeds received from repayment of officer note receivable - 380,986
Proceeds from sale of marketable securities 280,886 969,818
Purchases of marketable securities (326,217) (1,000,262)
----------- -----------
Net Cash (Used In) Provided By Investing Activities (399,425) 290,639
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Decrease) increase in short-term debt, net (66,729) 293,644
Proceeds from long term debt 409,004 388,216
Payments on long-term debt (501,274) (367,898)
----------- -----------
Net Cash (Used In) Provided By Financing Activities (158,999) 313,962
----------- -----------
EFFECT OF CHANGES IN EXCHANGE RATES ON CASH 53,033 181,148
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (279,013) (47,794)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 784,026 831,820
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 505,013 $ 784,026
=========== ===========
INTEREST PAID $ 121,949 $ 188,345
=========== ===========
TAXES PAID $ 160,736 $ 146,192
=========== ===========
The accompanying notes are an integral part of the consolidated
financial statements.
F - 6
DEFENSE INDUSTRIES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2004 AND 2003
NOTE 1 DESCRIPTION OF BUSINESS
Defense Industries International, Inc. and subsidiaries (the "Company") is
a manufacturer and global provider of personal military and civilian
protective equipment and supplies. The Company's products are used by
military, law enforcement, border patrol enforcement, and other special
security forces, corporations, non-governmental organizations and
individuals throughout the world.
The Company's main products include body armor, bomb disposal suits, bullet
proof vests and jackets, ballistic wall coverings, bullet proof ceramic and
polyethylene panels, V.I.P. car armoring and lightweight armor kits for
vehicles, personal military equipment, dry storage systems, liquid logistic
products, tents and other camping and travel gear.
Defense Industries International, Inc. is a holding company whose
subsidiaries include Export Erez USA, Inc., or Export Erez, and Rizzo Inc.
Export Erez is a holding company whose subsidiaries include Export Erez,
Ltd., a wholly owned subsidiary, Mayotex, Ltd., or Mayotex, a wholly owned
subsidiary , Dragonwear Trading Ltd., or Dragonwear, a wholly owned
subsidiary and Achidatex Nazareth Elite (1977) Ltd., or Achidatex, a
majority owned subsidiary.
Export Erez Ltd. was incorporated in Israel on January 23, 1983 under the
name R.T.V. Ltd., and changed its name to Export Erez Ltd. on April 25,
1987. Export Erez Ltd. is principally engaged in the design, production and
marketing of personal military and civilian protective equipment and
supplies such as body armor, bomb disposal suits, bulletproof vests, and
associated heavy fabric products, such as battle pouches and combat harness
units, tents and other camping equipment.
Mayotex Ltd. was incorporated in Israel on March 7, 1990. Mayotex is
engaged in weaving, processing, dyeing, cutting and sewing of fabric to
make the heavy-duty and bulletproof fabrics used by Export Erez Ltd. in
manufacturing its finished products and goods, and in VIP car armoring and
lightweight vehicle armor kits production.
Dragonwear Trading Ltd. was incorporated in Cyprus in October 2000 and is
engaged in trading textile products.
Achidatex Nazareth Elite (1977) Ltd. was incorporated in Israel on August
2, 1977 as a limited liability company under the Israeli Companies
Ordinance. Export Erez acquired 76% of Achidatex shares on June 18, 2001,
from Mr. Avraham Hatzor, Mr. Fredy Davidovitz and Mr. Shmuel Davidovitz,
which individuals retain 24% of the outstanding Achidatex shares. Achidatex
is a leading manufacturer of ballistic shields, long term storage systems,
liquid logistic products, combat flak jackets, tents and other personal
military and civilian protective equipment and supplies.
F - 7
DEFENSE INDUSTRIES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2004 AND 2003
On February 28, 2005, the Company acquired all of the outstanding shares of
Rizzo Inc. a California corporation, a company incorporated under the laws
of California, and doing business under the name Owen Mills Company. Owen
Mills specializes in military and industrial sewing of marine and ballistic
fabric products. The acquisition of Owen Mills provides the Company with
the ability to manufacture many of our products in the U.S.
On March 25, 2002, under a share exchange agreement (the "Agreement"),
Pawnbrokers Exchange, Inc. ("PEI"), a reporting public company with no
operations at that time, acquired 100% of the issued and outstanding common
stock of Export Erez USA, Inc. in exchange for 21,000,000 shares of common
stock of PEI. Immediately after the acquisition, there were 25,000,000
shares of PEI outstanding. As a result of the exchange, Export USA became a
wholly owned subsidiary of PEI and the shareholders of Export USA became
shareholders of approximately 84% of PEI. Generally accepted accounting
principles require that the company whose shareholders retain a majority
interest in a business combination be treated as the acquirer for
accounting purposes. As a result, the exchange was treated as an
acquisition of PEI by Export USA and a recapitalization of Export USA.
Accordingly, the consolidated financial statements include the following:
(1) The balance sheet consists of the net assets of the acquirer at
historical cost and the net assets of the acquiree at historical cost on
the date of the acquisition; (2) The statements of operations include the
operations of the accounting acquirer for the periods presented and the
operations of the acquiree from the date of the acquisition.
On June 18, 2001, Export USA acquired 76% of the total share capital of
Achidatex Nazareth Elite (1977) Ltd. ("Achidatex"). Achidatex manufactures
and markets ballistic shields.
Effective March 25, 2002, PEI began doing business as Defense Industries
International, Inc. On July 8, 2002, PEI changed its corporate domicile
from the State of Utah to the State of Nevada (the "re-incorporation"). In
order to accomplish the re-incorporation, PEI merged with and into its
wholly owned subsidiary, Defense Industries International, Inc., ("Defense
Industries") a Nevada corporation organized on July 1, 2002. As a result of
the re-incorporation, PEI's name was 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. As a result, common stock changed from no par value to a par value
of $.0001. Accordingly, the consolidated balance sheet and the consolidated
statement of changes in shareholders' equity have been retroactively
restated to effectuate the change.
F - 8
DEFENSE INDUSTRIES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2004 AND 2003
During 2004, the Israeli Government decided to evacuate the Erez Industrial
Zone in the Gaza Strip where some of the operations of the Company are
located. The Company owns facilities, leases other facilities and maintains
equipment and inventory within this area. The Israeli Government's initial
decision to evacuate the Gaza Strip was backed by resolutions to compensate
the Israeli Gaza Strip settlers as well as businesses and property owners
in the Gaza Strip and in the Erez Industrial Zone. While the Israeli
Government hasn't decided the date when they will start to evacuate the
Industrial Zone, there isn't any doubt that it will evacuate the area but
not before the Government comes to an agreement with the businesses and
property owners for their compensation. The compensation is mentioned in
the "Evacuation Law" resolution that was adopted by the Israeli Parliament,
however, the amount of the compensation itself will be negotiable.
During the last half of 2004, the Company started to prepare for the
eventual evacuation by merging existing production facilities. The Company
moved its "light cut and sew" operation from the Erez Industrial Zone to
Sderot as well as some of its webbing equipment to Nazareth. The Erez Zone
operation will continue and inventories will continue to be maintained
there until the evacuation occurs.
Due to the Company's anticipation that it will be reimbursed for all costs
related to the evacuation of the Erez Industrial Zone, and the fact that
the facility is still operating and the equipment will be relocated, no
impairment or accrued liabilities have been recorded at December 31, 2004.
F - 9
DEFENSE INDUSTRIES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2004 AND 2003
NOTE 2 SIGNIFICANT ACCOUNTING POLICIES
(A) PRINCIPLES OF CONSOLIDATION
The 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 (1977) Ltd. The
minority interest represents the minority shareholders' proportionate share
of Achidatex.
All significant inter-company accounts and transactions have been
eliminated in consolidation.
(B) FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS
The accompanying consolidated financial statements are presented in United
States dollars. The functional currency of Export Erez, Ltd., Mayotex Ltd.,
and Achidatex Nazareth Elite is the New Israeli Shekel (NIS). The
functional currency of Dragonwear Trading Ltd. is the Cyprus Pound (CYP).
The financial statements of Dragonwear are translated into NIS. The
financial statements for all of these entities are then translated into
United States dollars from NIS at year-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. During 2004 and 2003,a gain (loss) of $40,544 and
($64,214), respectively are included in financial expense, net in the
accompanying consolidated statements of income and comprehensive income
(loss).
(C) COMPREHENSIVE INCOME
The foreign currency translation gains (losses) resulting from the
translation of the financial statements of the Company's subsidiaries
expressed in NIS to United States dollars are reported as Other
Comprehensive Income in the consolidated statements of income and as
Accumulated Other Comprehensive Loss in the statements of changes in
shareholders' equity.
The unrealized gains and losses, net of tax, resulting from the valuation
of available-for-sales securities at their fair market value at year end
are reported as Other Comprehensive Income in the consolidated statements
of income and as Accumulated Other Comprehensive Loss in the statements of
changes in shareholders' equity (See Note 2(H)).
F - 10
DEFENSE INDUSTRIES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2004 AND 2003
Amounts reported in net income and other comprehensive income for the years
ended December 31, 2004 and 2003 are presented net of an assumed tax rate
of 35% and 36%, respectively as follows:
2004 2003
----------- --------
Other comprehensive income:
Holding gain arising during period, net of tax $ - $ 95,082
Reclassification adjustment, net of tax - (91,800)
----------- --------
Net gain recognized in other comprehensive income, net of tax $ - $ 3,282
=========== ========
(D) USE OF ESTIMATES
The preparation of 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 financial statements
and the reported amounts of revenues and expenses during the reporting
periods. Actual results could differ from those estimates.
(E) FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments are principally non-derivative assets
and non-derivative liabilities (non-derivative assets include cash and cash
equivalents, deposits in banks and other financial institutions, marketable
securities, trade accounts receivable, other assets; non-derivative
liabilities include short-term debt, trade accounts payable, and other
liabilities). Because of the nature of these financial instruments, fair
value generally equals or approximates the amounts presented in the
consolidated financial statements. The carrying amount of the Company's
long-term debt approximates quoted market prices or current rates offered
to the Company for debt of the same remaining maturities.
(F) CONCENTRATIONS OF CREDIT RISK
At December 31, 2004 and 2003, the Company held cash and cash equivalents,
in the aggregate amount of $556,513 and $784,026, respectively, and 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, the Company does not anticipate losses in respect to these
items.
A significant portion of the Company's sales are made to government
institutions and private industry in Israel. Consequently, the exposure to
credit risks relating to these trade receivables is limited. Export sales
are made primarily with a letter of credit by the buyer or under controlled
credit with specific accredited customers, so the receivable is
collectible. The Company performs ongoing credit evaluations of its
customers and generally does not require collateral. An appropriate
allowance for doubtful accounts is included in trade accounts receivable.
F - 11
DEFENSE INDUSTRIES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2004 AND 2003
(G) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents.
(H) INVESTMENTS IN MARKETABLE SECURITIES AND BANK DEPOSIT
The Company invests in mutual funds and common stocks in Israel and in
common stocks in the United States and has a term bank deposit with a
maturity of greater than three months. Available-for-sale securities are
carried at market value, with unrealized gains and losses, net of tax,
reported as a separate component of shareholders' equity. In determining
realized gains and losses, the cost of the securities sold is based on the
specific identification method. The Company reviews each marketable
security to determine whether a decline in fair market value is other than
temporary. If the decline is deemed other than temporary, the cost basis of
the individual security is written down to fair market value as a new cost
basis and the amount written down is included in operations as a realized
loss.
During the fourth quarter of 2003, the Company sold substantially all of
its investments in marketable securities that were available for sale and
purchased different marketable securities deemed to be trading securities.
Prospectively, all investments in marketable securities were classified as
trading securities. Accordingly, all securities as of December 31, 2004 and
2003 are carried at their fair market value based upon quoted market prices
of those investments at year end. Net realized and unrealized gains and
losses on trading securities are included in net earnings in other income
for the years ended December 31, 2004 and 2003. Accordingly, there is no
unrealized gain or loss in marketable securities included in accumulated
other comprehensive income (loss) as of December 31, 2004 and 2003.
(I) INVENTORIES
Inventories are valued at the lower of cost or market value using the
first-in first-out method for raw materials. The cost includes expenses for
freight-in transportation. The specific identification method is used for
finished goods since all orders are custom orders for customers.
(J) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost less accumulated
depreciation.
F - 12
DEFENSE INDUSTRIES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2004 AND 2003
Depreciation is computed using the straight-line method over the estimated
useful lives of three to twenty-five years. Under Statement of Financial
Accounting Standards ("SFAS) No.144, these long-lived assets are generally
evaluated on an individual basis in making a determination as to whether
such assets are impaired. Periodically, the Company reviews its 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. There has been no impairment
loss recorded for the years ended December 31, 2004 and 2003.
(K) INTANGIBLE ASSETS
Intangible assets represent purchased manufacturing knowledge and are being
amortized using the straight-line method over the estimated useful life of
eight years.
(L) REVENUE RECOGNITION
Revenues from sales of products are recognized upon shipment to customers.
In accordance with Staff Accounting Bulletin ("SAB") No.101 "Revenue
Recognition in Financial Statement" (as updated by SAB 104) revenue is
recognized when delivery has occurred, persuasive evidence of an agreement
exists, the vendor's fee is fixed or determinable, no further obligation
exists and collectability is probable.
The Company provides a warranty on goods ranging from three to four years.
The Company's policy is to consider the establishment of a reserve for
warranty expenses. Based upon historical experience of no warranty claims,
the Company has not established a reserve at December 31, 2004 and 2003.
(M) SEGMENTS
During 2004 and 2003, the Company operated and managed 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 assets are used in more than one
segment and any allocation would be impractical (See Note 15(A) for segment
information).
(N) INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
F - 13
DEFENSE INDUSTRIES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2004 AND 2003
(O) 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. There were no common stock
equivalents outstanding at December 31, 2004 and 2003.
(P) SHIPPING AND HANDLING FEES
The Company includes shipping and handling fees billed to customers as
revenues and the related costs as cost of sales. Such fees and costs are
primarily comprised of outbound freight. Included in revenues in the
accompanying consolidated statements of income are shipping and handling
fees of $17,474 and $11,187 for the years ended December 31, 2004 and 2003,
respectively.
(Q) ADVERTISING COSTS
The Company expenses advertising costs as incurred. Advertising expenses
included in selling expenses were $66,996 and $36,342 for the years ended
December 31, 2004 and 2003, respectively.
(R) RESEARCH AND DEVELOPMENT COSTS
Expenditures relating to the development of new products and processes,
including significant improvements to existing products, are expensed as
incurred. Research and development expenses were $121,345 and $124,435 for
the years ended December 31, 2004 and 2003.
F - 14
DEFENSE INDUSTRIES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2004 AND 2003
(S) RECENT ACCOUNTING PRONOUNCEMENTS
In November 2004, the Financial Accounting Standards Board ("FASB") issued
SFAS No 151, "Inventory Costs". SFAS No. 151 amends the guidance in
Accounting Research Bulletin ("ARB") No. 43 Chapter 4 Inventory Pricing, to
require items such as idle facility costs, excessive spoilage, double
freight and rehandling costs to be expensed in the current period,
regardless if they are abnormal amounts or not. SFAS No. 151 will become
effective for us in the first quarter of 2006. The adoption of SFAS No. 151
is not expected to have a material impact on our financial condition,
results of operations, or cash flows. In December 2004, the FASB issued
SFAS No.153, "Exchanges of Non-monetary Assets", an amendment of Accounting
Principles Bpard ("APB") Opinion No. 29. The guidance in APB Opinion No.29,
"Accounting for Non-monetary Transactions" is based on the principle that
exchanges of non-monetary assets should be measured based on value of the
assets exchanged. APB 29 included certain exceptions to that principle.
SFAS 153 amends APB 29 to eliminate the exception for non-monetary
exchanges of similar productive assets and replaces it with a general
exception for exchanges of non-monetary assets that do not have commercial
substance. A non-monetary exchange has commercial substance if the future
cash flows of the entity are expected to change significantly as a result
of the exchange. SFAS 153 is effective for non-monetary assets exchanges
occurring in fiscal periods beginning after June 15, 2005. The Company does
not expect that the adoption of SFAS 153 will have a material effect on its
financial position or results of operations.
In December 2004, the FASB issued SFAS No. 123 (R), "Share-Based Payment".
SFAS No. 123 (R) revises SFAS No. 123, "Accounting for Stock-Based
Compensation" and supersedes APB Opinion No. 25, "Accounting for Stock
Issued to Employees". SFAS No. 123 (R) focuses primarily on the accounting
for transactions in which an entity obtains employee services in
share-based payment transactions. SFAS No. 123 (R) requires companies to
recognize in the statement of operations the cost of employee services
received in exchange for awards of equity instruments based on the
grant-date fair value of those awards (with limited exceptions). SFAS No.
123 (R) is effective as of the first interim or annual reporting period
that begins after June 15, 2005 for non-small business issuers and after
December 15, 2005 for small business issuers. Accordingly, the Company will
adopt SFAS No. 123 (R) in its quarter ending March 31, 2006. The Company is
currently evaluating the provisions of SFAS No. 123 (R) and has not yet
determined the impact, if any, that SFAS No. 123 (R) will have on its
financial statement presentation or disclosures.
NOTE 3 INVESTMENT IN MARKETABLE SECURITIES
During the first three quarters of 2003, the Company classified its
investments in marketable securities as available for sale, and those that
it intended to hold for more than one year as non-current. Unrealized
holding gains and losses were reported as a separate component of
shareholders' equity as part of other comprehensive income (loss), until
realized. During the fourth quarter of 2003, the Company reclassified its
investment in marketable securities from available for sale to trading. A
reconciliation of original cost to market value for securities held at
December 31, 2004 and 2003 follows:
F - 15
DEFENSE INDUSTRIES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2004 AND 2003
2004 2003
-------- --------
Investment in marketable securities, at cost $687,262 $560,610
Unrealized gain on trading securities 69,340 102,365
Net unrealized holding gain on available for sale securities - 41,071
-------- --------
Investment in marketable securities at fair market value $756,602 $704,046
======== ========
In July 2004 the Company invested $51,500 in a term bank deposit, bearing
2% of annual interest and matures in August 2006.
NOTE 4 INVENTORIES
Inventories as of December 31, 2004 and 2003 consisted of the following:
2004 2003
---------- ----------
Raw materials $1,639,456 $1,175,453
Work in progress 837,836 796,100
Finished goods 331,727 144,272
---------- ----------
$2,809,019 $2,115,825
========== ==========
NOTE 5 PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31, 2004 and 2003 consisted of
the following:
ESTIMATED
2004 2003 USEFUL LIFE
----------------- ---------------- ------------------
Buildings $ 178,797 $ 157,337 15-25 Years
Leasehold improvements 254,566 248,609 10 Years
Motor vehicles 374,285 368,213 5-7 Years
Office equipment and furniture 315,769 284,943 3-14 Years
Equipment 2,795,513 2,459,745 5 Years
----------- ------------
3,918,930 3,518,847
Less: Accumulated depreciation (2,157,088) (1,855,945)
----------- ------------
$ 1,761,842 $ 1,662,902
=========== ============
Depreciation expense for the years ended December 31, 2004 and 2003 was
$276,243 and $292,238, respectively.
F - 16
DEFENSE INDUSTRIES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2004 AND 2003
During 2004, the Israeli Government decided to evacuate the Erez Industrial
Zone in the Gaza Strip where some of the operations of the Company are
located. The Company owns facilities and maintains equipment within this
area. The Company moved its "light cut and sew" operation from the Erez
Industrial Zone to Sderot as well as some of its webbing equipment to
Nazareth. The Erez Industrial Zone operation will continue until the
evacuation occurs.
Due to the Company's anticipation of being reimbursed for all costs related
to the evacuation of the Erez Industrial Zone, and the fact that the
facility is still operating and the equipment will be relocated, no
impairment or accrued liabilities have been recorded at December 31, 2004.
NOTE 6 INTANGIBLE ASSETS
In October 2000, the Company purchased the knowledge to manufacture ceramic
plates with a ballistic cloth covering for $89,100. This amount is being
amortized over the estimated useful life of eight years.
Intangible assets as of December 31, 2004 and 2003 consisted of the
following:
2004 2003
-------- --------
Purchased manufacturing knowledge $ 89,100 $ 89,100
Less accumulated amortization (57,763) (47,995)
-------- --------
$ 31,337 $ 41,105
======== ========
Amortization expense for the years ended December 31, 2004 and 2003 was
$9,768 and $6,370, respectively.
NOTE 7 SHORT-TERM DEBT
Short-term debt as of December 31, 2004 and 2003 consisted of the
following:
INTEREST RATES 2004 2003
-------------------- --------------- ----------------
Overdraft credit 7% - 12% $ 518,279 $ 696,806
Short-term bank loans 2% - 6% 134,634 22,836
--------------- ----------------
$ 652,913 $ 719,642
=============== ================
F - 17
DEFENSE INDUSTRIES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2004 AND 2003
The overdraft credit is a revolving credit facility due on demand. The
short-term bank loans include one loan due in twelve monthly installments
of $1,548 per installment and a second loan of $116,058 due on demand.
To secure its short-term liabilities and long-term loans (See Note 9), the
Company has registered unlimited charges on its assets in favor of several
Israeli banks on all assets, securities, notes and other trade instruments
that are deposited with the banks.
NOTE 8 OTHER CURRENT LIABILITIES
Other current liabilities as of December 31, 2004 and 2003 consisted of the
following:
2004 2003
---------- ----------
Government $ 103,410 $ 79,686
Employees and institutions for wage 197,120 269,419
Shareholder loans payable 12,181 17,358
Advances from customers 197,885 30,686
Accrued expenses 489,535 199,540
Taxes 6,828 6,825
---------- ----------
$1,006,959 $ 603,514
========== ==========
NOTE 9 LONG-TERM DEBT
On June 18, 2001 the Company borrowed $455,200 at an interest rate of 10%.
The terms are 60 monthly payments commencing July 18, 2001 with each
payment consisting of principal along with accrued interest. On May 21,
2003, this loan was amended whereby all amounts would be repaid as of
February 18, 2005. As of December 31, 2004, the balance of the loan was
$19,256 which amount is included in current portion of long-term debt. The
balance was paid on the due date.
On November 4, 2001, the Company borrowed $1,138,000 at an interest rate of
7.3%. The terms are 60 monthly payments commencing December 4, 2001 with
each payment consisting of a fixed amount of principal along with accrued
interest. As of December 31, 2004, the balance of the loan was $421,854, of
which $219,061 is included in current portion of long-term debt.
On December 24, 2003, the Company borrowed $388,216 at an interest rate of
7%. The terms are 60 monthly payments commencing January 24, 2004 with each
payment consisting of a fixed amount of principal along with accrued
interest. As of December 31, 2004, the balance of the loan was $315,977, of
which $78,923 is included in current portion of long-term debt.
F - 18
DEFENSE INDUSTRIES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2004 AND 2003
On May 31, 2004, the Company obtained two loans of $92,850 each at an
interest rate of 7.02%. The terms are 56 monthly payments commencing June
1, 2004 with each payment consisting of a fixed principal along with
accrued interest. As of December 31, 2004 the balance of the loan was
$165,576 of which $36,413, is included in current portion of long-term
debt.
On August 6, 2004, the Company borrowed $232,126 at an interest rate of
libor +1%. The terms are 38 monthly payments commencing September 6, 2004
with each payment consisting of a fixed amount of principal along with
accrued interest. As of December 31, 2004, the balance of the loan was
$216,006, of which $53,573 is included in current portion of long-term
debt.
All of the Company's long-term debt is collateralized by a floating
guarantee on essentially all of the Company's assets (See Note 7).
Required principal payments (including current maturities) on long-term
debt as of December 31, 2004 was as follows:
YEAR AMOUNT
---- ------
2005 407,227
2006 351,589
2007 196,745
2008 91,554
2009 91,554
----------
1,138,669
Less: current portion 407,227
----------
Long-term portion of debt $ 731,442
==========
NOTE 10 DEPOSITS AND PROVISIONS FOR THE SEVERANCE OF EMPLOYER-EMPLOYEE RELATIONS
2004 2003
-------- --------
Deposits for the severance of employer-employee relations $483,334 $437,963
Provision for the severance of employer-employee relations $336,101 $290,573
F - 19
DEFENSE INDUSTRIES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2004 AND 2003
Under the Israeli Severance Pay Law, the Company is required to make
severance payments to terminated employees who have been employed at least
one year. The calculation is based on the employee's latest salary and the
period employed whereby the employee is entitled to one month of severance
pay for each year employed based on the last month's salary. For certain
employees, including officers, the obligation for severance pay is
discharged by payment of premiums to insurance companies under approved
plans. Certain classes of the Company's employees are included in a
comprehensive defined contribution pension plan for industrial workers and
the Company is contributing to a pension fund in order to secure a pension
for such employees. The Company contributes 6% to 13% of the employee's
salary each month to the pension fund. Contributions charged to operations
were approximately $112,000 and $53,000 in 2004 and 2003, respectively.
Part of the Company's contributions relate to the Company's liability for
severance pay for the period commencing from the date when the employee
joined the program. The amount required to cover the liability of the
Company for severance pay to such employees prior to their joining the
program was deposited with a severance pay fund. For employees other than
those referred to above, the Company's liability is covered by regular
payments to severance pay funds.
The amounts maintained with insurance companies and the pension funds are
not under control of the Company and therefore are not reflected in the
financial statements. The deposits presented in the balance sheet include
profits and interest in the fund accumulated to the balance sheet date. The
amounts deposited may be withdrawn only after fulfillment of the
obligations under the Severance Pay Law as discussed above.
NOTE 11 INCOME TAXES
The United States parent company, its United States subsidiary and the
Israeli subsidiaries file separate tax returns. The Israeli companies are
taxed in Israel at a flat rate of 35% and are subject to the Israel Income
Tax Law (Inflation Adjustment) of 1985. Under this law, results of
operations for income tax purposes are measured in real terms in accordance
with the changes in the Israeli Consumer Price Index. The inflation
adjustment is expressed as financing costs or income and is applied as an
adjustment to book income for purposes of computing income taxes. The
Company's plant expansions were granted an approved status under the law
for the encouragement of capital investments and the income for the
approved part will be taxed at 25%.
Income tax expense in United States Dollars for the years ended December
31, 2004 and 2003 was as follows:
2004 2003
-------- --------
Current United States $ - $ 21,639
Current Israel 164,054 38,933
Deferred Israel and United States 174,691 33,982
-------- --------
Income tax expense $338,745 $ 94,554
======== ========
F - 20
DEFENSE INDUSTRIES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2004 AND 2003
The actual tax expense differs from the "expected" tax expense for the
years ended December 31, 2004 and 2003 (computed by applying United States
statutory rates and the Israeli tax rates to income before taxes) as
follows:
2004 2003
--------- ---------
Computed "expected" tax expense $ 320,579 $ 83,030
Non-tax deductible expenses 20,490 28,347
Inflationary adjustment (15,896) (5,714)
Tax exempt revenues or taxable at different rate (17,490) 9,078
Prior year's taxes 31,062 (20,187)
--------- ---------
$ 338,745 $ 94,554
========= =========
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities at December 31, 2004 and
2003 were as follows:
2004 2003
--------- ---------
Deferred taxes asset - current:
Allowance for doubtful accounts $ 36,014 $ 24,604
Marketable securities (12,847) -
Provision for vacation and supplementary holiday 19,882 20,749
--------- ---------
Total deferred tax assets, current $ 43,049 $ 45,353
========= =========
Deferred taxes asset, net - non current:
Depreciable fixed assets $ (8,353) $ (11,084)
Shares issued for employee services - 51,128
Net operating loss carry forward 75,689 194,080
Severance of employer/employee relations (7,010) (1,411)
--------- ---------
Total deferred tax assets, non-current $ 60,326 $ 232,713
========= =========
At December 31, 2004, the United States parent company and its United
States subsidiary had net operating loss carry forwards of approximately
$264,112 for income tax purposes, available to offset future taxable income
expiring in 2023, which resulted in a deferred tax asset of $75,689. The
United States parent company and its United States subsidiary did not
record a valuation allowance at December 31, 2004 because it was more
likely than not that they would avail themselves of the tax benefit
generated by the net operating loss carry forwards.
F - 21
DEFENSE INDUSTRIES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2004 AND 2003
NOTE 12 COMMITMENTS AND CONTINGENCIES
(A) OPERATING LEASE AGREEMENTS
1. Under a lease agreement dated January 1, 1998, between the Company and
a principal shareholder of the Company, the Company leases an
industrial building located in the Erez Industrial Zone (See Note
14(A)). The lease term is for one year and is renewable for an
additional period of one year at the end of each term. The annual
rental payments are approximately $85,500. The Company is subleasing
one-third of the building to its wholly-owned subsidiary, Mayotex Ltd.
The sublease terms are identical to the Company's and the annual
proceeds from rental payments are approximately $14,400. During 2004,
the Israeli Government decided to evacuate the Erez Industrial Zone in
the Gaza Strip where some of the operations of the Company are
located. As a consequence the Company started to prepare for the
eventual evacuation by merging existing production facilities. The
Company moved its "light cut and sew" operation from the Erez
Industrial Zone to Sderot as well as some of its webbing equipment to
Nazareth. Commencing in 2005 the Company leases only 2,000 square
meters of this industrial building compared to 2,500 square meters in
previous years, and the annual rental payment was reduced to $68,400.
2. Under a lease agreement effective January 1, 1998, the Company leases
an industrial building located near the city of Netivot. The annual
rental payments are approximately $10,000. The lease expired on
December 31, 2004 and was not renewed.
3. Under a lease agreement effective January 1, 2002, the Company leases
an industrial building located in the Erez Industrial Zone. The lease
term is for one year and is renewable for additional one-year periods
at the end of each term. The annual rental payments totaled
approximately $19,200.
4. Under a lease agreement effective January 1, 2002, the Company leases
an industrial building located in the Ashdod Industrial Zone. The
lease term is for one year and is renewable for additional one-year
periods at the end of each term. The annual rental payments totaled
approximately $12,000.
5. Under a lease agreement effective January 1, 2001, the Company leases
an industrial building located in the Nazareth Industrial Zone. The
lease term is for four years expiring December 31, 2004. The annual
rental payments are approximately $180,000. This building is owned by
a related party (See Note 14(A)). The lease was renewed in January 1,
2005 for an additional three years under the same lease terms.
F - 22
DEFENSE INDUSTRIES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2004 AND 2003
6. Under a lease agreement effective January 1, 2001, the Company leases
an industrial building located in the Petach Tikva Industrial Zone.
The lease term is for five years expiring December 31, 2005. The
annual rental payments are approximately $21,600.
7. The Company also owns and occupies an industrial building in the Erez
Industrial Zone. No mortgage or lien exists on this building.
Future minimum lease payments for the operating leases were follows as of
December 31, 2004:
YEAR AMOUNT
---- --------
2005 201,600
2006 180,000
2007 180,000
--------
$561,600
========
Rent expense under the operating leases for the years ended December 31,
2004 and 2003 was $328,300 and $325,355, respectively.
(B) CONSULTING AGREEMENTS
On October 24, 2002, the Company entered into a consulting agreement with a
consultant whereby the consultant agreed to act as the Company's exclusive
financial advisor and private placement agent. The consultant was entitled
to an engagement fee of $25,000 (paid in 2002) upon execution of the
agreement and an additional $25,000 (paid in 2003) for a retainer fee upon
completion of a private placement memorandum. The agreement expired on
December 31, 2003. The Company has no further obligation under this
agreement.
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. The remaining consulting expense of $43,000
was recognized for the year ended December 31, 2003.
(C) OTHER AGREEMENTS
On May 20, 2003, the Company entered into a joint venture with a South
American company to supply bulletproof vests to a local police authority.
Under the terms of the agreement, the parties agreed to collaborate on the
development, manufacture and supply of products for an initial period of
fifteen months. During the year ended December 31, 2003, the Company
received an order for approximately $540,000, which was delivered in the
fourth quarter. In the first quarter of 2004, the Company received an
additional order for $600,000, which was delivered in the second quarter of
2004.
F - 23
DEFENSE INDUSTRIES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2004 AND 2003
Effective January 1, 2003, the Company entered into a licensing agreement
with a firearms manufacturer to use the manufacturer's trademarks in
connection with the manufacture and sale of the Company's armored vests and
apparel and armored wall fabric products worldwide. The agreement was to
expire June 30, 2006, but could have been extended upon mutual agreement
for an additional three-year term. The agreement required the Company to
pay a royalty of 5% of net sales of products with the licensee's
trademarks. No royalties were paid nor are any royalties due under this
agreement for the year ended December 31, 2003. On July 22, 2003, the
Company assigned this licensing agreement to an unrelated corporation. The
Company will still be able to provide certain products to the assignee to
be sold and marketed under the firearms manufacturer's name. Under the
assignment, the Company is relieved of certain real and contingent
liabilities associated with the agreement including minimum royalties, the
cost of securing and maintaining product liability insurance, and allotment
of a marketing budget.
(D) CONTINGENCIES
1. The Company's subsidiary, Achidatex, received grants in the past from
the Fund for Encouragement of Foreign Sales of the Ministry of
Industry and Trade. Achidatex is required to pay royalties of 3% from
the additional export sales each year through 1999 compared with the
calendar year in which its plan was submitted. The grants received
were recorded as a liability to which future royalties would be
applied against. The remaining liability was extinguished and
recognized as revenue during 2003.
2. Liens existed on the assets of the Company's subsidiary, Achidatex, in
favor of the State of Israel in respect of grants that the Company
received in the past and for which the Company received final
implementation approval in 1996. These liens were removed in 2003. No
royalties were paid nor are any royalties due under this agreement for
the years ended December 31, 2004 and 2003.
3. The Company has an employment agreement with the President of the
Company, pursuant to which the President is entitled to additional
compensation of 1.5% of the growth in the Company's total sales since
2002. The President, at his option, may receive shares of common stock
in lieu of cash. As of December 31, 2004, the President was entitled
to bonus compensation in the amount of $21,102, or 42,204 shares of
the Company's common stock in lieu of such compensation (having a fair
value of $48,957), which was accrued and included in other current
liabilities. As of March 23, 2005, the President had not received such
compensation.
F - 24
DEFENSE INDUSTRIES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2004 AND 2003
(E) OTHER MATTERS
During 2003, the Company discovered that a competitor had allegedly sold
products using the Company's name and logo without the Company's permission
to a customer located in Mexico. The Company engaged counsel in Mexico and
also reported the incident to Israeli authorities. In 2004, several of the
managers and key personnel of the competitor were arrested and/or held for
investigation. The Company has not determined what further actions, if any,
it will take regarding this matter.
NOTE 13 SHAREHOLDERS' EQUITY
(A) 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 during 2003.
On November 29, 2001, the Company entered into a one-year agreement with a
consultant whereby the consultant would assist the Company to acquire
public listing on a stock exchange, to raise capital and to settle disputes
the Company had with other companies. In return, the Company agreed to
issue 10,000 shares of the Company's common stock monthly and to reimburse
the consultant for out-of-pocket expenses. For settling the disputes, the
consultant was also entitled to additional equity compensation. The
agreement with the consultant was itself disputed during 2002 and a
settlement was signed on May 1, 2003. Under the terms of the settlement,
the Company in 2003 issued 100,000 shares (shown as to be issued as of
December 31, 2002) valued at $60,000 (based on the fair market value of the
services provided since the Company's stock had not yet begun trading at
the time the agreement was executed) and paid $51,069 for reimbursement of
out-of-pocket expenses.
NOTE 14 RELATED PARTIES
(A) TRANSACTIONS WITH RELATED PARTIES
The Company has signed lease agreements with the principal shareholder of
the Company and a sublease agreement with its wholly owned subsidiary,
Mayotex Ltd. (See Note 12(A)(1) and Note 14 (C) (ii)). The Company's
subsidiary, Achidatex, has signed lease agreements with a company owned by
minority shareholders of Achidatex (See Note 12(A)(5)).
F - 25
DEFENSE INDUSTRIES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2004 AND 2003
(B) INCOME AND (EXPENSES) FROM TRANSACTIONS WITH RELATED PARTIES
2004 2003
--------- ---------
Salaries and related expenses (See Note 16) $(167,935) $(167,456)
Lease and rent expenses (232,252) (253,576)
Sales to affiliate company** 84,104 112,510
(C) BALANCES WITH RELATED PARTIES
(I) ACCOUNTS RECEIVABLE
2004 2003
-------- --------
Customers in Israel
Affiliate company* $ 69,193 $ 66,375
Affiliate company** 305,265 255,998
-------- --------
$374,458 $322,373
======== ========
*The principal shareholder of the Company is a principal shareholder of
this affiliate. The receivable resulted from the sale of products in the
ordinary course of business.
**Some of the shareholders of this affiliate are the minority shareholders
in Achidatex. The receivable resulted from the sale of products in the
ordinary course of business.
(II) NOTE RECEIVABLE - OFFICER
On January 15, 2002, the Company made an advance of $400,000 on behalf of
the Company's controlling shareholder who is also an officer of the
Company. The note was for a term of eleven months and matured December 15,
2002, bore interest of 8% and required quarterly prepaid interest payments
only. During 2002, the Company recognized $31,300 in interest income on the
note receivable. In 2002, the officer paid $50,314 0f expenses on behalf of
the Company, which satisfied the $31,300 interest due from the officer and
$19,014 was accounted for as a reduction in the principal balance.
Accordingly, the balance of the note receivable as of December 31, 2002 was
$380,986. In 2003, the officer settled the note by abating one year of
lease payments amounting to $85,500 and paying the remaining balance in
cash including interest of $1,795 (See Note 14(A)(1)).
For additional related party transactions, see Notes 9 and 10.
F - 26
DEFENSE INDUSTRIES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2004 AND 2003
NOTE 15 SEGMENT INFORMATION AND CONCENTRATIONS
(A) SALES AND INCOME FROM OPERATIONS:
CIVILIAN LOCAL MILITARY LOCAL MILITARY EXPORT CONSOLIDATED
--------------- --------------- ---------------- -----------------
December 31, 2004
Net sales $ 1,636,027 $ 2,094,590 $ 8,305,787 $12,036,404
Income from operations 81,015 149,972 641,755 872,742
December 31, 2003
Net sales $ 2,286,137 $ 2,715,688 $ 4,030,138 $ 9,031,963
Income from operations 85,591 93,815 120,556 299,962
(B) SINGLE CUSTOMERS EXCEEDING 10% OF SALES:
2004 2003
---------- ----------
Customer A (Israeli Ministry of Defense and Government of Israel) $1,250,695 $2,079,592
Customer B (Military Export) $4,003,684 $1,379,735
Accounts receivable balance
Customer A (Israeli Ministry of Defense and Government of Israel) $ 160,210 $ 663,583
Customer B (Military Export) $ 529,704 $ -
NOTE 16 SUBSEQUENT EVENTS
In March 2005, the Company signed a definitive agreement to acquire all of
the outstanding shares of Rizzo Inc. doing business as Owen Mills Company,
a LosAngeles-based manufacturing and service company specializing in
military and industrial sewing of marine and ballistic fabric products.
Under the terms of the agreement, the Company will purchase all of Rizzo
Inc. outstanding stock in consideration for $200,000 in cash and shares of
the Company's common stock having a value of $200,000, based on the average
closing price per share of the Company's common stock for the ten trading
days preceding the issuance of such shares.
F - 27
DEFENSE INDUSTRIES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2004 AND 2003
The following table reflects the unaudited pro forma combined results of
operations for the year ended December 31, 2004, assuming the acquisition
had occurred at the beginning of 2004.
Revenue $13,182,599
Net income $ 335,901
Net income per share - basic and diluted $ 0.01
During 2004, the Israeli Government decided to evacuate the Erez Industrial
Zone in the Gaza Strip where some of the operations of the Company are
located. Consequently, the Company started to prepare for the eventual
evacuation by merging existing production facilities. The Company moved its
"light cut and sew" operation from the Industrial Zone Erez to Sderot as
well as some of its webbing equipment to Nazareth. Under a lease agreement
dated January 1, 2005 between the Company and a principal shareholder of
the Company, the Company leases an industrial building located in the
Sderot. The lease term is for one year and is renewable for additional
one-year periods at the end of each term. The annual rental payments will
total approximately $43,884 based on the average exchange rate for the
latest period presented.
F - 28