U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
X Quarterly report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the quarterly period ended March 31, 2003
___ Transition report under Section 13 or 15(d) of the Exchange Act for the
transition period from ___ to ___
Commission file number: 1-9009
Defense Industries International, Inc.
(Exact Name of Small Business Issuer as Specified in Its Charter)
Nevada 84-1421483
(State of Incorporation) (I.R.S. Employer Identification No.)
Industrial Zone Erez, P.O. Box 779, Ashkelon 78101, Israel
(Address of Principal Executive Offices)
(011) 972-7-689-1611
(Issuer's Telephone Number, Including Area Code)
______________________________________________
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No ___
APPLICABLE ONLY TO CORPORATE ISSUERS
As of May 19, 2003 the Issuer had 25,350,000 shares of Common Stock, no par
value per share, outstanding.
Transitional Small Business Disclosure Format (check one):
Yes ___ No X
DEFENSE INDUSTRIES INTERNATIONAL, INC.
(FORMERLY PAWNBROKERS EXCHANGE, INC.) AND SUBSIDIARIES
INDEX
Page
Part I - Financial Information:
Item 1. Condensed Consolidated Balance Sheets - March 31, 2003
(Unaudited) and December 31, 2002 2
Condensed Consolidated Statements of Income and Comprehensive Income
for the Three Months Ended March 31, 2003 and 2002 (Unaudited) 3
Condensed Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 2003 and
2002 (Unaudited) 4
Notes to the Condensed Consolidated Financial Statements -
(Unaudited) 6
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Item 3. Controls and Procedures 15
Part II - Other Information:
Item 4. Submission of Matters to a Vote of Shareholders 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
PART I - FINANCIAL INFORMATION
Item 1.
DEFENSE INDUSTRIES INTERNATIONAL, INC.
(FORMERLY PAWNBROKERS EXCHANGE, INC.) AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
March 31, 2003 December 31, 2002
(Unaudited)
-------------- -----------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $1,026,911 $831,820
Trade accounts receivable, net 2,634,287 1,965,918
Trade accounts receivable - related parties, net 183,646 209,165
Shareholder note receivable 277,474 380,986
Other receivables 362,212 186,868
Inventories 1,827,092 1,734,966
Deferred taxes 85,373 153,294
------ -------
Total current assets 6,396,995 5,463,017
--------- ---------
PROPERTY, PLANT AND EQUIPMENT, NET 1,826,723 1,847,642
--------- ---------
OTHER ASSETS
Investment in marketable securities 496,857 479,595
Deposits for the severance of
employer-employee relations 427,233 414,350
Deferred taxes, long-term 238,519 171,703
Intangible assets 45,604 47,475
------ ------
Total other assets 1,208,213 1,113,123
--------- ---------
TOTAL ASSETS $9,431,931 $8,423,782
========== ==========
See accompanying notes to condensed consolidated financialstatements.
1
PART I - FINANCIAL INFORMATION
DEFENSE INDUSTRIES INTERNATIONAL, INC.
(FORMERLY PAWNBROKERS EXCHANGE, INC.) AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (Cont.)
March 31, 2003 December 31, 2002
(Unaudited)
-------------- -----------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term bank credit $724,330 $425,998
Trade accounts payable 1,010,197 982,802
Current portion of long-term debt 333,362 435,152
Other liabilities 1,224,886 748,188
--------- -------
Total current liabilities 3,292,775 2,592,140
--------- ---------
LONG TERM LIABILITIES
Long-term loans 772,824 762,732
Provision for the severance of employer-
employee relations 435,296 397,936
Minority interest 830,092 817,888
------- -------
Total long-term liabilities 2,038,212 1,978,556
--------- ---------
TOTAL LIABILITIES 5,330,987 4,570,696
--------- ---------
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, 25,550,000 and 25,400,000
issued and outstanding, respectively 2,525 2,510
Common stock to be issued (250,000 shares) 10 25
Additional paid-in capital 1,711,450 1,711,450
Retained earnings 2,814,121 2,640,010
Accumulated other comprehensive loss (427,162) (457,909)
Deferred consulting fees - (43,000)
------- -------
Total shareholders' equity 4,100,944 3,853,086
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
$9,431,931 $8,423,782
========== ==========
See accompanying notes to condensed consolidated financial statements.
2
DEFENSE INDUSTRIES INTERNATIONAL, INC.
(FORMERLY PAWNBROKERS EXCHANGE, INC.) AND SUBSIDIARIES
Condensed Consolidated Statements of Income and Comprehensive Income
(Unaudited)
Three Months Ended March 31,
----------------------------
2003 2002
(As Restated)
---- ------------------
REVENUES $3,168,144 $2,621,220
Cost of sales and processing 2,273,812 1,603,829
--------- ---------
Gross profit 894,332 1,017,391
------- ---------
OPERATING EXPENSES
Selling 188,676 94,667
General and administrative 323,348 266,017
------- -------
TOTAL OPERATING EXPENSES 512,024 360,684
------- -------
INCOME FROM OPERATIONS 382,308 656,707
------- -------
OTHER INCOME (EXPENSE)
Interest, dividends and gain (loss) on sales of
securities, net (70,753) (33,151)
Other income - net - 1,005
----- -----
TOTAL OTHER INCOME (EXPENSE) (70,753) (32,146)
------- -------
INCOME BEFORE INCOME TAXES 311,555 624,561
Income tax expense 129,247 222,193
------- -------
INCOME BEFORE MINORITY INTEREST 182,308 402,368
Minority interest 8,196 23,086
----- ------
NET INCOME $174,112 $379,282
-------- --------
OTHER COMPREHENSIVE INCOME (LOSS)
Foreign currency translation gain (loss), net of
minority interest translation loss 37,858 (173,400)
Unrealized gain (loss) on available-for-sale securities (3,202) 8,370
------ -----
Other comprehensive income (loss) before tax 34,656 (165,030)
Income tax (expense) benefit related to items of other
comprehensive income (12,476) 59,411
------- ------
TOTAL OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX 22,180 (105,619)
------ --------
COMPREHENSIVE INCOME $196,292 $273,663
======== ========
Net income per share - basic and diluted $0.01 $0.02
===== =====
Weighted average number of shares outstanding during 25,350,000 23,311,111
========== ==========
the period - basic and diluted
See accompanying notes to condensed consolidated financial statements.
3
DEFENSE INDUSTRIES INTERNATIONAL, INC.
(FORMERLY PAWNBROKERS EXCHANGE, INC.) AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
For the Three Months Ended March 31,
-------------------------------------------
2003 2002
(As Restated)
------------------ ----------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 174,111 $ 379,282
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization 70,032 71,403
Stock issued for services 43,000 -
Minority interest in income of subsidiary 8,196 23,086
Changes in operating assets and liabilities:
Decrease (increase) in deposits for employee
severance (12,883) 37,231
Decrease (increase) in deferred taxes 1,104 70,611
Decrease (increase) in trade accounts receivable (642,850) 395,326
Decrease (increase) in other receivable (175,344) (552,139)
Decrease (increase) in inventory (92,126) 164,422
Increase (decrease) in trade accounts payable 27,396 (507,754)
Increase (decrease) in other liabilities 476,698 (149,924)
Increase (decrease) in provision for employee
severance 37,360 (20,280)
------------------ --------------------
Net Cash Used In Operating Activities (85,306) (88,736)
------------------ --------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (42,132) (36,141)
Proceeds from sale of property and equipment - 3,254
Repayments received on shareholders loans 103,512 -
Investment in marketable securities (146,011) (8,310)
Proceeds from sale of marketable securities 134,156 -
------------------ --------------------
Net Cash Provided By (Used In) Investing
Activities 49,525 (41,197)
------------------ --------------------
See accompanying notes to condensed consolidated financial statements.
4
DEFENSE INDUSTRIES INTERNATIONAL, INC.
(FORMERLY PAWNBROKERS EXCHANGE, INC.) AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Cont.)
(Unaudited)
For the Three Months Ended March 31,
CASH FLOWS FROM FINANCING ACTIVITIES: 2003 2002
(As Restated)
---------------------- ------------------------
Short-term bank credit, net 298,332 132,075
Payments on long term debt (91,698) (150,604)
Loan payable - related party - (47,432)
---------------------- ------------------------
Net Cash Provided By (Used In) Financing
Activities 206,634 (65,961)
---------------------- ------------------------
Effect of exchange rate changes on cash 24,238 (76,111)
---------------------- ------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 195,091 (272,005)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 831,820 781,996
---------------------- ------------------------
CASH AND CASH EQUIVALENTS - END OF PERIOD $1,026,911 $509,991
====================== ========================
INTEREST PAID $58,584 $30,029
====================== ========================
TAXES PAID $41,968 $29,911
====================== ========================
See accompanying notes to condensed consolidated financial statements.
5
DEFENSE INDUSTRIES INTERNATIONAL, INC.
(FORMERLY PAWNBROKERS EXCHANGE, INC.) AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE 1 BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
(A) Basis of Presentation
The accompanying condensed consolidated financial statements are presented
in United States dollars under accounting principles generally accepted in
the United States.
(B) Principles of Consolidation
The condensed consolidated financial statements for 2003 include the
accounts of Defense Industries International, Inc. , formerly Pawnbrokers
Exchange, Inc. ("PEI"), 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.
(collectively, the "Company"). The minority interest represents the
minority shareholders' proportionate share of Achidatex.
Effective March 25, 2002, PEI began doing business as Defense Industries
International, Inc. On July 8, 2002, PEI changed its corporate domicile
from Utah to Nevada (the "re-incorporation"). In order to accomplish the
re-incorporation, PEI merged with and into its wholly owned subsidiary,
Defense Industries International, Inc., a Nevada corporation. As a result,
PEI's name was changed from PEI to Defense Industries International, Inc.
Each issued and outstanding share of PEI capital stock 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.
All intercompany accounts and transactions have been eliminated in
consolidation.
(C) Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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.
6
DEFENSE INDUSTRIES INTERNATIONAL, INC.
(FORMERLY PAWNBROKERS EXCHANGE, INC.) AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(D) Per Share Data
Basic net income per common share is computed based on the weighted average
common shares outstanding during the year. Diluted net income per common
share is computed based on the weighted average common shares and common
stock equivalents outstanding during the year. The computation of weighted
average common shares outstanding gives retroactive effect to the
recapitalization discussed in Note 4. There were no common stock
equivalents outstanding because the exercise price of the common stock
equivalents exceeded the average market price of the stock. Accordingly, a
reconciliation between basic and diluted earnings per share is not
presented.
(E) Interim Consolidated Financial Statements
The condensed consolidated financial statements as of March 31, 2003 and
for the three months ended March 31, 2003 and 2002 are unaudited. In the
opinion of management, such condensed consolidated financial statements
include all adjustments (consisting only of normal recurring accruals)
necessary for the fair presentation of the consolidated financial position
and the consolidated results of operations. The condensed consolidated
results of operations for the three months ended March 31, 2003 are not
necessarily indicative of the results to be expected for the full year. The
condensed consolidated balance sheet information as of December 31, 2002
was derived from the audited consolidated financial statements included in
the Company's Annual Report on Form 10-KSB. The interim condensed
consolidated financial statements should be read in conjunction with that
report.
(F) Reclassifications
Certain prior period amounts have been reclassified to conform to the
current period presentation.
(G) Prior Period Adjustment
The accompanying condensed consolidated statement of income for the three
months ended March 31, 2002 has been restated to correct an error for the
understatement of depreciation expense as previously reported in the
Company's March 31, 2002 10-QSB filing. The effect of the restatement was
to decrease net income by $36,000. There was no effect on earnings per
share.
7
DEFENSE INDUSTRIES INTERNATIONAL, INC.
(FORMERLY PAWNBROKERS EXCHANGE, INC.) AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE 2 INVENTORY
Inventory consisted of the following:
March 31, 2003 December 31, 2002
Raw materials $1,349,405 $927,821
Work in process 320,713 584,487
Finished goods $156,974 $222,658
======== ========
$1,827,092 $1,734,966
========== ==========
NOTE 3 SHAREHOLDER NOTE RECEIVABLE
On January 15, 2002, the Company loaned $400,000 to an officer who is also
its controlling shareholder. The note was for a term of eleven months and
matured on December 15, 2002, bore interest of 8% and required quarterly
prepaid interest payments only. At March 31, 2003, the note receivable
remained outstanding and had a balance of $277,474. The officer plans to
settle the note in 2003 by: (1) paying $77,474; and (2) delivering 327,869
shares of the Company's common stock held by the officer valued at
$200,000. The failure to satisfy the note at maturity may be deemed to be a
violation of the newly enacted Sarbanes Oxley Act of 2002. As indicated
above, the Company intends to resolve this matter during 2003. Uncertainty
exists as to the ultimate resolution of the matter and whether such
resolution will have a material impact on the Company's consolidated
financial position and the results of operations. No accruals with respect
to this note have been made in the accompanying consolidated balance sheets
at March 31, 2003.
NOTE 4 SHAREHOLDERS' EQUITY
On March 25, 2002, PEI, a reporting public company with no assets,
liabilities or operations, consummated a share exchange agreement (the
"Agreement") with Export Erez USA, Inc., ("Export USA") a Delaware
corporation, whereby all of the shares of Export USA were converted into
21,000,000 shares, or 84%, of the common stock of PEI.
Under generally accepted accounting principles, a company whose
shareholders receive over fifty percent of the stock of the surviving
entity in a business combination is considered the acquirer for accounting
purposes. Accordingly, the transaction was accounted for as an acquisition
of PEI and a recapitalization of Export USA. The consolidated financial
statements subsequent to the acquisition include the following: (1) the
balance sheet consists of the net assets of PEI at historical costs (zero
at the acquisition date) and the net assets of Export USA and subsidiaries
at historical cost; and (2) the statement of operations consists of the
operations of Export USA and subsidiaries for the period presented and the
operations of PEI from the recapitalization date.
On April 8, 2002, the Company entered into a one-year agreement with a
consultant whereby the Company issued 100,000 shares of its 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 for the quarter ended March 31, 2003.
On July 30, 2002, the Company entered into a one-year agreement with a
consultant whereby the Company agreed to issue 700,000 shares of common
stock in return for future consulting services. The contract was terminated
after one month, and the Company, in accordance with the settlement reached
with the consultant, issued 150,000 common shares on February 1, 2003. The
150,000 shares were valued at $334,475, the fair market value of the common
stock on the grant date based on the prevailing market price. The
consulting expense was recognized during the fourth quarter of 2002.
8
DEFENSE INDUSTRIES INTERNATIONAL, INC.
(FORMERLY PAWNBROKERS EXCHANGE, INC.) AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE 5 SEGMENT INFORMATION
The Company has two strategic business units: the civilian market and the
military market. The military market is further broken down between local
and export sales in order to better analyze trends in sales and profit
margins. The Company does not allocate assets between segments because
several assets are used in more than one segment and any allocation would
be impractical.
Military Military
Civilian Local Local Export Consolidated
--------------- -------------- -------------- -----------------
March 31, 2003
Revenues $ 421,532 $ 998,747 $ 1,747,865 $ 3,168,144
Income from operations 73,316 97,562 211,430 382,308
March 31, 2002
Revenues $ 977,613 $ 1,386,809 $ 256,798 $ 2,621,220
Income from operations (as
restated) 346,771 250,708 59,228 656,707
NOTE 6 SUBSEQUENT EVENT
On November 29, 2001, the Company entered into a one-year agreement with a
consultant whereby the consultant agreed to assist the Company in having
its securities gain listing on a stock exchange, to raise capital and to
settle disputes the Company had against other companies. In return, the
agreement required the Company to issue 10,000 shares of the Company's
common stock monthly and to reimburse the consultant for out-of-pocket
expenses. In the event the consultant was successful in settling disputes,
the consultant was entitled to receive additional equity compensation. A
dispute with respect to the agreement with the consultant arose in 2002. A
settlement was signed on May 1, 2003 and the Company has accrued an
aggregate amount of $111,069 under the agreement.
9
ITEM 2. 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 CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS. THE DISCUSSION AND ANALYSIS WHICH FOLLOWS MAY CONTAIN
TREND ANALYSIS AND OTHER FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF
SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934 WHICH REFLECT OUR CURRENT
VIEWS WITH RESPECT TO FUTURE EVENTS AND FINANCIAL RESULTS. THESE INCLUDE
STATEMENTS REGARDING OUR EARNINGS, PROJECTED GROWTH AND FORECASTS, AND SIMILAR
MATTERS THAT ARE NOT HISTORICAL FACTS. WE REMIND SHAREHOLDERS THAT
FORWARD-LOOKING STATEMENTS ARE MERELY PREDICTIONS AND THEREFORE ARE INHERENTLY
SUBJECT TO UNCERTAINTIES AND OTHER FACTORS THAT COULD CAUSE THE FUTURE RESULTS
TO DIFFER MATERIALLY FROM THOSE DESCRIBED IN THE FORWARD-LOOKING STATEMENTS.
CRITICAL ACCOUNTING POLICIES
We have identified the following policies as critical to the understanding
of our financial statements. The preparation of our 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 financial statements and the reported amounts of
sales and expenses during the reporting periods. Areas where significant
judgments are made include, but are not limited to, inventory valuation and
revenue recognition. 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 under the completed contract method upon shipment to customers. The
contracts are short term, generally under two months. We provide a warranty on
goods ranging from three to four years. Our policy is to consider the
establishment of a reserve for warranty expenses. Based upon historical
experience of no warranty claims, we have not established a reserve at December
31, 2002 and March 31, 2003.
INVENTORIES. Inventories are stated at the lower of cost or market. Cost is
determined by the moving average method, inventories write-offs and write-down
provisions are provided to cover risks arising from slow-moving items or
technological obsolescence.
FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS. 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 quarter-end exchange rates as to assets and
liabilities and weighted 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.
10
COMPREHENSIVE INCOME (LOSS). Foreign currency translation gains (losses)
resulting from the translation of the financial statements of our company and
its subsidiaries expressed in NIS to United States dollars are reported as Other
Comprehensive Income (Loss) in the Statement of Income and as Accumulated Other
Comprehensive Income (Loss) in the Statement of Shareholders' Equity. The
unrealized gains and losses, net of tax, resulting from the valuation of
available-for-sale securities at their fair market value at period end are
reported as Other Comprehensive Income (Loss) in the Statement of Income and as
Accumulated Other Comprehensive Income (Loss) in the Statement of Shareholders'
Equity.
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 of freight-in transportation. The specific identification method is
used for finished goods since all orders are custom orders for customers.
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.
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.
OVERVIEW
Defense Industries International, Inc. is 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 and bullet proof
vests and jackets, ballistic wall covers helmets, plates, and one-way protective
windows, personal military equipment, battle pouch units and combat harness
units, dry storage units, liquid logistics, tents and vehicle covers, winter
suits, sleeping bags and backpacks.
Our strategic objective is to be a leading global provider of personal
military and civilian protective equipment and supplies. We intend to realize
our strategic objective through the following:
11
o PURSUE STRATEGIC ACQUISITIONS. We intend to selectively pursue acquisitions
that enhance our product lines and geographic presence in an effort to
consolidate our highly fragmented industry and to create a more diverse and
global reach for us in our marketplace.
o FOCUS ON INTERNAL GROWTH. We intend to focus on the internal expansion of
our existing businesses, thereby placing us in a position to offer a more
comprehensive portfolio of products to satisfy all of our customers'
protective equipment needs.
o CAPITALIZE ON INCREASED DEMAND FOR OUR PRODUCTS. As a result of the
terrorist attacks on September 11, 2001, and other recent world events, an
increased emphasis on safety and protection now exists worldwide. This has
translated into increased spending on personal, military and civilian
protective equipment and supplies. We expect a continued increase in volume
for our current major government programs and expect to participate in
other existing and future government programs that require our products. We
also expect a continued increase in sales to the growing civilian market.
o EXPAND MARKETING EFFORTS In the wake of the terrorist attacks of September
11, 2001, and other recent world events, a greater global recognition
regarding the need for our products has materialized. We intend to
capitalize on this increased interest in our products by broadening our
marketing efforts in an attempt to create better global brand and
recognition awareness of us and our products.
o EXPAND DISTRIBUTION NETWORK AND PRODUCT OFFERINGS. We intend to widen our
distribution network through strategic acquisitions and the development of
new products. We believe that a broader product line will enable us to both
strengthen our relationships with existing customers and attract new
customers.
THREE MONTHS ENDED MARCH 31, 2003 COMPARED WITH THREE MONTHS ENDED MARCH 31,
2002
RESULTS OF OPERATIONS
SALES AND GROSS PROFIT MARGIN. Sales for the three months ended March 31,
2003 were $3,168,144 compared to $2,621,220 for the same period in 2002. This
increase in sales resulted from a 580.6% increase in export sales. The increase
in export sales from $256,798 for the three months ended March 31, 2002 to
$1,747,865 in the 2003 period was due to the successful implementation of our
growth plan. Specifically, we believe that the increase is the result of the
successful implementation of our marketing efforts to create a better global
brand and gain worldwide recognition of our company as well as for our products.
We believe that the decrease in sales to our local market (see below) is due to
the recession in Israel. We do not expect that our sales in Israel will increase
until the government implements a new economic plan and not before the third
quarter of 2003 at the earliest. The breakdown of sales for the three months
ended March 31, 2003 and 2002 is as follows:
12
2003 2002
---- ----
Sales to the local civilian market $ 421,532 $ 977,613
Sales to the local military market 998,747 1,386,809
Export military sales 1,747,865 256,798
Gross profit for the three months ended March 31, 2003 was $894,332
compared to $1,017,391 for the same period in 2002. This decrease in gross
profit is primarily attributable to increased overseas sales which are not as
profitable as local sales due to higher costs. We believe that the level of
profit from future export sales will be higher, as a result of change in the
composition of the products to be exported.
Gross profit margin for the three months ended March 31, 2003 was 28.2%
compared to 38.8% for the same period in 2002. Our gross profit margin on our
increased overseas sales is lower than on local sales due to higher costs. We
believe that the level of profit from future export sales will be higher, as a
result of change in the composition of the products to be exported.
The cost of production for the three months ended March 31, 2003 was
$2,273,812 compared to $1,603,829 for the same the same period in 2002. This
increase is a result of increased overseas sales as well as a 21% overall
increase in sales.
GENERAL AND ADMINISTRATIVE EXPENSES AND SELLING EXPENSES. General and
administrative costs for three months ended March 31, 2003 were $323,348
compared to $266,017 for the same period in 2002. This increase is due to
increased professional expenditures, such as legal fees advertising, consultants
and market analysts. These expenditures arose from the increased costs
associated with becoming a publicly traded company on a U.S. securities market
and from our efforts to achieve public awareness of our company and products in
North America. Selling expenses for the three months ended March 31, 2003 were
$188,676 compared to $94,667 for the same period in 2002. This increase is a
result of commissions arising from the increase in overseas sales.
INCOME TAX EXPENSES. Income tax expense for the three months ended March
31, 2003 was $129,247 as compared to $222,193 for the comparable period in 2002.
Our effective tax rate was 41% in the 2003 period compared to 36% in 2002. The
increase in the effective tax rate is primarily attributable to the utilization
of net operations loss carryforwards in 2002 that have expired in 2003.
OTHER INCOME (EXPENSE), NET. Other income (expense), net for the three
months ended March 31, 2003 was ($70,753) as compared to ($32,146) for the same
period in 2002. Our financing expenditures increased as a result of the
devaluation of the shekel against the dollar and the increase in interest
payments on our short term bank debt.
MINORITY INTEREST. For the three months ended March 31, 2003 we recognized
and recorded minority interest of $8,196 compared to $23,086 for the same period
in 2002.
NET INCOME. As a result of the foregoing our net income for the three
months ended March 31, 2003 was $174,112 compared to $379,282 for the 2002
period.
13
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2003, we had $1,026,911 in cash and cash equivalents and
our working capital was $3,104,220. Our current activities are financed by short
and long term bank loans offset by short term deposits. Our decision to incur
additional short term debt was based on our consideration of the prevailing
yields on our deposits which are generally in foreign currency generated from
receipts from overseas sales, compared to the cost of short term loans. Our long
term loans arose from acquisition of Achidatex and are payable over five years.
Net cash used in operating activities was $85,306 for the three months
March 31, 2003. This amount was primarily attributable to a $476,698 increase in
other liabilities and our net income of $174,112 offset by a $642,850 increase
in trade accounts receivable, and a $175,344 increase in other receivables and a
$92,126 increase in inventory.
The increase in accounts receivable at March 31, 2003 compared to year end
was primarily the result of the increased level of sales in the first quarter of
2003. Similarly, the increase in inventory for the three months ended March 31,
2003 was primarily due to our increased level of operations.
Net cash provided by investing activities was $49,525 for the three months
ended March 31, 2003. During the three months ended March 31, 2003, $146,011 of
cash was used for investments in marketable securities and $42,132 was used for
purchases of property and equipment offset by $103,512 generated from repayments
recovered on the shareholders loan.
We anticipate increasing our research and development expenditures in 2003
and 2004, primarily with respect to ballistic helmets, stab-resistant fabric,
ceramic ballistic plates, ballistic wall covering and one-way protective
windows. We anticipate total research and development expenses for 2003 and 2004
will be approximately $350,000 and $750,000 respectively. The development of
these products will be by staff engineers. We expect that production of these
products will start by the end of 2003, increasing to full production by the
year 2006. We anticipate that in order to fund the research and development for
these products, we may seek to raise capital by means of an offering of our
equity securities. If we are unable to effect an offering of our securities, we
may fund our research and development expenditures through our operating funds.
In such event, the timing of our anticipated research and development and
subsequent production schedule would be delayed.
We believe that sufficient funds to fund our operations during the
remainder of 2003.
MARKET RISK
At March 31, 2003 and December 31, 2002, we held cash and cash equivalents
in the aggregate amount of $1,026,911 and $831,820, respectively, most of these
amounts were deposited with Israeli banks. Under Israeli law, the Bank of Israel
insures all bank deposits without limits on the amount. Therefore, we do not
anticipate losses in respect to these items.
14
The majority of our sales are made to government institutions and private
industry in Israel. Consequently, the exposure to credit risks relating to trade
receivables is limited. We perform ongoing credit evaluations of our customers
and generally do not require collateral. An appropriate allowance for doubtful
accounts is included in trade accounts receivable.
ITEM 3. CONTROLS AND PROCEDURES
Within the 90 days prior to the date of the filing of this Form 10-QSB, we
carried out an evaluation, under the supervision and with the participation of
our management, including our chief executive officer and chief financial
officer, of the effectiveness of the design and operation of our disclosure
controls and procedures pursuant to Rule 13a-14 of the Securities Exchange Act
of 1934. Based upon that evaluation, our chief executive officer and chief
financial officer concluded that our disclosure controls and procedures are
effective in timely alerting them to material information relating to us
required to be included in our periodic SEC filings. There have been no
significant changes in our internal controls or other factors which could
significantly affect internal controls subsequent to the date we carried out its
evaluation.
We also maintains a system of internal accounting controls that is designed
to provide assurance that our assets are safeguarded and that transactions are
executed in accordance with management's authorization and properly recorded.
This system is continually reviewed and is augmented by written policies and
procedures, the careful selection and training of qualified personnel and an
internal audit program to monitor its effectiveness. During the quarter ended
March 31, 2003, there were no significant changes to this system of internal
controls or in other factors that could significantly affect those controls.
15
PART II - OTHER INFORMATION
DEFENSE INDUSTRIES INTERNATIONAL, INC. AND SUBSIDIARIES
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
99.1 Certification by Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
99.2 Certification by Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
99.3 Certification by Chief Executive Officer Pursuant to 18 U.S.C. Section
1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.4 Certification by Chief Financial Officer Pursuant to 18 U.S.C. Section
1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
_______________
(B) Reports on Form 8-K:
16
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
DEFENSE INDUSTRIES INTERNATIONAL, INC.
(Registrant)
_______________________
Name: Joseph Postbinder
Chief Executive Officer
_______________________
Name: Tsippy Moldovan
Chief Financial Officer
17
EXHIBIT 99.1
CERTIFICATION PURSUANT TO SECTION 302(A)
OF THE SARBANES-OXLEY ACT OF 2002
I, Joseph Postbinder, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Defense Industries
International, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
May 20 , 2003
_______________________________
Joseph Postbinder
Chief Executive Officer
EXHIBIT 99.2
CERTIFICATION PURSUANT TO SECTION 302(A)
OF THE SARBANES-OXLEY ACT OF 2002 I,
I, Tsippy Moldovan, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Defense Industries
International, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and b) any fraud, whether or not material, that
involves management or other employees who have a significant role in
the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
May 20 , 2003
________________________________
Tsippy Moldovan
Chief Financial Officer
EXHIBIT 99.3
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Defense Industries
International, Inc. (the "Company") on Form 10-QSB for the period ending March
31, 2003 as filed with the Securities and Exchange Commission on the date hereof
(the "Report"), I, Joseph Postbinder, Chief Executive Officer of the Company,
certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of
the Company.
________________________________
Joseph Postbinder
Chief Executive Officer
May 20 , 2003
EXHIBIT 99.4
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Defense Industries
International, Inc. (the "Company") on Form 10-QSB for the period ending March
31, 2003 as filed with the Securities and Exchange Commission on the date hereof
(the "Report"), I, Tsippy Moldovan, Chief Financial Officer of the Company,
certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of
the Company.
_____________________________
Tsippy Moldovan
Chief Financial Officer
May 20 , 2003