U.S. SECURITIES EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
( ) TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For Quarter Ended: Commission File Number: 000-30105
September 30,2002
DEFENSE INDUSTRIES INTERNATIONAL, INC.
--------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
NEVADA 84-1421481
------------------------------- ----------------------------
(State or other jurisdiction of (IRS Employer Identification
incorporation or organization) Number)
Industrial Zone Erez
P.O. Box 779
Ashkelon, Israel 78101
--------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
011-972-8-689-1611
--------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to filing requirements
for the past 90 days.
Yes X No___
The number of shares of Common Stock, no par value per share, outstanding as of
June 30, 2002 is 25,400,000.
Transitional Small Business Disclosure Format (check one): Yes __ No X
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DEFENSE INDUSTRIES INTERNATIONAL, INC.
(FORMERLY PAWNBROKERS EXCHANGE, INC.)
AND SUBSIDIARIES
CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2002
DEFENSE INDUSTRIES INTERNATIONAL, INC.
(FORMERLY PAWNBROKERS EXCHANGE, INC.) AND SUBSIDIARIES
CONTENTS
PAGES 1 - 2 CONDENSED CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER
30, 2002 (UNAUDITED) AND DECEMBER 31, 2001
PAGE 3 CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND
COMPREHENSIVE INCOME (LOSS) FOR THE THREE AND NINE
MONTHS ENDED SEPTEMBER 30, 2002 AND 2001 (UNAUDITED)
PAGE 4 CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN
SHAREHOLDERS' EQUITY FOR THE NINE MONTHS ENDED SEPTEMBER
30, 2002 (UNAUDITED)
PAGE 5 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001 (UNAUDITED)
PAGES 6 - 11 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
DEFENSE INDUSTRIES INTERNATIONAL, INC.
FORMERLY EXPORT EREZ LTD. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 2002
ASSETS
September 30, December 31,
2002 2001
(Unaudited)
(As Restated)
--------------- --------------
CURRENT ASSETS
Cash and cash equivalents $ 611,060 $ 781,996
Trade accounts receivable, net 2,190,106 2,461,671
Trade accounts receivable - related parties, net 103,723 181,059
Shareholder note receivable 400,000 -
Other assets 389,131 274,840
Inventories 1,483,840 1,956,072
Deferred taxes 101,925 97,761
--------------- --------------
Total Current Assets 5,279,785 5,753,399
--------------- --------------
PROPERTY, PLANT AND EQUIPMENT, NET 1,800,513 1,951,147
--------------- --------------
OTHER ASSETS
Investment in marketable securities 480,764 616,105
Deposits for the severance of employer-employee relations 371,180 472,421
Deferred taxes, long-term 35,902 400,689
Intangible assets 48,786 61,452
--------------- --------------
Total Other Assets 936,632 1,550,667
--------------- --------------
TOTAL ASSETS $ 8,016,930 $ 9,255,213
=============== ==============
The accompanying notes are an integral part of the condensed consolidated
financial statements.
-1-
DEFENSE INDUSTRIES INTERNATIONAL, INC.
(FORMERLY PAWNBROKERS EXCHANGE, INC.) AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
September 30, December 31,
2002 2001
(Unaudited)
(As Restated) --------------- --------------
CURRENT LIABILITIES
Short-term bank credit $ 693,698 $ 894,981
Trade accounts payable 1,227,336 1,551,470
Current portion of long-term debt 340,710 371,344
Other liabilities 453,355 1,011,062
--------------- --------------
Total Current Liabilities 2,715,099 3,828,857
--------------- --------------
LONG-TERM LIABILITIES
Long-term loans 570,298 1,295,440
Long-term loan - related party - 47,432
Provision for the severance of employer-employee
relations 399,399 431,522
Minority interest 708,055 572,106
--------------- --------------
Total Long-Term Liabilities 1,677,752 2,346,500
--------------- --------------
Total liabilities 4,392,851 6,175,357
--------------- --------------
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, 25,400,000 and 21,000,000 issued and
outstanding, respectively 2,540 2,100
Additional paid-in capital 2,066,945 1,145,385
Retained earnings 3,161,365 2,396,616
Accumulated other comprehensive loss (770,771) (464,245)
Deferred consulting fees (836,000) -
--------------- --------------
Total Shareholders' Equity 3,624,079 3,079,856
--------------- --------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 8,016,930 $ 9,255,213
=============== ==============
The accompanying notes are an integral part of the condensed consolidated
financial statements.
-2-
DEFENSE INDUSTRIES INTERNATIONAL, INC.
(FORMERLY PAWNBROKERS EXCHANGE, INC.) AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND
COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
For the For the For the For the
Three Three Nine Nine
Months Months Months Months
Ended Ended Ended Ended
September September September September
30, 2002 30, 2001 30, 2002 30, 2001
----------- ------------ ------------ ------------
REVENUES $ 2,586,107 $ 3,599,774 $ 7,899,742 $ 5,639,032
Cost of sales and processing 1,778,018 2,438,100 5,045,126 3,812,089
----------- ------------ ------------ ------------
Gross profit 808,089 1,161,674 2,854,616 1,826,943
----------- ------------ ------------ ------------
OPERATING EXPENSES
Selling 106,593 122,385 429,276 224,282
General and administrative 349,113 452,228 948,278 716,796
----------- ------------ ------------ ------------
TOTAL OPERATING EXPENSES 455,706 574,613 1,377,554 941,078
----------- ------------ ------------ ------------
INCOME FROM OPERATIONS 352,383 587,061 1,477,062 885,865
----------- ------------ ------------ ------------
OTHER INCOME (EXPENSE)
Interest, dividends and gain (loss) on
sales of securities, net (32,988) (26,509) (99,283) (56,555)
Other income - net 1,077 4,878 13,997 53,906
----------- ------------ ------------ ------------
----------- ------------ ------------ ------------
TOTAL OTHER INCOME (EXPENSE) (31,911) (21,631) (85,286) (2,649)
----------- ------------ ------------ ------------
INCOME BEFORE INCOME TAXES 320,472 565,430 1,391,776 883,216
Income tax expense 64,679 268,619 472,760 366,362
----------- ------------ ------------ ------------
INCOME BEFORE MINORITY INTEREST 255,793 296,811 919,016 516,854
Minority interest 112,927 36,474 154,267 43,787
----------- ------------ ------------ ------------
NET INCOME $ 142,866 $ 260,337 $ 764,749 $ 473,067
----------- ------------ ------------ ------------
OTHER COMPREHENSIVE INCOME (LOSS)
Foreign currency translation gain
(loss), net of minority interest
translation loss (40,498) (98,235) (203,626) (156,377)
Unrealized gain (loss) on
available-for-sale securities (36,682) (72,453) (89,572) (166,435)
----------- ------------
------------ ------------
Other comprehensive income (loss) (77,180) (170,688) (293,198) (322,812)
before tax
Income tax (expense) benefit related to
items of other comprehensive income 27,785 61,447 105,551 116,212
----------- ------------ ------------ ------------
TOTAL OTHER COMPREHENSIVE INCOME (LOSS),
NET OF TAX (49,395) (109,241) (187,647) (206,600)
----------- ------------ ------------ ------------
COMPREHENSIVE INCOME (LOSS) $ 93,471 $ 151,096 $ 577,102 $ 266,467
=========== ============ ============ ============
Net income per share - basic and diluted $ 0.01 $ 0.01 $ 0.03 $ 0.02
=========== ============ ============ ============
Weighted average number of shares
outstanding during the period - basic
and diluted 25,400,000 21,000,000 24,017,582 20,353,841
=========== ============ ============ ============
The accompanying notes are an integral part of the condensed consolidated
financial statements.
-3-
DEFENSE INDUSTRIES INTERNATIONAL, INC.
(FORMERLY PAWNBROKERS EXCHANGE, INC.) AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
(UNAUDITED)
Common Stock Additional Retained Deferred Accumulated
Other
Paid-In Consulting Comprehensive
Income
Shares Amount Capital Earnings Fees (Loss) Total
---------- --------- ----------- ---------- ----------- ------------- ----------
$
Balance, January 1, 2002 (as
previously reported) 21,000,000 $ 2,100 $ 1,145,385 $ 2,468,669 $ - (464,245) $ 3,151,909
Prior period adjustment - error
in depreciation expense - - - (72,053) - - (72,053)
---------- --------- ----------- ---------- ----------- ------------- ----------
Balance, January 1, 2002 (as
restated) 21,000,000 2,100 1,145,385 2,396,616 - (464,245) 3,079,856
Common stock transferred in
recapitalization 4,000,000 400 (400) - - - -
Common stock issued for services 400,000 40 921,960 - (836,000) - 86,000
Foreign currency translation loss - - - - - (216,954) (216,954)
Unrealized loss on available for
sale securities - - - - - (89,572) (89,572)
Net income 2002 - - - 764,749 - - 764,749
---------- --------- ----------- ---------- ----------- ------------- ----------
---------- --------- ----------- ---------- ----------- ------------- ----------
BALANCE, SEPTEMBER 30, 2002 25,400,000 $ 2,540 $ 2,066,945 $ 3,161,365 $ (836,000) (770,771) $ 3,624,079
========== ========= =========== ========== =========== ============= ==========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
-4-
DEFENSE INDUSTRIES INTERNATIONAL, INC.
(FORMERLY PAWNBROKERS EXCHANGE, INC.) AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For The For The
Nine Nine
Months Months
Ended Ended
September September
30, 2002 30, 2001
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 764,749 $ 473,067
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 211,740 122,009
Stock issued for services 86,000 -
Minority interest in income of subsidiary 154,267 43,786
Gain from sale of fixed assets - (24,902)
Changes in operating assets and liabilities:
Decrease (increase) in deposits for employee severance 101,241 31,090
Decrease (increase) in deferred taxes 360,623 206,643
Decrease (increase) in trade accounts receivable 348,900 (140,338)
Decrease (increase) in other assets (114,290) (195,261)
Decrease (increase) in inventory 472,232 371,778
Increase (decrease) in trade accounts payable (324,135) (573,716)
Increase (decrease) in other liabilities (557,707) 153,553
Increase (decrease) in provision for employee severance (32,123) (11,862)
------------ ------------
Net Cash Provided By Operating Activities 1,471,497 455,847
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (111,381) (80,033)
Proceeds from sale of property and equipment 3,171 27,221
Investment in marketable securities (27,753) (27,699)
Cash acquired in acquisition of Achidatex - 39,147
Funds advanced on behalf of shareholder (400,000) -
Advances related to acquisition, net - 56,820
Loan to subsidiary - (480,000)
------------ ------------
Net Cash Used in Investing Activities (535,963) (464,544)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term bank credit, net (201,282) 13,116
Payments on long term debt (755,776) (16,527)
Loan payable - related party (47,432) -
------------ ------------
Net Cash Used In Financing Activities (1,004,490) (3,411)
------------ ------------
Effect of exchange rate changes on cash (101,980) (60,186)
------------ ------------
Net decrease in cash and cash equivalents (170,936) (72,294)
Cash and cash equivalents - beginning of period 781,996 663,295
------------ ------------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 611,060 $ 591,001
============ ============
INTEREST PAID $ 103,691 $ 45,886
============ ============
TAXES PAID $ 94,008 $ 67,419
============ ============
The accompanying notes are an integral part of the 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 of America.
(B) PRINCIPLES OF CONSOLIDATION
The condensed consolidated financial statements for 2002 include the
accounts of Defense Industries International, Inc. (formerly Pawnbrokers
Exchange, Inc. (see below)) 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.
The condensed consolidated financial statements for 2001 include the
accounts of Export Erez, USA, Inc. and its wholly owned subsidiaries,
Export Erez, Ltd., Mayotex, Ltd. and Dragonwear Trading Ltd. for the
periods ended September 30, 2001 and its 76% owned subsidiary Achidatex
Nazareth Elite (1977) Ltd. from June 18, 2001, the date of acquisition
(See Note 5).
On July 8, 2002, the Company changed its corporate domicile from the State
of Utah to the State of Nevada (the "re-incorporation"). In order to
accomplish the re-incorporation, the Company merged with and into its
wholly owned inactive subsidiary, Defense Industries International, Inc., a
Nevada corporation organized on July 1, 2002. As a result of the
re-incorporation, the Company's name was effectively changed from
Pawnbrokers Exchange, Inc. to Defense Industries International, Inc. Each
share of Pawnbrokers capital stock issued and outstanding on the effective
date was converted into and exchanged for one share of Defense Industries
capital stock. Defense Industries is authorized to issue 250,000,000 shares
of $.0001 par value common stock and 50,000,000 shares of $.0001 par value
preferred stock. As a result, the Company's common stock changed from no
par value to a par value of $.0001. Accordingly, the December 31, 2001
condensed consolidated balance sheet and the condensed consolidated
statement of changes in stockholders' equity have been retroactively
restated to effectuate the change.
All intercompany accounts and transactions have been eliminated in
consolidation.
-6-
(C) USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that effect the reported
amounts of assets and liabilities and disclose the nature of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates.
(D) PER SHARE DATA
Basic net income per common share is computed based on the weighted average
common shares outstanding during the year. Diluted net income per common
share is computed based on the weighted average common shares and common
stock equivalents outstanding during the year. The computation of weighted
average common shares outstanding gives retroactive effect to the
recapitalization discussed in Note 4. There were no common stock
equivalents outstanding because the exercise price of the common stock
equivalents exceeded the average market price of the stock. Accordingly, a
reconciliation between basic and diluted earnings per share is not
presented.
(E) INTERIM CONSOLIDATED FINANCIAL STATEMENTS
The condensed consolidated financial statements as of September 30, 2002
and for the three and nine months ended September 30, 2002 and 2001 are
unaudited. In the opinion of management, such condensed consolidated
financial statements include all adjustments (consisting only of normal
recurring accruals) necessary for the fair presentation of the consolidated
financial position and the consolidated results of operations. The
condensed consolidated results of operations for the three and nine months
ended September 30, 2002 and 2001 are not necessarily indicative of the
results to be expected for the full year. The condensed consolidated
balance sheet information as of December 31, 2001 was derived from the
audited consolidated financial statements included in the Company's annual
report Form 10-KSB. The interim condensed consolidated financial statements
should be read in conjunction with that report.
(F) PRIOR PERIOD ADJUSTMENT
The accompanying condensed consolidated balance sheet as of December 31,
2001 has been restated to correct an error for the understatement of
depreciation expense during 2001. The effect of the restatement was to
decrease net income for 2001 by $72,053. Retained earnings and property,
plant and equipment, net in the December 31, 2001 consolidated balance
sheet and retained earnings in the condensed consolidated statement of
changes in shareholders' equity have been restated for the effects of the
prior period adjustment.
-7-
DEFENSE INDUSTRIES INTERNATIONAL, INC.
(FORMERLY PAWNBROKERS EXCHANGE, INC.) AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(G) NEW ACCOUNTING PRONOUNCEMENTS
In April 2002, the FASB issued SFAS 145, Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. SFAS 145 rescinds the provisions of SFAS No. 4 that requires
companies to classify certain gains and losses from debt extinguishments as
extraordinary items, eliminates the provisions of SFAS No. 44 regarding
transition to the Motor Carrier Act of 1980 and amends the provisions of
SFAS No. 13 to require that certain lease modifications be treated as sale
leaseback transactions. The provisions of SFAS 145 related to
classification of debt extinguishments are effective for fiscal years
beginning after May 15, 2002. Earlier application is encouraged. The
Company does not believe the adoption of this standard will have a material
impact the financial statements.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Restructuring
Costs." SFAS 146 applies to costs associated with an exit activity
(including restructuring) or with a disposal of long-lived assets. Those
activities can include eliminating or reducing product lines, terminating
employees and contracts and relocating plant facilities or personnel. Under
SFAS 146, the Company will record a liability for a cost associated with an
exit or disposal activity when that liability is incurred and can be
measured at fair value. SFAS 146 will require the Company to disclose
information about its exit and disposal activities, the related costs, and
changes in those costs in the notes to the interim and annual financial
statements that include the period in which an exit activity is initiated
and in any subsequent period until the activity is completed. SFAS 146 is
effective prospectively for exit or disposal activities initiated after
December 31, 2002, with earlier adoption encouraged. Under SFAS 146, a
company cannot restate its previously issued financial statements and the
new statement grandfathers the accounting for liabilities that a company
had previously recorded under Emerging Issues Task Force Issue 94-3. The
Company does not believe the adoption of this standard will have a material
impact the financial statements.
(H) RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform to the
current period presentation.
NOTE 2 INVENTORY
Inventory consisted of the following:
-8-
DEFENSE INDUSTRIES INTERNATIONAL, INC.
(FORMERLY PAWNBROKERS EXCHANGE, INC.) AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
September December
30, 2002 31, 2001
-------------- -------------
Raw materials $ 1,032,394 $ 1,166,086
Work in process 286,953 491,237
Finished goods 164,493 298,749
-------------- -------------
$ 1,483,840 $ 1,956,072
============== =============
NOTE 3 SHAREHOLDER NOTE RECEIVABLE
On January 15, 2002, the Company loaned $400,000 to the Company's
controlling shareholder. The note is for a term of eleven months maturing
December 15, 2002, bears interest of 8% and requires quarterly prepaid
interest payments only. Interest paid on the note for the nine months ended
September 30, 2002 amounted to $10,000. The remaining interest payable and
princpal will be paid at maturity.
NOTE 4 SHAREHOLDERS' EQUITY
(A) RECAPITALIZATION
On March 25, 2002, Pawnbrokers Exchange, Inc. ("PEI"), a reporting public
company with no assets, liabilities or operations at that time, consummated
a share exchange agreement (the "Agreement") with Export Erez USA, Inc.,
("Export USA") a company incorporated in Delaware whereby all of the
shareholders in Export USA had their shares converted into 21,000,000
shares or 84% of the common stock of PEI.
Under generally accepted accounting principles, a company whose
stockholders receive over fifty percent of the stock of the surviving
entity in a business combination is considered the acquirer for accounting
purposes. Accordingly, the transaction was accounted for as an acquisition
of PEI and a recapitalization of Export USA. The condensed consolidated
financial statements subsequent to the acquisition include the following:
(1) the balance sheet consists of the net assets of PEI at historical costs
(zero at the acquisition date) and the net assets of Export USA and
subsidiaries at historical cost. (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.
(B) ISSUANCES OF COMMON STOCK
On April 8, 2002, the Company entered into a one-year agreement with a
consultant whereby the Company issued 100,000 shares of common stock in
return for future consulting services. The 100,000 shares were valued at
$172,000, the fair market value of the common stock on the grant date based
on the prevailing market price. Consulting expense of $86,000 was
recognized as of September 30, 2002 and $86,000 is reflected as a deferred
consulting expense component of equity.
-9-
DEFENSE INDUSTRIES INTERNATIONAL, INC.
(FORMERLY PAWNBROKERS EXCHANGE, INC.) AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
On April 30, 2002, the Company entered into a one-year agreement with a
consultant whereby the Company issued 300,000 shares of common stock in
return for future consulting services. The 300,000 shares were valued at
$750,000 the fair market value of the common stock on the grant date based
on the prevailing market price. The contract is in dispute and no services
have been performed to date. Counsel for the Company is confident that the
Company will prevail and receive its 300,000 shares back. Therefore, no
consulting expense was recognized as of September 30, 2002 and $750,000 is
reflected as a deferred consulting expense component of equity.
NOTE 5 BUSINESS COMBINATION
Effective June 18, 2001, the Company acquired 76% of the total common stock
of Achidatex Nazareth Elite (1977) Ltd. ("Achidatex"). Accordingly, the
results of operations of Achidatex are included in the condensed
consolidated financial statements for the nine months ended September 30,
2002.
For comparative purposes, following are the summarized unaudited pro forma
condensed consolidated results of operations for the nine months ended
September 30, 2001, assuming the acquisition had taken place at the
beginning of 2001. The unaudited pro forma results are not necessarily
indicative of future earnings or earnings that would have been reported had
the acquisition been completed when assumed.
Net revenues $ 8,678,481
Income before income taxes $ 1,245,722
Income tax expense (benefit) $ (333,068)
Minority interest, net of tax $ 298,651
Net income $ 1,280,139
Net income per share $ 0.06
NOTE 6 SEGMENT INFORMATION
The Company has two strategic business units: the civilian market and the
military market. The military market is further broken down between local
and export sales in order to better analyze trends in sales and profit
margins. The Company does not allocate assets between segments because
several assets are used in more than one segment and any allocation would
be impractical.
-10-
DEFENSE INDUSTRIES INTERNATIONAL, INC.
(FORMERLY PAWNBROKERS EXCHANGE, INC.) AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Civilian Military Military
Local Local Export Consolidated
---------- ----------- ----------- ------------
September 30, 2002
Net Sales $ 2,699,092 $ 3,272,312 $ 1,928,338 $ 7,899,742
Income from
operations 660,149 514,804 302,109 1,477,062
September 30, 2001
Net Sales $ 2,264,649 $ 2,514,289 $ 860,094 $ 5,639,032
Income from
operations 397,332 379,422 109,111 885,865
NOTE 7 SUBSEQUENT EVENT
On October 24, 2002, the Company entered into a consulting agreement with
KPMG Corporate Finance, LLC ("KPMG") whereby KPMG shall act as the
Company's exclusive financial advisor and private placement agent. KPMG is
entitled to an engagement fee of $25,000 upon execution of the agreement
and an additional $25,000 for a retainer fee upon completion of the
Memorandum to be used in any private placement. KPMG will attempt to raise
up to $10,000,000 in a private placement of the Company's securities in
return for a success fee of 7.0% of the proceeds raised. KPMG will assist
the Company in identifying possible acquisitions including and up to final
negotiations in return for (1) 75% of KPMG's normal hourly fees and (2)
2.0% of the aggregate consideration paid by the Company including any
liabilities assumed.
-11-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
OVERVIEW
Cautionary Statement Pursuant to Safe Harbor Provisions of the Private
Securities Litigation Reform Act of 1995:
This Quarterly Report on Form 10-QSB for the quarterly period ended September
30, 2002 contains "forward-looking" statements within the meaning of Section 27A
of the Securities Act of 1933, as amended, including statements that include the
words "believes", "expects", "anticipates", or similar expressions. These
forward-looking statements may include, among others, statements of
expectations, beliefs, future plans and strategies, anticipated events or
trends, and similar expressions concerning matters that are not historical
facts. The forward-looking statements in this Quarterly Report on Form 10-QSB
for the quarterly period ended September 30, 2002 involve known and unknown
risks, uncertainties and other factors that could the cause actual results,
performance or achievements of the Company to differ materially from those
expressed in or implied by the forward-looking statements contained herein.
The strategic objective of Defense Industries International, Inc. is to be the
leading global provider of personal military and civilian protective equipment
and supplies. We intend to realize our strategic objective through the
following:
-Pursue Strategic Acquisitions: We intend to selectively pursue
acquisitions that enhance our product lines and geographic presence in an effort
to consolidate our highly fragmented industry and to create a more diverse and
global reach for our company in our marketplace.
-Focus on Internal Growth: We intend to focus on internal expansion
of our existing businesses, thereby placing our company in a position to offer
an even more comprehensive portfolio of products to satisfy all of our
customers' protective equipment needs.
-Capitalize On Increased Demand For Company Products. As a result of
the terrorist attacks on September 11, 2001, and other recent world events, an
increased emphasis on safety and protection now exists worldwide. This has
translated into increased spending on personal military and civilian protective
equipment and supplies. We expect a continued increase in volume for our current
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 for our products.
-Expand Marketing Efforts: In the wake of the terrorist attacks of
September 11, 2001, and other recent world events, a greater global recognition
regarding the need for our products has materialized. We intend to capitalize on
this increased interest in our products by broadening our marketing efforts in
an attempt to create better global brand and recognition awareness of our
company and our products.
-Expand Distribution Network and Product Offerings: We intend to widen
our distribution network through strategic acquisitions and the development of
new products. We believe that a broader product line will enable us to
strengthen our relationship with existing customers and attract new customers at
the same time.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 2001
SALES AND GROSS PROFIT MARGIN
Sales in the three months ended September 30, 2002 were $2,586,107, as
compared to $3,599,774 for the same three months in 2001. We attribute this
decrease to a temporary reorganization of the local Defense Ministry which has
resulted in a delay in certain orders being made by the local Defense Ministry
during the three months ended September 30, 2002, and the elimination of certain
unprofitable operations that were acquired by the company in connection with its
acquisition of Achidatex Ltd. We expect that this reorganization will be
completed in the first quarter of 2003 and the delay on the orders will be
removed. Export sales in the three months ended September 30, 2002 increased to
$1,132,705 or 93.4% from $585,558. We attribute the increase in export sales to
the successful implementation of our growth plan. Specifically, we believe that
the increase in export sales is the result of the successful implementation of
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our marketing efforts to create a better global brand and worldwide recognition
awareness of our company and our products. The breakdown of sales for the three
months ended September 30, 2002 is as follows:
2002 ($) 2001($)
------- -------
Sales to the local market-civilian $687,434 $1,304,029
Sales to the local market-military 765,968 1,710,187
Export sales-military 1,132,705 585,558
---------- ----------
Totals $2,586,107 $3,599,774
========== ==========
Gross profit for the three months ended September 30, 2002 was $808,089,
as compared to $1,161,674 for the same three months in 2001. We attribute this
decrease in gross profit to the temporary reorganization of the local Defense
Ministry described above. We expect to realize the delayed local military orders
during the first quarter of 2003.
The cost of production in the three months ended September 30, 2002 was
$1,778,018, as compared to $2,438,100 for the same three months in 2001. This
change in cost of production is explained partly by the temporary reorganization
of the local Defense Ministry described above.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative costs in the three months ended September 30,
2002 were $349,113 compared to $452,228 for the same three months in 2001. This
change is explained by cutting unnecessary cost.
INCOME TAX EXPENSES
Income tax expense for the three months ended September 30, 2002 was
$64,679 or 20.2% of income before income taxes, as compared to $268,619 or 47.5%
of income before income taxes for the three months ended September 30, 2001. As
a result of rate of inflation in Israel in the last three months the Israeli
Government has reduced the tax rate or adjusted the tax rate to reflect the
increase in inflation. This, therefore, has caused there to be a decrease in the
effective tax rate for the three and nine months ended September 30, 2002.
FINANCIAL INCOME / (EXPENSES,) NET
Financial income (expense), net in the three months ended September 30,
2002 were $(32,988) compared to $(26,509) for the same three months in 2001.
NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 2001
SALES AND GROSS PROFIT MARGIN
Sales in the nine months ended September 30, 2002 increased to $7,899,742
or 40% from $5,639,032 for the same nine months in 2001. Sales to the local
market in the nine months ended September 30, 2002 increased to $5,971,404 or
25% from $4,778,938 for the same nine months in 2001. We attribute this increase
in sales to the local market to the acquisition of Achidatex, Ltd. Export sales
in the nine months ended September 30, 2002 increased to $1,928,338 or 124% from
$860,094. We attribute the increase in export sales to the successful
implementation of our growth plan. Specifically, we believe that the increase in
export sales is the result of the successful implementation of our marketing
efforts to create a better global brand and worldwide recognition awareness of
our company and our products. Sales for the nine months ended September 30, 2001
include revenues attributable to the operations of Achidatex Ltd. from June 18,
2001 (the effective date of the acquisition of Achidatex Ltd. by the Company) to
September 30, 2001, while sales for the nine months ended September 30, 2002
include revenues attributable to the operations of Achidatex Ltd. from January
1, 2002 to September 30, 2002. The breakdown of sales for the nine months ended
September 30, 2002 is as follows:
2002 ($) 2001 ($)
-------- --------
Sales to the local market-civilian 2,699,092 2,264,649
Sales to the local market-military 3,272,312 2,514,289
Export sales-military 1,928,338 860,094
--------- ---------
Totals $7,899,742 $5,639,032
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Gross profit for the nine months ended September 30, 2002 increased to
$2,854,616 or 56% from $1,826,946 for the same nine months in 2001. This
increase in gross profit is explained partly by the acquisition of Achidatex
Ltd. and increased demand for our products. The gross margin for the nine months
ended September 30, 2002 improved to 36.1% as compared to 32.4% for the same
three months in 2001
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The cost of production in the nine months ended September 30, 2002 was
$5,045,126 compared to $3,812,084 for the same nine months in 2001. This change
in cost of production is explained by the acquisition of Achidatex.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative costs in the nine months ended September 30,
2002 were $948,278 compared to $716,792 for the same nine months in 2001. This
change is explained by the acquisition of Achidatex Ltd.
Unfulfilled open orders at September 30, 2002 totaled $2,500,000 and are
scheduled for filling within the next four months. A temporary reorganization of
the local Defense Ministry which has resulted in a delay in certain orders being
made by the local Defense Ministry during the three months ended September 30,
2002, and the elimination of certain unprofitable operations that were acquired
by the company in connection with its acquisition of Achidatex Ltd. We expect
that this reorganization will be completed in the first quarter of 2003 and the
delay on the orders will be removed.
INCOME TAX EXPENSES
Income tax expense for the nine months ended September 30, 2002 was
$472,760 or 34% of income before income taxes, as compared to $366,362 or 41.5%
of income before income taxes for the nine months ended September 30, 2001.
FINANCIAL INCOME / (EXPENSES,) NET
Financial income (expense), net in the nine months ended September 30,
2002 were $(99,283)
compared to $(56,555) for the same nine months in 2001.
LIQUIDITY AND CAPITAL RESOURCES
Our current activities are financed by short and long term bank loans
balanced by short term deposits. The decision regarding the amount of the short
term loans was derived from considerations of the yield on the deposit which is
generally in foreign currency (receipts from overseas sales), compared to the
cost of short term loans. We have positive working capital (current assets less
current liabilities). Long term loans derived from acquisition of Achidatex Ltd.
their due spread over five years.
During this year and the year following, we anticipate increasing our
research and development of certain items, primarily, ballistic helmets,
stab-resistant fabric, ceramic ballistic plates, ballistic wall covering and
one-way protective windows. We anticipate total research and development
expenses for 2002 and 2003 to be approximately $60,000 and $750,000
respectively. We anticipate that in the year 2004 research and development
expenses will drop to approximately $350,000. The development of these products
will be with staff engineers. With respect to ballistic helmets, we anticipate
that these products will be approximately in 20% production by the end of this
year, increasing to full production by the year 2005. We anticipate that in
order to fund the research and development for these products, we may effect an
offering of our equity securities. If we are unable to effect an offering of our
securities, we may fund our research and development through our operating
funds. In such event, the timing of our anticipated research and development and
subsequent production schedule would be slowed.
In conjunction with the acquisition of 76% of the outstanding common stock
of Achidatex effective June 18, 2001, the Company recorded long-term deferred
tax assets of approximately $666,000 relating to the expected utilization of the
net operating loss ("NOL") carryforwards of Achidatex aggregating approximately
$1,851,000. As of September 30, 2002 and December 31, 2001, the balance of
deferred tax assets with respect to the NOL carryforwards of Achidatex was
approximately $17,000 and $362,000, respectively.
As a result of Achidatex having operated profitably since its acquisition
by the Company in June 2001, the Company has recognized a reduction in its
reported income of $112,927 and $36,474 for the three months ended September 30,
2002 and 2001, respectively, and $154,267 and $43,787 for the nine months ended
September 30, 2002 and 2001, respectively, to account for the 24% minority
interest liability. Although the Company has recorded a reduction in reported
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income as a result of the recognition of the 24% minority interest liability of
Achidatex, the utilization of the NOL carryforwards of Achidatex has increased
the Company's consolidated cash flows by approximately $223,000 and $237,000 for
the three months ended September 30, 2002 and 2001, respectively, and by
approximately $345,000 and $237,000 for the nine months ended September 30, 2002
and 2001, respectively, since utilization of the NOL carryforwards reduces cash
expended by the Company for income taxes. The Company has access to the cash
generated by Achidatex.
The Company expects that the NOL carryforwards of Achidatex will be fully
exhausted no later than March 2003. Accordingly, subsequent to such date, the
Company expects that the reduction in its reported income to account for the
minority interest liability will decrease, as will the Company's consolidated
cash flows, reflecting the absence of NOL carryforwards available to reduce cash
expended for income taxes.
RECENT ACCOUNTING PRONOUNCEMENTS AND CRITICAL ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements are presented
in United States dollars under accounting principles generally accepted in the
United States of America.
PRINCIPLES OF CONSOLIDATION
The condensed consolidated financial statements for 2002 include the
accounts of Defense Industries International, Inc. (formerly Pawnbrokers
Exchange, Inc. (see below)) 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.
The condensed consolidated financial statements for 2001 include the
accounts of Export Erez, USA, Inc. and its wholly owned subsidiaries, Export
Erez, Ltd., Mayotex, Ltd. and Dragonwear Trading Ltd. for the periods ended
September 30, 2001 and its 76% owned subsidiary Achidatex Nazareth Elite
(1977) Ltd. from June 18, 2001, the date of acquisition (See Note 5).
On July 8, 2002, the Company changed its corporate domicile from the State
of Utah to the State of Nevada (the "re-incorporation"). In order to accomplish
the re-incorporation, the Company merged with and into its wholly owned inactive
subsidiary, Defense Industries International, Inc., a Nevada corporation
organized on July 1, 2002. As a result of the re-incorporation, the Company's
name was effectively changed from Pawnbrokers Exchange, Inc. to Defense
Industries International, Inc. Each share of Pawnbrokers capital stock issued
and outstanding on the effective date was converted into and exchanged for one
share of Defense Industries capital stock. Defense Industries is authorized to
issue 250,000,000 shares of $.0001 par value common stock and 50,000,000 shares
of $.0001 par value preferred stock. As a result, the Company's common stock
changed from no par value to a par value of $.0001. Accordingly, the December
31, 2001 condensed consolidated balance sheet and the condensed consolidated
statement of changes in stockholders' equity have been retroactively restated to
effectuate the change.
All intercompany accounts and transactions have been eliminated in
consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that effect the reported amounts of
assets and liabilities and disclose the nature of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting periods. Actual results could differ
from those estimates.
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PER SHARE DATA
Basic net income per common share is computed based on the weighted average
common shares outstanding during the year. Diluted net income per common share
is computed based on the weighted average common shares and common stock
equivalents outstanding during the year. The computation of weighted average
common shares outstanding gives retroactive effect to the recapitalization
discussed in Note 4. There were no common stock equivalents outstanding because
the exercise price of the common stock equivalents exceeded the average market
price of the stock. Accordingly, a reconciliation between basic and diluted
earnings per share is not presented.
INTERIM CONSOLIDATED FINANCIAL STATEMENTS
The condensed consolidated financial statements as of September 30, 2002
and for the three and nine months ended September 30, 2002 and 2001 are
unaudited. In the opinion of management, such condensed consolidated financial
statements include all adjustments (consisting only of normal recurring
accruals) necessary for the fair presentation of the consolidated financial
position and the consolidated results of operations. The condensed consolidated
results of operations for the three and nine months ended September 30, 2002 and
2001 are not necessarily indicative of the results to be expected for the full
year. The condensed consolidated balance sheet information as of December 31,
2001 was derived from the audited consolidated financial statements included in
the Company's annual report Form 10-KSB. The interim condensed consolidated
financial statements should be read in conjunction with that report.
PRIOR PERIOD ADJUSTMENT
The accompanying condensed consolidated balance sheet as of December 31,
2001 has been restated to correct an error for the understatement of
depreciation expense during 2001. The effect of the restatement was to decrease
net income for 2001 by $72,053. Retained earnings and property, plant and
equipment, net in the December 31, 2001 consolidated balance sheet and retained
earnings in the condensed consolidated statement of changes in shareholders'
equity have been restated for the effects of the prior period adjustment.
NEW ACCOUNTING PRONOUNCEMENTS
In April 2002, the FASB issued SFAS 145, Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.
SFAS 145 rescinds the provisions of SFAS No. 4 that requires companies to
classify certain gains and losses from debt extinguishments as extraordinary
items, eliminates the provisions of SFAS No. 44 regarding transition to the
Motor Carrier Act of 1980 and amends the provisions of SFAS No. 13 to require
that certain lease modifications be treated as sale leaseback transactions. The
provisions of SFAS 145 related to classification of debt extinguishments are
effective for fiscal years beginning after May 15, 2002. Earlier application is
encouraged. The Company does not believe the adoption of this standard will have
a material impact the financial statements.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Restructuring
Costs." SFAS 146 applies to costs associated with an exit activity (including
restructuring) or with a disposal of long-lived assets. Those activities can
include eliminating or reducing product lines, terminating employees and
contracts and relocating plant facilities or personnel. Under SFAS 146, the
Company will record a liability for a cost associated with an exit or disposal
activity when that liability is incurred and can be measured at fair value. SFAS
146 will require the Company to disclose information about its exit and disposal
activities, the related costs, and changes in those costs in the notes to the
interim and annual financial statements that include the period in which an exit
activity is initiated and in any subsequent period until the activity is
completed. SFAS 146 is effective prospectively for exit or disposal activities
initiated after December 31, 2002, with earlier adoption encouraged. Under SFAS
146, a company cannot restate its previously issued financial statements and the
new statement grandfathers the accounting for liabilities that a company had
previously recorded under Emerging Issues Task Force Issue 94-3. The Company
does not believe the adoption of this standard will have a material impact the
financial statements.
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RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform to the
current period presentation.
ITEM 3. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are designed to ensure that information
required to be disclosed in the reports filed or submitted under the Exchange
Act of 1934 is recorded, processed, summarized and reported, within the time
periods specified in the rules and forms of the Securities and Exchange
Commission. Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information required to be
disclosed in the reports filed under the Exchange Act of 1934 is accumulated and
communicated to management, including the Chief Executive Officer/Chief
Financial Officer, as appropriate, to allow timely decisions regarding required
disclosure.
Within the 90 days prior to the filing of this report, the Company carried
out an evaluation, under the supervision and with the participation of the
Company's management, including the Company's Chief Executive Officer/Chief
Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures. Based upon and as of the date of
that evaluation, the Chief Executive Officer/Chief Financial Officer concluded
that the Company's disclosure controls and procedures are effective to ensure
that information required to be disclosed in the reports the Company files and
submits under the Exchange Act of 1934 is recorded, processed, summarized and
reported as and when required.
(b) Changes in Internal Controls
There were no changes in the Company's internal controls or in other
factors that could have significantly affected those controls subsequent to the
date of the Company's most recent evaluation.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Certification Pursuant To Section 906 Of The Sarbanes-Oxley Act of
2002
(b) Reports on Form 8-K:
None.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant
has caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
Dated: November 14, 2002
DEFENSE INDUSTRIES INTERNATIONAL,
INC.
By: /s/ JOSEPH FOSTBINDER
-------------------------------
Name: Joseph Fostbinder
Title: President
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