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In the month of April a lot of events have transpired for our company that I am compelled to post and discuss with fellow shareholders/investors. Let me point out the 3 items that come into mind.
(1) Resignation of the independent auditors Weiser LLP. There could be a good reason why Weiser did not stand for re-election, but none has been given so far and no representative of Weiser will be present in the up-coming 2005 Annual Meeting to discuss the reason why they resigned. What we do know is that DHB filed their 10K on 17-Mar-2005 even though Weiser had not completed their review. That resulted in a subsequent amendment with restatements to Stockholder's equity and accounts receivable in the cash flow statement. Weiser pointed out certain deficiencies including weakness in the Audit Committee. Weiser has not given an opinion on DHB's internal control procedure as required under SOX. All this points to a poor working relationship between management, the board and independent accountants, not a good sign. I'm expecting an adverse opinion by Weiser on DHB's internal controls, which reflects badly on management and the board. Also the new independent accountants Rachlin Cohen and Holtz LLP are the same guys who checked the internal controls procedure of DHB (not mentioned in the 8K release but in the DEF-14A proxy statement). Something doesn't smell right here and I'm getting suspicious of management.
(2) Change in Company Bylaws. On 13-Apr-2005, management decided to change Section 1.4 of Article VII of the Company Bylaws. This effectively decreases the amount of outstanding shares needed for a meeting from a majority [of] outstanding shares to just 1/3. This is simply poor corporate governance and I'm extremely disappointed with management and the board for implementing this. Management can call a shareholder's meeting at short notice, with resolutions proposed and passed without the need for the majority of shareholders being present to say the meeting is valid. If there is an example for this, the proposed Annual Stockholders Meeting on the 6-May-2005 can be used.
(3) DEF14-A Proxy Statement and 2005 Annual Stockholders Meeting. On 18-Apr-2005, DHB submitted their DEF-14A proxy statement asking for the 2005 Annual Stockholders Meeting. That's pretty short notice (about 3 weeks) for existing shareholders to organize a trip down to Point Blank Body Armor facility located at 2102 S.W. 2nd Street, Pompano Beach, Florida on 6-May-2005 at 1600 hours Eastern Time. It seems such a short time since the last Stockholders Meeting (end of 2004 if my memory serves me correctly) and I hope as many shareholder turn up for this ad hoc meeting as far as practical. The reasons being that owners will get an opportunity to see and possibly talk with management, members of the board, and the new independent accountants. I hope the majority shareholder, CEO and Chairman turns-up this time around and give an opinion on our company. It's important all shareholders vote on the proposals mentioned in the proxy statement as this is the only time of the year when shareholders and owners have an opportunity to exercise their rights by voting on proposals set forth. Below I have summarized these proposals and how I voted on each one of them.
(a) First proposal: Election of Directors for 1-year term. The proposed directors and my votes are:
Director Name How I Voted
David H. Brooks AGAINST
Dawn M. Schlegel AGAINST
Jerome Krantz AGAINST
Gary Nadelman AGAINST
Cary Chasin AGAINST
Barry Berkman FOR
Gen. Larry Ellis, USA, Retired FOR
Let me give some reasons for how I voted on the first proposal. Though 2004 results were good, I wanted to express my frustration and disappointment in management as well as to some of the existing board members on the poor handling of events in the past 4 months. First is the massive insider selling during December 2004. Recall that about 10 million shares were sold during the month of December and existing shareholders have been feeling the pain since then. Whilst I have no problems with insiders selling, the method and timing has left a bad taste and smell. I have previously written that a planned sale arrangement with regular monthly or quarterly sales is a much better way to dispose of large volume of shares onto the market. Both existing shareholders and the market would know in advance that the planned sales are an asset allocating exercise, while a massive and sudden sale within a short time frame could and would be interpreted differently. I believe Saprophytic1 used the word "harvested" and this pretty well describes what insiders did in December 2004. Second point is that management and members of the Audit Committee failed to work closely with the previous independent accountants Weiser LLP - see item (1). The change of company bylaws to suit management is also another negative point - see item (2). I would add that I did not vote against Barry Berkman & Gen. Larry Ellis as they're new to the Board and I'll give them the benefit of the doubt for the time being.
(b) Second proposal: Election of Rachlin Cohen and Holtz LLP as the new independent auditors. I'm voting against Rachlin Cohen and Holtz LLP for 2 reasons. First is that Rachlin was paid $234,831 in 2004 for consulting services in connection with assisting DHB in documenting internal control policies and $136,037 in audit fees to perform a re-audit of financial statements for the fiscal year ended December 31, 2002. There is a potential conflict of interest when an accounting firm performs both auditing and consulting services for the same company, recall the fiasco over Arthur Anderson and Enron. Thus I would not consider Rachlin as independent in this instance. Second, DHB needs to have a strong, reputable, recognizable and steady independent auditor. It is no longer appropriate for DHB to have 2nd and 3rd tier public accountants for a growing and profitable company. There are a number of 1st tier public accountants such as Ernst & Young LLP, Deloitte & Touch LLP, PricewaterhouseCoopers LLP, etc. that can do the job and give shareholders a better re-assurance of the financial statements which are a critical factor in determining the health of the business. Its time for the company to move onto the next level and as shareholders we can have a say on who our independent auditors can be. Again I voted AGAINST Rachlin Cohen and Holtz LLP as the independent auditors. It would be acceptable to retain Rachlin for consulting services and getting the internal controls sorted out.
(c) Third proposal: Implement the new 2005 Omnibus Equity Incentive Plan. As stated in my previous post and as a shareholder, I have a problem with the Omnibus Equity Incentive Plan. There are currently 507,000 shares available for option grants at a weighted price of $5.00 on 18-Apr-2005. Also there are 45,337,575 shares outstanding. Compare that to last year when there were only 40,922,416 shares outstanding and 5,123,000 shares available for option grants at a ridiculous average weighted price of $1.51 as filed under Nov-2004 DEF-14A proxy statement. Yes dear shareholders, over a 5-month period we got hit with a huge 10.8% dilution. If one extrapolates this over a year the number of shares outstanding would blow out to 51,518,798 shares by end of 2005. That means shareholders are going to get diluted by monstrous 26% based on 40,922,416 shares outstanding as at November 2004. The new plan intends to increase number of options by a staggering 12,000,000 shares! If DHB were growing revenues and earnings at a triple digit rate say 100% a year, this may not be an issue, but the problem is they're are not. This is simply a transfer of wealth from existing shareholders to management. The new plan gives little assurances to owners on limiting the excessive dilution while giving maximum benefit to the management. Furthermore the limitation of 1,000,000 grants each year to an individual is of little consideration. It would have been better to limit the increase in options to a quarter of that proposed � say 3,000,000 shares of restricted stock only and bringing the total number available for grant up to 3,507,000 shares. Still a significant amount, but if the 2005 Omnibus Equity Incentive Plan lasts for 10 years (similar length to the previous plan), then owners can limit the dilution rate to about 0.9% per year instead of 2.57% per year as it is currently proposed. So when 2005 full year earnings results come through, I can't help but think of the additional 12,507,000 shares that has to taken into account when calculating the per share number, thus I voted against the 2005 Omnibus Equity Incentive Plan. If options are to be granted instead of restricted stock, I would insist that the options be granted at the end of each quarter based on the average closing price of the stock for the past 5 trading days. This would resolve the "timing" issues we've been experiencing so far.
So everyone knows how I voted on the proposals laid on in the 2005 proxy statement. I encourage everyone to think over and vote accordingly with their conscience. Other shareholders may have a different view from my approach, but all shareholders should vote, as this is the only time where we have the ability to exercise our rights.
Best and regards,
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