DHB Industries, Inc.
Results for 2005 3Q

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By steveting
November 17, 2005

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DHB has announced 3Q results, held their CC and have filed the 10Q. I had a look through the 10Q, press release and brief listen on the CC. My take on all this is decidedly negative and others may like to say more positive things on DHB.

From the press release management seems pretty up-beat on the results. Revenues are up to record levels, though year-on-year comparison is flat. Earnings have taken a significant hit, but it's being spin doctored away. Management claim to be doing shareholders a favor by announcing a $9 million share buyback program for up to 3 million shares. Before investors get too excited over this, please note the following:

(1) The buyback is in the form taking additional debt through the revolving credit agreement that costs 6.124% pa interest payment so that means an additional $551,160 interest payments per year if all $9 million is spent. Read this as reduced earnings going forward. Management could have given the $9 million in the form of a special dividend and served shareholders better. But that will never happen.

(2) Even if the maximum limit of 3 million in shares are bought back, it does little to stop the heavy dilution that Brook$ and Co. have been inflicting on existing shareholders with great pain. Recall that at the end of 2004 there were 46.1 million diluted shares outstanding which is a significant number comparing at end of 1996 when there were approximately 24.8 million diluted shares outstanding. This brings a compounded dilution rate of 8% for the past 8 years � shareholder value destruction equivalent to a train wreck. Now couple this with self enriching program that Brook$ and Co. set for themselves in last year in which there will be an extra 6.2 million to be issued going forward that one can be forgiven in being cynical on this feeble attempt to placate existing shareholders and the market.

There's also the elimination of 500,000 preferred shares. Whilst this is a good idea this should have been done a long time ago. As previously pointed out, the preferred shares are nothing more than a high interest debt (12%) imposed to shareholders to the benefit to Mr. Brook$. At the company's option the preferred could be exchanged to common shares at $6.00 on 15-Dec of each year. The question is to exchange the preferred shares on the 1:1 basis or buyback in cash? That's a no brainer as one only needs to look at the current share price to decide. Apparently the Board of Directors didn't have any brains and did not have the interest of shareholders in mind (they didn't and wont so in the future) when implementing the conversion feature as the current share price does not warrant the re-purchasing of all 500,000 preferred at $6.00 for a total cost to shareholders of $3 million. This is a good example where Brook$ & Co. is enriching themselves at the expense of shareholders. An analogy is in a coin toss where there are two possibilities � heads or tails, but Brook$ and Co. says "Heads I win, tails you loose!" If the current share price was in the $20 range would the Board of Directors be prepared to do the same? I think not as Mr. Brook$, the clever and greedy fellow would get much more if he had converted the preferred to common shares and sold at $20.

The CFO was kind enough to mention that cash flow from operations of $26.6 million for 9 months to 30-Sep-2005. Sounds good right? However, this is simple smoke and mirrors accounting trick which includes a large one time non-cash charge of $36.73 million due to the Zylon issue. If this expense is excluded as well as the $11.3 million charge due to the highly objectionable $1 warrant options issued to Mr. Brook$, the cash flow is significantly in the red to the tune of $21.43 million. We haven't even dealt with changes working capital tricks yet, so how the emperor's clothes looking? Is the DHB emperor looking naked now?

Finally let's look at the claim that shareholders had approved the new 2005 Omnibus Equity Incentive Plan that allows for 2.5 million shares to be issued. Check out the following voting numbers on 29-Jul-2005:

Proposal 1. To consider and vote upon the Company's proposed 2005 Omnibus Equity Incentive Plan.

Number of Shares Voted:

Voted For      Against      Abstain       Non-Votes

11,715,548     8,064,100    152,114       0

Notice something funny here? If one adds up all the vote numbers it comes to 19,931,762 shares and much less than outstanding share count of 45,300,796 that stood at the end of 30-Jun-2005. As a matter of fact that comes out to less than 44% of the outstanding shares and significantly less than majority that would be needed to confirm that shareholders approved of the proposal. No wonder Brook$ and Co. on 13-Apr-2005 changed the bylaws to hold a meeting to just 33% of the outstanding shares, now we know why! Do investors believe that the proposal was a close race? Not likely, let's look at the numbers a bit more closely and see how the game was rigged. Assume that Brook$ and Co. would vote for the proposal as it benefits them greatly and according the 24-Jun-2005 proxy statement, approximately 7,585,799 shares out of 11,715,548 would have voted for the proposal and that leaves 4,129,749 of independent shareholder who really were in favor. Now compare that to 8,064,100 of independent shareholders who voted against and the ratio of FOR:AGAINST comes to about 1:2. So in reality, even taking into account that less 50% of the share were present at the meeting the majority of the independent shareholders (that's you and me) have spoken and voted against the 2005 Omnibus Equity Incentive Plan. So how did the 2005 Omnibus Equity Incentive Plan get passed? The only way is for Brook$ and Co. rigged the system by ensuring the majority of independent shareholders would not be present in the vote. This yet another example of the self-enriching scheme Brook$ and Co. has set-up for themselves at the expense of outside shareholders.

Brook$ and Co. have done nothing to resolve the related party transactions or the SEC investigation.

In the CC, I was surprised to hear that the investor relations guy has left for "personal reasons". Maybe he did the right thing and no longer wanted to be associated with Brook$ and Co. It's going to be difficult to find good people to work for DHB if one knows the guy at the top is less than honest.


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