By Timothy L. O'Brien
The New York Times, 22 January 2006
A 9-millimeter bullet, erupting from the barrel of a handgun at 1,100 to 1,400 feet per second, can puncture skin, splinter bone and shred internal organs. A 7.62-millimeter rifle slug, flashing along at about 2,750 feet a second, dispatches targets at greater distances and with more accuracy and force than most handgun ammunition. And the human body - essentially a large, mobile sack of water - offers little resistance to bullets of any caliber.
Bulletproof vests, made of Kevlar and other fabrics, are meant to shield vulnerable bodies, giving a veteran cop on the beat or a young soldier on patrol in Baghdad added protection. Most vests, if properly designed, can stop a 9-millimeter handgun bullet. No vest, unless it is supplemented with heavy, brittle ceramic inserts, can stop a high-velocity rifle bullet. Over time, or with repeated exposure to gunfire, all vests degrade and lose their stopping power. Still, well-made vests offer wearers a measure of security in encounters that might otherwise prove fatal.
When the Iraq war began in early 2003, analysts say, the American military hadn't stocked up on body armor because the White House did not intend to send a large occupational force. The White House game plan called for lightning strikes led by lithe, technologically adept forces that would snare a quick victory. A light deployment of troops and a harmonious occupation were to follow, with the Pentagon anticipating relatively little hand-to-hand or house-to-house fighting. But as the breadth and duration of the Iraqi occupation grew, the war became a series of perilous, unpredictable street fights in Baghdad and other cities, leaving soldiers exposed to sniper fire and close-quarters combat - and in urgent need of hundreds of thousands of bulletproof vests.
In the world of military contractors, times like these - when a sudden, pressing need intersects with a limited number of suppliers - have all the makings of full-blown financial windfalls. For small vendors, the effect can be even more seismic than it is for their larger brethren, turning anonymous businesses into beehives of production and causing their sales to skyrocket. DHB Industries, based in Westbury, N.Y., whose Point Blank subsidiary in Pompano Beach, Fla., is a leading manufacturer of bulletproof vests, found itself occupying this lucrative turf when the military awarded it hundreds of millions of dollars in body armor contracts in 2003 and 2004.
With sales of just $340 million last year, DHB is a small fry amid giant military suppliers like Lockheed Martin, Boeing and Halliburton. But DHB offers a case study of the complexities of military contracting - and of the riches and responsibilities that accompany it. DHB's dealings also offer a peek into the vagaries of internal controls and executive compensation that continue to challenge companies of all stripes, the individuals and institutions that invest in them, and a public that relies on them for goods and services.
DHB might have remained anonymous if not for a spate of recent events. The quality and adequacy of vests supplied to soldiers in Iraq has come into question over the last year, culminating in a Pentagon study, first reported by The New York Times this month, that said that 80 percent of the Marines who died in Iraq from upper-body wounds might have survived if they had had body armor covering more of their torsos. (It was the military, and not manufacturers, that determined the specifications for the vests DHB supplied the Marines, said DHB.)
The Marines and the Army recalled about 23,000 Point Blank vests from the field last year after The Marine Corps Times reported that the Marines acquired the vests despite warnings from Army personnel that the vests had what the newspaper described as "critical, life-threatening flaws." The Marine Corps issued a statement in November saying that there was "no evidence to suggest that soldiers or Marines have been at risk, or that these vests will not protect against the threat they were designed to defeat."
The Marine Corps declined to respond to repeated interview requests for this article. An Army spokesman said in an e-mail message that Army officials would not grant an interview because it "would be inappropriate, considering DHB and Point Blank Armor business arrangement."
DHB declined to make any of its executives or directors available for interviews, including David H. Brooks, 51, its founder, namesake, largest shareholder and chief executive. In regulatory filings, DHB said it had delivered more than 850,000 vests to the military since 1998, and a company spokesman, Bruce Rubin, said the vests that the military withdrew were only a small percentage of those it supplied most recently.
"A significant amount of anecdotal evidence from the field indicates that DHB's products are doing what they are designed to do - save lives," Mr. Rubin said.
Mr. Brooks, who, along with his wife and children, cashed in DHB stock worth about $186 million in late 2004, has also courted attention and controversy. In November, Mr. Brooks held a bat mitzvah party for his daughter atop Rockefeller Center in New York, which an article in The Daily News said had cost $10 million. Mr. Rubin characterized the figure as exaggerated. He declined to comment on other elements of the article, which said that Mr. Brooks had used his company's jet to fetch a clutch of rock and hip-hop stars, ranging from Don Henley to 50 Cent, to perform at the celebration; that he changed out of an all-leather, metal-studded suit into a hot-pink suede suit as the party heated up; and that he supplied guests with goody bags stuffed with $1,000 worth of merchandise.
The $186 million stock sale occurred four months before reports surfaced of possible problems with vests in Iraq, and reduced Mr. Brooks's stake in DHB to 15 percent from 48 percent in 2003. It also preceded DHB's announcement last fall that it would take a $60 million charge to reserve for a potential class-action settlement and replacement costs related to legal disputes surrounding vests the company had sold to police departments nationwide. Those events helped DHB's shares to plunge 76 percent last year, but a lawyer representing Mr. Brooks said that none of his client's stock sales were based on nonpublic information.
Over the years, DHB has bestowed unusual financial rewards on Mr. Brooks. From 1997 to 2004, he was entitled to lay claim to 10 percent of the company's annual profits as reimbursement for personal and business expenses. During that time, he rang up $2 million in personal charges on DHB's corporate credit cards, according to securities filings. For one year, between 1996 and 1997, he was also entitled to 10 percent of the company's annual profit as a bonus, a right that Mr. Rubin said Mr. Brooks had never exercised. Mr. Brooks' total annual compensation in 2004, the most recent year for which data are available, was about $73.3 million. Of that amount, $69.9 million represented options he exercised as part of his $186 million stock sale that year. DHB itself had profits in 2004 of $49.5 million.
"The American economic system rewards those who take great risks with commensurate benefits," Mr. Rubin said of Mr. Brooks's stock sales and compensation. "The compensation Mr. Brooks received is directly attributable to the risk he undertook in aiding the capitalization of DHB and achieving extraordinary results for the company."
Mr. Rubin also pointed out that Mr. Brooks lent DHB more than $20 million and personally guaranteed its bank loans during the company's earlier and leaner years - a time when he could not be assured that he would get his money back or that DHB would turn a profit.
Nonetheless, the Securities and Exchange Commission is currently investigating aspects of Mr. Brooks' compensation and other corporate transactions, according to the company's securities filings. Mr. Brooks and the company declined to comment on the investigation, as did the S.E.C.
This is not the first time that regulators have examined Mr. Brooks' activities. In 1992, the S.E.C. fined him heavily and barred him from the brokerage business for five years for improprieties related to an insider trading scandal. That aspect of Mr. Brooks' résumé appeared in the company's public filings until the late 1990's, and then disappeared.
Although DHB adopted a new code of ethics in 2003 that required the company to make "full, fair, accurate, timely, and understandable disclosure" in its public communications, a lawyer representing DHB's management, George S. Canellos, said that the company was legally obligated to notify the public about the 1992 S.E.C. sanctions only for the five years after the agency imposed them. The absence of more recent disclosure, Mr. Canellos said, "in no way conflicts with the company's code of conduct or any law or regulation."
In any case, while Mr. Brooks was briefly banished from the securities business, that did not prevent him from assembling a small group of companies and eventually becoming the chief executive of a publicly traded company - one that now supplies a product, bulletproof vests, that is vital to the safety of American troops overseas.
THE rapid growth in military spending has fattened the wallets of C.E.O.'s running major defense contractors, according to the Institute for Policy Studies, a left-leaning research group in Washington. The group, which labeled Mr. Brooks a "body armor profiteer" in a report it prepared last summer, noted that the average compensation for C.E.O.'s at 34 leading military contractors tripled from 2001 to 2004, to $3.9 million. That meant that C.E.O.'s pay packages were 23 times larger than generals' salaries and 160 times the size of an average soldier's pay.
The Pentagon awarded more than $230 billion worth of military contracts in the 2004 fiscal year, and how companies of all sizes secured pieces of that pie depended on different combinations of expertise and political access. Government and military oversight of the fitness and capacity of suppliers has historically been plagued with challenges and lapses, and military analysts say that those problems are magnified during times of war. Some of the concerns that have cropped up recently about the adequacy of bulletproof vests, they say, are no surprise.
"This is somewhat similar to the lifesaving drug that is rushed into production for fear that people will die if they don't get it," said Loren B. Thompson, a military security specialist at the Lexington Institute, a conservative research organization based in Arlington, Va. "In a time of war there is great pressure to equip troops with body armor and other life-saving equipment as soon as possible."
Other analysts say that the sheer volume of money gushing out of the military's contracting faucet, the difficulty of overseeing each and every supplier, and the need to rush armor and weaponry into the field inevitably creates problems.
"If you see some of these big companies scarfing down billions of dollars with nothing to show for it, then it's not surprising that problems have emerged at some of the smaller companies," said John E. Pike, founder of GlobalSecurity.org, a research firm that specializes in military and intelligence policy. "At the end of the day, the oversight comes in the testing."
In the span of just six months in 2004, the Pentagon awarded DHB three body armor contracts worth about $455 million. DHB's entire revenue the previous year had been only $230 million. DHB, the Marines and the Army would not discuss the process through which DHB had secured its body armor contracts. The military began awarding contracts to the company as early as 1998, three years after DHB paid $2 million to acquire Point Blank out of bankruptcy.
Neither DHB nor Mr. Brooks appears to be a big political contributor. Mr. Brooks made a $25,000 contribution to a fund-raising arm of the Republican National Committee last June, his only political contribution since 1990, according to campaign finance records maintained by the Center for Responsive Politics; DHB and Point Blank themselves do not appear in those filings at all.
But DHB has been an active client of three Washington lobbyists - Grayson Winterling, John C. Tuck, and Michael P. Flanagan - each of whom lobbied the Defense Department or undisclosed members of Congress on DHB's behalf, according to federal records. None of the three men returned phone calls seeking comment. DHB executives declined to discuss their relationships with the lobbyists; Mr. Rubin, the company's spokesman, said that DHB, "like many other companies, has engaged lobbying firms to help it understand federal government contracts and to facilitate working relationships."
It is unclear whether the Pentagon was aware or concerned about quality-control problems at DHB, and the entire industry it inhabits, in recent years. In 2002, the New York Police Department returned 6,400 Point Blank vests to DHB for replacement after state government tests showed that some of the vests were defective. DHB said it believed that the vests it sold to the police department were "safe and effective."
A confrontation in 2003 with a union representing DHB's employees in Florida led to the workers accusing the company of shoddy quality control. The union also filed a complaint with the S.E.C. asserting that DHB had not publicly disclosed that Mr. Brooks's wife, Terry S. Brooks, controlled the company, Tactical Armor Products, that supplied plates used in DHB's vests. The S.E.C. began its investigation of DHB the next year.
A few small companies dominate the body armor industry, and military publications have described DHB as the largest supplier of bulletproof vests to the Army. One of its former leading competitors for military vest contracts, Second Chance Body Armor Inc., was forced into bankruptcy in 2004 after state governments and police associations sued it for supplying police officers with what they said were defective vests.
At the heart of those cases was a material called Zylon, made solely by a Japanese company, Toyobo, and billed by it as having greater tensile strength than Kevlar or steel. But lawsuits filed against Second Chance and other companies that use Zylon, including DHB, contend that Zylon degrades when exposed to heat and moisture.
The suits, all of which are in the process of being settled, contend that Toyobo notified the companies in the late 1990's of possible problems with Zylon but that the companies, including DHB, kept selling vests made from it. Second Chance documents uncovered in the litigation shed light on how that company weighed its responsibilities as Zylon-related failures began emerging.
According to a letter sent by Richard C. Davis, the president of Second Chance, to his board in 2002, the company could "continue operating as though nothing is wrong until one of our customers is killed or wounded," which he said was undesirable because once someone died in a Zylon vest, then "we will be forced to make excuses as to why we didn't recognize and correct the problem."
Mr. Davis said Second Chance's other option was to stop making the vests completely and offer upgrades to customers. According to one of the lawsuits filed against it, Second Chance did not notify police officials of the Zylon problems and offer them upgrades until a year after Mr. Davis wrote that letter.
Second Chance referred all questions about the company to Armor Holdings, another body armor company that bought most of its assets out of bankruptcy. An Armor Holdings spokesman declined to comment on issues involving Second Chance's Zylon-related liabilities, which he said Armor Holdings did not assume when it bought the company's assets.
The Armor Holdings spokesman said that the company still believed that vests made from Zylon were sound, and Toyobo has stated that it stands by its product. But the National Institute of Justice, a branch of the Justice Department that certifies the safety of vests used in law enforcement, said last August that it would no longer approve Zylon vests.
DHB said that none of the vests it had supplied to the military contain Zylon and that it, too, believes that Zylon-based vests it sold to police officers and other law enforcement officials remain safe. But it is replacing those vests anyhow, it said, in order to comply with the new federal guidelines against Zylon.
For whatever complications have arisen in Mr. Brooks's industry because of questions about the safety of bulletproof vests, his representatives say that the riches he has reaped are rewards for his prescience about the industry's potential. Mr. Brooks unearthed that opportunity after the S.E.C. barred him from his earlier profession.
In 1992, according to S.E.C. records, regulators charged Mr. Brooks, who was 37 at the time, and his brother, Jeffrey Brooks, with "recklessly" failing to prevent an employee at a brokerage firm they ran from "engaging in illegal trading activity." The commission said that an employee had been buying and selling well-known media stocks using inside information as part of a scheme engineered with a Morgan Stanley analyst. The S.E.C. said that the Brooks brothers and the firm they controlled, Jeffrey Brooks Securities, aided the scheme and that David Brooks copied the insider trades made by his employee, pulling in about $291,000 in illicit profits for himself and the firm.
Without admitting or denying charges that the commission filed against them in a civil complaint, David and Jeffery Brooks agreed to pay a $405,000 joint penalty. The S.E.C. also banned David Brooks from associating with any brokerage or investment firm for five years. Jeffrey Brooks, who later became one of DHB's early and largest shareholders, declined to respond to a request for an interview.
David Brooks found a way around this setback by using a publicly traded holding company he controlled, DHB, to buy Point Blank three years later, adding the troubled body armor concern to a small stable of companies that also included an orthopedics products supplier and a maker of sports gear, according to public filings. Today, body armor accounts for 98 percent of DHB's sales.
From the outset, DHB has struggled with management issues. DHB was sometimes late in filing financial records with regulators; was governed by just five directors (two of whom were Mr. Brooks and another DHB executive) who met irregularly; and has had three outside auditors resign since 2001.
When one of the auditors, Grant Thornton, resigned in 2003, it notified DHB's board that there were "deficiencies" in internal control procedures relating to the preparation of the company's financial statements, according to securities filings. Grant Thornton also expressed reservations about "understaffing" in DHB's accounting and finance department. When yet another firm, Weiser LLP, gave up its auditing duties early last year, it told DHB that it was concerned about "deficiencies" in the way DHB priced its inventory.
Not to worry, DHB says. Gary Nadelman, a member of the company's audit committee, said in an e-mail message that DHB "believes that its internal controls are adequate to provide reasonable assurance that its financial statements and public disclosures are materially accurate."
THE DHB board, which has been expanded to seven members and still includes Mr. Brooks, has granted unusually generous perks to the company's founder. Under a 1996 employment agreement approved by the board's compensation committee, Mr. Brooks was entitled to annual bonuses equal to 10 percent of DHB's profits each year. That was replaced in 1997 by a new plan granting him annual reimbursement for business and personal expenses up to 10 percent of DHB's profits. DHB also reimburses Mr. Brooks for all expenses associated with a residence and office he uses in Florida. The company also reimburses Mr. Brooks' children for a jet they own whenever DHB uses it for business purposes (a bill that amounted to about $860,000 in 2004).
In the summer of 2004, DHB's compensation committee repealed the portion of Mr. Brooks's employment agreement that entitled him to a 10 percent cut of corporate profits for his business and personal expenses. DHB declined to say what precipitated the change, but at the time Mr. Brooks had rung up about $2 million in personal expenses on DHB credit cards. A spokesman for the company said that Mr. Brooks's debt was offset by money DHB owed him and that the company now considers the personal expenses repaid. Mr. Brooks's wife, Terry, has also had a fruitful relationship with DHB. Her company, Tactical Armor Products, sold $18 million worth of body armor components to DHB in 2004, according to securities filings. Although Tactical Armor is characterized as an outside supplier in DHB's filings, it manufactures some of its products in a Tennessee plant that DHB owns. Tactical Armor paid DHB about $40,000 in rent and bought about $7 million in raw materials from the company in 2004.
"These related-party transactions have been publicly disclosed and carefully evaluated by independent directors of the board, who were satisfied that the terms of all transactions were fair to the company," said Mr. Rubin, DHB's spokesman.
The head of DHB's compensation committee, Jerome Krantz, a life insurance underwriter with the Krantz Financial Group, declined to be interviewed. In response to questions about Mr. Brooks's compensation, Mr. Nadelman, who is also a compensation committee member, said in an e-mail message that DHB's board had exercised proper judgment.
"The overarching responsibility of the board is to provide oversight and create management incentives for the successful operation of the company and to build long-term shareholder value," he wrote. "The company thinks they have done this very well."
On Friday, DHB shares closed at $4.95, down 70 percent from their 52-week high of $16.59. "We live and work in extremely difficult, often threatening times," DHB notes on one of its body armor Web sites. "We never forget that our customers rely on us to protect their lives."
------------------------
Citation: Timothy L. O'Brien. "All's Not Quiet on the Military Supply Front," The New York Times, 22 January 2006.
Original URL: http://www.nytimes.com/2006/01/22/business/yourmoney/22vests.html
------------------------