U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [Fee Required]
For the fiscal year ended December 31, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [No Fee Required]
For the transition period from_______ to________
Commission File No. 0-22429
DHB CAPITAL GROUP INC.
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(Name of small business issuer in its charter)
Delaware 11-3129361
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(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
11 Old Westbury Road, Old Westbury, New York 11568
(Address of principal executive offices)
Issuer's telephone number: (516) 997-1155
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under
Section 12(g) of the Exchange Act:
Common Stock, $0.001 Par Value
(Title of Class)
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 [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B and no disclosure will be contained, to the best of the
registrant's knowledge, in the definitive proxy or information statements
incorporated by Reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB [ x ]
Issuer's revenues for the most recent fiscal year: $41,834,425
Aggregate market value of the voting stock held by non-affiliates computed by
reference to the price at which the stock sold, or the average bid and asked
price of such stock, as of March 22, 1999: $15,296,076.
Number of shares outstanding of the issuer's common equity, as of March 20, 1999
(exclusive of securities convertible into common equity) : 25,627,440
<PAGE>
Item 1. BUSINESS
Business - History
DHB Capital Group, Inc. (the "Company") was originally incorporated as
a New York corporation on October 22, 1992, by Mr. David H. Brooks, the
Company's Co-Chairman. Effective April 17, 1995 (the "Reincorporation Date"),
pursuant to the authorization of the security holders of the Company, the
Company was reincorporated (the "Reincorporation") in Delaware. Under the terms
of the Reincorporation, the Delaware corporation is the successor in interest to
all the rights, interests, assets and liabilities of the New York corporation.
Holders of certificates which, prior to the Reincorporation Date, evidenced
securities of the New York corporation, automatically became holders of a like
number of securities of the Delaware corporation.
DHB Capital Group Inc., is a holding company which has three divisions,
DHB Armor Group, DHB Sports Group, and DHB Electronics Group. DHB Armor Group
consists of Protective Apparel Corporation of America ("PACA"), Point Blank Body
Armor Inc., Point Blank International ("PBInt'l") S.A., and Lanxide Armor
Products Inc. ("LAP"). DHB Sports Group consists of NDL Products Inc. ("NDL")
and Orthopedic Products Inc. ("OPI"). The DHB Electronics Group consists of
Lanxide Electronic Components Inc. ("LEC") and DHB KK. DHB Armor Group develops,
manufactures, and distributes bullet and projectile resistant garments, bullet
resistant and fragmentation vests, bomb projectile blankets, and related
ballistic accessories, as well as, certain hard composite armor for personnel,
ground vehicles and aircraft. DHB Sports Group manufactures and distributes
protective athletic apparel and equipment, such as elbow, breast, hip, groin,
knee, shin and ankle supports, and wrist, elbow, groin and knee braces, a line
of magnetic therapy product, as well as, orthopedic products. OPI is engaged in
the manufacture and sale of medical and orthopedic products directly to the
medical industry, including hospitals, sports medicine centers and medical
practices. DHB Electronics Group manufactures and markets metal matrix composite
materials (e.g. silicon carbide/aluminum composites) which function as packaging
and structural thermal management components for the electronics industries.
DHB Armor Group
The Company entered the body-armor business by acquiring PACA at the
end of 1992. In August 1995, the Company, through a wholly-owned subsidiary, now
known as Point Blank Body Armor, Inc., a Delaware corporation ("Point Blank"),
acquired from a trustee in bankruptcy certain assets (the "Point Blank Assets")
of Point Blank Body Armor, L.P., and an affiliated company (collectively, "Old
Point Blank"), for a cash payment of $2,000,000, which was provided by a loan
from Mr. Brooks. Old Point Blank had been a leading U.S. manufacturer of
bullet-resistant garments and related accessories. On February 28, 1997, the
Company exchanged a total of 666,000 shares of its registered common stock to
acquire 100% of the common stock of Zunblindage S.A. a privately held Belgian
corporation. In January 1999, the Company changed the name of Zunblindage S.A.
to Point Blank International SA. PB Int'l is engaged in the manufacture and
distribution of bullet resistant equipment, apparel and related products and
specializes in marketing, distribution and sales of such products in Europe and
the Middle East. On February 9, 1998, the Company purchased the common stock of
two privately held Delaware corporations for $4.8 million which was funded by
loans from Mr. Brooks. See - "The Company - Recent Acquisitions". LAP is an
innovative company having unique technological capabilities in the development,
design, testing and manufacture of composite hard armor systems. LAP has over
ten years of experience in the performance of armor research and development for
the U.S. Department of Defense, and more than seven years of experience in the
design, manufacture testing and sale of products for specific armor systems and
components. LAP's composite hard armor systems are based on patented and highly
proprietary ceramic / metal composite systems.
<PAGE>
DHB Sports Group
On December 20, 1994, the Company, through a newly organized,
wholly-owned subsidiary, DHB Acquisition, Inc., a Florida corporation, purchased
(the "Transaction") the assets (the "NDL Assets"), free of all liabilities, of
NDL Products, Inc., a Delaware corporation and also purchased the assets of its
wholly-owned subsidiaries (collectively, the "Seller"), for a cash payment of
$3,080,000, net of cash acquired, at an auction held pursuant to Chapter 7 of
the Bankruptcy Code. Prior to the Transaction, the Seller was a
debtor-in-possession under Chapter 11 of the United States Bankruptcy Code. The
transaction was consummated pursuant to an order of the United States Bankruptcy
Court, Southern District of Florida, dated December 20, 1994. The Company
changed the name of DHB Acquisition, Inc., to "NDL Products, Inc."
The Company expanded into the orthopedic products business by acquiring
the outstanding capital stock of Orthopedic Products Inc., ("OPI"), a Florida
corporation. The Company issued 270,000 shares of its registered Common Stock in
March 1996, in two transactions, in exchange for all the outstanding capital
stock of OPI. DHB initiated a lawsuit against the former shareholders of OPI,
and as a result of that lawsuit being settled by mediation, 45,250 shares were
returned.
DHB Electronics Group
The other Delaware corporation purchased by the Company on February 9,
1998, is Lanxide Electronics Components, Inc. ("LEC"). LEC designs, manufactures
and sells unique and heavily patented thermal management, packaging and
structural components for the electronics industry. LEC's current products are
primarily based on silicon carbide / aluminum composites which provide a unique
combination of desirable properties including, high thermal conductivity, low
coefficient of thermal expansion, light weight and high stiffness. These
properties are ideally suited to provide a number of products including, but not
limited to, power module and amplifier heat sinks and baseplates, microprocessor
package lids, heat spreaders, printed wiring board cores, carriers, package
bases and fluid cooled heat sinks. LEC has over seven years of experience in the
design, manufacture and sale of electronic component parts in the hi-tech
electronics industry. On May 29, 1998, the Company acquired a Japanese
subsidiary, DHB KK for a cash payment of $375,000. This company markets LEC's
products in Japan.
Recent Developments
Point Blank International. In January 1999, the name of our Belgian
Company, Zunblindage S.A., was changed to Point Blank International S.A. ("PB
Int'l")
NASDAQ Small Cap Listing. On September 4, 1998, the Company's stock
became listed on the NASDAQ Small Cap MarketTM listing. The listing was granted
pursuant to satisfying certain conditions the NASDAQ Listing Qualifications
Panel required. The following is a list of the conditions which the NASDAQ
required: (1) David Brooks, the Chairman, CEO, and majority shareholder placed
all shares beneficially owned by him into a three year voting trust administered
by a an independent trustee who votes the shares according to the majority
shareholders vote; (2) David Brooks will not buy or sell any shares beneficially
owned by him for a three year period (3) David Brooks resigned as Chief
Executive Officer; (4) David Brooks resigned as a Director of the Audit
Committee; and (5) David Brooks would be Co-Chairman along with an independent
Board Member; (6) Jeffrey Brooks, David's brother, would lower his ownership of
the Company to not more than 4.9 percent of the outstanding shares by July 27,
1999, forgo buying any additional shares of the Company for three years and all
the shares owned by him were placed into a Voting Trust.
<PAGE>
Exclusive license and trademark agreement with Magnesystems. On January
16, 1998, the Company signed an exclusive (except for certain rights in the
field of products for horses) licensing agreement, to make, use and sell
magnetic products covered by certain US and Canadian patents, along with the
technical know how related to the magnetic products in the possession of
Magnesystems.
Buyback of Common Stock. On February 4, 1998, the board of Directors of
the Company announced its authorization for the Company to purchase up to one
million additional shares of its common stock on the open market, from time to
time, at its discretion. The Board of Directors had previously authorized the
repurchase of one million shares of its common stock in October 1996. To date,
the Company has repurchased and retired 1,284,854 shares at a cost of
$4,915,419.
The Company has no specific plans, arrangements, understandings or
commitments with respect to any future acquisition, and it is uncertain as to
when or if any acquisition will be made. The Company is not currently involved
in any substantive negotiations for purchasing any business or group of assets.
BUSINESS
DHB Armor Group ("the Armor Group")
Products. The Armor Group can be further divided into the "soft" body
armor group ("Soft Armor Group") and the "hard" armor group ("Hard Armor
Group"). Point Blank, PACA, and PB Int'l comprise the soft body armor group and
they manufacture two basic types of body armor: concealable armor, which is
designed to be worn beneath the user's clothing, and tactical armor, which is
worn externally and is designed to protect against more serious ballistic
threats. LAP is known as the "hard' armor group. Hard armor is manufactured from
ceramic/metal composite materials for use in various vehicles including ground
vehicles and aircraft, as well as personal body armor.
With regards to the Soft Armor Group, both the concealable and tactical
vests are manufactured using multiple layers of KevlarTM and/or a combination of
KevlarTM, Gold FlexTM, SpectrashieldTM, SpectraFibreTM, ballistic fabric, then
covered and fully enclosed in an outer carrier. Although some products of Point
Blank and PACA are competitive with each other, brand recognition, brand loyalty
and distribution channels are expected to minimize the extent to which products
of the two companies may impact each other's sales.
Concealable vests are contoured to closely fit the user's body shape.
The Soft Body Armor Group also sells a line of vests designed specifically for
the body shapes of women users. Male vests are manufactured in standard sizes
and may also be custom-made. Vests are fastened using Velcro-elastic strapping.
Concealable vests may be supplemented for additional protection and supplied
with a shock plate, such as SpectrashieldTM trauma plates or a new series of
plates which are manufactured by the Hard Body Armor Group. These plates are
becoming more integral with the supply of concealable armor. Vests may be
supplemented with an additional armor plate made by the Hard Armor Group, which
consists of either metal or certain composite materials to withstand greater
threat levels than the vest is otherwise designed to protect against. The
DiamondliteTM thin plate is an ultra lightweight plate, manufactured using
proprietary patented processes which when combined with Level II ballistics,
achieves a significant leap in ballistic protection from multiple hits from
steel penetration bullets, AK-47, 7.62 x 39 mm and similar threats.
<PAGE>
During 1998, Point Blank introduced more than fifteen new NIJ (National
Institute of Justice) certified vests. Among the more notable was the updating
of the original Hi-Lite line which now provided Point Blank's law enforcement
customers with exceptional protection (under one pound per square foot). This
was a remarkable improvement of an existing excellent design and will continue
to be a Point Blank asset in the future. In addition, the introduction of the
Fusion line provided Point Blank's federal law enforcement customers with the
highest level of ballistic protection in all NIJ threat levels available in the
body armor industry today - incomparable in today's body armor industry by all
standards.
DHB Armor Group also introduced a new Corrections body armor division
in 1998. DHB Armour Group developed and distibuted new catalogs which were
devoted exclusively to the Correctional Law Enforcement Community. A customer
service department was expanded to add representatives who would support only
the Correctional division. The Counterpoint series of vests and Deflex series of
vests were a key product introduction in conjunction with this new division.
Counterpoint combines ballistic protection with anti-stab protection in an
unforeseen, versatile manner. DHB Armor Group's full line of correctional vests
for anti-stab protection are derived from extensive research and the realization
that correction officers have specific needs unique to law enforcement. Point
Blank was awarded the Delaware Corrections Officers Association contract.
Point Blank's Goldflex Level II was rated #1 in wearability and comfort
during yearlong blind wear testing by New York City Police Department male
officers while PACA was most wearable by the female officers. Combined, Point
Blank and PACA were the recipients of a five million dollar contract awarded by
the New York City Police Department, one of the most prestigious contracts ever
awarded in the industry (with possibly the exception of Interceptor.)
With the updating of the Marine Corps standard issue Flak Jacket - the
largest and most progressive contract of its kind was awarded to Point Blank,
the Interceptor program. This contract has the potential value in excess of
$150,000,000. In addition, although Interceptor has already been accepted by the
Marine Corps, with the cooperation of manufacturers such as DuPont, Point Blank
is able to continue with unlimited, non-stop research and development to further
optimize the Interceptor project and levels of performance.
As a result of Point Blank's contract awards during 1998, and in
anticipation of the increased volume with our government contracts, Point Blank
has added an additional Gerber machine, a computerized cutting machine, which
will more than double the cutting capacity of the plant. This will enable
manufacturing to meet the higher production levels due to the increased demand
for Point Blank's products.
PACA was awarded a prestigious contract from the State of California
with a value in excess of $1.8 million. This contract is further proof of PACA's
proven ability to design, develop and produce innovative, concealable soft body
armor at competitive prices. One of PACA's new innovative products utilizes a
new weave in ballistic fabric which resulted in a lightweight ballistic vest.
Other contracts awarded to PACA were the US Federal Drug Enforcement Agency and
the US Immigration and Naturalization Service contract which it shares with
Point Blank.
PACA's wholesale prices for concealable vests range from approximately
$150 to approximately $375. Point Blank's wholesale prices for its concealable
vests range from approximately $215 to $540, and PB Int'l's prices range from
$300 to $500. The Soft Body Armor Group expects to continue these price levels.
<PAGE>
Tactical vests are designed to give all-around protection and more
coverage around the neck, shoulders and kidneys than concealable vests. These
vests contain pockets to incorporate small panels constructed from, for example,
hard composite materials and high-alumina ceramic tiles (made by the Hard Armor
Group), all of which provide additional protection against high power rifle
fire. Tactical vests come in a variety of styles, including tactical assault
vests, high-coverage armor, and flak jackets, each of which is manufactured to
protect against varying degrees of ballistic threats. The DiamondliteTM series
of plates also includes a tactical plate made from novel composite materials.
Specifically, DiamondliteTM tactical plates are made from DIMOX-HTTM composite
armor, a high performance ceramic matrix composite manufactured by the Hard
Armor Group. The DiamondliteTM Tactical Plate is only 1/2" thick and weighs
under six pounds, far less than the commonly used alternative plates which weigh
8-10 pounds. According to NIJ body armor Standards, the tactical plate is
certified as Level IV when used in conjunction with a Level IIIA vest. PACA
hired an ex-navy seal and former police training officer, Howard Wasdin to add
his expertise in tactical body armor and head the sales and research and
development for PACA's tactical series. PACA's wholesale prices of these
products range from approximately $370 to approximately $1,200. Point Blank's
wholesale prices for its tactical garments range from approximately $500 to
$1,350, and PB Int'l prices range from $700-$1,400. The Armor Group expects to
continue these price levels.
The Soft Armor Group's other body-armor products include a tactical
police jacket, military field jacket, executive vests, NATO-style vests,
fragmentation vests and attack vests. Bomb and fragmentation vests and pants are
designed to specifications in U.S. government contracts to offer protection
against materials and velocities associated with the fragmentation of explosive
devices such as grenades and artillery shells. PACA was awarded a contract from
the United States Army Soldier Command for the design and development of a
technologically advanced countermine suit "Basis P31 CE". This five part
contract will reach revenues in excess of $8.5 million. In general, concealable
vests sold to law enforcement agencies and distributors are designed to resist
bullets from handguns. Bomb gear utilizes a variety of designs and materials and
patterns slightly different from bullet-resistant vests. The Soft Armor Group
also manufactures a variety of accessories for use with its body armor products.
The Hard Armor Group's or LAP's products, which are primarily based on
novel and patented ceramic matrix composite technologies, are used when
ballistic protection must be achieved using economically priced light weight
armor. When weight is not critical, lower cost metallic armors are used. While
weight is important in the full spectrum of armor protection, i.e., small arms
to tank rounds, the most important applications for LAP's armor, in the near
term, are for protection against threats up to 14.5 mm armored piercing (AP)
projectiles and heavy artillery fragments. The most important markets are
personnel armor, aircraft armor and armor for light land vehicles including
armored personnel carriers (APC). LAP is fundamentally a composite armor
company, i.e., LAP makes ceramic matrix composite materials which are used as
hard materials in armor and also makes armor panels and parts which use hard
materials, e.g., ceramic matrix composites, ceramics and metals in conjunction
with fiber reinforced plastic or metals.
Initial production of armor started in 1991 during the Gulf War. LAP
manufactures ceramic matrix composite tiles and armor panels for U.S. military
cargo aircraft. In 1997 LAP developed and commercialized personnel armor
products combining ceramic composite plates encapsulated within a specially
designed fiber reinforced composite.
<PAGE>
Potential Product Liability. The products manufactured or distributed
by the Armor Group, e.g., bullet-resistant vests, are used in situations which
could result in serious personal injuries or death, as a potential result of the
failure of such products, or otherwise. The Armor Group maintains product
liability insurance for PACA, Point Blank and LAP in the amount of $20,000,000
each per occurrence, and $22,000,000 in the aggregate less a deductible of
$5,000 for each company. PB Int'l maintains product liability insurance in the
amount of $2,000,000 for each occurrence. There is no assurance that these
amounts would be sufficient to cover the payment of any potential claim. In
addition, there is no assurance that this or any other insurance coverage will
continue to be available or, if available, that PACA, Point Blank and PB Int'l
would be able to obtain it at a reasonable cost. Any substantial uninsured loss
would have to be paid out of the Armor Group's assets, as applicable, and may
have a material adverse effect on the Company's financial condition and results
of operations on a consolidated basis. In addition, the inability to obtain
product liability coverage would prohibit PACA, Point Blank, LAP or PB Int'l as
applicable, from bidding for orders from certain governmental customers, because
many governmental agencies require such coverage, and any such inability to bid
would have a material adverse effect on the Company's financial condition and
results of operations on a consolidated basis.
Raw Materials and Manufacturing. The Soft Armor Group manufactures
substantially all of their respective bullet-, bomb- and projectile-resistant
garments and other ballistic-protection devices. The primary raw material used
by the Soft Armor Group in 55% of its manufacturing of ballistic-resistant
garments is Kevlar(TM), a patented product of E.I. Du Pont de Nemours & Co.
Spectrashield(TM), GoldFlexTM, and SpectraFibre(TM), which are patented products
of Allied Signal are used in approximately 45% of all vests. GoldFlexTM
represents the latest in ballistic technology from Allied Signal. Utilizing
Allied Signal's patented, non-woven Shield technology, GoldFlexTM is softer and
thinner than traditional ballistic materials while offering the maximum in
multi-hit and angled shot protective capabilities. The Soft Armor Group
purchases cloth woven from these materials from three independent weaving
companies. The woven fabric is placed on tables, layered over patterns for a
particular component of a garment (for example, the front or back of a vest),
cut using computerized cutting machines and electric knives, and then are
stitched together. The Soft Armor Group utilizes several hundred patterns based
upon size, shape and style (depending upon whether the garment is a bullet-,
bomb- or fragmentation-resistant garment). KevlarTM, GoldFlexTM,
SpectrashieldTM, SpectraFibreTM and Twaron differ in their pliability, strength
and cost, such that the materials are combined to suit a particular application.
In the opinion of management, the Soft Armor Group enjoys a good relationship
with its suppliers of KevlarTM, SpectrashieldTM and SpectraFibreTM. If, however,
Du Pont or its European licensee were to cease, for any reason, to manufacture
and distribute the bullet-resistant fabrics, the Soft Armor Group would be
required to utilize other fabrics, and the specifications of some of the Soft
Armor Group's products would have to be modified. Until the Soft Armor Group
selected an alternative fabric and appropriate ballistic tests were performed,
its operations would be severely curtailed and the Soft Armor Group's financial
condition and results of operations would be adversely affected.
The Hard Armor Group manufactures all of its composite hard armor
materials. Products include individual ballistic tiles that measure 4" x 4" up
to composite ballistic panels that measure 36" x 36". Key ingredients in the
manufacture of hard armor materials include silicon carbide and aluminum, as
well as many of the materials used by the Soft Armor Group. While many of these
materials are supplied by sole sources, management believes that these materials
will continue to be available to the Hard Armor Group.
<PAGE>
The Armor Group purchases other raw materials used in the manufacture
of their products from a variety of sources and believes additional sources of
supply for these materials are readily available.
Research and Development DHB Armor Group's research and development
team has combined 50 years of notable ballistic research and development
experience, previously retained in various positions of responsibility by H.P.
White Laboratories, for a total of 23 years experience in an NIJ certification
environment. The research and development department is directed by Allen Price
who heads an eight man department which is responsible for certification and new
product development. Each location/facility for DHB Armor Group has on-site
ballistic laboratory test facilities, where percentages of certification
potentials are improved, and in certain cases individual lots can be tested for
quality control purposes. As soon as materials are received at these facilities
their ballistic integrity is assured which provides a continuous flow to the
manufacturing and production process.
Customers. The Soft Armor Group's products are sold to United States
law enforcement agencies and the military and internationally to governments and
distributors. Sales to domestic law enforcement agencies, security and
intelligence agencies, police departments, federal and state correctional
facilities, highway patrols and sheriffs' departments accounted for 44% and 42%,
respectively, of the Soft Armor Group's revenues in each of the years ended
December 31, 1998 and 1997. One customer, the New York City Police Department,
accounted for approximately 8% and 5% of PACA's sales for the years ended
December 31, 1998 and 1997, respectively. New York City Police Department
accounted for approximately 14% of Point Blank's sales for the year ended
December 31, 1998. Besides domestic customers, Point Blank also has
international customers which accounted for 6.24 % and 17% of Point Blank's
sales for the years ended December 31, 1998 and 1997 respectively. The loss of
any one customer would not be expected to have a significant impact on the Soft
Armor Group's continuing financial results, due to the Soft Armor Group's
constant submission of bids for new contracts. Sales to the United States armed
forces directly or as a subcontractor accounted for 5% and 8% of revenues for
the years ended December 31, 1998 and 1997, respectively.
Substantially all sales by the Soft Armor Group to the armed services
and other federal agencies are made pursuant to standard purchasing contracts
between PACA or Point Blank and the General Services Administration of the
Federal Government, commonly referred to as a "GSA Contract". The Soft Armor
Group also responds to invitations by military branches and government agencies
to bid for particular orders. GSA contracts accounted for approximately 25% and
28%, respectively, of the Soft Armor Group's sales for the year ended December
31, 1998 and 1997 .
PACA and Point Blank, as GSA Contract vendors, are obligated to make
all sales pursuant to such contracts at its lowest unit price. PACA's current
GSA Contract expires July 31, 2001, while Point Blank's GSA Contract is from
July 31, 1997 through July 31, 2001.
During the years ended December 31, 1998 and 1997, commercial sales
(i.e., sales to non-governmental entities) remained unchanged at 49% of the
Armor Group's revenues.
The Hard Armor Group sells composite armor for aircraft in the U.S.
military, which has already defined the need to armor a specific number of
additional aircraft. In addition to cargo aircraft sales, a major objective is
to add sales in the helicopter armor market. LAP's breast plate has been
selected by the U.S. Army for its' Land Warrior program.
<PAGE>
Land vehicle armor is currently dominated by metal systems, however,
there is an emerging recognition of the importance of weight reduction for land
vehicle armor which will create an opportunity for light weight ceramic armor
systems. Land vehicles represent a very large opportunity for LAP products.
Marketing and Distribution. The Armor Group employs 12 customer support
representatives, 5 regional sales managers and in addition has 40 independent
sales representatives who are paid solely on a commission basis. These personnel
and distributors are responsible for marketing the Soft Armor Group's products
to law enforcement agencies in the United States. These individuals and entities
often call upon personnel within these agencies who are responsible for making
purchasing decisions in order to provide information concerning the Armor
Group's products. Sales are made primarily through independent local
distributors. However, in areas in which there are no suitable distributors, the
Armor Group will fill orders directly.
Substantially all of the Soft Armor Group's advertising is directed
toward law enforcement agencies in the form of catalogs, trade magazines and
trade shows. The Soft Armor Group advertises its products primarily in law
enforcement trade magazines and at trade shows. During the years ended December
31, 1998 and 1997, advertising expenditures were approximately $465,000 and
$697,000, respectively.
Government and Industry Regulations and Standards. Bullet- and
bomb-resistant garments and accessories manufactured and sold by the Armor Group
are not currently the subject of government regulations. However, law
enforcement agencies and the military publish invitations for bidding which
specify certain standards of performance the bidders' products must meet. The
National Institute of Justice, under the auspices of the United States
Department of Justice, has issued a revised voluntary ballistic standard
(NIJ0101.03) for bullet-resistant vests of several categories. The Soft Armor
Group regularly submits its vests to independent laboratories for ballistic
testing under this voluntary ballistic standard and all of its products have, at
the time of manufacture, met or exceeded such standards in their respective
categories.
In addition, bullet-resistant garments and hard-armor inserts are
regularly submitted by the Armor Group for rating by independent laboratories in
accordance with a test commonly referred to as V50. This test involves exposing
the tested item to blasts of fragments of increasing velocity until 50% of the
fragments penetrate the materials. The tested item is then given a velocity
rating which may be used by prospective purchasers in assessing the suitability
of the Armor Group's products for a particular application. In addition, PACA,
Point Blank and PB Int'l perform similar tests internally.
Competition. The ballistic-resistant garment business is highly
competitive and the number of United States manufacturers is estimated to be
less than 20. Management is not aware of published reports concerning the
market, and most companies are privately held. Nevertheless, the Soft Armor
Group believes, based upon its experience in the industry, that the largest
manufacturer of ballistic-resistant garments in the United States is the Soft
Armor Group. In the future, the Company may face other and unknown competitors,
some of whom may have substantially greater financial, marketing and other
resources than the Company.
<PAGE>
The Soft Armor Group believes that the principal elements of
competition in the sale of ballistic-resistant garments are its innovative
design, price and quality. In dealings with law enforcement agencies and the
military, PACA, Point Blank, and PB Int'l bid for orders in response to
invitations for bidding which set forth specifications for product performance.
The Soft Armor Group believes its products are competitive as to both price and
quality with the products of its competitors having similar ballistic
capabilities. The Soft Armor Group's ability to remain competitive in pricing is
due to its relatively lower labor and production costs. In addition, the Company
believes that the Soft Armor Group enjoys a favorable reputation in the industry
with over 20 years of supplying federal, state and municipal governments and
agencies. These factors, combined with the financial resources made available to
the Soft Armor Group by the Company, which are expected to continue will reduce
interest expenses, improve production efficiencies and capacity, control
purchasing costs and permit the Soft Armor Group to viably compete.
The Hard Armor Group competes against traditional ceramic and metal
materials. The Hard Armor Group believes that its advantage lies in a
combination of ballistic performance and price. The primary competitive threats
would be high priced ceramic materials (e.g. boron carbide) becoming less
expensive and / or lower priced metals or ceramics (e.g. aluminum oxide) gaining
in ballistic performance.
The Armor Group's Backlog. As of February 28, 1999 the backlog is
approximately $16,200,000. As of December 31, 1998, the Armor Group had a
backlog of approximately $16,200,000, as compared to $4,500,000 as of December
31, 1997. Backlog at any one date is not a reliable indicator of future sales or
sales trends.
In addition to the backlog, which represents orders believed to be
firm, from time to time the Armor Group receives contract awards for municipal
orders which may be extended over an extended period of time. The actual dollar
amount of products to be delivered pursuant to this and similar contracts cannot
be accurately predicted and is generally excluded from reported backlog.
Employees. As of February 28, 1999, there were three officers of the
Armor Group, 18 persons employed in supervisory capacities, 287 employed for
manufacturing, shipping and warehousing, 19 technical/research development
personnel and 30 were office personnel. All of the Armor Group's employees are
employed full time. In the opinion of management, the Armor Group enjoys good
relationships with its employees.
DHB SPORTS GROUP.
On December 20, 1994, the Company, through a wholly-owned subsidiary,
acquired the NDL Assets for a cash payment of $3,080,000, and renamed the
acquiring subsidiary "NDL Products, Inc." NDL is engaged in business as a
manufacturer and distributor of specialized protective athletic equipment and
apparel. NDL's protective sports apparel and fitness products and related items
are sold under the brand names NDL(TM), Grid(TM), Magnesystems, Dr. Bone
Savers(TM), Hitman(TM) and Flex Aid(TM). NDL has hired new executives for sales
and marketing, production, and new product research and development. NDL has
moved its corporate, manufacturing and warehouse operations into a single
building in Oakland Park, Florida. See "Properties - NDL/Point Blank/OPI
Facility." In March 1996, the Company exchanged a total of 270,000 shares of its
<PAGE>
common stock with a value of approximately $579,000 to acquire 100% of the
common stock of Orthopedic Products Inc., a Florida corporation. This
transaction was accounted for by the purchase method of accounting. In August
1996, the Company commenced a lawsuit against the former shareholders of OPI and
as a result 45,250 shares of the Company's common stock were returned and
retired. OPI is engaged in the manufacture and sale of orthopedic products, and
the distribution and sale of general medical supplies to orthopedists,
orthopedic clinics, hospitals, sports medicine centers and orthopedic medical
practices.
DHB Sports Group's Marketing and Distribution. The Sports Group employs
6 sales executives who are responsible for sales throughout the United States,
Western Europe, Asia, the Middle East and Latin America, and supervise 30
independent sales representatives who are paid solely on a commission basis.
These representatives solicit customers, who are generally major retailers and
distributors. Sports Group also sells to local distributors and has a
telemarketing staff of 6.
DHB Sports Group's Potential Products Liability. Some of the products
manufactured or distributed by the Sports Group are used in situations where
serious personal injuries could occur, whether on account of the failure of the
Sports Group's products or otherwise. The Sports Group maintains product
liability insurance in the amount of $20,000,000 per occurrence and $22,000,000
in the aggregate, including legal fees, subject to a $5,000 deductible. There
can be no assurance that these amounts would be sufficient to cover payment of
potential claims, and there can be no assurance that this or any other insurance
coverage would continue to be available, or if available, that The Sports Group
would be able to obtain it at reasonable cost. Any substantial uninsured loss
would have to be paid out of The Sports Group's assets and could have a material
adverse effect on the Company's financial condition and results of operations.
Employees. As of February 28, 1999, there was one officer of the Sports
Group, 7 persons employed in supervisory capacities, 86 employed for
manufacturing, shipping and warehousing, and 19 were office personnel. All of
the Sports Group's employees are employed full time. In the opinion of
management, The Sports Group enjoys good relationships with its employees.
DHB ELECTRONICS GROUP
On February 9, 1998, the Company purchased the common stock of two
privately held Delaware Corporations for $4.8 million which was funded by loans
from Mr. Brooks. One of these corporations was Lanxide Electronic Components
Inc. and the other was Lanxide Armor Products Inc. LEC is a manufacturer of
unique and patented thermal management, packaging, and structural components for
the electronics industry. LEC has over seven years of experience in the design,
manufacture, and sale of products in the electronics industry. On May 29, 1998,
the Company acquired a Japanese subsidiary, DHB KK, for a cash payment of
$375,000. This Company markets LEC's products in Japan.
Products - LEC's current products are based on silicon carbide particle
reinforced aluminum composite technology applied to thermal management,
packaging, and structural components for the electronics industry. The silicon
carbide/aluminum composites provide a unique combination of desirable
properties: High thermal conductivity, low coefficient of thermal expansion,
light weight, and high stiffness. These properties are ideal for products useful
<PAGE>
in a wide variety of electronic applications: Power Module and Amplifier Heat
Sinks or Baseplates, microprocessor package lids and heat spreaders, printed
wiring board cores, carriers, package bases, and fluid cooled heat sinks. Power
Module and Amplifier Heat Sinks provide excellent heat dissipation and thermal
expansion characteristics which minimize thermal stresses. These features
provide both high performance and great reliability when used in this
application. Microprocessor Package Lids and Heat Spreaders have low cost,
provide heat dissipation, and matched expansion properties which are critical
characteristics for these components. LEC's lightweight Printed Wiring Board
Cores are used extensively for constraining surface mount assemblies, where they
provide improved reliability, excellent thermal performance, and weight
reductions of up to 70% of conventional cores. LEC's carriers provide high heat
dissipation and weight savings, while matching the thermal expansion of many
semiconductor devices and ceramic substrates. Major weight savings can be
obtained by substituting LEC's package bases for those made of conventional
materials for various package applications. For applications requiring higher
levels of heat dissipation, LEC produces unique flow-through heat sinks with
internal cooling passages for air or liquid cooling. LEC markets these products
under the trade names PRIMECOOL(TM) and PRIMEFLO(TM) composite components.
LEC's products are fabricated using patented technologies. Composites with high
loading of silicon carbide are made using the PRIMEX(TM) pressureless metal
infiltration technology ("infiltrated products"). Lower silicon carbide loadings
are achieved using the PRIMEX CAST(TM) composite casting technology ("cast
products"). Together these technologies provide a comprehensive range of SiC/A1
products to meet customer needs.
LEC's original business strategy was to address first the military markets to
establish a base business from which to attack the commercial/industrial
markets. This sequence offered a natural progression from low-to-moderate
volume, high value products to high volume, low cost products, compatible with
the need to develop production experience with a new process technology. The
strategy has been only partially successful: while LEC has achieved numerous
product adoptions in military applications, dramatic changes in DOD procurement
plans during the past several years have precluded the development of a
profitable business based solely on this market segment. LEC's current strategy
is to maintain and grow, where possible, its military business on a selective
basis, while directing its primary attention toward the commercial/industrial
markets. The commercial/industrial business has shown strong growth in the past
two years and this trend is projected to continue.
Competition and Customers. LEC's business strategy is based upon its unique
strengths. LEC has established itself as a market leader in SiC/A1 products. LEC
estimates its current business share to be approximately 50% of all SiC/A1
electronic products sold. LEC's leadership position will be key in maintaining
the level of growth necessary to pursue opportunities in areas currently
dominated by lower cost incumbent materials, such as copper and aluminum, as
well as competitively priced materials, such as copper/tungsten and
molybdenum/copper. LEC's position will also be critical in protecting its market
share from competitors attempting to "buy" new business as it develops.
LEC has the lowest production costs. Based on competitive bidding experience and
feedback from customers who have closely evaluated alternative SiC/A1 processing
methods, LEC's technology appears to offer the lowest production costs for high
volume applications. LEC will continue to aggressively drive down its costs
through improved manufacturing processes and yields to maintain its cost
advantage.
<PAGE>
LEC has received credibility from major product acceptances. In particular, to
name only a few, the selection of LEC's products by Toyota Motor Company and
Delco Electronics for their power modules and by Motorola for the Iridium
satellite network provides strong confirmation of product effectiveness for new
customers.
LEC's Marketing and Distribution. LEC employs a sales executive (along with two
customer service specialists) who are responsible for sales and marketing
throughout the United States, Europe, and Japan. Additionally, LEC utilizes 17
independent sales representatives who are paid on a commission basis. LEC
utilizes a website to market its products. Their address is
http//www.LEC-Inc.com.
In addition, LEC has obtained strong access to the Japanese market through LEC's
affiliate DHB KK which is located in Japan. DHB KK. has established customer
contacts with key accounts in Japan that taken together have the major share of
the power electronics market; these include almost all of the major electronic
and/or electronic components manufacturers in Japan. Product adoption has been
achieved, and most of the key customers are pursuing additional qualification
programs.
LEC's Potential Products Liability. Most of the products manufactured by LEC are
used as components in a wide variety of thermal management applications in the
electronics industry. LEC maintains product liability insurance in the amount of
$20,000,000 per occurrence and $22,000,000 in the aggregate, including legal
fees, subject to a $5,000 deductible. There can be no assurance that these
amounts would be sufficient to cover payment of potential claims, and there can
be no assurance that this or any other insurance coverage would continue to be
available, or if available, that LEC would be able to obtain it at reasonable
cost. Any substantial uninsured loss would have to be paid out of LEC's assets
and could have a material adverse effect on the Company's financial condition
and results of operations.
Backlog. As of February 28, 1999, LEC's backlog was approximately $1,600,000.
Backlog at any one date is not a reliable indicator of future sales or sales
trends.
Employees. As of August 31, 1998, there was one officer of LEC, Inc., 5 people
employed in supervisory capacities, 22 employed for manufacturing, shipping and
receiving. All of LEC's employees are employed full time. LEC shares the
administrative staff with LAP. In the opinion of management, LEC enjoys good
relationships with its employees.
<PAGE>
Segment Information
As described in detail above, the Company operates in three principal segments:
Ballistic-resistant equipment, Electronic Components and Protective
athletic/medical equipment. The Company designs, manufacturers and markets
products in both segments as described above. Financial information on the
Company's business segments was as follows:
<TABLE>
<CAPTION>
Net Sales 1998 1997
- - --------- ------------ -------------
<S> <C> <C>
Ballistic-resistant equipment .............. $ 28,695,127 $ 26,805,471
Electronic components ...................... 8,398,107 --
Protective athletic & medical equipment .... 8,388,544 7,094,808
------------ ------------
45,481,778 33,900,279
Less inter-segment sales ................... (3,647,353) (628,672)
------------ ------------
Consolidated Net Sales ..................... $ 41,834,425 $ 33,271,607
============ ============
Income from Operations
Ballistic-resistant equipment .............. $ 2,485,395 $ 2,017,281
Electronic components ...................... (782,908) --
Protective athletic & medical equipment .... 1,207,743 498,062
Corporate and Other (1) .................... (1,508,027) (1,039,316)
------------ ------------
Consolidated Operating Income .............. $ 1,402,203 $ 1,476,027
============ ============
Identifiable Assets (2)
Ballistic-resistant equipment .............. $ 23,743,604 $ 17,572,698
Electronic components ...................... 5,749,438 --
Protective athletic & medical equipment .... 8,844,627 6,322,150
------------ ------------
38,337,669 23,894,848
Corporate and Other ........................ 4,762,866 3,779,781
------------ ------------
Consolidated Net Assets .................... $ 43,100,535 $ 27,674,629
============ ============
</TABLE>
Foreign sales accounted for 12% and 10%, respectively of the total revenues for
the years ended December 31, 1998 and 1997. Foreign identifiable assets
accounted for 5% and 2% of the total assets at December 31, 1998 and 1997.
(1) Corporate and Other includes corporate general and administrative expenses
(2) Corporate assets are principally cash, marketable securities, and deferred
charges
<PAGE>
Item 2. PROPERTIES
Corporate Headquarters. On January 17, 1996, the Company purchased a
one-story building on a two acre lot at 11 Old Westbury Road, Old Westbury, New
York, and relocated its corporate headquarters to that site on or about January
19, 1996.
PACA. PACA leases 23,400 square feet of office, manufacturing and
warehouse space at 148 Cedar Place, Norris, Tennessee from Leonard Rosen,
President of PACA, at a present annual rental of $43,200, plus real estate taxes
of approximately $4,800 annually. The Company leases this space on a month to
month basis. In the opinion of management, PACA's facilities are adequate for
its current needs and for its needs in the foreseeable future. Management
believes that the terms of the lease are at the current market price that would
be obtained from an unrelated party.
NDL/Point Blank/OPI Facility. NDL Products leases a 67,000 square foot
office and warehouse facility (the "Oakland Park Facility") located at 4031 N.E.
12th Terrace, Oakland Park, Florida 33334, from V.A.E. Enterprises ("V.A.E."), a
partnership controlled by Mrs. Terry Brooks, wife of Mr. David H. Brooks, and
beneficially owned by Mr. and Mrs. Brooks' minor children. V.A.E. purchased the
Oakland Park facility as of January 1, 1995. Point Blank and OPI entered into a
net-net lease for a portion of the space in the Oakland Park facility. Annual
aggregate base rental is $480,000 and is scheduled to increase by 4% per year.
NDL Products, Point Blank, and OPI, as lessees, are responsible for all real
estate taxes and other operating and capital expenses. Management believes that
the terms of the lease are at the current market price that would be obtained
from an unrelated party. In April 1997, the Company entered a five year lease
for a 60,000 square foot warehouse adjacent to the Oakland Park, Florida
facility with an annual rental of approximately $210,000. This warehouse is
located at 1201 NE 38th Street Oakland Park, Florida.
Point Blank International Facility. PB Int'l leases a 5,700 square foot
office and warehouse facility located at Rue Leon Frederiq, 14, 4020 Liege,
Belgium. This space is occupied pursuant to a three year lease with options to
renew for six years and annual rentals of approximately, $42,000.
Lanxide Facility. LAP and LEC lease an 82,000 square foot office and
warehouse facility located at 1300 Marrows Road, Newark, Delaware and a 3,500
square foot ballistic testing range at Forge Dr., Newark, Delaware which is
adjacent to the manufacturing facility. The Marrow's road space is occupied
pursuant to a lease which provides for annual base rentals of $420,000 and
expires in March 2001. In January, 1999 the sublessor filed for bankruptcy
protection and the Trustee has not yet decided on the assumption or rejection of
the LAP or LEC leases.
Item 3. PENDING LITIGATION
On or about July 1998, DL Cromwell Investments Inc. filed an action
against the Company in the United States District Court Eastern Division of New
York in connection with the breach of a consulting agreement. The Company and
its attorneys believe the case is meritless and on January 8, 1999 the Court
dismissed this action.
<PAGE>
On or about January 20, 1999, DL Cromwell Investments, Inc. commenced
an action against DHB Capital Group Inc. and David Brooks in the Supreme Court
of New York, County of Nassau. The Plaintiff claims it was fraudulently induced
to enter into a consulting agreement with the defendant and for breach of the
consulting agreement and a supplemental agreement and for quantum merit for the
fair and reasonable value of services rendered. The Company believes this case
is meritless and intends to vigorously defend the claim and pursue a
counterclaim.
The Company initiated a lawsuit against Bioflex Medical Magnetics for
patent infringement, unfair competition under federal and state law and breach
of contract. Bioflex Medical Magnetics commenced an action against NDL and DHB
Capital in the US District Court for the Southern District of Florida. Bioflex
claims patent and trademark infringement, as well as, breach of contract. NDL
has filed a claim with its general liability insurance carrier, and they
acknowledge that it is their duty to defend this action. At this time,
discussions regarding a comprehensive settlement of these two actions are
ongoing, which if completed, would provide for a net payment to NDL/DHB from the
Bioflex parties. However, no assurance can be given that the above settlement
will be completed on favorable terms to the Company.
Thomas "Hitman" Hearns filed a complaint against NDL Products in the
US District court for the Eastern District of Michigan alleging unfair
competition, and violation of Mr. Hearn's right of publicity and seeking
cancellation of NDL's "Hitman" trademark. NDL has filed a claim with its general
liability insurance carrier. Due to the preliminary status of this litigation,
counsel to DHB is unable to predict the outcome of this litigation. In the
opinion of management of DHB, the ultimate outcome of this litigation will not
have a material adverse effect on the financial condition of DHB.
Barry Finn, the former president of NDL Products Inc., obtained a
judgment in the amount of $330,825 against NDL Products Inc. and DHB Capital
Group Inc. in March 1999. The Company intends to vigorously appeal the Decision
and in the opinion of counsel, the appellate issues identified appear to favor
NDL.
The Company is involved in other minor litigation, none of which is
considered by management to be material to its business or, if adversely
determined, would have a material adverse effect on the Company's financial
condition.
Item 4. Submission of Matters to a Vote of Security Holders. There was no
meeting of Security Holders in 1998.
<PAGE>
Part II
Item 5. Market for Common Equity and Related Stockholder Matters.
The Common Stock of the Company has been traded on the NASDAQ Small Cap
MarketTM since September 4, 1998 and traded under the symbol "DHBT". Prior to
that it was traded on over-the-counter market ("OTC Bulletin Board") since
September 22, 1993. Prior thereto, there was no public market for the Company's
securities. Commencing on June 8, 1994, the Company was listed on the Boston
Stock Exchange and traded under the symbol "DHB."
Low High
--- ----
1997: 1st Quarter 1.75 3.00
2nd Quarter 1.75 4.25
3rd Quarter 3.31 6.00
4th Quarter 3.25 4.375
1998 1st Quarter 3.88 5.063
2nd Quarter 4.00 4.500
3rd Quarter 4.00 4.9375
4th Quarter 4.5625 5.6875
1999 1st Quarter 3.25 5.25
(through March 20, 1999)
No cash dividend were declared for the last two years. If the
Company generates earnings, the Company will retain such earnings for further
development of its business. The payment of cash dividends in the future will
depend upon the earnings and financial requirements of the Company and all other
relevant factors, including approval of such dividends by the Board of
Directors.
The number of holders of record of the Company's Common Stock on March
22, 1999 was 144; however, the number of holders of record includes several
brokers and depositories for the accounts of their customers. The Company
estimates that shares of Common Stock are held by approximately 1,600 beneficial
owners.
Recent Sales of Unregistered Securities
In July and August 1998, the Company sold 60,000 shares of common stock
in a private placement to accredited investors for proceeds of $240,000. These
proceeds were used for general working capital requirements. The offering price
per common share was $4.00. There was no underwriting discounts or commissions
and the Company relied on the exemption to registration provided by Regulation D
pursuant to the Securities Act of 1933, as amended.
In November and December 1998, the Company sold 686,500 shares of
common stock in a private placement to accredited investors for proceeds of
$2,506,000. These proceeds were used for general working capital requirements.
The offering price per common share was $4.00. A commission of $40,000 was paid
and the Company relied on the exemption to registration provided by Regulation D
pursuant to the Securities Act of 1933, as amended.
<PAGE>
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following analysis of the Company's financial condition and results
of operations should be read in conjunction with the financial statements,
including the notes thereto, contained elsewhere in this document.
General
The Company is a holding company which conducts business through its
wholly-owned subsidiaries organized in three divisions. The Armor Group which
develops, manufactures and distributes bullet and projectile resistant garments,
and DHB Sports Group, which engages in the manufacture and distribution of
protective athletic equipment and apparel and the manufacture of orthopedic
products and is a distributor of general medical supplies. The Electronic Group
which engages in the manufacture and distribution of electronic components. The
Armor Group's products are sold both nationally and internationally. Sales are
directed primarily to law enforcement agencies and military services. Sales to
domestic law enforcement agencies, including government, security and
intelligence agencies, police departments, federal and state correctional
facilities, highway patrol and Sheriff's departments, comprise the largest
portion of the Armor Group's business. Accordingly, any substantial reduction in
governmental spending or change in emphasis in defense and law enforcement
programs could have a material adverse effect on the Armor Group's business. The
Company also owns a minority interest in several other companies, some privately
held and some publicly held, including the telecommunications, health care, and
electronics. The management of the Company is engaged in the review of potential
acquisitions and in providing management assistance to the Company's operating
subsidiaries.
The Company commenced operations in November 1992 by acquiring the
outstanding common stock of PACA, a manufacturer and distributor of bullet-proof
garments and accessories. From the acquisition of PACA through December 20,
1994, PACA was the Company's only source of revenue from operations. Thereafter,
the Company purchased a business each year and thus to date, NDL, Point Blank,
OPI, PB Int'l, LAP, LEC and DHB KK are also sources of revenue from operations.
The discussion that follows must be read in conjunction with the
financial statements, including the notes thereto.
Results of Operations
Year Ended December 31, 1998, compared to year ended December 31, 1997.
Consolidated net sales of the Company for the year ended December 31, 1997
increased by $8,562,818 to $41,834,425. This increase was the result of the
acquisitions made this year, as well as, increased growth in sales volume for
Point Blank and NDL. Gross profit in 1998 increased $3,349,932 to $14,467,614
The Company's gross profit percentage increased from 33% in 1997 to 35% in 1998
due to increased sales volumes as well as a change in the product mix being sold
that yield higher margins. The Company had a consolidated net income of
approximately $130,000 for 1998 as compared to a consolidated net income of
approximately $1,541,000 for 1997. The decrease in net income in 1998 was
primarily due to the acquisition of Lanxide Armor Products and Lanxide
Electronic Components. The Company has cut their operating cost significantly
throughout 1998 and believes these companies will not impact net income as
negatively in 1999.
<PAGE>
The Company's selling, general and administrative expenses ("S, G & A,"
expenses") for 1998 increased to $13,065,411 from $9,641,655 in 1997. As a
percentage of net sales, the S,G, & A expenses were 31% in 1998 compared to 28%
in 1997. This increase of approximately, $3,424,000 was due mainly to the
acquisitions made during 1998.
Interest expense, net of interest income for 1998 increased to
$1,278,867 for 1998 from $339,754 in 1997 due to an increase in borrowing of
approximately $11,000,000 associated with the purchase of LAP and LEC.
Year Ended December 31, 1997, compared to year ended December 31, 1996.
Consolidated net sales of the Company for the year ended December 31, 1997
increased by $9,892,909 to approximately $33,271,607. This increase was
primarily due to the increased sales volume for Point Blank, PACA, and NDL.
Gross profit in 1997 increased $6,766,725 to $11,117,682. The Company's gross
profit percentage increased from 19% in 1996 to 33% in 1997. This increase was
the result of improved production efficiencies, as well as, increased sales
volume. The Company had a consolidated net income of approximately $1,541,000
for 1997 as compared to a consolidated net loss of approximately $4,866,000 for
1996.
During the last quarter of 1996, the Company instituted major changes
at their Florida facility which houses Point Blank, NDL and OPI. New management
was put in place in October 1996, including a new production manager. Pricing
was reviewed and better controls where put into place to yield higher profit
margins. The Company had net income for the year ended December 31, 1997 of
$1,540,809 as compared to a net loss of $4,865,872 for the year ended December
31, 1996. This turn around was due to the successful implementation of the
Company's strategic plan put in place in late 1996.
The Company's selling, general and administrative expenses ("S,G&A
expenses") for 1997, increased to $9,641,655 from $8,668,950 in 1996. As a
percentage of net sales, the S,G & A expenses were 28% in 1997 compared to 37%
in 1996. This increase of approximately $1.5 million was due mainly to increased
selling costs including sales commissions, show expenses and increase
advertising and travel expenses associated with sales.
In 1997, the Company continued aggressive measures to regain its market
share by increasing its marketing efforts. This amounted to 8% of the S,G&A
expenses for 1996 as compared 20 % of the S,G&A expenses for 1997.
Interest expense, net of interest income, for 1997, increased to
$339,754 from $327,347 in 1996 due to a decline of interest income on the
Company's cash balances.
Liquidity and Capital Resources.
The Company's primary capital requirements over the next twelve months
are to assist PACA, Point Blank, NDL, OPI, PB Int'l, LAP, LEC and DHB KK, in
financing their working capital requirements. PACA, Point Blank, PB Int'l, LEC
and NDL sell the majority of their products on 60 - 90 day terms, and OPI, LAP
and DHB KK sells the majority of its products on 30-60 day terms, and working
capital is needed to finance the receivables, manufacturing process and
inventory. Working capital at December 31, 1998 was $18,982,541 compared to
$13,621,014 at December 31, 1997 and its ratio of current assets to current
liabilities was 2.46:1 and 2.59:1, respectively, on such dates.
<PAGE>
Cash, cash equivalents and marketable securities totaled $1,048,445 at
December 31, 1998 compared to $2,586,690 at December 31, 1997. The cash
generated by the net income for the year ended December 31, 1997, was utilized
to repurchase the Company's common stock in the open market which amounted to
approximately $2,145,000 for the year ended December 31, 1997. The Company has
repurchased and retired an additional 700,995 shares of its common stock in the
open market for approximately $2,770,002 in 1998. The Company has a loan of
$4,175,000 from the Bank of New York coming due in May 1999, bearing interest at
6.965% per year. This is a $1,500,000 increase over last year's line of credit.
There is no assurance that the Company will be able to roll over such loans as
they become due. The Company expects to renew this loan, at prevailing interest
rates, when it becomes due.
The Company's principal commitments at December 31, 1997 consisted of
obligations under their operating leases for its facilities.
The Company's capital expenditures for 1998 were $1,423,267 as compared
to $801,150 for 1997. The Company purchased LAP and LEC in February 1998 for
$4.8 million dollars, DHB KK in May 1998 for $375,000 and PB Int'l in February
1997 by issuing stock in lieu of a cash payment.
Special Note Regarding Forward-Looking Statements
This Annual Report contains certain forward-looking statements and information
relating to the Company that are based on the beliefs of the Company's
management as well as assumptions made by and information currently available to
the Company's management. When used in this document, the words "anticipate,",
"believe," "estimate", "expect", "going forward", and the similar expressions,
as they relate to the Company or Company management, are intended to identify
forward-looking statements. Such statements reflect the current views of the
Company with respect to future events and are subject to certain risks,
uncertainties and assumptions. Should one or more of these risks or
uncertainties materialize, or should the underlying assumptions prove incorrect,
actual results may vary materially from those described herein as anticipated,
believed, estimated or expected. The Company does not intend to update these
forward-looking statements.
Item 7. Financial Statements: See Index to Consolidated Financial Statements
Appearing in the Consolidated Financial Statement Annexed Hereto.
Item 8. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure.
On January 23, 1998, the firm of Paritz and Company P.A. was engaged as
the Company's principal certifying accountant, replacing Capraro, Centofranchi,
Kramer & Co., P.C. who resigned December 9, 1997.
Part III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.
The Directors serve for a term of one year following their election at
the Annual Meeting of Shareholders, and until their successors have been elected
and qualified. The officers serve at the discretion of the Board of Directors.
<PAGE>
Directors and Executive Officers
- - --------------------------------
David H. Brooks, age 44, has served as the Chairman and Chief Executive
Officer of the Company since its inception in 1992. In September 1998, Mr.
Brooks resigned his position as CEO and COB as a condition for listing on
NASDAQ. He is currently serving as Co-Chairman of the Board. Mr. Brooks has been
the Chairman of the Board, President and a Director of Brooks Industries of
L.I., Inc. ("Brooks Industries"), since October 1988, a New York corporation of
which he is the sole shareholder and through which he makes investments. Brooks
Industries engages in the venture capital business and in securities trading.
Mr. Brooks received a bachelor of science degree in accounting from New York
University in 1976. Since that time he has been engaged principally as an
investor for his own account.
Mary Kreidell, age 46, has served as Treasurer, Secretary, and a
Director of the Company since its inception. She has functioned in various
positions within the Company's in operations and finances. Mrs. Kreidell became
a Certified Public Accountant in 1991. She worked for Israeloff, Trattner & Co.
CPA'S, P.C., a certified public accounting firm, for four years prior thereto.
She presently serves on the audit committee.
Leonard Rosen, age 61, is a founder of PACA and has served as its
President since its inception in 1975. He is actively involved in all facets of
PACA's operations, from production to sales. Mr. Rosen has experience in the
apparel industry for over 35 years. He worked closely in the research and
development of ballistic-resistant soft body armor and helmets with the Federal
Government, including serving as a charter member of the committee that
conceived the National Institute of Justice "0l" Standard for ballistic body
armor.
Sandra Hatfield, age 45, has been President of Point Blank since
October 1996. For more than 5 years prior thereto, she was the Vice President of
Production at PACA.
Joseph Giaquinto, age 35, has been President of NDL since March, 1995.
For more than 7 years prior thereto, he was a Vice President of Sales for
Tru-Fit Marketing, of Boston, Massachusetts.
Gary Nadelman, age 47, has been the president of Synari, Inc., of New
York, NY, a privately held manufacturer and distributor of women's sportswear
and other apparel, for more than 5 years. Mr. Nadelman has been a director of
the Company since 1995 and he became Co-Chairman of the Company in September
1998. He presently serves on the audit committee.
Morton A. Cohen, age 63, has over ten years experience in venture
capital and over twenty-five years experience in the public securities industry,
both as a securities analyst and a investment banker. Also, he has successfully
managed several emerging growth companies. Mr. Cohen has been Chairman,
President and Chief Executive Officer of Clarion Capital Corp. since 1982. Mr.
Cohen served as Governor of the Montreal Stock Exchange, is a Chartered
Financial Analyst and holder of a M.B.A. from the Wharton School of Business of
the University of Pennsylvania. Mr. Cohen was a member of the Small Business
Investment Advisory of Small Business Investment Companies and is a member of
the Small Business Investment Advisory Council. He is the Chairman of Monitek
Technologies, Inc. (NASDAQ), Chairman of Cohesant Technologies (NASDAQ) and
Director of Gothic Energy (NASDAQ) and a director of Zemex Corp (NYSE). Mr.
Cohen has been a director of the Company since 1996. He presently serves on the
audit committee.
<PAGE>
Robert Beckel, age 49, has had an active consulting practice advising
corporations, trade associations and labor unions on communication strategy,
consensus-building and public policy for the last twelve years. He is one of
Washington's leading political analysts, the on-air American political analyst
for Britian's Independent Television Network. He also is the co-host of CNN's
Crossfire Sunday and a political analyst for CBS's This Morning Show. Mr.
Beckel became a director in January 1998.
Because of the relatively small size of the Company, the loss of a
senior executive may have a materially adverse effect upon the Company until a
suitable replacement can be found.
Item 10. Executive Compensation.
Summary Compensation Table. The following table sets forth certain
summary information regarding the compensation of the executive officers whose
total salary and bonus for the year ended December 31, 1998, and 1997, exceeded
$100,000:
<TABLE>
<CAPTION>
Long-term
Compensation
Annual Compensation Awards
-------------------------------------- ----------------
Other
Annual underlying Securities
Name and Principal Position Year Salary(1) Bonus Compensation Options/SAR's(4)
--------------------------- ---- --------- ----- ------------ ----------------
<S> <C> <C> <C> <C> <C>
David Brooks,(2) 1998 50,000
Co-Chairman 1997 191,917 0 0 0
Mary Kreidell 1998 100,000 0 0 0
Chief Financial Officer 1997 100,000
Sandra Hatfield 1998 149,080 0 0 0
President of Point Blank 1997 100,330
Joseph Giaquinto President of 1998 107,886 0 0 0
NDL 1997 100,000
Leonard Rosen,(3) President 1998 163,750 0 0 0
of PACA 1997 147,596
</TABLE>
- - ------
(1) Although certain officers receive certain benefits, such as auto allowances
and expense allowances, the value of such perquisites did not exceed the
lesser of $50,000 or 10% of the respective officers' salary and bonus.
(2) Certain warrants were awarded to Mrs. Terry Brooks in 1994 and Mr. David
Brooks in 1996; see "Employment Agreements" and "Certain Transactions."
(3) Mr. Rosen is the lessor of PACA's premises in Norris, Tennessee. See
"Properties" and "Certain Transactions." The Company does not consider the
lease payments to be compensation, because they are not in excess of the
fair market value of the lease.
<PAGE>
(4) In October 1995, the Company adopted a plan (the "1995 Stock Option Plan"
or the "Plan") pursuant to which the Board of Directors or a committee (the
"committee") of the Board is authorized to award up to 3,500,000 shares of
Common Stock, after giving effect to the 50% stock dividend paid on July
16, 1996, to selected officers, employees, agents, consultants and other
persons who render services to the Company. The options may be issued on
such terms and conditions as determined by the Board or Committee, and may
be issued so as to qualify as incentive stock options under Internal
Revenue Code Section 422A. The directors who are authorized to award
options are not eligible to receive options under the Plan. The Company has
filed a registration statement with respect to the Plan, and shares
("Option Shares") of Common Stock acquired under the Plan are eligible for
resale by non-affiliates without further registration under the Act; Option
Shares acquired by affiliates of the Company are subject to the
registration requirements of the Act.
Employment Agreements. Mr. Brooks, Co-Chairman of the Board of DHB
Capital Group Inc. is employed pursuant to a five year employment agreement
which was entered into April 1, 1996. Pursuant to the agreement Mr. Brooks
receives an annual salary of $250,000 through April 1997, with annual increases
of $25,000. The terms of Mr. Brooks' contract provides for 750,000 warrants per
year exercisable at $2.33 for five years. As the Company has businesses in
Florida and requires Mr. Brooks to spend considerable time there, this contract
includes provisions for certain of his Florida living expenses. In September
1998, Mr. Brooks' employment agreement was amended to reflect his position as
Co-chairman. There were no other changes to Mr. Brooks' employment agreement.
Mr. Rosen is employed pursuant to a five-year employment agreement with
PACA which was entered into at the time the Company acquired PACA, i.e.,
November 6, 1992. Pursuant to the agreement, Mr. Rosen receives an annual base
salary of $115,000 in 1993 with annual increases, plus certain fringe benefits.
Mr. Rosen is currently employed under the same terms and conditions.
Mr. Giaquinto, had a three year employment contract entered into in
February 1995, providing for an annual base salary of $100,000 and options to
purchase 49,500 shares of common stock at a price of $1.33 per share exercisable
at the rate of not more than 16,500 shares per year. Mr. Giaquinto is currently
employed under the same terms and conditions.
In 1997, the Company entered into an employment agreement with a
salesman for DHB Armor Group, expiring in 2000 with an annual salary of $100,000
plus certain fringe benefits.
Stock Warrants. The Board of Directors granted during the year ended
December 31, 1997, 50,000 warrants exercisable at $2.00 for three years to the
president of Point Blank, Sandra Hatfield. No additional stock options, warrants
or similar securities, rights or interests to any of the executive officers of
the Company listed in the Summary Compensation Table above, no options, warrants
or similar securities, rights or interests were exercised by any such executive
officers with the exception of Joseph Giaquinto, who exercised 49,500 warrants
in 1998.
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors and executive officers, and persons who own more than ten
percent of a registered class of the Company's equity securities to file with
the Securities and Exchange Commission initial reports of ownership and reports
of changes of ownership of Common Stock and other equity securities of the
Company.
<PAGE>
To the Company's knowledge, based solely on review of the copies of
such reports furnished to the Company and written representations that no other
reports were required during the fiscal year ended December 31, 1997, all
Section 16(a) filing requirements applicable to its officers, directors and
greater-than-ten-percent beneficial owners were complied with.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth the beneficial ownership of the
Company's Common Stock as of March 22, 1999, for (i) each person known by the
Company to beneficially own more than five percent of the shares of outstanding
Common Stock, (ii) each of the executive officers listed in the Summary
Compensation Table in "Executive Compensation" and (iii) all of the Company's
executive officers and directors as a group. Except as otherwise indicated, all
shares are beneficially owned, and investment and voting power are held by the
persons named as the owners.
<TABLE>
<CAPTION>
Number of Shares
Name Address Beneficially Owned Percent Owned (1)
---- ------- ------------------ -----------------
<S> <C> <C> <C>
David Brooks (2,3) 11 Old Westbury Rd 17,750,6002 55%
Old Westbury, NY 11568
Jeffrey Brooks (3) 1500 South Ocean Blvd. 2,158,038 6%
Boca Raton, FL 33234
Mary Kreidell 11 Old Westbury Rd 84,3754 *
Old Westbury, NY 11568
Leonard Rosen 148 Cedar Place 120,1425 *
Norris, TN
Sandra Hatfield 4031 NE 12th Terrace Oakland 50,0006 *
Park, Fl 33334
Joseph Giaquinto 4031 NE 12th Terrace Oakland 63,800 *
Park, Fl 33334
Mark Mortenson 1300 Marrows Road Newark, DE 5,000 *
19714
Gary Nadelman 11 Old Westbury Rd 235,000 *
Old Westbury, NY
Morton Cohen (7) 11 Old Westbury Rd 450,0007 *
Old Westbury, NY
All officers and Directors as a group 18,762,9178 58% (8)
</TABLE>
<PAGE>
1. Based upon 25,627,440 shares outstanding as of March 22, 1999 increased
by the currently exercisable options and warrants of 6,362,500 shares
of common stock held by directors and officers for an aggregate total
of 31,989,940 shares. Currently exercisable options or warrants are
those which are exercisable within 60 days after the date of this form
10-KSB.
2. Consists of 7,500,600 shares owned by Mr. Brooks and 4,500,000 owned by
his wife as custodian for his minor children, and 4,250,000 shares
which may be acquired by Mrs. Brooks upon exercise of a currently
exercisable warrant and 1,500,000 shares which may be acquired by Mr.
Brooks at $2.33 per share upon exercise of a currently exercisable
warrant. All of these shares are in a voting trust for three years with
independent trustee who votes the shares according the votes of the
other shareholders.
3. Messrs. Jeffrey Brooks and David H. Brooks are brothers. Each disclaims
beneficial ownership of the shares owned by the other.
4. Includes 75,000 shares acquirable under currently exercisable warrants
awarded to Mrs. Kreidell.
5. Includes 75,000 shares acquirable under currently exercisable warrants
awarded to Mr. Rosen; does not include 4,350 shares owned by Mr.
Rosen's wife, as to which Mr. Rosen disclaims beneficial ownership.
6. Includes 50,000 shares acquirable under currently exercisable warrants
awarded to Mrs. Hatfield.
7. These shares are owned by Clarion Capital Corporation and Clarion
Partners of which Morton Cohen is the director, President, CEO and
Chairman.
8. Includes 5,950,000 currently exercisable warrants of common stock held
by directors and officers.
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company has funded certain of its acquisitions through the use of
term loans from Mr. David H. Brooks, Chairman of the Board of the Company, and
Mrs. Terry Brooks, his wife. On February 6, 1998 Mr. Brooks loaned the Company
$6 million, $4.8 million of which was connection with the purchases of LAP and
LEC. The balance of the shareholder loans at December 31, 1998 is $11,527,604.
These shareholders loans expire in April 2000 bearing interest at 12% per annum.
The interest paid on shareholder loans to date is $475,447. In 1998, the Company
granted warrants to purchase 500,000 shares of Common Stock, at a price of $3.50
per share and expiring in 2001, to Mrs. Brooks in consideration for the
outstanding and additional loans lent to the Company in February 1998. The
Company entered into an employment agreement in April 1996 with Mr. Brooks, See
- - - "Employment Agreements".
<PAGE>
NDL, Point Blank and OPI operate at a 67,000 square foot office and
warehouse facility (the "Facility") located at 4031 N.E. 12th Terrace, Fort
Lauderdale, Florida 33334, which it leases from V.A.E. Enterprises ("V.A.E."), a
partnership controlled by Mrs. Brooks and beneficially owned by Mr. and Mrs.
Brooks' minor children, which purchased the Facility on or about January 1,
1995. The lease is a 5-year net-net lease expiring in 2000; with annual base
rental is $480,000 and is scheduled to increase by 4% per year. The Company, as
lessee, is responsible for all real estate taxes and other operating and capital
expenses. In the opinion of management, the rental is fair and reasonable and is
approximately at the same rate that could be obtained from an unaffiliated
lessor for property of similar type and location.
PACA leases 23,400 square feet of office, manufacturing and warehouse
space at 148 Cedar Place, Norris, Tennessee from Leonard Rosen, President of
PACA, at a present annual rental of $43,200, plus real estate taxes of
approximately $4,800 annually. The Company is currently leasing this space on a
month to month basis. In the opinion of management, the rental is fair and
reasonable and is approximately at the same rate that could be obtained from an
unnaffiliated lessor for property of similar type and location. In the opinion
of management, PACA's facilities are adequate for its current needs and for its
needs in the foreseeable future.
Item 13. Exhibits and Reports on Form 8K: See Exhibits annexed hereto after the
financial statements.
<PAGE>
DHB CAPITAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS INDEX
CONTENTS
Page
----
INDEPENDENT AUDITORS' REPORT F-1
Consolidated Balance Sheets as of December 31, 1998 and 1997 F-2
Consolidated Statements of Operations for the years ended
December 31, 1998 and 1997 F-3
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1998 and 1997 F-4
Consolidated Statements of Cash Flows for the years ended December 31,
1998 and 1997 F-5
Consolidated Statements of Comprehensive Income for the year ended
December 31, 1998 and 1997 F-6
Notes to the Consolidated Financial Statements F-7 - F-16
Schedule II Valuation and Qualifying Accounts F-17
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors of
DHB Capital Group Inc.
We have audited the accompanying consolidated balance sheets of DHB Capital
Group Inc. and Subsidiaries as of December 31, 1998 and 1997 and the related
consolidated statements of operations, stockholders' equity comprehensive income
and cash flows for the years then ended. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall consolidated
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of DHB
Capital Group Inc. and Subsidiaries as of December 31, 1998 and 1997 and the
consolidated results of its operations and its cash flows for the year ended
December 31, 1998 and 1997 in conformity with generally accepted accounting
principles.
/s/Paritz and Company P.A.
- - --------------------------
Paritz and Company P.A.
Hackensack, New Jersey
March 19, 1999
F-1
<PAGE>
<TABLE>
<CAPTION>
DHB CAPITAL GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
---------------------------
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents ............................ $ 519,117 $ 882,884
Marketable securities ................................ 529,328 1,703,806
Accounts receivable, less allowance for doubtful
accounts of $507,739 and $353,320 ................. 8,997,354 6,285,181
Inventories .......................................... 20,001,547 12,543,474
Prepaid expenses and other current assets ............ 1,948,347 727,421
----------- -----------
Total Current Assets ................................. 31,995,693 22,142,766
----------- -----------
PROPERTY AND EQUIPMENT ............................... 7,104,233 2,374,085
----------- -----------
OTHER ASSETS
Intangible assets, net ............................... 1,271,668 588,017
Investments in non-marketable securities ............. 1,688,750 1,688,750
Deferred tax assets .................................. 455,300 455,300
Deposits and other assets ............................ 584,891 425,711
----------- -----------
Total Other Assets ................................... 4,000,609 3,157,778
----------- -----------
TOTAL ASSETS ......................................... $43,100,535 $27,674,629
=========== ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
<S> <C> <C>
Note payable ......................................... $ 4,175,000 $ 2,675,000
Current maturities of long term debt ................. 159,607 65,192
Accounts payable ..................................... 6,233,131 5,072,929
Accrued expenses and other current liabilities ....... 2,445,414 708,631
----------- -----------
Total Current Liabilities ............................ 13,013,152 8,521,752
----------- -----------
LONG TERM LIABILITIES
Long term debt, net of current maturities ............ 387,512 111,258
Note Payable - stockholder ........................... 11,527,604 1,300,000
----------- -----------
Total Long Term Debt ................................. 11,915,116 1,411,258
----------- -----------
Total Liabilities .................................... 24,928,268 9,933,010
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY ................................. 18,172,267 17,741,619
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ........... $43,100,535 $27,674,629
=========== ===========
</TABLE>
See accompanying notes to financial statements
F-2
<PAGE>
<TABLE>
<CAPTION>
DHB CAPITAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For The Years Ended December 31,
1998 1997
------------ ------------
<S> <C> <C>
Net sales .......................................... $ 41,834,425 $ 33,271,607
Cost of sales ...................................... 27,366,811 22,153,925
------------ ------------
Gross Profit ....................................... 14,467,614 11,117,682
Selling, general and administrative expenses
13,065,411 9,641,655
------------ ------------
Income before other income (expense) ............... 1,402,203 1,476,027
------------ ------------
Other Income (Expense)
Interest expense, net of interest income ........... (1,278,867) (339,754)
Other income ....................................... 40,393 51,599
Settlement of employment contract .................. (220,000) --
Loss on holding of equity investments .............. -- 372,000
Realized gain (loss) on sale of marketable
securities ......................................... 154,155 (72,175)
Unrealized gain on marketable securities ........... 52,967 449,702
------------ ------------
Total Other Income (Expense) ....................... (1,251,352) 461,372
------------ ------------
Income before income taxes ......................... 150,851 1,937,399
Income taxes ....................................... 21,049 396,509
------------ ------------
Net Income ......................................... $ 129,802 $ 1,540,890
============ ============
Earnings per common share
Primary ............................................ $ 0.005 $ 0.06
============ ============
Fully Diluted ...................................... $ 0.004 $ 0.05
============ ============
Weighted average number of common share outstanding:
Primary ............................................ 24,982,394 24,837,771
============ ============
Fully Diluted ...................................... 29,685,262 28,053,959
============ ============
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
DHB CAPITAL GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
Number of Additional Common Stock Foreign
Common Par Paid-in Subscription Currency
Shares Value Capital Receivable Translation
------ ----- ------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Balance January 1, 1997 23,146,008 $23,146 $17,956,030 $(227,500) $ 0
Net Income for the year ended 12-31-97 - - - - -
Issuance of stock to purchase subsidiary 666,000 666 999,334 - -
Stock issued to purchase lease 144,200 144 209,856 - -
Sale of common stock 1,825,000 1,825 3,639,004 227,500 -
Stock issued for services 13,500 13 67,487 - -
Exercise of warrants 100,000 100 149,900 - -
Stock issued in settlement of a lawsuit 75,000 75 149,925 - -
Stock returned in settlement of a lawsuit (38,625) (38) (73,596) - -
Effect of foreign currency translation - - - - (6,135)
Purchase of treasury stock (583,859) (584) (2,144,833) - -
--------- ----- ----------- --------- ---------
Balance December 31, 1997 25,347,224 $ 25,347 $ 20,953,107 0 $ (6,135)
Net Income for the year ended 12-31-98
Sale of common stock 686,500 687 2,705,313
Stock issued for services 65,211 64 260,780
Exercise of warrants 49,500 50 65,950
Effect of foreign currency translation 38,004
Purchase of treasury stock (700,995) (701) (2,769,301) - -
--------- ----- ----------- --------- ---------
Balance December 31, 1998 25,447,440 $ 25,447 $ 21,215,849 0 $ 31,869
========== ======== ============== ========= ==========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
DHB CAPITAL GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
Retained
Earnings Total
-------- -----
<S> <C> <C>
Balance January 1, 1997 $(4,771,590) $12,980,086
Net Income for the year ended 12-31-97 1,540,890 1,540,890
Issuance of stock to purchase subsidiary - 1,000,000
Stock issued to purchase lease - 210,000
Sale of common stock - 3,868,329
Stock issued for services - 67,500
Exercise of warrants - 150,000
Stock issued in settlement of a lawsuit - 150,000
Stock returned in settlement of a lawsuit - (73,634)
Effect of foreign currency translation - (6,135)
Purchase of treasury stock - (2,145,417)
----------- -----------
Balance December 31, 1997 $(3,230,700) $17,741,619
Net Income for the year ended 12-31-98 129,802 129,802
Sale of common stock 2,706,000
Stock issued for services 260,844
Exercise of warrants 66,000
Effect of foreign currency translation 38,004
Purchase of treasury stock - (2,770,002)
----------- -----------
Balance December 31, 1998 $(3,100,898) $18,172,267
============ ===========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
DHB CAPITAL GROUP INC. AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED
DECEMBER 31,
CASH FLOWS FROM OPERATING ACTIVITIES 1998 1997
------------ ------------
<S> <C> <C>
Net Income $129,802 $1,540,890
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization ..................................... 756,608 440,650
Valuation allowances/reserves ..................................... -- (372,000)
Stock issued for services ......................................... 260,844 67,500
Stock issued in settlement of a lawsuit ........................... -- 150,000
Stock returned in settlement of a lawsuit ......................... -- (73,596)
Stock issued to purchase a lease .................................. -- 210,000
Unrealized gain on transfer from investment in non-marketable ..... -- (598,900)
securities to marketable securities
Deferred income taxes ............................................. -- 364,000
Changes in assets and liabilities (Increase) Decrease in: ......... --
Accounts receivable ............................................... (1,993,667) (2,663,565)
Marketable securities ............................................. 1,174,478 1,237,121
Inventories ....................................................... (6,084,399) (5,018,686)
Prepaid expenses and other current assets ......................... (1,208,688) (472,203)
Deposits and other assets ......................................... (136,900) (86,972)
Increase (decrease) in:
Accounts payable .................................................. 2,694 2,013,134
Accrued expenses and other current liabilities .................... 957,554 439,377
State income taxes payable ........................................ 124,124 (14,134)
------------ ------------
Net cash used by operating activities ............................. (6,017,550) (2,837,384)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Payments for purchase of assets of subsidiary, net of cash acquired (4,924,073) 134,356
Payments made for property and equipment .......................... (1,423,267) (801,150)
------------ ------------
Net Cash used by investing activities ............................. (6,347,340) (666,794)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds of note payable- bank .................................... 1,500,000 1,275,000
Proceeds of note payable- shareholder ............................. 10,227,604 --
Proceeds from the issuance of long term debt ...................... 250,000 --
Principal payments on long-term debt .............................. (16,483) (45,657)
Proceeds from the exercise of warrants - common stock ............. 66,000 150,000
Foreign Currency Translation ...................................... 38,004 (6,135)
Purchase of treasury stock ........................................ (2,770,002) (2,145,417)
Net proceeds from sale of common stock ............................ 2,706,000 3,909,616
------------ ------------
Net cash provided by financing activities ......................... 12,001,123 3,137,407
------------ ------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
DHB CAPITAL GROUP INC. AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
(continued)
FOR THE YEARS ENDED
DECEMBER 31,
CASH FLOWS FROM OPERATING ACTIVITIES 1998 1997
------------ ------------
<S> <C> <C>
NET DECREASE IN CASH AND EQUIVALENTS .............................. (363,767) (366,771)
CASH AND CASH EQUIVALENTS - BEGINNING ............................. 882,884 1,249,655
------------ ------------
CASH AND CASH EQUIVALENTS - END ................................... $ 519,117 $ 882,884
============ ============
</TABLE>
See accompanying notes to financial statements
F-5
<PAGE>
<TABLE>
<CAPTION>
DHB CAPITAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
For the years ended
December 31,
-------------------------------
1998 1997
----------- -----------
<S> <C> <C>
Net Income ............................ $ 129,802 $ 1,540,890
Other comprehensive
income (loss)
Foreign currency translation .......... 38,004 (6,135)
----------- -----------
Comprehensive Income .................. $ 167,806 $ 1,534,755
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
DHB CAPITAL GROUP INC.
NOTES TO FINANCIAL STATEMENTS
Note 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation
The consolidated financial statements include the accounts of
DHB Capital Group Inc. and its subsidiaries ("DHB"), all of which
are wholly-owned. DHB has three major divisions, DHB Armor Group,
DHB Electronics Group, and DHB Sports Group. DHB Armor Group
consists of Protective Apparel Corporation ("PACA"), Point Blank
Body Armor Inc., Lanxide Armor Products Inc. ("LAP") and Point Blank
International S.A. ("PB Int'l") S.A. DHB Sports Group consists of
NDL Products Inc. ("NDL") and Orthopedic Products Inc. ("OPI"). DHB
Electronics Group consists of Lanxide Electronic Components ("LEC")
and DHB KK. All material inter-company balances and transactions
have been eliminated.
Business description
DHB Armor Group develops, manufactures, and distributes bullet and
projectile resistant garments, bullet resistant and fragmentation
vests, bomb projectile blankets, aircraft armor, bullet resistant
plates and shields, and related ballistic accessories. DHB Sports
Group manufactures and distributes specialized protective athletic
apparel and equipment and orthopedic products. DHB Electronics Group
manufactures and markets thermal management, packaging and
structural components for the electronic industry within the United
States and Japan.
Uses of estimates in the preparation of financial statements
The preparation of financial statements in conformity with
generally accepted accounting principles 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
net revenue and expenses during each reporting period. Actual
results could differ from those estimates.
Revenue recognition
Revenue from product sales is recognized at the time the
product is shipped.
Inventories
Inventories are valued at the lower of cost or market,
determined on the first-in, first-out basis (replacement cost).
Property, plant and equipment and depreciation
Property, plant and equipment are stated at cost. Major
additions, improvements, and renewals, which substantially increase
the useful lives of assets, are capitalized. Maintenance, repairs,
and minor renewals are expensed as incurred.
F-7
<PAGE>
Note 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Depreciation is provided for both financial reporting and
income tax purposes using the straight-line and accelerated methods.
Marketable/Non-Marketable Securities
Investments in marketable securities are accounted for
according to the provisions of Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" (SFAS 115). Management of DHB classified all its
marketable securities as trading securities and, accordingly,
unrealized gains and losses are reflected in earnings.
Non-marketable securities are valued at historical cost and if
necessary, reduced by a valuation allowance to the net realizable
value.
Intangible assets
Intangible assets are stated at cost and are amortized over
their estimated useful lives (see Note 7).
Income taxes
DHB and its domestic subsidiaries file a consolidated Federal
income tax return and separate state income tax returns.
DHB accounts for deferred income taxes in accordance with SFAS
Statement No. 109 which requires that deferred tax assets and
liabilities be recognized for the future tax consequence
attributable to differences between financial statement carrying
amounts of existing assets and liabilities and their respective tax
bases. In addition, SFAS No. 109 requires recognition of future tax
benefits, such as net operating loss carryforwards, to the extent
that realization of such benefits is more likely than not and that a
valuation allowance be provided when it is more likely than not that
some portion of the deferred tax asset will not be realized.
Stock based compensation
Statement of Financial Accounting Standards No. 123,
"Accounting for Stock Based Compensation" (SFAS 123) encourages, but
does not require companies to record compensation cost for
stock-based employee compensation at fair value. DHB has chosen not
to adopt SFAS 123 and to continue to account for stock-based
compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees," and related interpretations. Accordingly,
compensation cost for stock options is measured as the excess, if
any, of the quoted market price of the Company's stock at the date
of the grant over the amount an employee must pay to acquire the
stock.
F-8
<PAGE>
Note 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Impairment of long-lived assets
DHB accounts for the impairment of long-lived assets in
accordance with SFAS No. 121 which requires that long-lived assets
and identifiable intangibles held and used by a company be
reviewed for possible impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may
not be recoverable.
Note 2 SUPPPLEMENTAL CASH FLOW INFORMATION
Cash paid for: 1998 1997
------- -------
Interest 308,282 269,450
Taxes 78,877 11,971
During the year ended December 31, 1998, the Company
purchased LEC and LAP for a cash payment of $4.8 millin less of
cash acquired, $250,927. The Company also purchased DHB KK for a
cash payment of $375,000. The total cash paid for acquisitions
during 1997, net of cash acquired total $4,924,073.
During the year ended December 31, 1997, the Company had
non-cash investing activities when it issued common stock to
acquire all of the outstanding stock of PB Int'l.
Note 3 BUSINESS ACQUISITIONS
On February 9, 1998, the Company purchased the common stock of
two privately held Delaware corporations, Lanxide Armor Products
Inc. (LAP) and Lanxide Electronic Components Inc. (LEC). The
purchase price was approximately $4.8 million and was funded by an
additional loan from the Company's majority shareholder. LAP
specializes in the design, development and manufacture of
ceramic/metal matrix composites for protective armor applications.
LEC is a leading supplier of Silicon Carbide / Aluminum composites
for heat management applications in the electronics industry. This
transaction was accounted for as a purchase. On May 28, 1998, the
Company acquired a Japanese subsidiary, DHB KK, for a cash payment
of $375,000. This company markets LEC's products in Japan.
In February, 1997 DHB acquired 100% of the issued and
outstanding common stock of Zunblindage S.A. ("ZSA"), a Belgian
corporation, in exchange for 666,000 shares of DHB common stock
valued at an aggregate of $1,000,000. In January, 1999,
Zunblindage's name was changed to Point Blank International S.A.
Pb Int'l manufactures and distributes bullet resistant equipment,
apparel and related products generally in Europe and the Middle
East.
The above acquisitions were accounted for using the purchase
method of accounting, pursuant to which the purchase price was
allocated based upon the estimated fair values of the assets
acquired as of the dates of acquisition. The purchase of PB Int'l
resulted in goodwill of $541,000. The purchases of LAP, LEC, and
DHB KK resulted in goodwill of approximately $500,000.
<PAGE>
In the opinion of management, if the results of operations of
the acquired businesses had been included in the consolidated
financial statements since the beginning of the year, it would not
have a material effect on the results of operations.
F-9
<PAGE>
Note 4 MARKETABLE SECURITIES/NON-MARKETABLE SECURITIES
The following is a comparison of the cost and market value
of marketable securities included in current assets:
1998 1997
---------- ----------
Cost $ 476,361 $1,254,104
Unrealized gain 52,967 449,702
---------- ----------
Market Value $ 529,328 $1,703,806
The Company has acquired minority interests in
non-marketable securities, at December 31, 1997 the historical
cost was $2,316,750 reduced by a valuation allowance of $628,000
to bring the carrying value of these securities to the net
realizable value of $1,688,750.
Note 5 INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
1998 1997
----------- ------------
<S> <C> <C>
Finished goods $ 7,901,221 $ 5,776,562
Work in process 5,533,648 1,646,610
Raw materials and supplies 6,566,678 5,120,302
----------- ------------
$20,001,547 $ 12,543,474
=========== ============
</TABLE>
Note 6 PROPERTY, PLANT AND EQUIPMENT
A summary of property, plant and equipment and the
estimated lives used in the computation of depreciation is as
follows:
<TABLE>
<CAPTION>
Estimated
1998 1997 useful life
---- ---- -----------
<S> <C> <C> <C>
Land $47,500 $47,500 --
Buildings 427,500 427,500 39 years
Machinery and equipment 6,709,810 1,225,812 5-30 years
Furniture, fixtures and
computer equipment 796,049 819,019 5-7 years
Transportation equipment 231,579 244,510 3-5 years
Leasehold improvements 549,746 480,928 5-31.5 years
------- -------
8,762,184 3,245,269
Less accumulated depreciation and
amortization 1,657,951 871,184
--------- -------
$7,104,233 $2,374,085
========== ==========
</TABLE>
F-10
<PAGE>
Note 7 INTANGIBLE ASSETS
A summary of intangible assets and the estimated lives
used in the computation of amortization is as follows:
<TABLE>
<CAPTION>
Estimated
1998 1997 useful life
---------- --------- -----------
<S> <C> <C> <C>
Goodwill $1,194,473 $ 694,473 15 years
On-going
government 612,106 312,086 1-5 years
contracts
Other 178,261 129,563 1-7 years
---------- ----------
1,984,840 1,136,122
Less accumulated amortization 713,172 548,105
---------- ----------
$1,271,668 $ 588,017
========== ==========
</TABLE>
Note 8 NOTES PAYABLE - BANK
Notes payable - bank are due on demand and are collateralized by
marketable securities owned by the majority stockholder of the
Company. The weighted average interest rate on these borrowings
was 6.965% at December 31, 1998.
Note 9 NOTES PAYABLE STOCKHOLDER
These notes bear interest at 12% per annum and are due, as
extended, in April 2000 (see Note 15 in connection with additional
loans made by the majority stockholder in 1998.)
Note 10 LONG-TERM DEBT
<TABLE>
<CAPTION>
Long-term debt consists of the following: 1998 1997
------- --------
<S> <C> <C>
Notes payable in monthly principal installments of $65,998 $112,798
$3,600. Interest at the rate of 9% per annum
accrues and is payable upon maturity in 2001.
Capital lease obligation payable in monthly payments 238,390
of $5,281 this note is collateralized by certain
238,390 equipment originally costing $250,000
Note payable in monthly installments of $4,729 201,097
inclusive of interest at 5.1%.
Other 41,634 63,652
------ ------
547,119 176,450
Less Current Portion 159,607 65,192
------- ------
$387,512 $111,258
======== ========
</TABLE>
F-11
<PAGE>
Note 10 LONG-TERM DEBT - Continued
Long-term debt matures as follows:
1999 $159,607
2000 149,035
2001 125,646
2002 107,741
2003 5,090
--------
$547,119
========
Note 11 STOCKHOLDERS' EQUITY
Common and preferred stock
DHB has 100,000,000 shares authorized of its $.001 par value
Common. At December 31, 1998 and 1997, 25,447,440 and 25,347,224
were outstanding, respectively. In addition, DHB is authorized to
issue 1,500,000 shares of Class A 10% convertible Preferred Stock,
none of which was issued and outstanding at December 31, 1998 and
1997.
Stock option plan
In October, 1995, the Company adopted a plan (the "1995
Stock Option Plan" or the "Plan") pursuant to which the Board of
Directors authorized to award options to purchase up to 3,500,000
shares of Common Stock to selected officers, employees, agents,
consultants and other persons who render services to the Company.
The options may be issued on such terms and conditions as
determined by the Board or Committee, and may be issued so as to
qualify as incentive stock options under Internal Revenue Code
Section 422A. No options have been granted under the plan.
Stock warrants
During 1997, the Board of Directors granted 50,000 stock
warrants exercisable at $2.00 per share to a key employee expiring
in June 2000. Pursuant to employment agreements (See Note 14), the
Company has 1,549,500 stock warrants outstanding exercisable at
$1.33 per share and expiring in 2001. In December 1994, in
consideration for monies loaned to the Company, the Board of
Directors granted a relative of the majority stockholder, stock
warrants to purchase 3,750,000 shares of common stock for $1.33
per share for a five year period commencing December 19, 1994. In
1998, all of the warrants to the majority stockholder and his
relatives were extended until September 2003, the length of the
NASDAQ agreement. In June 1993, the Board of Directors granted
stock warrants to certain individuals and organizations with
150,000 warrants still outstanding exercisable at $1.33 and
expiring in June 1999.
F-12
<PAGE>
Note 12 RELATED PARTY TRANSACTIONS
A summary of related party transactions for the years ended
December 31, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Rental expense paid or accrued to the
relatives of the majority stockholder $753,235 $546,000
Rental expense paid to the President
of a subsidiary of DHB 48,000 48,000
Interest paid or accrued on a loan from
DHB's majority stockholder. 992,359 177,340
</TABLE>
See Note 14 for details of the lease with a related party
Note 13 RISKS AND UNCERTAINTIES
The Company maintains cash balances at various financial
institutions. Accounts at each institution are insured by the
Federal Deposit Insurance Corporation up to $100,000. The
Company's accounts at these institutions may, at times, exceed the
Federally insured limits. The Company has not experienced any
losses in such accounts.
Approximately 18% and 27% for the years ended December 31,
1998 and 1997, respectively, of DHB's sales were made to the
United States Government or its agencies.
Certain factors relating to the industries in which DHB
operates and the Company's business should be carefully
considered. A substantial portion of the products sold by DHB are
used in situations which could result in serious personal injuries
or death, whether on account of the failure of such products, or
otherwise. Although DHB maintains substantial amounts of insurance
coverage to cover such risks, there is no assurance that these
amounts would be sufficient to cover the payment of any potential
claims. In addition, there is no assurance that this or any other
insurance coverage will remain available or, if available, that
DHB would be able to obtain such insurance at a reasonable cost.
The inability to obtain such insurance coverage would prohibit DHB
from bidding for certain orders for bullet resistant products from
certain governmental customers.
Substantially all of the raw materials used in the manufacturing
of ballistic-resistant garments are made from fabrics which are
patented by major corporations and which are purchased from three
independent weaving companies. Although, in the opinion of
management of DHB, DHB enjoys a good relationship with these
vendors, should any of the manufacturers cease to produce these
products for any reason, DHB would be required to use other
fabrics. In such an event, an alternative fabric would have to be
selected and ballistic test would have to be performed. Until this
was done, DHB's sale of ballistic resistant products would be
severely curtailed and DHB's financial condition would be
materially adversely affected.
F-13
<PAGE>
Note 14 FAIR VALUES OF FINANCIAL INSTRUMENTS
The Company's financial instruments include cash, accounts
receivable, accounts payable and long-term debt. The carrying
values of cash, accounts receivable, accounts payable and
long-term debt approximate their fair values. The Company's
long-term debt is not traded and has no quoted market value,
however management believes any difference between its carrying
value and fair value would not be material in relation to the
consolidated financial statements.
Note 15 SEGMENT INFORMATION
As described in detail above, the Company operates in three
principal segments: Ballistic-resistant equipment, Electronics and
Protective athletic/medical equipment. The Company designs,
manufactures and markets products in both segments as described
above.
Financial information on the Company's business segments was as
follows:
<TABLE>
<CAPTION>
Net Sales 1998 1997
------------ -------------
<S> <C> <C>
Ballistic-resistant equipment .............. $ 28,695,127 $ 26,805,471
Electronic components ...................... 8,398,107 --
Protective athletic & medical equipment .... 8,388,544 7,094,808
------------ ------------
45,481,778 33,900,279
Less inter-segment sales ................... (3,647,353) (628,672)
------------ ------------
Consolidated Net Sales ..................... $ 41,834,425 $ 33,271,607
============ ============
Income from Operations
Ballistic-resistant equipment .............. $ 2,485,395 $ 2,017,281
Electronic components ...................... (782,908) --
Protective athletic & medical equipment .... 1,207,743 498,062
Corporate and Other (1) .................... (1,508,027) (1,039,316)
------------ ------------
Consolidated Operating Income .............. $ 1,402,203 $ 1,476,027
============ ============
Identifiable Assets (2)
Ballistic-resistant equipment .............. $ 23,743,604 $ 17,572,698
Electronic components ...................... 5,749,438 --
Protective athletic & medical equipment .... 8,844,627 6,322,150
------------ ------------
38,337,669 23,894,848
Corporate and Other ........................ 4,762,866 3,779,781
------------ ------------
Consolidated Net Assets .................... $ 43,100,535 $ 27,674,629
============ ============
</TABLE>
Foreign sales accounted for 12% and 10%, respectively of the total
revenues for the years ended December 31, 1998 and 1997. Foreign
identifiable assets accounted for 5% and 2% of the total assets at
December 31, 1998 and 1997.
(1) Corporate and Other includes corporate general and administrative expenses.
(2) Corporate assets are principally cash, marketable securities and deferred
charges
F-14
<PAGE>
Note 16 COMMITMENTS AND CONTINGENCIES
Leases
DHB leases a warehouse and manufacturing facility from a
partnership indirectly owned by the majority stockholder of DHB.
The lease provides for annual rentals of $480,000 for 1996 and 4%
annual increases through expiration in 1999. In addition, DHB must
pay real estate taxes and certain operating expenses of this
property.
DHB leases a warehouse and manufacturing facility from the
president of one of its subsidiaries on a month by month basis
with annual rentals of $43,200, plus real estate taxes.
The Company has a four year lease for a 60,000 square foot
warehouse adjacent to the existing Florida facility with an annual
rental of approximately $210,000.
In association with the acquisition of PB Int'l , the
Company assumed a lease for their warehouse and store in Liege,
Belgium. This space is occupied pursuant to a nine year lease with
annual rentals of approximately, $42,000.
In association with the acquisitions of LAP and LEC, the
Company assumed a lease for a 82,000 square feet of office and
warehouse facility in Delaware, as well as, a 3,500 square foot
ballistic testing range. The lease expires in March 2001 and
provides for annual base rentals of $420,000.
Rent and real estate tax expense charged to operations for
the years ended December 31, 1998 and 1997 aggregated
approximately $1,917,000 and $962,000, respectively.
Employment agreements
The Company is committed under an employment agreement
with its majority stockholder which expires in April, 2001 and
provides for an annual salary of $250,000 through April, 1997 and
annual increases of $25,000 thereafter. In addition, the contract
provides for the annual grant of 750,000 warrants to the principal
stockholder, which are exercisable at $2.33 per share and expire
five years from date of grant. In September 1998, Mr. Brook's
employment agreement was amended to reflect his position as
Co-chairman
Year 2000.
Many computer systems were originally designed to recognize
calendar years by their last two digits. Calculations performed
using these shortened fields may not work properly with dates from
the year 2000 and beyond. The Company is undertaking a review and
evaluation of its existing computerized systems as part of a
program to bring such systems into Year 2000 compliance. The
Company expects, to the extent necessary, to either modify or
upgrade third party software to ensure Year 2000 compliance. The
Company has not yet determined the total cost of modifications to
its computerized systems; however, based upon the review and
evaluations conducted to date, the Company believes the costs
associated with this process will not have a material adverse
effect on the Company's results of operations or liquidity.
F-15
<PAGE>
Note 16 COMMITMENTS AND CONTINGENCIES - Continued
Litigation
DHB is a defendant in a lawsuit filed in the United States
District Court for the Southern District of New York. The lawsuit
alleging breach of contract, seeks among other things,
compensatory damages of not less than $2,500,000, punitive damages
of not less than $500,000 and an order enabling the plaintiff to
execute certain stock purchase warrants. On January 8, 1999 the
Court dismissed this action. The Plaintiff then filed in the
Supreme Court of New York, County of Nassau. DHB has filed an
Answer and Counter-Claim and intends to vigorously defend the
claim and to pursue its Counter-Claims. In the opinion of
management of DHB, the ultimate outcome of this litigation will
not have a material adverse effect on the financial condition of
DHB.
The Company initiated a lawsuit claiming patent
infringement and unfair competition under federal and state law
and breach of contract. The defendant also filed a claim against
NDL and DHB Capital in the US District Court for the Southern
District of Florida claiming patent and trademark infringement, as
well as, breach of contract. NDL has filed a claim with its
general liability insurance carrier, and they acknowledge that it
is their duty to defend this action. At this time, discussions
regarding a comprehensive settlement of these two actions are
ongoing, which if completed, as currently contemplated would
provide for a net payment to NDL/DHB from the Plaintiff. However,
no assurance can be given that the above settlement will be
completed on favorable terms to the Company. In the opinion of
management of DHB, the ultimate outcome of this litigation will
not have a material adverse effect on the financial condition of
DHB.
The Company is a defendant in an action claiming breach of
employment contract filed in the Circuit Court of the Seventeenth
Judicial Circuit in and for Broward County, Florida. The Case went
to trial on March 1 through 3, 1999 and a final judgment of
$330,825 was entered against the Company. The Company has
instructed their attorneys to appeal the decision. In the opinion
of the Company's counsel, the appellate issues identified to date
appear to favor the Company. In the opinion of management of DHB,
the ultimate outcome of this litigation will not have a material
adverse effect on the financial condition of DHB.
The Company is subject to other legal proceedings and
claims which have risen in the ordinary course of its business and
have not been finally adjudicated. These actions when ultimately
concluded and determined will not, in the opinion of management,
have a material adverse effect on the results of operations or the
financial condition of the Company.
<PAGE>
Note 17 INCOME TAXES
Components of income taxes are as follows:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Current: Federal $ 110,000 $ 455,000
State 24,400 22,509
Benefit of net operating
loss carryforward (110,000) (455,000)
------------ ------------
Total current 24,400 22,509
Deferred: Federal 0 690,000
State 0 430,700
Less: valuation allowance 0 (1,494,700)
------------ ------------
Total Deferred 355,800 374,000
------------ ------------
Total income taxes (benefits) $ 24,400 $ 396,509
============ ============
</TABLE>
Note 18 COMPREHENSIVE INCOMCE
Effective January 1, 1998, the Company adopted the
provision of statement No. 130, Reporting comprehensive income
which modifies the financial presentation of comprehensive income
and its components. In accordance with this Statement, a
Consolidated Statement of Comprehensive Income is included in the
Consolidated financial statements to present all changes in
Stockholders' equity in the periods presented other than changes
resulting from transactions relating to the Company's stock.
F-16
<PAGE>
DHB CAPITAL GROUP INC. AND SUBSIDIARIES
SCHEDULE II TO THE FINANCIAL STATEMENTS
VALUATION AND QUALIFYING ACCOUNTS
DECEMBER 31, 1998 AND 1997
Allowances deducted from related balance sheet accounts:
<TABLE>
<CAPTION>
Investment in Net Write Down
Accounts Non-marketable of investment in
Receivable Inventory securities subsidiaries
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance at January 1, 1997 ......... $ 303,230 $ 700,000 $ 1,000,000 $ 529,579
Additions charged to
costs and expenses ........... 50,000 -- -- --
Subtractions charged to
costs and expenses ............ -- (700,000) (372,000) --
----------- ----------- ----------- -----------
Balance at December 31, 1997 ....... $ 353,230 $ 0 $ 628,000 $ 529,579
Additions charged to
costs and expenses ........... 154,509 -- -- --
Subtractions charged to
costs and expenses ............ -- -- -- --
----------- ----------- ----------- -----------
Balance at December 31, 1998 ....... $ 507,739 $ 0 $ 0 $ 529,579
=========== =========== =========== ===========
</TABLE>
F-17
<PAGE>
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 on this the 23rd day of
March, 1999.
DHB Capital Group Inc.
/S/ David Brooks
David Brooks
Co-Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities indicated on March 23, 1999.
Signature Capacity Date
- - --------- -------- ----
/S/David H. Brooks Co-Chairman of the Board, March 23, 1999
- - ------------------- and Director
David H. Brooks
/S/Mary Kreidell Treasurer/Director March 23, 1999
- - ---------------- Principal Financial Officer
Mary Kreidell Principal Accounting Officer
/S/Gary Nadelman Co-Chairman and Director March 23, 1999
-----------------
Gary Nadelman
<PAGE>
Item 13 (a) Exhibits.
Exhibit Description
2.1 Securities Purchase Agreement dated November 6, 1992, between the
Company, E.S.C. Industries, Inc., The Thunder Group, Inc. and
Protective Apparel Corporation of America 1
3.1 Certificate of Incorporation of DHB Capital Group Inc., a New York
corporation (hereinafter, "DHB-New York") 1
3.2 Certificate of Amendment to the Certificate of Incorporation of DHB-New
York filed November 5, 1992 1
3.3 Restated and amended Certificate of Incorporation of DHB New York dated
February 10, 1993 1
3.4 By-laws of DHB-New York 2
3.5 Certificate of Incorporation of DHB Capital Group Inc., a Delaware
corporation (hereinafter, "DHB Delaware"), filed with the Delaware
Secretary of State on or about September 1, 1994 2
3.5(a)Certificate of Amendment to Certificate of Incorporation of DHB Capital
Group Inc. filed December 31, 1996 Note 10
3.6 By-laws of DHB Delaware 2
3.7 Plan of merger of DHB-New York into DHB-Delaware 2
3.8 Certificate of Ownership and Merger, Merging DHB-New York into
DHB-Delaware, pursuant to Section 253 of the General Corporation Law of
the State of Delaware, filed in the Office of the Secretary of State of
Delaware on or about April 17, 1995 2
4.1 Specimen Common Stock Certificate 1
4.2 Specimen Class A Preferred Stock Certificate 1
4.3 Form of Warrant Agreement with respect to the Redeemable Warrant
together with list of purchasers 1
7.1 Opinion regarding Liquidation Preference 1
10.1 Employment Agreement dated November 6, 1992 between Protective Apparel
Corporation of America and Leonard Rosen 1
10.2 Lease dated November 6, 1992, between Protective Apparel Corporation of
America and Leonard Rosen in Norris, Tennessee 1
10.3 Domestic and International Non-Competition Agreement dated March 12,
1990 between the Company and American Body Armor & Equipment, Inc. (the
"American Body Armor Non-competition Agreement") 1
<PAGE>
10.4 GSA Contracts dated January 21, 1991 and March 19, 1992 1
10.5 Indemnification Agreements between certain officers of E.S.C.
Industries, Inc., Protective Apparel Corporation of America and the
Company regarding Certain Liabilities in Connection with the
Acquisition of Protective Apparel Corporation of America 1
10.6 Warrant to purchase 2,000,000 shares of common stock of The Thunder
Group, Inc. 1
10.7 Registration Rights Agreement between the Company and the Thunder
Group, Inc. 1
10.8 Loan Agreement dated November 6, 1992, between the Company and E.S.C.
Industries, Inc. 1
10.9 Security Agreement dated November 6, 1992 of TL Fasteners Corp. 1
10.10 Promissory Note between the Company and David Brooks dated November 6,
1992 1
10.11 Loan and Security between the Company and Protective Apparel
Corporation of American dated December 7, 1992 1
10.12 Chase Manhattan Bank, N.A. ("Chase") Loan dated November 24, 1992 1
10.13 Form of Registration Rights Agreement between the Company and
participants in the Company's private placement 1
10.14 Form of Unit Purchase Option 1
10.15 Agreement between the Company, Jeffrey Brooks Securities, Inc., Jeffrey
Brooks, Paul Kazak and Jason Chang dated September 13, 1993 3
10.16 Agreement between the Company, Jeffrey Brooks Securities, Inc., Jeffrey
Brooks, Paul Kazak and Jason Chang dated September 17, 1993 3
10.17 Promissory note, general security agreement and related loan documents
dated September 15, 1993 between the Company, PACA and Chase 4
10.18 Subscription agreement dated March 17, 1994 (the "ID Subscription
Agreement"), between the Company and Intelligent Data Corporation, a
Nevada corporation ("ID"), regarding the purchase by the Company of
shares of the common stock and preferred stock of ED 5
10.19 Amendment dated March 30, 1994, of the ID Subscription Agreement 5
10.20 Shareholders' agreement dated March 17, 1994, among the Company, ID,
and shareholders of ID 5 10.21 Employment agreement dated March 17,
1994, between ID and Sam Balabon, including written termination thereof 5
10.22 Bill of sale dated December 20, 1994, made by N.D.L. Products, Inc., a
Delaware corporation, and its subsidiaries, N.D.L. International, Inc.,
Dr. Bonesavers, Inc., Grid, Inc., Hitman, Inc., and Flex-Aid, Inc.,
each being a Florida corporation, to DHB Acquisition, Inc., covering
the NDL Assets 6
<PAGE>
10.23 Order Determining Successful Bidder, etc., dated December 20, 1994, In
Re N.D.L. Products, Debtor, of the United States Bankruptcy Court,
Southern District of Florida, Case No. 9421458-BKC-RBR, Chapter 11
(Lead Case), jointly administered with Case Nos. 94-21459 through
94-21463 6
10.24 Term loan to the Registrant in the amount of $1,150,000 due September
19, 1995, from The Chase Manhattan Bank, N.A., of New York, New York
(the "Secured Lender"), bearing interest at 7.2% per year 7
10.25 Collateral Agreement [Third Party] dated October 18, 1994, made by Mr.
David H. Brooks in favor of the Secured Lender 7
10.26 Agreement dated August 4, 1995, terminating the American Body Armor
Non-Competition Agreement 9
10.27 Bill of sale dated August 3, 1995, made by the Trustee in Bankruptcy of
Point Blank Body Armor, L.P. 8
10.28 Order Authorizing Sale at Auction dated July 25, 1995, In Re Point
Blank Body Armor, L.P., Debtor, of the United States Bankruptcy Court,
Eastern District of New York, Case Nos. 895-83336-2D and 895-83335-2D 8
10.29 1995 Stock Option Plan 9
10.30 Stock Purchase Agreement with respect to the outstanding capital stock
of Orthopedic Products, Inc., dated as of March 22, 1996 11
10.31 Definitive Merger Agreement with The Lehigh Group Inc and Plan of
Reorganization 12
10.32 Employment Agreement with Michael Bell dated March 7, 1997. 12
10.33 Assignment Agreement dated as of February 6, 1998 by and between DHB
Capital Group, Inc. and E.I. Du Point Nemours and Company.
10.34 Transfer Agreement, dated as of February 6, 1998 by and among Lanxide
Corporation, DHB Capital Group, Inc., Lanxide Armor Products, Inc.
Lanxide Electronic Components, Inc. and Lanxide Technology company,
L.P.
10.35 Notification Letter from Lanxide Corporation of E.I. Du Pont de Nemours
and Company dated February 6, 1998.
10.36 Negotiable Promissory Note form DHB Capital Group, Inc. to David H.
Brooks dated February 9, 1998. Notes to Exhibit Table:
<PAGE>
1. Incorporated by reference to the Company's Registration Statement on Form
SB-2, No. 33-59764, which became effective on May 14, 1993.
2. Incorporated by reference to the Company's Definitive Proxy Material filed
with the Commission in connection with the Special Meeting in Lieu of
Annual Meeting of Shareholders of the Company held on February 15, 1995.
3. Incorporated by reference to the Company's Registration Statement on Form
SB-2, No. 33-70678, which became effective on December 29, 1993.
4. Incorporated by reference to the Company's Quarterly Report on Form 10-QSB
for the quarter ended June 30, 1993.
5. Incorporated by reference to Post-Effective Amendment No. 1 of the
Company's two Registration Statements on Form SB-2, Nos. 33-59764 and
33-70678, which became effective on October 17, 1994.
6. Incorporated by reference to the Current Report on Form 8-K dated December
20, 1994.
7. Incorporated by reference to Amendment No. 1 dated March 2, 1995, of the
Current Report on Form 8-K dated December 20, 1994.
8. Incorporated by reference to the Current Report on Form 8-K dated August 3,
1995.
9. Incorporated by reference to Registration Statement on Form S-8 filed on or
about October 1, 1995.
10. Incorporated by reference to Post-Effective Amendment No. 33-59764, on Form
SB-2, File # filed on Jan 31, 1997.
11. Incorporated by reference to the Current Report on Form 8-K dated March 22,
1996, including the amendments thereof.
12. Incorporation by reference to Registration Statement on Form SB-2, File No.
333-31383 Filed on July 24, 1997.
13. Incorporated by reference to Current Report on Form 8-K filed February 25,
1998.
- - --------
* - Less than one (1%) percent
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