UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10K-SB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM________TO __________
COMMISSION FILE NUMBER 000-29211
DAC TECHNOLOGIES GROUP INTERNATIONAL, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
Florida 65-0847852
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1601 Westpark Dr. #4C Little Rock, AR 72204
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(Address of principal executive offices)(Zip Code)
(501) 661-9100
(Issuer's telephone number)
Securities registered under Section 12(b) of the Act:
None
Name of each exchange on which registered
Not applicable
Securities registered under Section 12(g) of the Act:
Common Stock, par value $0.001
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 IS NOT CONTAINED IN THIS FORM, AND NO DISCLOSURE WILL
BE CONTAINED, TO THE BEST OF THE REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR
INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-KSB
OR ANY AMENDMENT TO THIS FORM 10-KSB. [ ]
STATE ISSUER'S REVENUES FOR ITS MOST RECENT FISCAL YEAR. $4,756,530
STATE THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY
NON-AFFILIATES COMPUTED BY REFERENCE TO THE PRICE AT WHICH THE STOCK WAS SOLD,
OR THE AVERAGE BID AND ASKED PRICES OF SUCH STOCK, AS OF A SPECIFIED DATE WITHIN
THE PAST 60 DAYS. THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY
NON-AFFILIATES AS OF MARCH 15, 2004 WAS APPROXIMATELY $5,180,495.
STATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASS OF
COMMON EQUITY, AS OF THE LATEST PRACTICABLE DATE. AS OF MARCH 15, 2004,
5,713,056 SHARES OF COMMON STOCK ARE ISSUED AND OUTSTANDING.
DOCUMENTS INCORPORATED BY REFERENCE
IF THE FOLLOWING DOCUMENTS ARE INCORPORATED BY REFERENCE, BRIEFLY
DESCRIBE THEM AND IDENTIFY THE PART OF THE FORM 10-KSB INTO WHICH THE DOCUMENT
IS INCORPORATED: (1) ANY ANNUAL REPORT TO SECURITY HOLDERS; (2) ANY PROXY OR
INFORMATION STATEMENT; AND (3) ANY PROSPECTUS FILED PURSUANT TO RULE 424(b) OF
THE SECURITIES ACT OF 1933 ("SECURITIES ACT"). NOT APPLICABLE.
TABLE OF CONTENTS
FORWARD-LOOKING STATEMENT ............................................. 1
PART I ................................................................ 1
ITEM 1. DESCRIPTION OF BUSINESS ...................................... 2
ITEM 2. DESCRIPTION OF PROPERTY ...................................... 14
ITEM 3. LEGAL PROCEEDINGS ............................................ 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS .......... 15
PART II ............................................................... 16
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS ..... 16
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION .... 16
ITEM 7. FINANCIAL STATEMENTS ......................................... 19
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE ........................ 20
ITEM 8A. CONTROLS AND PROCEDURES ...................................... 20
PART III .............................................................. 20
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT ............ 20
ITEM 10. EXECUTIVE COMPENSATION ....................................... 21
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 22
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ............... 24
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K ............................. 24
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES ....................... 24
SIGNATURES ............................................................ 25
CERTIFICATIONS ........................................................
ii
UNLESS THE CONTEXT OTHERWISE REQUIRES, THE TERMS "COMPANY," "WE," "US" AND
"OUR" REFER TO DAC TECHNOLOGIES GROUP INTERNATIONAL, INC.
FORWARD-LOOKING STATEMENTS
This document includes "forward looking statements" within the meaning
of Section 27A of the Securities Act of 1933, as amended, (the "Securities Act")
and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). All statements other than statements of historical fact
contained in this document, including, without limitation, the statements under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Liquidity and Sources of Capital" regarding the Company's
strategies, plans, objectives, expectations, and future operating results are
forward-looking statements. Such statements also consist of any statement other
than a recitation of historical fact and can be identified by the use of
forward-looking terminology such as "may," "expect," "anticipate," "estimate,"
or "continue" or the negative thereof or other variations thereon or comparable
terminology. Although the Company believes that the expectations reflected in
such forward-looking statements are reasonable at this time, it can give no
assurance that such expectations will prove to have been correct. Actual results
could differ materially based upon a number of factors including, but not
limited to, risks attending litigation and government investigation, inability
to raise additional capital or find strategic partners, leverage and debt
service, governmental regulation, dependence on key personnel, competition,
including competition from other manufacturers of gun locks, costs and risks
attending manufacturing, expansion of operations, market acceptance of the
Company's products, limited public market and liquidity, shares eligible for
future sale, the Company's common stock ("Common Stock") being subject to penny
stock regulation and other risks detailed in the Company's filings with the
United States Securities and Exchange Commission ("SEC" or "Commission").
1
PART I
ITEM 1. DESCRIPTION OF BUSINESS
(a) History and Business Development.
We were incorporated as a Florida corporation in July 1998, under the
name Dac Technologies of America, Inc. for the purpose of succeeding to the
interest of Dac Technologies of America, Inc., an Arkansas corporation ("DAC
Arkansas"). In September 1998, we purchased substantially all of the assets of
DAC Arkansas. DAC Arkansas, formed as an Arkansas corporation in 1993, may be
deemed to be a predecessor of our company. DAC Arkansas commenced operations
with the manufacture of various safety products, which were eventually acquired
by us. Our principal owners and management held similar positions with DAC
Arkansas. We have continued the operations of DAC Arkansas without any
significant changes. In July 1999, we changed our name to Dac Technologies Group
International, Inc.
Between July 1998 and March 2002, we sold an aggregate of 5,763,956
shares of our Common Stock to approximately 40 accredited or otherwise
sophisticated investors with whom we had pre-existing relationships and who had
access to relevant information concerning the Company in a series of
transactions exempt from registration under the Securities Act of 1933, as
amended (the "Securities Act"). We received cash proceeds of approximately
$724,400 from these transactions.
We have not been involved in any bankruptcy, receivership or similar
proceeding. Except as set forth herein, we have not been involved in any
material reclassification, merger, consolidation, or purchase or sale of a
significant amount of assets not in the ordinary course of business.
Our primary business is gun safety and gun maintenance; our target
consumer base is sportmen, hunters and outdoorsmen, and recreational
enthusiasts. In 2002, the American Firearms Industry, a trade association,
estimated that there are 60-65 million gunowners in the United States According
to the February 2000 COMMERCE IN FIREARMS IN THE UNITED STATES published by the
U.S. Bureau of Alcohol, Tobacco and Firearms and the Department of Commerce, an
estimated two million new and two million second-hand handguns are sold in the
United States annually. The government also reported that a survey done in 1994
indicated that the total number of firearms in private hands exceeded 200
million, of which only 11% are used for protection. Because of the population
growth over the decade since the report, it is safe to assume that the number of
firearms and firearm owners has substantially increased.
2
(b) Business Plan
2003 SUMMARY
The most significant event in 2003 was the introduction of the
Company's line of GunMaster gun cleaning kits. This has now replaced gun locks
as the Company's primary growth sector. First sold late in the second quarter,
and with only four items in this line, sales of these kits totaled approximately
$1,990,000. Sales of these gun cleaning kits enabled the Company to increase its
sales 73% over 2002 and increase net income 2,391%.
Due to the success of the initial four items in its GunMaster line, the
Company, in 2004, has added over thirty new gun accessory items to this
category. These new items were introduced at the SHOT Show in February, 2004,
with tremendous response. Shipments of these new items will begin in the second
quarter of 2004.
Because the Company's GunMaster gun cleaning kits are high quality,
solid brass, and priced significantly lower than its competition, the Company
has not only been able to increase its market share with its existing customers,
but has been able to add several of the largest sporting goods retailers,
distributors and mail order companies to its customer base, including Dick's
Sporting Goods, RSR Group, Inc., Jerry's Sport Center, Inc, AcuSport Corp., and
Cabella Catalogue Co.
While management believes there is significant room for growth with its
existing product lines, the Company continually looks for new products to bring
to market. With its expanded customer base in the sporting goods market, the
Company has positioned itself to diversify its product line into other sporting
goods, hunting and outdoorsman's products.
CORE BUSINESS
We are in the business of developing, marketing and outsourcing the
manufacture of various consumer products, patented and non-patented. Our
products have historically been security related, evolving from various
personal, home and automotive electronic security devices, to firearm safety
devices such as gun and trigger locks, cable locks and safes. In 2003, we
expanded our product line to include a line of gun cleaning kits.
A significant portion of our business is with mass market retailers
such as Wal Mart, Walgreens and Kmart. However, we have been able to
significantly increase our business with firearm manufacturers, as well as large
sporting goods retailers and distributors. Our line of GunMaster gun cleaning
kits has enabled us to establish relationships in the sporting goods market
which management believes will enable the Company to expand its product line
into other areas outside of the gun related items currently marketed.
The majority of our products are manufactured and imported from
mainland China and shipped to a central location in Little Rock, Arkansas for
distribution.
3
The Company's business plan and strategy for growth continues to focus
on:
o increased penetration of our existing markets, particularly in the
gun cleaning market and accessories
o development of new products for the sporting goods market
o identify and develop new markets for gun cleaning kits, i.e.
government, law enforcement and military
o adoption of new technologies for safety and security products
o adoption of new product lines
o identification and recruitment of effective manufacturer's
representatives to actively market these products on a national and
international basis
o aggressive cost containment
Management believes that continued growth will require the Company to
continually innovate and improve its existing line of products and services to
meet consumer, industry and governmental demands. In addition, we must continue
to develop or acquire new and unique products that will appeal to gun owners, as
well as non-gun related products for our expanding sporting goods customer base.
In addition to our traditional products, our management is actively
pursuing initiatives which may add complementary businesses, products and
services. These initiatives are intended to broaden the base of revenues to make
us less dependent on particular products. By developing businesses which focus
on products and services which complement our current line of products,
management hopes to leverage these opportunities to not only develop new sources
of revenue, but to strengthen the demand for our existing products.
We are in the process of improving and redesigning our website
(WWW.DACTEC.COM). All of our products will be available via e-commerce on this
new site. Our web site is intended to be the only direct link by the Company to
the retail market. Because our products are strictly safety devices, they are
not burdened by the politics surrounding gun ownership and gun rights, and can
be widely embraced as a solution to unintended gun injuries and death.
(c) Products
Our products can be grouped into four main categories: (a) gun safety,
(b) gun maintenance, (c)personal security, and (d) non-security products. In
developing these products, we focus on developing features, establishing
patents, and formulating pricing to obtain a competitive edge. We currently
design and engineer our products with the assistance of our Chinese and domestic
manufacturers, who are responsible for the tooling, manufacture and packaging of
our products.
4
(1) Security Products
(A) GUN SAFETY. We market ten (10) different gun safety locks and
five security and specialty safes. The lock's composition
range from plastic to steel, keyed trigger locks to cable
locks. The security safes are of heavy duty, all steel
construction and are designed for firearms, jewelry and other
valuables. Nine of the Company's gun locks and three safes
have been certified for sale consistent with the standards set
out by the State of California. These standards have been
adopted by other states and by a variety of gun manufacturers.
(B) GUN MAINTENANCE. We market over thirty-five different gun
cleaning kits, rod sets, tools and accessories used to clean
and maintain virtually any firearm on the market. These kits
are solid brass, and consist of "universal" kits designed to
fit a variety of firearms, caliber specific kits, as well as
replacement brushes, mops, etc. These kits are available in
solid wood or aluminum cases, as well as blister packed.
(C) PERSONAL SECURITY. We market over seven (7) different
electronic security devices designed to protect the person. We
also market non-electronic security devices such as pepper
spray and tear gas. These are marketed primarily through the
3000+ nationwide Walgreen chain of stores.
(D) NON-SECURITY PRODUCTS. We market two licensed products, the
Clampit Cupholder and Plateholder. We also market through
Wal-Mart and other customers nation-wide, the Sportsman
Lighter, a windproof, water resistant, refillable butane
lighter.
d) Manufacturing and Distribution.
Through our foreign and domestic manufacturing agents, we manufacture,
design and build our tooling, molds and products. Our administrative offices and
warehouse facilities are located in Little Rock, Arkansas. We contract our
manufacturing for tooling and production (including all of our gun related
products) primarily in Shanghai, China, and to a lesser extent, in Little Rock,
Arkansas and Sandwich, Illinois. We distribute the majority of our domestic,
and certain of our international business out of our Little Rock facility. Most
of our international business is shipped directly to our customers direct from
the Shanghai, China location. Products are delivered to our Little Rock facility
complete and ready for delivery to our customers. Countries outside the U. S.
where we have a presence include: Ireland/England, France, Germany, Russia,
Canada, New Zealand and Australia.
5
We utilize both internal sales personnel and commissioned independent
sales representatives. We have increased our sales promotions and sales
development activities to provide assistance to the independent sales
representatives through the use of brochures, product samples and demonstration
products. Our web site WWW.DACTEC.COM will serve both as a marketing tool and a
platform from which we will be able to provide various support services for our
independent sales representatives. We have added e-commerce capability to our
web site. We also utilize trade shows, both on a regional and national level to
promote our products and to attract qualified sales representatives.
Our management attempts to maintain sufficient inventory levels to meet
customer's demands, but there can be no assurance that we will be successful in
doing so. Turnaround time from the date we place an order with our manufacturers
until the product is received in our distribution center is normally between
four to six weeks. This quick turnaround time allows us to maintain minimum
inventory levels. However, since we outsource our manufacturing, a good portion
of which is done in China, it is difficult to predict the efficiency of our
vendors. Outsourcing to a foreign country also subjects our manufacturing to the
risk of political instability, currency fluctuation and reliability. See, "Risk
Factors."
(e) Competition
We operate in a very competitive industry, dominated by national and
international companies with well-established brands, all of whom are better
capitalized, have more experience in our industry and have established varying
degrees of consumer loyalty. There are no assurances we will ever be successful
in establishing our brands or penetrating our target markets. Our products
compete with other competitors gun cleaning kits, lock boxes, trigger locks,
cable locks, ring locks and the evolving smart guns. Many of these products are
more widely known than the Company's products. While we believe that our
products are favorably priced to comparable products on the current market, we
nevertheless expect competitors to develop and market similar products at
competitive prices, possibly reducing the Company's sales or profit margins or
both. (See, "Risk Factors")
Some of our competitors in the business sectors which we operate in are:
o GUN SAFETY - Master Lock (which presently controls 60%-70% of the
market), Smith & Wesson, and Shot Lock.
o GUN CLEANING KITS - Outers and Hoppes
o SECURITY SAFES - Sentry Safes, GunLocker and Gun Vault.
o PERSONAL SECURITY - competitors are varied and mostly smaller
vendors.
o NON-SECURITY PRODUCTS - competitors are various small and large
vendors.
6
We are subject to competition that is expected to intensify in the
future because we believe that the number of competitors is increasing. There
are no significant barriers to entry into our markets. We feel our greatest
difficulties in competing come in areas such as gun maintenance, gun safety and
security safes where our competitors generally are bigger, better known, and
have greater resources including capital and personnel. We realize it is
important to achieve brand name recognition in establishing a market share,
which, in turn generates additional market share giving consumers preferences
for brand names. We believe that while brand names operate effectively in
mainstream product distribution, there is significant opportunity for lesser
known names with specific products and solutions that appeal to consumers. The
keys to our maintaining a competitive position is product design, pricing,
quality of the product and the maintenance of favorable relationships with
various mass merchandisers.
(f) Principal Suppliers and Manufacturers
In 2003, 94% of our products, in particular our gun locks, cleaning
kits, gun accessories, and security safes, were manufactured in mainland China.
We customarily develop our manufacturing through trading companies located in
China. Our principal agents are Nimax and MDD Trading, Ltd., which are trading
companies/agents that are responsible for locating manufacturers for our gun
safety, security safes and electronics products. These companies typically
provide us with price lists for the manufacture and tooling of our products,
which we may or may not negotiate. The products are then purchased by the
trading companies and sold to us at a marked up cost.
Domestically, Personal Security Products, a Little Rock, Arkansas
company, manufactures our pepper spray and tear gas products, and Taico Design
Products, located in Sandwich, Illinois, manufactures our Clampit Cupholder and
Plateholder.
We believe our relationships with our suppliers and manufacturers are
satisfactory. Nonetheless, the Company is dependent upon it's primary Chinese
supplier continuing in business and its ability to ship to the United States,
but believes that it could replace this supplier, if required to, at similar
quality and terms. However, should any of them cease providing for us, we
believe they can be replaced within 30 days, without difficulty and at
competitive cost.
(g) Customers.
Although we have numerous customers, we sell on the basis of purchase
orders, rather than fixed contracts primarily to:
o national retail chains such as Wal Mart, Kmart and Walgreens (in
2003, Wal Mart accounted for 52% of our gross revenues),
o distributors such as Dicks Sporting Goods, RSR Group, Inc., Jerry's
Sport Center, Inc, AcuSport Corp., and Cabella Catalogue Co., and
o gun manufacturer's such as Savage Arms, Browning, and SIG-Arms
7
During 2003, we added a number of firearm manufacturers and sporting
goods retailers and distributors to our customer base, and continued to focus
our marketing efforts through our independent sales representatives in this
area.
Demand for our gun cleaning kits have presented opportunities in the
sporting goods market for our existing products and development of new products.
By developing these new markets we will be able to be less dependent on our
primary customers.
(h) Intellectual Property.
We believe that protection of proprietary rights to our products is
important because, as we are in a highly competitive market, a patent provides
us with a competitive advantage by limiting or eliminating similarly designed
competitive products. To this end, we have obtained U.S. patents on certain of
our products as follows:
MODEL PATENT NO. EXPIRATION
----- ---------- ----------
TVP 095 Trigger Lock Des. 375,342 2009
SWA 03 SWAT Steering Wheel
Alarm Des. 365,774 2009
KAL 201 Personal Safety Alarm Des. 355,863 2008
Key Chain Alarm 5,475,368 2008
GWA 001 Glass/Window Alarm Des. 371,086 2009
Defense Spray and Flashlight Des. 375,994 2009
In addition, we have entered into licensing agreements giving us the
exclusive right to sell the patented DAC Lok, a gun lock designed specifically
for Glock handguns, and the Clampit Cupholder and Plateholder in the U.S., with
certain minor exceptions.
We have not to date registered or trademarked any of our product names.
(See, "Risk Factor")
Depending upon the development of our business, we may also wish to
develop and market products which incorporate patented or patent-pending
formulations, as well as products covered by design patents or other patent
applications.
While we may seek to protect our intellectual property, in general,
there can be no assurance that our efforts to protect our intellectual property
rights through copyright, trademark and trade secret laws will be effective to
prevent misappropriation of our products. See, "Risk Factors." Our failure or
inability to protect our proprietary rights could have a material adverse affect
on our business, financial condition and results of operations. Moreover,
inasmuch as we will often seek to outsource manufactured products which are
similar to those manufactured by others, it is critical for us to insure that
our manufactured products do not infringe upon existing patents of others.
8
(i) Governmental Regulations.
Several federal laws regulate the ownership, purchase and use of
handguns, including the 1968 Gun Control Act and the Brady Bill. There is not,
however, any federal law which requires the use of gunlocks. In February 2004,
the U.S. Senate passed a Bill (S.2129) that would require child safety locks on
all handguns sold in the U.S., as part of a movement in Congress to immunize gun
makers and sellers from lawsuits arising from gun crimes. The Bill must still
pass through the House of Representatives and the White House.
At least 18 states and a variety of cities and counties have enacted
Children Access Prevention laws designed to prevent the unsupervised storage of
loaded weapons. These "CAP" laws typically require that guns be safely secured
in gun safes or with gun locks.
We are not subject to specific governmental regulation or
standards, although the sale of handguns is heavily regulated. However, several
states have considered types of enhanced gun regulation that impact handgun
safety locks and ways to increase gun safety and minimize gun violence. One way
of accomplishing this is to require gun manufacturers to incorporate safety
devices similar to the Company's products into all handguns sold. The first
regulation of this kind was passed by the Maryland state legislature in early
April 2000, and signed into law by Governor Glendening on April 11, 2000. More
than half a dozen states are considering similar laws. Although gun
manufacturers have uniformly resisted this kind of legislation in the past, this
view is changing. Should such regulations materialize, they presumably will
serve to increase the demand for our products and sales in the gun safety area.
Such regulations may, however, also be promulgated to regulate the
specifications of the devices. The Federal Consumer Products Safety Council has
contracted with the American Society for Testing and Materials ("ASTM") to set
standards and test procedures for gun locking devices.
Additionally, the State of California has enacted legislation that
establishes performance standards for "firearm safety devices", "lock-boxes" and
"safes". This legislation requires manufacturers to have their products tested
by an independent testing laboratory in order to be listed as an approved
device. Effective January 1, 2002, this legislation required that every firearm
sold in the state be accompanied by an approved safety device. Effective January
1, 2003, the legislation was expanded in that any firearm safety device sold
within the state must be approved.
We have obtained the required approvals from the Federal Communications
Commission for the Rf signals emitted by our remote control units used with our
car alarms. We are not aware of any other required governmental approvals on any
of our products.
9
(j) Research and Development.
Research and development costs are expensed as incurred. We develop our
products internally, utilizing the expertise of our manufacturers, input from an
engineering consulting firm and input from our customers. Any R & D cost
incurred by our manufacturers is passed on to us in the pricing of the tooling,
molds and products. We do not pass such costs onto our customers. Because of our
close relationships with our customers, we are able to determine the level of
interest in a particular product before investing significant time or capital in
its development. Once a potential new product is identified, we utilize the
services of a patent attorney to assure that we do not infringe upon anyone's
patent rights. We also design our own packaging internally.
Working closely with our manufacturers' engineers, a final design for a
product and cost estimations are completed. If management determines that a
product can be produced at competitive prices, and the interest level justifies
production, we proceed with having tooling made. We own the molds and tooling
for all of our gunlock products. After pre-production samples are approved, full
production begins.
(k) Environmental Laws.
We incur no costs and suffer no adverse effects by complying with
environmental laws (federal, state and local).
(l) Employees.
We currently employ five employees, all of whom are full-time:
President & Chief Executive Officer, Chief Financial Officer, Vice President of
Manufacturing, receptionist/clerk and shipping clerk. There are no collective
bargaining agreements.
(m) Reports to Security Holders.
We file reports with the SEC as a small business issuer. Copies of this
report, including exhibits to the Report and other materials filed with the SEC
that are not included herein, may be inspected and copied, without charge, at
the Public Reference Room, 450 Fifth Street, N. W., Washington, DC 20549.
Information on the operation of the Public Reference Room may be obtained by
calling the Commission at 1-800-SEC-0330. In addition, the Commission maintains
an Internet site on the World Wide Web at HTTP://WWW.SEC.GOV that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission.
10
(n) Certain Risk Factors.
IF WE ARE TO EXPAND OUR OPERATIONS, WE MAY NEED ADDITIONAL CAPITAL.
Our ability to timely expand our product operations and, in particular, the
production and marketing of our products is largely dependent upon our revenues
or the acquisition of additional funding. In the event that additional capital
is not obtained or our revenues fall off, we may be unable to timely complete
and/or implement our plans to expand our operations. While we believe we have
accurately identified strategic and viable business opportunities to pursue,
there is no assurance that these will become profitable operations. Technology
is a rapidly developing industry and our success is dependent on, among other
things, developing commercially acceptable products and pursuing the correct
distribution channels. Anti-gun sentiments and a weak economy are potential risk
factors.
WE HAVE A HISTORY OF OPERATING PROFITS, AND OUR GROWTH PROGRAM AND
FUTURE PROFITABILITY REMAINS UNCERTAIN. We believe that operating results will
be adversely affected if start-up expenses associated with our new product lines
are incurred without sufficient revenues. Moreover, future events, including
unanticipated expenses or increased competition could have an adverse effect on
our long-term operating margins and results of operations. There can be no
assurance that our Company's growth program will result in an increase in the
profitability of our operations.
OUR SUCCESS DEPENDS ON MAINTAINING RELATIONSHIPS WITH KEY CUSTOMERS. We
have several customers upon which we depend on for the sale of a large
percentage of our products. For example, more than 50% of our business is
through Wal-Mart. Customer orders are dependent upon their markets and may vary
significantly in the future based upon the demand for our products. The loss of
one or more of such customers, or a declining market in which such customers
reduce orders or request reduced prices, could have a material adverse effect on
our business.
WE DEPEND ON CONTRACT MANUFACTURERS FOR SUBSTANTIALLY ALL OF OUR
MANUFACTURING REQUIREMENTS. During 2003 the Company purchased 94% of its
products from one major supplier. The Company is dependent upon this supplier
continuing in business and its ability to ship to the United States, but
believes that it could replace this supplier, if required to, at similar quality
and terms. The inability of our contract manufacturers to provide us with
adequate supplies of high quality products or the loss of any of our contract
manufacturers would have an adverse effect on our business. We rely on contract
manufacturers to procure components, assemble, and package our products. We have
developed highly outsourced contract manufacturing capability for the production
of our products. Our primary relationship with our foreign contract
manufacturers has been accomplished through our agents located in Shanghai,
China. Because our primary manufacturer is located in mainland China, we are
exposed to risks of political uncertainty including U.S. foreign trade treaties,
foreign laws and currency fluctuations. While we believe there are alternative
manufacturing companies available at competitive prices, any interruption in the
operations of one or more of these contract manufacturers or delays in their
shipment of products would adversely affect our ability to meet scheduled
product deliveries to our customers.
11
WHILE WE MANUFACTURE A VARIETY OF PRODUCTS, WE RELY PRIMARILY ON THE
SALE OF GUN CLEANING KITS AND GUN-LOCKS AS OUR MAJOR SOURCE OF REVENUE. Although
we sell a number of different products, we rely primarily on two products-gun
cleaning kits and gun locks-which collectively accounts for approximately 73% of
our total revenues. Should our sales of either of these products significantly
decline due to the loss of customers, or a declining market in which such
customers reduce orders or request reduced prices, it could have a material
adverse effect on our business.
WE MAY BE UNABLE TO COMPETE FAVORABLY IN THE HIGHLY COMPETITIVE GUN
CLEANING, SECURITY PRODUCTS AND GUN LOCK INDUSTRY. The manufacture and sale of
gun cleaning kits, security safes and gun lock products is highly competitive
and there are no substantial barriers to entry into the market. Most of our
competitors are large, well-established companies with considerably greater
financial, marketing, sales and technical resources than those available to us.
Additionally, many of our present and potential competitors have research and
development capabilities that may allow such competitors to develop new or
improved products that may compete with our product lines. These companies may
succeed in developing proposed products that are more effective or less costly
than our proposed products or such companies may be more successful in
manufacturing and marketing their proposed products. An increase in competition
could result in a loss of market share.
WE ARE SUBJECT TO SALES CYCLES BEYOND OUR CONTROL, WHICH ARE DRIVEN
MANY TIMES BY NATIONAL EVENTS. The entire gun industry has experienced a surge
in demand in the United States since and as a direct result of the terrorist
acts which occurred on September 11, 2001. Americans are now focused on their
personal security. There has been a decline in recent years concerning the sale
of handguns, possibly due to licensing legislation and to the dissipation of
fear as we are time-removed from the events of September 11. Our Company,
however, is not reliant on persons who own guns for protection as much as we are
on hunters and sportsmen, who are less likely to be affected by national or
international events.
WE MAY NOT BE ABLE TO ATTRACT AND RETAIN THE QUALIFIED PERSONNEL WE
NEED TO SUCCEED IN THE FUTURE. Our future success will depend in part on our
ability to attract and retain qualified personnel to manage the development and
future growth of our company. While we believe we have a reliable and effective
core team, there can be no assurance that we will be successful in attracting
and retaining such personnel.
WE ANTICIPATE EVENTUAL STATE AND FEDERAL GUN LOCK LEGISLATION AND
REGULATION. While gun locking devices are currently not regulated under federal
or most state statutes or regulations, it is likely that such devices will be
regulated in the future. At the present time, the state of California has
established standards for gun locks which must accompany the sale of any
firearm. Other states are considering such legislation. In an effort to develop
a national standard, the firearms' industry is working with the U.S. Consumer
Products Safety Commission to develop reasonable performance standards for gun
locks. There can be no assurances that our devices will meet the requirements of
such future regulations, in which case, sales of such devices by us would be
adversely affected.
12
WE MAY BE AFFECTED BY LEGISLATION AND REGULATION OVER FIREARMS. The
business of all producers and marketers of firearms and firearms parts, is
subject to thousands of federal, state and local laws and governmental
regulations and protocols. The basic federal laws are the National Firearms Act,
the Federal Firearms Act, and the Gun Control Act of 1968. These laws generally
prohibit the private ownership of fully automatic weapons and place certain
restrictions on the interstate sale of firearms unless certain licenses are
obtained. From time to time, congressional committees review proposed bills and
various states enact laws relating to the regulation of firearms. These proposed
bills and enacted state laws generally seek either to restrict or ban the sale
and, in some cases, the ownership of various types of firearms. When such laws
restrict the ownership of guns, they will have a material adverse effect on our
business;on the other hand, if such laws require safety devices to be applied to
gun ownership, they will have a positive effect on our business. Such laws,
rules, regulations and protocols are subject to change. There can be no
assurance that the regulation of firearms will not become more restrictive in
the future and that any such restriction would not have a material adverse
effect on the business of the Company.
WE ARE OPERATING FROM OFFICES FOR WHICH WE HAVE NO CURRENT LEASE
AGREEMENT. The Company's lease at its primary Little Rock location has expired,
and the Company, currently a month to month tenant, is now negotiating with its
current landlord to lease larger facilities in proximity to its current offices.
The Company's occupancy can be terminated at any time, although if terminated,
we believe there are available adequate alternative facilities at reasonably
competitive prices.
WE EXTEND CREDIT TO OUR CUSTOMERS AND SHOULD OUR CUSTOMERS DEFAULT ON
THEIR OBLIGATIONS TO US, WE MAY BE SUBJECT TO CREDIT RISK. The Company provides
credit in the normal course of business to its customers and performs ongoing
credit evaluations of its customers. Approximately 94% of these trade
receivables were subject to a factoring agreement. These accounts are factored
on a non-recourse basis which reduces the Company's exposure to credit risk. We
also maintain allowances for doubtful accounts and provisions for returns and
credits based on factors surrounding the specific customers and circumstances.
The Company generally does not require collateral from its customers. Credit
risk is considered by management to be limited due to the Company's customer
base and its customer's financial resources.
13
WE HAVE NOT TO DATE REGISTERED OR TRADEMARKED ANY OF OUR PRODUCT NAMES.
While we may seek to protect our intellectual property, in general, there can be
no assurance that our efforts to protect our intellectual property rights
through copyright, trademark and trade secret laws will be effective to prevent
misappropriation of our products. Our failure or inability to protect our
proprietary rights could have a material adverse affect on our business,
financial condition and results of operations. Moreover, inasmuch as we will
often seek to outsource manufacture products which are similar to those
manufactured by others, it is critical for us to insure that our manufactured
products do not infringe upon existing patents of others.
ITEM 2. DESCRIPTION OF PROPERTY
Our corporate headquarters are located at 1601 Westpark Drive, Suite
4C, Little Rock, Arkansas 72204. This location consists of approximately 1,500
square feet of office space and 6,000 square feet of warehouse space. All of the
administrative, accounting and shipping functions are performed at this
location, as well as some sales. This space is leased at a monthly rent of
$3,605 for one year, and expired January 31, 2004. There are no renewal options.
We are currently operating as a month to month tenant, which means that we can
be terminated on thirty days notice. We believe there are adequate alternative
facilities at reasonably competitive prices in the event this lease is
terminated. The Company also maintains an executive office at the residence of
its president, David A. Collins, 19955 NE 38th Court, Aventura, Florida 33180.
This office and personal residence is rented from the Company's President at a
monthly rental of $3,000, for which there is no lease agreement. This lease
arrangement was not the product of arms-length negotiation, however, the Company
believes that the rental payment is competitive with other facilities in the
same or proximate location.
ITEM 3. LEGAL PROCEEDINGS
We were the plaintiff against our former manufacturer SKIT
International, Ltd. and Uni-Skit Technologies, Inc. which alleged breach of a
manufacturing contract which required defendants to manufacture certain of our
products within the range of "competitive pricing", a defined term. We sought
damages and recission of 165,000 shares of our common stock as part of the
compensation paid to the defendants. The defendants denied the allegations and
counterclaimed for an outstanding balance of $182,625, for recission of the
manufacturing agreement and for damage to its business reputation.
14
In August of 2003, this suit went to trial before a twelve member jury
in the Circuit Court of Pulaski County, Arkansas. The jury awarded the Company
damages in the amount of $1,650,560, which includes the value of the returned
shares of stock previously issued to the defendants. In addition, all
counterclaims of the defendants were dismissed. Pursuant to an order of the
Court, the shares issued to the defendants have been canceled and reissued to
the Company. We have not yet been successful in collecting the damage award,
thus it has not been provided for in the Company's financial statements, with
the exception of the return of the shares of common stock, into the Company's
treasury.
On October 23, 2003, the Company initiated suit, seeking unspecified
damages, in the Circuit Court of Pulaski County, Arkansas against former
manufacturers, Uni-Tat International, Inc., Uni-Champion Ltd., and their
respective principals, Victor Lee and Arthur Yung, for common law fraud (as to
Unit-Tat, Lee and Yung), breach of contract, and violation of the Deceptive
Trade Practices Act, and for vicarious liability.
We instituted suit along with The Collins Family Trust, our affiliate
in which David Collins, our Chairman claims a beneficial interest, and DAC
Technologies of America, Inc., our predecessor, against Larry Legel, our former
CPA, Director and the Trustee of The Collins Family Trust. The suit, commenced
in March 2001 alleged a transfer of 180,000 shares of our common stock for
services which the Defendant did not provide. The suit also alleges that the
Defendant breached an agreement not to sell his shares before certain private
investors had recouped their investment. In October 2002, the Arkansas Court
ordered the transfer rescinded and the stock returned to David Collins. Mr.
Legal has noticed the appeal of the Court's October Order.
Subsequent to the Arkansas action, Mr. Legal instituted against the
Company in August 2001, alleging failure by the Company and its officers to
permit the sale of his shares of the Company, which were the same shares that
were the subject of the Arkansas action. A Motion to Dismiss was filed and
granted. In February,2003, Legal filed an amended complaint, alleging that the
Company failed to honor his request to sell the shares. The company has filed a
motion to dismiss or abate the Amended Complaint due to the decision and
pendency of the Arkansas appeal.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There are no matters submitted during the fourth quarter of the fiscal
year covered by this report to a vote of security holders, through the
solicitation of proxies or otherwise.
15
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
On June 19, 2000, our common stock began trading on the NASDAQ
Over-the-Counter Bulletin Board market under the trading symbol DAAT. The high
and low bid information for each quarter is presented below. These prices
reflect inter-dealer prices, without retail markup, markdown or commission and
may not represent actual transactions.
QUARTER ENDED HIGH LOW
------------- ---- -----
March 31, 2002 $2.17 $0.80
June 30, 2002 $1.22 $0.45
September 30, 2002 $1.00 $0.65
December 31, 2002 $0.85 $0.60
March 31, 2003 $1.01 $0.51
June 30, 2003 $0.92 $0.38
September 30, 2003 $0.87 $0.47
December 31, 2003 $1.30 $0.62
As of March 15, 2004, there were approximately 92 holders of record,
excluding those held in street name, of our 5,713,056 shares of common stock
outstanding.
We have not paid a cash dividend on the common stock since inception.
The payment of dividends may be made at the discretion of our Board of Directors
and will depend upon, among other things, our operations, our capital
requirements and our overall financial condition. Although there is no
restriction to pay a dividend, as of the date of this registration statement, we
have no present intention to declare dividends.
During 2003, 25,000 shares of our restricted stock were issued for
services under a consulting agreement entered into by the Company with a certain
public relations company. Because this company had a preexisting relationship
with us and access to relevant information concerning us, the issuance of such
securities was exempt from the registration requirements of the Securities Act
pursuant to the exemption set forth in Section 4(2) of the Securities Act.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following Management Discussion and Analysis of Financial Condition
is qualified by reference to and should be read in conjunction with, our
Financial Statements and the Notes thereto as set forth at the end of this
document. We include the following cautionary statement in this Form 10K-SB for
any forward-looking statements made by, or on behalf of, the Company.
Forward-looking statements include statements concerning plans, objectives,
goals, strategies, expectations, future events or performances and underlying
assumptions and other statements which are other than statements of historical
facts. Certain statements contained herein are forward-looking statements and
accordingly, involve risks and uncertainties which could cause actual results or
outcomes to differ materially from those expressed in the forward-looking
statements. The Company's expectations, beliefs and projections are expressed in
good faith and are believed by the Company to have a reasonable basis, including
without limitations, management's examination of historical operating trends,
data contained in the Company's records and other data available from third
parties, but there can be no assurance that management's expectations, beliefs
or projections will result or be achieved or accomplished.
16
(b) OVERVIEW
The year 2002 was the beginning of a significant turnaround in the
Company's operations, which continued in 2003 at an even greater rate. The keys
to this success, and continued success in the future, has been management's
ability to identify, develop and bring to market new products of high quality,
and at prices at or below its competition.
The development of these new products, particularly the Company's
GunMaster line of gun cleaning kits in 2003, has enabled the Company to increase
its revenues in 2002 by 39% over 2001 and in 2003 by 73% over 2002. Revenues in
2003 increased by 140% over 2001. At the same time, the Company has been able to
reduce its operating expenses over 2001 levels. These results have led to
significant increases in income and cash generated from operations, which has
allowed the Company, without any outside sources of capital, to reduce its debt,
fund its operations and development of new products.
Significant operating items for the past three years are summarized below:
2003 2002 2001
---------- ---------- -----------
Net sales ............. $4,756,530 $2,756,193 $ 1,984,692
Income (loss) from
operations .......... $ 590,848 $ 110,341 $ (554,513)
Income (loss) before
income taxes ........ $ 519,681 $ 24,346 $ (655,548)
Net income (loss) ..... $ 319,084 $ 12,810 $ (404,665)
Earnings per share .... $ 0.06 $ 0.00 $ (0.08)
The successful operations the past two years has improved the overall financial
condition of the Company, as summarized below:
Current assets ........ $1,458,293 $ 957,235 $ 820,054
Current liabilities.... $1,100,830 $1,027,986 $ 897,796
Net working capital ... $ 357,463 $ (70,751) $ (77,742)
Total assets .......... $2,019,752 $1,716,351 $ 1,475,484
Stockholders equity ... $ 918,922 $ 688,365 $ 577,688
17
DETAILS
Net sales for 2003 totaled $4,756,530, an increase of $2,000,337, or
73% over 2002 net sales of $2,756,193. Of this increase, $1,990,000 was
generated from sales of the Company's new GunMaster line of gun cleaning kits.
First sold late in the second quarter of 2003, sales from these new products
represent only six months worth of sales.
The Company also experienced increases in sales of its gun locks. Net
sales of gun locks in 2003 totaled $1,485,253 as compared to $1,144,615 in 2002,
an increase of $340,638, or 30%.
While net sales increased 73%, operating expenses only increased 16%,
from $1,118,500 in 2002 to $1,299,235 in 2003. Of this increase, 75% was
directly related to increased sales commissions generated from the increased
sales, and accounting and legal expenses incurred from complying with the
Sarbanes-Oxley Act.
FUTURE CONSIDERATIONS
As the Company's product line and revenues continue to grow, the
challenges for management grow as well. Management must anticipate future demand
for its products in order to maintain an adequate supply of its expanding
product line, without tying up too much capital in excess inventory. This will
become more difficult as new products are developed.
Another challenge for management will be to maintain control of
operating expenses. Thus far, the Company has been able to significantly
increase its product line and revenues without a corresponding increase in
expenses. The anticipated increase in revenues and inventory levels in 2004 will
require the Company to increase its warehouse facilities, shipping personnel,
and support staff for sales and customer service needs. Management has been
addressing these issues to ensure these needs are adequately and economically
met.
The Company has benefitted in 2002 and 2003 from the positive effect on
cash flow generated from the net operating losses for income tax purposes from
losses incurred in prior years. Although the Company has recorded income tax
expense on its financial statements of $200,597 and $11,536 for 2003 and 2002,
respectively, no income taxes have been paid due to the operating loss
carryforward. Based on estimates for 2004, these net operating loss carry
forwards will be used up in 2004.
o Liquidity and Capital Resources
Our primarily source of cash is funds from our operations. We believe
that external sources of liquidity could be obtained in the form of bank loans,
letters of credit, etc. We maintain an account receivable factoring arrangement
in order to insure an immediate cash flow. The factor may also, at its
discretion, advance funds prior to the collection of our accounts. Advances are
payable to the factor on demand. Should our sales revenues significantly
decline, it could affect our short term liquidity. For the period ending
December 31, 2003, our factor had advanced to us $1,342,814.
18
During 2003, the Company refinanced three demand notes with a local
bank. The loans bear interest at 7.00% and mature in 2005 and 2006. The
principal balance of these loans on December 31, 2003 totaled $342,581. We
believe our revenues will be sufficient to pay these obligations. If not, we
will seek to refinance them or request our shareholders to pay their guarantees.
CRITICAL ACCOUNTING ESTIMATES
The Company prepares its consolidated financial statements in
accordance with accounting principles generally accepted in the United States of
America. The Company's significant accounting policies are discussed in detail
in Note 2 to the consolidated financial statements. Certain of these accounting
policies as discussed below require management to make estimates and assumptions
about future events that could materially affect the reported amounts of assets,
liabilities, revenues and expenses and disclosure of contingent assets and
liabilities. Accounting estimates and assumptions discussed in this section are
those that we consider to be the most critical to an understanding of our
financial statements because they inherently involve significant judgments and
uncertainties. For all of these estimates, we caution that future events rarely
develop exactly as forecast, and the best estimates routinely require
adjustment.
LONG-LIVED ASSETS. Depreciation expense is based on the estimated
economic useful lives of the underlying property and equipment. Although the
Company believes it is unlikely that any significant changes to the useful lives
of its property and equipment will occur in the near term, an increase or
decrease in the estimated useful lives would result in changes to depreciation
expense.
The Company continually reevaluates the carrying value of its
long-lived assets, for events or changes in circumstances, which indicate that
the carrying value may not be recoverable. As part of this reevaluation, if
impairment indicators are present, the Company estimates the future cash flows
expected to result from the use of the asset and its eventual disposal. If the
sum of the expected future cash flows (undiscounted and without interest
charges) is less than the carrying value of the asset, an impairment loss is
recognized to reduce the carrying value of the long-lived asset to the estimated
fair value of the asset.
PATENTS AND TRADEMARKS. Amortization expense is based on the estimated
economic useful lives of the underlying patents and trademarks. Although the
Company believes it is unlikely that any significant changes to the useful lives
of its patents and trademarks will occur in the near term, rapid changes in
technology or changes in market conditions could result in revisions to such
estimates that could materially affect the carrying value of these assets and
the Company's future consolidated operating results.
ITEM 7. FINANCIAL STATEMENTS
Our financial statements are contained in pages F-1 through F-18
following.
19
DAC TECHNOLOGIES GROUP INTERNATIONAL, INC.
DECEMBER 31, 2003 AND 2002
CONSOLIDATED FINANCIAL STATEMENTS
WITH
INDEPENDENT AUDITORS' REPORT
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
DAC Technologies Group International, Inc.
Little Rock, Arkansas
We have audited the accompanying consolidated balance sheets of DAC
Technologies Group International, Inc. as of December 31, 2003 and 2002, and the
related consolidated statements of operations, stockholders' equity 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 auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audits 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 consolidated 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
DAC Technologies Group International, Inc. as of December 31, 2003 and 2002, and
the consolidated results of its operations and its cash flows for the years then
ended, in conformity with accounting principles generally accepted in the United
States of America.
Certified Public Accountants
Little Rock, Arkansas
February 18, 2004
F-1
DAC TECHNOLOGIES GROUP INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 2003 and 2002
2003 2002
----------- -----------
ASSETS
Current assets
Cash $ 104,376 $ 13,378
Accounts receivable, less allowance for doubtful
accounts of $5,500 in 2003 and 2002 99,300 54,063
Due from factor 223,029 159,144
Inventories 909,352 596,767
Note receivable 44,665 42,332
Prepaid expenses and deferred charges 41,104 82,701
Current deferred income tax benefit 36,467 8,850
----------- -----------
Total current assets 1,458,293 957,235
----------- -----------
Property and equipment
Furniture and fixtures 129,847 123,733
Molds, dies, and artwork 473,441 453,470
----------- -----------
603,288 577,203
Accumulated depreciation (379,190) (320,380)
----------- -----------
Net property and equipment 224,098 256,823
----------- -----------
Other assets
Patents and trademarks, net of accumulated
amortization of $40,968 and $29,153 in 2003
and 2002, respectively 170,280 122,095
Deferred income tax benefit -- 228,214
Advances to employees 3,325 4,023
Note receivable - related party 72,518 43,863
Note receivable - stockholder 91,238 104,098
----------- -----------
Total other assets 337,361 502,293
----------- -----------
Total assets $ 2,019,752 $ 1,716,351
=========== ===========
F-2
2003 2002
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes payable $ 342,581 $ 413,546
Notes payable - stockholders 142,719 192,500
Accounts payable 517,580 272,168
Accrued payroll tax withholdings 78,871 131,511
Accrued expenses other 19,079 18,261
----------- -----------
Total current liabilities 1,100,830 1,027,986
----------- -----------
Commitments and contingencies (Note 13)
Stockholders' equity
Common stock, $.001 par value; authorized 50,000,000 shares; issued 5,843,056
shares and outstanding 5,713,056 shares at December 31, 2003; issued and
outstanding 5,817,956 shares at December 31, 2002 5,843 5,818
Preferred stock, $.001 par value; authorized
10,000,000 shares; none issued and outstanding -- --
Additional paid-in capital 1,249,065 1,236,217
Treasury stock, at cost (101,400) --
Accumulated deficit (234,586) (553,670)
----------- -----------
Total stockholders' equity 918,922 688,365
----------- -----------
Total liabilities and stockholders' equity $ 2,019,752 $ 1,716,351
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
DAC TECHNOLOGIES GROUP INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2003 and 2002
2003 2002
----------- -----------
Net sales $ 4,756,530 $ 2,756,193
Cost of sales 2,866,447 1,527,352
----------- -----------
Gross profit 1,890,083 1,228,841
----------- -----------
Operating expenses
Selling 574,009 441,639
General and administrative 725,226 676,861
----------- -----------
Total operating expenses 1,299,235 1,118,500
----------- -----------
Income from operations 590,848 110,341
----------- -----------
Other income (expense)
Interest expense (126,635) (111,327)
Interest expense - stockholder notes (21,490) (22,000)
Interest income 2,508 1,032
Gain on sale of assets -- 46,300
Other income 74,450 --
----------- -----------
Total other income (expense) (71,167) (85,995)
----------- -----------
Income before income tax expense 519,681 24,346
Provision for income taxes 200,597 11,536
----------- -----------
Net income $ 319,084 $ 12,810
=========== ===========
Earnings per share:
Numerator - net income $ 319,084 $ 12,810
Denominator - weighted average number of
shares outstanding 5,786,600 5,782,329
----------- -----------
Basic and dilutive earnings per share $ 0.06 $ 0.00
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
DAC TECHNOLOGIES GROUP INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Year Ended December 31, 2003 and 2002
COMMON STOCK ADDITIONAL TREASURY STOCK STOCK
----------------- PAID-IN ------------------- ACCUMULATED SUBSCRIPTION
SHARES AMOUNT CAPITAL SHARES COST DEFICIT RECEIVABLE TOTAL
--------- ------ ---------- -------- --------- ----------- ------------ -------
Balances - December 31, 2001 5,723,956 $5,724 $1,163,444 $ -- $ -- $(566,480) $(25,000) $ 577,688
Issuance of stock for cash 40,000 40 39,960 -- -- -- -- 40,000
Issuance of stock for services 54,000 54 32,813 -- -- -- -- 32,867
Collection of stock subscription
receivable -- -- -- -- -- -- 25,000 25,000
Net income -- -- -- -- -- 12,810 -- 12,810
--------- ------ ---------- -------- --------- --------- -------- ---------
Balances - December 31, 2002 5,817,956 5,818 1,236,217 -- -- (553,670) -- 688,365
Issuance of stock as a
tradeshow incentive 100 -- 40 -- -- -- -- 40
Issuance of stock for services 25,000 25 12,808 -- -- -- -- 12,833
Treasury stock received in
lawsuit settlement -- -- -- 130,000 (101,400) -- -- (101,400)
Net income -- -- -- -- -- 319,084 -- 319,084
--------- ------ ---------- -------- --------- --------- -------- ---------
Balances - December 31, 2003 5,843,056 $5,843 $1,249,065 130,000 $(101,400) $(234,586) $ -- $ 918,922
========= ====== ========== ======== ========= ========= ======== =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
DAC TECHNOLOGIES GROUP INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year Ended December 31, 2003 and 2002
2003 2002
--------- ---------
Cash flows from operating activities
Net income $ 319,084 $ 12,810
Adjustments to reconcile net income to net
cash provided by (used in) operating activities
Issuance of common stock for services and incentives 12,873 32,867
Receipt of treasury stock in lawsuit settlement (101,400) --
Depreciation 58,810 66,897
Amortization 11,815 6,434
Imputed interest on notes receivable (2,333) --
Deferred income tax provision 200,597 11,536
Gain on sale of assets -- (46,300)
Changes in operating assets and liabilities
Accounts receivable (45,237) (53,430)
Due from factor (63,885) (39,120)
Inventories (312,585) (181,651)
Prepaid expenses and deferred charges 41,597 (3,495)
Advances to employees 698 (3,613)
Accounts payable 245,412 191,213
Accrued payroll tax withholdings (52,640) (36,976)
Accrued expenses other 818 (31,765)
--------- ---------
Net cash provided by (used in) operating activities 313,624 (74,593)
--------- ---------
Cash flows from investing activities
Proceeds from sale of Summit Training
International assets -- 5,000
Purchases of property and equipment (26,085) (31,301)
Purchases of patents and trademarks (60,000) --
Advances on note receivable - related party (28,655) (29,975)
Advances on note receivable - stockholder (4,240) (42,379)
Payments received on note receivable - stockholder 17,100 41,275
--------- ---------
Net cash used in investing activities (101,880) (57,380)
--------- ---------
F-6
DAC TECHNOLOGIES GROUP INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
For the Years Ended December 31, 2003 and 2002
2003 2002
--------- ---------
Cash flows from financing activities
Repayments on notes payable $ (70,965) $ (59,782)
Advances on notes payable - stockholders 15,000 100,000
Repayments on notes payable - stockholders (64,781) (32,500)
Proceeds from issuance of common stock -- 40,000
Collection of stock subscription receivable -- 25,000
--------- ---------
Net cash provided by (used in) financing activities (120,746) 72,718
--------- ---------
Net increase (decrease) in cash 90,998 (59,255)
Cash - beginning of year 13,378 72,633
--------- ---------
Cash - end of year $ 104,376 $ 13,378
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION
Cash paid during the year for
Interest $ 152,439 $ 131,712
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
DAC TECHNOLOGIES GROUP INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002
1. ORGANIZATION AND NATURE OF BUSINESS
DAC Technologies Group International, Inc. ("DAC") was originally
incorporated under the name DAC Technologies of America, Inc. In July 1999,
the Company changed its name to DAC Technologies Group International, Inc.
DAC is in the business of developing, manufacturing and marketing various
patented and unpatented consumer products that are designed to provide
security for the consumer and their property. In addition, DAC has
developed a wide range of security and non-security products for the home,
automobile and individual. The majority of DAC's products are manufactured
and imported from mainland China and are shipped to DAC's central warehouse
facility in Little Rock, Arkansas. These products, along with other items
manufactured in the United States, are sold primarily to major retail
chains in the United States.
In February 2001, DAC formed a wholly owned subsidiary, Summit
Training International ("STI"), an Arkansas corporation. STI was formed
with the primary objective of providing training to law enforcement
agencies through courses, seminars and conferences. During the early part
of 2002, the Company decided not to pursue further development of STI due
to changes in the perceived market. In July 2002, the Company sold certain
assets of STI, including its name for $50,000, which consisted of $5,000 in
cash and a $45,000 note, maturing no later than eighteen (18) months from
the date of the note. The Company had suspended operations of STI earlier
in 2002 due to unprofitability. In connection with this sale, the Company
has entered into a noncompete agreement in regards to educational or
instructional services for a four year period.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. BASIS OF PRESENTATION - The accompanying consolidated financial
statements include the accounts of DAC Technologies Group
International, Inc. and its wholly owned subsidiary, Summit Training
International (collectively, the "Company"). All material intercompany
accounts and transactions have been eliminated in the consolidation.
b. REVENUE RECOGNITION - The Company recognizes sales revenue when the
following criteria are met: persuasive evidence of an agreement
exists, delivery has occurred or services have been rendered, the
Company's price to the buyer is fixed and determinable, and
collectibility is reasonably assured.
Interest income associated with notes receivable is recognized in
the period in which it is earned based upon the terms of the note. As
such time that management would deem a note to be uncollectible,
interest income would cease to be recognized. Based on management's
analysis, there were no conditions that existed in the years ended
December 31, 2003 and 2002 to indicate the need for the nonaccrual of
interest income.
c. CASH EQUIVALENTS - The Company considers all highly liquid investments
with original maturities of three months or less at the time of
purchase to be cash equivalents. At December 31, 2003 and 2002, the
Company had no cash equivalents.
F-8
DAC TECHNOLOGIES GROUP INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.)
d. ACCOUNTS AND NOTES RECEIVABLE - The majority of the Company's
receivables are factored pursuant to a factoring agreement (Note 4).
At December 31, 2003 and 2002, approximately 94% and 98% of the
Company's accounts receivable, gross of the balance due to factor,
were covered by this agreement. For receivables that are not covered
under this agreement, the Company evaluates these customer accounts on
a periodic basis and records an allowance for amounts estimated to be
uncollectible. Past due status is determined based upon contractual
terms. Amounts that are determined to be uncollectible are written off
against this allowance when collection attempts on the accounts have
been exhausted. Management uses significant judgment in estimating
uncollectible accounts. In estimating uncollectible amounts,
management considers factors such as current overall economic
conditions, industry-specific economic conditions, historical customer
performance and anticipated customer performance. While management
believes the Company processes effectively address its exposure to
doubtful accounts, changes in economy, industry or specific customer
conditions may require adjustment to the allowance recorded by the
Company.
e. INVENTORIES - Inventories are stated at the lower of average cost or
market. Costs include freight and applicable customs fees. The Company
receives inventory from oversees at terms F.O.B. shipping point, and
thereby bearing the risk of loss. During the time period prior to the
time it is received in the warehouse, this inventory is classified as
inventory in transit. Inventory held in the warehouse is classified as
finished goods.
f. PROPERTY AND EQUIPMENT - Property and equipment are stated at cost.
Depreciation is provided using the straight-line method over the
estimated useful lives of the assets, which range from five to ten
years. Depreciation expense of $58,810 and $66,897 was recognized
during the years ended December 31, 2003 and 2002, respectively.
g. PATENTS AND TRADEMARKS - Costs incurred in connection with the
acquisition of patents and trademarks are capitalized and amortized
over their estimated useful lives, which range from five to seventeen
years.
h. INCOME TAXES - The Company utilizes the liability method of accounting
for deferred income taxes. The liability method requires the
recognition of deferred tax liabilities and assets for the expected
future tax consequences of temporary differences between tax basis and
financial reporting basis of assets and liabilities as of the year-end
date at the presently enacted tax rates. A valuation allowance is
established when necessary to reduce deferred tax assets to the amount
that is expected to be realized.
i. SHIPPING AND HANDLING - All shipping and handling costs are included
in selling expense in the accompanying consolidated statement of
operations. These costs totaled $155,298 and $154,132 for the years
ended December 31, 2003 and 2002, respectively.
j. EARNINGS PER SHARE - Earnings per share have been calculated using the
weighted average number of shares outstanding for each year. The
Company has no potentially dilutive shares or options outstanding.
F-9
DAC TECHNOLOGIES GROUP INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.)
k. ESTIMATES - The preparation of consolidated financial statements in
conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and the disclosure of contingent assets and liabilities at the date of
the consolidated financial statements, and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
l. FAIR VALUE OF FINANCIAL INSTRUMENTS - The fair values of cash and cash
equivalents, accounts receivables and notes payable approximate their
carrying values due to the short-term nature of the instruments.
m. IMPAIRMENT OF LONG-LIVED ASSETS - Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" requires that long-lived assets be reviewed for
impairment whenever events or changes in circumstances indicate that
the carrying amounts of any asset may not be recoverable.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered
to be impaired, the impairment to be recognized is measured by the
amount the carrying amount of the assets exceeds the fair value of the
assets. Based upon management's assessment of the impairment
indicators, no impairment testing is necessary at December 31, 2003.
n. RECLASSIFICATIONS - Certain 2002 balances in the accompanying
consolidated financial statements have been reclassified to conform to
the 2003 presentation. These reclassifications had no effect on
previously reported results of operations or retained earnings.
3. INVENTORIES
Inventories consist of:
2003 2002
-------- --------
Finished Goods $605,941 $391,898
Inventory in transit 280,444 181,901
Parts 22,967 22,968
-------- --------
$909,352 $596,767
======== ========
F-10
DAC TECHNOLOGIES GROUP INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002
4. INTANGIBLE ASSETS
Intangible assets consisted of the following at December 31:
2003 2002
-------- --------
Finite lived:
Patents, net of accumulated amortization
of $40,968 and $29,153, respectively $ 170,280 $122,095
========= ========
Aggregate amortization expense related to finite lived intangible
assets was $11,815 and $6,434 for the years ended December 31, 2003 and
2002, respectively. Future finite lived intangible asset amortization
expenses are as follows:
2004 $ 14,021
2005 13,078
2006 13,078
2007 12,037
2008 11,762
Thereafter 106,304
---------
$ 170,280
=========
5. DUE FROM FACTOR
The Company factors a majority of its receivables without recourse
under a credit risk factoring agreement, which is renewable annually. This
agreement provides for factoring fees of .65% to 1.8% monthly, depending on
the creditworthiness and location of an account (domestic or foreign). An
additional fee of .25% is charged for each thirty-day period, or part
thereof, when the terms of sale exceed ninety-days. Fees are calculated on
the gross face value of each invoice. Additionally, this agreement provides
for advances of funds on the factored receivable. Interest is charged at a
greater of 7% or 1.25% above prime (5.25% at December 31, 2003) on the
outstanding funds in use. The amounts borrowed are collateralized by the
outstanding accounts receivable, and are reflected as a reduction to
accounts receivable in the accompanying consolidated balance sheets. These
amounts are as follows:
2003 2002
---------- ----------
Accounts receivable factored $1,565,843 $ 894,179
Amounts advanced and outstanding 1,342,814 735,035
---------- ----------
Due from factor $ 223,029 $ 159,144
========== ==========
F-11
DAC TECHNOLOGIES GROUP INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002
6. NOTES PAYABLE
Notes payable consist of:
2003 2002
-------- --------
Note payable with a bank; interest at 7.00%;
payable on demand or if no demand,
November 1, 2005; collateralized by
the Company's receivables and personal
guarantees of the Company's major stockholders $167,496 $180,000
Note payable with a bank; interest at 7.00%;
payable on demand or if no demand,
November 12, 2005; collateralized by
the Company's receivables and personal
guarantees of the Company's major stockholders 137,747 149,500
Note payable with a bank; interest at 7.00%;
payable on demand or if no demand,
April 30, 2006; secured by the Company's
inventories and personal guarantees of
the Company's major stockholders 37,338 53,138
Note payable with a bank; interest at
Wall Street Journal Prime Rate (4.25% at
December 31, 2002); payable on demand or
if no demand is made in thirty-six
monthly payments of principal and interest
of $4,659 through its maturity on
July 2, 2003; secured by the Company's
inventories and personal guarantees of
the Company's major stockholders -- 30,908
-------- --------
$342,581 $413,546
======== ========
The weighted average interest rates on short-term borrowings,
including notes payable - stockholders, for the years ended December 31,
2003 and 2002 were 7.45% and 7.61%, respectively. The Company recognized
interest expense of approximately $51,100 and $59,400 for the years ended
December 31, 2003 and 2002, respectively, on notes payable and notes
payable - stockholders.
F-12
DAC TECHNOLOGIES GROUP INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002
7. NOTES PAYABLE - STOCKHOLDERS
During 2003 and 2002, the Company maintained note payable agreements
with certain stockholders of the Company. Borrowings and repayments under
these agreements during 2003 were $15,000 and $64,781, respectively.
Borrowings and repayments under these agreements during 2002 were $100,000
and $32,500, respectively. These notes bear interest at rates ranging from
6% to 10% and are payable on various dates throughout 2004. At December 31,
2003 and 2002, outstanding borrowings under these agreements totaled
$142,719 and $192,500, respectively. During 2003 and 2002, the Company
recognized interest expense of $21,490 and $22,000, respectively, on these
notes.
8. EQUITY
On January 16, 2003, the Company issued 100 shares of restricted
common stock as a door prize at a trade show. These shares were valued at
fair value on the date of issuance.
On April 1, 2003, the Company issued 25,000 shares of restricted
common stock for services valued at $12,833.
On September 1, 2002, the Company entered into a one year agreement
with a consulting firm for services relating to strategic planning and
operational assistance. As compensation for these services, the Company
issued 25,000 shares of restricted common stock valued at $14,667.
On July 7, 2002, the Company issued 25,000 shares of restricted common
stock valued at $15,000 as additional interest on note payable to a
stockholder. The value of these shares were recognized as interest expense
over the term of note payable of ten months, which expired on May 7, 2003.
On March 18, 2002, the Company issued 4,000 shares of restricted
common stock for services valued at $3,200.
During the first quarter of the year ended December 31, 2002, the
Company issued 40,000 shares of restricted common stock at $1.00 per share.
9. TREASURY STOCK
In August 2000, the Company filed suit against a former manufacturer
alleging breach of a manufacturing contract and seeking damages and
recission of 165,000 shares of its common stock as part of the amounts
which had been previously paid to the manufacturer. During 2003, a jury
awarded the Company damages in the amount of $1,650,560, which included the
value of the returned shares of common stock. The treasury stock was
received during the year at a court-mandated value of $0.78 per share. Of
the total shares, 35,000 were paid to legal counsel as consideration for
legal fees. The remaining 130,000 shares are reflected as treasury stock in
the accompanying balance sheet at the $0.78 per share, or $101,400. The
Company is attempting to collect the remainder of the award, $1,521,860, by
filing suit in October 2003 against the owners of the former manufacturer.
As collection of this award is uncertain, this gain contingency has not
been recorded in the accompanying consolidated statement of operations.
F-13
DAC TECHNOLOGIES GROUP INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002
10. STOCK OPTION PLAN
During 2000, the Company adopted the 2000 Equity Incentive Plan (the
"Plan"), a non-qualified stock option plan. Under the terms of the Plan,
officers, directors, employees and other individuals may be granted options
to purchase the Company's common stock at exercise prices determined by the
Company's Board of Directors. The terms and conditions of any options
granted under the Plan, to include vesting period and restrictions or
limitations on the options, will be determined by the Board of Directors.
The maximum number of shares that can be granted under this Plan is one
million shares of stock. At December 31, 2003, the Company had granted no
options pursuant to this Plan.
11. INCOME TAXES
The provision for income taxes consists of:
2003 2002
-------- --------
Current provision $ -- $ --
Deferred provision 200,597 11,536
-------- --------
$200,597 $ 11,536
======== ========
Reconciliations of the differences between income taxes computed at
the federal statutory tax rates and the provision for income taxes is as
follows:
2003 2002
-------- --------
Income taxes computed at federal
statutory tax rate $176,692 $ 8,278
State tax provision, net of federal benefits 22,294 1,044
Nondeductible expenses and other 1,611 2,214
-------- --------
Provision for income taxes $200,597 $ 11,536
======== ========
Temporary differences that give rise to significant deferred tax
assets (liabilities) are as follows:
2003 2002
--------- ---------
Net operating loss carryforward $ 28,240 $ 238,611
Allowance for doubtful accounts 2,106 2,106
Allowance for excess inventory 6,744 6,744
Other accrued liabilities (623) (10,397)
--------- ---------
Net deferred tax asset $ 36,467 $ 237,064
========= =========
F-14
DAC TECHNOLOGIES GROUP INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002
11. INCOME TAXES (CONT.)
During the year ended December 31, 2003, the Company utilized $537,174
of its net operating loss carryforward to offset its current federal and
state income tax liability. At December 31, 2003, the Company has a net
operating loss carryforward available for federal and state income tax
purposes of approximately $74,000. Unless utilized, this carryforward will
begin expiring in 2021.
During 2003, the Company received a final audit determination letter
from the Internal Revenue Service which disallowed the S-Corporation status
of DAC Technologies of America, Inc. As a result of this determination, net
tax losses recognized by the members of DAC Technologies of America, Inc.
were disallowed resulting in such losses becoming net operating losses of
the Company. Based on the current tax situation of the Company, these
amounts will increase the current net operating loss carryforward. However,
the tax impact to be recorded by the Company is undeterminable, and
accordingly, has not been recorded in the accompanying consolidated
financial statements.
12. RELATED PARTY TRANSACTIONS
During the years ended December 31, 2003 and 2002, the Company made
periodic advances to certain employees of the Company. At December 31, 2003
and 2002, the outstanding balances of advances to these individuals were
$3,325 and $4,023, respectively. These advances have been classified as
noncurrent in the accompanying consolidated balance sheets because
repayment is not anticipated during the next year.
At December 31, 2003 and 2002, the Company has a note receivable of
$91,238 and $104,098, respectively, due from an individual, who is both an
employee and a stockholder, that is due on December 31, 2004. This note is
unsecured and non-interest bearing. The note receivable has been classified
as noncurrent in the accompanying consolidated balance sheets because
repayment is not anticipated during the next year.
At December 31, 2003 and 2002, the Company has a note receivable of
$72,518 and $43,863, respectively, due from a related party, which is owned
by the individual discussed above, that is due on December 31, 2004. This
note is unsecured and non-interest bearing. The note receivable has been
classified as noncurrent in the accompanying consolidated balance sheets
because repayment is not anticipated during the next year.
For the year ended December 31, 2002, consulting service fees in the
amount of $62,500 were paid to a related party, which is owned by the
individual discussed above. The stockholder provided consulting services to
the Company pursuant to a consulting agreement that terminated on May 30,
2002, which is the date that the stockholder became an employee.
Certain stockholders of the Company have personally guaranteed the
Company's outstanding borrowings with a bank at December 31, 2003 and 2002.
F-15
DAC TECHNOLOGIES GROUP INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002
13. COMMITMENTS AND CONTINGENCIES
The Company leased office and warehouse space under a lease that
expires on January 31, 2004. The lease was converted to a month to month
operating lease upon expiration. The Company also leases space from a
shareholder for office space for $3,000 per month under no formal lease
agreement. Total rent expense for the years ended December 31, 2003 and
2002 was $83,283 and $53,368, respectively.
The Company is involved in various legal actions arising in the normal
course of business. In the opinion of management, the ultimate resolution
of these matters will not have a material adverse effect on the Company's
financial position or results of operations.
During 1998, the Company entered into an asset purchase agreement,
wherein it acquired certain assets and assumed certain liabilities of DAC
Technologies of America, Inc. ("DAC Arkansas") in a combination that was
accounted for in a manner similar to a pooling of interest. Assets and
liabilities that were not included in this transaction consisted of a
receivable from a major stockholder and President, certain bridge loans,
stockholder advances, an automobile, certain accounts payable, accrued
commissions and accrued payroll totaling $200,488. The Company could be
held liable in the event of litigation, for the outstanding balances of
certain unsecured liabilities of DAC Arkansas totaling approximately
$119,000. No accrual has been made for this contingency.
14. MAJOR CUSTOMERS AND SUPPLIERS
During the year ended December 31, 2003, the Company had aggregate
sales to one customer that exceeded ten percent of total net sales. Sales
to this individual customer were approximately $2,478,000. During the year
ended December 31, 2002, the Company had aggregate sales to two customers
that exceeded ten percent of total net sales. Sales to these individual
customers were approximately $1,127,000 and $298,000, respectively.
Accounts receivable related to the sales were factored without recourse
(Note 5).
During the years ended December 31, 2003 and 2002, the Company
purchased 94% and 85%, respectively, of its products from one major
supplier. The Company is dependent upon this supplier continuing in
business and its ability to ship to the United States, but believes that it
could replace this supplier, if required to, at similar quality and terms.
15. CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of trade accounts
receivable with a variety of customers. As discussed in Note 5, the Company
factors a majority of its receivables under a factoring agreement. These
accounts are factored on a non-recourse basis which reduces the Company's
exposure to credit risk. Approximately 94% and 98% of the Company's
accounts receivable at December 31, 2003 and 2002, respectively, were
factored. The Company provides credit in the normal course of business to
its customers and performs ongoing credit evaluations of its customers. It
maintains allowances for doubtful accounts and provisions for returns and
credits based on factors surrounding the specific customers and
circumstances. The Company generally does not require collateral from its
customers. Credit risk is considered by management to be limited due to the
Company's customer base and its customer's financial resources.
F-16
DAC TECHNOLOGIES GROUP INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002
15. CONCENTRATION OF CREDIT RISK (CONT.)
At December 31, 2003 and at various times throughout the year, the
Company maintained cash balances with financial institutions in excess of
the federally insured limit.
16. FINANCIAL INFORMATION BY BUSINESS SEGMENT
During the years ended December 31, 2003 and 2002, the Company
operates in five primary business segments delineated by products or
services. These segments are security products, gun locks, safes,
non-security products and training. The accounting policies of the
Company's segments are the same as those described in Note 2. The Company's
long-lived assets are located in the United States and China.
Information concerning operations in these segments of business is as
follows:
2003 2002
----------- -----------
Revenues
Security products $ 394,367 $ 435,276
Gun-locks 1,485,253 1,144,615
Safes 565,740 853,233
Non-security products 2,311,170 320,744
Training -- 2,325
----------- -----------
Total $ 4,756,530 $ 2,756,193
=========== ===========
Income (loss) before income tax expense (benefit)
Security products $ 80,167 $ 11,500
Gun-locks 93,548 (20,990)
Safes 50,759 (55,389)
Non-security products 295,207 45,265
Training -- 43,960
----------- -----------
Total $ 519,681 $ 24,346
=========== ===========
F-17
DAC TECHNOLOGIES GROUP INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002
16. FINANCIAL INFORMATION BY BUSINESS SEGMENT (CONT.)
2003 2002
----------- -----------
Identifiable assets
Security products
United States $ 182,114 $ 185,246
China 51,105 98,186
Gun-locks
United States 271,898 309,932
China 45,483 54,553
Safes
United States 154,368 79,318
China 14,362 16,326
Non-security products
United States 476,613 27,704
Corporate 2,163,037 1,680,121
----------- -----------
Total $ 3,358,980 $ 2,451,386
=========== ===========
Molds used to manufacture the Company's security products and gun
locks are located in China (See Note 1).
19. NEW ACCOUNTING PRONOUNCEMENTS
In January 2003, the Financial Accounting Standards Board issued
Interpretation No. 46, "Consolidation of Variable Interest Entities, an
interpretation of Accounting Research Bulletin No. 51" (the
Interpretation). The Interpretation requires the consolidation of entities
in which an enterprise absorbs a majority of the entity's expected losses,
receives a majority of the entity's expected residual returns, or both, as
a result of ownership, contractual or other financial interests in the
entity. A variable interest entity results from interests in an entity
through ownership, contractual relationships, or other pecuniary interest.
Under current accounting guidance, entities are generally consolidated by
an enterprise only when it has a controlling financial interest through
ownership of a majority voting interest in the entity.
F-18
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
ITEM 8A. CONTROLS AND PROCEDURES
Our Company's Chief Executive Officer and Chief Financial Officer have
evaluated our Company's disclosure controls and procedures within 90 days prior
to the date of filing of this Annual Report on Form 10-KSB. Management believes
that our Company's current internal controls and procedures are effective and
designed to ensure that information required to be disclosed by our Company in
its periodic reports is recorded, processed, summarized and reported, within the
appropriate time periods specified by the SEC, and that such information is
accumulated and communicated to our Company's CEO and CFO as appropriate to
allow timely decisions to be made regarding required disclosure. As of December
31, 2003, there were no significant corrective actions taken by our Company or
other changes made to these internal controls. Our Company's management does not
believe there were changes in other factors that could significantly affect
these controls subsequent to the date of the evaluation.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The following sets forth the names and ages of our executive officers
and directors. Directors are elected annually at our annual meeting of
stockholders, and serve for the one year term for which they are elected and
until their successors are duly elected and qualified. Our officers are
appointed by the board of directors and serve at the board's discretion.
NAME AGE POSITION TERM
---- --- -------- ----
David A. Collins 58 President, CEO, Director 2003-2004
Robert C. Goodwin 47 CFO/Director 2003-2004
David A. Collins is a founder of the Company and it predecessors, and
previously served as its President, CEO and Director from inception in 1993
until July 11, 2001. From July, 2001 until May, 2002, Mr. Collins served as a
consultant to the Company, particularly in the areas of sales and marketing. In
May, 2002, Mr. Collins was reappointed as President, CEO and Chairman upon the
resignation of James R. Pledger.
20
Robert C. Goodwin has served as the Company's CFO since its inception
in July 1998, as well as DAC Arkansas continuously since 1993. In July 1998, Mr.
Goodwin was elected to the Company's board.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES ACT OF 1934
Section 16(a) of the Exchange Act requires the Company"s directors,
executive officers and persons who own more than 10% of the Company"s Common
Stock (collectively, "Reporting Persons") to file with the SEC initial reports
of ownership and changes in ownership of the Company"s Common Stock. Reporting
Persons are required by SEC regulations to furnish the Company with copies of
all Section 16(a) reports they file. To the Company's knowledge, based solely on
its review of the copies of such reports received or written representations
from certain Reporting Persons that no other reports were required, the Company
believes that during its fiscal year ended December 31, 2003, all Reporting
Persons complied with all applicable filing requirements except as follows: Each
of the following Reporting Persons failed to timely file:
Form 4: David Collins-one transaction filed late
Form 5: David Collins-one transaction filed late
The Company is not aware of any failures by the Section 16 Reporting
Persons to file the forms required to be filed by them pursuant to Section 16 of
the Exchange Act.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth summary information concerning the
compensation received for services rendered to us during the fiscal year ended
December 31, 2003.
21
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------------------------------------------------ -----------------------------------------------------
Awards Payouts
-----------------------------------------------------------------------------------------------------------------
Securities
Underlying
Name & Principal Other Annual Restricted Options/ All Other
Position Year Bonus Compensation Stock Awards SAR's LTIP Payouts Compensation
------------------------- ------ ------- -------------- ----------------- ------------ ------------- ------------
Robert C.
Goodwin, CFO 2003 66,000
------------------------- ------ ------- -------------- ----------------- ------------ ------------- ------------
David A. Collins
Pres. CEO(1) 2003 120,000 57,000
------------------------- ------ ------- -------------- ----------------- ------------ ------------- ------------
Board of Directors.
Our directors do not receive cash compensation for their services as
Directors.
Employment Contracts
David A. Collins serves in the capacity of Chairman and CEO under an
Employment Agreement dated December 1, 2000. All other officers and employees
serve at the discretion of the Board of Directors.
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of our common stock as of December 31, 2003 by (a) each
person known by us to be the beneficial owner of five (5) percent or more of the
outstanding common stock and (b) all executive officers and directors both
individually and as a group. Unless otherwise indicated in the footnotes to this
table and subject to community property laws where applicable, we believe that
each of the shareholders named in this table has sole or shared voting and
investment power with respect to the shares indicated as beneficially owned.
Applicable percentages are based upon 5,713,056 shares of common stock
outstanding.
22
(a) Security Ownership of Certain Beneficial Owners.
NAME AND ADDRESS OF NUMBER OF SHARES PERCENT
TITLE OF CLASS BENEFICIAL OWNER BENEFICIALLY OWNED OF CLASS
-------------- ---------------- ------------------ --------
Common Stock Dan R. Lasater 1,220,765 21.4%
Little Rock, AR
Common Stock Lasater Family Limited 298,388 5.2%
Partnership
Little Rock, Ark.
Common Stock David A. Collins 538,000 [1] 9.4%
Aventura, FL
Common Stock Collins Childrens Trust 452,400 7.9%
c/o Kimberly Talley
Little Rock, AR
Common Stock Warren Overton 310,450 5.4%
Little Rock, AR
--------
[1] Includes 32,000 shares owned by the Collins Family Trust. David Collins
acknowledges beneficial ownership and control of the shares held in this
Trust. The beneficiaries of the Collins Family Trust are Payton P. Collins
and David A. Collins, Jr.
(b) Security Ownership of Management
NAME AND ADDRESS OF NUMBER OF SHARES PERCENT
TITLE OF CLASS BENEFICIAL OWNER BENEFICIALLY OWNED OF CLASS
Common Stock Robert C. Goodwin 5,000 0.09%
Sherwood, AR
Common Stock David A. Collins 538,000 9.4%
Aventura, FL
There are no arrangements which may result in a change in control of
the Company.
23
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
At December 31, 2003 and 2002, the Company has a non-interest bearing
note receivable of $91,238 and $104,098, respectively, from David A. Collins,
Chairman and CEO. This note is due December 31, 2004.
At December 31, 2003 and 2002, the Company has a non-interest bearing
note receivable of $72,518 and $43,863, respectively, from DAC Investment Group,
Inc., a company owned by David A. Collins, Chairman and CEO.
David A. Collins, Chairman and CEO, has personally guaranteed loans
obtained by the Company from a local bank. The total of these loans at December
31, 2003 and 2002 was $342,581 and $413,546, respectively. Mr. Collins has also
personally guaranteed repayment of funds borrowed by the Company under its
factoring agreement. The amounts borrowed under this factoring agreement at
December 31, 2003 and 2002 were $1,342,814 and $735,035, respectively.
During 2003 and 2002, the Company maintained note payable agreements
with Dan R. Lasater, a 10% shareholder. These notes bear interest ranging from
8% to 10% and are payable on various dates during 2004. Interest of $10,833 and
$11,666 was paid on these notes during 2003 and 2002, respectively. The balance
of these notes at December 31, 2003 and December 31, 2002 was $85,000 and
$100,000, respectively.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
The following documents are incorporated by reference from the
Registrant's Form 10-SB filed with the Securities and Exchange Commission (the
"Commission") file #000-29211, on January 28, 2000.
EXHIBIT DESCRIPTION
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2 Asset Purchase Agreement
3.1 Articles of Incorporation
3.2 Bylaws
10.1 Consulting Agreement
10.2 Lease
10.3 Factoring Agreement
10.4 Employment contract of David A. Collins
23.1* Independent Auditors' Consent
31.1* Certification of Principal Executive Officer pursuant to
Rule 13a-14(a)/15d-14(a)
31.2* Certificate of Principal Financial Officer pursuant to
Rule 13a-14(a)/15d-14(a)
32* Certifications of Principal Executive Officer and Principal
Financial Officer pursuant to 18 U.S.C. Section 1350
-------
* Filed herein.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit Fees
The Company incurred the following fees to Moore Stephens Frost, PLC,
the Company's independent auditors, for services rendered during the fiscal year
ended December 31, 2003 a total of $25,526 for the audit of the Company's
financial statements for fiscal 2002 and $13,024 for the review of the financial
statements included in each of the Company's Quarterly Reports on Form 10-QSB
for the fiscal year ended December 31, 2003. The Company incurred the following
fees to Moore Stephens Frost, PLC, the Company's independent auditors, for
services rendered during the fiscal year ended December 31, 2002 a total of
$17,825 for the audit of the Company's financial statements for fiscal 2001 and
$1,083 for the reviews of the financial statements included in each of the
Company's Quarterly Reports on Form 10-QSB for the fiscal year ended December
31, 2002.
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Tax Fees
The Company's Board of Directors determined that the services performed
by Moore Stephens Frost, PLC, other than audit services are not incompatible
with maintaining its independence. The additional fee for non audit related
services was approximately $1,200 in 2003 $4,060 in 2002.
Audit committee
The Company does not have a standing Audit Committee of its Board of
Directors.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, hereunto duly
authorized DAC Technologies Group International, Inc.
By: /s/ David A. Collins
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David A. Collins, Chairman and CEO, March 29, 2004
By: /s/ Robert C. Goodwin
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Robert C. Goodwin, CFO, November March 29, 2004
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