DAC Technologies Group International Inc.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10K-SB
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ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 |
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005
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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)
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Florida
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65-0847852 |
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.) |
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1601 Westpark Dr. #2 Little Rock, AR
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72204 |
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(Address of principal executive offices)
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(Zip code) |
(Issuers 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 IS NOT REQUIRED TO FILE REPORTS PURSUANT TO SECTION 13 OR 15(d) OF THE
EXCHANGE ACT. o
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 o
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 REGISTRANTS 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. o
INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS A SHELL COMPANY (AS DEFINED IN RULE 12b-2 OF THE
EXCHANGE ACT YES o NO x
STATE ISSUERS REVENUES FOR ITS MOST RECENT FISCAL YEAR. $13,351,115
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 27, 2006 WAS APPROXIMATELY $9,778,059
STATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUERS CLASS OF
COMMON EQUITY, AS OF THE LATEST PRACTICABLE DATE. AS OF MARCH 27, 2006,
6,323,364 SHARES OF COMMON STOCK ARE ISSUED AND 6,193,364 ARE 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.
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
Managements Discussion and Analysis of Financial Condition and Results of Operations and
Liquidity and Sources of Capital regarding the Companys 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 Companys
products, limited public market and liquidity, shares eligible for future sale, the Companys
common stock (Common Stock) being subject to penny stock regulation and other risks detailed in
the Companys filings with the United States Securities and Exchange Commission (SEC or
Commission).
PART I
ITEM 1. DESCRIPTION OF BUSINESS
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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.
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.
1
Our primary business is gun safety and gun maintenance; our target consumer base is sportsmen,
hunters and outdoorsmen, and recreational enthusiasts. In part, we judge the size of our market by
the reported statistics concerning the sale and manufacture of guns. In 2006, the American Firearms Industry
(AFI), a firearms trade association, estimated that in the United States there are over 200
million firearms, which include 60-65 million handguns. In addition, the AFI reports that over
the past 10 years, the manufacture of handguns has modestly declined from 2.6 million in 1994 to
just over one million in 2004. Rifle and shotgun production has remained more stable with
manufacture of 2.6 million in 1994 and 2.1 million in 2004. The size of this market is not to imply
that we have achieved a significant penetration into the market for our gun- related products.
According to the U.S. Department of Alcohol, Tobacco, Firearms and Explosives, a principal law
enforcement agency within the United States Department of Justice, there were approximately 1,024,000
handguns manufactured in 2004, with 74% of the manufacturers reporting.
(2) Business Plan
We are in the business of developing, outsourcing the manufacture, and marketing 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, although in recent
years we have expanded into other product areas. In 2003, we added to our product line a line of
gun cleaning kits, which we have continued to expand into 2006. In 2005, we also added a line of
meat processing items, which is consistent with our business philosophy of marketing products to
sportsmen, hunters and outdoorsmen, and recreational enthusiasts.
A significant portion of our business is with the mass-market retailer Wal-Mart. However,
we have been able to considerably 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 has allowed the Company
to expand its non-gun-related product line.
The majority of our products are manufactured and imported from mainland China and shipped to
a central location in Little Rock, Arkansas for distribution.
The Companys business plan and strategy for growth continues to focus on:
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Increased penetration of our existing markets, particularly in the gun
cleaning market and accessories |
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Development of new products for the sporting goods market |
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Identify and develop new markets for gun cleaning kits, i.e. government,
law enforcement and military |
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Adoption of new technologies for safety and security products |
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Adoption of new product lines |
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Identification and recruitment of effective manufacturers
representatives to actively market these products on a national and
international basis |
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Aggressive cost containment |
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Management believes that continued growth would require the Company to continually innovate
and improve its existing line of products 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. All of our products are available via e-commerce
on our website, www.dactec.com. Our web site is intended to be the only direct link by the Company
to the retail market.
A. Introduction.
Our products have historically been security related, evolving from various personal, home and
automotive electronic security devices, to firearm safety devices such as gunlocks, trigger locks,
cable locks and security safes. In 2003, we introduced our line of GunMaster gun cleaning kits and
accessories, and have continued expanding this line in 2004, 2005, and 2006.
Because of the tremendous success of the GunMaster, the Company has placed particular emphasis
on developing this product line. From the initial introduction of our gun cleaning kits in June
2003, the Company had thirty-two separate models in this product line by the end of 2005. In 2004,
sales were $6,765,926, or 72% of sales. In 2005, sales of the GunMaster gun cleaning kits increased
to $10,060,754 or 75% of sales. This represented a 49% increase over 2004. The Company currently
has seven varieties of its GunMaster gun cleaning kits carried as permanent items in the 2,900
Wal-Mart stores that carry gun accessories.
Because of the success of the GunMaster line, the Company has been able to add to its customer
base a number of large sporting goods retailers and distributors such as Dicks Sporting Goods, RSR
Group, Inc., Jerrys, AcuSport, Academy Sports and Cabelas. The addition of these sporting goods
customers has positioned the Company to expand its product line into other, non-gun related
sporting goods items
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.
B. Security Products
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Gun Safety. We market twelve (12) different gun safety locks and five security
and specialty safes. The locks composition ranges 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. Eight of the
Companys gun locks and two of the safes have been certified for sale consistent with
the standards set out by the State of California. These
California standards have been adopted by other states and by a variety of gun
manufacturers. |
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Gun Maintenance. We market over thirty-two (32) different gun cleaning kits and
rod sets 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. We also
carry a full line of replacement pieces for each kit. |
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Personal Security. We market four (4) different electronic security devices
designed to protect the person. These include our Body Alarm, Key Alert, Glass Window
Alert and Patient Alarm. |
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Non-security Consumer Products. We market two licensed products, the Clampit Cupholder
and Plateholder. We also market through Wal-Mart and other customers nationwide, the
Sportsman Lighter, a windproof, water resistant, refillable butane lighter. We have
also added in 2005 three (3) meat processors and a portable light for ATVs. |
(4) |
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Manufacturing, Suppliers and Distribution. |
Through our foreign and domestic manufacturing agents, we manufacture, design and build our
tooling, molds and products. Currently, at least 99% of our products, in particular our gun locks,
cleaning kits, gun accessories, and security safes, are 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, gun cleaning kits, 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 from the
manufacturers by the trading companies and sold to us at marked-up costs.
Domestically, 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, we are dependent upon our primary Chinese supplier continuing in business and its
ability to ship to the United States, but believe that we could replace this supplier, if required
to, at similar quality and terms. Should any of the manufacturers cease providing for us,
we believe they can be replaced within 30 days, without difficulty and at competitive cost, due to
the numerous manufacturing facilities in China capable of manufacturing our products.
Our administrative offices and warehouse facilities are located in Little Rock, Arkansas; our
executive office is located in Miami Beach, Florida. 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.
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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, serves both as a
marketing tool and a platform from which are able to provide various support services for
our independent sales representatives. Our website has e-commerce capability. 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 customers 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.
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 Companys
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 Companys sales or profit margins or both. (See Risk
Factors)
Some of our competitors in the business sectors which we operate in are:
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Gun Safety Master Lock (which presently controls 60%-70% of the market), Smith &
Wesson, and Shot Lock. |
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Gun Cleaning Kits Outers and Hoppes. |
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Security Safes Sentry Safes, GunLocker and Gun Vault. |
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Personal security competitors are varied and mostly smaller vendors. |
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Non-security products competitors are various small and large vendors. |
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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 given 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 are product design, pricing, quality of the
product and the maintenance of favorable relationships with various mass merchandisers.
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Market and Customers. |
The ultimate users of our products include sportsmen, hunters, collectors, and law enforcement
agencies. Because of the uncertain size of the potential market for our gun products and the
number of competitors, we cannot state with any degree of certainty, the size of our market share.
Although we sell our products both foreign and domestically, our U.S. sales account for 95% of our
overall revenues.
Although we have numerous customers, we generally sell on the basis of purchase orders, rather
than fixed contracts, primarily to:
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National retail chains Wal-Mart and Kmart (in 2005, these national chains represent 57% of sales); |
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Distributors such as Dicks Sporting Goods, RSR Group, Inc., Jerrys Sport Center, Inc, Acu-Sport Corp., and Cabelas
Catalogue Co. (representing 13% of sales); and, |
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Gun manufacturers such as Savage Arms, Browning, Marlin, Glock and SIG-Arms (representing 7% of sales) |
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Regional retail chains and sole proprietors (representing 23% of sales) |
Wal-Mart is the largest national discount retailer in the United States. Prior to filing its
Chapter 11 bankruptcy reorganization in January 2002, K-Mart was the countrys second largest
discount retailer and the fourth largest general merchandise retailer. K-Mart continues to operate
and is currently a subsidiary of Sears Holding Co., having emerged from bankruptcy in May 2003.
Demand for our gun cleaning kits has 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.
While our arrangements with customers vary, we generally sell on the basis of purchase orders
rather than fixed contracts. A purchase order represents a written contract to purchase a
specified product(s) at a specified price. Any future orders from a particular customer would be
dependent upon that customers ability to sell the product. Some customers do issue Blanket
purchase orders, which request delivery of a specified quantity over a specified period of time.
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Credit is extended to customers, generally on 30 or 60-day terms. Credit approval is
performed by the Companys factor. Any credit approved by the factor is on a non-recourse basis,
thus there is no risk of loss
due to non-payment to the Company. For any customers whose credit is not approved by the
factor, the Company will make other arrangements, such as prepayment or COD (Cash on Delivery).
The Company does have a limited warranty on most of its products, typically for one year from
date of purchase. The Company does accept return of defective products, and will either replace at
no charge or issue credit to the customer for the defective product. The cost to the Company for
defective products in 2005 was less than 1% of sales.
The Company maintains a standard price list for its customers, depending upon whether they are
a distributor or a dealer. This protects our distributor customers from having to compete with the
Company for our dealer customers. The Company does not set mandatory retail pricing for its
customers to use.
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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:
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Patent No. |
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Expiration |
TVP095 Trigger Lock |
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Des. 375,342 |
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2009 |
SWA 03 SWAT Steering Wheel
Alarm |
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Des. 365,774 |
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2009 |
KAL 201 Personal Safety Alarm |
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Des. 355,863 |
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2008 |
Key Chain Alarm |
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5,475,368 |
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GWA 001 Glass/Window Alarm |
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Des. 371,086 |
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2009 |
Defense Spray and Flashlight |
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Des. 375,994 |
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2009 |
Gun Cleaning Kit case |
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7,020,994 |
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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.
The Company currently has two patents pending related to a number of features of its gun
cleaning kits. In April 2006, one of the patents was issued to the Company. In October 2005, the
Companys application to trademark the name GunMaster was received by the U. S. Trademark office,
and remains pending.
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To date, we have not to date registered or trademarked any of our product
names except for the GunMaster. (See, Risk Factor) We rely primarily on our patents and licensing arrangements with
3rd parties to avoid infringing on the products of others. We also use the services of
patent attorneys to insure that our unlicensed
and unpatented products do not infringe. We dont patent or trademark all our products
because of the cost and we have been advised by patent counsel that certain of the products are not
patentable.
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 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.
(8) |
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Governmental Regulations. |
Several federal laws regulate the ownership, purchase and use of handguns, including the 1968
Gun Control Act and the Brady Bill. The Brady Bill was implemented on February 28, 1994. This law
established a national five (5) business day waiting period on handgun purchases through licensed
dealers. It also required local authorities to conduct background checks on handgun purchasers. As
of December 1998, an amendment to the Brady Bill replaced the five (5) business-day waiting period
with a national instant felon ID system. Dealers are required to conduct this background check on
all gun purchases, not just handgun purchases.
The Assault Weapons Ban was enacted on September 14, 1994. This bill banned the
manufacture, possession, and importation of semiautomatic assault weapons for civilian use. Guns
manufactured before September 14th, 1994 were grandfathered. Guns manufactured after this date (for
use by the military, police, and government agencies) must be marked with the date they are
manufactured. The law was allowed to expire in 2004.
On July 29, 2005, the U.S. Senate passed Senate Bill 397, the Protection of
Lawful Commerce in Arms Act. The bill is designed to prohibit civil liability actions from being
brought or continued against manufacturers, distributors, dealers, or importers of firearms or
ammunition for damages, injunctive, or other relief resulting from the misuse of their products by
others. The U.S. House of Representatives has not yet voted on passage of the bill, although it
voted to pass similar legislation in 2004. If the legislation passes the House and is signed by the
President of the United States, it should result in the dismissal of the remaining municipal cases
and preclude similar cases in the future. There can be no assurance that judges in existing
proceedings will dismiss cases currently pending before them.
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Notwithstanding these laws, there is not any federal law that requires the use of gunlocks,
despite numerous attempts in Congress to pass such legislation. Most recently, on January 5, 2005,
House Bill H.R
246 (Child Gun Safety and Gun Access Prevention Act of 2005) was introduced for the purpose of
increasing youth gun safety by raising the age of handgun eligibility and prohibiting youth from
possessing semiautomatic assault weapons. The Bill, if passed into law in its present form, will
make it unlawful for any licensed importer, licensed manufacturer, or licensed dealer to sell,
transfer, or deliver any firearm to any person (other than a licensed importer, licensed
manufacturer, or licensed dealer) unless the transferee is provided with a secure gun storage or
safety device.
Child Access Prevention (or CAP) Laws hold gun owners responsible if they leave guns easily
accessible to children and a child improperly gains access to the weapon. In 1989, Florida became
the first state to pass a CAP law because of increasing gun fatalities among children. The Florida
law only applies if the minor gains access to a gun that was not stored securely. The law does not
apply if the firearm is stored in a locked box, secured with an effective child-safety lock, or
obtained by a minor through unlawful entry. Eighteen states have enacted standard CAP laws:
California, Connecticut, Delaware, Florida, Hawaii, Illinois, Iowa, Maryland, Massachusetts,
Minnesota, Nevada, New Hampshire, New Jersey, North Carolina, Rhode Island, Texas, Virginia, and
Wisconsin.
In addition to the 18 standard CAP laws, Kansas courts have held that gun owners may be held
civilly liable for leaving guns easily accessible to children; Maine has a child endangerment
statute that references children under 16 obtaining firearms and requires gun stores and gun shows
to post signs warning gun owners that they may be prosecuted if they leave firearms where children
can access them; and Montana holds adults/guardians responsible if a child under 14 possesses a
firearm in public without adult supervision.
Many CAP laws require that the guns be safely secured - this can be done easily by storing the
gun in a locked box, or by attaching an effective child-safety lock. These locks can preserve quick
access by the owner for self-protection in the home while preventing young children from firing the
locked gun. California, Connecticut, Maryland, Massachusetts, Michigan, New Jersey, New York,
Pennsylvania and Rhode Island specifically require dealers to sell child-safety locks with every
handgun.
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 an
approved safety device accompany every firearm sold in the state. Effective January 1, 2003, the
legislation was expanded in that any firearm safety device sold within the state must be approved.
Our products sold in California comply with these standards.
In Florida, it is a crime to store or leave a loaded firearm within the reach or easy access
of a child if the child gains access to the gun. The law does not apply if the firearm is stored in
a locked box, secured with a trigger lock.
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The penalty is a misdemeanor unless the minor injures someone in which case it is a felony. |
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Child is defined as anyone under the age of 16. |
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Gun dealers are required to provide purchasers with a written warning about the law, as well
as place a warning sign at the counter.
The fact that gun safety laws are passed by federal, state, or local governments does not
ensure that the demand for our products will increase.
(9) |
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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 anyones patent rights. We also design our own packaging internally.
Working closely with our manufacturers and 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.
We incur no costs and suffer no adverse effects by complying with environmental laws (federal,
state and local).
We currently employ ten (10) employees, all of whom are full-time: President & Chief Executive
Officer, Chief Financial Officer, Vice President of Manufacturing, Salesman, Information Systems
Tech, receptionist/clerk, shipping manager and three full-time warehouse workers. There are no
collective bargaining agreements.
(12) |
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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
(14) |
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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, as they
may inhibit consumer purchases of guns.
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. Consequently, there can be no assurance that our Companys growth program will continue consistent with historical trends and will continue to
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 purchase orders and have no long-term contractual relationship with our
customers. Our business relationship is based upon purchase orders with our customers. We have no
contracts, which require any of our customers to continue to purchase our products. Although we
have had long-term relationships with many of our customers, there can be no assurance that such
relationships will continue or that customers will continue ordering our products.
We depend on foreign contract manufacturers for substantially all of our manufacturing
requirements. During 2005, the Company purchased 99.9% of its products from one major supplier, who
in turn distributes the manufacturing to multiple companies in mainland China. 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. We
rely on contract manufacturers to procure components, assemble, and package our products. 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.
11
In addition, the outsourcing production of our products is almost universally with non-U.S.
manufacturers. 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 foreign contract manufacturers or delays in their shipment of products would
adversely affect our ability to meet scheduled product deliveries to our customers and as a
consequence adversely impact our business.
While we manufacture a variety of products, we rely primarily on the sale of gun cleaning kits
and gunlocks 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 account for approximately 85%
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 gunlock industry. The manufacture and sale of gun cleaning kits, security safes and
gunlock 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 may not be able to attract and retain the qualified personnel we need to succeed in the
future. At present, the success of our company is highly dependent on our chief executive officer,
David A. Collins and our Chief Financial Officer, Robert Goodwin. 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. There can be no assurance that we will be successful in attracting
and retaining such personnel.
We anticipate eventual state and federal gunlock legislation and regulation, which may cause
the Company to incur unanticipated expenses. 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
gunlocks which must accompany the sale of any firearm. Other states have adopted or 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 gunlocks. If new laws create design specifications, it may require the Company to
retool its current products to meet those specifications, thus creating additional expenses that
will result in the reduction of profit. Moreover, 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 adversely 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 since our major products are gun
related. 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 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 87% of
these trade receivables were subject to a factoring agreement. These accounts are factored on a
non-recourse basis, which reduces the Companys 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
Companys customer base and its customers financial resources.
We have not registered or trademarked any of our product names to date. While we may seek to
protect our intellectual property, and have filed for the GunMaster trademark, 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. Among other things, it could foster more
competition or create identical products sold under different labels. Moreover, inasmuch as we will
often seek to 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. Patent and other intellectual property type lawsuits are extremely expensive to prosecute
or defend, and in either case success cannot be assured.
The Company has engaged in several related-party transactions, which were not effected in
arms-length transactions. On occasion, we have engaged with related parties, including our chief
executive officer and certain shareholders in related party transactions. These transactions
include loans made by and to the Company, and were not arms-length. See, Certain Relationships and
Related Transactions at Item 12 below. There has been no independent evaluation of the
transactions, and therefore there can be no assurance that these transactions are fair to the
Company.
13
The Company at present is without a lease for its premises. The Companys lease expired in
April 2005, and is currently occupying its business premises in Arkansas on a month-to-month basis.
The Company is presently negotiating with the landlord to acquire more space to satisfy its growth
demands, and while the Company believes that it will be able to enter into a satisfactory lease
arrangement, there can be no assurance that will be the case. If an appropriate arrangement cannot
be achieved, the Company believes that comparable
office and business space is available in the Little Rock area and the move will cause
inconsequential disruption to its business.
ITEM 2. DESCRIPTION OF PROPERTY
Our corporate headquarters are located at 1601 Westpark Drive, Suite 2, Little Rock, Arkansas
72204. This location consists of approximately 2,000 square feet of office space and 14,000 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 was leased at a monthly rent of
$5,537 for one year, and expired April 30, 2005. There are two one-year renewal options at a
monthly rental of $6,436. The Company elected not to exercise the renewal option on this space,
and is currently renting this space on a month-to-month basis for $5,537 per month. The Company is
currently working with its present landlord to secure a larger facility. The Company also maintains
an executive office in Miami Beach, Florida at the residence of its president, David A. Collins.
The Company pays a monthly office allowance to Mr. Collins, the Companys President, of $5,500, for
approximately 1200 square feet and secretarial support. There is no lease agreement for these
premises. This office arrangement was not the product of arm-length negotiation; however, the
Company has determined the arrangement to be competitive with comparable office space and
secretarial support.
ITEM 3. LEGAL PROCEEDINGS
On December 16, 2005, Continental Western Insurance Company filed suit against the Company in
the Circuit Court of Pulaski County, Arkansas, claiming unpaid insurance premiums in the amount of
$236,121 relating to the product liability potion of the policy. The premiums are calculated based
upon the Companys revenues and a classification code applied by the insurance company. The
Companys counsel believes that the Company will prevail on the merits and defeat the claim, should
the matter go to trial. As a result of the dispute, the Company has changed its insurance carrier
for the period commencing July 12, 2005.
On November 8, 2005, the Company was sued in the Court of Common Pleas, in Dauphin County,
Pennsylvania, by Marie Ann Rhayam, on a products liability claim involving a 12-year-old boy who
allegedly defeated a gunlock manufactured by the Company, and shot and wounded the plaintiffs
son. The suit seeks unspecified damages. The Companys attorney believes that the Company will
prevail on the merits and defeat the claim. A demand has been made on the Companys former
insurance company, Continental Western Insurance Company for coverage of the claim.
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 with the range of competitive pricing, a defined term. We
sought damages and rescission 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 rescission of the manufacturing agreement and for damage to
its business reputation.
14
In August of 2003, this suit went to trial before a twelve (12)-member jury in the
Circuit Court of Pulaski County, Arkansas. The jury awarded the Company damages in the amount of
$1,650,560, against Skit and Uni-Skit, 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 cancelled and reissued to the Company.
Thereafter, defendant Skit International, Ltd. filed a Motion to Set Aside Judgment. The Court
denied this motion and no appeal has been filed.
On November 9, 2005, Skit International, Ltd. filed a Complaint for Declaratory Judgment in
the United States District Court, Eastern District of Arkansas, Western Division, seeking once
again to set aside the judgment against Skit International, Ltd., based upon the allegation that
Skit International, Ltd.s former attorney did not have authorization to act on its behalf with
respect to the Pulaski County case, and that the Arkansas Court did not have personal jurisdiction
over the defendant. Based upon advice from its legal counsel, the Company believes that this
matter will also be dismissed, and the Company will be able to pursue the collection of the
outstanding judgment against Skit International, Ltd.
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. On January 5, 2005, the Court denied our claim, on
grounds that that it was barred by the statute of limitations.
The litigation, Legel v. DAC Technologies Group International, Inc., et al, which has
previously been reported in the Companys periodic reports, involving the suit and countersuit
between Larry Legel, the Companys former director, and his wife Brenda Legel, and the Company and
its CEO, David Collins, has been resolved. The litigation has been dismissed with prejudice, and
the Company and its stock transfer agent have been released from all claims and liability to the
Legels. Of the 177,400 shares of the Company stock which the Legels received, 115,400 will be
returned to the Collins Childrens Trust, leaving the Legels with 62,000 shares (placed in the name
of their company Glacier Marketing International, Inc.), and cash to be paid by the Trust and not
the Company. The Company will not be required to compensate the Legels in any manner, other than to
pay costs of the transfer of stock and the costs for any legal opinion to transfer stock. If and
when the Legels, who no longer serve in any capacity with the Company except as shareholders,
decide to sell the 62,000 shares of the Companys common stock in the marketplace they may do so at
the rate of no more than 5,000 shares per week. This matter had been previously reported in the
Companys 8-K on September 6, 2005.
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.
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|
|
|
|
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Quarter Ended |
|
High |
|
|
Low |
|
March 31, 2004 |
|
$ |
2.25 |
|
|
$ |
1.09 |
|
June 30, 2004 |
|
$ |
2.30 |
|
|
$ |
1.60 |
|
September 30, 2004 |
|
$ |
2.20 |
|
|
$ |
1.51 |
|
December 31, 2004 |
|
$ |
2.99 |
|
|
$ |
1.67 |
|
March 31, 2005 |
|
$ |
3.65 |
|
|
$ |
2.30 |
|
June 30, 2005 |
|
$ |
2.84 |
|
|
$ |
2.24 |
|
September 30, 2005 |
|
$ |
2.85 |
|
|
$ |
2.14 |
|
December 31, 2005 |
|
$ |
2.60 |
|
|
$ |
2.14 |
|
As of March 27, 2006, there were approximately 61 holders of record, excluding those held in
street name, of our 6,193,364 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 dividends, as of the date of this registration statement, we have no
present intention to declare dividends.
16
We have an Equity Compensation Plan in place in order to promote the interests of the
Company by enabling us to motivate, attract, and retain the services of persons upon whose
judgment, efforts, and contributions the success of the Companys business depends. The maximum
number of shares that can be granted under this Plan is 1,000,000 shares of common stock.
|
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|
|
|
|
|
|
|
|
|
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|
Equity Compensation Plan Information |
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|
|
|
|
|
|
|
|
|
|
Number of |
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|
|
|
|
|
|
|
|
|
|
securities |
|
|
|
|
|
|
|
|
|
|
|
remaining available |
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|
|
|
|
|
|
|
|
|
|
for future issuance |
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|
|
|
|
Number of securities |
|
|
|
|
|
under equity |
|
|
|
|
|
to be issued upon |
|
|
Weighted-average |
|
|
compensation plans |
|
|
|
|
|
exercise of |
|
|
exercise price of |
|
|
(excluding |
|
|
|
|
|
outstanding options, |
|
|
outstanding options, |
|
|
securities |
|
|
|
|
|
warrants and rights |
|
|
warrants and rights |
|
|
reflected in column(a)) |
|
|
Plan category |
|
|
(a) |
|
|
(b) |
|
|
(c) |
|
|
Equity compensation plans
approved by security holders |
|
|
None
none outstanding |
|
|
zero
none outstanding |
|
|
1,000,000 |
|
|
Equity compensation plans not
approved by security holders |
|
|
None
none outstanding |
|
|
zero
none outstanding |
|
|
None |
|
|
Total |
|
|
None |
|
|
None |
|
|
1,000,000 |
|
|
ITEM 6. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following Management Discussion and Analysis of Financial Condition and Results of Operations is qualified by
reference to and should be read in conjunction with, our Consolidated 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 Companys expectations, beliefs and projections are expressed in good faith and
are believed by the Company to have a reasonable basis, including without limitations, managements
examination of historical operating trends, data contained in the Companys records and other data
available from third parties, but there can be no assurance that managements expectations, beliefs
or projections will result or be achieved or accomplished.
(1) |
|
Managements Discussion and Analysis of Financial Condition and Results of Operations |
2005 Summary
During 2005, the Company reported net income of $1,180,547 on net sales of $13,351,115,
representing increases of 17% and 43%, respectively, over 2004 figures. Earnings per share
increased from 17 cents per share in 2004, to 19 cents per share in 2005.
17
In 2005, the Company wrote-down the value of some slow moving inventory by $35,250. This
non-cash charge to income decreased earnings per share by one cent.
Management believes it will be able to liquidate this inventory for an amount in excess of its
carrying value.
The Companys growth continues to come from its expanded line of GunMaster gun cleaning kits,
as well as new products being added each year. New products added in 2005, in addition to gun
cleaning items, included a line of meat processing items, a portable
ATV light, a new Camo Sportsmans
lighter, and three new security safes. In 2006, the Company has begun a private label program for
some of its larger retail and distributor customers, as well as a direct import program. Higher
quality gun cleaning kits are being developed for some of our retail and gun manufacturer customers. The Company has also added a gun
carrying case with a built-in cleaning kit, and a game processing kit to compliment our meat
processing line.
Financial Condition
The Companys overall financial condition continues to improve greatly as a result of
increasing profits.
A summary of the significant balance sheet items is summarized below:
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
Accounts receivable |
|
$ |
692,690 |
|
|
$ |
477,150 |
|
Due from factor |
|
$ |
1,313,618 |
|
|
$ |
1,261,480 |
|
Inventories |
|
$ |
2,704,310 |
|
|
$ |
1,933,112 |
|
Accounts payable-trade |
|
$ |
981,042 |
|
|
$ |
1,158,562 |
|
Income taxes payable |
|
$ |
380,843 |
|
|
$ |
341,701 |
|
Total current assets |
|
$ |
4,920,677 |
|
|
$ |
3,909,358 |
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
$ |
1,658,106 |
|
|
$ |
1,839,338 |
|
Net working capital |
|
$ |
3,262,571 |
|
|
$ |
2,070,020 |
|
Total assets |
|
$ |
5,499,502 |
|
|
$ |
4,467,562 |
|
Stockholders equity |
|
$ |
3,825,896 |
|
|
$ |
2,612,724 |
|
Accounts receivable and due from factor
The Company maintains a factoring agreement wherein it assigns its receivables (on a
non-recourse basis). The factor performs all credit and collection functions, and assumes all
risks associated with the collection of the receivables. The Company pays a fee of 65/100ths of 1%
of the face value of each receivable for this service. In addition, in order to generate immediate
cash flow, the Company may borrow against the assigned receivables prior to their collection and is
charged interest on any such advances.
18
Accounts receivable on the Companys balance sheet represents those receivables that have not
yet been legally assigned to the factor. Due from factor represents the net equity the Company has
in its assigned receivables reduced by any funds advanced by the factor. At December 31, 2005 and
2004, these amounts are calculated as follows:
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2004 |
Total accounts receivable |
|
$ |
5,512,193 |
|
|
$ |
3,669,863 |
|
Less: assigned receivables |
|
|
(4,819,503 |
) |
|
|
(3,192,713 |
) |
|
|
|
|
|
|
|
|
|
Net accounts receivables |
|
$ |
692,690 |
|
|
$ |
477,150 |
|
|
|
|
|
|
|
|
|
|
|
Assigned receivables |
|
$ |
4,819,503 |
|
|
$ |
3,192,713 |
|
Less: Funds advanced |
|
|
(3,505,885 |
) |
|
|
(1,931,233 |
) |
|
|
|
|
|
|
|
|
|
Due from factor |
|
$ |
1,313,618 |
|
|
$ |
1,261,480 |
|
|
|
|
|
|
|
|
|
|
The increase in accounts receivable is related to the seasonal aspect of the Companys
business, as well as the increase in sales. The major portion of the Companys sales is derived
from gun cleaning kits and accessories, and sales of these items increase during the fourth quarter
as most areas of the country are into the hunting season. Many of the Companys products also
experience increases in sales at the retail level during the Christmas buying season. Fourth
quarter sales increased from $4,298,955 in 2004 to $5,630,745 in 2005.
This increase in fourth quarter sales and receivables also accounts for the increase in Due
from factor line item.
Inventories
Inventories increased $771,198, or 40% from 2004 to 2005. This increase is directly related
to the increase in sales and the inventory levels required to meet those sales.
Liabilities
Accounts payable decreased $177,520, or 15% from 2004. A significant portion of the Companys
accounts payable is related to inventory purchases. Because of the Companys increase in operating
profits, and cash provided from operations, the Company was able to significantly reduce the amount
owed for these purchases.
Results of Operations
Significant operating items for the past two years are summarized below:
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2004 |
Net sales |
|
$ |
13,351,115 |
|
|
$ |
9,352,353 |
|
Income from operations |
|
$ |
2,195,083 |
|
|
$ |
1,583,115 |
|
Income before income taxes |
|
$ |
1,963,464 |
|
|
$ |
1,395,978 |
|
Net income |
|
$ |
1,180,547 |
|
|
$ |
1,011,910 |
|
Earnings per share |
|
$ |
0.19 |
|
|
$ |
0.17 |
|
19
The increase in 2005 net sales of $3,998,762 represents a 43% increase over 2004. Sales of
the Companys gun cleaning kits and accessories increased $3,294,828 and accounted for 75% of the
Companys gross sales. Sales of the meat processing and ATV accessory lines added in 2005 totaled
$622,848. Sales of the Companys existing products, including its gunlocks, remained relatively
unchanged from 2004. These increases, particularly in the sales of gun cleaning kits, are
reflective of the shift in the focus of the Companys product line.
Operating
expenses increased from $1,901,254 in 2004 to $2,530,270 in 2005. This is an
increase of $629,016, or 33%. However, as a percentage of sales, operating expenses decreased from
20% to 19% of net sales. While the Company experienced increases in almost every expense category,
management believes the
increases were held to a minimum, based on the increase in sales. Those variable expenses
that are directly related to sales levels, actually increased at a lesser rate than the increase in
sales.
Gross profit margins decreased from 37% of net sales in 2004 to 35% of net sales in 2005. As
reported in last years 10K-SB, the Company expected margins to decrease in 2005 due to the price
increase during 2004 from its overseas manufacturers. Gross margins in 2005 were also affected
by the $35,250 non-cash charge to reserve for slow moving inventory.
Income from operations and income before income taxes increased 39% and 41%, respectively,
while net income only increased 17%. During 2004, the Company was still receiving tax benefits
from the effects of net operating losses from prior years. This resulted in an effective tax rate
in 2004 of only 28%, as compared to 40% in 2005. Had the Company been subject to the full tax rate
of 40% in 2004, net income would have increased by 41%.
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. Repayment of
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, 2005, our factor had
advanced to us $3,505,885.
The Company has three demand notes with a local bank guaranteed by certain of our principal
shareholders, David Collins and Dan Lasater. The loans bear interest at 7.00% and 7.70% and mature
in 2006 and 2008. The principal collective balance of these loans on December 31, 2005 totaled
$236,220. 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.
Off-Balance Sheet Arrangements
The Company is a party to a lease arrangement for its corporate headquarters. Information
pertaining to this arrangement is present in Item 2 Description of Property.
20
The Company does not use affiliation with special purpose entities, variable interest entities
or synthetic leases to finance its operations. Additionally, the Company has not entered into any
arrangement requiring it to guarantee payment of third party debt or to fund losses of an
unconsolidated special purpose entity.
Trends
Handgun safety remains a major concern and interest to the American public, particularly
in light of the accidental and intentional shootings involving children. Moreover, the tragic
terrorist attack against the United States on September 11, 2001 continues to have many Americans
concerned about their personal security. As a result, many people are purchasing firearms to
maintain for home defense purposes. While they are purchasing handguns, many are also concerned
with the safe storage and maintenance of the firearm in the home and want to purchase affordable
gun safes to increase security and cleaning kits for gun care.
The focus continues to be one of gun safety rather than legislative attempts to ban guns
possibly due to the strong gun lobby and the nature of politics. Gun safety issues have been moving
from the federal level to the state level through the introduction of mandatory gun lock
legislation, while those at the federal level are seemingly in accord with the approach being taken
by the Consumer Products Safety Commission to set measurable standards of performance for gun
locking devices. The Company, with developed products that address preventive handgun safety,
anticipates that it will be in a position to benefit from this trend, although this, of course,
cannot be guaranteed. We believe that the continued focus on handgun safety, the use of gun locks
by law enforcement agencies, and the litigation aimed at gun manufacturers as well as the gun
legislation will hopefully enhance our product line revenues.
State legislation has been effective in increasing gun safety and minimizing gun violence. One
way of accomplishing this is to require gun manufacturers to incorporate safety devices similar to
the Companys products into all handguns sold. The first regulation of this kind was passed by the
Maryland state legislature in early April 2000. This legislation required gun manufacturers to
incorporate safety devices similar to the Companys products into all handguns sold. The State of
California enacted legislation to establish performance standards for firearm safety devices,
lock-boxes, and safes. These standards prevent an attack on the gunlock or safe with hand
tools, such as hammers, screwdrivers, electric drills, screw and hack saws. This legislation
requires manufacturers to have their products tested by an independent testing laboratory in order
to be listed as an approved device. This testing has resulted in significant expenditures to the
company. We anticipate that similar standards will be adopted throughout the United States in the
next few years.
Critical Accounting Estimates
The Company prepares its consolidated financial statements in accordance with
accounting principles generally accepted in the United States of America. The Companys
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 consolidated 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.
21
Long-lived Assets
Depreciation expense is based on the estimated 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 Companys future consolidated operating results.
Inventories
Inventories
are valued at the lower of weighted average cost or market. Market is
determined based on net realizable value. Appropriate consideration
is given to obsolescence, excessive levels, deterioration and other
factors in evaluating net realizable value. The Company records a
valuation reserve for inventories for which costs exceed the net
realizable value. Although the Company believes it is unlikely that
any significant changes to the valuation reserve will be necessary in
the near term, changes in demand for our products would result in
changes to the valuation reserve.
ITEM 7. FINANCIAL STATEMENTS
Our financial statements are contained in pages F-1 through F-20 following.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None
ITEM 8A. CONTROLS AND PROCEDURES
As of December 31, 2005, the Company carried out an evaluation, under the supervision and with
the participation of the Companys management, including the Companys Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and operation of the Companys
disclosure controls and procedures. Based upon that evaluation, the Companys management,
including the Chief Executive Officer and Chief Financial Officer, concluded the Companys
disclosure controls and procedures were effective as of December 31, 2005. There have been no
significant changes during the period covered by this report in the Companys internal control over
financial reporting or in other factors that could significantly affect internal control over
financial reporting.
ITEM 8B. OTHER INFORMATION
There was no information reportable on Form 8K for the 2005 fourth quarter, which has not
otherwise been reported.
22
PART III
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ITEM 9. |
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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 typically elected at annual meetings of stockholders, and serve for the term for
which they are elected and until their successors are duly elected and qualified. The Company,
however, has not held an annual meeting for the election of its directors. Our officers are
appointed by the board of directors and serve at the boards discretion.
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Name |
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Age |
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Position |
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Term |
David A. Collins |
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60 |
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President, CEO, Director |
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2005-2006 |
Robert C. Goodwin |
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49 |
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CFO/Director |
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2005-2006 |
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.
Robert C. Goodwin has served as the Companys CFO since its inception in July 1998, as well as
DAC Arkansas continuously since 1993. In July 1998, Mr. Goodwin was elected to the Companys
board.
23
Compliance with Section 16(a) of the Securities Act of 1934
Section 16(a) of the Exchange Act requires the Companys directors, executive officers and
persons who own more than 10% of the Companys Common Stock (collectively, Reporting Persons) to
file with the SEC initial reports of ownership and changes in ownership of the Companys 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 Companys 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,
2005, all Reporting Persons complied with all applicable filing requirements except as follows:
Each of the following Reporting Persons failed to timely file:
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Form 4: David Collins-four transactions
filed late
Form 5: David Collins-one transaction filed late
Form 5 Dan Lasater- 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.
The Company at this point in time does not have a Code of Ethics but is working diligently
at developing one, fitting to the Companys needs and views.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth summary information concerning the compensation received for
services rendered to us during the past three (3) fiscal years.
SUMMARY COMPENSATION TABLE
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Annual Compensation |
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Long-Term Compensation |
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Awards Payouts |
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Securities |
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Name & |
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Other Annual |
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Restricted Stock |
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Underlying Options/ |
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All Other |
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Principal Position |
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|
Year |
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|
Salary |
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|
Compensation |
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Awards |
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SARs |
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LTIP Payouts |
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Compensation |
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Robert C. |
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2005 |
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77,400 |
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Goodwin, CFO |
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2004 |
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73,500 |
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|
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|
|
|
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|
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2003 |
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|
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66,000 |
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|
|
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David A. Collins |
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2005 |
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120,000 |
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391,047 |
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Pres. CEO(1) |
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2004 |
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120,000 |
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293,141 |
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2003 |
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120,000 |
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57,000 |
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24
Board of Directors
Our directors do not receive compensation in any form for their services as Directors.
Employment Contracts
David A. Collins serves in the capacity of Chairman and CEO under a five (5) year Employment
Agreement commencing December 1, 2005. This Agreement may not be terminated by the Company except
for cause, defined as a felony conviction, embezzlement, or violation of the non-compete or
confidentiality provisions. If cause is found, Mr. Collins will cease to receive compensation.
Furthermore, Mr. Collins may terminate his agreement at any time upon 30 days advance written
notice to the Company; should he elect to do so, the Company will discontinue payment of benefits,
except that any stock options already granted will remain in force. Should Mr. Collins be
terminated from his position with the Company, he agrees not to compete with the Company for a
period of twelve (12) months following the date of termination.
All other officers and employees serve at the discretion of the Board of Directors, and do not
have employment contracts.
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 March 27, 2006 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. Included are any securities that any person or group
identified has the right to acquire within sixty (60) days pursuant to options, warrants, and
conversion privileges or other rights. 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 6,193,364 shares of common
stock outstanding.
(1) |
|
Security Ownership of Certain Beneficial Owners. |
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Name and Address of |
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Number of Shares |
|
|
Percent |
|
Title of Class |
|
Beneficial Owner |
|
Beneficially Owned |
|
|
of Class |
|
Common Stock |
|
Dan R. Lasater |
|
|
740,865 |
|
|
|
12.0 |
% |
|
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Little Rock, AR |
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Common Stock |
|
Praetorian Capital Management LLC |
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|
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|
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Miami Beach, FL |
|
|
700,000 |
|
|
|
11.3 |
% |
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|
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|
Common Stock |
|
David A. Collins |
|
|
500,500 |
[1] |
|
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8.1 |
% |
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Miami Beach, FL |
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[1] |
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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. |
(2) |
|
Security Ownership of Management |
|
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|
|
|
|
|
Name and Address of |
|
Number of Shares |
|
|
Percent |
|
Title of Class |
|
Beneficial Owner |
|
Beneficially Owned |
|
|
of Class |
|
Common Stock |
|
Robert C. Goodwin |
|
|
19,073 |
|
|
|
0.31 |
% |
|
|
Sherwood, AR |
|
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|
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|
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|
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|
|
|
|
|
Common Stock |
|
David A. Collins |
|
|
500,500 |
|
|
|
8.1 |
% |
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|
Miami Beach, FL |
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|
There are no arrangements, which may result in a change in control of the Company.
25
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
At December 31, 2005 and 2004, the Company has a non-interest bearing note receivable of
$99,531 and $98,400, respectively, from David A. Collins, Chairman and CEO. This note is due
December 31, 2006. This note was not negotiated in an arms-length transaction, and the Company
has not undertaken any independent evaluation to determine the fairness of the transaction.
At December 31, 2005 and 2004, the Company has a non-interest bearing note receivable
of $72,518 and $72,518, respectively, from DAC Investment and Consulting, Inc., a company
wholly-owned by David A. Collins, our Chairman and CEO. This note is due December 31, 2006.
This note was not negotiated in an arms-length transaction, and the Company has not undertaken any
independent evaluation to determine the fairness of the transaction.
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, 2005 and 2004 was $236,220 and
$293,406, respectively. The Notes are due on various dates in 2006 and 2008. The Company intends
to refinance the loans when they mature; in the event they cannot be refinanced the Company
believes it will have adequate resources to pay off the loans. 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, 2005 and 2004 were $3,505,885 and
$1,931,233, respectively. Although the Company has not undertaken any independent evaluation to
determine the fairness of the transaction, Management believes that the terms of this transaction
are at least as favorable as the terms the Company could have obtained from an unaffiliated third
party.
For
the years 2005 and 2004, our Chief Executive Officer, David Collins, leased a portion of
his home in Miami Beach, Florida to the Company, which serves as the Companys executive office. The
Company pays a monthly office allowance to Mr. Collins, the
Companys President, of $5,500, for
approximately 1,200 square feet and secretarial support. There is no lease agreement for these
premises. This office arrangement was not the product of arms-length negotiation; however the
Company has determined the arrangement to be competitive with comparable office space and
secretarial support.
26
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
The following documents are incorporated by reference from the Registrants Form 10-SB filed
with the Securities and Exchange Commission (the commission) file #000-29211, on January 28, 2000
and the 2004 10-KSB.
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|
Exhibit |
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Description |
|
2 |
|
|
Asset Purchase Agreement |
|
3.1 |
|
|
Articles of Incorporation |
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3.2 |
|
|
Bylaws |
|
10.1 |
|
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Lease |
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10.2 |
|
|
Factoring Agreement |
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10.3 |
|
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Employment contract of David A. Collins |
|
31.1 |
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Certification of Principal Executive Officer pursuant to Rule
13a-14(a)/15d-14(a)* |
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31.2 |
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|
Certification of Principal Financial Officer pursuant to Rule
13a-14(a)/15d-14(a)* |
|
32.1 |
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|
Certification of Principal Executive Officer pursuant to 18 U.S.C.
Section 1350* |
|
32.2 |
|
|
Certification of Principal Financial Officer pursuant to 18 U.S.C.
Section 1350* |
|
|
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* |
|
These exhibits are enclosed within this filing. |
The
Company has reported on Form 8-K this year on September 7, 2005.
27
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit Fees
The Company incurred the following fees to Moore Stephens Frost, PLC, the Companys
independent auditors, for services rendered during the fiscal year ended December 31, 2005 a total
of $32,823 for the audit
of the Companys consolidated financial statements for fiscal 2004 and $24,070 for the review of the
consolidated financial statements included in each of the Companys Quarterly Reports on Form 10-QSB for the
fiscal year ended December 31, 2005. The Company incurred the following fees to Moore Stephens
Frost, PLC, the Companys independent auditors, for services rendered during the fiscal year ended
December 31, 2004 a total of $26,352 for the audit of the Companys consolidated financial statements for fiscal
2003 and $27,475 for the reviews of the consolidated financial statements included in each of the Companys
Quarterly Reports on Form 10-QSB for the fiscal year ended December 31, 2004.
Tax Fees
The Companys 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 $3,430 in 2005 and $2,830 in 2004.
Audit committee
The Company does not have a standing Audit Committee of its Board of Directors.
28
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.
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By: |
/s/ David A. Collins
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March 31, 2006 |
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David A. Collins, Chairman,
CEO and Principal Executive Officer
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By: |
/s/ Robert C. Goodwin
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March 31, 2006 |
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Robert C. Goodwin, Principal
Accounting Officer and Principal Financial Officer
|
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29
DAC TECHNOLOGIES GROUP INTERNATIONAL, INC.
December 31, 2005 and 2004
Consolidated Financial Statements
With
Report of Independent Registered Public Accounting Firm
Report of Independent Registered Public Accounting Firm
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, 2005 and 2004, and the related consolidated statements of
income, stockholders equity and cash flows for the years then ended. These consolidated financial
statements are the responsibility of the Companys management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). 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. The Company has determined that it is not required to have, nor were we
engaged to perform, an audit of its internal control over financial reporting. Our audit included
consideration of internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purposes of expressing an
opinion on the effectiveness of the Companys internal control over financial reporting.
Accordingly, we express no such opinion. 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, 2005 and 2004, 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.
Independent Registered Public Accounting Firm
Little Rock, Arkansas
February 22, 2006
DAC TECHNOLOGIES GROUP INTERNATIONAL, INC.
Consolidated Balance Sheet
December 31, 2005 and 2004
|
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2005 |
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|
2004 |
|
Assets |
|
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
|
|
Cash |
|
$ |
130,886 |
|
|
$ |
167,846 |
|
Accounts receivable, less allowance for doubtful accounts of
$5,000 and $7,500 in 2005 and 2004, respectively |
|
|
692,690 |
|
|
|
477,150 |
|
Due from factor |
|
|
1,313,618 |
|
|
|
1,261,480 |
|
Inventories |
|
|
2,704,310 |
|
|
|
1,933,112 |
|
Prepaid expenses and deferred charges |
|
|
69,573 |
|
|
|
60,170 |
|
Deferred income tax asset |
|
|
9,600 |
|
|
|
9,600 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
4,920,677 |
|
|
|
3,909,358 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment |
|
|
|
|
|
|
|
|
Leasehold improvements |
|
|
29,049 |
|
|
|
29,049 |
|
Furniture and fixtures |
|
|
201,108 |
|
|
|
147,010 |
|
Molds, dies and artwork |
|
|
500,137 |
|
|
|
481,481 |
|
|
|
|
|
|
|
|
|
|
|
730,294 |
|
|
|
657,540 |
|
Accumulated depreciation |
|
|
(496,267 |
) |
|
|
(441,176 |
) |
|
|
|
|
|
|
|
Net property and equipment |
|
|
234,027 |
|
|
|
216,364 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets |
|
|
|
|
|
|
|
|
Patents and trademarks, net of accumulated amortization of
$72,439 and $56,446 in 2005 and 2004, respectively |
|
|
156,531 |
|
|
|
164,662 |
|
Deposit |
|
|
1,435 |
|
|
|
1,435 |
|
Advances to employees |
|
|
14,783 |
|
|
|
4,825 |
|
Note receivable related party |
|
|
72,518 |
|
|
|
72,518 |
|
stockholder |
|
|
99,531 |
|
|
|
98,400 |
|
|
|
|
|
|
|
|
Total other assets |
|
|
344,798 |
|
|
|
341,840 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
5,499,502 |
|
|
$ |
4,467,562 |
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity |
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
|
Notes payable |
|
$ |
236,220 |
|
|
$ |
293,406 |
|
Accounts payable |
|
|
981,042 |
|
|
|
1,158,562 |
|
Accrued payroll tax withholdings |
|
|
29,463 |
|
|
|
22,127 |
|
Accrued expenses other |
|
|
30,538 |
|
|
|
23,542 |
|
Income taxes payable |
|
|
380,843 |
|
|
|
341,701 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
1,658,106 |
|
|
|
1,839,338 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax liability |
|
|
15,500 |
|
|
|
15,500 |
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 15) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity |
|
|
|
|
|
|
|
|
Preferred stock, $.001 par value; authorized 10,000,000 shares;
no shares issued and outstanding |
|
|
|
|
|
|
|
|
Common stock, $.001 par value; authorized 50,000,000 shares;
6,323,364 shares issued and 6,193,364 shares outstanding at
December 31, 2005; 6,310,864 shares issued and 6,180,864
shares outstanding at December 31, 2004 |
|
|
6,323 |
|
|
|
6,311 |
|
Additional paid-in capital |
|
|
1,963,102 |
|
|
|
1,930,489 |
|
Treasury stock, at cost |
|
|
(101,400 |
) |
|
|
(101,400 |
) |
Retained earnings |
|
|
1,957,871 |
|
|
|
777,324 |
|
|
|
|
|
|
|
|
Total stockholders equity |
|
|
3,825,896 |
|
|
|
2,612,724 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
5,499,502 |
|
|
$ |
4,467,562 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
2
DAC TECHNOLOGIES GROUP INTERNATIONAL, INC.
Consolidated Statements of Income
For the Years Ended December 31, 2005 and 2004
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
Sales, net of returns and allowances |
|
$ |
13,351,115 |
|
|
$ |
9,352,353 |
|
|
|
|
|
|
|
|
|
|
Cost of sales |
|
|
8,625,762 |
|
|
|
5,867,984 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
4,725,353 |
|
|
|
3,484,369 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
|
|
|
|
|
|
Selling |
|
|
1,538,715 |
|
|
|
1,043,537 |
|
General and administrative |
|
|
991,555 |
|
|
|
857,717 |
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
2,530,270 |
|
|
|
1,901,254 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
2,195,083 |
|
|
|
1,583,115 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense) |
|
|
|
|
|
|
|
|
Interest expense |
|
|
(231,619 |
) |
|
|
(181,138 |
) |
Interest expense stockholder notes |
|
|
|
|
|
|
(6,334 |
) |
Interest income |
|
|
|
|
|
|
335 |
|
|
|
|
|
|
|
|
Total other income (expense) |
|
|
(231,619 |
) |
|
|
(187,137 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax provision |
|
|
1,963,464 |
|
|
|
1,395,978 |
|
|
|
|
|
|
|
|
|
|
Provision for income taxes |
|
|
782,917 |
|
|
|
384,068 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
1,180,547 |
|
|
$ |
1,011,910 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted earnings per share |
|
$ |
0.19 |
|
|
$ |
0.17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of common shares |
|
|
|
|
|
|
|
|
Basic |
|
|
6,189,905 |
|
|
|
5,955,907 |
|
Diluted |
|
|
6,209,784 |
|
|
|
5,974,203 |
|
The accompanying notes are an integral part of these consolidated financial statements.
3
DAC TECHNOLOGIES GROUP INTERNATIONAL, INC.
Consolidated Statements of Stockholders Equity
For the Years Ended December 31, 2005 and 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained |
|
|
|
|
|
|
Common Stock |
|
|
Additional |
|
|
Treasury Stock |
|
|
Earnings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paid-in |
|
|
|
|
|
|
|
|
|
|
(Accumulated |
|
|
|
|
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Shares |
|
|
Cost |
|
|
Deficit) |
|
|
Total |
|
Balance January 1, 2004 |
|
|
5,843,056 |
|
|
$ |
5,843 |
|
|
$ |
1,249,065 |
|
|
|
130,000 |
|
|
$ |
(101,400 |
) |
|
$ |
(234,586 |
) |
|
$ |
918,922 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of stock through private placement |
|
|
467,808 |
|
|
|
468 |
|
|
|
681,424 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
681,892 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,011,910 |
|
|
|
1,011,910 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2004 |
|
|
6,310,864 |
|
|
|
6,311 |
|
|
|
1,930,489 |
|
|
|
130,000 |
|
|
|
(101,400 |
) |
|
|
777,324 |
|
|
|
2,612,724 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of stock for services |
|
|
12,500 |
|
|
|
12 |
|
|
|
32,613 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,625 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,180,547 |
|
|
|
1,180,547 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2005 |
|
|
6,323,364 |
|
|
$ |
6,323 |
|
|
$ |
1,963,102 |
|
|
|
130,000 |
|
|
$ |
(101,400 |
) |
|
$ |
1,957,871 |
|
|
$ |
3,825,896 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
4
DAC TECHNOLOGIES GROUP INTERNATIONAL, INC.
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2005 and 2004
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
Cash flows from operating activities |
|
|
|
|
|
|
|
|
Net income |
|
$ |
1,180,547 |
|
|
$ |
1,011,910 |
|
Adjustments to reconcile net income to net cash
provided (used) by operating activities |
|
|
|
|
|
|
|
|
Issuance of common stock for services |
|
|
32,625 |
|
|
|
|
|
Depreciation |
|
|
55,091 |
|
|
|
61,986 |
|
Amortization |
|
|
15,993 |
|
|
|
15,478 |
|
Deferred income tax provision |
|
|
|
|
|
|
42,367 |
|
Changes in operating assets and liabilities |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(215,540 |
) |
|
|
(377,850 |
) |
Due from factor |
|
|
(52,138 |
) |
|
|
(1,038,451 |
) |
Inventories |
|
|
(771,198 |
) |
|
|
(1,023,760 |
) |
Prepaid expenses and deferred charges |
|
|
(9,403 |
) |
|
|
(19,066 |
) |
Deposits |
|
|
|
|
|
|
(1,435 |
) |
Advances to employees |
|
|
(9,958 |
) |
|
|
(1,500 |
) |
Accounts payable |
|
|
(177,520 |
) |
|
|
640,982 |
|
Accrued payroll tax withholdings |
|
|
7,336 |
|
|
|
(56,744 |
) |
Accrued expenses other |
|
|
6,996 |
|
|
|
4,463 |
|
Income taxes payable |
|
|
39,142 |
|
|
|
341,701 |
|
|
|
|
|
|
|
|
Net cash provided (used) by operating activities |
|
|
101,973 |
|
|
|
(399,919 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities |
|
|
|
|
|
|
|
|
Payments received on note receivable |
|
|
|
|
|
|
44,665 |
|
Purchases of property and equipment |
|
|
(72,754 |
) |
|
|
(54,252 |
) |
Payments for patents and trademarks |
|
|
(7,862 |
) |
|
|
(9,860 |
) |
Net advances on note receivable stockholder |
|
|
(1,131 |
) |
|
|
(7,162 |
) |
|
|
|
|
|
|
|
Net cash used by investing activities |
|
|
(81,747 |
) |
|
|
(26,609 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities |
|
|
|
|
|
|
|
|
Payments on notes payable |
|
|
(57,186 |
) |
|
|
(49,175 |
) |
Payments on notes payable stockholders |
|
|
|
|
|
|
(142,719 |
) |
Proceeds from issuance of common stock through private placement |
|
|
|
|
|
|
681,892 |
|
|
|
|
|
|
|
|
Net cash provided (used) by financing activities |
|
|
(57,186 |
) |
|
|
489,998 |
|
|
|
|
|
|
|
|
Net increase (decrease) in cash |
|
|
(36,960 |
) |
|
|
63,470 |
|
Cash beginning of year |
|
|
167,846 |
|
|
|
104,376 |
|
|
|
|
|
|
|
|
Cash end of year |
|
$ |
130,886 |
|
|
$ |
167,846 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information |
|
|
|
|
|
|
|
|
Cash paid during the year for |
|
|
|
|
|
|
|
|
Interest |
|
$ |
230,204 |
|
|
$ |
199,723 |
|
Taxes |
|
|
743,775 |
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
5
DAC TECHNOLOGIES GROUP INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
December 31, 2005 and 2004
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 develops, manufactures and markets 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 other consumer
products for the home, automobile and individual. The majority of DAC products are manufactured
and imported from mainland China and are shipped to DACs 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 throughout 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 non-compete agreement related 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, risk of loss has been transferred
which is generally F.O.B shipping point, the Companys price to the buyer is fixed and
determinable, and collectibility is reasonably assured. |
|
|
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, 2005 and 2004, the Company held no cash equivalents. |
|
|
d. |
|
Accounts and notes receivable The majority of the Companys receivables are factored
pursuant to a factoring agreement (Note 6). At December 31, 2005 and 2004, approximately 87%
of the Companys accounts receivable, gross of the balance due to factor, was covered by this
agreement. For receivables which are not covered under this agreement, the Company evaluates
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 |
6
DAC TECHNOLOGIES GROUP INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
December 31, 2005 and 2004
2.
Summary of Significant Accounting Policies (cont.)
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.
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
managements analysis, there were no conditions that existed in the years ended December 31,
2005 and 2004 to indicate the need for the non-accrual of interest income.
|
e. |
|
Inventories Inventories are stated at the lower of weighted average cost or market.
Costs include freight and applicable customs fees. Market is determined based on net
realizable value. Appropriate consideration is given to obsolescence, excessive levels,
deterioration and other factors in evaluating net realizable value. Inventories are shown
net of a valuation reserve of $52,924 and $17,674 at December 31, 2005 and 2004,
respectively. The Company receives inventory from overseas at terms of F.O.B. shipping
point, bearing the risk of loss at that point in time. During the time period prior to
receipt in the warehouse, inventory is classified and recorded 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 following useful lives: |
|
|
|
|
|
|
Leasehold improvements |
|
3 years |
Furniture and fixtures |
|
10 years |
Molds, dies and artwork |
|
10 years |
Depreciation expense of $55,091 and $61,986 was recognized during the years ended
December 31, 2005 and 2004, respectively. Maintenance and repairs are charged to expense as
incurred. Major additions and improvements of existing facilities are capitalized. For
retirements or sales of property, the Company removes the original cost and the related
accumulated depreciation from the accounts and the resulting gain or loss is reflected in
other income (expense), net in the accompanying consolidated statements of income.
|
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. |
7
DAC TECHNOLOGIES GROUP INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
December 31, 2005 and 2004
2. Summary of Significant Accounting Policies (cont.)
|
i. |
|
Shipping and handling All shipping and handling costs are included in selling
expense in the accompanying consolidated statements of income. These costs totaled
$389,511 and $260,221 for the years ended December 31, 2005 and 2004, respectively. |
|
|
j. |
|
Earnings per share Basic earnings per share has been calculated using the weighted
average number of common shares outstanding for each year. The dilutive effect of
potential common shares outstanding is included in diluted earnings per share. The
computations of basic earnings per share and diluted earnings per share for 2005 and 2004
are as follows: |
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
Net earnings from continuing operations |
|
$ |
1,180,547 |
|
|
$ |
1,011,910 |
|
|
|
|
|
|
|
|
Basic weighted average shares |
|
$ |
6,189,905 |
|
|
$ |
5,955,907 |
|
Effect of dilutive securities
|
|
|
|
|
|
|
|
|
Common stock warrants |
|
|
19,879 |
|
|
|
18,296 |
|
|
|
|
|
|
|
|
Dilutive potential common shares |
|
$ |
6,209,784 |
|
|
$ |
5,974,203 |
|
|
|
|
|
|
|
|
Net earnings per share from continuing operations |
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.19 |
|
|
$ |
0.17 |
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.19 |
|
|
$ |
0.17 |
|
|
|
|
|
|
|
|
|
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. The fair value of notes receivable, which is based
on discounted cash flows using current interest rates, approximates the carrying value at
December 31, 2005 and 2004. |
8
DAC TECHNOLOGIES GROUP INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
December 31, 2005 and 2004
2. Summary of Significant Accounting Policies (cont.)
|
m. |
|
Impairment of long-lived assets Statement of Financial Accounting Standards (SFAS)
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
managements assessment of the impairment indicators, no impairment testing was necessary
during the years ended December 31, 2005 and 2004. |
|
|
n. |
|
Impairment of patents and trademarks SFAS No. 144 requires that separate intangible
assets that have finite lives 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 on
managements assessment of the impairment indicators, no impairment testing was necessary
during the years ended December 31, 2005 and 2004. |
|
|
o. |
|
New accounting pronouncements In December 2004, the Financial Accounting Standards
Board (FASB) issued SFAS No. 151, Inventory Costs. SFAS No. 151 requires abnormal
amounts of inventory costs related to idle facility, freight handling and wasted material
expenses to be recognized as current period charges. Additionally, SFAS No. 151 requires
that allocation of fixed production overheads to the costs of conversion be based on the
normal capacity of the production facilities. The standard is effective for fiscal years
beginning after June 15, 2005. The Company is currently evaluating the effect of SFAS No.
151 on its consolidated financial statements. |
In December 2004, the FASB issued SFAS No. 123(R), Share-Based Payment, which is a
revision of SFAS No. 123 and supersedes APB Opinion No. 25. SFAS No. 123(R) requires all
share-based payments to employees, including grants of employee stock options, to be valued
at fair value on the date of grant, and to be expensed over the applicable vesting period.
Pro forma disclosure of the income statement effects of share-based payments is no longer an
alternative. SFAS No. 123(R) is effective for all stock-based awards granted on or after
July 1, 2005. In addition, companies must also recognize compensation expense related to
any awards that are not fully vested as of the effective date. Compensation expense for the
unvested awards is measured based on the fair value of the awards previously calculated in
developing the pro forma disclosures in accordance with the provisions of SFAS No. 123. The
adoption of SFAS No. 123(R) did not have a material impact on the Companys consolidated
results of operations.
9
DAC TECHNOLOGIES GROUP INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
December 31, 2005 and 2004
3. Variable Interest Entities
FASB Interpretation No. 46 (Revised December 2003), Consolidation of Variable Interest
Entities (FIN 46R), requires that if an enterprise is the primary beneficiary of a variable
interest entity, the assets, liabilities, and results of operations of the variable interest
entity should be included in the consolidated financial statements of the enterprise. The
Company held a note receivable, which is a variable interest, from DAC Investment and
Consulting, Inc. (DAC Investment) of $72,518. Since 2001, DAC Investment has provided
consulting and sales services to the Company. For purposes of FIN 46R, management determined
that DAC Investment is a variable interest entity; however, the Company is not the primary
beneficiary. The balance of the note receivable represents the Companys maximum exposure to
loss as a result of its involvement with DAC Investment.
4. Inventories
Inventories consist of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
Finished goods |
|
$ |
2,282,743 |
|
|
$ |
1,055,407 |
|
|
|
|
|
Inventory in transit |
|
|
398,600 |
|
|
|
854,738 |
|
|
|
|
|
Parts |
|
|
22,967 |
|
|
|
22,967 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,704,310 |
|
|
$ |
1,933,112 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5. Intangible Assets
Intangible assets consisted of the following at December 31:
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
Finite-lived |
|
|
|
|
|
|
|
|
Patents and trademarks, net of accumulated
amortization of $72,439 and $56,446 in 2005
and 2004, respectively |
|
$ |
156,531 |
|
|
$ |
164,662 |
|
|
|
|
|
|
|
|
10
DAC TECHNOLOGIES GROUP INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
December 31, 2005 and 2004
5. Intangible Assets (cont.)
Aggregate amortization expense related to finite-lived intangible assets was $15,993 and
$15,478 for the years ended December 31, 2005 and 2004, respectively. Future finite-lived
intangible asset amortization expenses are as follows:
|
|
|
|
|
2006 |
|
$ |
15,129 |
|
2007 |
|
|
14,746 |
|
2008 |
|
|
14,471 |
|
2009 |
|
|
13,210 |
|
2010 |
|
|
12,224 |
|
Thereafter |
|
|
86,751 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
156,531 |
|
|
|
|
|
During 2005, the Company acquired a patent which pertains to technology incorporated into
certain of the Companys products. The Company paid $7,862 for this patent. The fair value of
this patent is being amortized over the weighted-average expected life of 17 years.
6. 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 4% or 0.50% above prime, which was 7.25% at
December 31, 2005, 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:
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
Accounts receivable factored |
|
$ |
4,819,503 |
|
|
$ |
3,192,713 |
|
Amounts advanced and outstanding |
|
|
3,505,885 |
|
|
|
1,931,233 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due from factor |
|
$ |
1,313,618 |
|
|
$ |
1,261,480 |
|
|
|
|
|
|
|
|
11
DAC TECHNOLOGIES GROUP INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
December 31, 2005 and 2004
7. Notes Payable
Notes payable consist of:
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
Note payable with a bank; interest at 7.70%; payable
on demand or if no demand, November 1, 2008;
collateralized by the Companys receivables and
personal guarantees of the Companys major
stockholders |
|
$ |
125,580 |
|
|
$ |
148,113 |
|
|
|
|
|
|
|
|
|
|
Note payable with a bank; interest at 7.70%; payable
on demand or if no demand, November 12, 2008;
collateralized by the Companys receivables and
personal guarantees of the Companys major
stockholders |
|
|
104,674 |
|
|
|
121,785 |
|
|
|
|
|
|
|
|
|
|
Note payable with a bank; interest at 7.00%; payable
on demand or if no demand, April 30, 2006; secured
by the Companys inventories and personal
guarantees of the Companys major stockholders |
|
|
5,966 |
|
|
|
23,508 |
|
|
|
|
|
|
|
|
|
|
$ |
236,220 |
|
|
$ |
293,406 |
|
|
|
|
|
|
|
|
The weighted average interest rates on short-term borrowings, including notes payable
stockholders for the years ended December 31, 2005 and 2004 were 7.64% and 7.00%, respectively.
The Company recognized interest expense of approximately $19,500 and $28,500 for the years ended
December 31, 2005 and 2004, respectively, on notes payable and notes payable stockholders.
8. Notes Payable Stockholders
During 2004, the Company maintained note payable agreements with certain stockholders of
the Company. Repayments under these agreements during 2004 were $142,719. These notes bore
interest at rates ranging from 6% to 10% and were paid off during 2004. During 2004, the
Company recognized interest expense of $6,334 on these notes.
12
DAC TECHNOLOGIES GROUP INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
December 31, 2005 and 2004
9. Equity
On April 1, 2005, the Company issued 12,500 shares of restricted common stock for services
valued at $32,625.
On June 24, 2004, the Company issued 467,808 shares of common stock through private
placement valued at $681,892. In addition to the shares, investors were also issued 233,904
warrants, which upon exercise, will be able to purchase an additional 233,904 shares at a price
of $2.57 per share. The placement agent received a $69,000 fee and was issued 160,000 warrants
that will allow it to purchase up to 160,000 shares of the Companys common stock at a price of
$2.57 per share. Additionally, legal expenses incurred related to the private placement were
$16,844. The warrant holders have until June 28, 2009 to exercise the warrants.
10. Treasury Stock
In August 2000, the Company filed suit against a former manufacturer alleging breach of a
manufacturing contract and seeking damages and rescission 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 sheets 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 statements of income.
11. 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 Companys common stock at exercise
prices determined by the Companys 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, 2005, the Company had
granted no options pursuant to this Plan.
13
DAC TECHNOLOGIES GROUP INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
December 31, 2005 and 2004
12. Warrants
A summary of warrant activity for 2005 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
Number of |
|
|
Exercise |
|
|
Warrants |
|
|
Exercise |
|
|
|
Warrants |
|
|
Price |
|
|
Exercisable |
|
|
Price |
|
Outstanding, December 31, 2004 |
|
|
393,304 |
|
|
$ |
2.57 |
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2005 |
|
|
393,304 |
|
|
$ |
2.57 |
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2005, all warrants outstanding have an exercise price of $2.57 and expire
on June 28, 2009.
13. Income Taxes
The provisions for income taxes consist of:
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
Current provision |
|
$ |
782,917 |
|
|
$ |
341,701 |
|
Deferred provision |
|
|
|
|
|
|
42,367 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
782,917 |
|
|
$ |
384,068 |
|
|
|
|
|
|
|
|
Reconciliations of the differences between income taxes computed at the federal statutory
tax rates and the provision for income taxes is as follows:
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
Income taxes computed at federal
statutory tax rate |
|
$ |
667,578 |
|
|
$ |
474,633 |
|
State tax provision, net of federal benefits |
|
|
84,233 |
|
|
|
59,887 |
|
Recognition of DAC Technologies of
America, Inc. net operating losses |
|
|
|
|
|
|
(161,061 |
) |
Non-deductible expenses and other |
|
|
31,106 |
|
|
|
10,609 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes |
|
$ |
782,917 |
|
|
$ |
384,068 |
|
|
|
|
|
|
|
|
14
DAC TECHNOLOGIES GROUP INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
December 31, 2005 and 2004
13. Income Taxes (cont.)
Temporary differences that give rise to significant deferred tax assets (liabilities) are
as follows:
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
Allowance for doubtful accounts |
|
$ |
1,915 |
|
|
$ |
2,872 |
|
Allowance for excess inventory |
|
|
22,389 |
|
|
|
6,767 |
|
Accumulated tax depreciation in
excess of book depreciation |
|
|
(28,857 |
) |
|
|
(14,618 |
) |
Accumulated tax amortization in
excess of book amortization |
|
|
(1,347 |
) |
|
|
(878 |
) |
Other accrued liabilities |
|
|
|
|
|
|
(43 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset (liability) |
|
$ |
(5,900 |
) |
|
$ |
(5,900 |
) |
|
|
|
|
|
|
|
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. Previously, the tax impact to be recorded by the Company based on this event had been
undeterminable. However, during 2004, the amount of these net tax losses was determined to be
$420,634. Pursuant to SFAS No. 109, Accounting for Income Taxes, the full effect of these net
operating losses was recorded in 2004.
During the year ended December 31, 2004, the Company utilized all of these net operating
losses, as well as its previously recorded net operating loss carryforward in the amount of
approximately $74,000 to offset its federal and state income tax liability.
14. Related Party Transactions
During the years ended December 31, 2005 and 2004, the Company made periodic advances to
certain employees of the Company. At December 31, 2005 and 2004, the outstanding balances of
advances to these individuals were $14,783 and $4,825, respectively.
At December 31, 2005 and 2004, the Company held a note receivable of $99,531 and $98,400,
respectively, due from an individual, who is both an employee and a stockholder, which is due on
December 31, 2006. This note is unsecured and non-interest bearing.
At December 31, 2005 and 2004, the Company held a note receivable of $72,518 due from a
related party entity, which is owned by the individual discussed above, which is due on December
31, 2006. This note is unsecured and non-interest bearing. The note receivable has been
classified as non-current in the accompanying consolidated balance sheets because repayment is
not anticipated during the next year.
15
DAC TECHNOLOGIES GROUP INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
December 31, 2005 and 2004
14. Related Party Transactions (cont.)
For the years ended December 31, 2005 and 2004, consulting service fees in the amount of
$60,000 were paid to a related party entity, which is owned by the individual discussed above.
The related party provides consulting services to the Company on an ongoing basis.
Certain stockholders of the Company have personally guaranteed the Companys outstanding
borrowings with a bank at December 31, 2005 and 2004.
15. Commitments and Contingencies
The Company leases office and warehouse space for $5,537 per month under a lease that
expires on April 30, 2005. The lease agreement provides for renewal options through April 30,
2007 at a rate of $6,436 per month. The Company also leases space from a shareholder for office
space for $5,500 per month, which increased from $3,000 beginning July 1, 2004, under no formal
lease agreement. Total rent expense for the Company for the years ended December 31, 2005 and
2004 was $201,887 and $128,775, 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 Companys consolidated 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. 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 Technologies of America, Inc. totaling approximately $119,000. No accrual
has been made for this contingency.
16. Major Customers and Suppliers
During the years ended December 31, 2005 and 2004, the Company recognized aggregate sales
to one customer that exceeded ten percent of total net sales. Sales to this individual customer
were approximately $7,643,000 and $5,111,000 during 2005 and 2004, respectively. Accounts
receivable related to the sales were factored without recourse (Note 6).
During the years ended December 31, 2005 and 2004, the Company purchased 99.9% and 98%,
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.
16
DAC TECHNOLOGIES GROUP INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
December 31, 2005 and 2004
17. Concentrations 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 6, the Company factors a majority of its receivables under a factoring agreement. These
accounts are factored on a non-recourse basis which reduces the Companys exposure to credit
risk. Approximately 87% of the Companys accounts receivable at December 31, 2005 and 2004 were
factored. The Company also provides credit in the normal course of business to certain of its
customers and performs ongoing credit evaluations of these 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 Companys
customer base and its customers financial resources.
At December 31, 2005 and 2004 and at various times throughout the year, the Company
maintained cash balances with financial institutions in excess of the federally insured limit.
18. Financial Information by Business Segment
During the years ended December 31, 2005 and 2004, the Company operates in four primary
business segments delineated by products or services. These segments are security products, gun
locks, safes and non-security products. The accounting policies of the Companys segments are
the same as those described in Note 2. The Companys long-lived assets are located in the
United States and China.
Information concerning operations in these segments of business is as follows:
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
Revenues |
|
|
|
|
|
|
|
|
Security products |
|
$ |
66,388 |
|
|
$ |
159,104 |
|
Gun-locks |
|
|
1,461,309 |
|
|
|
1,571,453 |
|
Safes |
|
|
355,406 |
|
|
|
374,657 |
|
Non-security products |
|
|
11,468,012 |
|
|
|
7,247,139 |
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
13,351,115 |
|
|
$ |
9,352,353 |
|
|
|
|
|
|
|
|
Income (loss) before income tax expense |
|
|
|
|
|
|
|
|
Security products |
|
$ |
(3,492 |
) |
|
$ |
44,806 |
|
Gun-locks |
|
|
(11,972 |
) |
|
|
182,661 |
|
Safes |
|
|
11,180 |
|
|
|
62,454 |
|
Non-security products |
|
|
1,967,748 |
|
|
|
1,106,057 |
|
|
|
|
|
|
|
|
Total income (loss) before income tax expense |
|
$ |
1,963,464 |
|
|
$ |
1,395,978 |
|
|
|
|
|
|
|
|
17
DAC TECHNOLOGIES GROUP INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
December 31, 2005 and 2004
18. Financial Information by Business Segment (cont.)
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
Identifiable assets |
|
|
|
|
|
|
|
|
Security products |
|
|
|
|
|
|
|
|
United States |
|
$ |
130,770 |
|
|
$ |
172,563 |
|
China |
|
|
41,587 |
|
|
|
53,628 |
|
Gun-locks |
|
|
|
|
|
|
|
|
United States |
|
|
347,045 |
|
|
|
321,109 |
|
China |
|
|
28,041 |
|
|
|
36,413 |
|
Safes |
|
|
|
|
|
|
|
|
United States |
|
|
148,721 |
|
|
|
102,900 |
|
China |
|
|
10,434 |
|
|
|
12,398 |
|
Non-security products |
|
|
|
|
|
|
|
|
United States |
|
|
2,209,052 |
|
|
|
1,474,835 |
|
Corporate |
|
|
2,583,852 |
|
|
|
2,293,716 |
|
|
|
|
|
|
|
|
Total identifiable assets |
|
$ |
5,499,502 |
|
|
$ |
4,467,562 |
|
|
|
|
|
|
|
|
Molds used to manufacture the Companys security products and gun locks are located in
China (Note 1).
18