DAC Technologies Group International, Inc.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
10-QSB/A
Amendment No. 1
x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2006
o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE
ACT
For the transition period from ______ to ______
Commission File Number 000-29211
DAC Technologies Group International, Inc.
(Name of Small Business Issuer in its charter)
|
|
|
Florida
|
|
65-0847852 |
|
|
|
(State or other jurisdiction of
incorporation or organization)
|
|
(I.R.S. Employer
Identification No.) |
|
|
|
12120 Colonel Glenn Road, Suite
6200 Little Rock, AR
|
|
72210 |
|
|
|
(Address of principal executive offices)
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|
(Zip Code) |
(501) 661-9100
(Issuers telephone number)
Check whether the Issuer (1) has filed all reports required to be filed by the 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.
(1) Yes x No o (2) Yes x No 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 the number of shares outstanding of each of the issuers class of common equity, as of
the latest practicable date. As of
November 7, 2006, 6,323,364 shares of Common Stock are issued
and 6,135,599 are outstanding.
Transitional Small Business Disclosure Format: Yes o No x
TABLE OF CONTENTS
EXPLANATORY NOTE
This
Amendment No. 1 to the Quarterly Report of DAC Technologies Group
International Inc. for the quarter ended September 30, 2006, as originally
filed November 14, 2006, is being filed for the purpose of restating
previously issued quarterly financial statements to reflect changes
to the Companys cost of sales and inventory values. These changes
do not affect the Companys annual financial statements for the
year ended December 31, 2006 as previously filed in the
Companys December 31, 2006 10K.
2
PART I
ITEM 1. FINANCIAL STATEMENTS
Our financial statements are contained in pages 4 through 9 following.
3
DAC TECHNOLOGIES GROUP INTERNATIONAL, INC.
Condensed Balance Sheet (Consolidated)
September 30, 2006
Unaudited
|
|
|
|
|
|
|
(Restated) |
|
Assets
|
Current assets |
|
|
|
|
Cash |
|
$ |
39,151 |
|
Accounts receivable, less allowance for doubtful
accounts of $5,000 |
|
|
1,372,737 |
|
Due from factor |
|
|
614,666 |
|
Inventories |
|
|
4,393,701 |
|
Income taxes
receivable |
|
|
87,184 |
|
Prepaid expenses and deferred charges |
|
|
132,360 |
|
Current deferred income tax benefit |
|
|
35,815 |
|
|
|
|
|
Total current assets |
|
|
6,675,614 |
|
|
|
|
|
|
|
|
|
|
Property and equipment |
|
|
|
|
Leasehold improvements |
|
|
29,049 |
|
Furniture and fixtures |
|
|
209,557 |
|
Molds, dies, and artwork |
|
|
504,283 |
|
|
|
|
|
|
|
|
742,889 |
|
Accumulated depreciation |
|
|
(539,040 |
) |
|
|
|
|
Net property and equipment |
|
|
203,849 |
|
|
|
|
|
|
|
|
|
|
Other assets |
|
|
|
|
Patents and trademarks, net of
accumulated amortization of $85,537 |
|
|
150,679 |
|
Deposits |
|
|
1,435 |
|
Advances to employees |
|
|
34,151 |
|
Note receivable related party |
|
|
72,945 |
|
Note receivable stockholder |
|
|
74,614 |
|
|
|
|
|
Total other assets |
|
|
333,824 |
|
|
|
|
|
Total assets |
|
$ |
7,213,287 |
|
|
|
|
|
The accompanying selected notes are an integral part of these condensed consolidated financial statements.
4
DAC TECHNOLOGIES GROUP INTERNATIONAL, INC.
Condensed Balance Sheet (Consolidated)
September 30, 2006
Unaudited
|
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|
|
|
|
|
|
|
|
|
(Restated) |
|
Liabilities and Stockholders Equity
|
Current liabilities |
|
|
|
|
Notes payable |
|
$ |
202,838 |
|
Accounts payable |
|
|
2,607,103 |
|
Accrued payroll tax withholdings |
|
|
26,974 |
|
Accrued expenses-other |
|
|
53,888 |
|
|
|
|
|
Total current liabilities |
|
|
2,890,803 |
|
|
|
|
|
|
|
|
|
|
Deferred income tax liability |
|
|
33,100 |
|
|
|
|
|
|
|
|
|
|
Stockholders equity |
|
|
|
|
Preferred stock, $.001 par value; authorized
10,000,000 shares; none issued and outstanding |
|
|
|
|
Common stock, $.001 par value; authorized
50,000,000 shares; 6,323,364 shares issued and
6,135,599 shares outstanding |
|
|
6,323 |
|
Additional paid-in capital |
|
|
1,963,102 |
|
Treasury stock, at cost |
|
|
(201,333 |
) |
Retained earnings |
|
|
2,521,292 |
|
|
|
|
|
Total stockholders equity |
|
|
4,289,384 |
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
7,213,287 |
|
|
|
|
|
The accompanying selected notes are an integral part of these condensed consolidated financial statements.
5
DAC TECHNOLOGIES GROUP INTERNATIONAL, INC.
Condensed Statements of Operations (Consolidated)
For The Nine Months Ended September 30, 2006 and 2005
Unaudited
|
|
|
|
|
|
|
|
|
|
|
|
|
(Restated) |
|
|
|
|
|
|
2006 |
|
|
2005 |
|
Net sales |
|
$ |
9,416,561 |
|
|
$ |
7,720,369 |
|
|
|
|
|
|
|
|
|
|
Cost of sales |
|
|
6,373,054 |
|
|
|
4,944,682 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
3,043,507 |
|
|
|
2,775,687 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
|
|
|
|
|
|
Selling |
|
|
1,163,956 |
|
|
|
891,318 |
|
General and administrative |
|
|
780,127 |
|
|
|
706,488 |
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
1,944,083 |
|
|
|
1,597,806 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
1,099,424 |
|
|
|
1,177,881 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expense |
|
|
|
|
|
|
|
|
Interest expense |
|
|
(190,645 |
) |
|
|
(134,194 |
) |
|
|
|
|
|
|
|
Total other expense |
|
|
(190,645 |
) |
|
|
(134,194 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax provision |
|
|
908,779 |
|
|
|
1,043,687 |
|
|
|
|
|
|
|
|
|
|
Provision for income taxes |
|
|
345,358 |
|
|
|
409,858 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
563,421 |
|
|
$ |
633,829 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted earnings per share |
|
$ |
0.09 |
|
|
$ |
0.10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of common shares: |
|
|
|
|
|
|
|
|
Basic |
|
|
6,166,068 |
|
|
|
6,188,739 |
|
Diluted |
|
|
6,166,068 |
|
|
|
6,215,244 |
|
The accompanying selected notes are an integral part of these condensed consolidated financial statements.
6
DAC TECHNOLOGIES GROUP INTERNATIONAL, INC.
Condensed Statements of Operations (Consolidated)
For The Three Months Ended September 30, 2006 and 2005
Unaudited
|
|
|
|
|
|
|
|
|
|
|
(Restated) |
|
|
|
|
|
|
2006 |
|
|
2005 |
|
Net sales |
|
$ |
3,936,195 |
|
|
$ |
3,193,129 |
|
|
|
|
|
|
|
|
|
|
Cost of sales |
|
|
2,648,589 |
|
|
|
2,033,405 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
1,287,606 |
|
|
|
1,159,724 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
|
|
|
|
|
|
Selling |
|
|
504,625 |
|
|
|
373,428 |
|
General and administrative |
|
|
270,015 |
|
|
|
263,169 |
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
774,640 |
|
|
|
636,597 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
512,966 |
|
|
|
523,127 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expense |
|
|
|
|
|
|
|
|
Interest expense |
|
|
(79,774 |
) |
|
|
(57,586 |
) |
|
|
|
|
|
|
|
Total other expense |
|
|
(79,774 |
) |
|
|
(57,586 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax provision |
|
|
433,192 |
|
|
|
465,541 |
|
|
|
|
|
|
|
|
|
|
Provision for income taxes |
|
|
159,269 |
|
|
|
184,804 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
273,923 |
|
|
$ |
280,737 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted earnings per share |
|
$ |
0.04 |
|
|
$ |
0.05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares: |
|
|
|
|
|
|
|
|
Basic and diluted |
|
|
6,135,599 |
|
|
|
6,193,364 |
|
The accompanying selected notes are an integral part of these condensed consolidated financial statements.
7
DAC TECHNOLOGIES GROUP INTERNATIONAL, INC.
Condensed Statements of Cash Flows (Consolidated)
For the Nine Months Ended September 30, 2006 and 2005
Unaudited
|
|
|
|
|
|
|
|
|
|
|
(Restated) |
|
|
|
|
|
|
2006 |
|
|
2005 |
|
Cash flows from operating activities |
|
|
|
|
|
|
|
|
Net income |
|
$ |
563,421 |
|
|
$ |
633,829 |
|
Adjustments to reconcile net income to
net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Issuance of common stock for services |
|
|
|
|
|
|
32,625 |
|
Depreciation |
|
|
42,773 |
|
|
|
40,476 |
|
Amortization |
|
|
13,098 |
|
|
|
11,994 |
|
Deferred income taxes |
|
|
(8,615 |
) |
|
|
|
|
Changes in operating assets and liabilities |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(680,047 |
) |
|
|
(231,620 |
) |
Due from factor |
|
|
698,952 |
|
|
|
647,616 |
|
Inventories |
|
|
(1,689,391 |
) |
|
|
(1,707,762 |
) |
Income taxes receivable |
|
|
(87,184 |
) |
|
|
|
|
Advances to employees |
|
|
(19,368 |
) |
|
|
(14,141 |
) |
Prepaid expenses and deferred charges |
|
|
(62,787 |
) |
|
|
(103,064 |
) |
Accounts payable |
|
|
1,626,061 |
|
|
|
947,877 |
|
Accrued payroll tax withholdings |
|
|
(2,489 |
) |
|
|
5,011 |
|
Accrued expenses other |
|
|
23,350 |
|
|
|
(4,324 |
) |
Income taxes payable |
|
|
(380,843 |
) |
|
|
(243,917 |
) |
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
36,931 |
|
|
|
14,600 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities |
|
|
|
|
|
|
|
|
Purchases of property and equipment |
|
|
(12,595 |
) |
|
|
(23,403 |
) |
Payments for patents and trademarks |
|
|
(7,246 |
) |
|
|
|
|
Net advances on note receivable related party |
|
|
(427 |
) |
|
|
(30,876 |
) |
Net advances on note receivable stockholder |
|
|
24,917 |
|
|
|
|
|
Purchase of treasury stock |
|
|
(99,933 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net cash used by investing activities |
|
|
(95,284 |
) |
|
|
(54,279 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities |
|
|
|
|
|
|
|
|
Payments on notes payable |
|
|
(33,382 |
) |
|
|
(40,285 |
) |
|
|
|
|
|
|
|
Net cash used by financing activities |
|
|
(33,382 |
) |
|
|
(40,285 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in cash |
|
|
(91,735 |
) |
|
|
(79,964 |
) |
|
|
|
|
|
|
|
|
|
Cash beginning of period |
|
|
130,886 |
|
|
|
167,846 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash end of period |
|
$ |
39,151 |
|
|
$ |
87,882 |
|
|
|
|
|
|
|
|
The accompanying selected notes are an integral part of these condensed consolidated financial statements.
8
DAC TECHNOLOGIES GROUP INTERNATIONAL, INC.
Condensed Statements of Cash Flows (Consolidated)
For the Three Months Ended September 30, 2006 and 2005
Unaudited
|
|
|
|
|
|
|
|
|
|
|
(Restated) |
|
|
|
|
|
|
2006 |
|
|
2005 |
|
Cash flows from operating activities |
|
|
|
|
|
|
|
|
Net income |
|
$ |
273,923 |
|
|
$ |
280,737 |
|
Adjustments to reconcile net income to
net cash used in operating activities: |
|
|
|
|
|
|
|
|
Depreciation |
|
|
15,000 |
|
|
|
13,668 |
|
Amortization |
|
|
5,000 |
|
|
|
3,996 |
|
Deferred income tax provision |
|
|
(2,872 |
) |
|
|
|
|
Changes in operating assets and liabilities |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
48,113 |
|
|
|
471,483 |
|
Due from factor |
|
|
(62,028 |
) |
|
|
(459,201 |
) |
Inventories |
|
|
(886,647 |
) |
|
|
(1,511,109 |
) |
Income taxes
receivable |
|
|
12,141 |
|
|
|
|
|
Advances to employees |
|
|
(6,517 |
) |
|
|
3,530 |
|
Prepaid expenses and deferred charges |
|
|
436 |
|
|
|
920 |
|
Accounts payable |
|
|
228,429 |
|
|
|
1,099,065 |
|
Accrued payroll tax withholdings |
|
|
(3,890 |
) |
|
|
3,407 |
|
Accrued expenses other |
|
|
43,751 |
|
|
|
8,888 |
|
Income taxes payable |
|
|
|
|
|
|
(25,971 |
) |
|
|
|
|
|
|
|
Net cash used in operating activities |
|
|
(335,161 |
) |
|
|
(110,587 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities |
|
|
|
|
|
|
|
|
Purchases of property and equipment |
|
|
|
|
|
|
(6,930 |
) |
Payments on notes receivable stockholder |
|
|
28,155 |
|
|
|
6,485 |
|
|
|
|
|
|
|
|
Net cash provided (used) by investing activities |
|
|
28,155 |
|
|
|
(445 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities |
|
|
|
|
|
|
|
|
Payments on notes payable |
|
|
(9,867 |
) |
|
|
(13,628 |
) |
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(9,867 |
) |
|
|
(13,628 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in cash |
|
|
(316,873 |
) |
|
|
(124,660 |
) |
|
|
|
|
|
|
|
|
|
Cash beginning of period |
|
|
356,024 |
|
|
|
212,542 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash end of period |
|
$ |
39,151 |
|
|
$ |
87,882 |
|
|
|
|
|
|
|
|
The accompanying selected notes are an integral part of these condensed consolidated financial statements.
9
PART F/S
DAC TECHNOLOGIES GROUP INTERNATIONAL, INC.
SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Nature of Business
DAC Technologies Group International, Inc. (the Company), is in the business of
developing, marketing and outsourcing the manufacture of various consumer products, patented and
non-patented. The Companys primary business is gun safety and gun maintenance with a target
consumer base of sportsmen, hunters and outdoorsmen, and recreational enthusiasts. The Companys
products have historically been security related, evolving from various personal, home and
automotive electronic security devices, to firearm safety devices such as gun and trigger locks,
cable locks and safes. In 2003, the product line was expanded to include a line of gun cleaning
kits and accessories. This line has continued to be expanded, and now accounts for approximately
73% of the Companys sales revenues. In 2005, the Company added a line of food processing
equipment and accessories for ATVs (All Terrain Vehicles).
The majority of the Companys products are manufactured and imported from mainland China and
shipped to the Companys central warehouse facility in Little Rock, Arkansas for distribution.
These products, along with other items manufactured in the United States, are sold primarily to
mass merchants and sporting goods retailers throughout the United States and international
locations.
Organization and Summary of Significant Accounting Policies
Organization and basis of presentation
The Company was incorporated as a Florida corporation in July 1998 under the name DAC
Technologies of America, Inc. In July 1999, the Company changed its name to DAC Technologies Group
International, Inc.
Unaudited interim condensed consolidated financial statements
The accompanying condensed consolidated financial statements of the Company as of and for the
nine months ended September 30, 2006 and 2005 and for the three months ended September 30, 2006 and
2005 are unaudited, but, in the opinion of management, reflect the adjustments, all of which are of
a normal recurring nature, necessary for a fair presentation of such financial statements in
accordance with accounting principles generally accepted in the United States. The accompanying
condensed consolidated financial statements have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and note disclosures
normally included in annual financial statements prepared in accordance with
accounting principles generally accepted in the United States have been condensed or omitted
pursuant to those rules and regulations, although the Company believes that the disclosures made
are adequate to make the information not misleading. It is suggested that these condensed
consolidated financial statements be read in conjunction with the consolidated financial statements
and the notes thereto included in the Companys latest 10KSB. The results of operations for an
interim period are not necessarily indicative of the results for a full year.
10
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 $80,974 at
September 30, 2006. 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.
|
|
|
|
|
|
|
(Restated) |
|
|
|
September 30, |
|
|
|
2006 |
|
Inventories consist of: |
|
|
|
|
Finished goods |
|
$ |
3,238,440 |
|
Inventory in transit |
|
|
1,132,294 |
|
Parts |
|
|
22,967 |
|
|
|
|
|
|
|
$ |
4,393,701 |
|
|
|
|
|
Restatement
The
Company has restated its previously issued condensed consolidated financial statements as
of September 30, 2006 and for the period then ended for
inventory costs and the related income tax
effects. The accompanying condensed consolidated financial statements for this period have been
restated to reflect the corrections.
|
|
|
|
|
Inventory cost adjustment, net of tax effect |
|
$ |
180,845 |
|
|
|
|
|
Total
reduction in quarter ended September 30, 2006 earnings |
|
$ |
180,845 |
|
|
|
|
|
The effect on the Companys previously issued condensed consolidated financial statements as of
September 30, 2006 are summarized as follows:
Condensed Balance Sheet (Consolidated) as of September 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Previously |
|
|
Increase |
|
|
|
|
|
|
Reported |
|
|
(Decrease) |
|
|
Restated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories |
|
$ |
4,686,757 |
|
|
$ |
(293,056 |
) |
|
$ |
4,393,701 |
|
Income taxes receivable |
|
|
|
|
|
|
87,184 |
|
|
|
87,184 |
|
Total current assets |
|
|
6,881,486 |
|
|
|
(205,872 |
) |
|
|
6,675,614 |
|
Total assets |
|
|
7,419,159 |
|
|
|
(205,872 |
) |
|
|
7,213,287 |
|
Income taxes payable |
|
|
25,027 |
|
|
|
(25,027 |
) |
|
|
|
|
Total
current liabilities |
|
|
2,915,830 |
|
|
|
(25,027 |
) |
|
|
2,890,803 |
|
Retained earnings |
|
|
2,702,137 |
|
|
|
(180,845 |
) |
|
|
2,521,292 |
|
Total stockholders equity |
|
|
4,470,229 |
|
|
|
(180,845 |
) |
|
|
4,289,384 |
|
Total
liabilities and stockholders equity |
|
|
7,419,159 |
|
|
|
(205,872 |
) |
|
|
7,213,287 |
|
Condensed Statement of Operations (Consolidated) for the Nine Months Ended September 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Previously |
|
|
Increase |
|
|
|
|
|
|
Reported |
|
|
(Decrease) |
|
|
Restated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales |
|
$ |
6,079,998 |
|
|
$ |
293,056 |
|
|
$ |
6,373,054 |
|
Gross profit |
|
|
3,336,563 |
|
|
|
(293,056 |
) |
|
|
3,043,507 |
|
Income from operations |
|
|
1,392,480 |
|
|
|
(293,056 |
) |
|
|
1,099,424 |
|
Income before income tax provision |
|
|
1,201,835 |
|
|
|
(293,056 |
) |
|
|
908,779 |
|
Provision for income taxes |
|
|
457,569 |
|
|
|
(112,211 |
) |
|
|
345,358 |
|
Net income |
|
|
744,266 |
|
|
|
(180,845 |
) |
|
|
563,421 |
|
Basic and diluted earnings per share |
|
|
0.12 |
|
|
|
(0.03 |
) |
|
|
0.09 |
|
Earnings per Share
Basic earnings per share of common stock are computed by dividing net income applicable to
common shares by the weighted average number of common shares outstanding during the period.
Diluted earnings per share are computed using the weighted average number of common shares and, if
dilutive, the incremental common shares issuable upon the exercise of outstanding stock warrants
(using the treasury stock method). For the three months and ended September 30, 2006 and 2005 and
for the nine months ended September 30, 2006, approximately 394,000 stock warrants to purchase
common stock were excluded from the calculation, as their exercise price of $2.57 was greater than
the average market price of the common stock during the period. A reconciliation of the net income
and number of shares used in computing basic and diluted earnings per share was as follows for the
three month and nine month periods ended September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
|
(Restated) |
|
|
|
|
|
(Restated) |
|
|
|
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
273,923 |
|
|
$ |
280,737 |
|
|
$ |
563,421 |
|
|
$ |
633,829 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average
common
shares for
basic
calculation |
|
|
6,135,599 |
|
|
|
6,193,364 |
|
|
|
6,166,068 |
|
|
|
6,188,739 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average
effect of dilutive
securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,505 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for
diluted calculation |
|
|
6,135,599 |
|
|
|
6,193,364 |
|
|
|
6,166,068 |
|
|
|
6,215,244 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share-
basic |
|
$ |
0.04 |
|
|
$ |
0.05 |
|
|
$ |
0.09 |
|
|
$ |
0.10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share-
diluted |
|
$ |
0.04 |
|
|
$ |
0.05 |
|
|
$ |
0.09 |
|
|
$ |
0.10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 10QSB 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.
Historically, the identification and development of new products and expansion of the
Companys sales organization have achieved growth. There can be no assurance that we will be able
to continue to develop new products or expand sales to sustain rates of revenue growth and
profitability in future periods. Any future success that the Company may achieve will depend upon
many factors including those that may be beyond the control of the Company or which cannot be
predicted at this time. Although we believe that our expectations are based on reasonable
assumptions within the bounds of our knowledge of our business and operations, actual results may
differ materially from our expectations.
Factors that could cause actual results to differ from expectations include, without
limitations:
|
|
|
Achieving planned revenue and profit growth in each of the Companys business units; |
|
|
|
|
Renewal of purchase orders consistent with past experience; |
|
|
|
|
Increasing price, products and services competition; |
|
|
|
|
Emergence of new competitors or consolidation of existing competitors; |
|
|
|
|
The timing of orders and shipments; |
|
|
|
|
Continuing availability of appropriate raw materials and manufacturing relationships; |
|
|
|
|
Maintaining and improving current product mix; |
|
|
|
|
Changes in customer requirements and in the volume of sales to principal customers; |
|
|
|
|
Changes in governmental regulations in the various geographical regions where the
Company operates; |
|
|
|
|
General economic and political conditions; |
|
|
|
|
Attracting and retaining qualified key employees; |
|
|
|
|
The ability of the Company to control manufacturing and operating costs; and |
12
|
|
|
Continued availability of financing, and financial resources on the terms required to
support the Companys future business strategies. |
In evaluating these statements, you should consider various factors, including those
summarized above, and, from time to time, in other reports the Company files with the SEC. These
factors may cause the Companys actual results to differ materially from any forward-looking
statement. The Company disclaims any obligation to publicly update these statements, or disclose
any difference between its actual results and those reflected in these statements. The information
constitutes forward-looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995.
(a) Background
Summary
The
Company reported net income of $563,421, as restated, on net sales of $9,416,561 for the nine months
ended September 30, 2006 as compared to $633,829 and $7,720,369, respectively, for the nine months
ended September 30, 2005. This represents a decrease in net
income of 11%, as restated, and an increase in net sales of 22%.
The Company has completed in October the rollout of the special holiday promotion to Wal-Mart
on its game processing kit and wooden toolbox. The holiday promotion rollout on the camouflage
Sportsmans lighter will be completed in mid-November.
The Company continues to expand its existing product lines, as well as developing products in
new categories, such as camping and housewares. To this end, the Company has already received a
verbal commitment from Wal-Mart for an aluminum camping table for shipment early in 2007.
Management anticipates additional revenue from this item in 2007 to be in excess of $1,000,000. In
exploring these new categories, the Company hopes to increase sales during the spring and summer
months, which are traditionally slower months.
Details
We are in the business of developing, marketing and outsourcing the manufacture of various
consumer products, patented and non-patented, designed to enhance and provide security for the
consumer and for his property. Our products consist of gun cleaning kits and accessories,
gunlocks, trigger locks, security safes, specialty safes, personal protection devices and items
such as medical alarm alerts for the health care industry. In recent years we have placed
particular emphasis on gun cleaning kits and gun accessories, in addition to our standard gun
safety devices. We have added in 2005 and 2006, complementary items for the hunting enthusiast,
such as a line of meat processing items and a game processing kit.
A significant portion of our business is with mass-market retailers, primarily Wal-Mart, as
well as gun manufacturers. With the addition of our Gunmaster gun cleaning kits, we continue to
increase our business with sporting goods retailers and distributors.
The Companys business plan and strategy for growth focuses on:
|
|
|
Increased penetration of our existing markets, particularly in the gun cleaning
and accessories market; |
|
|
|
|
Development of new products in new markets, such as camping and housewares |
13
|
|
|
Development of new products for the sporting goods market; |
|
|
|
|
Identification and development of new markets for gun cleaning kits, i.e.
government, law enforcement and military; |
|
|
|
|
Identification and recruitment of effective manufacturers
representatives to actively market these products on a national and
international basis; and |
|
|
|
|
Aggressive cost containment. |
Management believes that continued growth would require the Company to continually innovate
and improve its existing line of products and services to meet consumer, industry and governmental
demands. In addition, we must continue to develop or acquire new and unique products that will
appeal to gun owners and other outdoor activities.
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, and
our current customer base, management hopes to leverage these opportunities to not only develop new
sources of revenue, but to strengthen the demand for our existing products.
Our products can be grouped into four main categories: (a) gun maintenance, (b) gun safety,
(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.
Gun Maintenance. We market over thirty-two (32) different gun cleaning kits, rod sets, tools
and accessories used to clean and maintain virtually any firearm on the market. These kits are
solid brass, and consist of universal kits designed to fit a variety of firearms, caliber
specific kits, as well as replacement brushes, mops, etc. These kits are available in solid wood
or aluminum cases, as well as blister packed.
Gun Safety. We market twelve (12) different gun safety locks and five (5) security and
specialty safes. The gun-locks composition range from plastic to steel, keyed trigger locks to
cable locks. The security safes are of heavy-duty, all steel construction and are designed for
firearms, jewelry and other valuables. Eight of the Companys gunlocks and two safes have been
certified for sale consistent with the standards set out by the State of California.
Personal Security. We market four (4) different electronic security devices designed to
protect the person. These include the Body Alarm, Key Alert, Glass Window Alert and Patient Alarm.
Non-Security Products. We market through Wal-Mart and other customers nationwide, the
Sportsmans Cigarette/Cigar Lighter, a windproof, water-resistant refillable butane lighter. We
also market two licensed exclusive products, the Clampit Cupholder and Plateholder. We also market
four (4) food processing items, ATV accessories, and a game processing kit.
Our website is (www.dactec.com) . All of our products are available via e-commerce on
this site. Our web site is intended to be the only direct link by the Company to the retail
market.
14
(b) Financial Condition and Results of Operations
Results of Operations
For
the nine months ended September 30, 2006, the Company had net
income of $563,421, as restated, on net
sales of $9,416,561 as compared to net income of $633,829 on net sales of $7,720,369 for the nine
months ended September 30, 2005. This represents a decrease in
net income of 11%, as restated, and an increase in net sales of 22%.
For
the three months ended September 30, 2006, the Company had net
income of $273,923, as restated, on net
sales of $3,936,195 as compared to net income of $280,737 on net sales of $3,193,129 for the same
period in 2005. This represents a decrease in net income of 2%, as restated, and an
increase in net sales of 23%.
Sales of the Companys line of GunMaster gun cleaning kits continue to grow significantly,
accounting for approximately 73% of the Companys sales for both the nine months and three months
ended September 30, 2006. Sales of these kits for the nine-month period were $6,961,946 and for
the three months were $2,935,661. Also contributing to the increase were the sales of the
Companys new game processing kit, introduced late in the second quarter of 2006, and the fact that
the Companys electric meat grinder is carried in almost 2,000 Wal-Mart stores this year as
compared to 280 last year.
For
both the nine month and three month periods ended September 30,
2005, the Company had gross margins of 36%. During the first nine
months of 2006, the Company experienced price increases in several of
its products, primarily due to increased manufacturing cost as a
result of rising commodity prices, and due to the devaluation of the
U.S. dollar against the Chinese currency. These price increases
resulted in reduced gross margins of 32% and 33%, as restated, for the nine months
and three months ended June 30, 2006, respectively.
Operating expenses for the nine months ended September 30, 2006 were $1,944,083 as compared to
$1,597,806 for the same period in the prior year, an increase of 22%. For the three month period
ended September 30, 2006, operating expenses were $774,640 as compared to $636,597 for the prior
year, an increase of 22%. General and administrative expenses only increased 10% and 3% for the
nine-month and three-month periods, respectively. Selling expenses,which includes shipping and
warehouse expenses, increased 31% for the nine-month period and 35% for the three-month period over
the prior year. Commission expense, the single largest selling expense item, accounts for 33% and
38% of the increase for the nine-month and three month periods, respectively. Freight costs have
increased significantly due to the increase in fuel costs. Freight carriers are adding fuel
surcharges, which have ranged from 15% to 23% during 2006. Freight costs increased 39% and 34% for
the nine month and three month periods, respectively. Taking into account the fuel surcharges,
these increases are reasonable in relation to the 22% increase in sales. Because of the increase
in sales during the third quarter, the expected increase in the fourth quarter, and the three large
rollouts to Wal-Mart for holiday promotions, the Company has had to significantly increase its
inventory levels over the prior year. This has resulted in increased warehousing costs, as the
Company has had to use third party warehouses to accommodate the additional inventory. The Company
is currently negotiating a lease agreement for a new warehouse that will be large enough to handle
all of its inventory needs in one location and reduce its overall costs.
Interest expense increased 42% and 39% for the nine-month and three-month periods,
respectively. The Company maintains a factoring agreement, wherein it borrows against assigned
receivables to generate cash flow. The Company is charged interest on funds borrowed, as well as
charged a fee on the face value of receivables assigned. Interest expense is therefore up due to
the increase in sales, as well as the need to borrow additional funds to finance the increased
inventory levels.
15
Financial Condition
A summary of the significant balance sheet items at September 30, 2006 as compared to year-end
December 31, 2005 is presented below:
|
|
|
|
|
|
|
|
|
|
|
(Restated) |
|
|
|
|
|
|
Sept. 30, 2006 |
|
|
Dec. 31, 2005 |
|
Accounts receivable |
|
$ |
1,372,737 |
|
|
$ |
692,690 |
|
Due from factor |
|
|
614,666 |
|
|
|
1,313,618 |
|
Inventories |
|
|
4,393,701 |
|
|
|
2,704,310 |
|
Total current assets |
|
|
6,675,614 |
|
|
|
4,920,677 |
|
Accounts payable |
|
|
2,607,103 |
|
|
|
981,042 |
|
Total current liabilities |
|
|
2,890,803 |
|
|
|
1,658,106 |
|
Working capital |
|
|
3,784,811 |
|
|
|
3,262,571 |
|
Stockholders equity |
|
|
4,289,384 |
|
|
|
3,825,896 |
|
The Companys overall financial condition continues to improve, due mainly to increasing
profits.
As explained below, accounts receivable on the Companys balance sheet represents those
receivables that have not yet been legally assigned to the factor. The Companys total
receivables, as detailed below, were $4,282,003 at September 30, 2006, as compared to $5,512,193 at
December 31, 2005. This decrease of $1,230,190 is a result of the decrease in sales during the
quarter ended September 30, 2006 as compared to the quarter ended December 31, 2005. Historically,
sales in the fourth quarter have been the largest quarter. It is normal and expected that total
receivables would decrease during the first three quarters as compared to the fourth quarter
of the previous year.
Inventories
increased $1,689,391, as restated, at September 30, 2006 as compared to December 31, 2005. This
increase is normal and planned as the Company begins to increase its inventory to meet the expected
increase in sales beginning in the third and fourth quarters.
Accounts payable increased $1,626,061 at September 30, 2006 as compared to December 31, 2005.
This increase is directly related to the increase in inventory.
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.
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
16
receivables reduced by any funds advanced by the factor. At September 30, 2006 and year end
December 31, 2005, these amounts were as follows:
|
|
|
|
|
|
|
|
|
|
|
Sept. 30, 2006 |
|
|
Dec. 31, 2005 |
|
Total accounts receivable |
|
$ |
4,282,003 |
|
|
$ |
5,512,193 |
|
Less: assigned receivables |
|
|
(2,909,266 |
) |
|
|
(4,819,503 |
) |
|
|
|
|
|
|
|
Net accounts receivables |
|
$ |
1,372,737 |
|
|
$ |
692,690 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assigned receivables |
|
$ |
2,909,266 |
|
|
$ |
4,819,503 |
|
Less: Funds advanced |
|
|
(2,294,600 |
) |
|
|
(3,505,885 |
) |
|
|
|
|
|
|
|
Due from factor |
|
$ |
614,666 |
|
|
$ |
1,313,618 |
|
|
|
|
|
|
|
|
(c) Liquidity and Capital Resources
Our primary source of cash is funds from our operations. We believe that external sources of
liquidity could be obtained in the form of bank loans, letters of credit, etc. We maintain an
account receivable factoring arrangement in order to insure an immediate cash flow. The factor may
also, at its discretion, advance funds prior to the collection of our accounts. Advances are
payable to the factor on demand. Should our sales revenues significantly decline, it could affect
our short-term liquidity. As of September 30, 2006, our factor had advanced us
$2,294,600.
(d) Trends
Handgun safety remains a major concern and interest to the American public, particularly in
light of 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 will 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.
Because many of the Companys competitors are not subject to public filing requirements
and industry-wide data is generally not available in a timely manner, the Company is unable to
compare its performance to other companies or specific current industry trends. Instead, the
Company measures itself against its own historical results. The Company does not consider its
overall business to be predictably seasonal; however, sales of its gun cleaning kits have shown
increased volume particularly in the fourth quarter of the year.
17
(e) Gun Legislation
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.
Notwithstanding these laws, there is not any federal law that requires the use of gunlocks,
despite numerous attempts in Congress to pass such legislation.
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.
18
The fact that gun safety laws are passed by federal, state, or local governments does not
ensure that the demand for our gun safety products will increase.
We have obtained the required approvals from the Federal Communications Commission for the Rf
signals emitted by our remote control units used with our car alarms. Other than as stated above,
we are not aware of any other required governmental approvals on any of our products.
(f) Critical Accounting Estimates
The Company prepares its condensed 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 December 31, 2005 audited
consolidated financial statements included in the Companys Form 10KSB. The quarterly financial
statements for the period ended September 30, 2006, attached hereto, and should therefore be read
in conjunction with that discussion. Certain of these accounting policies as discussed below
require management to make estimates and assumptions about future events that could materially
affect the reported amounts of assets, liabilities, revenues and expenses and disclosure of
contingent assets and liabilities. Accounting estimates and assumptions discussed in this section
are those that we consider to be the most critical to an understanding of our financial statements
because they inherently involve significant judgments and uncertainties. For all of these
estimates, we caution that future events rarely develop exactly as forecast, and the best estimates
routinely require adjustment. Since December 31, 2005, there have been no changes in our critical
accounting policies and no significant change to the assumptions and estimates related to them.
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.
Inventories. Inventories are valued at the lower of weighted 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.
19
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.
(g) Off-Balance Sheet Arrangements
Since 2003, our Chief Executive Officer, David Collins, leased a portion of his home in Miami,
Florida to the Company, which serves as the Companys executive office. The Company pays a monthly
office allowance to Mr. Collins 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.
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.
ITEM 3. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
The Companys management, with the participation of the Principal Executive Officer and
Principal Financial Officer, has evaluated the effectiveness of the Companys disclosure controls
and procedures as of the end of the period covered by this quarterly report. Based on that
evaluation, the Companys Principal Executive Officer and Principal Financial Officer have
concluded that, as of September 30, 2006, such controls and procedures were effective.
(b) Definition of Disclosure Controls
Disclosure Controls are controls and other procedures of the Company designed to ensure that
information required to be disclosed in our reports filed under the Securities Exchange Act of
1934, such as this Quarterly Report, is recorded, processed, summarized and reported within the
time periods specified in the SECs rules and forms. Disclosure Controls are also designed to
ensure that such information is accumulated and communicated to our management, including the
Companys principal executive and principal financial officers, as appropriate, to allow timely
decisions regarding required disclosure.
(c) Limitations on the Effectiveness of Controls
Our CEO and CFO do not expect that our Disclosure Controls or our internal control over
financial reporting will prevent all error and all fraud. A control system, no matter how well
designed and operated, can provide only reasonable, not absolute, assurance that the control
systems objectives will be met. Further, the design of a control system must reflect the fact
that there are resource constraints, and the benefits of controls must be considered relative to
their costs. Because of the inherent limitations in all control systems, no evaluation of controls
can provide absolute assurance that all control issues and instances of fraud, if any, have been
detected.
20
These inherent limitations include the realities that judgments in decision-making can be
faulty, and that breakdowns can occur because of simple error or mistake. The design of any system
of controls is based in part upon certain assumptions about the likelihood of future events, and
there can be no assurance that any design will succeed in achieving its stated goals under all
potential future conditions. Over time, controls may become inadequate because of changes in
conditions or deterioration in the degree of compliance with policies or procedures. Because of
the inherent limitations in a cost-effective control system, misstatements due to error or fraud
may occur and not be detected.
(d) Conclusions
Based upon the Disclosure Controls evaluation referenced above, our acting CEO and our CFO
have concluded that, subject to the limitations noted above, as of the end of the period covered by
this Quarterly Report, our Disclosure Controls were effective.
(e) Changes in Internal Controls
The Companys management, with the participation of the Principal Executive Officer and
Principal Financial Officer, have evaluated any changes in the Companys internal control over
financial reporting that occurred during the period covered by this quarterly report, and they have
concluded that there was no material change to the Companys internal control over financial
reporting that has materially affected, or is reasonably likely to materially affect, the Companys
internal control over financial reporting.
(f) Sarbanes-Oxley Section 404 Compliance
As directed by Section 404 of the Sarbanes-Oxley Act of 2002, the Securities and Exchange
Commission adopted rules requiring public companies to include a report of management on the
Companys internal controls over financial reporting in their annual reports. In addition, the independent
registered public accounting firm auditing a companys financial statements must also attest to and
report on managements assessment of the effectiveness of the companys internal controls over
financial reporting as well as the operating effectiveness of the companys internal controls. We
were not subject to these requirements for the fiscal year ended December 31, 2005 and we will also
not be subject to such requirements for the current fiscal year ending December 31, 2006.
Notwithstanding, there is risk that we may not be able to comply with all of the requirements
imposed by this rule. At present there is no precedent available with which to measure compliance
adequacy. In the event we identify significant deficiencies or material weaknesses in our internal
controls that we cannot remediate in a timely manner or we are unable to receive a positive
attestation from our independent registered public accounting firm with respect to our internal
controls, investors and others may lose confidence in the reliability of our financial statements
and our stock price and ability to obtain equity or debt financing as needed could suffer. In
addition, in the event that our independent registered public accounting firm is unable to rely on
our internal controls in connection with their audit of our financial statements, and in the
further event that they are unable to devise alternative procedures in order to satisfy themselves
as to the material accuracy of our financial statements and related disclosures, it is possible
that we would receive a qualified or adverse audit opinion on those financial statements which
could also adversely affect the market price of our common stock and our ability to secure
additional financing as needed.
21
PART II
ITEM 1. 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 portion 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. Continental
Western has engaged the services of an attorney (at their expense) to represent themselves and the
Company in this matter.
The Company was the plaintiff against a former manufacturer Skit International, Ltd. and
Uni-Skit Technologies, Inc. which alleged breach of a manufacturing contract which required
defendants to manufacture certain of its products within the range of competitive pricing, a
defined term. The Company sought damages and rescission of 165,000 shares of its 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.
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. On June 6, 2006, the Court dismissed Skit International, Ltd.s Complaint and
entered a Judgment in favor of the Company for the original judgment amount. On June 16, 2006,
Skit International, Ltd. filed a Motion for Reconsideration, which the Company, through advice from
legal counsel, believes will also be denied.
22
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 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
23
ITEM
6. EXHIBITS AND REPORTS ON FORM 8 K
A Form 8K was filed on September 7, 2005, and is incorporated herein by reference. The
following documents are incorporated by reference from Registrants Form 10SB filed with the
Securities and Exchange Commission (the Commission), File No. 000-29211, on January 28, 2000:
Exhibits
|
|
|
2
|
|
Acquisition Agreement |
3(i)
|
|
Articles of Incorporation |
3(ii)
|
|
By-laws |
Exhibits required by Item 601 of Regulation S-B attached:
|
|
|
Exhibits |
|
|
|
|
|
31.1
|
|
Certification of David A. Collins Pursuant to Rule 13a-14(a)/15d-14(a) |
|
|
|
31.2
|
|
Certification of Robert C. Goodwin Pursuant to Rule 13a-14(a)/15d-14(a) |
|
|
|
32.1
|
|
Certification of David A. Collins Pursuant to Rule 13a-14(b) or Rule
15d-14(c) of the Securities Exchange Act of 1934 and 18U.S.C. Section 1350 |
|
|
|
32.2
|
|
Certification of Robert C. Goodwin Pursuant to Rule 13a-14(b) or Rule
15d-14(c) of the Securities Exchange Act of 1934 and 18U.S.C. Section 1350 |
24
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:
|
|
|
|
|
|
|
|
|
By: |
/s/ David A. Collins
|
|
|
|
David A. Collins, Chairman, CEO and Principal Executive Officer |
|
|
|
|
|
|
|
|
|
|
By: |
/s/ Robert C. Goodwin
|
|
|
|
Robert C. Goodwin, Principal Accounting Officer and Principal Financial Officer |
|
|
|
|
|
|
Dated:
August 16, 2007
25