DAC Technologies Group International, Inc.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
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þ |
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QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2005
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o |
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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)
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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 Drive #2 Little Rock, AR
(Address of principal executive offices)
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72204
(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 þ No o (2) Yes þ No o
State the number of shares outstanding of each of the issuers class of common equity, as of
the latest practicable date. As of August 8, 2005, 6,323,364 shares of Common Stock are issued and
6,193,364 are outstanding.
Transitional
Small Business Disclosure Format: Yes
o No þ
PART I
ITEM 1. FINANCIAL STATEMENTS
Our financial statements are contained in pages 4 through 9 following.
3
DAC TECHNOLOGIES GROUP INTERNATIONAL, INC.
Balance Sheet (Consolidated)
June 30, 2005
Unaudited
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Assets |
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Current assets |
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Cash |
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$ |
212,542 |
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Accounts receivable, less allowance for doubtful
accounts of $7,500 |
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1,180,253 |
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Due from factor |
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154,663 |
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Inventories |
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2,129,765 |
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Prepaid expenses and deferred charges |
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164,154 |
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Current deferred income tax benefit |
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9,600 |
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Total current assets |
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3,850,977 |
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Property and equipment |
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Leasehold improvements |
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29,049 |
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Furniture and fixtures |
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148,593 |
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Molds, dies, and artwork |
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496,372 |
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674,014 |
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Accumulated depreciation |
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(467,985 |
) |
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Net property and equipment |
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206,029 |
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Other assets |
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Patents and
trademarks, net of accumulated amortization of $64,444 |
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156,664 |
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Deposits |
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|
1,435 |
|
Advances to employees |
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|
22,496 |
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Note receivable related party |
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|
72,518 |
|
Note receivable stockholder |
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135,761 |
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Total other assets |
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388,874 |
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Total assets |
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$ |
4,445,880 |
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The accompanying selected notes are an integral part of these consolidated financial statements.
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4
DAC TECHNOLOGIES GROUP INTERNATIONAL, INC.
Balance Sheet (Consolidated)
June 30, 2005
Unaudited
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Liabilities and Stockholders Equity |
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Current liabilities |
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Notes payable |
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$ |
266,749 |
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Accounts payable |
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1,007,374 |
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Accrued payroll tax withholdings |
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|
23,731 |
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Accrued expenses-other |
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|
10,330 |
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Income taxes payable |
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123,755 |
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Total current liabilities |
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1,431,939 |
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Deferred income tax liability |
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15,500 |
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Stockholders equity |
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Common stock, $.001 par value; authorized
50,000,000 shares; 6,323,364 shares issued and
6,193,364 shares outstanding |
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6,323 |
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Preferred stock, $.001 par value; authorized
10,000,000 shares; none issued and outstanding |
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Additional paid-in capital |
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1,963,102 |
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Treasury stock, at cost |
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(101,400 |
) |
Retained earnings |
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1,130,416 |
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Total stockholders equity |
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2,998,441 |
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Total liabilities and stockholders equity |
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$ |
4,445,880 |
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The accompanying selected notes are an integral part of these consolidated financial statements.
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5
DAC TECHNOLOGIES GROUP INTERNATIONAL, INC.
Statements of Operations (Consolidated)
For The Six Months Ended June 30, 2005 and 2004
Unaudited
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2005 |
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2004 |
Net sales |
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$ |
4,527,240 |
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$ |
2,957,521 |
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Cost of sales |
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2,911,277 |
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1,802,328 |
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Gross profit |
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1,615,963 |
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|
1,155,193 |
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Operating expenses |
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|
|
|
|
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Selling |
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|
517,890 |
|
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|
367,058 |
|
General and administrative |
|
|
443,319 |
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|
402,770 |
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|
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Total operating expenses |
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961,209 |
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|
769,828 |
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Income from operations |
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654,754 |
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|
385,365 |
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Other income (expense) |
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Interest expense |
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(76,608 |
) |
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|
(62,690 |
) |
Interest expense stockholder notes |
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(5,519 |
) |
Other income |
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|
335 |
|
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Total other income (expense) |
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|
(76,608 |
) |
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|
(67,874 |
) |
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|
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Income before income tax provision |
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|
578,146 |
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|
317,491 |
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|
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Provision for income taxes |
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|
225,054 |
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|
6,267 |
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Net income |
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$ |
353,092 |
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$ |
311,224 |
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|
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|
|
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Basic and diluted earnings per share |
|
$ |
0.06 |
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$ |
0.05 |
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Weighted-average number of common shares: |
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Basic |
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|
6,186,389 |
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|
5,728,478 |
|
Diluted |
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|
6,226,146 |
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|
5,728,478 |
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|
|
|
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|
The accompanying selected notes are an integral part of these consolidated financial statements.
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6
DAC TECHNOLOGIES GROUP INTERNATIONAL, INC.
Statements of Operations (Consolidated)
For The Three Months Ended June 30, 2005 and 2004
Unaudited
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|
|
|
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|
2005 |
|
2004 |
Net sales |
|
$ |
2,264,162 |
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|
$ |
1,620,069 |
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|
|
|
|
|
|
|
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Cost of sales |
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|
1,453,107 |
|
|
|
1,000,485 |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Gross profit |
|
|
811,055 |
|
|
|
619,584 |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Operating expenses |
|
|
|
|
|
|
|
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Selling |
|
|
241,072 |
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|
|
204,046 |
|
General and administrative |
|
|
234,049 |
|
|
|
215,373 |
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|
|
|
|
|
|
|
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Total operating expenses |
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|
475,121 |
|
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|
419,419 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Income from operations |
|
|
335,934 |
|
|
|
200,165 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Other income (expense) |
|
|
|
|
|
|
|
|
Interest expense |
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|
(30,547 |
) |
|
|
(27,329 |
) |
Interest expense stockholder notes |
|
|
|
|
|
|
(2,641 |
) |
|
|
|
|
|
|
|
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|
Total other income (expense) |
|
|
(30,547 |
) |
|
|
(29,970 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Income before income tax provision |
|
|
305,387 |
|
|
|
170,195 |
|
|
|
|
|
|
|
|
|
|
Provision (benefit) for income taxes |
|
|
118,737 |
|
|
|
(21,973 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
186,650 |
|
|
$ |
192,168 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted earnings per share |
|
$ |
0.03 |
|
|
$ |
0.03 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Weighted-average number of common shares: |
|
|
|
|
|
|
|
|
Basic |
|
|
6,191,853 |
|
|
|
5,743,900 |
|
Diluted |
|
|
6,191,853 |
|
|
|
5,743,900 |
|
|
|
|
|
|
The accompanying selected notes are an integral part of these consolidated financial statements.
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7
DAC TECHNOLOGIES GROUP INTERNATIONAL, INC.
Statements of Cash Flows (Consolidated)
For the Six Months Ended June 30, 2005 and 2004
Unaudited
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2004 |
Cash flows from operating activities |
|
|
|
|
|
|
|
|
Net income |
|
$ |
353,092 |
|
|
$ |
311,224 |
|
Adjustments to reconcile net income to |
|
|
|
|
|
|
|
|
net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Issuance of common stock for services |
|
|
32,625 |
|
|
|
|
|
Depreciation |
|
|
26,808 |
|
|
|
28,471 |
|
Amortization |
|
|
7,998 |
|
|
|
7,245 |
|
Imputed interest on note receivable |
|
|
|
|
|
|
(335 |
) |
Deferred income tax provision |
|
|
|
|
|
|
6,267 |
|
Changes in operating assets and liabilities |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(703,103 |
) |
|
|
(225,119 |
) |
Due from factor |
|
|
1,106,817 |
|
|
|
53,930 |
|
Inventories |
|
|
(196,653 |
) |
|
|
(750,088 |
) |
Deposits |
|
|
|
|
|
|
(1,435 |
) |
Advances to employees |
|
|
(17,671 |
) |
|
|
|
|
Prepaid expenses and deferred charges |
|
|
(103,984 |
) |
|
|
(50,930 |
) |
Accounts payable |
|
|
(151,188 |
) |
|
|
668,592 |
|
Accrued payroll tax withholdings |
|
|
1,604 |
|
|
|
13,213 |
|
Accrued expenses other |
|
|
(13,212 |
) |
|
|
8,629 |
|
Income taxes payable |
|
|
(217,946 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
125,187 |
|
|
|
69,664 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities |
|
|
|
|
|
|
|
|
Purchases of property and equipment |
|
|
(16,473 |
) |
|
|
(29,204 |
) |
Payments on notes receivable stockholder |
|
|
|
|
|
|
773 |
|
Advances on note receivable stockholder |
|
|
(37,361 |
) |
|
|
|
|
Advances on note receivable related party |
|
|
|
|
|
|
(34,409 |
) |
Payments on note receivable |
|
|
|
|
|
|
45,000 |
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(53,834 |
) |
|
|
(17,840 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities |
|
|
|
|
|
|
|
|
Issuance of common stock |
|
|
|
|
|
|
714,156 |
|
Repayments on notes payable |
|
|
(26,657 |
) |
|
|
(23,486 |
) |
Repayments on notes payable stockholders |
|
|
|
|
|
|
(33,943 |
) |
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
(26,657 |
) |
|
|
656,727 |
|
|
|
|
|
|
|
|
|
|
|
Increase in cash |
|
|
44,696 |
|
|
|
708,551 |
|
|
Cash beginning of period |
|
|
167,846 |
|
|
|
104,376 |
|
|
|
|
|
|
|
|
|
|
|
Cash end of period |
|
$ |
212,542 |
|
|
$ |
812,927 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying selected notes are an integral part of these consolidated financial statements.
|
8
DAC TECHNOLOGIES GROUP INTERNATIONAL, INC.
Statements of Cash Flows (Consolidated)
For the Three Months Ended June 30, 2005 and 2004
Unaudited
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2004 |
Cash flows from operating activities |
|
|
|
|
|
|
|
|
Net income |
|
$ |
186,650 |
|
|
$ |
192,168 |
|
Adjustments
to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Issuance of common stock for services |
|
|
32,625 |
|
|
|
|
|
Depreciation |
|
|
13,536 |
|
|
|
14,882 |
|
Amortization |
|
|
3,999 |
|
|
|
3,622 |
|
Deferred income tax provision |
|
|
|
|
|
|
(21,973 |
) |
Changes in operating assets and liabilities |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(629,336 |
) |
|
|
18,285 |
|
Due from factor |
|
|
332,541 |
|
|
|
(63,705 |
) |
Inventories |
|
|
(230,838 |
) |
|
|
(509,234 |
) |
Deposits |
|
|
|
|
|
|
(1,435 |
) |
Advances to employees |
|
|
(1,496 |
) |
|
|
|
|
Prepaid expenses and deferred charges |
|
|
(23,665 |
) |
|
|
16,331 |
|
Accounts payable |
|
|
343,107 |
|
|
|
439,146 |
|
Accrued payroll tax withholdings |
|
|
1,337 |
|
|
|
6,897 |
|
Accrued expenses other |
|
|
(13,610 |
) |
|
|
2,208 |
|
Income taxes payable |
|
|
28,738 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
43,588 |
|
|
|
97,192 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities |
|
|
|
|
|
|
|
|
Purchases of property and equipment |
|
|
(10,480 |
) |
|
|
(27,572 |
) |
Payments on notes receivable stockholder |
|
|
13,519 |
|
|
|
773 |
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
3,039 |
|
|
|
(26,799 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities |
|
|
|
|
|
|
|
|
Issuance of common stock |
|
|
|
|
|
|
714,156 |
|
Repayments on notes payable |
|
|
(13,393 |
) |
|
|
(12,489 |
) |
Repayments on notes payable stockholders |
|
|
|
|
|
|
(19,678 |
) |
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
(13,393 |
) |
|
|
681,989 |
|
|
|
|
|
|
|
|
|
|
|
Increase in cash |
|
|
33,234 |
|
|
|
752,382 |
|
|
Cash beginning of period |
|
|
179,308 |
|
|
|
60,545 |
|
|
|
|
|
|
|
|
|
|
|
Cash end of period |
|
$ |
212,542 |
|
|
$ |
812,927 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying selected notes are an integral part of these consolidated financial statements.
|
9
PART
F/S
DAC
TECHNOLOGIES GROUP INTERNATIONAL, INC.
SELECTED NOTES TO 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.
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 consolidated financial statements
The accompanying consolidated financial statements of the Company as of and for the six months
ended June 30, 2005 and 2004 and for the three months ended June 30, 2005 and 2004 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 significant accounting policies
applied to these interim consolidated financial statements are consistent with those applied to the
Companys December 31, 2004 audited financial statements included in the Companys Form 10KSB and should be read in conjunction with each other. The
results of operations for an interim period are not necessarily indicative of the results for a
full year.
Equity transactions
On April 12, 2005 the Company issued 12,500 shares of restricted stock at a market price of $2.61 pursuant to Section
4.2(2) of the Securities Act of 1933, as amended, in exchange for financial public relations
services.
Earnings per Share
Basic earnings per share of common stock is 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).
10
For the three months ended June 30, 2005 and 2004, 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 periods. For the six months
ended June 30, 2004, approximately 394,000 stock warrants to purchase common stock were excluded
from the calculation, as their exercise price of $2.57 was greater than the average market price of the
common stock during the period. A reconciliation of the net income and number of shares used in
computing basic and diluted earnings per share was as follows for the three and six month periods
ended June 30:
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Three Months Ended |
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Six Months Ended |
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2005 |
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2004 |
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2005 |
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2004 |
Numerator: |
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Net income |
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$ |
186,650 |
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$ |
192,168 |
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$ |
353,092 |
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$ |
311,224 |
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Denominator: |
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Weighted
average
common
shares for
basic
calculation |
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6,191,853 |
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5,743,900 |
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6,186,389 |
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5,728,478 |
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Weighted average
effect of dilutive
securities: |
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Warrants |
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39,757 |
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Denominator for
diluted calculation |
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6,191,853 |
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5,743,900 |
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6,226,146 |
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5,728,478 |
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Earnings per
share-basic |
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$ |
0.03 |
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$ |
0.03 |
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$ |
0.06 |
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$ |
0.05 |
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Earnings per
share-diluted |
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$ |
0.03 |
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$ |
0.03 |
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$ |
0.06 |
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$ |
0.05 |
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ITEM
2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
The following Management Discussion and Analysis of Financial Condition 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 10QSBin accordance with Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended 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.
11
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, growth has been achieved by the identification and development of new products,
and expansion of the Companys sales organization. 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 factors 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:
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achieving planned revenue and profit growth in each of the Companys business units; |
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renewal of purchase orders consistent with past experience; |
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increasing price, products and services competition; |
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emergence of new competitors or consolidation of existing competitors; |
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the timing of orders and shipments; |
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continuing availability of appropriate raw materials and manufacturing relationships; |
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maintaining and improving current product mix; |
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changes in customer requirements and in the volume of sales to principal customers; |
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changes in governmental regulations in the various geographical regions where the
Company operates; |
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general economic and political conditions; |
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attracting and retaining qualified key employees; |
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the ability of the Company to control manufacturing and operating costs; and |
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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
During the second quarter of 2005, the Company completed the rollout of ten new items as
permanent additions to Wal-Marts sporting goods modules. The Company now has twenty-three
permanent items in Wal-Mart that are being re-ordered on a daily basis. In addition, the Company
has received a verbal commitment from Wal-Mart for special Christmas promotions beginning in
November 2005.
12
The Company continues to develop new products, in addition to the food processing, ATV
accessories and additional gun cleaning items already added this year. Responding to requests from
some of its large retail customers, the Company is currently working on expanding into the
automotive market with various auto, motorcycle and recreational vehicle accessories.
For the six months ended June 30, 2005, the Companys net sales are up 53%, while operating
expenses are up only 25% over the same period in the prior year. This has resulted in a 70%
increase in income from operations and an 82% increase in income before taxes. This growth is on
target for the Company to reach its anticipated goals of $9 million to $11 million in sales and
$0.23 to $0.26 earnings per share for the 2005 year.
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. In recent years we have placed particular emphasis on gun cleaning
kits and gun accessories as well as gun safety devices. In particular, 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.
A significant portion of our business is with mass market retailers, primarily Wal-Mart, as
well as gun manufacturers. However, 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:
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increased penetration of our existing markets, particularly in the gun cleaning
and accessories market; |
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development of new products for the sporting goods market; |
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identification and development of 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 and
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; and |
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aggressive cost containment. |
Management believes that continued growth will require the Company to continually innovate and
improve its existing line of products and services to meet consumer, industry and governmental
demands. In addition, we must continue to develop or acquire new and unique products that will
appeal to gun owners 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.
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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-five (35) 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 ten (10) different gun safety locks and five (5) security and specialty
safes. The gun-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. Nine of the Companys gun-locks and three safes have been certified
for sale consistent with the standards set out by the State of California.
Personal Security. We market seven (7) different electronic security devices designed to
protect the person. These include the Body Alarm, Key Alert, SWAT Steering Wheel Alarm, SWAT
Talking Car Alarm, Warning Module, Glass Window Alert and Patient Alarm. We also market
non-electronic security devices such as pepper spray and tear gas.
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.
Our website (www.dactec.com) has been redesigned. All of our products are available
via e-commerce on this new site. Our web site is intended to be the only direct link by the
Company to the retail market.
(b) Financial Condition and Results of Operations
Results of Operations
For the six months ended June 30, 2005, the Company had net income of $353,092 on net sales of
$4,527,240 as compared to net income of $311,224 on net sales of $2,957,521 for the same period in
2004. These represent increases of $41,868 (13%) in net income, and $1,569,719 (53%) in net sales,
respectively.
Sales of the Companys line of GunMaster gun cleaning kits continue to grow significantly.
Sales of these kits for the six months was $3,149,867, evidencing an increase by $1,437,188 for
the six months ended June 30, 2005 as compared to 2004. This increase accounts for 92% of the
Companys increase in sales during this six month period.
Gross profit margins decreased from 39% for the six months ended June 30, 2004 to 36% for the
same period ended June 30, 2005. The Company is still experiencing the effects of a price increase
from its overseas manufacturers late in 2004. These increases were
due to increases in commodity
prices in 2004, particularly for brass and steel, which are the primary components of our safes and gun-cleaning kits. The
Company expects gross profit margins to remain in the 36% to 37% range for the remainder of 2005.
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Operating expenses for the six months ended June 30, 2005 were $961,209 as compared to
$769,828 for the prior year, an increase of $191,381, or 25%. Increases in operating expenses are
expected as sales increase. The Company believes the increase is reasonable when compared to the
53% increase in sales. Most of the increase is due to the increases in variable expenses such as
sales commissions and shipping costs, which fluctuate based on sales volumes.
Income from operations increased from $385,365 for the six months ended June 30, 2004 to
$654,754 in 2005, an increase of $269,389, or 70%. This increase is due to the 53% increase in
sales, while at the same time operating expenses only increased 25%.
During the first two quarters of 2004, the Company benefited from the effects of net operating
loss carry forwards for tax purposes, resulting in an income tax provision of only 2% for the first
six months of 2004. These net operating loss carry forwards were completely utilized in 2004. For
2005, the Company is subject to an effective tax rate for federal and state purposes of 38%. Had
this same rate been in effect in 2004, net income for the six months ended June 30, 2004 would have
been approximately $194,000 instead of the reported $311,224. This would have reflected an
increase in net income of 82% as compared to the actual increase of 13%.
Financial Condition
A summary of the significant balance sheet items at June 30, 2005 as compared to year-end
December 31, 2004 is presented below:
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June 30, 2005 |
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Dec. 31, 2004 |
Accounts receivable |
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$ |
1,180,253 |
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$ |
477,150 |
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Due from factor |
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154,663 |
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1,261,480 |
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Total current assets |
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3,850,977 |
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3,909,358 |
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Accounts payable |
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1,007,374 |
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1,158,562 |
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Income taxes payable |
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123,755 |
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341,701 |
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Total current liabilities |
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1,431,939 |
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1,839,338 |
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Working capital |
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2,419,038 |
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2,070,020 |
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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 receivables reduced by any funds advanced by the factor. At June 30, 2005 and
year end December 31, 2004, these amounts were calculated as follows:
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June 30, 2005 |
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Dec. 31, 2004 |
Total accounts receivable |
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$ |
2,000,379 |
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$ |
3,669,863 |
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Less: assigned receivables |
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( 820,126 |
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(3,192,713 |
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Net accounts receivables |
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$ |
1,180,253 |
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$ |
477,150 |
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Assigned receivables |
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$ |
820,126 |
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$ |
3,192,713 |
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Less: Funds advanced |
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( 665,463 |
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(1,931,233 |
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Due from factor |
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$ |
154,663 |
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$ |
1,261,480 |
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Accounts receivable, assigned receivables, funds advanced by factor and due from factor have
all decreased since December 31, 2004. This is due to the seasonal nature of the Companys
business, which is related to the fall and winter hunting and holiday seasons. The fourth quarter
2004 sales were $4,298,955 as compared to $2,264,162 for the second quarter of 2005. This decrease
in sales results in decreases in all of these items. In addition, there is a larger than normal
difference at June 30, 2005 between the amount of total receivables as compared to assigned
receivables. Assigned receivables represent those receivables that have legally been assigned to
the factor based on the terms and conditions of our factoring agreement. There is always a time
lag between when a receivable is created and when the assignment legally occurs. Because of the
large amount of receivables generated during the last ten (10) days to two (2) weeks of the
quarter, specifically due to the rollout of the Wal-Mart module, this difference is much larger
than normal.
Accounts payable at June 30, 2005 were $1,007,374 as compared to $1,158,562 at year end
December 31, 2004. This decrease of $151,188 is again related to the large sales volume in the
fourth quarter of 2004 as compared to the first six months of 2005. Because of the Companys
increased cash flow, liquidity and availability of cash, the amount owed to the Companys
manufacturer has decreased.
Income taxes payable at year-end December 31, 2004 represented the total taxes owed for the
entire year of 2004. These taxes were paid during the first quarter of 2005. During 2005, the
Company is now required to make quarterly estimated tax payments based upon its estimated income.
Correspondingly, income taxes payable at June 30, 2005 reflects only that portion due for the
second quarter of 2005.
(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. For the period ending June 30, 2005, our factor had advanced us $665,463.
(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.
16
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 gunlocks by
law enforcement agencies, and the litigation aimed at gun manufacturers as well as the gun
legislation will hopefully enhance our product line revenues.
On July 28, 2005, the U. S. Senate passed the Protection of Lawful Commerce in Arms Act,
which provides broad immunity from civil lawsuits filed by dozens of cities and municipalities
against gun makers, dealers and distributors. This Bill also requires that all handguns sold by
licensed dealers be accompanied by trigger locks or a safe storage device, such as a gun-safe. The gun safety provision of the bill is the
type of popular legislation that has been attempted in the past but has traditionally failed due to it
being tied to a larger, more political Bill, in this instance, one that would shield the gun
industry from lawsuits. There can be no certainty that this Bill will eventually pass into law.
Moreover, should such Bill become law, it is uncertain as to what, if any, impact it will have on
the Companys revenues or the Companys operating expenses.
Recently, 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 gun-lock 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.
On July 21, 2005, the Chinese established a currency basket to determine the exchange
rate between the renminbi and the US dollar. This change has resulted in a 2% decrease in the
value of the US dollar against the Chinese currency. There is great speculation as to the
long-term effect of this change. In discussions with its trading partners in China, the Company
does not believe there will be any significant effect on its ability to continue to produce highly
competitive priced products for its customers.
(e) 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 December 31, 2004 audited consolidated
financial statements included in the Companys Form 10KSB. The quarterly financial statements for
the period ended June 30, 2005, attached hereto, 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.
17
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, 2004 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.
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.
(f) 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, 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 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 June 30, 2005, such
controls and procedures were effective.
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Attached as exhibits to this Quarterly Report are
certifications of the CEO and the CFO, which are required in accord with Rule 13a-14 of the
Securities Exchange Act of 1934. This Controls and Procedures section includes the information
concerning the controls evaluation referred to in the certifications and it should be read in
conjunction with the certifications for a more complete understanding of the topics presented.
(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.
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.
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(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, 2004 and
we will also not be subject to such requirements for the current fiscal year ending December 31,
2005. We have begun evaluating our internal control systems in order to allow our management to
report on, and our independent registered public accounting firm to attest to, our internal
controls as a required part of our Annual Report on Form 10-KSB beginning with our report for the
fiscal year ending December 31, 2006.
Notwithstanding, there is a 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 able to 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.
PART II
ITEM 1. LEGAL PROCEEDINGS
We instituted suit along with The Collins Family Trust, our affiliate in which David Collins,
our Chairman, claims a beneficial interest, and DAC Technologies of America, Inc., our predecessor,
against Larry Legel, our former CPA, Director and the Trustee of The Collins Family Trust. The
suit, commenced in March 2001, sought to rescind a transfer of 180,000 shares of our common stock
for services which the Defendant did not provide. The suit also alleged that the Defendant
breached an agreement not to sell his shares before certain private investors had recouped their
investment. In October 2002, the Arkansas Court ordered the transfer rescinded and the stock
returned to David Collins. Larry Legel appealed the Courts Order and then dismissed his appeal.
Subsequent to the Arkansas action, an amended Complaint was filed in February 2003 in Broward
County, Florida by Larry Legel and his wife Brenda Legel, seeking damages against the Company and
others for breach of duty pursuant to § 678.4011 Fla. Stat. for failing to register and transfer to
him and his wife securities of the Company and the failure by the Company and its officers to
permit the sale of his shares of the Company, which were the same shares that were the subject of the Arkansas action.
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The Court
stayed the Florida action pending the Arkansas action. Upon the appeal being dismissed in the
Arkansas action, Legel had the stay lifted. Plaintiffs have demanded that the Company along with
David Collins and Florida Atlantic pay the Plaintiffs the difference between the maximum amount
Plaintiffs could have received from the public sale of the 177,400 shares at any time since October
1, 2000 and the amount they receive when, and if, the sale occurs. Thereafter, the Company filed a
Counterclaim, seeking final judgments determining Legels lack of ownership rights over the shares
in question as well as costs and attorneys fees. An Answer was filed on October 2, 2004 in
response to Legels Amended Complaint, wherein all allegations are denied and DAC Technologies
requests a dismissal of Legels Complaint as well as costs and fees.
In June 2005, the Broward County Circuit Court granted the Companys motion for Summary
Judgment denying Larry Legels claim, but permitted the claim of Brenda Legel to proceed. In July
2005, Mr. Legel filed a Motion for Rehearing, appealing the Courts Summary Judgment. A decision
on this motion remains pending. Although this case has been set for trial for September 2005, the
parties have currently scheduled mediation for August 2005. While the Company believes it has
meritorious defenses against the remaining claim, it is impossible at this time to ascertain with
certainty the ultimate legal and financial liability or whether this action will have a material
adverse effect on the Companys financial condition and results of operation.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On April 12, 2005 the Company issued 12,500 shares of restricted stock pursuant to Section
4.2(2) of the Securities Act of 1933, as amended, in exchange for financial public relations
services.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8 K
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
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2 |
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Acquisition Agreement |
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3 |
(i) |
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Articles of Incorporation |
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3 |
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By-laws |
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Exhibits required by Item 601 of Regulation S-B attached:
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Exhibits |
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31.1 |
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Certification of David A. Collins Pursuant to Rule 13a-14(a)/15d-14(a) |
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31.2 |
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Certification of Robert C. Goodwin Pursuant Rule 13a-14(a)/15d-14(a) |
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32.1 |
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Certification of David A. Collins Pursuant to Rule 13a -14(b) or Rule 15d -
14(c) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350 |
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32.2 |
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Certification of Robert C. Goodwin Pursuant to Rule 13a -14(b) or Rule 15d -
14(c) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350 |
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 15, 2005
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