DAC Technologies Group International, Inc.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2007
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) (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
State the number of shares outstanding of each of the issuers class of common equity, as of
the latest practicable date. As of November 6, 2007, 6,323,364 shares of Common Stock are issued
and 6,089,699 are outstanding.
Transitional Small Business Disclosure Format: Yes o No x
PART I
ITEM 1. FINANCIAL STATEMENTS
DAC TECHNOLOGIES GROUP INTERNATIONAL, INC.
Condensed Balance Sheet (Consolidated)
September 30, 2007
Unaudited
|
|
|
|
|
Assets |
|
|
|
|
Current assets |
|
|
|
|
Cash |
|
$ |
106,947 |
|
Accounts receivable, less allowance for doubtful
accounts of $5,000 |
|
|
1,267,262 |
|
Due from factor |
|
|
440,505 |
|
Inventories |
|
|
6,204,907 |
|
Prepaid expenses and deferred charges |
|
|
165,268 |
|
Income taxes receivable |
|
|
214,570 |
|
Current deferred income tax benefit |
|
|
35,815 |
|
|
|
|
|
Total current assets |
|
|
8,435,274 |
|
|
|
|
|
|
|
|
|
|
Property and equipment |
|
|
|
|
Leasehold improvements |
|
|
55,323 |
|
Furniture and fixtures |
|
|
260,767 |
|
Molds, dies, and artwork |
|
|
511,233 |
|
|
|
|
|
|
|
|
827,323 |
|
Accumulated depreciation |
|
|
(559,845 |
) |
|
|
|
|
Net property and equipment |
|
|
267,478 |
|
|
|
|
|
|
|
|
|
|
Other assets |
|
|
|
|
Patents and trademarks, net of
accumulated amortization of $100,272 |
|
|
137,698 |
|
Deposits |
|
|
17,351 |
|
Advances to employees |
|
|
34,717 |
|
Note receivable long term |
|
|
20,000 |
|
Note receivable related party |
|
|
72,518 |
|
Note receivable stockholder |
|
|
172,428 |
|
|
|
|
|
Total other assets |
|
|
454,712 |
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
9,157,464 |
|
|
|
|
|
The accompanying selected notes are an integral part of these condensed consolidated financial statements.
3
DAC TECHNOLOGIES GROUP INTERNATIONAL, INC.
Condensed Balance Sheet (Consolidated)
September 30, 2007
Unaudited
|
|
|
|
|
Liabilities and Stockholders Equity |
|
|
|
|
Current liabilities |
|
|
|
|
Notes payable |
|
$ |
218,274 |
|
Accounts payable |
|
|
4,202,677 |
|
Accrued payroll tax withholdings |
|
|
18,463 |
|
Accrued expenses-other |
|
|
16,890 |
|
|
|
|
|
Total current liabilities |
|
|
4,456,304 |
|
|
|
|
|
|
|
|
|
|
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
6,089,699 shares outstanding |
|
|
6,323 |
|
Additional paid-in capital |
|
|
1,963,102 |
|
Treasury stock, at cost |
|
|
(257,260 |
) |
Retained earnings |
|
|
2,955,895 |
|
|
|
|
|
Total stockholders equity |
|
|
4,668,060 |
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
9,157,464 |
|
|
|
|
|
The accompanying selected notes are an integral part of these condensed consolidated financial statements.
4
DAC TECHNOLOGIES GROUP INTERNATIONAL, INC.
Condensed Statements of Operations (Consolidated)
For The Nine Months Ended September 30, 2007 and 2006
Unaudited
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
Net sales |
|
$ |
8,960,497 |
|
|
$ |
9,416,561 |
|
Cost of sales |
|
|
6,270,727 |
|
|
|
6,373,054 |
|
|
|
|
|
|
|
|
Gross profit |
|
|
2,689,770 |
|
|
|
3,043,507 |
|
|
|
|
|
|
|
|
Operating expenses |
|
|
|
|
|
|
|
|
Selling |
|
|
1,107,876 |
|
|
|
1,163,956 |
|
General and administrative |
|
|
970,076 |
|
|
|
780,127 |
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
2,077,952 |
|
|
|
1,944,083 |
|
|
|
|
|
|
|
|
Income from operations |
|
|
611,818 |
|
|
|
1,099,424 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense) |
|
|
|
|
|
|
|
|
Interest expense |
|
|
(210,385 |
) |
|
|
(190,645 |
) |
|
|
|
|
|
|
|
Total other income (expense) |
|
|
(210,385 |
) |
|
|
(190,645 |
) |
|
|
|
|
|
|
|
Income before income tax provision |
|
|
401,433 |
|
|
|
908,779 |
|
Provision for income taxes |
|
|
156,247 |
|
|
|
345,358 |
|
|
|
|
|
|
|
|
Net income |
|
$ |
245,186 |
|
|
$ |
563,421 |
|
|
|
|
|
|
|
|
Basic and diluted earnings per share |
|
$ |
0.04 |
|
|
$ |
0.09 |
|
|
|
|
|
|
|
|
Weighted-average number of common shares: |
|
|
|
|
|
|
|
|
Basic and diluted |
|
|
6,122,613 |
|
|
|
6,166,068 |
|
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 Three Months Ended September 30, 2007 and 2006
Unaudited
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
Net sales |
|
$ |
3,380,969 |
|
|
$ |
3,936,195 |
|
Cost of sales |
|
|
2,415,100 |
|
|
|
2,648,589 |
|
|
|
|
|
|
|
|
Gross profit |
|
|
965,869 |
|
|
|
1,287,606 |
|
|
|
|
|
|
|
|
Operating expenses |
|
|
|
|
|
|
|
|
Selling |
|
|
373,260 |
|
|
|
504,625 |
|
General and administrative |
|
|
295,982 |
|
|
|
270,015 |
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
669,242 |
|
|
|
774,640 |
|
|
|
|
|
|
|
|
Income from operations |
|
|
296,627 |
|
|
|
512,966 |
|
|
|
|
|
|
|
|
Other income (expense) |
|
|
|
|
|
|
|
|
Interest expense |
|
|
(73,619 |
) |
|
|
(79,774 |
) |
|
|
|
|
|
|
|
Total other income (expense) |
|
|
(73,619 |
) |
|
|
(79,774 |
) |
|
|
|
|
|
|
|
Income before income tax provision |
|
|
223,008 |
|
|
|
433,192 |
|
Provision for income taxes |
|
|
76,240 |
|
|
|
159,269 |
|
|
|
|
|
|
|
|
Net income |
|
$ |
146,768 |
|
|
$ |
273,923 |
|
|
|
|
|
|
|
|
Basic and diluted earnings per share |
|
$ |
0.02 |
|
|
$ |
0.04 |
|
|
|
|
|
|
|
|
Weighted average number of common shares: |
|
|
|
|
|
|
|
|
Basic and diluted |
|
|
6,108,045 |
|
|
|
6,135,599 |
|
The accompanying selected notes are an integral part of these condensed consolidated financial statements.
6
DAC TECHNOLOGIES GROUP INTERNATIONAL, INC.
Condensed Statements of Cash Flows (Consolidated)
For the Nine Months Ended September 30, 2007 and 2006
Unaudited
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
Cash flows from operating activities |
|
|
|
|
|
|
|
|
Net income |
|
$ |
245,186 |
|
|
$ |
563,421 |
|
Adjustments to reconcile net income to
net cash provided (used) by operating activities: |
|
|
|
|
|
|
|
|
Depreciation |
|
|
37,379 |
|
|
|
42,773 |
|
Amortization |
|
|
11,807 |
|
|
|
13,098 |
|
Deferred income taxes |
|
|
|
|
|
|
(8,615 |
) |
Changes in operating assets and liabilities |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(735,234 |
) |
|
|
(680,047 |
) |
Due from factor |
|
|
841,703 |
|
|
|
698,952 |
|
Inventories |
|
|
(3,074,082 |
) |
|
|
(1,689,391 |
) |
Advances to employees |
|
|
(10,610 |
) |
|
|
(19,368 |
) |
Prepaid expenses and deferred charges |
|
|
(56,303 |
) |
|
|
(62,787 |
) |
Income taxes receivable |
|
|
156,247 |
|
|
|
(87,184 |
) |
Deposits |
|
|
(5,916 |
) |
|
|
|
|
Accounts payable |
|
|
2,562,232 |
|
|
|
1,626,061 |
|
Accrued payroll tax withholdings |
|
|
(6,481 |
) |
|
|
(2,489 |
) |
Accrued expenses other |
|
|
(30,662 |
) |
|
|
23,350 |
|
Income taxes payable |
|
|
|
|
|
|
(380,843 |
) |
|
|
|
|
|
|
|
Net cash provided (used) by operating activities |
|
|
(64,734 |
) |
|
|
36,931 |
|
|
|
|
|
|
|
|
Cash flows from investing activities |
|
|
|
|
|
|
|
|
Purchases of property and equipment |
|
|
(93,249 |
) |
|
|
(12,595 |
) |
Payments for patents and trademarks |
|
|
(1,755 |
) |
|
|
(7,246 |
) |
Net advances on note receivable related party |
|
|
|
|
|
|
(427 |
) |
Net advances on note receivable stockholder |
|
|
(41,897 |
) |
|
|
24,917 |
|
Purchase of treasury stock |
|
|
(55,927 |
) |
|
|
(99,933 |
) |
|
|
|
|
|
|
|
Net cash used by investing activities |
|
|
(192,828 |
) |
|
|
(95,284 |
) |
|
|
|
|
|
|
|
Cash flows from financing activities |
|
|
|
|
|
|
|
|
Proceeds from notes payable |
|
|
96,500 |
|
|
|
|
|
Payments on notes payable |
|
|
(70,959 |
) |
|
|
(33,382 |
) |
|
|
|
|
|
|
|
Net cash provided (used) by financing activities |
|
|
25,541 |
|
|
|
(33,382 |
) |
|
|
|
|
|
|
|
Decrease in cash |
|
|
(232,021 |
) |
|
|
(91,735 |
) |
Cash beginning of period |
|
|
338,968 |
|
|
|
130,886 |
|
|
|
|
|
|
|
|
Cash end of period |
|
$ |
106,947 |
|
|
$ |
39,151 |
|
|
|
|
|
|
|
|
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 Three Months Ended September 30, 2007 and 2006
Unaudited
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
Cash flows from operating activities |
|
|
|
|
|
|
|
|
Net income |
|
$ |
146,768 |
|
|
$ |
273,923 |
|
Adjustments to reconcile net income to
net cash provided (used) in operating activities: |
|
|
|
|
|
|
|
|
Depreciation |
|
|
13,356 |
|
|
|
15,000 |
|
Amortization |
|
|
3,871 |
|
|
|
5,000 |
|
Deferred income tax provision |
|
|
|
|
|
|
(2,872 |
) |
Changes in operating assets and liabilities |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
123,729 |
|
|
|
48,113 |
|
Due from factor |
|
|
(117,789 |
) |
|
|
(62,028 |
) |
Inventories |
|
|
(1,044,915 |
) |
|
|
(886,647 |
) |
Advances to employees |
|
|
4,668 |
|
|
|
(6,517 |
) |
Prepaid expenses and deferred
charges |
|
|
(6,797 |
) |
|
|
436 |
|
Income taxes receivable |
|
|
76,240 |
|
|
|
12,141 |
|
Accounts payable |
|
|
910,171 |
|
|
|
228,429 |
|
Accrued payroll tax withholdings |
|
|
(6,643 |
) |
|
|
(3,890 |
) |
Accrued expenses other |
|
|
(3,928 |
) |
|
|
43,751 |
|
|
|
|
|
|
|
|
Net cash provided (used) in operating activities |
|
|
98,731 |
|
|
|
(335,161 |
) |
|
|
|
|
|
|
|
Cash flows from investing activities |
|
|
|
|
|
|
|
|
Purchases of property and equipment |
|
|
(9,014 |
) |
|
|
|
|
Net advances on notes receivable stockholder |
|
|
356 |
|
|
|
28,155 |
|
Purchase of treasury stock |
|
|
(27,068 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided (used) by investing activities |
|
|
(35,726 |
) |
|
|
28,155 |
|
|
|
|
|
|
|
|
Cash flows from financing activities |
|
|
|
|
|
|
|
|
Payments on notes payable |
|
|
(34,484 |
) |
|
|
(9,867 |
) |
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(34,484 |
) |
|
|
(9,867 |
) |
|
|
|
|
|
|
|
Increase (decrease) in cash |
|
|
28,521 |
|
|
|
(316,873 |
) |
Cash beginning of period |
|
|
78,426 |
|
|
|
356,024 |
|
|
|
|
|
|
|
|
Cash end of period |
|
$ |
106,947 |
|
|
$ |
39,151 |
|
|
|
|
|
|
|
|
The accompanying selected notes are an integral part of these condensed consolidated financial statements.
8
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 through the third quarter of
2007 has accounted for approximately 55% of the Companys sales revenues. In 2005, the Company
began developing products in the hunting and camping market, adding a line of meat processing
items. The Company continues to develop this market, having added a knife processing kit, aluminum
camping table and turkey seat. Hunting and camping has accounted for 31% of the Companys sales
through the third quarter of 2007. The Company has begun to expand its product line into household
products, adding a wooden fireplace bellow in the third quarter of 2007, and started production of
three cleaning dusters that will begin to ship to customers in December 2007.
Although a significant portion of our business is with the mass-market retailer Wal-Mart
(approximately 61%), we have been able to considerably increase our business with large sporting
goods retailers, distributors and catalog companies.
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, 2007 and 2006 and for the three months ended September 30, 2007 and
2006, 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
9
disclosures made are adequate to make
the information not misleading. It is suggested that these condensed financial statements be read
in conjunction with the 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.
Use of Estimates
The preparation of consolidated financial statements in accordance with accounting principles
generally accepted in the United States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the disclosures of
contingent assets and liabilities at the date of the consolidated financial statements, and the
reported amounts of revenues and expenses during the reporting period. Actual results may vary
from those estimates.
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 $82,926 at
September 30, 2007. 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.
|
|
|
|
|
|
|
Sept. 30, 2007 |
|
Inventories consist of: |
|
|
|
|
Finished goods |
|
$ |
4,586,807 |
|
Inventory in transit |
|
|
1,595,133 |
|
Parts |
|
|
22,967 |
|
|
|
|
|
|
|
$ |
6,204,907 |
|
|
|
|
|
Due from Factor
The Company factors a majority of its receivables without recourse under a credit risk
factoring agreement. The fair values of accounts receivables and the amount due to the factor
under this factoring agreement approximate their carrying values due to the short-term nature of
the instruments. The amounts borrowed are collateralized by the outstanding accounts receivable,
and are reflected as a reduction to accounts receivable in the accompanying condensed consolidated
balance sheet. These amounts are as follows:
|
|
|
|
|
|
|
Sept. 30, 2007 |
|
Accounts receivable factored |
|
$ |
2,570,872 |
|
|
|
|
|
Amounts advanced and outstanding |
|
|
2,130,367 |
|
|
|
|
|
Due from factor |
|
$ |
440,505 |
|
|
|
|
|
10
Earnings per Share: Dilutive Effect
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 nine months and three months ended September 30, 2007
and 2006, there was no dilutive effect related to these outstanding stock warrants as their
exercise price of $2.57 was greater than the average market price of the common stock during the
period.
Accounting Changes
In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No.
48, Accounting for Uncertainty in Income Taxes an interpretation of FASB Statement No. 109
(FIN 48), which clarifies the accounting for uncertainty in income tax positions. FIN 48
requires that the Company recognize in the consolidated financial statements the impact of a tax
position that is more likely than not to be sustained upon examination based on the technical
merits of the position. Effective January 1, 2007, the Company adopted the provisions of FIN 48.
The adoption of FIN 48 did not have a material impact on the condensed consolidated financial
statements of the Company.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This statement
defines fair value, establishes a framework for measuring fair value in generally accepted
accounting principles (GAAP), and expands disclosures about fair value measurements. The
Companys management does not anticipate that this pronouncement will have a significant impact on
the consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets
and Liabilities (SFAS 159), to permit all entities to choose to elect to measure eligible
financial instruments at fair value. SFAS 159 applies to fiscal years beginning after November 15,
2007, with early adoption permitted for an entity that has also elected to apply the provisions of
SFAS 157, Fair Value Measurements. An entity is prohibited from retrospectively applying SFAS 159,
unless it chooses early adoption. Management is currently evaluating the impact of SFAS 159 on its
consolidated financial statements.
Treasury Stock Transactions
During the three months ended September 30, 2007, the Company purchased 23,800 shares of its
common stock in the open market at a total cost of $27,068. These shares are accounted for as
treasury stock (at cost) in the accompanying condensed consolidated financial statements.
11
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management Discussion and Analysis of Financial Condition is qualified by
reference to and should be read in conjunction with our Condensed 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:
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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.
12
(a) Background
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, gun safety items such as
gun locks, trigger locks and security safes, and hunting and camping accessories. In 2007, we have
begun to expand our product line into household products, having added a wooden fireplace bellow
during the third quarter and production of three new cleaning dusters that will begin shipping to
customers in December 2007.
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:
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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 in new markets, such as camping and housewares; |
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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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|
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 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 cleaning and maintenance, (b)
hunting and camping, (c) gun safety, and (d) other 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 fifty (50) 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. We also market several kits that have been privately
labeled for certain customers. This product area accounted for 55% of sales during the first nine
months of 2007.
Hunting and camping. This category includes three meat processing items, Sportsmans Lighter,
game processing kit, aluminum camping table, turkey seat and camo drink coolers. This product area
accounted for 31% of sales during the first nine months of 2007.
13
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. This product
area accounted for 14% of sales during the first nine months of 2007.
Other Products. We market four (4) different electronic security devices designed to protect
the person, and two licensed products, the Clampit Cupholder and Plateholder. A new wooden
fireplace bellow was added in the third quarter of 2007. This product area accounts for less than
one percent of the Companys sales.
(b) Financial Condition and Results of Operations
Results of Operations
Three Months Ended September 30, 2007 and 2006
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|
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|
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|
|
|
|
|
|
|
|
|
|
|
Increase |
|
|
Percent |
|
|
|
2007 |
|
|
2006 |
|
|
(Decrease) |
|
|
Change |
|
Net sales |
|
$ |
3,380,969 |
|
|
$ |
3,936,195 |
|
|
$ |
(555,226 |
) |
|
|
(14 |
%) |
Gross profit |
|
|
965,869 |
|
|
|
1,287,606 |
|
|
|
(321,737 |
) |
|
|
(25 |
%) |
Operating expenses |
|
|
669,242 |
|
|
|
774,640 |
|
|
|
(105,398 |
) |
|
|
(14 |
%) |
Income from operations |
|
|
296,627 |
|
|
|
512,966 |
|
|
|
(216,339 |
) |
|
|
(42 |
%) |
Net income |
|
|
146,768 |
|
|
|
273,923 |
|
|
|
(127,155 |
) |
|
|
(46 |
%) |
The decrease in net sales for the three months ended September 30, 2007 as compared to 2006,
is the result of several factors. Sales to several of the Companys larger sporting goods
customers were down due to different delivery dates from last year. The unseasonably warm weather across the country has also
affected sales for gun related products.
Going forward, the Company has begun production of a line of household cleaning dusters that will
begin shipping in the fourth quarter, and a new large aluminum camping table that will begin
shipping in January 2008. The Company estimates that, based upon communication with Wal-Mart, these
items will add over $3,300,000 in additional annual revenue in 2008 just from Wal-Mart alone. The
Company will continue to expand its product line in the household cleaning products to include
additional dusters, mops, brooms, and brushes. The Company has also begun to develop a line of
fireplace accessories, including a new wooden fireplace bellows that began shipping in the third
quarter of 2007.
Gross profit margins are down for the three-month period as compared to last year by about 3%, but at 29%, equal gross margins for the year 2006.
Gross profit margins continue to be pressured by the declining value of the US dollar versus the
Chinese RMB. Also, sales of lower gross margin items such as meat grinders and knife sets have affected gross margins. The Company expects fourth quarter margins to increase over fourth quarter 2006 margins.
14
In June of 2007, the Company instituted a price increase to its general customer base of approximately 8%, which did
not include Wal-Mart. Wal-Mart has communicated to the Companys management that it will consider a price increase in January 2008 for the Companys gun cleaning and gun accessory items. The Company anticipates that this price increase will be around 5% on these items.
Operating expenses for the three-month period ended September 30, 2007, decreased by 14% over 2006.
General and administrative expenses increased $25,967, or 10% over 2006. Insurance costs for the
Companys liability insurance increased $21,936, and accounting fees increased $14,244 over last
year. Overall, all other general and administrative expenses decreased over the prior year.
Selling expenses, (including warehouse and shipping costs), decreased $131,365, or 26% over last
year. Of this decrease, $46,122 is from decreased commissions resulting from the decrease in
sales. The remaining decrease of $85,243 is directly attributable to cost saving measures
initiated by the Company earlier this year. Significant savings have been realized in the areas of
freight, warehouse, and travel costs.
Nine Months Ended September 30, 2007 and 2006
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Increase |
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Percent |
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|
|
2007 |
|
|
2006 |
|
|
(Decrease) |
|
|
Change |
|
Net sales |
|
$ |
8,960,497 |
|
|
$ |
9,416,561 |
|
|
$ |
(456,064 |
) |
|
|
(5 |
%) |
Gross profit |
|
|
2,689,770 |
|
|
|
3,043,507 |
|
|
|
(353,737 |
) |
|
|
(12 |
%) |
Operating expenses |
|
|
2,077,952 |
|
|
|
1,944,083 |
|
|
|
133,869 |
|
|
|
7 |
% |
Income from operations |
|
|
611,818 |
|
|
|
1,099,424 |
|
|
|
(487,606 |
) |
|
|
(44 |
%) |
Net income |
|
|
245,186 |
|
|
|
563,421 |
|
|
|
(318,235 |
) |
|
|
(56 |
%) |
The decrease in sales for the nine months ended September 30, 2007 as compared to the same
period in 2006 is due to the decrease in third quarter sales as discussed above. Gross profit
margins for the nine months ended September 30, 2007 was 30%, down from 32% in the prior year.
Operating expenses for the nine-month period increased $133,869 over the prior year. If not
for the one time expense of $146,500 in the first quarter of 2007 for the settlement of a lawsuit,
operating expenses for the nine-month period would have decreased by $12,631. General and
administrative expenses increased $189,949 (including the $146,500 lawsuit settlement). The
remaining increase of $43,449 is directly caused by increases in liability insurance and accounting
fees. Selling expenses decreased $56,080 over the prior year. Of this decrease, $27,933 is from
decreased sales commissions due to decreased sales. The remaining decrease is the result of the
cost saving measures related to freight and shipping costs.
15
Financial Condition
A summary of the significant balance sheet items at September 30, 2007 as compared to year-end
December 31, 2006 is presented below:
|
|
|
|
|
|
|
|
|
|
|
Sept. 30, 2007 |
|
|
Dec. 31, 2006 |
|
Accounts receivable |
|
$ |
1,267,262 |
|
|
$ |
532,028 |
|
Due from factor |
|
|
440,505 |
|
|
|
1,282,208 |
|
Inventories |
|
|
6,204,907 |
|
|
|
3,130,825 |
|
Total current assets |
|
|
8,435,274 |
|
|
|
5,799,626 |
|
Accounts payable |
|
|
4,202,677 |
|
|
|
1,640,445 |
|
Total current liabilities |
|
|
4,456,304 |
|
|
|
1,905,674 |
|
Working capital |
|
|
3,978,970 |
|
|
|
3,893,952 |
|
Stockholders equity |
|
|
4,668,060 |
|
|
|
4,478,801 |
|
The only significant changes as reflected above relate to inventory levels and accounts payable.
Inventories at September 30, 2007 increased $3,074,082 over December 31, 2006. Because of the
seasonality of the Companys business, inventory needs for the fourth quarter is significantly
greater than for the first quarter. Therefore, the Company begins to build its inventory levels
towards the end of the third quarter in anticipation of this increased need. Accounts payable
increased $2,562,232 from December 31, 2006 to September 30, 2007, in direct relation to the
increase in inventory.
The Companys overall financial condition continues to be strong as a result of continuing profits.
(c) Liquidity and Capital Resources
Our liquidity needs arise primarily from inventory. 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. The Company maintains a factoring agreement wherein it assigns its
receivables (on a non-recourse basis). Consequently, should our sales revenues significantly
decline, it could affect our short-term liquidity. 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. The factor may
also, at its discretion, advance funds prior to the collection of our accounts, for which the
Company is charged interest. Advances are payable to the factor on demand. For the period ending
September 30, 2007, our factor had advanced us $2,130,367.
(d) Trends
Our business faces the issues of increased manufacturing costs and margin erosion as a result
of raw material, fuel and other utility price increases, and a weak U.S. dollar. This will put
pressure on our margins and overhead costs. Any strengthening of the U.S. dollar would impact
favorably on the business, as this would ease the pressure on margins and increase our
competitiveness. Current trends, however, suggest a continued weakening which will place
additional pressure on our sales into our markets.
(e) Gun Legislation
Several federal laws regulate the ownership, purchase and use of handguns, including the 1968
Gun Control Act and the Brady Bill. Notwithstanding these and other laws, there is not any federal
law that requires the use of gunlocks, despite numerous attempts in Congress to pass such
legislation.
Some states have passed Child Access Prevention (or CAP) Laws, which hold gun owners responsible if
they leave guns easily accessible to children and a child improperly gains access to the weapon.
Additionally, the State of California has enacted legislation that establishes performance
standards for firearm safety devices, lock-boxes and safes.
16
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.
(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, 2006 audited
consolidated financial statements included in the Companys Form 10KSB. The quarterly financial
statements for the period ended September 30, 2007, 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, 2006, 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.
17
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, 2007, 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.
18
(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.
(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, 2006.
Management will assess its internal controls over financial reporting in its annual report for
2007; however, managements assessment will not be audited until fiscal 2008.
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.
19
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. On April 30, 2007, the Company
settled this suit by agreeing to pay Continental Western at total of $146,500. Terms of this
settlement call for the Company to pay $50,000 on April 30, 2007, with the balance of $96,500 to be
paid in twelve equal monthly installments of $8,305.41 beginning May 15, 2007.
On November 8, 2005, the Company was sued in the Court of Common Pleas, in Dauphin County,
Pennsylvania, on a product liability claim. This suit had been turned over to the Companys
insurance carrier Continental Western Insurance Company. On July 3, 2007, Continental Western
executed a settlement agreement with the plaintiff, which included the release of the Company from
any and all claims.
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. The district judge ruled in the Companys favor dismissing the action, which
has been affirmed by the Eighth Circuit Court of Appeals on April 13, 2007. On August 20, 2007,
the Company was advised by its legal counsel that Skit International Ltd. had filed a writ of certiorari to
the United States Supreme Court. In a ruling dated October 29, 2007, and filed November 9, 2007, the Supreme Court denied Skit International, Ltd.s petition for a writ of certiorari, effectively ending all
appeals. The Company is now able to pursue collection of the judgment.
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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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A
Form 8-K 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:
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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(ii)
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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 to 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 18U.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 18U.S.C. Section 1350 |
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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:
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By: |
/s/ David A. Collins
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David A. Collins, Chairman, CEO and Principal Executive Officer |
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By: |
/s/ Robert C. Goodwin
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Robert C. Goodwin, Principal Accounting Officer and Principal Financial Officer |
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Dated: November 14, 2007
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