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, 2007
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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
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(I.R.S. Employer |
incorporation or organization)
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Identification No.) |
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12120 Colonel Glenn Road, Suite 6200 Little Rock, AR
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72210 |
(Address of principal executive offices)
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(Zip Code) |
(501) 661-9100
(Issuers telephone number)
Check whether the Issuer (1) has filed all reports required to be filed by the Section 13 or
15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing requirements for the
past 90 days.
(1) Yes þ No o (2) Yes þ No o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes o No þ
State the number of shares outstanding of each of the issuers class of common equity, as of
the latest practicable date. As of August 2, 2007, 6,323,364 shares of Common Stock are issued and
6,113,499 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.
Condensed Balance Sheet (Consolidated)
June 30, 2007
Unaudited
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Assets |
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Current assets |
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Cash |
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$ |
78,426 |
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Accounts receivable, less allowance for doubtful
accounts of $5,000 |
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1,390,991 |
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Due from factor |
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322,716 |
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Inventories |
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5,159,992 |
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Prepaid expenses and deferred charges |
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158,471 |
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Income taxes receivable |
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290,810 |
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Current deferred income tax benefit |
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35,815 |
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Total current assets |
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7,437,221 |
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Property and equipment |
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Leasehold improvements |
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55,323 |
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Furniture and fixtures |
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251,753 |
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Molds, dies, and artwork |
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511,233 |
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818,309 |
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Accumulated depreciation |
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(546,489 |
) |
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Net property and equipment |
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271,820 |
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Other assets |
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Patents and trademarks, net of
accumulated amortization of $96,401 |
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141,569 |
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Deposits |
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17,351 |
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Advances to employees |
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39,385 |
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Note receivable long term |
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20,000 |
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Note receivable related party |
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72,518 |
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Note receivable stockholder |
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172,784 |
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Total other assets |
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463,607 |
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Total assets |
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$ |
8,172,648 |
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The accompanying selected notes are an integral part of these condensed consolidated financial statements.
4
DAC TECHNOLOGIES GROUP INTERNATIONAL, INC.
Condensed Balance Sheet (Consolidated)
June 30, 2007
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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$ |
252,758 |
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Accounts payable |
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3,292,506 |
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Accrued payroll tax withholdings |
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25,106 |
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Accrued expenses-other |
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20,818 |
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Total current liabilities |
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3,591,188 |
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Deferred income tax liability |
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33,100 |
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Stockholders equity |
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Preferred stock, $.001 par value; authorized
10,000,000 shares; none issued and outstanding |
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Common stock, $.001 par value; authorized
50,000,000 shares; 6,323,364 shares issued and
6,113,499 shares outstanding |
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6,323 |
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Additional paid-in capital |
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1,963,102 |
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Treasury stock, at cost |
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(230,192 |
) |
Retained earnings |
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2,809,127 |
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Total stockholders equity |
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4,548,360 |
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Total liabilities and stockholders equity |
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$ |
8,172,648 |
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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 Six Months Ended June 30, 2007 and 2006
Unaudited
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2007 |
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2006 |
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Net sales |
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$ |
5,579,528 |
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$ |
5,480,366 |
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Cost of sales |
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3,855,627 |
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3,724,465 |
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Gross profit |
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1,723,901 |
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|
1,755,901 |
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Operating expenses |
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Selling |
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734,616 |
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|
659,331 |
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General and administrative |
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674,094 |
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510,112 |
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Total operating expenses |
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1,408,710 |
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1,169,443 |
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Income from operations |
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315,191 |
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586,458 |
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Other income (expense) |
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Interest expense |
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(136,766 |
) |
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(110,871 |
) |
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Total other income (expense) |
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(136,766 |
) |
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(110,871 |
) |
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Income before income tax provision |
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178,425 |
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475,587 |
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Provision for income taxes |
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80,007 |
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186,089 |
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Net income |
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$ |
98,418 |
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$ |
289,498 |
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Basic and diluted earnings per share |
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$ |
0.02 |
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$ |
0.05 |
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Weighted-average number of shares |
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Basic and diluted |
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6,130,018 |
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6,181,556 |
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The accompanying selected notes are an integral part of these condensed consolidated financial statements.
6
DAC TECHNOLOGIES GROUP INTERNATIONAL, INC.
Condensed Statements of Operations (Consolidated)
For The Three Months Ended June 30, 2007 and 2006
Unaudited
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2007 |
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2006 |
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Net sales |
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$ |
2,739,903 |
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$ |
2,717,169 |
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|
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Cost of sales |
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|
1,853,512 |
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|
1,932,054 |
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|
|
|
|
|
|
|
|
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Gross profit |
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|
886,391 |
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|
785,115 |
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Operating expenses |
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|
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Selling |
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353,576 |
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|
318,542 |
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General and administrative |
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|
266,374 |
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|
263,843 |
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|
|
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Total operating expenses |
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619,950 |
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|
582,385 |
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Income from operations |
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266,441 |
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|
202,730 |
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|
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|
|
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|
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Other income (expense) |
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Interest expense |
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(63,206 |
) |
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(51,136 |
) |
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Total other income (expense) |
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|
(63,206 |
) |
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(51,136 |
) |
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|
|
|
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|
|
|
|
|
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Income before income tax provision |
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|
203,235 |
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|
151,594 |
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|
|
|
|
|
|
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|
Provision for income taxes |
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|
87,615 |
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|
59,278 |
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|
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Net income |
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$ |
115,620 |
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|
$ |
92,316 |
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|
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|
|
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Basic and diluted earnings per share |
|
$ |
0.02 |
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$ |
0.01 |
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|
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|
|
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|
|
|
|
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Weighted-average number of shares |
|
|
|
|
|
|
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Basic and diluted |
|
|
6,124,498 |
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|
|
6,169,877 |
|
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 Six Months Ended June 30, 2007 and 2006
Unaudited
|
|
|
|
|
|
|
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|
|
2007 |
|
|
2006 |
|
Cash flows from operating activities |
|
|
|
|
|
|
|
|
Net income |
|
$ |
98,418 |
|
|
$ |
289,498 |
|
Adjustments to reconcile net income to
net cash provided (used) by operating activities: |
|
|
|
|
|
|
|
|
Depreciation |
|
|
24,023 |
|
|
|
27,773 |
|
Amortization |
|
|
7,936 |
|
|
|
8,098 |
|
Deferred income taxes |
|
|
|
|
|
|
(5,743 |
) |
Changes in operating assets and liabilities |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(858,963 |
) |
|
|
(728,160 |
) |
Due from factor |
|
|
959,492 |
|
|
|
760,980 |
|
Inventories |
|
|
(2,029,167 |
) |
|
|
(802,744 |
) |
Advances to employees |
|
|
(15,278 |
) |
|
|
(12,851 |
) |
Prepaid expenses and deferred charges |
|
|
(49,506 |
) |
|
|
(63,223 |
) |
Income taxes receivable |
|
|
80,007 |
|
|
|
|
|
Deposits |
|
|
(5,916 |
) |
|
|
|
|
Accounts payable |
|
|
1,652,061 |
|
|
|
1,397,632 |
|
Accrued payroll tax withholdings |
|
|
162 |
|
|
|
1,401 |
|
Accrued expenses other |
|
|
(26,734 |
) |
|
|
(20,401 |
) |
Income taxes payable |
|
|
|
|
|
|
(480,168 |
) |
|
|
|
|
|
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Net cash
provided (used) by operating activities |
|
|
(163,465 |
) |
|
|
372,092 |
|
|
|
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|
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|
|
|
|
|
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Cash flows from investing activities |
|
|
|
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|
|
|
|
Purchases of property and equipment |
|
|
(84,235 |
) |
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|
(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 |
|
|
(42,253 |
) |
|
|
(3,238 |
) |
Purchase of treasury stock |
|
|
(28,859 |
) |
|
|
(99,933 |
) |
|
|
|
|
|
|
|
Net cash
provided (used) by investing activities |
|
|
(157,102 |
) |
|
|
(123,439 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities |
|
|
|
|
|
|
|
|
Proceeds from notes payable |
|
|
96,500 |
|
|
|
|
|
Payments on notes payable |
|
|
(36,475 |
) |
|
|
(23,515 |
) |
|
|
|
|
|
|
|
Net cash
provided (used) by financing activities |
|
|
60,025 |
|
|
|
(23,515 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
(decrease) in cash |
|
|
(260,542 |
) |
|
|
225,138 |
|
|
|
|
|
|
|
|
|
|
Cash beginning of period |
|
|
338,968 |
|
|
|
130,886 |
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|
|
|
|
|
|
|
|
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|
|
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|
Cash end of period |
|
$ |
78,426 |
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|
$ |
356,024 |
|
|
|
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|
The accompanying selected notes are an integral part of these condensed consolidated financial statements.
8
DAC TECHNOLOGIES GROUP INTERNATIONAL, INC.
Condensed Statements of Cash Flows (Consolidated)
For the Three Months Ended June 30, 2007 and 2006
Unaudited
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
Cash flows from operating activities |
|
|
|
|
|
|
|
|
Net income |
|
$ |
115,620 |
|
|
$ |
92,316 |
|
Adjustments to reconcile net income to
net cash provided (used) by operating activities: |
|
|
|
|
|
|
|
|
Depreciation |
|
|
12,045 |
|
|
|
14,000 |
|
Amortization |
|
|
4,000 |
|
|
|
4,100 |
|
Deferred income taxes |
|
|
|
|
|
|
(5,743 |
) |
Changes in operating assets and liabilities |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(438,315 |
) |
|
|
114,355 |
|
Due from factor |
|
|
131,143 |
|
|
|
88 |
|
Inventories |
|
|
(1,901,472 |
) |
|
|
(931,429 |
) |
Advances to employees |
|
|
(3,006 |
) |
|
|
(2,147 |
) |
Prepaid expenses and deferred charges |
|
|
(24,907 |
) |
|
|
30,928 |
|
Income taxes receivable |
|
|
87,615 |
|
|
|
|
|
Deposits |
|
|
780 |
|
|
|
|
|
Accounts payable |
|
|
2,142,725 |
|
|
|
1,360,387 |
|
Accrued payroll tax withholdings |
|
|
(1,425 |
) |
|
|
5,329 |
|
Accrued expenses other |
|
|
(150,216 |
) |
|
|
(15,327 |
) |
Income taxes payable |
|
|
|
|
|
|
(226,979 |
) |
|
|
|
|
|
|
|
Net cash provided (used) by operating activities |
|
|
(25,413 |
) |
|
|
439,878 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities |
|
|
|
|
|
|
|
|
Purchases of property and equipment |
|
|
(21,053 |
) |
|
|
(3,487 |
) |
Payments for patents and trademarks |
|
|
|
|
|
|
(3,966 |
) |
Net advances on note receivable related party |
|
|
|
|
|
|
(427 |
) |
Net advances on note receivable stockholder |
|
|
2,748 |
|
|
|
(10,011 |
) |
Purchase of treasury stock |
|
|
(28,859 |
) |
|
|
(99,933 |
) |
|
|
|
|
|
|
|
Net cash used by investing activities |
|
|
(47,164 |
) |
|
|
(117,824 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities |
|
|
|
|
|
|
|
|
Proceeds from notes payable |
|
|
96,500 |
|
|
|
|
|
Payments on notes payable |
|
|
(26,145 |
) |
|
|
(12,608 |
) |
|
|
|
|
|
|
|
Net cash
provided (used) by financing activities |
|
|
70,355 |
|
|
|
(12,608 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
(decrease) in cash |
|
|
(2,222 |
) |
|
|
309,446 |
|
|
|
|
|
|
|
|
|
|
Cash beginning of period |
|
|
80,648 |
|
|
|
46,578 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash end of period |
|
$ |
78,426 |
|
|
$ |
356,024 |
|
|
|
|
|
|
|
|
The accompanying selected notes are an integral part of these condensed consolidated financial statements.
9
PART F/S
DAC TECHNOLOGIES GROUP INTERNATIONAL, INC.
SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Nature of Business
DAC Technologies Group International, Inc. (the Company), is in the business of developing,
marketing and outsourcing the manufacture of various consumer products, patented and non-patented.
The Companys primary business is gun safety and gun maintenance with a target consumer base of
sportsmen, hunters and outdoorsmen, and recreational enthusiasts. The Companys products have
historically been security related, evolving from various personal, home and automotive electronic
security devices, to firearm safety devices such as gun and trigger locks, cable locks and safes.
In 2003, the product line was expanded to include a line of gun cleaning kits and accessories.
This line has continued to be expanded, and during 2007 has accounted for approximately 56% 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 products accounted for 28% of the Companys sales in 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
six months ended June 30, 2007 and 2006 and for the three months ended June 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 disclosures made are adequate to make the information not misleading.
It is suggested that these condensed financial statements be read in
10
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
June 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.
|
|
|
|
|
|
|
June 30, 2007 |
|
Inventories consist of: |
|
|
|
|
Finished goods |
|
$ |
3,726,213 |
|
Inventory in transit |
|
|
1,410,812 |
|
Parts |
|
|
22,967 |
|
|
|
|
|
|
|
$ |
5,159,992 |
|
|
|
|
|
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:
|
|
|
|
|
|
|
June 30, 2007 |
|
Accounts receivable factored |
|
$ |
1,951,636 |
|
Amounts advanced and outstanding |
|
|
1,628,920 |
|
|
|
|
|
Due from factor |
|
$ |
322,716 |
|
|
|
|
|
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
11
incremental common shares issuable upon the exercise of outstanding stock warrants (using the
treasury stock method). For the six months and three months ended June 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.
Treasury Stock Transactions
During the three months ended June 30, 2007, the Company purchased 22,100 shares of its common
stock in the open market at a total cost of $28,859. These shares are accounted for as treasury
stock (at cost) in the accompanying condensed consolidated financial statements.
|
|
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ITEM 2. |
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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:
12
|
|
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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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|
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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; |
|
|
|
|
the ability of the Company to control manufacturing and operating costs; and |
|
|
|
|
continued availability of financing, and financial resources on the terms required to
support the Companys future business strategies. |
In evaluating these statements, you should consider various factors, including those
summarized above, and, from time to time, in other reports the Company files with the SEC. These
factors may cause the Companys actual results to differ materially from any forward-looking
statement. The Company disclaims any obligation to publicly update these statements, or disclose
any difference between its actual results and those reflected in these statements. The information
constitutes forward-looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995.
(a) Background
Summary
For the three months ended June 30, 2007, the Company had net income of $115,620 on net sales of
$2,739,903. For the six months ended June 30, 2007, the Company had net income of $98,418 on net
sales of $5,579,528.
The Company continues to fight the effects of rising commodity prices on its gross margins. Gross
margins did increase during the second quarter of 2007 to 32% as compared to 29% in the second
quarter of 2006.
The Companys line of GunMaster gun cleaning kits continues to be a leader in the gun cleaning
market. However, it is becoming increasingly difficult to maintain the tremendous sales growth
experienced in this market from 2003 through 2005. While the Company will continue its efforts to
gain a larger market share in this area, future sales growth will need to come from new markets.
To this end, the Company continues to expand its product line in the hunting and camping area,
which now accounts for approximately 28% of the Companys sales, and is working on a new line of
household cleaning items.
The effects of cost saving measures adopted by the Company earlier this year are now beginning to
be realized, especially in the shipping and freight areas. The Company believes these measures
will continue to have a positive impact on earnings during the remainder of 2007.
13
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 recent years, we have placed particular emphasis on gun cleaning kits and gun
accessories, as well as expanding our hunting and camping category.
A significant portion of our business is with mass-market retailers, primarily Wal-Mart, as
well as gun manufacturers. With the addition of our Gunmaster gun cleaning kits, we continue to
increase our business with sporting goods retailers and distributors.
The Companys business plan and strategy for growth focuses on:
|
|
|
increased penetration of our existing markets, particularly in the gun cleaning
and accessories market; |
|
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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; |
|
|
|
|
identification and development of new markets for gun cleaning kits, i.e.
government, law enforcement and military; |
|
|
|
|
identification and recruitment of effective manufacturers
representatives to actively market these products on a national and
international basis; and |
|
|
|
|
aggressive cost containment. |
Management believes that continued growth would require the Company to continually innovate
and improve its existing line of products and services to meet consumer, industry and governmental
demands. In addition, we must continue to develop or acquire new and unique products that will
appeal to gun owners and other outdoor activities.
In addition to our traditional products, our management is actively pursuing initiatives,
which may add complementary businesses, products and services. These initiatives are intended to
broaden the base of revenues to make us less dependent on particular products. By developing
businesses which focus on products and services which complement our current line of products, and
our current customer base, management hopes to leverage these opportunities to not only develop new
sources of revenue, but to strengthen the demand for our existing products.
Our products can be grouped into four main categories: (a) gun 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 forty (40) 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 56% of sales during the first six
months of 2007.
14
Hunting and camping. This category includes three meat processing items, Sportsmans Lighter,
game processing kit, aluminum camping table, turkey seat and portable ATV light. This product area
accounted for 28% of sales during the first six months of 2007.
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 16% of sales during the first six 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. 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 June 30, 2007 and 2006
For the three months ended June 30, 2007, the Company had net income of $115,620 on net sales
of $2,739,903 as compared to net income of $92,316 on net sales of $2,717,169 for the three months
ended June 30, 2006. This represents only a one percent increase in sales, however, net income
increased $23,304, or 25%.
The increase in net income is mainly the result of improved gross margins. Gross margins
increased from 29% for the three months ended June 30, 2006, to 32% for the three months ended in
2007. During 2006, the Company experienced significant increases in most of its products, mainly
due to increases in commodity prices. To offset these increases and resulting reductions in gross
margins, the Company has initialed measures this year to improve its margins, including a price
increase to its customers during the second quarter of 2007. The results of these measures are
beginning to be realized, as reflected in the improved margins during the second quarter of 2007.
Operating expenses for the three months ended June 30, 2007 were $619,950 as compared to
$582,385 for the same period in the prior year, an increase of 6%. Selling expenses (which
includes shipping and warehouse expenses), increased $35,034, or 11%. The most significant
increases were in commissions and warehouse rent. Commissions increased because a larger
percentage of sales were done by outside sales reps, who earn a higher commission rate than
internal sales personnel. In January 2007, the Company leased a new 102,000 square foot warehouse
which will be sufficient to meet all its needs, even during the heavy shipping seasons during the
third and fourth quarters. In previous years, the Company used the services of a third party
bonded warehouse to store the extra inventory needed during the third and fourth quarters. While
the fixed monthly rental of the new warehouse currently exceeds the cost incurred in prior years
during the first two quarters, the savings during the last two quarters will exceed the additional
costs now. These increases were offset, to some extent, by reduced costs relating to shipping and
freight, a result of new cost saving measures adopted early in the second quarter of 2007.
15
General and administrative expenses increased $2,531, or 1% over 2006. Insurance costs,
accounting fees and other costs associated with meeting SEC reporting requirements continue to
increase. These increases were offset to some extent by decreases in administrative salaries and
legal fees.
Six Months Ended June 30, 2007 and 2006
For the six months ended June 30, 2007, the Company had net income of $98,418 on net sales of
$5,579,528 as compared to net income of $289,498 on net sales of $5,480,366 for the six months
ended June 30, 2006.
The increase in net sales of $99,162 represents an increase of 2% over the six months ended
June 30, 2006. Gross margins decreased slightly from 32% in 2006 to 31% in 2007.
Operating expenses for the six months ended June 30, 2007 were $1,408,710 as compared to
$1,169,443 for the six months ended June 30, 2006. This is an increase of $239,267, or 20%.
Included in operating expenses for 2007 is a one-time charge of $146,500 recorded in the first
quarter of 2007 for the settlement of a lawsuit brought against the Company by its former insurance
carrier. Without this one-time charge, operating expenses would have increased $92,767, or 8% over
2006. Most of this increase, as in the three months ended June 30, 2007 is related to increased
costs for insurance, accounting fees, warehouse rent and commissions.
Financial Condition
A summary of the significant balance sheet items at June 30, 2007 as compared to year-end
December 31, 2006 is presented below:
|
|
|
|
|
|
|
|
|
|
|
June 30, 2007 |
|
Dec. 31, 2006 |
Accounts receivable |
|
$ |
1,390,991 |
|
|
$ |
532,028 |
|
Due from factor |
|
|
322,716 |
|
|
|
1,282,208 |
|
Inventories |
|
|
5,159,992 |
|
|
|
3,130,825 |
|
Total current assets |
|
|
7,437,221 |
|
|
|
5,799,626 |
|
Accounts payable |
|
|
3,292,506 |
|
|
|
1,640,445 |
|
Total current liabilities |
|
|
3,591,188 |
|
|
|
1,905,674 |
|
Working capital |
|
|
3,846,033 |
|
|
|
3,893,952 |
|
Stockholders equity |
|
|
4,548,360 |
|
|
|
4,478,801 |
|
The only significant changes as reflected above relate to inventory levels and accounts payable.
Inventories at June 30, 2007 increased $2,029,167 over December 31, 2006. The reason for this
increase relates mainly to two factors. Because of the seasonality of the Companys business,
inventory needs for the third and fourth quarters are significantly greater than for the first and
second quarters. Therefore, the Company begins to build its inventory levels towards the end of
the second quarter in anticipation of these increased needs. In addition, the Company moved up the
scheduled shipment of certain items into the second quarter to save on the cost of these items, in
anticipation of a price increase. Accounts payable increased $1,652,061 from December 31, 2006 to
June 30, 2007, in direct relation to the increase in inventory.
16
(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
June 30, 2007, our factor had advanced us $1,628,920.
(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.
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 June 30, 2007, 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. 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
17
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.
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
18
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, 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.
(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
19
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.
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 general release of the Company from
any and all claims.
20
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. There are no further
appeal processes available to Skit. The Companys legal counsel is currently in negotiations with
Skit International and certain individuals regarding the settlement of this $1,524,420 judgment.
Should settlement talks not be successful, the Company intends to pursue collection through any and
all means available.
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ITEM 2. |
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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 |
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:
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 14, 2007
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