DAC Technologies Group International, Inc.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
x ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2007
o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM________TO __________
COMMISSION FILE NUMBER 000-29211
DAC TECHNOLOGIES GROUP INTERNATIONAL, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
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Florida
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65-0847852 |
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.) |
12120 Colonel Glenn Road, Suite 6200 Little Rock, AR 72210
(address of principal executive offices) (zip code)
(501) 661-9100
(Issuers telephone number)
Securities registered under Section 12(b) of the Act:
None
Name of each exchange on which registered
Not applicable
Securities registered under Section 12(g) of the Act:
Common Stock, par value $0.001
CHECK WHETHER THE ISSUER IS NOT REQUIRED TO FILE REPORTS PURSUANT TO SECTION 13 OR 15(d) OF THE
EXCHANGE ACT. o
CHECK WHETHER THE ISSUER (1) FILED ALL REPORTS REQUIRED TO BE FILED BY
SECTION 13 OR 15(d) OF THE EXCHANGE ACT DURING THE PAST 12 MONTHS (OR FOR SUCH
SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND
(2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS.
YES x NO o
CHECK IF THERE IS NO DISCLOSURE OF DELINQUENT FILERS IN RESPONSE TO
ITEM 405 OF REGULATION S-B IS NOT CONTAINED IN THIS FORM, AND NO DISCLOSURE WILL
BE CONTAINED, TO THE BEST OF THE REGISTRANTS KNOWLEDGE, IN DEFINITIVE PROXY OR
INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-KSB OR ANY AMENDMENT
TO THIS FORM 10-KSB. o
INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS A SHELL COMPANY (AS DEFINED IN RULE 12b-2 OF THE
EXCHANGE ACT YES o NOx
STATE ISSUERS REVENUES FOR ITS MOST RECENT FISCAL YEAR. $14,777,645
STATE THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY
NON-AFFILIATES COMPUTED BY REFERENCE TO THE PRICE AT WHICH THE STOCK WAS SOLD, OR THE AVERAGE BID
AND ASKED PRICES OF SUCH STOCK, AS OF A SPECIFIED DATE WITHIN THE PAST 60 DAYS. THE AGGREGATE
MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES AS OF MARCH 13, 2008 WAS APPROXIMATELY $3,182,981.
STATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUERS CLASS OF
COMMON EQUITY, AS OF THE LATEST PRACTICABLE DATE. AS OF MARCH 13, 2008,
6,323,364 SHARES OF COMMON STOCK ARE ISSUED AND 6,032,899 ARE OUTSTANDING.
DOCUMENTS INCORPORATED BY REFERENCE
IF
THE FOLLOWING DOCUMENTS ARE INCORPORATED BY REFERENCE, BRIEFLY DESCRIBE THEM AND IDENTIFY THE PART OF THE FORM 10-KSB INTO WHICH THE DOCUMENT IS INCORPORATED: (1)
ANY ANNUAL REPORT TO SECURITY HOLDERS; (2) ANY PROXY OR INFORMATION STATEMENT; AND (3) ANY
PROSPECTUS FILED PURSUANT TO RULE 424(b) OF THE SECURITIES ACT OF 1933 (SECURITIES ACT). NOT
APPLICABLE.
UNLESS THE CONTEXT OTHERWISE REQUIRES, THE TERMS COMPANY, WE, US, AND OUR, REFER TO DAC
TECHNOLOGIES GROUP INTERNATIONAL, INC.
FORWARD-LOOKING STATEMENTS
This document includes forward looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, (the Securities Act) and Section 21E of the Securities
Exchange Act of 1934, as amended (the Exchange Act). All statements other than statements of
historical fact contained in this document, including, without limitation, the statements under
Managements Discussion and Analysis of Financial Condition and Results of Operations and
Liquidity and Sources of Capital regarding the Companys strategies, plans, objectives,
expectations, and future operating results are forward-looking statements. Such statements also
consist of any statement other than a recitation of historical fact and can be identified by the
use of forward-looking terminology, such as may, expect, anticipate, estimate, or
continue or the negative thereof or other variations thereon or comparable terminology. Although
the Company believes that the expectations reflected in such forward-looking statements are
reasonable at this time, it can give no assurance that such expectations will prove to have been
correct. Actual results could differ materially based upon a number of factors including, but not
limited to, risks attending litigation and government investigation, inability to raise additional
capital or find strategic partners, leverage and debt service, governmental regulation, dependence
on key personnel, competition, including competition from other manufacturers of gun locks, and gun
cleaning kits, costs and risks attending manufacturing, expansion of operations, market acceptance
of the Companys products limited public market and liquidity, shares eligible for future sale,
the Companys common stock (Common Stock) being subject to penny stock regulation and other risks
detailed in the Companys filings with the United States Securities and Exchange Commission (SEC
or Commission).
PART
I
ITEM 1. DESCRIPTION OF BUSINESS
(1) History and Business Development.
We were incorporated as a Florida corporation in July 1998, under the name DAC Technologies of
America, Inc. for the purpose of succeeding to the interest of DAC Technologies of America, Inc.,
an Arkansas corporation (DAC Arkansas). In September 1998, we purchased substantially all of the
assets of DAC Arkansas. DAC Arkansas, formed as an Arkansas corporation in 1993, may be deemed to
be a predecessor of our company. DAC Arkansas commenced operations with the manufacture of various
safety products, which were eventually acquired by us. Our principal owners and management held
similar positions with DAC Arkansas. We have continued the operations of DAC Arkansas without any
significant changes. In July 1999, we changed our name to DAC Technologies Group International,
Inc.
We have not been involved in any bankruptcy, receivership or similar proceeding. Except as
set forth herein, we have not been involved in any material reclassification, merger,
consolidation, or purchase or sale of a significant amount of assets not in the ordinary course of
business.
Our primary business is the sale of gun maintenance and hunting and camping accessories, and
to a lesser degree, gun safety; our target consumer base is sportsmen, hunters and outdoorsmen, and
recreational enthusiasts.
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(2) Business Plan
We are in the business of developing, outsourcing the manufacture and marketing of, various
consumer products, patented and non-patented. Our products were initially 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. Beginning in 2003, with the
introduction of our line of GunMaster® gun cleaning kits, we have shifted our emphasis to gun
cleaning items and related gun maintenance accessories and away from gun locks and firearm safety
devices. This product line has continued to grow and now accounts for approximately 59% of the
Companys sales, whereas gun locks now account for approximately 11% of sales. The percentage
decline is not due to a numerical decline in the volume of gun lock sales but rather the increased
sales volume of other product areas.
In 2005, we added a line of meat processing items, which is consistent with our business
philosophy of marketing products to sportsmen, hunters, outdoorsmen, and recreational enthusiasts.
We have continued to develop products in the hunting and camping area, adding a game processing kit
(knife set) in 2006, and an aluminum camping table and turkey hunting seat in 2007. In 2007,
hunting and camping accounted for approximately 28% of sales. In 2008, the Company added a new,
large roll-top camping table to this area.
In December 2007, the Company began shipping three new cleaning dusters as the first items in
the household cleaning area. The Company will continue to expand this product line, and has added
new items in 2008.
Although a significant portion of our business is with the mass-market retailer Wal-Mart
(approximately 66%), we have been able to considerably increase our business with large sporting
goods retailers, distributors and catalog companies.
The majority of our products are manufactured and imported from mainland China and shipped to
a central location in Little Rock, Arkansas for distribution.
The Companys business plan and strategy for growth continues to focus on:
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Increased penetration of our existing markets, particularly in
the gun cleaning market and accessories |
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Development of new products for the hunting and camping
market and expanding into the household market |
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Identification and development of products for new markets
in which the Company can be competitive due to its manufacturing
relationships |
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Identification and recruitment of effective manufacturers
representatives to actively market these products on a national and
international basis |
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Aggressive cost containment, both in operating expenses and
manufacturing costs |
Management believes that continued growth would require the Company to continually innovate
and improve its existing line of products to meet consumer, industry and governmental demands. In
addition, we must continue to develop or acquire new and unique products that will appeal to gun
owners, as well as non-gun related products for the expansion of our sporting goods customer base.
In addition to our traditional products, our management is actively pursuing initiatives which
may add complimentary business and products. 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 which compliment our current line of products, management hopes to leverage these
opportunities to not only develop new sources of revenue, but to strengthen the demand for our
existing products.
(3) Products
A. Introduction.
Our products were initially security related, evolving from various personal, home and
automotive electronic security devices, to firearm safety devices such as gunlocks, trigger locks,
cable locks and security safes. Beginning in 2003, we shifted our emphasis to gun cleaning and
maintenance items, and in 2005 began adding new items in the hunting and camping area.
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 trading
company and manufacturers, who are responsible for the tooling, manufacture and packaging of our
products.
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Gun Maintenance. We market over forty (40) different gun cleaning kits and rod
sets used to clean and maintain virtually any firearm on the market. These kits are
solid brass, and consist of universal kits designed to fit a variety of firearms,
caliber specific kits, as well as replacement brushes, mops, etc. These kits are
available in solid wood or aluminum cases, as well as blister packed. We also carry a
full line of replacement pieces for each kit. We also market several kits that have
been privately labeled for certain customers. This product area accounts for 59% of
our business. |
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Hunting and Camping. This category includes three meat-processing items,
Sportsmans Lighter, game processing kit, two aluminum camping tables and turkey
hunting seat. This product area accounts for 28% of our business. |
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Gun Safety. We market twelve (12) different gun safety locks and five security
and specialty safes. The locks composition range from plastic to steel and keyed
trigger locks to cable locks. The security safes are of heavy-duty, all steel
construction and are designed |
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for firearms, jewelry and other valuables. Eight of the Companys gun locks and two of
the safes have been certified for sale consistent with the standards set out by the
State of California. These California standards have been adopted by other states
and by a variety of gun manufacturers. This product area accounts for 11% of our
business. |
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Other Products. We market four (4) different electronic security devices
designed to protect the person. These include our Body Alarm, Key Alert, Glass Window
Alert and Patient Alarm. For 2007, the Companys household cleaning items are also
included in this category. |
(4) Manufacturing, Suppliers and Distribution.
Through our foreign and domestic manufacturing agents, we manufacture, design and build our
tooling, molds and products. Currently, at least 99% of our products are manufactured in mainland
China. We customarily develop our manufacturing through trading companies located in China. Our
principal agent is MDD Trading, Ltd., which is a trading company/agent that is responsible for
locating manufacturers for our products. These companies typically provide us with price lists for
the manufacture and tooling of our products, which we may or may not negotiate. The products are
then purchased from the manufacturers by the trading companies and sold to us at marked-up costs.
We believe our relationships with our suppliers and manufacturers are satisfactory.
Nonetheless, we are dependent upon our primary Chinese supplier continuing in business and its
ability to ship to the United States, but believe that we could replace this supplier, if required
to, at similar quality and terms. However, should any of the manufacturers cease providing for us,
we believe they can be replaced within 30 days, without difficulty, and at competitive cost, due to
the numerous manufacturing facilities in China capable of manufacturing our products.
Our administrative offices and warehouse facilities are located in Little Rock, Arkansas; our
executive office is located in Miami Beach, Florida. We distribute the majority of our domestic,
and certain of our international business out of our Little Rock facility. Most of our
international business is shipped directly to our customers direct from the Shanghai, China
location. Products are delivered to our Little Rock facility complete and ready for delivery to
our customers. Countries outside the U. S. where we have a presence include: Ireland/England,
France, Germany, Russia, Canada, New Zealand and Australia.
We utilize both internal sales personnel and commissioned independent sales
representatives. We use sales promotions and sales development activities to provide assistance
to the independent sales representatives through the use of brochures, product samples and
demonstration products. We also utilize trade shows, both on a regional and national level to
promote our products and to attract qualified sales representatives.
Our management attempts to maintain sufficient inventory levels to meet customers demands,
but there can be no assurance that we will be successful in doing so. Turnaround time from the
date we place an order with our manufacturers until the product is received in our distribution
center is normally between four to six weeks. This quick turnaround time allows us to maintain
minimum inventory levels. However, since we outsource our manufacturing, a good portion of which
is done in China, it is difficult to predict the efficiency
of our vendors. Outsourcing to a foreign country also subjects our manufacturing to the risk
of political instability, currency fluctuation and reliability. See, Risk Factors.
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(5) Competition
We operate in a very competitive industry, dominated by national and international companies
with well-established brands, all of whom are better capitalized, have more experience in our
industry and have established varying degrees of consumer loyalty. There are no assurances we will
ever be successful in establishing our brands or penetrating our target markets. Our products
compete with other competitors gun cleaning kits, gunlocks and hunting and camping accessories.
Many of these products are more widely known than the Companys products. While we believe that our
products are favorably priced to comparable products on the current market, we nevertheless expect
competitors to develop and market similar products at competitive prices, possibly reducing the
Companys sales or profit margins or both. (See, Risk Factors)
Some of our competitors in the business sectors which we operate in are:
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Gun Safety Master Lock (which presently controls 60%-70% of the market),
Smith & Wesson, and Shot Lock. |
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Gun Cleaning Kits Outers and Hoppes |
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Security Safes Sentry Safes, GunLocker and Gun Vault. |
We are subject to competition that is expected to intensify in the future because we
believe that the number of competitors is increasing. There are no significant barriers to entry
into our markets. We feel our greatest difficulties in competing are due to our competitors
generally being bigger, better-known, and having greater resources including capital and personnel.
We realize it is important to achieve brand name recognition in establishing a market share,
which, in turn generates additional market share, giving consumers preferences for brand names. We
believe that while brand names operate effectively in mainstream product distribution, there is
significant opportunity for lesser-known names with specific products and solutions that appeal to
consumers. The keys to our maintaining a competitive position are product design, pricing, quality
of the product and the maintenance of favorable relationships with various mass merchandisers.
(6) Market and Customers.
The ultimate users of our products include hunters, gun owners, sportsmen and outdoor
enthusiasts. Because of the uncertain size of the potential market for our products and the number
of competitors, we cannot state, with any degree of certainty, the size of our market share. For
example, the most recent year that the American Firearms 2008 web site reports statistics
regarding hunting licenses, was 1994. In that year, there were 15, 343,000 paid license holders. A
paid license holder is defined as one individual, regardless of the number of licenses owned.
License holders, who hunt in multiple states, will be counted in each state where they hunt.
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The American Firearms Industry report also published that the number of guns owned in the U.S.
approximated 200 million (today estimated at 240,000,000), including 60-65 million handguns. In
addition, it is reported that there are approximately 60-65 million gun owners of which 30-35
million own handguns.
A 2005 report published in the Pediatrics online journal found that about 1.7 million children
live in homes where there are unlocked and loaded guns. Most gun manufacturers already provide
some kind of lock with new firearms, but the practice is voluntary. The federal legislation that
would protect the firearm industry from lawsuits when guns are used to commit a crime includes an
amendment that would require locks, or another safety device, to be sold with every handgun. Seven
states, including California, already require that locks be sold with some firearms.
Although we sell our products both foreign and domestically, our U.S. sales account for 98% of
our overall revenues.
Our primary customer base can be broken down as follows:
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National retail chains such as Wal-Mart and Kmart (representing 67% of sales, Wal-Mart
accounted for 66% of our total sales revenues); |
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Distributors such as Dicks Sporting Goods, RSR Group, Inc., Jerrys Sport Center, Inc,,
Acu-Sport Corp., and Cabelas Catalogue Co. (representing 17% of sales); |
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Gun manufacturers such as Savage Arms, Browning, Marlin, Glock and SIG-Arms (representing
5% of sales); and |
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Regional retail chains and sole proprietors (representing 11% of sales). |
While our arrangements with customers vary, we generally sell on the basis of purchase orders
rather than fixed contracts. A purchase order represents a written contract to purchase a
specified product(s) at a specified price. Any future orders from a particular customer would be
dependant upon that customers ability to sell the product and a desire to re-order. Some
customers do issue blanket purchase orders, which request delivery of a specified quantity over a
specified period of time.
Credit is extended to customers, generally on 30 or 60-day terms. Credit approval is
performed by the Companys factor. Any credit approved by the factor is on a non-recourse basis,
thus there is no risk of loss due to non-payment to the Company. For any customers whose credit is
not approved by the factor, the Company will make other arrangements, such as prepayment or COD
(Cash on Delivery).
The Company does have a limited warranty on most of its products, typically for one year from
date of purchase. The Company does accept return of defective products, and will either replace at
no charge or issue credit to the customer for the defective product. The cost to the Company for
defective products in 2007 was less than 1.6% of sales.
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The Company maintains a standard price list for its customers, depending upon whether they are
a distributor or a dealer. This protects our distributor customers from having to compete with the
Company for our dealer customers. The Company does not set mandatory retail pricing for its
customers to use.
(7) Intellectual Property.
We believe that protection of proprietary rights to our products is important because,
as we are in a highly competitive market, a patent provides us with a competitive advantage by
limiting or eliminating similarly designed competitive products. To this end, we have obtained
U.S. patents on certain of our products as follows:
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Patent No. |
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Expiration |
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TVP095 Trigger Lock |
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Des. 375,342 |
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2009 |
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SWA 03 SWAT Steering Wheel Alarm |
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Des. 365,774 |
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2009 |
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KAL 201 Personal Safety Alarm |
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Des. 355,863 |
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2008 |
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Key Chain Alarm |
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5,475,368 |
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2008 |
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GWA 001 Glass/Window Alarm |
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Des. 371,086 |
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2009 |
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Defense Spray and Flashlight |
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Des. 375,994 |
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2009 |
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Gun Cleaning Kit |
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7,020,994B2 |
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2024 |
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In October 2006, the Companys application to trademark the name GunMaster was granted by
the U. S. Trademark office under Registration Number 3,161,436.
To date, we have not registered or trademarked any of our product names except for the
(GunMaster®). (See Risk Factor) We rely primarily on our patents and licensing arrangements
with third parties to avoid infringing on the products of others. We also use the services of
patent attorneys to insure that our unlicensed and unpatented products do not infringe. We dont
patent or trademark all our products because of the cost and we have been advised by patent counsel
that certain of the products are not patentable.
Depending upon the development of our business, we may also wish to develop and market
products, which incorporate patented or patent-pending formulations, as well as products covered by
design patents or other patent applications.
While we may seek to protect our intellectual property, in general, there can be no assurance
that our efforts to protect our intellectual property rights through copyright, trademark and trade
secret laws will be effective to prevent misappropriation of our products. See, Risk Factors.
Our failure or inability to protect our proprietary rights could have a material adverse affect on
our business, financial condition and results of operations. Moreover, inasmuch as we will often
seek to manufacture products, which are similar to those
manufactured by others, it is critical for us to ensure that our manufactured products do not
infringe upon existing patents of others.
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(8) Governmental Regulations.
Several federal laws, including the National Firearms Act (1934), Gun Control Act (1968),
Firearms Owners Protection Act (1986), Brady Handgun Violence Prevention Act (1993), the 1994
Omnibus Crime Control Act and other laws, regulate the ownership, purchase and use of handguns.
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.
In March 2008, the U. S. Supreme Court heard argument in the case of District of Columbia vs.
Heller, relating to the issue of whether the gun control laws of Washington, D. C. on
non-government persons violated the Second Amendment to the U. S. Constitution, the right to bear
arms. The city is challenging the decision of the D.C. Circuit Court, which said that, The Second
Amendment protects an individual right to keep and bear arms, and is not limited to people serving
in a modern militia. It is unknown what impact, if any, a
ruling upholding the D.C. Circuits decision will have on
our business.
In addition to federal gun laws, most states and some local jurisdictions have imposed their
own firearms restrictions. 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 products will increase.
(9) Research and Development.
Research and development costs are expensed as incurred. We develop our products internally,
utilizing the expertise of our manufacturers, input from an engineering consulting firm and input
from our customers. Any R & D cost incurred by our manufacturers is passed on to us in the pricing
of the tooling, molds and products. We do not pass such costs onto our customers. Because of our
close relationships with our customers, we are able to determine the level of interest in a
particular product before investing significant time or capital in its development. Once a
potential new product is identified, we utilize the services of a patent attorney to assure that we
do not infringe upon anyones patent rights. We also design our own packaging internally.
Working closely with our manufacturers and engineers, a final design for product and cost
estimations are completed. If management determines that a product can be produced at competitive
prices, and the interest level justifies production, we proceed with having tooling made. We own
the molds and tooling for all of our gunlock products. After pre-production samples are approved,
full production begins.
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(10) Environmental Laws.
We incur no costs and suffer no adverse effects by complying with environmental laws (federal,
state and local).
(11) Employees.
We currently employ eleven (11) employees, all of whom are full-time: President & Chief
Executive Officer, Chief Financial Officer, Vice President of Manufacturing, Salesman, Information
Systems Tech, accounting clerk, receptionist/clerk, shipping manager and three full-time warehouse
workers. There are no collective bargaining agreements.
(12) Reports to Security Holders.
We file reports with the SEC as a small business issuer. Copies of this report, including
exhibits to the Report and other materials filed with the SEC that are not included herein, may be
inspected and copied, without charge, at the Public Reference Room, 450 Fifth Street, N.W.,
Washington, DC 20549. Information on the operation of the Public Reference Room may be obtained by
calling the Commission at 1-800-SEC-0330. In addition, the Commission maintains an Internet site
on the World Wide Web at http://www.sec.gov that contains reports, proxy and information
statements and other information regarding registrants that file electronically with the
Commission.
(13) Certain Risk Factors.
Historically, the Company has achieved growth by the development of new products. There can
be no assurance that the Company will be able to continue to develop new products, to sustain rates
of growth and profitability in future periods. Any future success that the Company may achieve
will depend upon many factors which 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. Uncertainties and factors that could cause actual results
or events to differ materially from those set forth or implied, including without limitation:
If we are to expand our operations, we may need additional capital. Our ability to timely
expand our product operations and, in particular, the production and marketing of our products is
largely dependent upon our revenues or the acquisition of additional funding. In the event that
additional capital is not obtained or our revenues fall off, we may be unable to timely complete
and/or implement our plans to expand our operations. While we believe we have accurately identified
strategic and viable business opportunities to pursue, there is no assurance that these will become
profitable operations. Technology is a rapidly developing industry and our success is dependent on,
among other things, developing commercially acceptable products
and pursuing the correct distribution channels.
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Our growth program and future profitability remains uncertain. We believe that operating
results will be adversely affected if start-up expenses associated with our new product lines are
incurred without sufficient revenues. Moreover, future events, including unanticipated expenses or
increased competition could have an adverse effect on our long-term operating margins and results
of operations. Consequently, there can be no assurance that our Companys growth program will
result in an increase in the profitability of our operations.
Our success depends on maintaining relationships with key customers. We have several
customers upon which we depend on for the sale of a large percentage
of our products. For example, 66% of our business is through Wal-Mart. Customer orders are dependent upon their markets
and may vary significantly in the future based upon the demand for our products. The loss of one
or more of such customers, or a declining market in which such customers reduce orders or request
reduced prices, could have a material adverse effect on our business.
We depend on purchase orders and have no long-term contractual relationship with our
customers. Our business relationship is based upon purchase orders with our customers. We have no
contracts, which require any of our customers to continue to purchase our products. Although we
have had long-term relationships with many of our customers, there can be no assurance that such
relationships will continue or that customers will continue ordering our products.
We depend on foreign contract manufacturers for substantially all of our manufacturing
requirements. During 2007 the Company purchased 99% of its products from one major supplier, who
in turn distributes the manufacturing to multiple companies in mainland China. We also rely on
contract manufacturers to procure components, assemble, and package our products. The inability of
our contract manufacturers to provide us with adequate supplies of high quality products or the
loss of any of our contract manufacturers would have an adverse effect on our business. Because
our major supplier and contract manufacturers are located in mainland China, we are exposed to
risks of political uncertainty, including United States foreign trade treaties and foreign laws.
Any disruption in our relationships with any of these vendors or reductions in the production
of the material supplied could, in each case, adversely affect our ability to obtain an adequate
supply of our products and could impose additional operational costs associated with sourcing raw
materials from new suppliers. Although the Company is dependent upon this supplier continuing in
business and its ability to ship to the United States, we believe that we could replace this
supplier, if required to, at similar quality and terms. Nevertheless, while we have no long-term
contract with our supplier or manufacturers, we have had long-term relationships with them and
believe such relationship is good, and do not currently anticipate any material shortages or
disruptions in supply from this vendor or manufacturers. .
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The increased cost of raw materials and manufacturing has adversely affected our profits.
Over the past year, we have experienced increased manufacturing costs due to the increase in the
cost of raw materials used in our products such as steel, plastic, wood and brass. The price and
availability of production materials for our products are affected by a wide variety of
interrelated economic and other factors, including alternative uses of materials and their
components, changes in production capacity, energy prices, commodity prices, and governmental
regulations. Specifically, our manufacturing experienced cost increases related to steel, brass and
plastic purchases. Industry competition and the timing of price increase by suppliers and
manufacturers limit to some extent our ability and the ability of other industry participants to
pass raw material cost increases on to customers. We are not advised of the source or availability
of the raw materials for our manufacturers. Although alternative sources exist from which we could
obtain such raw materials, we do not currently have supply relationships with any of these
alternative sources and cannot estimate with any certainty the length of time that would be
required to establish such a supply relationship, or the sufficiency of the quantity or quality of
materials that could be so obtained.
Since we have minimal control over the economics that dictate these price increases, we have
suffered a corresponding reduction in profit since we are not always able to pass the additional
cost on to our customers.
While we manufacture a variety of products, we rely primarily on the sale of gun cleaning kits
and hunting and camping accessories as our major source of revenue. Although we sell a number of
different products, we rely primarily on two product lines gun cleaning kits and hunting and
camping accessories-which account for approximately 87% of our total revenues. Should our sales of
either of these product lines significantly decline due to the loss of customers, or a declining
market in which such customers reduce orders or request reduced prices, it could have a material
adverse effect on our business.
We may be unable to compete favorably in the highly competitive markets in which we operate.
The manufacture and sale of all of our products is highly competitive and there are no substantial
barriers to entry into the market. Most of our competitors are large, well-established companies
with considerably greater financial, marketing, sales and technical resources than those available
to us. Additionally, many of our present and potential competitors have research and development
capabilities that may allow such competitors to develop new or improved products that may compete
with our product lines. These companies may succeed in developing proposed products that are more
effective or less costly than our proposed products or such companies may be more successful in
manufacturing and marketing their proposed products. An increase in competition could result in a
loss of market share.
We may not be able to attract and retain the qualified personnel we need to succeed in the
future. At present the success of our company is highly dependent on our Chief Executive Officer,
David A. Collins and our Chief Financial Officer, Robert Goodwin. Our future success will depend
in part on our ability to attract and retain qualified personnel to manage the development and
future growth of our company. There can be no assurance that we will be successful in attracting
and retaining such personnel.
11
We may be adversely affected by legislation and regulation over firearms. The business of all
producers and marketers of firearms and firearms parts is subject to thousands of federal, state
and local laws
and governmental regulations and protocols. The basic federal laws are the National Firearms Act,
the Federal Firearms Act, and the Gun Control Act of 1968. These laws generally prohibit the
private ownership of fully automatic weapons and place certain restrictions on the interstate sale
of firearms unless certain licenses are obtained. From time to time, congressional committees
review proposed bills and various states enact laws relating to the regulation of firearms. These
proposed bills and enacted state laws generally seek either to restrict or ban the sale and, in
some cases, the ownership of various types of firearms. When such laws restrict the ownership of
guns, they will have a material adverse effect on our business since our major products are gun and
hunting related. Such laws, rules, regulations and protocols are subject to change. There can be no
assurance that the regulation of firearms will not become more restrictive in the future and that
any such restriction would not have a material adverse effect on the business of the Company.
We extend credit to our customers and should our customers default on their obligations to
us, we may be subject to credit risk. The Company provides credit in the normal course of business
to its customers and performs ongoing credit evaluations of its customers. Approximately 94% of
these trade receivables were subject to a factoring agreement. These accounts are factored on a
non-recourse basis, which reduces the Companys exposure to credit risk. We also maintain
allowances for doubtful accounts and provisions for returns and credits based on factors
surrounding the specific customers and circumstances. The Company generally does not require
collateral from its customers. Credit risk is considered by management to be limited due to the
Companys customer base and its customers financial resources.
With the exception of Gunmaster we have not to date registered or trademarked any of our
product names. While we may seek to protect our intellectual property, and have trademarked the
GunMaster® name, there can be no assurance that our efforts to protect our intellectual property
rights through copyright, trademark and trade secret laws will be effective to prevent
misappropriation of our products. Our failure or inability to protect our proprietary rights could
have a material adverse affect on our business, financial condition and results of operations.
Among other things, it could foster more competition or create identical products sold under
different labels. Moreover, inasmuch as we will often seek to manufacture products that are similar
to those manufactured by others, it is critical for us to insure that our manufactured products do
not infringe upon existing patents of others. Patent and other type intellectual property lawsuits
are extremely expensive to prosecute or defend, and in either case success cannot be assured.
The Company has engaged in several related-party transactions, which were not effected in
arms-length transactions. On occasion, we have engaged with related parties, including our chief
executive officer and certain shareholders in related party transactions. These transactions
include loans made by and to the Company, and were not arms-length. See, Certain Relationships and
Related Transaction at Item 12 below. There has been no independent evaluation of the
transactions, and therefore there can be no assurance that these transactions are fair to the
Company.
We face risks associated with international trade and currency exchange. Annually, we purchase
approximately $10-$11 million of inventory from the Chinese manufacturers and suppliers. This
exposes us to risk from foreign exchange rate fluctuations. Political and economic conditions
abroad may result in increasing the cost of our foreign manufactured products, particularly those
manufactured in mainland China. Protectionist trade legislation in either the United States or
foreign countries, such as a
change in the current tariff structures, export or import compliance laws, or other trade
policies, could reduce our ability to import our products from foreign manufacturers and suppliers.
While we transact business predominantly in U.S. dollars and bill and collect most of our sales in
U.S. dollars, our revenues result from goods that were manufactured or purchased, in whole or in
part, from Chinese manufacturers and suppliers in Renminbi currency, thereby exposing us to some
foreign exchange fluctuations.
12
We face risks associated with international activities. These activities expose us to various
economic, political, and other risks, including the following:
|
|
|
Compliance with local laws and regulatory requirements as well as changes in those laws and requirements; |
|
|
|
|
Foreign exchange rate fluctuations; |
|
|
|
|
Limitations on exports; |
|
|
|
|
The possibility of appropriation of our assets without just compensation; |
|
|
|
|
Overlap of tax issues; |
|
|
|
|
Tariffs and duties; |
|
|
|
|
The burdens and costs of compliance with a variety of foreign laws; and |
|
|
|
|
Political or economic instability in countries in which we conduct business, including
possible terrorist acts. |
Changes in policies by the United States or foreign governments resulting in, among other
things, increased duties, higher taxation, currency conversion limitations, restrictions on the
transfer or repatriation of funds, or limitations on imports or exports also could have a
material adverse effect on us. Any actions by foreign countries to reverse policies that
encourage foreign trade also could adversely affect our operating results. In addition, U.S.
trade policies, such as most favored nation status and trade preferences, could affect the
attractiveness of our services to our U.S. customers.
ITEM 2. DESCRIPTION OF PROPERTY
Our corporate headquarters are located at 12120 Colonel Glenn Road, Suite 6200, Little Rock,
Arkansas 72210. This location consists of approximately 7,500 square feet of office space. All of
the administrative and accounting functions are performed at this location, as well as some sales.
This space is leased at a monthly rent of $7,757 for four years, and expires January 31, 2011.
There is one four-year renewal option. The lease provides for a three percent increase each year
beginning in the third year.
The Companys distribution center is located at 3700 Old Shackleford Road, Little Rock,
Arkansas 72204. This facility consists of 102,000 square feet of warehouse space and
approximately 800 square feet of office space. This warehouse space is leased at a monthly rent of
$9,366.08 for four years, and expires December 31, 2010. There is one four-year renewal option.
The lease provides for an increase in the monthly rent of $425 beginning in the second year.
The
Company also maintains an executive office in Miami Beach, Florida at
the residence of its Chief Executive Officer, David A. Collins. The Company pays a monthly office allowance to Mr. Collins of $5,500, for approximately 1200 square feet and secretarial support. There
is no lease agreement
for these premises. This office arrangement was not the product of arm-length negotiation;
however, the Company has determined the arrangement to be competitive with comparable office space
and secretarial support.
13
ITEM 3. LEGAL PROCEEDINGS
In December 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 three policies. On April 30, 2007, the
Company settled this suit by agreeing to pay Continental Western a 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 was 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 an appeal 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.
14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There are no matters submitted during the fourth quarter of the fiscal year covered by this
report to a vote of security holders, through the solicitation of proxies or otherwise.
PART
II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
On June 19, 2000, our common stock began trading on the
NASDAQ Over-the-Counter Bulletin Board market under the trading symbol
DAAT. The high and low bid information for each quarter is presented
below. These prices reflect inter-dealer prices, without retail markup,
markdown or commission and may not represent actual transactions.
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
High |
|
Low |
March 31, 2006
|
|
$ |
2.42 |
|
|
$ |
2.10 |
|
June 30, 2006
|
|
$ |
2.30 |
|
|
$ |
2.00 |
|
September 30, 2006
|
|
$ |
2.05 |
|
|
$ |
1.73 |
|
December 31, 2006
|
|
$ |
2.54 |
|
|
$ |
2.00 |
|
March 31, 2007
|
|
$ |
2.48 |
|
|
$ |
1.26 |
|
June 30, 2007
|
|
$ |
1.47 |
|
|
$ |
1.10 |
|
September 30, 2007
|
|
$ |
1.35 |
|
|
$ |
1.06 |
|
December 31, 2007
|
|
$ |
1.33 |
|
|
$ |
0.82 |
|
As of March 13, 2008, there were approximately 65 holders of record, excluding those held in
street name, of our 6,032,899 shares of common stock outstanding.
We have not paid a cash dividend on the common stock since inception. The payment of
dividends may be made at the discretion of our Board of Directors and will depend upon, among other
things, our operations, our capital requirements and our overall financial condition. Although
there is no restriction to pay dividends as of the date of this Report, we have no
present intention to declare dividends.
We have an Equity Compensation Plan in place in order to promote the interests of the
Company by enabling us to motivate, attract, and retain the services of persons upon whose
judgment, efforts, and contributions the success of the Companys business depends. The maximum
number of shares that can be
granted under this Plan is 1,000,000 shares of common stock.
15
|
|
|
|
|
|
|
|
|
|
|
Equity Compensation Plan Information |
|
|
|
|
|
|
Number of |
|
|
|
|
|
|
securities |
|
|
|
|
|
|
remaining available |
|
|
Number of securities |
|
|
|
for future issuance |
|
|
to be issued upon |
|
Weighted-average |
|
under equity |
|
|
exercise of |
|
exercise price of |
|
compensation plans |
|
|
outstanding options, |
|
outstanding options, |
|
(excluding securities |
|
|
warrants and rights |
|
warrants and rights |
|
reflected in column (a)) |
Plan category |
|
(a) |
|
(b) |
|
(c) |
Equity
compensation
plans
approved by
security holders
|
|
None none outstanding
|
|
zero none outstanding
|
|
|
1,000,000 |
|
Equity
compensation
plans not
approved by
security
holders
|
|
None none outstanding
|
|
zero none outstanding
|
|
None
|
Total
|
|
None
|
|
None
|
|
|
1,000,000 |
|
ITEM 6. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following Management Discussion and Analysis of Financial Condition is qualified by
reference to and should be read in conjunction with, our Consolidated Financial Statements and the
Notes thereto as set forth at the end of this document. We include the following cautionary
statement in this Form 10K-SB for any forward-looking statements made by, or on behalf of, the
Company. Forward-looking statements include statements concerning plans, objectives, goals,
strategies, expectations, future events or performances and underlying assumptions and other
statements, which are other than statements of historical facts. Certain statements contained
herein are forward-looking statements and accordingly, involve risks and uncertainties, which could
cause actual results or outcomes to differ materially from those expressed in the forward-looking
statements. The Companys expectations, beliefs and projections are expressed in good faith and
are believed by the Company to have a reasonable basis, including without limitations, managements
examination of historical operating trends, data contained in the Companys records and other data
available from third parties, but there can be no assurance that managements expectations, beliefs
or projections will result or be achieved or accomplished.
(1) Managements Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations
The
Company reported net income of $340,894 on net sales of $14,777,645 for 2007 as compared
to net income of $752,838 on net sales of $15,475,880 for 2006. Net
income decreased $411,944, or
55%, while net sales decreased $698,235, or 5%. Earnings per share decreased from $0.12 in 2006,
to $0.06 in 2007.
16
The most significant factor affecting the decrease in net income was the decrease in gross
profit margins from 29% in 2006 to 27% in 2007. This decrease is a direct result of price
increases from the Companys manufacturers for many of its products, particularly in the gun
cleaning and maintenance area. Rising commodity prices, particularly for brass, metal, wood and
plastic resulted in increased costs for raw materials, which were passed on to the Company in price
increases. Also contributing to the price increases was the devaluation of the US dollar versus
the Chinese Renminbi (RMB) over the past two years.
Significant operating items for the past two years are summarized below:
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
Net sales |
|
$ |
14,777,645 |
|
|
$ |
15,475,880 |
|
Gross profit |
|
$ |
3,938,674 |
|
|
$ |
4,490,316 |
|
Operating expenses |
|
$ |
3,054,455 |
|
|
$ |
2,959,983 |
|
Income from operations |
|
$ |
884,219 |
|
|
$ |
1,530,333 |
|
Income before income taxes |
|
$ |
557,841 |
|
|
$ |
1,224,968 |
|
Net income |
|
$ |
340,894 |
|
|
$ |
752,838 |
|
Earnings per share |
|
$ |
0.06 |
|
|
$ |
0.12 |
|
The decrease in 2007 net sales of $698,235 represents a 5% decrease over 2006. Net sales of
the Companys gun cleaning kits and accessories decreased $2,213,415, or 20%, while net sales in
the hunting and camping area increased $1,458,922, or 54%, in 2007 versus 2006. This shift also
had an affect on gross margins, as margins on hunting and camping items are lower than for gun
cleaning kits.
Operating expenses increased from $2,959,983 in 2006 to $3,054,455 in 2007. This is an
increase of $94,472, or 3% . Selling and shipping expenses decreased
$124,233, or 7% over 2006.
This decrease was due mainly to cost saving measures initiated in the shipping department, most
notably in freight costs, which decreased 30%. General and administrative expenses increased by
$218,705, or 20% over 2006. Included in this increase was a one-time expense to settle a lawsuit
with the Companys former insurance carrier in the amount of $146,500. The Company experienced
increases in its liability insurance premiums of $60,701 and accounting and auditing fees of
$29,279. Without these increases, over which the Company has little control, general and
administrative expenses decreased over 2006.
Financial Condition
A summary of the significant balance sheet items is summarized below:
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
Accounts receivable |
|
$ |
263,646 |
|
|
$ |
532,028 |
|
Due from factor |
|
$ |
765,510 |
|
|
$ |
1,282,208 |
|
Inventories |
|
$ |
4,925,275 |
|
|
$ |
3,130,825 |
|
Income taxes receivable |
|
$ |
153,870 |
|
|
$ |
370,817 |
|
Accounts payable-trade |
|
$ |
2,393,050 |
|
|
$ |
1,640,445 |
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
$ |
6,662,270 |
|
|
$ |
5,799,626 |
|
Total current liabilities |
|
$ |
2,640,446 |
|
|
$ |
1,905,674 |
|
Net working capital |
|
$ |
4,021,824 |
|
|
$ |
3,893,952 |
|
Total assets |
|
$ |
7,387,427 |
|
|
$ |
6,417,575 |
|
Stockholders equity |
|
$ |
4,713,881 |
|
|
$ |
4,478,801 |
|
17
Accounts receivable and due from factor
The Company maintains a factoring agreement wherein it assigns its receivables (on a
non-recourse basis). The factor performs all credit and collection functions, and assumes all
risks associated with the collection of the receivables. The Company pays a fee of 65/100ths of 1%
of the face value of each receivable for this service. In addition, in order to generate immediate
cash flow, the Company may borrow against the assigned receivables prior to their collection and is
charged interest on any such advances.
Accounts receivable on the Companys balance sheet represents those receivables that have not
yet been legally assigned to the factor. Due from factor represents the net equity the Company has
in its assigned receivables reduced by any funds advanced by the factor. At December 31, 2007 and
2006, these amounts are calculated as follows:
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
Total accounts receivable |
|
$ |
4,772,170 |
|
|
$ |
5,633,811 |
|
Less: assigned receivables |
|
|
(4,508,524 |
) |
|
|
(5,101,783 |
) |
|
|
|
|
|
|
|
Net accounts receivables |
|
$ |
263,646 |
|
|
$ |
532,028 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assigned receivables |
|
$ |
4,508,524 |
|
|
$ |
5,101,783 |
|
Less: Funds advanced |
|
|
(3,743,014 |
) |
|
|
(3,819,575 |
) |
|
|
|
|
|
|
|
Due from factor |
|
$ |
765,510 |
|
|
$ |
1,282,208 |
|
|
|
|
|
|
|
|
Inventories
Inventories increased $1,794,450, or 57% from 2006 to 2007. Of this increase,
approximately $1,200,000 is due to new products added during 2007, of which, $700,730 is from
the two new aluminum camping tables. The selling season for these tables begins in the spring
and runs through the summer. A small portion of the increase can be attributed to fourth
quarter 2007 sales falling short of what was anticipated.
Liabilities
Accounts payable increased $752,605, or 46% from 2006. Because a significant portion of
the Companys accounts payable is related to inventory purchases, the increased inventory levels
is reflected in the increase in accounts payable.
18
Liquidity and Capital Resources
Our primary source of cash is funds from our operations. We believe that external
sources of liquidity could be obtained in the form of bank loans, letters of credit, etc. We
maintain an account receivable factoring arrangement in order to insure an immediate cash flow.
The factor may also, at its discretion, advance funds prior to the collection of our accounts.
Repayment of advances are payable to the factor on demand. Should our sales revenues
significantly decline, it could affect our short-term liquidity. For the period ending December
31, 2007, our factor had advanced to us $3,743,014.
The Company has two demand notes with a local bank guaranteed by our CEO, David Collins.
The loans bear interest at 7.70% and mature in 2008. The principal collective balance
of these loans on December 31, 2007 totaled $150,376. We believe our revenues will be
sufficient to pay these obligations. If not, we will seek to refinance them or request our
shareholder to pay his guarantees.
Off-Balance Sheet Arrangements
The Company is a party to a lease arrangement for its executive offices. Information
pertaining to this arrangement is present in Item 2 Description of Property and Item 12
Certain Relationships and Related Transactions.
We do not have any transactions, arrangements, or other relationships with unconsolidated
entities that are reasonably likely to affect our liquidity or capital resources. We have no
special purpose or limited purpose entities that provide off-balance sheet financing, liquidity, or
market or credit risk support that engage in leasing, hedging, research and development services,
or other relationships that expose us to liability that is not reflected on the face of the
financial statements.
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 dollar. This will put pressure
on our margins and overhead costs, and wherever possible, these
increases will be passed on through sales price increases. Any strengthening of the US 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.
Critical Accounting Estimates
The Company prepares its consolidated financial statements in accordance with
accounting principles generally accepted in the United States of America. The Companys
significant accounting policies are discussed in detail in Note 2 to the consolidated financial
statements. Certain of these accounting policies, as discussed below, require management to make
estimates and assumptions about future events that could materially affect the reported amounts of
assets, liabilities, revenues and expenses and disclosure of contingent assets and liabilities.
Accounting estimates and assumptions discussed in this section are those that we
consider to be the most critical to an understanding of our consolidated financial statements
because they inherently involve significant judgments and uncertainties. For all of these
estimates, we caution that future events rarely develop exactly as forecast, and the best estimates
routinely require adjustment.
19
Long-lived Assets
Depreciation expense is based on the estimated useful lives of the underlying property and
equipment. Although the Company believes it is unlikely that any significant changes to the useful
lives of its property and equipment will occur in the near term, an increase or decrease in the
estimated useful lives would result in changes to depreciation expense.
The Company continually reevaluates the carrying value of its long-lived assets, for events or
changes in circumstances, which indicate that the carrying value may not be recoverable. As part
of this reevaluation, if impairment indicators are present, the Company estimates the future cash
flows expected to result from the use of the asset and its eventual disposal. If the sum of the
expected future cash flows (undiscounted and without interest charges) is less than the carrying
value of the asset, an impairment loss is recognized to reduce the carrying value of the long-lived
asset to the estimated fair value of the asset.
Patents and Trademarks
Amortization expense is based on the estimated economic useful lives of the underlying patents
and trademarks. Although the Company believes it is unlikely that any significant changes to the
useful lives of its patents and trademarks will occur in the near term, rapid changes in technology
or changes in market conditions could result in revisions to such estimates that could materially
affect the carrying value of these assets and the Companys future consolidated operating results.
ITEM 7. FINANCIAL STATEMENTS
Our
consolidated financial statements are contained in pages F-1 through
F-20 following.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
ITEM 8A. CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934, as amended (the Exchange Act), that are designed to
ensure that information required to be disclosed by us in reports we file or submit under the
Exchange Act is recorded, processed, summarized and reported within the time periods specified in
the Securities and Exchange Commissions rules and forms, and that such information is accumulated
and communicated to our management, including our principal executive officer and principal
financial officer, as appropriate, to allow timely decisions regarding required disclosure. In
designing and evaluating our disclosure controls and procedures, management recognized that
disclosure controls and procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and we necessarily are required
to apply our judgment in evaluating the cost-benefit relationship of possible disclosure controls
and procedures.
As of December 31, 2007, the Company carried out an evaluation, under the supervision and with
the participation of the Companys management, including the Companys principal executive officer
and principal financial officer, of the effectiveness of the design and operation of the Companys
disclosure controls and procedures. Based upon that evaluation, the Companys principal executive
officer and principal financial officer concluded the Companys disclosure controls and procedures
were not effective, because certain deficiencies involving internal controls constituted a material
weakness as discussed below. The material weakness identified did not result in the restatement of
any previously reported financial statements or any other related financial disclosure, nor does
management believe that it had any effect on the accuracy of the Companys financial statements for
the current reporting period.
MANAGEMENTS ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act.
Our internal control system was designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes, in
accordance with generally accepted accounting principles. Because of inherent limitations, a
system of internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate due to change in conditions, or that the degree of compliance with
the policies or procedures may deteriorate.
20
Based on its evaluation, our management concluded that there is a material weakness in our
internal control over financial reporting. A material weakness is a deficiency, or a combination
of control deficiencies, in internal control over financial reporting such that there is a
reasonable possibility that a material misstatement of the Companys annual or interim financial
statements will not be prevented or detected on a timely basis.
The material weakness relates to the monitoring and review of work performed by our principal
financial officer in the preparation of audit and financial statements, footnotes and financial
data provided to the Companys registered public accounting firm in connection with the annual
audit. All of our financial reporting is carried out by our principal financial officer, and we do
not have an audit committee. This lack of accounting staff results in a lack of segregation of
duties and accounting technical expertise necessary for an effective system of internal control.
In order to mitigate this material weakness to the fullest extent possible, all financial
reports are reviewed by the principal executive officer, as well as the Board of Directors for
reasonableness. All unexpected results are investigated. At any time, if it appears that any
control can be implemented to continue to mitigate such weakness, it is immediately implemented.
Within the next few months, management anticipates hiring sufficient accounting staff to implement
appropriate procedures for monitoring and review of work performed by our principal financial
officer.
This annual report does not include an attestation report of the Companys registered public
accounting firm regarding internal control over financial reporting. Managements report was not
subject to attestation by the Companys registered public accounting form pursuant to temporary
rules of the Securities and Exchange Commission that permit the Company to provide only
managements report in this annual report.
ITEM 8B. OTHER INFORMATION
There was no information reportable on Form 8K for the 2007 fourth quarter, which has not
otherwise been reported.
PART
III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
(1) Officers & Directors
The following sets forth the names and ages of our executive officers and directors.
Directors are typically elected at annual meetings of stockholders, and serve for the term for
which they are elected and until their successors are duly elected and qualified. The Company,
however, has not held an annual meeting for the election of its directors. Our officers are
appointed by the board of directors and serve at the boards discretion.
|
|
|
|
|
|
|
|
|
|
|
|
|
Name |
|
Age |
|
|
Position |
|
|
Term |
|
David A. Collins |
|
|
62 |
|
|
President, CEO, Director |
|
|
2007-2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert C. Goodwin |
|
|
51 |
|
|
CFO/Director |
|
|
2007-2008 |
|
21
David A. Collins is a founder of the Company and it predecessors, and previously served as its
President, CEO and Director from inception in 1993 until July 11, 2001. From July 2001 until May
2002, Mr. Collins served as a consultant to the Company, particularly in the areas of sales and
marketing. In May 2002, Mr. Collins was reappointed as President, CEO and Chairman upon the
resignation of James R. Pledger.
Robert C. Goodwin has served as the Companys CFO since its inception in July 1998, as well as
DAC Arkansas continuously since 1993. In July 1998, Mr. Goodwin was elected to the Companys
board.
(2) Compliance with Section 16(a) of the Securities Act of 1934
Section 16(a) of the Exchange Act requires the Companys directors, executive officers and
persons who own more than 10% of the Companys Common Stock (collectively, Reporting Persons) to
file with the SEC initial reports of ownership and changes in ownership of the Companys Common
Stock. Reporting Persons are required by SEC regulations to furnish the Company with copies of all
Section 16(a) reports they file. To the Companys knowledge, based solely on its review of the
copies of such reports received or written representations from certain Reporting Persons that no
other reports were required, the Company believes that during its fiscal year ended December 31,
2007, all Reporting Persons complied with all applicable filing requirements except that each of
the following Reporting Persons failed to timely file the following Reports:
|
|
|
|
|
|
|
Name
of Filer |
|
Form Type |
|
# Late Reports |
|
# Late Transactions |
David Collins
|
|
Form 4
|
|
two
|
|
three |
(3) Code of Ethics
Effective March 30, 2007, our Companys board of directors adopted a Code of Business
Conduct and Ethics that applies to all of our Companys officers, directors and employees. Our
Code of Business Conduct and Ethics and Compliance Program were filed with the Securities and
Exchange Commission as Exhibit 14.1 to our Form 10KSB for the year ended December 31, 2006,
filed on April 2, 2007. We will provide a copy of the Code of Business Conduct and Ethics and
Compliance Program to any person without charge, upon request. Requests can be sent to: Robert
C. Goodwin, CFO, DAC Technologies Group International, Inc., 12120 Colonel Glenn Road, Suite
6200 Little Rock, AR 72210.
(4) Committees of the Board
Our board of directors is of the view that it is appropriate for us not to have a standing
compensation or nominating committees because there are currently only two directors on our board
of directors, who are in frequent communication with each other as to all matters that would
ordinarily be handled by such committees. These directors have performed and will perform
adequately the functions of nominating and compensation committees. There has not been any defined
policy or procedure requirements for stockholders to submit recommendations or nomination for
directors. Our board of directors does not believe that a defined policy with regard to the
consideration of candidates recommended by stockholders is necessary at this time because we
believe that, given the stage of our development, a specific nominating policy would be premature
and of
little assistance until our business operations are at a more advanced level. The process of
identifying and evaluating nominees for directors is conducted by our board of directors. Based on
the information gathered, our board of directors then makes a decision on whether to recommend the
candidates as nominees for director. We do not pay any fee to any third party or parties to
identify or evaluate or assist in identifying or evaluating potential nominees.
22
None of our directors are
independent.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth summary information concerning the compensation received for
services rendered to us during the past two (2) fiscal years.
SUMMARY
COMPENSATION TABLE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Other |
|
|
|
|
Name and |
|
|
|
|
|
Salary |
|
|
Commission |
|
|
Compensation |
|
|
Total |
|
Principal Position |
|
Year |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
David A. Collins, PEO |
|
|
2007 |
|
|
|
70,000 |
|
|
|
453,245 |
|
|
|
66,000 |
|
|
|
589,245 |
|
|
|
|
2006 |
|
|
|
120,000 |
|
|
|
421,179 |
|
|
|
66,000 |
|
|
|
607,179 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert C. Goodwin,
PFO |
|
|
2007 |
|
|
|
77,400 |
|
|
|
|
|
|
|
|
|
|
|
77,400 |
|
|
|
|
2006 |
|
|
|
77,400 |
|
|
|
|
|
|
|
|
|
|
|
77,400 |
|
(1) Board of Directors
Our directors do not receive compensation in any form for their services as Directors.
(2) Employment Contracts and Other Compensation
David A. Collins serves in the capacity of Chairman and CEO under a five (5) year Employment
Agreement commencing December 1, 2005, and unless terminated according to its terms, is renewable
for three additional five-year terms. This Agreement may not be terminated by the Company except
for cause, defined as a felony conviction, or violation of the non-compete or confidentiality
provisions. If cause is found, Mr. Collins will cease to receive compensation. Furthermore, Mr.
Collins may terminate his agreement at any time upon 30 days advance written notice to the Company;
should he elect to do so, the Company will discontinue payment of benefits, except that any stock
options already granted will remain in force. Should Mr. Collins be terminated from his position with the Company, he agrees not to compete with
23
the Company for a period of twelve (12) months following the date of termination. Mr. Collins is
compensated both with salary and commissions on all sales generated by the accounts/customers of
Mr. Collins of between 3%-5%. In addition, for the years 2006
and 2007, David A. 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
1200 square feet and secretarial support. There is no lease agreement for these premises. This
office arrangement was not the product of arm-length negotiations; however, the Company has
determined the arrangement to be competitive with comparable office space and secretarial support.
All other officers and employees serve at the discretion of the Board of Directors, and do not
have employment contracts.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial ownership
of our common stock as of March 13, 2008 by (a) each person known by us to be the beneficial owner
of five (5) percent or more of the outstanding common stock and (b) all executive officers and
directors both individually and as a group. Included are any securities that any person or group
identified has the right to acquire within sixty (60) days pursuant to options, warrants, and
conversion privileges or other rights. Unless otherwise indicated in the footnotes to this table
and subject to community property laws where applicable, we believe that each of the shareholders
named in this table has sole or shared voting and investment power with respect to the shares
indicated as beneficially owned. Applicable percentages are based
upon 6,032,899 shares of common
stock outstanding.
(1) Security Ownership of Certain Beneficial Owners.
|
|
|
|
|
|
|
|
|
|
|
|
|
Name and Address of |
|
Number of Shares |
|
Percent |
Title of Class |
|
Beneficial Owner |
|
Beneficially Owned |
|
of Class |
Common Stock
|
|
Praetorian Capital Management LLC
Miami Beach, FL
|
|
|
1,215,000 |
|
|
|
20.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
David A. Collins
Miami Beach, FL
|
|
|
500,500 |
(1) |
|
|
8.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Bruce M. Stachenfeld
New York, NY
|
|
|
326,726 |
|
|
|
5.4 |
% |
|
|
|
(1) |
|
Includes 32,000 shares owned by the Collins Family Trust. David Collins acknowledges
beneficial ownership and control of the shares held in this Trust. The beneficiaries of
the Collins Family Trust are Payton P. Collins and David A. Collins, Jr. |
24
(2) Security Ownership of Management
|
|
|
|
|
|
|
|
|
|
|
|
|
Name and Address of |
|
Number of Shares |
|
Percent |
Title of Class |
|
Beneficial Owner |
|
Beneficially Owned |
|
of Class |
Common Stock
|
|
Robert C. Goodwin
N. Little Rock, AR
|
|
|
19,073 |
|
|
|
0.31 |
% |
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
David A. Collins
Miami Beach, FL
|
|
|
500,500 |
|
|
|
8.3 |
% |
There are no arrangements, which may result in a change in control of the Company.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
At December 31, 2007 and 2006, the Company has a non-interest bearing note receivable of
$178,465 and $130,531, respectively, from David A. Collins, Chairman and CEO. This note is due
December 31, 2008. This note was not negotiated in an arms-length transaction, and the Company
has not undertaken any independent evaluation to determine the fairness of the transaction.
At December 31, 2007 and 2006, the Company has a non-interest bearing note receivable
of $72,518 and $72,518, respectively, from DAC Investment and Consulting, Inc., a company
wholly-owned by David A. Collins, our Chairman and CEO. This note is due December 31, 2008.
This note was not negotiated in an arms-length transaction, and the Company has not undertaken any
independent evaluation to determine the fairness of the transaction.
David A. Collins, Chairman and CEO, has personally guaranteed loans obtained by the Company
from a local bank. The total of these loans at December 31, 2007 and 2006 was $150,376 and
$192,733, respectively. The notes are due on various dates in 2008. The Company intends to
refinance the loans when they mature; in the event they cannot be refinanced the Company believes
it will have adequate resources to pay off the loans. Mr. Collins has also personally guaranteed
repayment of funds borrowed by the Company under its factoring agreement. The amounts borrowed
under this factoring agreement at December 31, 2007 and 2006 were $3,743,014 and $3,819,575,
respectively. Although the Company has not undertaken any independent evaluation to determine the
fairness of the transaction, management believes that the terms of this transaction are at least as
favorable as the terms the Company could have obtained from an unaffiliated third party.
For the years 2007 and 2006, our Chief Executive Officer, David Collins, leased a portion of
his home in Miami, Florida to the Company, which serves as the Companys executive office. The
Company pays a monthly office allowance to Mr. Collins, the Companys President of $5,500, for
approximately 1200 square feet and secretarial support. There is no lease agreement for these
premises. This office arrangement was not
the product of arm-length negotiation; however the Company has determined the arrangement to
be is competitive with comparable office space and secretarial support.
25
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
The following documents are incorporated by reference from the Registrants Form 10-SB filed
with the Securities and Exchange Commission (the commission) file #000-29211, on January 28, 2000
and the 2004 10KSB.
|
|
|
Exhibit |
|
Description |
2
|
|
Asset Purchase Agreement |
3.1
|
|
Articles of Incorporation |
3.2
|
|
Bylaws |
10.1
|
|
Office Lease |
10.1.1
|
|
Warehouse Lease |
10.2
|
|
Factoring Agreement |
10.3.1
|
|
Amended Employment contract of David A. Collins* |
14.1
|
|
Code of Business Conduct & Ethics |
31.1
|
|
Certification of Principal Executive Officer pursuant to Rule 13a-14(a)/15d-14(a)* |
31.2
|
|
Certification of Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a)* |
32.1
|
|
Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350* |
32.2
|
|
Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350* |
|
|
|
* |
|
These exhibits are enclosed within this filing. |
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
(1) Audit Fees
The Company incurred the following fees to Moore Stephens Frost, PLC, the Companys
independent auditors, for services rendered during the fiscal year ended December 31, 2007 a total
of $67,760 for the audit of the Companys consolidated financial statements for fiscal 2006 and
$37,790 for the review of the consolidated financial statements included in each of the Companys
Quarterly Reports on Form 10-QSB for the fiscal year ended December 31, 2007. The Company incurred
the following fees to Moore Stephens Frost, PLC, the Companys independent auditors, for services
rendered during the fiscal year ended December 31, 2006 a total of $42,955 for the audit of the
Companys consolidated financial statements for fiscal 2005 and $22,907 for the
reviews of the consolidated financial statements included in each of the Companys Quarterly
Reports on Form 10-QSB for the fiscal year ended December 31, 2006.
(2) Tax Fees
The Companys Board of Directors determined that the services performed by Moore Stephens
Frost, PLC, other than audit services are not incompatible with maintaining its independence. The
additional fee for non-audit related services was approximately $3,260 in 2007 and $5,699 in 2006.
(3) Audit committee
The Company does not have a standing Audit Committee of its Board of Directors.
26
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report
to be signed on its behalf by the undersigned, hereunto duly authorized DAC Technologies Group
International, Inc.
|
|
|
|
|
|
|
|
|
By: |
/s/ David A. Collins
|
|
|
|
David A. Collins, Chairman, |
|
March 31, 2008 |
|
CEO and Principal Executive Officer |
|
|
|
|
|
|
|
|
|
|
|
By: |
/s/ Robert C. Goodwin
|
|
|
|
Robert C. Goodwin, Principal Accounting |
|
March 31, 2008 |
|
Officer and Principal Financial Officer |
|
27
DAC TECHNOLOGIES
GROUP INTERNATIONAL, INC.
December 31, 2007 and 2006
Consolidated Financial Statements
With
Report of Independent
Registered Public Accounting Firm
F-1
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
DAC Technologies Group International, Inc.
Little Rock, Arkansas
We have audited the accompanying consolidated balance sheets of DAC Technologies Group
International, Inc. as of December 31, 2007 and 2006, and the related consolidated statements of
income, stockholders equity and cash flows for the years then ended. These consolidated financial
statements are the responsibility of the Companys management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the consolidated financial statements are free of
material misstatement. The Company has determined that it is not required to have, nor were we
engaged to perform, an audit of its internal control over financial reporting. Our audit included
consideration of internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purposes of expressing an
opinion on the effectiveness of the Companys internal control over financial reporting.
Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial statements. An audit also
includes assessing the accounting principles used and significant estimates made by management, as
well as evaluating the overall consolidated financial statement presentation. We believe our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of DAC Technologies Group International,
Inc. as of December 31, 2007 and 2006, and the consolidated results of its operations and its cash
flows for the years then ended in conformity with accounting principles generally accepted in the
United States of America.
Independent Registered Public Accounting Firm
Little Rock, Arkansas
March 28, 2008
F-2
DAC TECHNOLOGIES
GROUP INTERNATIONAL, INC.
Consolidated Balance Sheets
December 31, 2007 and 2006
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
|
|
Cash |
|
$ |
402,468 |
|
|
$ |
338,968 |
|
Accounts receivable, less allowance for doubtful accounts
of $5,000 in 2007 and 2006 |
|
|
263,646 |
|
|
|
532,028 |
|
Due from factor |
|
|
765,510 |
|
|
|
1,282,208 |
|
Inventories |
|
|
4,925,275 |
|
|
|
3,130,825 |
|
Prepaid expenses and deferred charges |
|
|
115,686 |
|
|
|
108,965 |
|
Income taxes receivable |
|
|
153,870 |
|
|
|
370,817 |
|
Deferred income tax asset |
|
|
35,815 |
|
|
|
35,815 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
6,662,270 |
|
|
|
5,799,626 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment |
|
|
|
|
|
|
|
|
Leasehold improvements |
|
|
55,323 |
|
|
|
1,121 |
|
Furniture and fixtures |
|
|
278,322 |
|
|
|
228,670 |
|
Molds, dies and artwork |
|
|
513,949 |
|
|
|
504,283 |
|
|
|
|
|
|
|
|
|
|
|
847,594 |
|
|
|
734,074 |
|
Accumulated depreciation |
|
|
(573,458 |
) |
|
|
(522,466 |
) |
|
|
|
|
|
|
|
Net property and equipment |
|
|
274,136 |
|
|
|
211,608 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets |
|
|
|
|
|
|
|
|
Patents and trademarks, net of accumulated amortization of
$104,208 and $88,465 in 2007 and 2006, respectively |
|
|
133,762 |
|
|
|
147,750 |
|
Deposit |
|
|
17,351 |
|
|
|
11,435 |
|
Advances to employees |
|
|
28,925 |
|
|
|
24,107 |
|
Note receivable |
|
|
|
|
|
|
|
|
Long-term |
|
|
20,000 |
|
|
|
20,000 |
|
Related party |
|
|
72,518 |
|
|
|
72,518 |
|
Stockholder |
|
|
178,465 |
|
|
|
130,531 |
|
|
|
|
|
|
|
|
Total other assets |
|
|
451,021 |
|
|
|
406,341 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
7,387,427 |
|
|
$ |
6,417,575 |
|
|
|
|
|
|
|
|
F-3
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
Liabilities and Stockholders Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
|
Notes payable |
|
$ |
183,186 |
|
|
$ |
192,733 |
|
Accounts payable |
|
|
2,393,050 |
|
|
|
1,640,445 |
|
Accrued payroll tax withholdings |
|
|
25,338 |
|
|
|
24,944 |
|
Accrued expenses other |
|
|
38,872 |
|
|
|
47,552 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
2,640,446 |
|
|
|
1,905,674 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax liability |
|
|
33,100 |
|
|
|
33,100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 14) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity |
|
|
|
|
|
|
|
|
Preferred stock, $.001 par value; authorized 10,000,000 shares;
no shares issued and outstanding |
|
|
|
|
|
|
|
|
Common stock, $.001 par value; authorized 50,000,000 shares;
6,323,364 shares issued at December 31, 2007 and 2006;
6,041,399 and 6,135,599 shares outstanding at December 31,
2007 and 2006, respectively |
|
|
6,323 |
|
|
|
6,323 |
|
Additional paid-in capital |
|
|
1,963,102 |
|
|
|
1,963,102 |
|
Treasury stock, at cost |
|
|
(307,147 |
) |
|
|
(201,333 |
) |
Retained earnings |
|
|
3,051,603 |
|
|
|
2,710,709 |
|
|
|
|
|
|
|
|
Total stockholders equity |
|
|
4,713,881 |
|
|
|
4,478,801 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
7,387,427 |
|
|
$ |
6,417,575 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-4
DAC TECHNOLOGIES
GROUP INTERNATIONAL, INC.
Consolidated Statements of Income
For the Years Ended December 31, 2007 and 2006
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
Sales, net of returns and allowances |
|
$ |
14,777,645 |
|
|
$ |
15,475,880 |
|
|
|
|
|
|
|
|
|
|
Cost of sales |
|
|
10,838,971 |
|
|
|
10,985,564 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
3,938,674 |
|
|
|
4,490,316 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
|
|
|
|
|
|
Selling |
|
|
1,742,220 |
|
|
|
1,866,453 |
|
General and administrative |
|
|
1,312,235 |
|
|
|
1,093,530 |
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
3,054,455 |
|
|
|
2,959,983 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
884,219 |
|
|
|
1,530,333 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense) |
|
|
|
|
|
|
|
|
Interest expense |
|
|
(326,473 |
) |
|
|
(318,116 |
) |
Other income |
|
|
95 |
|
|
|
12,751 |
|
|
|
|
|
|
|
|
Total other expense, net |
|
|
(326,378 |
) |
|
|
(305,365 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax provision |
|
|
557,841 |
|
|
|
1,224,968 |
|
|
|
|
|
|
|
|
|
|
Provision for income taxes |
|
|
216,947 |
|
|
|
472,130 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
340,894 |
|
|
$ |
752,838 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted earnings per share |
|
$ |
0.06 |
|
|
$ |
0.12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of common shares |
|
|
|
|
|
|
|
|
Basic |
|
|
6,109,026 |
|
|
|
6,158,388 |
|
Diluted |
|
|
6,109,026 |
|
|
|
6,158,388 |
|
The accompanying notes are an integral part of these consolidated financial statements.
F-5
DAC TECHNOLOGIES
GROUP INTERNATIONAL, INC.
Consolidated Statements of Stockholders Equity
For the Years Ended December 31, 2007 and 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock |
|
|
Paid-in |
|
|
Treasury Stock |
|
|
Retained |
|
|
|
|
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Shares |
|
|
Cost |
|
|
Earnings |
|
|
Total |
|
Balance January 1, 2006 |
|
|
6,323,364 |
|
|
$ |
6,323 |
|
|
$ |
1,963,102 |
|
|
|
130,000 |
|
|
$ |
(101,400 |
) |
|
$ |
1,957,871 |
|
|
$ |
3,825,896 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of treasury stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57,765 |
|
|
|
(99,933 |
) |
|
|
|
|
|
|
(99,933 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
752,838 |
|
|
|
752,838 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2006 |
|
|
6,323,364 |
|
|
|
6,323 |
|
|
|
1,963,102 |
|
|
|
187,765 |
|
|
|
(201,333 |
) |
|
|
2,710,709 |
|
|
|
4,478,801 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of treasury stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
94,200 |
|
|
|
(105,814 |
) |
|
|
|
|
|
|
(105,814 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
340,894 |
|
|
|
340,894 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2007 |
|
|
6,323,364 |
|
|
$ |
6,323 |
|
|
$ |
1,963,102 |
|
|
|
281,965 |
|
|
$ |
(307,147 |
) |
|
$ |
3,051,603 |
|
|
$ |
4,713,881 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-6
DAC TECHNOLOGIES
GROUP INTERNATIONAL, INC.
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2007 and 2006
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
Cash flows from operating activities |
|
|
|
|
|
|
|
|
Net income |
|
$ |
340,894 |
|
|
$ |
752,838 |
|
Adjustments to reconcile net income to net cash
provided by operating activities |
|
|
|
|
|
|
|
|
Depreciation |
|
|
50,992 |
|
|
|
55,247 |
|
Amortization |
|
|
15,743 |
|
|
|
16,026 |
|
Deferred income tax benefit |
|
|
|
|
|
|
(8,615 |
) |
Changes in operating assets and liabilities |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
268,382 |
|
|
|
160,662 |
|
Due from factor |
|
|
516,698 |
|
|
|
31,410 |
|
Inventories |
|
|
(1,794,450 |
) |
|
|
(426,515 |
) |
Prepaid expenses and deferred charges |
|
|
(6,721 |
) |
|
|
(39,392 |
) |
Income taxes receivable |
|
|
216,947 |
|
|
|
(370,817 |
) |
Deposits |
|
|
(5,916 |
) |
|
|
(10,000 |
) |
Advances to employees |
|
|
(4,818 |
) |
|
|
(9,324 |
) |
Accounts payable |
|
|
752,605 |
|
|
|
659,403 |
|
Accrued payroll tax withholdings |
|
|
394 |
|
|
|
(4,519 |
) |
Accrued expenses other |
|
|
(8,680 |
) |
|
|
17,014 |
|
Income taxes payable |
|
|
|
|
|
|
(380,843 |
) |
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
342,070 |
|
|
|
442,575 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities |
|
|
|
|
|
|
|
|
Purchases of property and equipment |
|
|
(113,520 |
) |
|
|
(32,828 |
) |
Payments for patents and trademarks |
|
|
(1,755 |
) |
|
|
(7,245 |
) |
Net advances on note receivable |
|
|
|
|
|
|
(20,000 |
) |
Net advances on note receivable stockholder |
|
|
(47,934 |
) |
|
|
(31,000 |
) |
Purchase of treasury stock |
|
|
(105,814 |
) |
|
|
(99,933 |
) |
|
|
|
|
|
|
|
Net cash used by investing activities |
|
|
(269,023 |
) |
|
|
(191,006 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities |
|
|
|
|
|
|
|
|
Net advances on notes payable |
|
|
96,500 |
|
|
|
|
|
Payments on notes payable |
|
|
(106,047 |
) |
|
|
(43,487 |
) |
|
|
|
|
|
|
|
Net cash used by financing activities |
|
|
(9,547 |
) |
|
|
(43,487 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash |
|
|
63,500 |
|
|
|
208,082 |
|
|
|
|
|
|
|
|
|
|
Cash beginning of year |
|
|
338,968 |
|
|
|
130,886 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash end of year |
|
$ |
402,468 |
|
|
$ |
338,968 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplementary disclosures of cash flow information |
|
|
|
|
|
|
|
|
Cash paid during the year for |
|
|
|
|
|
|
|
|
Interest |
|
$ |
326,662 |
|
|
$ |
317,219 |
|
Taxes |
|
|
|
|
|
|
1,232,000 |
|
The accompanying notes are an integral part of these consolidated financial statements.
F-7
DAC TECHNOLOGIES
GROUP INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
December 31, 2007 and 2006
1. |
|
Organization and Nature of Business |
|
|
|
DAC Technologies Group International, Inc. (DAC) was originally incorporated under the
name DAC Technologies of America, Inc. In July 1999, the Company changed its name to DAC
Technologies Group International, Inc. DAC develops, manufactures and markets various patented
and unpatented consumer products that are designed to provide security for the consumer and
their property. In addition, DAC has developed a wide range of security and other consumer
products for the home, automobile and individual. The majority of DAC products are manufactured
and imported from mainland China and are shipped to DACs central warehouse facility in Little
Rock, Arkansas. These products, along with other items manufactured in the United States, are
sold primarily to major retail chains throughout the United States. |
|
|
|
In February 2001, DAC formed a wholly owned subsidiary, Summit Training International
(STI), an Arkansas corporation. STI was formed with the primary objective of providing
training to law enforcement agencies through courses, seminars and conferences. During the
early part of 2002, the Company decided not to pursue further development of STI due to changes
in the perceived market. In July 2002, the Company sold certain assets of STI, including its
name for $50,000, which consisted of $5,000 in cash and a $45,000 note, maturing no later than
eighteen (18) months from the date of the note. The Company had suspended operations of STI
earlier in 2002 due to unprofitability. In connection with this sale, the Company has entered
into a non-compete agreement related to educational or instructional services for a four-year
period, which has expired. |
2. |
|
Summary of Significant Accounting Policies |
|
a. |
|
Basis of presentation The accompanying consolidated financial statements include the
accounts of DAC Technologies Group International, Inc. and its wholly owned subsidiary,
Summit Training International (collectively, the Company). All material intercompany
accounts and transactions have been eliminated in the consolidation. |
|
|
b. |
|
Revenue recognition The Company recognizes sales revenue when the following criteria
are met: persuasive evidence of an agreement exists, which is an invoice, risk of loss has
been transferred which is generally F.O.B shipping point, the Companys price to the buyer
is fixed and determinable, and collectibility is reasonably assured. |
|
|
c. |
|
Cash equivalents The Company considers all highly liquid investments with original
maturities of three months or less at the time of purchase to be cash equivalents. The
Company held no cash equivalents at December 31, 2007 or 2006. |
F-8
DAC TECHNOLOGIES
GROUP INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
December 31, 2007 and 2006
2. |
|
Summary of Significant Accounting Policies (cont.) |
|
d. |
|
Accounts and notes receivable The majority of the Companys receivables are factored
pursuant to a factoring agreement as described in Note 6. At December 31, 2007 and 2006,
approximately 94% and 91%, respectively, of the Companys accounts receivable, gross of the
balance due to factor, was covered by this agreement. For receivables which are not
covered under this agreement, the Company evaluates customer accounts on a periodic basis
and records an allowance for amounts estimated to be uncollectible. Past due status is
determined based upon contractual terms. Amounts that are determined to be uncollectible
are written off against this allowance when collection attempts on the accounts have been
exhausted. Management uses significant judgment in estimating uncollectible accounts. In
estimating uncollectible amounts, management considers factors such as current overall
economic conditions, industry-specific economic conditions, historical customer performance
and anticipated customer performance. While management believes the Companys processes
effectively address its exposure to doubtful accounts, changes in economic, industry or
specific customer conditions may require adjustment to the allowance recorded by the
Company. |
|
|
|
|
Interest income associated with notes receivable is recognized in the period in which
it is earned based upon the terms of the note. At such time that management would deem a
note to be uncollectible, interest income would cease to be recognized. Based on
managements analysis, there were no conditions related to collectibility that existed in
the years ended December 31, 2007 or 2006 to indicate the need to discontinue accrual of
interest income. |
|
|
e. |
|
Inventories Inventories are stated at the lower of weighted-average cost or market.
Costs include freight and applicable customs fees. Market is determined based on net
realizable value. Appropriate consideration is given to obsolescence, excessive levels,
deterioration and other factors in evaluating net realizable value. Inventories are shown
net of a valuation reserve of $82,926 at December 31, 2007 and 2006. The Company receives
inventory from overseas at terms of F.O.B. shipping point, bearing the risk of loss at that
point in time. During the time period prior to receipt in the warehouse, inventory is
classified and recorded as inventory in transit. Inventory held in the warehouse is
classified as finished goods. |
|
|
f. |
|
Property and equipment Property and equipment are stated at cost. Depreciation is
provided using the straight-line method over the following useful lives: |
|
|
|
Leasehold improvements
|
|
8 years |
Furniture and fixtures
|
|
10 years |
Molds, dies and artwork
|
|
10 years |
|
|
Depreciation expense of $50,992 and $55,247 was recognized during the years ended
December 31, 2007 and 2006, respectively. Maintenance and repairs are charged to expense as
incurred. Major additions and improvements of existing facilities are capitalized. For
retirements or sales of property, the Company removes the original cost and the related
accumulated depreciation from the accounts and the resulting gain or loss is reflected in
other income (expense), net, in the accompanying consolidated statements of income. |
F-9
DAC TECHNOLOGIES
GROUP INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
December 31, 2007 and 2006
2. |
|
Summary of Significant Accounting Policies (cont.) |
|
g. |
|
Patents and trademarks Costs incurred in connection with the acquisition of patents
and trademarks are capitalized and amortized over their estimated useful lives, which range
from five to seventeen years. |
|
|
h. |
|
Income taxes The Company utilizes the liability method of accounting for deferred
income taxes. The liability method requires the recognition of deferred tax liabilities
and assets for the expected future tax consequences of temporary differences between tax
basis and financial reporting basis of assets and liabilities as of the year end date at
the presently enacted tax rates. A valuation allowance is established when necessary to
reduce deferred tax assets to the amount that is expected to be realized. |
|
|
i. |
|
Shipping and handling All shipping and handling costs are included in selling
expense in the accompanying consolidated statements of income. These costs totaled
$383,477 and $488,427 for the years ended December 31, 2007 and 2006, respectively. |
|
|
j. |
|
Earnings per share Basic earnings per share has been calculated using the weighted
average number of common shares outstanding for each year. The dilutive effect of
potential common shares outstanding is included in diluted earnings per share. The
computations of basic earnings per share and diluted earnings per share are as follows: |
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
Net income |
|
$ |
340,894 |
|
|
$ |
752,838 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted-average shares |
|
|
6,109,026 |
|
|
|
6,158,388 |
|
|
|
|
|
|
|
|
|
|
Dilutive potential common shares |
|
|
6,109,026 |
|
|
|
6,158,388 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per share |
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.06 |
|
|
$ |
0.12 |
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.06 |
|
|
$ |
0.12 |
|
|
|
|
|
|
|
|
|
k. |
|
Estimates The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date of the
consolidated financial statements,
and the reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates. |
F-10
DAC TECHNOLOGIES
GROUP INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
December 31, 2007 and 2006
2. |
|
Summary of Significant Accounting Policies (cont.) |
|
l. |
|
Fair value of financial instruments The fair values of cash and cash equivalents,
accounts receivables and notes payable approximate their carrying values due to the
short-term nature of the instruments. The fair value of notes receivable, which is based
on discounted cash flows using current interest rates, approximates the carrying value at
December 31, 2007 and 2006. |
|
|
m. |
|
Impairment of long-lived assets Statement of Financial Accounting Standards (SFAS)
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, requires that
long-lived assets be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amounts of any asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is measured by the amount the
carrying amount of the assets exceeds the fair value of the assets. Based upon
managements assessment of the impairment indicators, no impairment testing was necessary
during the years ended December 31, 2007 or 2006. |
|
|
n. |
|
Impairment of patents and trademarks SFAS No. 144 requires that separate intangible
assets that have finite lives be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amounts of any asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the carrying
amount of an asset to future net cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized is measured by the
amount the carrying amount of the assets exceeds the fair value of the assets. Based on
managements assessment of the impairment indicators, no impairment testing was necessary
during the years ended December 31, 2007 or 2006. |
|
|
o. |
|
New accounting pronouncements In September 2006, the Financial Accounting Standards
Board (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 September 2006, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 108, Considering the Effect of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements (SAB 108). SAB 108 requires that
registrants quantify errors using both a consolidated balance sheet and consolidated
statement of income approach and evaluate whether either approach results in a misstated
amount that, when all relevant quantitative and qualitative factors are considered, is
material. SAB 108 is effective for the Company in fiscal 2006 and did not have a material
impact on the Companys consolidated financial statements. |
F-11
DAC TECHNOLOGIES
GROUP INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
December 31, 2007 and 2006
2. |
|
Summary of Significant Accounting Policies (cont.) |
|
|
|
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities. This statement permits entities to measure many
financial instruments and certain other items at fair value without being required to apply
complex hedge accounting provisions, but does not require fair value measurement. SFAS No.
159 is effective for financial statements issued for fiscal years beginning after November
15, 2007. The Company does not expect the adoption of SFAS No. 159 to have a material
effect on its consolidated financial statements. |
|
|
|
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements. SFAS No. 160 amends Accounting Research Bulletin No.
51, Consolidated Financial Statements, to establish accounting and reporting standards for
noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. This
statement clarifies that a noncontrolling interest in a subsidiary is an ownership interest
in the consolidated entity and should be reported as equity in the financial statements,
rather than in the liability or mezzanine section between liabilities and equity. SFAS No.
160 also requires consolidated net income be reported at amounts that include the amounts
attributable to both the parent and the noncontrolling interest. The impact of SFAS No. 160
will not have a material impact on the consolidated financial statements. SFAS No. 160 is
effective for fiscal years, and interim periods within those fiscal years, beginning on or
after December 15, 2008. |
|
|
|
In December 2007, the FASB issued SFAS No. 141R, Business Combinations. SFAS No. 141R
establishes principles and requirements for how an acquirer in a business combination: 1)
recognizes and measures in its financial statements the identifiable assets acquired, the
liabilities assumed, and any noncontrolling interest in the acquiree; 2) recognizes and
measures the goodwill acquired in the business combination or a gain from a bargain
purchase; and 3) determines what information to disclose to enable users of the financial
statements to evaluate the nature and financial effects of the business combination. SFAS
No. 141R is effective for business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after December 15,
2008. The Company does not believe that the adoption of SFAS No. 141R will have a material
impact on the consolidated financial statements. |
|
3. |
|
Variable Interest Entities |
|
|
|
FASB Interpretation No. 46 (Revised December 2003), Consolidation of Variable Interest
Entities (FIN 46R), requires that if an enterprise is the primary beneficiary of a variable
interest entity, the assets, liabilities, and results of operations of the variable interest
entity should be included in the consolidated financial statements of the enterprise. The
Company holds a note receivable, which is a variable interest, from DAC Investment and
Consulting, Inc. (DAC Investment) of $72,518. Since 2001, DAC Investment has provided
consulting and sales services to the Company. For purposes of FIN 46R, management determined
that DAC Investment is a variable interest entity; however, the Company is not the primary
beneficiary. The balance of the note receivable represents the Companys maximum exposure to
loss as a result of its involvement with DAC Investment. |
F-12
DAC TECHNOLOGIES
GROUP INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
December 31, 2007 and 2006
4. |
|
Inventories |
|
|
|
Inventories consist of the following: |
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
Finished goods |
|
$ |
3,993,949 |
|
|
$ |
2,551,464 |
|
Inventory in transit |
|
|
908,359 |
|
|
|
556,394 |
|
Parts |
|
|
22,967 |
|
|
|
22,967 |
|
|
|
|
|
|
|
|
|
|
$ |
4,925,275 |
|
|
$ |
3,130,825 |
|
|
|
|
|
|
|
|
5. |
|
Intangible Assets |
|
|
|
Intangible assets consist of the following: |
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
Finite-lived |
|
|
|
|
|
|
|
|
Patents and trademarks, net of accumulated
amortization of $104,208 and $88,465 in 2007
and 2006, respectively |
|
$ |
133,762 |
|
|
$ |
147,750 |
|
|
|
|
|
|
|
|
|
|
Aggregate amortization expense related to finite-lived intangible assets was $15,743 and
$16,026 for the years ended December 31, 2007 and 2006, respectively. Future finite-lived
intangible asset amortization expenses are as follows: |
|
|
|
|
|
2008 |
|
$ |
15,000 |
|
2009 |
|
|
13,739 |
|
2010 |
|
|
12,753 |
|
2011 |
|
|
12,753 |
|
2012 |
|
|
12,753 |
|
Thereafter |
|
|
66,764 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
133,762 |
|
|
|
|
|
|
|
During 2007 and 2006, the Company acquired patents which pertain to technology incorporated
into certain of the Companys products. The Company paid $1,755 and $7,245, respectively, for
these patents. The fair value of these patents is being amortized over the weighted-average
expected lives of 17 years. |
F-13
DAC TECHNOLOGIES
GROUP INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
December 31, 2007 and 2006
6. |
|
Due From Factor |
|
|
|
The Company factors a majority of its receivables without recourse under a credit risk
factoring agreement, which is renewable annually. This agreement
provides for factoring fees of .65% to 1.8% monthly, depending on the creditworthiness and location of an account (domestic or
foreign). An additional fee of .25% is charged for each 30-day period, or part thereof, when
the terms of sale exceed 90 days. Fees are calculated on the gross face value of each invoice.
Additionally, this agreement provides for advances of funds on the factored receivable.
Interest is charged at a greater of 4% or 0.50% above prime, which was 7.25% at December 31,
2007, on the outstanding funds in use. The amounts borrowed are collateralized by the
outstanding accounts receivable, and are reflected as a reduction to accounts receivable in the
accompanying consolidated balance sheets. |
|
|
|
These amounts are as follows: |
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
Accounts receivable factored |
|
$ |
4,508,524 |
|
|
$ |
5,101,783 |
|
Amounts advanced and outstanding |
|
|
3,743,014 |
|
|
|
3,819,575 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due from factor |
|
$ |
765,510 |
|
|
$ |
1,282,208 |
|
|
|
|
|
|
|
|
7. |
|
Notes Payable |
|
|
|
Notes payable consist of the following: |
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
Note payable to a bank; interest at 7.70%; payable
on demand or if no demand, November 1, 2008;
collateralized by the Companys inventories,
property and equipment, and personal guarantees
of the Companys major stockholders |
|
$ |
82,524 |
|
|
$ |
105,762 |
|
|
|
|
|
|
|
|
|
|
Note payable to a bank; interest at 7.70%; payable
on demand or if no demand, November 12, 2008;
collateralized by the Companys inventories,
property and equipment, and personal guarantees
of the Companys major stockholders |
|
|
67,852 |
|
|
|
86,971 |
|
|
|
|
|
|
|
|
|
|
Note payable to an insurance company; interest
at 6.00%; payable in monthly installments of $8,305,
including interest, with remaining principal and
interest due May 15, 2008; unsecured |
|
|
32,810 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
183,186 |
|
|
$ |
192,733 |
|
|
|
|
|
|
|
|
F-14
DAC TECHNOLOGIES
GROUP INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
December 31, 2007 and 2006
7. |
|
Notes Payable (cont.) |
|
|
|
The weighted-average interest
rates on short-term borrowings, including notes payable stockholders for the years ended December 31, 2007 and 2006 were 7.28% and 7.69%, respectively.
The Company recognized interest expense of approximately $18,500 and $17,000 for the years ended
December 31, 2007 and 2006, respectively, on notes payable. |
|
8. |
|
Equity |
|
|
|
During 2007, the Company
purchased 94,200 shares of common stock for $105,814. These shares are accounted for as treasury stock in the accompanying consolidated financial
statements. |
|
|
|
On May 4, 2006, the
Company purchased 57,765 shares of common stock for $99,933. These shares are accounted for as treasury stock in the accompanying consolidated financial
statements. |
|
|
|
On June 24, 2004, the Company issued 467,808 shares of common stock through private
placement valued at $681,892. In addition to the shares, investors were also issued 233,904
warrants, which upon exercise, will be able to purchase an additional 233,904 shares at a price
of $2.57 per share. The placement agent received a $69,000 fee and was issued 160,000 warrants
that will allow it to purchase up to 160,000 shares of the Companys common stock at a price of
$2.57 per share. Additionally, legal expenses incurred related to the private placement were
$16,844. The warrant holders have until June 28, 2009 to exercise the warrants. |
|
9. |
|
Treasury Stock |
|
|
|
In August 2000, the Company filed suit against a former manufacturer alleging breach of a
manufacturing contract and seeking damages and rescission of 165,000 shares of its common stock
as part of the amounts which had been previously paid to the manufacturer. During 2003, a jury
awarded the Company damages in the amount of $1,650,560, which included the value of the
returned shares of common stock. The treasury stock was received during 2003 at a
court-mandated value of $0.78 per share. Of the total shares, 35,000 were paid to legal counsel
as consideration for legal fees. The remaining 130,000 shares are reflected as treasury stock
in the accompanying consolidated balance sheets at the $0.78 per share, or $101,400. The
Company is attempting to collect the remainder of the award, $1,521,860, by suit filed in
October 2003 against the owners of the former manufacturer. As collection of this award is
uncertain, this gain contingency has not been recorded in the accompanying consolidated
statements of income. |
F-15
DAC TECHNOLOGIES
GROUP INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
December 31, 2007 and 2006
10. |
|
Stock Option Plan |
|
|
|
During 2000, the Company adopted the 2000 Equity Incentive Plan (the Plan), a
non-qualified stock option plan. Under the terms of the Plan, officers, directors, employees
and other individuals may be granted options to purchase the Companys common stock at exercise
prices determined by the Companys Board of Directors. The terms and conditions of any options
granted under the Plan, to include vesting period and restrictions or limitations on the
options, will be determined by the Board of Directors. The maximum number of shares that can be
granted under this Plan is one million shares of stock. At December 31, 2007, the Company had
granted no options pursuant to this Plan. |
|
11. |
|
Warrants |
|
|
|
A summary of warrant activity is as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
Number of |
|
|
Exercise |
|
|
Warrants |
|
|
Exercise |
|
|
|
Warrants |
|
|
Price |
|
|
Exercisable |
|
|
Price |
|
Outstanding January 1, 2006 |
|
|
393,901 |
|
|
$ |
2.57 |
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding December 31, 2006 |
|
|
393,901 |
|
|
|
2.57 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding December 31, 2007 |
|
|
393,901 |
|
|
$ |
2.57 |
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2007, all warrants outstanding have an exercise price of $2.57 and expire
on June 28, 2009. |
F-16
DAC TECHNOLOGIES
GROUP INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
December 31, 2007 and 2006
12. |
|
Income Taxes |
|
|
|
The provision (benefit) for income taxes consists of the following: |
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
Current provision |
|
$ |
216,947 |
|
|
$ |
480,745 |
|
Deferred benefit |
|
|
|
|
|
|
(8,615 |
) |
|
|
|
|
|
|
|
|
|
$ |
216,947 |
|
|
$ |
472,130 |
|
|
|
|
|
|
|
|
|
|
Reconciliations of the differences between income taxes computed at the federal statutory
tax rates and the provision for income taxes is as follows: |
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
Income taxes computed at federal statutory
tax rate |
|
$ |
189,666 |
|
|
$ |
416,489 |
|
State tax provision, net of federal benefits |
|
|
23,931 |
|
|
|
52,551 |
|
Nondeductible expenses and other |
|
|
3,350 |
|
|
|
3,090 |
|
|
|
|
|
|
|
|
Provision for income taxes |
|
$ |
216,947 |
|
|
$ |
472,130 |
|
|
|
|
|
|
|
|
|
|
Temporary differences that give rise to significant deferred tax assets are as follows: |
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
Allowance for doubtful accounts |
|
$ |
1,915 |
|
|
$ |
1,915 |
|
Allowance for excess inventory |
|
|
38,125 |
|
|
|
38,125 |
|
Accumulated tax depreciation in excess of
book depreciation |
|
|
(35,467 |
) |
|
|
(35,467 |
) |
Accumulated tax amortization in excess of
book amortization |
|
|
(1,858 |
) |
|
|
(1,858 |
) |
|
|
|
|
|
|
|
Net deferred tax assets |
|
$ |
2,715 |
|
|
$ |
2,715 |
|
|
|
|
|
|
|
|
|
|
The Company adopted FASB
Interpretation No. 48 (FIN 48), Accounting for
Uncertainty in Income Taxes, effective January 1, 2007. FIN 48
clarifies the accounting for income taxes by prescribing the minimum
recognition threshold a tax position is required to meet before being
recognized in the consolidated financial statements. FIN 48 also
provides guidance on derecognition, measurement, classification,
interest and penalties, accounting in interim periods, disclosure and
transition. The Company had no significant unrecognized tax benefits
at the date of adoption or at December 31, 2007. Accordingly, the
Company does not have any interest or penalties related to uncertain
tax positions. However, if interest or penalties were to be incurred
related to uncertain tax positions, such amounts would be recognized
in income tax expense. Tax periods for all years after 2003 remain
open to examination by the federal and state taxing jurisdictions
to which it is subject. |
|
13. |
|
Related Party Transactions |
|
|
|
During the years ended December 31, 2007 and 2006, the Company made periodic advances to
certain employees of the Company. At December 31, 2007 and 2006, the outstanding balances of
advances to these individuals were $28,925 and $24,107, respectively. |
F-17
DAC TECHNOLOGIES
GROUP INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
December 31, 2007 and 2006
13. |
|
Related Party Transactions (cont.) |
|
|
|
At December 31, 2007 and 2006, the Company held a note receivable of $178,465 and $130,531,
respectively, due from an individual, who is both an employee and a stockholder, which is due on
December 31, 2008. This note is unsecured and non-interest bearing. |
|
|
|
At December 31, 2007 and 2006, the Company held a note receivable of $72,518 due from a
related party entity, which is owned by the individual discussed above, which is due on December
31, 2008. This note is unsecured and non-interest bearing. The note receivable has been
classified as non-current in the accompanying consolidated balance sheets because repayment is
not anticipated during the next year. |
|
|
|
For the years ended December 31, 2007 and 2006, consulting service fees in the amount of
$10,000 and $60,000, respectively, were paid to a related party entity, which is owned by the
individual discussed above. The related party provides consulting services to the Company on an
ongoing basis. |
|
|
|
Certain stockholders of the Company have personally guaranteed the Companys outstanding
borrowings with a bank at December 31, 2007 and 2006. |
|
14. |
|
Commitments and Contingencies |
|
a. |
|
In December 2006, the Company leased new office and warehouse space. The office space
lease agreement provides for rent at a rate of $7,757 per month and expires on January 31,
2011, with a renewal option through January 31, 2015. The warehouse space lease agreement
provides for rent at a rate of $9,366 per month and expires on December 31, 2010, with a
renewal option through December 31, 2014. |
|
|
|
|
Additionally, the Company leases space from a shareholder for office space for $5,500
per month under no formal lease agreement. Total rent expense for the Company for the years
ended December 31, 2007 and 2006 was $274,971 and $238,433, respectively. |
|
|
|
|
At December 31, 2007, future minimum rental commitments under non-cancelable operating
leases in excess of one year are as follows: |
|
|
|
|
|
2008 |
|
$ |
211,011 |
|
2009 |
|
|
218,912 |
|
2010 |
|
|
215,829 |
|
2011 |
|
|
8,229 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
653,981 |
|
|
|
|
|
F-18
DAC TECHNOLOGIES
GROUP INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
December 31, 2007 and 2006
14. |
|
Commitments and Contingencies (cont.) |
|
b. |
|
The Company is involved in various legal actions arising in the normal course of
business. In the opinion of management, the ultimate resolution of these matters will not
have a material adverse effect on the Companys consolidated financial position or results
of operations. |
|
|
c. |
|
During 1998, the Company entered into an asset purchase agreement, wherein it acquired
certain assets and assumed certain liabilities of DAC Technologies of America, Inc. in a
combination that was accounted for in a manner similar to a pooling of interest. Assets
and liabilities that were not included in this transaction consisted of a receivable from a
major stockholder and president, certain bridge loans, stockholder advances, an automobile,
certain accounts payable, accrued commissions and accrued payroll totaling $200,488. The
Company could be held liable in the event of litigation, for the outstanding balances of
certain unsecured liabilities of DAC Technologies of America, Inc. totaling approximately
$119,000. No accrual has been made for this contingency. |
15. |
|
Major Customers and Suppliers |
|
|
|
During the year ended December 31, 2007, the Company recognized aggregate sales to one
customer in the amount of approximately $9,687,000, which represented 65.6% of total net sales.
During the year ended December 31, 2006, the Company recognized aggregate sales to two customers
in the amount of approximately $9,612,000 and $1,715,000, which represented 62.1% and 11.1% of
total net sales, respectively. Accounts receivable related to the sales were factored without
recourse (Note 6). |
|
|
|
During the years ended December 31, 2007 and 2006, the Company purchased 99.9% of its
products from one major supplier. The Company is dependent upon this supplier continuing in
business and its ability to ship to the United States, but believes that it could replace this
supplier, if required to, at similar quality and terms. |
|
16. |
|
Concentrations of Credit Risk |
|
|
|
Financial instruments which potentially subject the Company to concentrations of credit
risk consist primarily of trade accounts receivable with a variety of customers. As discussed
in Note 6, the Company factors a majority of its receivables under a factoring agreement. These
accounts are factored on a non-recourse basis which reduces the Companys exposure to credit
risk. Approximately 94% and 91% of the Companys accounts receivable at December 31, 2007 and
2006, respectively, were factored. The Company also provides credit in the normal course of
business to certain of its customers and performs ongoing credit evaluations of these customers.
It maintains allowances for doubtful accounts and provisions for returns and credits based on
factors surrounding the specific customers and circumstances. The Company generally does not
require collateral from its customers. Credit risk is considered by management to be limited
due to the Companys customer base and its customers financial resources. |
|
|
|
At December 31, 2007 and 2006 and at various times throughout these years, the Company
maintained cash balances with financial institutions in excess of the federally insured limit. |
F-19
17. |
|
Financial Information by Business Segment |
|
|
|
During the years ended December 31, 2007 and 2006, the Company operates in four primary
business segments delineated by products or services. These segments are security products, gun
locks, safes and non-security products. The accounting policies of the Companys segments are
the same as those described in Note 2. The Companys long-lived assets are located in the
United States and China. |
|
|
|
Information concerning operations in these segments of business is as follows: |
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
Revenues |
|
|
|
|
|
|
|
|
Gun cleaning and maintenance |
|
$ |
8,659,456 |
|
|
$ |
10,872,871 |
|
Hunting and camping |
|
|
4,159,113 |
|
|
|
2,700,191 |
|
Gun safety |
|
|
1,622,982 |
|
|
|
1,867,427 |
|
Other |
|
|
336,094 |
|
|
|
35,391 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
14,777,645 |
|
|
$ |
15,475,880 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax provision |
|
|
|
|
|
|
|
|
Gun cleaning and maintenance |
|
$ |
595,363 |
|
|
$ |
1,215,318 |
|
Hunting and camping |
|
|
(173,213 |
) |
|
|
(124,433 |
) |
Gun safety |
|
|
88,464 |
|
|
|
149,395 |
|
Other |
|
|
47,227 |
|
|
|
(15,312 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax provision |
|
$ |
557,841 |
|
|
$ |
1,224,968 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable assets |
|
|
|
|
|
|
|
|
Gun cleaning and maintenance |
|
|
|
|
|
|
|
|
United States |
|
$ |
2,627,085 |
|
|
$ |
2,033,062 |
|
Hunting and camping |
|
|
|
|
|
|
|
|
United States |
|
|
1,623,617 |
|
|
|
627,222 |
|
Gun safety |
|
|
|
|
|
|
|
|
United States |
|
|
489,935 |
|
|
|
484,854 |
|
China |
|
|
19,477 |
|
|
|
28,829 |
|
Other |
|
|
|
|
|
|
|
|
United States |
|
|
292,786 |
|
|
|
108,441 |
|
China |
|
|
31,595 |
|
|
|
34,889 |
|
Corporate |
|
|
2,302,932 |
|
|
|
3,100,278 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total identifiable assets |
|
$ |
7,387,427 |
|
|
$ |
6,417,575 |
|
|
|
|
|
|
|
|
|
|
Molds used to manufacture the Companys security products and gun locks are located in
China (Note 1). |
F-20