DAC Technologies Group International, Inc.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2008
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE
ACT |
For the transition period from to
Commission File Number 000-29211
DAC Technologies Group International, Inc.
(Exact name of registrant as specified in its charter)
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Florida
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65-0847852 |
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.) |
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12120 Colonel Glenn Road, Suite 6200 Little Rock, AR
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72210 |
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(Address of principal executive offices)
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(Zip Code) |
(501) 661-9100
(Registrants telephone number)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
(1) Yes x No o (2) Yes x No o
Indicate by check mark whether the registrant is a large filer, an accelerated filer, a
non-accelerated filer, or a small reporting company.
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Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company þ |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).
o Yes x No
State the number of shares outstanding of each of the issuers class of common equity, as of
the latest practicable date. As of August 5, 2008, 6,323,364 shares of Common Stock are issued and
6,032,899 are outstanding.
Transitional Small Business Disclosure Format: Yes o No x
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Our financial statements are contained in pages 4 through 9 following.
3
DAC TECHNOLOGIES GROUP INTERNATIONAL, INC.
Condensed Balance Sheet (Consolidated)
June 30, 2008 and December 31, 2007
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June 30 |
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December 31 |
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2008 |
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2007 |
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(Unaudited) |
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Assets |
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Current assets |
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Cash |
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$ |
68,945 |
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$ |
402,468 |
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Accounts receivable, less allowance for doubtful
accounts of $5,000 in 2008 and 2007 |
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574,879 |
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263,646 |
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Due from factor |
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302,698 |
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765,510 |
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Inventories |
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4,361,584 |
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4,925,275 |
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Prepaid expenses and deferred charges |
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156,076 |
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115,686 |
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Income taxes receivable |
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121,592 |
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153,870 |
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Current deferred income tax benefit |
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35,815 |
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35,815 |
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Total current assets |
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5,621,589 |
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6,662,270 |
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Property and equipment |
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Leasehold improvements |
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55,323 |
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55,323 |
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Furniture and fixtures |
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294,026 |
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278,322 |
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Molds, dies, and artwork |
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528,187 |
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513,949 |
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877,536 |
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847,594 |
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Accumulated depreciation |
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(597,800 |
) |
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(573,458 |
) |
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Net property and equipment |
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279,736 |
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274,136 |
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Other assets |
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Patents and trademarks, net of accumulated
amortization of $111,942 and $104,208 in 2008 and 2007 |
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129,548 |
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133,762 |
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Deposits |
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17,351 |
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17,351 |
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Advances to employees |
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30,575 |
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28,925 |
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Note receivable |
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Long-term |
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20,000 |
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20,000 |
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Related party |
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72,518 |
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72,518 |
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Shareholder |
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173,722 |
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178,465 |
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Total other assets |
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443,714 |
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451,021 |
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Total assets |
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$ |
6,345,039 |
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$ |
7,387,427 |
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The accompanying selected notes are an integral part of these condensed consolidated financial statements.
4
DAC TECHNOLOGIES GROUP INTERNATIONAL, INC.
Condensed Balance Sheet (Consolidated)
June 30, 2008 and December 31, 2007
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June 30 |
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December 31 |
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2008 |
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2007 |
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(Unaudited) |
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Liabilities and Stockholders Equity |
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Current liabilities |
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Notes payable |
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$ |
127,951 |
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$ |
183,186 |
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Accounts payable |
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1,383,604 |
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2,393,050 |
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Accrued payroll tax withholdings |
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25,351 |
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25,338 |
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Accrued expenses-other |
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17,888 |
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38,872 |
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Total current liabilities |
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1,554,794 |
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2,640,446 |
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Deferred income tax liability |
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33,100 |
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33,100 |
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Stockholders equity |
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Preferred stock, $.001 par value; authorized
10,000,000 shares; none issued and outstanding |
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Common stock, $.001 par value; authorized
50,000,000 shares; 6,323,364 shares issued at
June 30, 2008 and December 31, 2007; 6,032,899
and 6,041,399 shares outstanding at June 30, 2008
and December 31, 2007, respectively |
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6,323 |
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6,323 |
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Additional paid-in capital |
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1,963,102 |
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1,963,102 |
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Treasury stock, at cost |
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(313,947 |
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(307,147 |
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Retained earnings |
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3,101,667 |
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3,051,603 |
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Total stockholders equity |
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4,757,145 |
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4,713,881 |
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Total liabilities and stockholders equity |
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$ |
6,345,039 |
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$ |
7,387,427 |
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The accompanying selected notes are an integral part of these condensed consolidated financial statements.
5
DAC TECHNOLOGIES GROUP INTERNATIONAL, INC.
Condensed Statements of Operations (Consolidated)
For The Three Months Ended June 30, 2008 and 2007
Unaudited
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2008 |
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2007 |
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Net sales |
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$ |
2,724,258 |
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$ |
2,739,903 |
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Cost of sales |
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2,043,077 |
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1,853,512 |
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Gross profit |
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681,181 |
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886,391 |
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Operating expenses |
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Selling |
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336,131 |
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353,576 |
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General and administrative |
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287,764 |
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266,374 |
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Total operating expenses |
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623,895 |
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619,950 |
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Income from operations |
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57,286 |
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266,441 |
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Other income (expense) |
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Interest expense |
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(43,579 |
) |
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(63,206 |
) |
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Total other income (expense) |
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(43,579 |
) |
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(63,206 |
) |
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Income before income tax provision |
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13,707 |
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203,235 |
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Provision for income taxes |
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5,617 |
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87,615 |
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Net income |
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$ |
8,090 |
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$ |
115,620 |
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Basic and diluted earnings per share |
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$ |
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$ |
0.02 |
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Weighted average number of common shares: |
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Basic and diluted |
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6,032,899 |
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6,124,498 |
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The accompanying selected notes are an integral part of these condensed consolidated financial statements.
6
DAC TECHNOLOGIES GROUP INTERNATIONAL, INC.
Condensed Statements of Operations (Consolidated)
For The Six Months Ended June 30, 2008 and 2007
Unaudited
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2008 |
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2007 |
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Net sales |
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$ |
5,440,027 |
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$ |
5,579,528 |
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Cost of sales |
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4,029,985 |
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3,855,627 |
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Gross profit |
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1,410,042 |
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1,723,901 |
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Operating expenses |
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Selling |
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651,893 |
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734,616 |
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General and administrative |
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569,351 |
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674,094 |
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Total operating expenses |
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1,221,244 |
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1,408,710 |
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Income from operations |
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188,798 |
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|
315,191 |
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Other income (expense) |
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Interest expense |
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(106,456 |
) |
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(136,766 |
) |
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Total other income (expense) |
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(106,456 |
) |
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(136,766 |
) |
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Income before income tax provision |
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82,342 |
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|
178,425 |
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Provision for income taxes |
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|
32,278 |
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80,007 |
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Net income |
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$ |
50,064 |
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$ |
98,418 |
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Basic and diluted earnings per share |
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$ |
0.01 |
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$ |
0.02 |
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Weighted average number of common shares: |
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Basic and diluted |
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6,034,534 |
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6,130,018 |
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The accompanying selected notes are an integral part of these condensed consolidated financial statements.
7
DAC TECHNOLOGIES GROUP INTERNATIONAL, INC.
Condensed Statements of Cash Flows (Consolidated)
For the Three Months Ended June 30, 2008 and 2007
Unaudited
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2008 |
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2007 |
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Cash flows from operating activities |
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Net income |
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$ |
8,090 |
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$ |
115,620 |
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Adjustments to reconcile net income to
net cash provided (used) by operating activities: |
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Depreciation |
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12,171 |
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|
12,045 |
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Amortization |
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3,867 |
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|
4,000 |
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Changes in operating assets and liabilities |
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Accounts receivable |
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(22,542 |
) |
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|
(438,315 |
) |
Due from factor |
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|
36,280 |
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|
131,143 |
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Inventories |
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|
616,145 |
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(1,901,472 |
) |
Prepaid expenses and deferred charges |
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25,073 |
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(24,907 |
) |
Income taxes receivable |
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|
5,617 |
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|
87,615 |
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Deposits |
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|
780 |
|
Advances to employees |
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(1,091 |
) |
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|
(3,006 |
) |
Accounts payable |
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(619,976 |
) |
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|
2,142,725 |
|
Accrued payroll tax withholdings |
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|
(166 |
) |
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|
(1,425 |
) |
Accrued expenses other |
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(16,909 |
) |
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(150,216 |
) |
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Net cash provided (used) by operating activities |
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|
46,559 |
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(25,413 |
) |
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Cash flows from investing activities |
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Purchases of property and equipment |
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(14,678 |
) |
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(21,053 |
) |
Payments for patents and trademarks |
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|
(3,520 |
) |
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|
Net payments (advances) on notes receivable stockholder |
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(4,459 |
) |
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|
2,748 |
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Net cash used by investing activities |
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|
(22,657 |
) |
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|
(18,305 |
) |
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Cash flows from financing activities |
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|
Proceeds from notes payable |
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|
|
|
|
|
96,500 |
|
Payments on notes payable |
|
|
(19,575 |
) |
|
|
(26,145 |
) |
Purchase of treasury stock |
|
|
|
|
|
|
(28,859 |
) |
|
|
|
|
|
|
|
Net cash provided (used) by financing activities |
|
|
(19,575 |
) |
|
|
41,496 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash |
|
|
4,327 |
|
|
|
(2,222 |
) |
|
|
|
|
|
|
|
|
|
Cash beginning of period |
|
|
64,618 |
|
|
|
80,648 |
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|
|
|
|
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|
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|
|
|
|
|
|
|
|
|
Cash end of period |
|
$ |
68,945 |
|
|
$ |
78,426 |
|
|
|
|
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|
The accompanying selected notes are an integral part of these condensed consolidated financial statements.
8
DAC TECHNOLOGIES GROUP INTERNATIONAL, INC.
Condensed Statements of Cash Flows (Consolidated)
For the Six Months Ended June 30, 2008 and 2007
Unaudited
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
Cash flows from operating activities |
|
|
|
|
|
|
|
|
Net income |
|
$ |
50,064 |
|
|
$ |
98,418 |
|
Adjustments to reconcile net income to
net cash used by operating activities: |
|
|
|
|
|
|
|
|
Depreciation |
|
|
24,342 |
|
|
|
24,023 |
|
Amortization |
|
|
7,734 |
|
|
|
7,936 |
|
Changes in operating assets and liabilities |
Accounts receivable |
|
|
(311,233 |
) |
|
|
(858,963 |
) |
Due from factor |
|
|
462,812 |
|
|
|
959,492 |
|
Inventories |
|
|
563,691 |
|
|
|
(2,029,167 |
) |
Prepaid expenses and deferred charges |
|
|
(40,390 |
) |
|
|
(49,506 |
) |
Income taxes receivable |
|
|
32,278 |
|
|
|
80,007 |
|
Deposits |
|
|
|
|
|
|
(5,916 |
) |
Advances to employees |
|
|
(1,650 |
) |
|
|
(15,278 |
) |
Accounts payable |
|
|
(1,009,446 |
) |
|
|
1,652,061 |
|
Accrued payroll tax withholdings |
|
|
13 |
|
|
|
162 |
|
Accrued expenses other |
|
|
(20,984 |
) |
|
|
(26,734 |
) |
|
|
|
|
|
|
|
Net cash used by operating activities |
|
|
(242,769 |
) |
|
|
(163,465 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities |
|
|
|
|
|
|
|
|
Purchases of property and equipment |
|
|
(29,942 |
) |
|
|
(84,235 |
) |
Payments for patents and trademarks |
|
|
(3,520 |
) |
|
|
(1,755 |
) |
Net payments (advances) on notes receivable stockholder |
|
|
4,743 |
|
|
|
(42,253 |
) |
|
|
|
|
|
|
|
Net cash used by investing activities |
|
|
(28,719 |
) |
|
|
(128,243 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities |
|
|
|
|
|
|
|
|
Proceeds from notes payable |
|
|
|
|
|
|
96,500 |
|
Payments on notes payable |
|
|
(55,235 |
) |
|
|
(36,475 |
) |
Purchase of treasury stock |
|
|
(6,800 |
) |
|
|
(28,859 |
) |
|
|
|
|
|
|
|
Net cash provided (used) by financing activities |
|
|
(62,035 |
) |
|
|
31,166 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash |
|
|
(333,523 |
) |
|
|
(260,542 |
) |
|
|
|
|
|
|
|
|
|
Cash beginning of period |
|
|
402,468 |
|
|
|
338,968 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash end of period |
|
$ |
68,945 |
|
|
$ |
78,426 |
|
|
|
|
|
|
|
|
The accompanying selected notes are an integral part of these condensed consolidated financial statements.
9
PART F/S
DAC TECHNOLOGIES GROUP INTERNATIONAL, INC.
SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Nature of Business
DAC Technologies Group International, Inc. (the Company), is in the business of
developing, marketing and outsourcing the manufacture of various consumer products, patented and
non-patented. Since 2003, the Companys primary business has been gun safety and gun maintenance,
with a target consumer base of sportsmen, hunters and outdoorsmen, and recreational enthusiasts.
The Company has continued to expand its line of GunMaster® gun cleaning kits and accessories,
becoming a leader in this market. In 2005, the Company began developing products in the hunting
and camping market, which accounted for 28% of the Companys sales in 2007. The Company has begun
to expand its product line into household products, including household cleaning items added in
2007, and a line of fireplace equipment that will be added in the third quarter of 2008.
Although a significant portion of our business is with the mass-market retailer Wal-Mart
(approximately 66% during 2007), we have been able to considerably increase our business with large
sporting goods retailers, distributors and catalog companies.
Virtually all of the Companys products are manufactured and imported from mainland China and
shipped to the Companys central warehouse facility in Little Rock, Arkansas for distribution.
These products are sold primarily to
mass merchants and sporting goods retailers throughout the United States and international
locations.
Organization and Summary of Significant Accounting Policies
Organization and basis of presentation
The Company was incorporated as a Florida corporation in July 1998 under the name DAC
Technologies of America, Inc. In July 1999, the Company changed its name to DAC Technologies Group
International, Inc.
Unaudited interim condensed consolidated financial statements
The accompanying condensed consolidated financial statements of the Company as of and for the
six months ended June 30, 2008 and 2007, and for the three months ended June 30, 2008 and 2007, are
unaudited, but, in the opinion of management, reflect the adjustments, all of which are of a normal
recurring nature, necessary for a fair presentation of such financial statements in accordance with
accounting principles generally accepted in the United States. The accompanying condensed
consolidated financial statements have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and note disclosures normally included in
annual financial statements prepared in accordance with accounting principles generally accepted in
the United States have been condensed or omitted pursuant to those
rules and regulations, although the Company believes that the disclosures made are adequate to make
the information not misleading. It is suggested that these condensed consolidated financial
statements be read in conjunction with the financial statements and the notes thereto included in
the Companys latest 10-KSB. The results of operations for an interim period are not necessarily
indicative of the results for a full year.
10
Use of Estimates
The preparation of consolidated financial statements in accordance with accounting principles
generally accepted in the United States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the disclosures of
contingent assets and liabilities at the date of the consolidated financial statements, and the
reported amounts of revenues and expenses during the reporting period. Actual results may vary
from those estimates.
Inventories
Inventories are stated at the lower of weighted average cost or market. Costs include freight
and applicable customs fees. Market is determined based on net realizable value. Appropriate
consideration is given to obsolescence, excessive levels, deterioration and other factors in
evaluating net realizable value. Inventories are shown net of a valuation reserve of $82,926 at
June 30, 2008. The Company receives inventory from overseas at terms of F.O.B. shipping point,
bearing the risk of loss at that point in time. During the time period prior to receipt in the
warehouse, inventory is classified and recorded as inventory in transit. Inventory held in the
warehouse is classified as finished goods.
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008 |
|
|
Dec. 31, 2007 |
|
Inventories consist of: |
|
|
|
|
|
|
|
|
Finished goods |
|
$ |
3,967,431 |
|
|
$ |
3,993,949 |
|
Inventory in transit |
|
|
371,186 |
|
|
|
908,359 |
|
Parts |
|
|
22,967 |
|
|
|
22,967 |
|
|
|
|
|
|
|
|
|
|
$ |
4,361,584 |
|
|
$ |
4,925,275 |
|
|
|
|
|
|
|
|
Due from Factor
The Company factors a majority of its receivables without recourse under a credit risk
factoring agreement. The fair values of accounts receivables and the amount due to the factor
under this factoring agreement approximate their carrying values due to the short-term nature of
the instruments. The amounts borrowed are collateralized by the outstanding accounts receivable,
and are reflected as a reduction to accounts receivable in the accompanying condensed consolidated
balance sheet. These amounts are as follows:
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008 |
|
|
Dec. 31, 2007 |
|
Accounts receivable factored |
|
$ |
1,973,285 |
|
|
$ |
4,508,524 |
|
Amounts advanced and outstanding |
|
|
1,670,587 |
|
|
|
3,743,014 |
|
|
|
|
|
|
|
|
Due from factor |
|
$ |
302,698 |
|
|
$ |
765,510 |
|
|
|
|
|
|
|
|
Earnings per Share: Dilutive Effect
Basic earnings per share of common stock are computed by dividing net income applicable to
common shares by the weighted average number of common shares outstanding during the period.
Diluted earnings per share are computed using the weighted average number of common shares and, if
dilutive, the incremental common shares issuable upon the exercise of outstanding stock warrants
(using the treasury stock method). For the six months and the three months ended June 30, 2008 and
2007, there was no dilutive effect related to these outstanding stock warrants as their exercise
price of $2.57 was greater than the average market price of the common stock during the period.
11
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 June 30, 2008 and December 31, 2007.
Accounting Changes
In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 157,
Fair Value Measurements, which provides enhanced guidance for using fair value to measure assets
and liabilities. Under the new standard, fair value refers to the price that would be received to
sell an asset or the price paid to transfer a liability in an orderly transaction between market
participants in the market in which the reporting entity transacts. The standard provides a fair
value hierarchy wherein quoted prices in active markets are assigned the highest priority is
assigned and the lowest priority to unobservable data. The standard is effective for the financial
statements issued for fiscal years beginning after November 15, 2007 and interim periods within
those fiscal years. The Company adopted the provisions of SFAS No. 157 on January 1, 2008. There
was no impact on these consolidated financial statements as a result of the adoption of the
standard.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities, which includes an amendment to the guidance in SFAS No. 115,
Accounting for Certain Investments in Debt and Equity Securities. This statement permits
entities to choose to measure many financial instruments and certain other items at fair value in
order to allow entities to mitigate volatility in reported earnings caused by measuring related
assets and liabilities differently without having to apply complex hedge accounting provisions.
The statement applies to all entities, including non-profit entities; however, most of the
provisions apply only to those entities electing the fair value option. The standard is effective
for financial statements issued for fiscal years beginning after November 15, 2007, provided the
entity also elects to apply the provisions of FASB SFAS No. 157, Fair Value Measurements. The
Company adopted the provisions of SFAS No. 159 on January 1, 2008. There was no impact on these
consolidated financial statements as a result of the adoption of the standard.
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. SFAS No. 160 is effective for fiscal years, and interim periods within those fiscal
years, beginning on or after December 15, 2008. The Companys management does not anticipate
that this pronouncement will have a material impact on the consolidated financial statements.
Treasury Stock Transactions
During the six months ended June 30, 2008 the Company purchased 8,500 shares of its common
stock in the open market at a total cost of $6,800. These shares are accounted for as treasury
stock (at cost) in the accompanying condensed consolidated financial statements.
12
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management Discussion and Analysis of Financial Condition is qualified by
reference to and should be read in conjunction with our Condensed Consolidated Financial Statements
and the Notes thereto as set forth at the end of this document. We include the following cautionary
statement in this Form 10-Q for any forward-looking statements made by, or on behalf of, the
Company. Forward-looking statements include statements concerning plans, objectives, goals,
strategies, expectations, future events or performances and underlying assumptions and other
statements, which are other than statements of historical facts. Certain statements contained
herein are forward-looking statements and, accordingly, involve risks and uncertainties, which
could cause actual results or outcomes to differ materially from those expressed in the
forward-looking statements. The Companys expectations, beliefs and projections are expressed in
good faith and are believed by the Company to have a reasonable basis, including without
limitations, managements examination of historical operating trends, data contained in the
Companys records and other data available from third parties, but there can be no assurance that
managements expectations, beliefs or projections will result or be achieved or accomplished.
Historically, the identification and development of new products and expansion of the
Companys sales organization have achieved growth. There can be no assurance that we will be able
to continue to develop new products or expand sales to sustain rates of revenue growth and
profitability in future periods. Any future success that the Company may achieve will depend upon
many factors including those that may be beyond the control of the Company or which cannot be
predicted at this time. Although we believe that our expectations are based on reasonable
assumptions within the bounds of our knowledge of our business and operations, actual results may
differ materially from our expectations.
Factors that could cause actual results to differ from expectations include, without
limitations:
|
|
|
achieving planned revenue and profit growth in each of the Companys business units; |
|
|
|
|
renewal of purchase orders consistent with past experience; |
|
|
|
|
increasing price, products and services competition; |
|
|
|
|
emergence of new competitors or consolidation of existing competitors; |
|
|
|
|
the timing of orders and shipments; |
|
|
|
|
continuing availability of appropriate raw materials and manufacturing relationships; |
|
|
|
|
maintaining and improving current product mix; |
|
|
|
|
changes in customer requirements and in the volume of sales to principal customers; |
|
|
|
|
changes in governmental regulations in the various geographical regions where the
Company operates; |
|
|
|
|
general economic and political conditions; |
|
|
|
|
attracting and retaining qualified key employees; |
|
|
|
|
the ability of the Company to control manufacturing and operating costs; and |
|
|
|
|
continued availability of financing and financial resources on the terms required to
support the Companys future business strategies. |
13
In evaluating these statements, you should consider various factors, including those
summarized above, and, from time to time, in other reports the Company files with the SEC. These
factors may cause the Companys actual results to differ materially from any forward-looking
statement. The Company disclaims any obligation to publicly update these statements, or disclose
any difference between its actual results and those reflected in these statements. The information
constitutes forward-looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995.
(a) Background
We are in the business of developing, marketing and outsourcing the manufacture of various
consumer products. Our products consist of gun cleaning kits and accessories, gun
safety items such as gun locks, trigger locks and security safes, and hunting and camping
accessories. In 2007, we expanded our product line into household products, having added a wooden
fireplace bellow during the third quarter 2007 and three new cleaning dusters that began shipping
to customers in December 2007. During the second quarter of 2008, the Company has added two
additional cleaning dusters. In the third quarter of 2008, the Company will be adding a line of
fireplace equipment, which will include fireplace screens, tools and accessories. The initial
order to roll out this line to over 1,600 stores has already been received from Wal-Mart.
While the Companys line of GunMaster® gun cleaning kits continues to account for over 50% of
the Companys revenues, opportunities for significant growth are expected to come from the
household product area. The Company is currently working on expanding further its line of household
cleaning items.
A significant portion of our business is with mass-market retailers, primarily Wal-Mart, as
well as sporting goods retailers and distributors.
Our products can be grouped into four main categories: (a) gun cleaning and maintenance, (b)
hunting and camping, (c) gun safety, and (d) household 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 certain of our products with the assistance of our Chinese
trading agent and manufacturers. They are, in addition, responsible for the tooling,
manufacturing and packaging of our products.
Gun Maintenance. We market over fifty (50) different gun cleaning kits, rod sets, tools and
accessories used to clean and maintain virtually any firearm on the market. These kits are solid
brass, and consist of universal kits designed to fit a variety of firearms, caliber specific
kits, as well as replacement brushes, mops, etc. These kits are available in solid wood or
aluminum cases, as well as blister packed. We also market several kits that have been privately
labeled for certain customers. This product area accounted for 53% and 56% of gross sales during
the first six months of 2008 and 2007, respectively.
14
Hunting and camping. This category includes three meat processing items, Sportsmans Lighter,
game processing kit, two aluminum camping tables, and a turkey seat. This product area accounted
for 20% and 28% of gross sales during the first six months of 2008 and 2007, respectively.
Gun Safety. We market twelve (12) different gun safety locks and five (5) security and
specialty safes. The gun-locks composition range from plastic to steel and keyed trigger locks to
cable locks. The security safes are of heavy-duty, all steel construction and are designed for
firearms, jewelry and other valuables. Eight of the Companys gunlocks and two safes have been
certified for sale consistent with the standards set out by the State of California. This product
area accounted for 14% and 16% of gross sales during the first six months of 2008 and 2007,
respectively.
Household Products. We market five household cleaner dusters and a wooden fireplace bellow in
this category. During the third quarter of 2008, the Company will be adding a line of fireplace
equipment. This product area, new for 2008, accounted for 13% of gross sales during the first six
months of 2008.
(b) Financial Condition and Results of Operations
Financial Condition
A summary of the significant balance sheet items at June 30, 2008 as compared to year-end
December 31, 2007 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008 |
|
|
Dec. 31, 2007 |
|
|
% Change |
|
Accounts receivable |
|
$ |
574,879 |
|
|
$ |
263,646 |
|
|
|
118 |
% |
Due from factor |
|
|
302,698 |
|
|
|
765,510 |
|
|
|
(60 |
%) |
Inventories |
|
|
4,361,584 |
|
|
|
4,925,275 |
|
|
|
(11 |
%) |
Total current assets |
|
|
5,621,589 |
|
|
|
6,662,270 |
|
|
|
(16 |
%) |
Accounts payable |
|
|
1,383,604 |
|
|
|
2,393,050 |
|
|
|
(42 |
%) |
Total current liabilities |
|
|
1,554,794 |
|
|
|
2,640,446 |
|
|
|
(41 |
%) |
Working capital |
|
|
4,066,795 |
|
|
|
4,021,824 |
|
|
|
1 |
% |
Stockholders equity |
|
|
4,757,145 |
|
|
|
4,713,881 |
|
|
|
1 |
% |
There has been no material change in the overall financial condition of the Company for the period
ending June 30, 2008 as compared to December 31, 2007.
The combined accounts receivable and due from factor represents the Companys total accounts
receivables less funds advanced by the Companys factor. The overall decrease of $151,579 on these
combined amounts from December 31, 2007 to June 30, 2008 is a result of sales during the second
quarter of 2008 being significantly less than the fourth quarter of 2007. This differential is
normal and expected, as the Companys sales historically, are much higher during the fourth quarter
as compared to all other quarters.
Accounts payable (and accordingly total current liabilities) decreased June 30, 2008 as compared to
December 31, 2007 due primarily to the reduction of the amount owed to the Companys trading agent
for inventory purchases.
15
Results of Operations
Six Months Ended June 30, 2008 and 2007
For the six months ended June 30, 2008, the Company had net income of $50,064 on net sales of
$5,440,027, as compared to net income of $98,418 on net sales of $5,579,528 for the six months
ended June 30, 2007.
The Company continues to experience inflationary pressure on its gross margins due to rising
commodity prices, particularly steel, aluminum, plastics and oil. Gross margins decreased from 31%
for the six months ended June 30, 2007 to 26% for the six months ended June 30, 2008.
Operating expenses for the six months ended June 30, 2008 decreased $187,466, or 13% from the same
period in 2007. Of this decrease, $146,500 is due to the one time charge related to the settlement
of a lawsuit with the Companys former insurance carrier during the period ended June 30, 2007.
The Company also continued to reduce freight costs due to the initiatives implemented in March
2007. By obtaining spot quotes for every less than full truckload
shipment from an approved carrier list, the Company has been able to obtain much more favorable freight rates. Freight costs decreased $34,805 (24%) for the six months ended June 30, 2008 as compared to
2007. In addition, the Company also had decreases in commission expenses of $34,927, and shipping
labor costs of $17,542 for the six months as compared to 2007.
Three Months Ended June 30, 2008 and 2007
For the three months ended June 30, 2008, the Company had net income of $8,090 on net sales of
$2,724,258, as compared to net income of $115,620 on net sales of $2,739,903 for the same period
ending June 30, 2007.
Commodity price increases had an even greater affect on the cost of the Companys products during
the three months ended June 30, 2008, thereby affecting gross margins more significantly than for
the six month period in comparison to 2007. Gross margins decreased from 32% for the three month
period in 2007 to 25% in 2008. The Company has had the greatest affect on its cost for aluminum
tables. During recent weeks, there has been some turnaround in most commodity prices, and a
strengthening of the U.S. dollar, which may help improve margins during the later part of 2008,
although there can be no assurance that this trend will continue.
Operating expenses for the three months ended June 30, 2008 remained virtually unchanged from the
same period in 2007.
(c) Liquidity and Capital Resources
Our liquidity needs arise primarily from inventory. Our primary source of cash is funds from our
operations. We believe that external sources of liquidity could be obtained in the form of bank
loans, letters of credit, etc. The Company maintains a factoring agreement wherein it assigns its
receivables (on a non-recourse basis). Consequently, should our sales revenues significantly
decline, it could affect our short-term liquidity. The factor performs all credit and collection
functions, and assumes all risks associated with the collection of the receivables. The Company
pays a fee of 65/100ths of 1% of the face value of each receivable for this service. This fee is
included in interest expense on the Companys condensed consolidated statements of operations. The
factor may also, at its discretion, advance funds prior to the collection of our accounts, for
which the Company is charged interest. The interest rate charged is the JPMorgan Chase Bank prime
rate (5.00% as of June 30, 2008). Advances are payable to the factor on demand. For the six-month
period ending June 30, 2008, our factor had advanced us $1,670,587.
16
(d) Trends
Our business faces the issues of increased manufacturing costs and margin erosion as a result of
raw material, fuel and other utility price increases, and a weak U.S. dollar. This has put
pressure on our margins and overhead costs. Any strengthening of the U.S. dollar, or decrease in
commodity prices, would impact favorably on our business, as this would ease the pressure on
margins and increase our competitiveness. During the later part of July 2008 and into early
August, there has been some strengthening of the U.S. dollar, and decrease in some commodity
prices. The Company has not to date sought to recover these price increases for our products by
passing them on to our customers, which has resulted in declining margins. We recognize that the
customary method of recovering these increased costs would be to increase our prices to our
customers. This is difficult for us to accomplish due to the nature of our customer base. Since a
significant portion of our sales are to national retailers and distributors (e.g. 66% of our 2007
sales business was through Wal-Mart alone), at this time we have chosen not to do so with minor
exceptions. We were able to increase our prices to some of our smaller customers (approximately 15%
of our customer base) in June 2007.
(e) Gun Legislation
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 decided 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
District of Columbia law banned handgun possession by making it a crime to carry an unregistered
firearm and prohibiting the registration of handguns. The law separately provided that no person
may carry an unlicensed handgun, but authorizes the police chief to issue 1-year licenses; and
requires residents to keep lawfully owned firearms unloaded and disassembled or bound by a trigger
lock or similar device. The Supreme Court held the Second Amendment to the U.S. Constitution
protects an individual right to possess a firearm unconnected with service in a militia, and to use
that firearm for traditionally lawful purposes, such as self-defense within the home. The
Districts total ban on handgun possession in the home amounts to a prohibition on an entire class
of arms that Americans overwhelmingly choose for the lawful purpose of self-defense. The Court
also held the handgun ban and the trigger-lock requirement (as applied to self-defense) violate the
Second Amendment, finding the requirement that any lawful firearm in the home be disassembled or
bound by a trigger lock makes it impossible for citizens to use firearms for the core lawful
purpose of self-defense and is hence unconstitutional. It is unknown what impact, if any, this
ruling 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.
17
(f) Critical Accounting Estimates
The Company prepares its condensed consolidated financial statements in accordance with
accounting principles generally accepted in the United States of America. The Companys
significant accounting policies are discussed in detail in Note 2 to the December 31, 2007 audited
consolidated financial statements included in the Companys Form 10-KSB. The quarterly financial
statements for the period ended June 30, 2008, attached hereto, should therefore be read in
conjunction with that discussion. Certain of these accounting policies as discussed below require
management to make estimates and assumptions about future events that could materially affect the
reported amounts of assets, liabilities, revenues and expenses and disclosure of contingent assets
and liabilities. Accounting estimates and assumptions discussed in this section are those that we
consider to be the most critical to an understanding of our financial statements because they
inherently involve significant judgments and uncertainties. For all of these estimates, we caution
that future events rarely develop exactly as forecast, and the best estimates routinely require
adjustment. Since December 31, 2007, there have been no changes in our critical accounting
policies and no significant change to the assumptions and estimates related to them.
Long-lived Assets. Depreciation expense is based on the estimated useful lives of the
underlying property and equipment. Although the Company believes it is unlikely that any
significant changes to the useful lives of its property and equipment will occur in the near term,
an increase or decrease in the estimated useful lives would result in changes to depreciation
expense.
The Company continually reevaluates the carrying value of its long-lived assets, for events or
changes in circumstances, which indicate that the carrying value may not be recoverable. As part
of this reevaluation, if impairment indicators are present, the Company estimates the future cash
flows expected to result from the use of the asset and its eventual disposal. If the sum of the
expected future cash flows (undiscounted and without interest charges) is less than the carrying
value of the asset, an impairment loss is recognized to reduce the carrying value of the long-lived
asset to the estimated fair value of the asset.
Inventories. Inventories are valued at the lower of weighted average cost or market. Market
is determined based on net realizable value. Appropriate consideration is given to obsolescence,
excessive levels, deterioration and other factors in evaluating net realizable value. The Company
records a valuation reserve for inventories for which costs exceed the net realizable value.
Although the Company believes it is unlikely that any significant changes to the valuation reserve
will be necessary in the near term, changes in demand for our products would result in changes to
the valuation reserve.
Patents and Trademarks. Amortization expense is based on the estimated economic useful lives
of the underlying patents and trademarks. Although the Company believes it is unlikely that any
significant changes to the useful lives of its patents and trademarks will occur in the near term,
rapid changes in technology or changes in market conditions could result in revisions to such
estimates that could materially affect the carrying value of these assets and the Companys future
consolidated operating results.
(g) Off-Balance Sheet Arrangements
Since 2003, our Chief Executive Officer, David Collins, leased a portion of his home in Miami,
Florida to the Company, which serves as the Companys executive office. The Company pays a monthly
office allowance to Mr. Collins of $5,500, for approximately 1,200 square feet and secretarial
support. There is no lease agreement for these premises. This office arrangement was not the
product of arms length negotiation;
however, the Company has determined the arrangement to be competitive with comparable office
space and secretarial support.
The Company does not use affiliation with special purpose entities, variable interest entities
or synthetic leases to finance its operations. Additionally, the Company has not entered into any
arrangement requiring it to guarantee payment of third party debt or to fund losses of an
unconsolidated special purpose entity.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None.
ITEM 4. 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 June 30, 2008, 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 more fully detailed in Item 8A of the Companys December 31, 2007 Form 10-KSB. 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.
Item 4T. CONTROLS AND PROCEDURES.
There was no material change to the Companys internal control over financial reporting during its
most recent fiscal quarter from that of December 31, 2007.
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PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 1A. RISK FACTORS
Our operations and financial results are subject to various risks and uncertainties that
could adversely affect our business, financial condition, results of operations, and
trading price of our common stock. Please refer to our annual report on Form 10-KSB for
fiscal year 2007 for additional information concerning these and other uncertainties that
could negatively impact the Company.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
The following documents are incorporated by reference from Registrants Form 10SB filed with
the Securities and Exchange Commission (the Commission), File No. 000-29211, on January 28, 2000:
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Exhibits |
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2 |
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Acquisition Agreement |
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3 |
(i) |
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Articles of Incorporation |
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3 |
(ii) |
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By-laws |
Exhibits required by Item 601 of Regulation S-K attached:
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Exhibits |
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31.1 |
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Certification of David A. Collins Pursuant to Rule 13a-14(a)/15d-14(a) |
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31.2 |
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Certification of Robert C. Goodwin Pursuant to Rule 13a-14(a)/15d-14(a) |
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32.1 |
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Certification of David A. Collins Pursuant to Rule 13a-14(b) or Rule
15d-14(c) of the Securities Exchange Act of 1934 and 18U.S.C. Section 1350 |
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32.2 |
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Certification of Robert C. Goodwin Pursuant to Rule 13a-14(b) or Rule
15d-14(c) of the Securities Exchange Act of 1934 and 18U.S.C. Section 1350 |
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SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report
to be signed on its behalf by the undersigned, hereunto duly authorized:
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By: |
/s/ David A. Collins
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David A. Collins, Chairman, CEO and Principal Executive Officer |
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By: |
/s/ Robert C. Goodwin
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Robert C. Goodwin, Principal Accounting Officer and Principal Financial Officer |
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Dated: August 14, 2008
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