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EX-31.1 - EX-31.1 - DAC TECHNOLOGIES GROUP INTERNATIONAL INC | g22693exv31w1.htm |
EX-31.2 - EX-31.2 - DAC TECHNOLOGIES GROUP INTERNATIONAL INC | g22693exv31w2.htm |
EX-32.2 - EX-32.2 - DAC TECHNOLOGIES GROUP INTERNATIONAL INC | g22693exv32w2.htm |
EX-32.1 - EX-32.1 - DAC TECHNOLOGIES GROUP INTERNATIONAL INC | g22693exv32w1.htm |
EX-10.3.2 - EX-10.3.2 - DAC TECHNOLOGIES GROUP INTERNATIONAL INC | g22693exv10w3w2.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
þ | ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2009
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)
Florida | 65-0847852 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
12120 Colonel Glenn Road, Suite 6200, Little Rock, AR 72210
(address of principal executive offices)(zip code)
(501) 661-9100
(Issuers telephone number)
(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 REGISTRANT IS A WELL-KNOWN SEASONED ISSUER, AS DEFINED IN RULE 406 OF THE
SECURITIES ACT. YES o NO þ
CHECK WHETHER THE ISSUER IS NOT REQUIRED TO FILE REPORTS PURSUANT TO SECTION 13 OR 15(d) OF THE
EXCHANGE ACT. YES o NO þ
CHECK WHETHER THE ISSUER (1) FILED ALL REPORTS REQUIRED TO BE FILED BY
SECTION 13 OR 15(d) OF THE EXCHANGE ACT 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. YES þ NO o
CHECK WHETHER THE REGISTRANT HAS SUBMITTED ELECTRONICALLY AND POSTED ON ITS CORPORATE
WEB SITE, IF ANY, EVERY INTERACTIVE DATA FILE REQUIRED TO BE SUBMITTED AND POSTED PURSUANT TO RULE
405 OF REGULATION S-T DURING THE PRECEDING 12 MONTHS. YES o NO þ
CHECK IF THERE IS NO DISCLOSURE OF DELINQUENT FILERS IN RESPONSE TO ITEM 405 OF REGULATION S-K
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-K OR ANY AMENDMENT TO THIS FORM 10-K. o
INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS A LARGE ACCELERATED FILER, AN ACCELERATED FILER, A
NON-ACCELERATED FILER, OR A SMALLER REPORTING COMPANY.
LARGE ACCELERATED FILER o | ACCELERATED FILER o | NON-ACCELERATED FILER o (DO NOT CHECK IF A SMALLER REPORTING COMPANY) |
SMALLER REPORTING COMPANY þ |
INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS A SHELL COMPANY (AS DEFINED IN RULE 12b-2 OF THE
EXCHANGE ACT YES o NO þ
STATE THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES COMPUTED BY
REFERENCE TO THE PRICE AT WHICH THE STOCK WAS LAST SOLD, OR THE AVERAGE BID AND ASKED PRICE OF SUCH
STOCK, AS OF THE LAST BUSINESS DAY OF THE REGISTRANTS MOST RECENTLY COMPLETED SECOND FISCAL
QUARTER. THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES AS OF JUNE 30, 2009
WAS APPROXIMATELY $2,587,011.
STATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUERS CLASS OF COMMON EQUITY, AS OF THE
LATEST PRACTICABLE DATE. AS OF MARCH 16, 2010, 6,323,364 SHARES OF COMMON STOCK ARE ISSUED AND
5,793,699 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-K 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.
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Table of Contents
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 products similar
to those offered by the Company, 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).
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PART I
ITEM 1. 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 gun safety products and to a lesser
degree, hunting and camping accessories and household products. Our target consumer base is
sportsmen, hunters and outdoorsmen, and recreational enthusiasts. The Company sells its products to
retailers and distributors, and advertises its products on its Internet website www.dactec.com.
At the heart of the Company is a strong culture of innovation and new product development.
The Company introduced over 100 new or redesigned products since inception and expects to introduce
several new or redesigned products in 2010. The Companys four main product categories are (1) Gun
cleaning and maintenance, (2) Gun safety, (3) hunting and camping, and (4) household.
(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,
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with the introduction of our line of GunMaster® gun cleaning kits, we shifted our emphasis to
gun cleaning items and related gun maintenance accessories. This product line accounted for 69% of
the Companys sales revenues in 2009. In 2009, we also entered into a trademark licensing
agreement with Olin Corporation to market certain of our gun cleaning items under the Winchester®
brand name for sale of these items to Wal-Mart.
In 2005, the Company began to develop products for the hunting and camping market which
includes game processing equipment, aluminum camping tables and other items. In 2007, the Company
added a line of household items, including a line of household cleaning dusters and fireplace
screens and related equipment. Sales in these two product lines peaked in 2008, accounting for 19%
and 23%, respectively, of the Companys sales. In 2009, the Company eliminated a number of the low
gross margin items resulting in a reduction of Company sales in these two areas to 9% and 7%
respectively.
Although a significant portion of our business is with the mass-market retailer Wal-Mart
(approximately 55% in 2009), we have been able to considerably increase our business customer base
with large sporting goods retailers, distributors and catalog companies.
Our products are primarily sourced from manufacturers and suppliers located in and imported
from the Peoples Republic of 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:
| Increased penetration of our existing markets, particularly in the gun cleaning market and accessories and the household cleaning market | ||
| Development of new products for the hunting and camping market and our other established markets | ||
| Identification and development of products for new markets in which the Company can be competitive due to its manufacturing relationships | ||
| Identification and recruitment of effective manufacturers representatives to actively market these products on a national and international basis | ||
| 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
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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 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 which complement 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. In 2005 the Company began adding new items in the hunting and camping area and
in 2007 added items in the household products area.
Our products can be grouped into four main categories: (a) gun cleaning and maintenance, (b)
hunting and camping, (c) household, and (d) gun safety. 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.
(a) | Gun Cleaning and Maintenance. We market over fifty (50) different gun cleaning kits and rod sets used to clean and maintain virtually any firearm on the market. The top of the line kits are solid brass, and consist of universal kits designed to fit a variety of firearms, or caliber specific kits, or replacement items such as 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. Finally, we also market several kits that have been privately labeled for certain customers. This product area accounted for 69% and 49% of sales in 2009 and 2008, respectively. | ||
(b) | Hunting and Camping. This category includes Sportsmans Lighter, two aluminum camping tables and turkey hunting seat. The game processing items carried in 2008 were eliminated in 2009. This product area accounted for 9% and |
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19% of sales in 2009 and 2008, respectively. | |||
(c) | Household. This category includes a line of five household cleaning dusters. The line of household fireplace screens, tools and accessories were eliminated in 2009. This product area accounted for 7% and 23% of sales in 2009 and 2008, respectively. | ||
(d) | Gun Safety. We market twelve (12) different gun safety locks and five (5) security and specialty safes. The locks composition range from plastic to steel, and are designed to range from keyed trigger locks to cable locks. Our security safes are of heavy-duty, all steel construction and are designed 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 firearms safety standards set out by the State of California. These California firearms safety standards have been adopted by other states and by a variety of gun manufacturers. This product area accounted for 15% and 9% of sales in 2009 and 2008, respectively. |
(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. 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 primary 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. In
September 2009, under a third party arrangement, we opened a warehouse facility in Los Angeles.
This facility is used primarily to ship products to certain Wal-Mart distribution centers and
customers located on the west coast. Most of our international business is shipped directly to
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our customers from our 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)
(5) Competition
We operate in a very competitive industry, dominated by more than 50 national and
international companies with well-established brands, many 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)
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Some of our competitors in the business sectors in which we operate are:
| Gun Safety - Master Lock (which presently controls 60%-70% of the market), Smith & Wesson, Shot Lock, Sentry Safes, Pro-Lok and Gun Vault. | ||
| Gun Cleaning Kits Outers and Hoppes | ||
| Hunting and Camping traditional manufacturers of hunting and camping equipment |
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, and
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, a market report published by Cygnus Business Media, an international business media
company, states that nationally sales of hunting licenses, tags and stamps in 2005 was
approximately $724 million. The 2005 figures issued by the U.S. Fish and Wildlife Service
indicated that total sales rose 2.8 percent from the previous year, from 14.7 million to 14.5
million. More aggressive reports were published by the National Sporting Goods Association, which
estimated there are 20.6 million active hunters. The Outdoor Industry Associations projection
would add about six million to that figure and a survey commissioned by National Shooting Sports
Foundation reported in 2009 that the number of hunters reached 18.5 million.
In a National
Rifle Association report published in January 2010 it was reported that the
number of gun owners in the U.S. approximated 70-80 million (of which 40-45 million owned
handguns), and that approximately 40-45% of households have firearms. In addition, the NRA website
reported that ...February 2010 ranked as the second highest February and eighth highest month
overall for firearm sales, according to data released by the FBIs National Instant Criminal
Background Check System (NICS). Though the 1,243,211 checks in February 2010 represent a 1.3
percent decrease from the 1,259,078 checks conducted in February 2009the
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middle of the boom in gun
sales following the 2008 presidential electionsthe figure is an increase of 21.7 percent over
checks in February 2008. The total number of background checks reported since the beginning of NICS
on Nov. 30, 1998 is 112,380,272.
A 2005 report published in the Pediatrics online journal found that about 1.7 million children
lived in homes where there were 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.
Despite the continuing weakness of the overall economy, manufacturers have reported strong
consumer demand for handguns and tactical rifle products in 2009. This period was marked by a new
administration taking office in Washington, D.C., speculation surrounding increased gun control,
and heightened fears of terrorism and crime. We are unable to assess whether or for how long the
recent and significant increase in consumer demand will last. Changes in the factors that are
contributing to the very strong consumer demand for handgun and tactical rifle products,
particularly in an overall weak economic environment, may adversely affect our operating results.
Although we sell our products both foreign and domestically, our U.S. sales account for 98% of
our overall revenues in 2009 and 2008.
Our primary customer base can be broken down as follows:
| National retail chains such as Wal-Mart, which accounted for 55% and 71% of sales in 2009 and 2008, respectively | |
| Distributors such as Acusport, RSR Group, Inc., Jerrys Sport Center, Inc., and Maurice (representing 6% and 3% of sales in 2009 and 2008, respectively); | |
| Sporting goods retailers such as Cabelas, Academy Sports, Dicks Sporting Goods and Sportsmans Guide (representing 24% and 16% of sales in 2009 and 2008, respectively); | |
| Gun manufacturers such as Savage Arms, Browning, Marlin, Glock and SIG-Arms (representing 9% and 5% of sales in 2009 and 2008, respectively); and | |
| Regional retail chains and sole proprietors (representing 7% and 4% of sales). |
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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
dependent 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 2009 and 2008 was approximately 1.7% of sales.
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:
Model | Patent No. | Expiration | ||||
TVP 095 Trigger Lock
|
Des. 375,342 | 2009 | ||||
SWA 03 SWAT Steering Wheel Alarm
|
Des. 365,774 | 2009 | ||||
GWA 001 Glass/Window Alarm
|
Des. 371,086 | 2009 | ||||
Defense Spray and Flashlight
|
Des. 375,994 | 2009 | ||||
Gun Cleaning Kit
|
7,020,994B2 | 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.
In January 2009, we entered into a trademark/licensing agreement with Olin Corporation for the
non-exclusive use of Olins Winchester® trademark. The agreement limits our use of the trademark
to six of our products, including our GunMaster® line which, with the trademark, is sold
exclusively through Wal-Mart. The agreement was for a period of one year, expiring on December 31,
2009, subject to renewal. The agreement may be earlier terminated by either party in the event of
default by the other. In February 2010, the agreement was renewed for an additional year, on
substantially the same terms and conditions. The agreement requires that we satisfy certain minimum
conditions relating to our net sales of products and licensing fees. To date, we have satisfied
all such conditions.
To date, we have not registered or trademarked any of our product names except for
GunMaster® (See Risk Factor). We have relied 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 do not patent or trademark all our products because of the cost and we have been advised by
patent counsel that certain products are not patentable.
As indicated in the chart at page 10, four of our patents expired in 2009 and we do not intend
to continue patent protection for these products. With the exception of the TVP 095 Trigger Lock,
we have not offered these products for sale in the past several years. See Risk Factors.
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 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 one (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 individuals 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.
California law also requires every gun to be sold with a state-approved child-safety lock to make
it easier for gun owners to lock up their weapons. The locks must be of sufficient quality to meet
state approval. The state contracts with independent laboratories to test gun locks to make sure
the locks will work and cannot be easily removed by unauthorized people.
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.
With the election of President Barack Obama his views on gun control may have an impact on our
sales of gun safety devices. While in the US Senate, Obama has supported several gun control
measures, including restricting the purchase of firearms at gun shows and the reauthorization of
the Federal Assault Weapons Ban. Obama voted against legislation protecting
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firearm manufacturers
from certain liability suits, which gun-rights advocates say are designed to bankrupt the firearms
industry. Obama did vote in favor of the 2006 Vitter Amendment to prohibit the confiscation of
lawful firearms during an emergency or major disaster, which passed.
More recently, Obama initially voiced support of Washington DCs handgun ban. Following the
Supreme Court decision that the ban was unconstitutional, he revised his position in support of the
decision overturning the law, saying and affirming that the Second Amendment protects the right of
individuals to bear arms.
(9) Research and Development.
We develop our products internally, utilizing the expertise of our manufacturers, input from
an engineering consulting firm and input from our customers. Since we do not design nor create
customized specifications, we do not directly generate Research and Development costs. The nature
of our relationship with our Chinese trading company does not require that they or our
manufacturers, disclose what, if any, R & D costs are sustained in connection with the manufacture
of our products. Any R & D costs incurred by our manufacturers is passed on to us in the pricing
of the tooling, molds and products and are thus subsumed in the pricing to our Company.
Consequently, to the extent, if any, that our manufacturers pass R & D costs to us, they are, in
turn, recaptured by us through the pricing to our customers.
(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 twelve (12) employees, all of whom are full-time: President & Chief
Executive Officer, Chief Financial Officer, Vice President of Manufacturing, Sales Analyst,
Salesman, Information Systems Tech, accounting clerk, shipping manager and four full-time warehouse
workers. There are no collective bargaining agreements.
(12) Reports to Security Holders.
We file reports with the SEC as a smaller reporting company. 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, 100 F Street, N.E., Washington,
DC 20549, on official business days during the hours of 10 a.m. to 3 p.m. Information on the
operation of the Public Reference Room may be obtained by calling the
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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.
ITEM 1A. 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:
The current economic and financial downturn may cause a decline in consumer spending and may
adversely affect the Companys business, operations, liquidity, financial results and stock price.
Our operating results are affected by the relative condition of the U.S., and to a lesser extent,
the world economy. While the major economic disruptions of the global financial markets have
largely subsided, our business and financial performance may be adversely affected by current and
future economic conditions that cause a decline in business and consumer spending, including a
reduction in the availability of credit, increased unemployment levels, higher energy and fuel
costs, rising interest rates, financial market volatility and recession. Additionally, we may
experience difficulties in operating and growing our operations to react to economic pressures in
the U.S.
As a business that ultimately depends on consumer discretionary spending, the Company may
face a difficult 2010 because our customers may reduce their purchases due to high unemployment,
record budget deficits, job losses, foreclosures, bankruptcies, higher consumer debt, loss of
consumer confidence, interest rates, reduced access to credit and falling home prices. Decreases
in comparable store sales, customer traffic or average value per transaction negatively affect the
Companys financial performance, and a prolonged period of depressed consumer spending could have a
material adverse effect on our business. Promotional activities and decreased demand for consumer
products, particularly higher-end products, could affect profitability and margins. The potential
effects of the economic and financial crisis are difficult to forecast and mitigate. As a
consequence, our sales, operating and financial results for a particular period are difficult to
predict, and, therefore, it is difficult to forecast results to be expected in future periods. Any
of the foregoing could have a material adverse effect on our business, results of operations, and
financial condition and could adversely affect our stock price.
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Additionally, many of the effects and consequences of the U.S. and global financial and
economic crises are currently unknown or unpredictable and could potentially have a material
adverse effect on the Companys liquidity and capital resources, including our ability to raise
additional capital if needed, and the ability of banks and factors to honor requests for credit, or
could otherwise negatively affect the Companys business and financial results. Although we
generally generate funds from our operations and our existing factoring facility to pay our
operating expenses and fund our capital expenditures, our ability to continue to meet these cash
requirements over the long-term may require access to additional sources of funds, including
capital and credit markets, and continuing market volatility, the impact of government intervention
in financial markets and general economic conditions may adversely affect the ability of the
Company to access capital and credit markets.
The global crisis may also adversely affect our manufacturers and suppliers access to
capital and liquidity with which to maintain their inventory, production levels and product quality
and to operate their businesses, all of which could adversely affect our supply chain. It may cause
manufacturers and suppliers to reduce their offerings of customer incentives and vendor allowances,
cooperative marketing expenditures and product promotions. The current crisis and market
instability make it difficult for us and our manufacturers and suppliers to accurately forecast
future product demand trends, which could cause us to carry too much or too little inventory in
various product categories.
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. Anti-gun sentiments and a weak economy are potential risk factors, as they
may inhibit consumer purchases of guns.
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 for the sale of a large percentage of our products. For
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example,
approximately 55% 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 2009 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.
In the past the increased cost of raw materials and manufacturing has adversely affected our
profits. During 2009 we experienced a decline in our manufacturing costs due to a decline in the
costs of raw materials such as steel, plastic, wood and brass, but there can be no assurance that
this favorable trend will continue. 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. Industry competition and the timing of price
increase by suppliers and manufacturers limit to some extent our ability
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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.
Demand for our products and our financial results are dependent on the successful development
of new products and processes. Our success depends in part on fulfilling available opportunities to
meet consumer needs and anticipating changes in consumer preferences with successful new products
and product improvements. We aim to introduce products on a timely basis to counteract obsolescence
and decreases in sales of existing products. While we devote significant focus to the development
of new products, we may not be successful in their development or these new products may not be
commercially successful.
While we manufacture a variety of products, we rely primarily on the sale of gun cleaning kits
and gun safety products 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 gun safety products -
which accounted for approximately 84% of our total revenues in 2009. 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
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successful in attracting
and retaining such personnel.
We may be adversely affected by legislation and regulation over firearms. The business of all
producers, manufacturers, 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. The majority of our
accounts are factored on a non-recourse basis, which reduces the Companys exposure to credit risk.
At the end of 2009 we entered into a Receivables Purchase Agreement with Wachovia Bank which
further reduced our credit risk exposure. 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. In sum,
credit risk is considered by management to be limited due to the Companys customer base, its
account receivable factoring and selling arrangements, and its customers financial resources.
We Need Liquidity to Operate Our Business. Due to the capital demands of operating our
business it is necessary that we have continuous liquidity. Our liquidity is, in large part,
dependant on our ability to factor and sell our account receivables. We also maintain a $1,000,000
line of credit with a local bank. In the event each of these agreements and arrangements terminate
or fail for any reason, it is likely to have a negative effect on our ability to operate at the
same level.
The inability to secure and maintain rights to intellectual property could adversely affect
our business. 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,
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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.
Moreover, with the exception of our Gun Cleaning Kit, our four other patented products
expired in 2009. 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 sale of our licensed products depends on the goodwill associated with the name and brand
and the success of our licensors. Licensed products sold by us compete, in part, on the goodwill
associated with the name and brand and the success of our licensors. In January 2009 we entered
into a licensing agreement with Olin corporation for the use of the Winchester® trademark. A
decline in the perceived quality of the Winchester® products or name, or other circumstances
adversely affecting its reputation could significantly damage our ability to sell our licensed
products. Moreover the expiration or termination of the licenses may adversely impact our net
sales revenues for those products.
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 Transactions, and Director Independence at Item 13. 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
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suppliers in Renminbi currency,
thereby exposing us to some foreign exchange fluctuations.
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 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
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.
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The Company also maintains an office in Bentonville, Arkansas. This location consists of
approximately 1,230 square feet of office space and is leased at a monthly rent of $922 and expires
March 31, 2011.
The Companys primary 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
$9,791.75, 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 has a secondary distribution facility located in Los Angeles, California under a
third party arrangement. The Company pays $2,375 a month to lease a portion of warehouse space.
This arrangement is on a month-to-month basis, with no formal written agreement.
The Company also maintains an executive office in Miami Beach, Florida at the residence of its
president, David A. Collins. 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 not recently determined whether the arrangement is
or is not competitive with comparable office space and secretarial support.
ITEM 3. LEGAL PROCEEDINGS
None
ITEM 4. REMOVED AND RESERVED
PART II
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES.
(1) Over the Counter Market. 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.
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Quarter Ended | High | Low | ||||||
March 31, 2008 |
$ | 1.05 | $ | 0.68 | ||||
June 30, 2008 |
$ | 0.92 | $ | 0.75 | ||||
September 30, 2008 |
$ | 0.89 | $ | 0.69 | ||||
December 31, 2008 |
$ | 0.75 | $ | 0.27 | ||||
March 31, 2009 |
$ | 0.39 | $ | 0.25 | ||||
June 30, 2009 |
$ | 0.80 | $ | 0.29 | ||||
September 30, 2009 |
$ | 0.94 | $ | 0.65 | ||||
December 31, 2009 |
$ | 0.96 | $ | 0.68 |
(2) Shareholders. As of March 17, 2010, there were approximately 65 holders of record,
excluding those held in street name, of our 5,793,699 shares of common stock outstanding. This
does not include owners of the Companys securities held in street name.
(3) Dividends. 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.
We currently plan to retain any earnings to finance the growth of our business rather than to pay
cash dividends. Although there is no restriction to pay dividends as of the date of this
registration statement, we have no present intention to declare dividends.
(4) Repurchases of Securities.
The Company did not repurchase any of its common stock during the fourth quarter of 2009.
ITEM 6. SELECTED FINANCIAL DATA
Information not required.
ITEM 7. 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 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-K for any forward-looking statements made by, or on behalf of, the
Company. Forward-looking statements include statements concerning plans,
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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 $553,555 on net sales of $14,680,709 for 2009 as compared
to net income of $356,694 on net sales of $17,042,361 for 2008. Net income increased
$196,861, or 55%, while net sales decreased $2,361,652, or 14%. Earnings per share increased
from $0.06 to $0.10, a 67% increase.
As previously reported, in 2009 the Company eliminated several low gross margin products in
the hunting and camping and household lines and shifted its sales efforts back to its core gun
cleaning and maintenance line. Gross Sales of the Companys gun cleaning and maintenance products
increased $1,828,456, or 21% over 2008, offsetting somewhat the lost sales due to the elimination
of the lower gross margin items.
The reversal during 2009 of the inflationary pressure the Company experienced in prior years
from rising commodity prices had a positive effect on gross margins, as did the elimination of the
lower gross margin products. Gross margins increased from 23% in 2008 to 28% in 2009. Because of
this increase in gross margins, the Companys gross profit increased $297,086, or 8% over 2008,
despite the $2,361,652 decrease in net sales.
Operating expenses remained virtually unchanged in 2009 as compared to 2008. Operating
expenses increased 3.6%, from $2,923,194 in 2008 to $3,029,997 in 2009. These increases were
directly related to the opening of the west coast distribution center and office in Bentonville,
Arkansas.
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Financial Condition
A summary of the significant balance sheet items is summarized below:
2009 | 2008 | |||||||
Accounts receivable |
$ | 929,082 | $ | 495,718 | ||||
Due from factor |
$ | 27,592 | $ | 1,542,918 | ||||
Inventories |
$ | 4,479,347 | $ | 2,742,563 | ||||
Accounts payable-trade |
$ | 776,093 | $ | 795,136 | ||||
Total current assets |
$ | 5,931,867 | $ | 5,483,389 | ||||
Total current liabilities |
$ | 1,072,590 | $ | 1,107,814 | ||||
Net working capital |
$ | 4,859,277 | $ | 4,375,575 | ||||
Stockholders equity |
$ | 5,530,234 | $ | 5,005,598 |
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. This fee is included in interest expense
on the Companys consolidated statements of income. 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, 2009 and
2008, these amounts are calculated as follows:
2009 | 2008 | |||||||
Total accounts receivable |
$ | 2,010,322 | $ | 5,220,636 | ||||
Less: assigned receivables |
(1,081,240 | ) | (4,724,918 | ) | ||||
Net accounts receivables |
$ | 929,082 | $ | 495,718 | ||||
Assigned receivables |
$ | 1,081,240 | $ | 4,724,918 | ||||
Less: Funds advanced |
(1,053,648 | ) | (3,182,000 | ) | ||||
Due from factor |
$ | 27,592 | $ | 1,542,918 | ||||
On December 4, 2009, the Company entered into a Receivables Purchase Agreement with Wachovia
Bank wherein the Company sells its receivables from Wal-Mart at a discounted price to Wachovia
Bank. This agreement is part of a vendor finance program initiated by Wal-Mart on behalf of their
vendors. Under the terms of the agreement, Wal-Mart confirms to
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Wachovia, normally within five to seven business days, that they accept and agree to pay
certain receivables generated by sales to them by the Company. Wachovia then purchases these
confirmed receivables, discounted at an annual rate equal to the 90 day LIBOR rate plus 1.75% for
the number of days remaining until the receivables come due under our normal terms with Wal-Mart.
We believe, under the terms of the agreement with Wachovia, the discount charged by Wachovia is
less than the fee charged by our factor. In addition there is no interest charge to us since the
receivables are being purchased by Wachovia as contrasted to loans in the case of our factor. Under
the agreement Wachovia is entitled to reject any receivable. Either party may terminate the
agreement upon 30 days notice to the other. We believe, this agreement will result in substantial
savings for the Company. This agreement does not impact or effect our factoring arrangement with
receivables other than those generated from our relationship with Wal-Mart.
To effectuate the transition from our factor to Wachovia, it was necessary to receive release
from our factor of their claim to any receivables previously assigned to them. In order to
accomplish this, Wal-Mart agreed to pay all invoices assigned to our factor prior to their normal
due date. In late December 2009, the Companys factor received payment from Wal-Mart for
approximately $2.1 million in receivables prior to their normal due date, and an additional
$200,000 in January 2010, which paid off all Wal-Mart receivables assigned to our factor. This
early payment of $2.1 million, coupled with the reduced sales in the fourth quarter from the
elimination of certain products, resulted in the $3,210,314 reduction in total receivables at
December 31, 2009 as compared to 2008.
Inventories
Inventories increased $1,736,784 from 2008 to 2009. This increase was the result of fourth
quarter sales being less than what management had estimated. This additional inventory has been
rolled over for sale into 2010 as it consists of products commonly sold to the Companys major
customers. This has resulted in the Company having to reduce its manufacturing orders in the first
quarter of 2010.
Liabilities
Trade accounts payable, which is related primarily to inventory purchases, remained virtually
unchanged from 2008, despite the increase in inventory.
Liquidity and Capital Resources
Our primarily 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
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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, 2009, the
outstanding balance owed to our factor was $1,053,648.
As previously reported in the Companys 10Q for the period ending September 30, 2009, CIT
Group, Inc., the parent company of the Companys factor, filed for Chapter 11 protection under the
federal bankruptcy code on November 1, 2009. On December 10, 2009, CIT Group, Inc. emerged from
Chapter 11 proceedings pursuant to a prepackaged plan of reorganization that was confirmed by an
order of the United States Bankruptcy Court for the Southern District of New York on December 8,
2009. The Company continues to factor most of its receivables (excluding Wal-Mart) with CIT
Group/Commercial Services, Inc. There has been no interruption in services or funding provided by
the Companys factor. Moreover, by entering into a Receivables Purchase Agreement with Wachovia
Bank for the Companys Wal-Mart receivables and securing a $1,000,000 line of credit, the Company
believes it has protected itself from any interruption in required cash needs should conditions
change with the ability of its factor to provide funding. These actions have also protected the
Company by reducing its risk of loss to an immaterial amount should its factor fail in implementing its
reorganization plan. The Company has and will continue to monitor the financial status of its
factor.
On December 4, 2009 the Company entered into a Receivables Purchase Agreement with Wachovia
Bank, certain terms of which are discussed above, for the sale of the Companys receivables with
Wal-Mart to Wachovia. The Company began receiving funding under this agreement on February 2,
2010.
On August 10, 2009 the Company secured a $1,000,000 line of credit with a local bank,
collateralized by its inventory. This line of credit was renewed on February 10, 2010 and matures
on April 10, 2011. The interest rate on this line of credit is 6%. At December 31, 2009, the
Company did not have an outstanding balance on this line of credit.
The Company has two demand notes with a local bank guaranteed by our CEO, David Collins. The
loans bear interest at 7.25% and mature in 2010. The total principal balance of these loans on
December 31, 2009 totaled $52,454. 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 Properties and Item 13 Certain
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Relationships and Related Transactions, and Director Independence. The Company does not believe
that this arrangement has, or is reasonably likely to have, a material effort on our
financial condition, revenues or expenses, results of operations, liquidity, capital
expenditures, or resources.
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
In previous years, our business faced the issue of increased manufacturing costs and margin
erosion as a result of raw material, fuel and other utility price increases, and a weak dollar.
This put pressure on our margins and overhead costs. During 2009, this trend reversed itself, as
decreases in raw materials and other costs resulted in decreased manufacturing costs for the
Companys products. These decreased manufacturing costs had a favorable impact on our business as
our gross margins increased significantly over previous years. It is difficult to ascertain
whether this trend will continue in the future (See Risk Factors).
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.
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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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Information not required for smaller reporting companies.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our
consolidated financial statements are contained in pages F-1 through
F-22 following.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
As more fully described in a Form 8-K that we filed with the
SEC on January 7, 2010, we were notified that, effective January 1, 2010, Frost,
PLLC (Frost), our independent accountant, and the principal accountant who was engaged
to audit our financial statements, and certain partners of Moore Stephens Wurth
Frazer and Torbet, LLP
(MSWFT) formed Frazer Frost, LLP (Frazer Frost),
a new partnership. Pursuant to the terms of a Combination Agreement by
and among Frost, MSWFT and Frazer Frost, each of Frost and MSWFT contributed
substantially all of their assets and certain of their liabilities to Frazer Frost,
resulting in Frazer Frost assuming Frosts engagement letter with us and becoming
our new independent accounting firm, and the principal accountant engaged to audit
our financial statements, effective January 1, 2010. As a consequence of the transaction
between Frost and MSWFT forming Frazer Frost, and simultaneously with the effectiveness of
this transaction, Frost resigned as our certifying accountant. The Companys Board
of Directorsthere being no audit or other similar committee of the Boardapproved the change
by resolution dated January 7, 2010.
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ITEM 9A. CONTROLS AND PROCEDURES
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) under the Exchange
Act, for the Company.
Internal control over financial reporting includes those policies and procedures that: (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that our receipts and expenditures are being made only in
accordance with authorizations of its management and directors; and (3)provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use or disposition of our
assets that could have a material effect on the financial statements.
Management recognizes that there are inherent limitations in the effectiveness of any system
of internal control, and accordingly, even effective internal control can provide only reasonable
assurance with respect to financial statement preparation and may not prevent or detect material
misstatements. In addition, effective internal control at a point in time may become ineffective in
future periods because of changes in conditions or due to deterioration in the degree of compliance
with our established policies and procedures.
A material weakness is a significant deficiency, or combination of significant deficiencies,
that results in there being a more than remote likelihood that a material misstatement of the
annual or interim financial statements will not be prevented or detected.
Under the supervision and with the participation of our Chief Executive Officer and Chief
Financial Officer, management conducted an evaluation of the effectiveness of our internal control
over financial reporting, as of the Evaluation Date, based on the framework set forth in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Based on its evaluation under this framework, management concluded that our
internal control over financial reporting was not effective as of the Evaluation Date.
Management assessed the effectiveness of the Companys internal control over financial
reporting as of Evaluation Date and identified the following material weaknesses:
| INADEQUATE SEGREGATION OF DUTIES: We have an inadequate number of personnel to properly implement control procedures. | ||
| LACK OF AUDIT COMMITTEE & OUTSIDE DIRECTORS ON THE COMPANYS BOARD OF DIRECTORS: We do not have a functioning audit committee or outside directors on the Companys Board of Directors, resulting in ineffective oversight in the establishment and monitoring of required internal controls and procedures. |
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Management is committed to improving its internal controls and will (1) increase the frequency
of independent reconciliations of significant accounts which will mitigate the lack of segregation
of duties until there are sufficient personnel and (2) may consider appointing outside directors
and audit committee members in the future.
Management, including our Chief Executive Officer and Chief Financial Officer, has discussed
the material weakness noted above with our independent registered public accounting firm. Due to
the nature of this material weakness, there is a more than remote likelihood that
misstatements which could be material to the annual or interim financial statements could
occur that would not be prevented or detected. The material weaknesses identified did not result
in the restatement of any previously reported consolidated financial statements or any other
consolidated financial statement disclosure for the past year.
This Annual Report does not include an attestation report of our registered public accounting
firm regarding internal control over financial reporting.
Managements report was not subject to attestation by the our registered public accounting
firm pursuant to temporary rules of the SEC that permit us to provide only managements report in
this annual report.
CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING
There were no significant changes in our internal controls or in other factors that could
significantly affect these controls subsequent to the Evaluation Date.
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 is 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.
ITEM 9A(T). CONTROLS AND PROCEDURES.
Information not required.
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ITEM 9B. OTHER INFORMATION
There was no information reportable on Form 8K for the 2009 fourth quarter, which has not
otherwise been reported.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
(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 |
64 | President, CEO, Director | 2009-2010 | |||
Robert C. Goodwin |
53 | CFO/Director | 2009-2010 |
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.
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(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,
2009, all Reporting Persons complied with all applicable filing requirements.
(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
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third party or parties to identify or evaluate or assist in identifying or evaluating potential nominees.
The Board of Directors also acts as the audit committee. None of our directors are
independent.
ITEM 11. 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 Principal Position | Year | Salary | Commission | Compensation | Total | |||||||||||||
David A. Collins,
PEO |
2009 | $ | 120,000 | $ | 450,443 | $ | 66,000 | $ | 636,443 | |||||||||
2008 | 120,000 | 423,747 | 66,000 | 609,747 | ||||||||||||||
Robert C. Goodwin,
PFO |
2009 | 77,400 | 77,400 | |||||||||||||||
2008 | 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
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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%. This agreement was
recently corrected to due to a scriveners error relating to the period of time that Mr. Collins
estate would receive certain benefits in the event of his demise.
In addition, for the years 2008 and 2009, 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 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS.
The following table sets forth certain information regarding the beneficial ownership
of our common stock as of March 17, 2010 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 5,793,699 shares of common
stock outstanding.
(1) Security Ownership of Certain Beneficial Owners.
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Number of Shares | Percent | |||||
Title of Class | Name and Address of Beneficial Owner | Beneficially Owned | of Class | |||
Common Stock |
Kennerman Associates |
785,020 | 13.5% | |||
Saratoga Springs, NY | ||||||
Common Stock |
Praetorian Capital Management LLC |
|||||
Miami Beach, FL | 575,255 | 9.9% | ||||
Common Stock |
David A. Collins |
500,500 [1] | 8.6% | |||
Miami Beach, FL | ||||||
Common Stock |
Midsouth Investor Fund LP |
370,000 | 6.4% | |||
Nashville, TN |
[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. |
(2) Security Ownership of Management
Number of Shares | Percent | |||||
Title of Class | Name and Address of Beneficial Owner | Beneficially Owned | of Class | |||
Common Stock |
Robert C. Goodwin |
19,073 | 0.33% | |||
N. Little Rock, AR | ||||||
Common Stock |
David A. Collins |
500,500 | 8.6% | |||
Miami Beach, FL |
There are no arrangements, which may result in a change in control of the Company.
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.
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Equity Compensation Plan Information
Plan category | Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) |
Weighted-average exercise price of outstanding options, warrants and rights (b) |
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (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 |
Nonenone outstanding | zeronone outstanding | None | |||
Total |
None | None | 1,000,000 |
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE.
At December 31, 2009 and 2008, the Company has a non-interest bearing note receivable of
$216,377 and $170,382, respectively, from David A. Collins, Chairman and CEO. This note is due
December 31, 2010. 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, 2009 and 2008, 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, 2010.
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.
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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, 2009 and 2008 was $52,454 and
$104,609, respectively. The notes are due on various dates in 2010. 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, 2009 and 2008 were $1,053,648 and $3,182,000,
respectively. In addition, Mr. Collins has also personally guaranteed repayment of any funds the
Company may borrow on its $1,000,000 line of credit with a local bank. As of December 31, 2009
there is no outstanding balance on this line of credit. 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 2009 and 2008, 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.
ITEM 14. PRINCIPAL ACCOUNTANTING FEES AND SERVICES
(1) Audit Fees
The Company incurred the following fees to Frost, PLLC, the Companys independent
auditors, for services rendered during the fiscal years ending December 31, 2009 and December 31,
2008:
(1) | (2) | (3) | ||||||||||||||||||
Audit | Audit | Tax | (4) | |||||||||||||||||
Total | Fees | Related | Compliance | Other | ||||||||||||||||
2009 |
$ | 72,680 | $ | 70,254 | $ | -0- | $ | 2,426 | $ | -0- | ||||||||||
2008 |
$ | 88,330 | $ | 85,526 | $ | -0- | $ | 2,804 | $ | -0- |
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(1) Audit Fees. The aggregate fees billed for professional services related to the audit of our
annual financial statements, review of financial statements included in our Forms 10-Q, or other
services normally provided by Frost in connection with statutory and regulatory filings or
engagements for the fiscal years ended December 31, 2009 and 2008.
(2) Audit-Related Fees. Audit related fees are for professional services for assurance and related
services by Frost that are reasonably related to the performance of the audit or review of our
financial statements and that are not reported above under Audit Fees for years ended December
31, 2009 and 2008. There were no such services provided during 2009 or 2008.
(3) Tax Fees. The aggregate fees billed by Frost for professional services related to tax
compliance including preparation of federal and state tax returns. These services were approved in
advance by the Board of Directors.
(4) All Other Fees. There were no other fees billed by Frost for the fiscal years ended December
31, 2009 and 2008.
As more fully described in a Form 8-K that we filed with the SEC on January 7, 2010, we were
notified that, effective January 1, 2010, Frost, PLLC and certain partners of Moore Stephens Wurth
Frazer and Torbet, LLP (MSWFT) formed Frazer Frost, LLP, a new partnership. Pursuant to the
terms of a combination agreement by and among Frost, MSWFT and Frazer Frost, each of Frost and
MSWFT contributed substantially all of their assets and certain of their liabilities to Frazer
Frost, resulting in Frazer Frost assuming Frosts engagement letter with us and becoming our new
independent accounting firm, and the principal accountant engaged to audit our financial
statements, effective January 1, 2010. As a consequence of the transaction between Frost and MSWFT
forming Frazer Frost, and simultaneously with the effectiveness of this transaction, Frost resigned
as our certifying accountant.
The Company has reaffirmed Frazer Frost as independent registered certified public accountants
for 2009 and 2010.
Audit committee. The Company does not have a standing Audit Committee of its Board of
Directors.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
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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 | |
10.3.2 |
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. |
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DAC TECHNOLOGIES
GROUP INTERNATIONAL, INC.
GROUP INTERNATIONAL, INC.
December 31, 2009 and 2008
Consolidated Financial Statements
With
Report of Independent Registered Public Accounting Firms
F-1
Table of Contents
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
DAC Technologies Group International, Inc.
Little Rock, Arkansas
DAC Technologies Group International, Inc.
Little Rock, Arkansas
We have audited the accompanying consolidated balance sheet of DAC Technologies Group
International, Inc. as of December 31, 2009, and the related consolidated statements of income,
stockholders equity and cash flows for the year 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 audit. The financial statements of
DAC Technologies Group International, Inc. as of December 31, 2008 were audited by FROST, PLLC who
was merged into FRAZER FROST, LLP, and whose report dated March 30, 2009, expressed an unqualified
opinion on those financial statements.
We conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit 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 audit
provides 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, 2009, and the consolidated results of its operations and its cash flows for
the year then ended in conformity with accounting principles generally accepted in the United
States of America.
/s/
Frazer Frost, LLP
Independent Registered Public Accounting Firm
Independent Registered Public Accounting Firm
Little Rock, Arkansas
March 26, 2010
March 26, 2010
F-2
Table of Contents
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
DAC Technologies Group International, Inc.
Little Rock, Arkansas
DAC Technologies Group International, Inc.
Little Rock, Arkansas
We have audited the accompanying consolidated balance sheet of DAC Technologies Group
International, Inc. as of December 31, 2008, and the related consolidated statements of income,
stockholders equity and cash flows for the year 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 audit.
We conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit 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 audit
provides 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, 2008, and the consolidated results of its operations and its cash flows for
the year then ended in conformity with accounting principles generally accepted in the United
States of America.
/s/ Frost, PLLC
Independent Registered Public Accounting Firm
Independent Registered Public Accounting Firm
Little Rock, Arkansas
March 30, 2009
March 30, 2009
F-3
Table of Contents
DAC TECHNOLOGIES
GROUP INTERNATIONAL, INC.
GROUP INTERNATIONAL, INC.
Consolidated Balance Sheets
December 31, 2009 and 2008
2009 | 2008 | |||||||
Assets |
||||||||
Current assets |
||||||||
Cash |
$ | 430,436 | $ | 599,103 | ||||
Accounts receivable, less allowance for doubtful accounts
of $20,000 in 2009 and 2008 |
929,082 | 495,718 | ||||||
Due from factor |
27,592 | 1,542,918 | ||||||
Inventories |
4,479,347 | 2,742,563 | ||||||
Prepaid expenses and deferred charges |
53,460 | 72,068 | ||||||
Deferred income tax asset |
11,950 | 31,019 | ||||||
Total current assets |
5,931,867 | 5,483,389 | ||||||
Property and equipment |
||||||||
Leasehold improvements |
57,232 | 55,323 | ||||||
Furniture and fixtures |
333,161 | 297,356 | ||||||
Molds, dies and artwork |
560,952 | 536,809 | ||||||
951,345 | 889,488 | |||||||
Accumulated depreciation |
(674,486 | ) | (623,477 | ) | ||||
Net property and equipment |
276,859 | 266,011 | ||||||
Other assets |
||||||||
Patents and trademarks, net of accumulated amortization of
$135,434 and $119,772 in 2009 and 2008, respectively |
117,346 | 121,718 | ||||||
Deposit |
17,351 | 17,351 | ||||||
Advances to employees |
29,658 | 28,617 | ||||||
Notes receivable |
||||||||
Long-term |
20,000 | 20,000 | ||||||
Related party |
72,518 | 72,518 | ||||||
Stockholder |
216,377 | 170,382 | ||||||
Total other assets |
473,250 | 430,586 | ||||||
Total assets |
$ | 6,681,976 | $ | 6,179,986 | ||||
F-4
Table of Contents
2009 | 2008 | |||||||
Liabilities and Stockholders Equity |
||||||||
Current liabilities |
||||||||
Notes payable |
$ | 52,454 | $ | 104,609 | ||||
Accounts payable |
776,093 | 795,136 | ||||||
Accrued payroll tax withholdings |
27,780 | 25,519 | ||||||
Accrued expenses other |
145,097 | 92,850 | ||||||
Income taxes payable |
71,166 | 89,700 | ||||||
Total current liabilities |
1,072,590 | 1,107,814 | ||||||
Deferred income tax liability |
79,152 | 66,574 | ||||||
Commitments and contingencies (Note 13) |
||||||||
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, 2009 and 2008;
5,793,699 and 5,882,999 shares outstanding at December 31,
2009 and 2008, respectively |
6,323 | 6,323 | ||||||
Additional paid-in capital |
1,963,102 | 1,963,102 | ||||||
Treasury stock, at cost |
(401,043 | ) | (372,124 | ) | ||||
Retained earnings |
3,961,852 | 3,408,297 | ||||||
Total stockholders equity |
5,530,234 | 5,005,598 | ||||||
Total liabilities and stockholders equity |
$ | 6,681,976 | $ | 6,179,986 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
F-5
Table of Contents
DAC TECHNOLOGIES
GROUP INTERNATIONAL, INC.
GROUP INTERNATIONAL, INC.
Consolidated Statements of Income
For the Years Ended December 31, 2009 and 2008
2009 | 2008 | |||||||
Sales, net of returns and allowances |
$ | 14,680,709 | $ | 17,042,361 | ||||
Cost of sales |
10,546,557 | 13,205,295 | ||||||
Gross profit |
4,134,152 | 3,837,066 | ||||||
Operating expenses |
||||||||
Selling |
1,800,138 | 1,752,243 | ||||||
General and administrative |
1,229,859 | 1,170,951 | ||||||
Total operating expenses |
3,029,997 | 2,923,194 | ||||||
Income from operations |
1,104,155 | 913,872 | ||||||
Other income (expense) |
||||||||
Interest expense |
(201,102 | ) | (275,507 | ) | ||||
Other income |
29 | 169 | ||||||
Total other expense, net |
(201,073 | ) | (275,338 | ) | ||||
Income before income tax provision |
903,082 | 638,534 | ||||||
Provision for income taxes |
349,527 | 281,840 | ||||||
Net income |
$ | 553,555 | $ | 356,694 | ||||
Basic and diluted earnings per share |
$ | 0.10 | $ | 0.06 | ||||
Weighted-average number of common shares |
||||||||
Basic |
5,809,483 | 6,020,485 | ||||||
Diluted |
5,809,483 | 6,020,485 |
The accompanying notes are an integral part of these consolidated financial statements.
F-6
Table of Contents
DAC TECHNOLOGIES
GROUP INTERNATIONAL, INC.
GROUP INTERNATIONAL, INC.
Consolidated Statements of Stockholders Equity
For the Years Ended December 31, 2009 and 2008
Common Stock | ||||||||
Shares | Amount | |||||||
Balance January 1, 2008 |
$ | 6,323,364 | $ | 6,323 | ||||
Purchase of treasury stock |
| | ||||||
Net income |
| | ||||||
Balance December 31, 2008 |
6,323,364 | 6,323 | ||||||
Purchase of treasury stock |
| | ||||||
Net income |
| | ||||||
Balance December 31, 2009 |
$ | 6,323,364 | $ | 6,323 | ||||
F-7
Table of Contents
Additional | ||||||||||||||||||||
Paid-in | Treasury Stock | Retained | ||||||||||||||||||
Capital | Shares | Cost | Earnings | Total | ||||||||||||||||
Balance January 1, 2008 |
$ | 1,963,102 | $ | 281,965 | $ | (307,147 | ) | $ | 3,051,603 | $ | 4,713,881 | |||||||||
Purchase of treasury stock |
| 158,400 | (64,977 | ) | | (64,977 | ) | |||||||||||||
Net income |
| | | 356,694 | 356,694 | |||||||||||||||
Balance December 31, 2008 |
1,963,102 | 440,365 | (372,124 | ) | 3,408,297 | 5,005,598 | ||||||||||||||
Purchase of treasury stock |
| 89,300 | (28,919 | ) | | (28,919 | ) | |||||||||||||
Net income |
| | | 553,555 | 553,555 | |||||||||||||||
Balance December 31, 2009 |
$ | 1,963,102 | $ | 529,665 | $ | (401,043 | ) | $ | 3,961,852 | $ | 5,530,234 | |||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-8
Table of Contents
DAC TECHNOLOGIES
GROUP INTERNATIONAL, INC.
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2009 and 2008
2009 | 2008 | |||||||
Cash flows from operating activities |
||||||||
Net income |
$ | 553,555 | $ | 356,694 | ||||
Adjustments
to reconcile net income to net cash provided by operating activities |
||||||||
Depreciation |
51,009 | 50,019 | ||||||
Amortization |
15,662 | 15,564 | ||||||
Deferred income taxes |
31,647 | 38,270 | ||||||
Changes in operating assets and liabilities |
||||||||
Accounts receivable |
(433,364 | ) | (232,072 | ) | ||||
Due from factor |
1,515,326 | (777,408 | ) | |||||
Inventories |
(1,736,784 | ) | 2,182,712 | |||||
Prepaid expenses and deferred charges |
18,608 | 43,618 | ||||||
Income taxes receivable |
| 153,870 | ||||||
Repayments (advances) to employees |
(1,041 | ) | 308 | |||||
Accounts payable |
(19,043 | ) | (1,597,914 | ) | ||||
Accrued payroll tax withholdings |
2,261 | 181 | ||||||
Accrued expenses other |
52,247 | 53,978 | ||||||
Income taxes payable |
(18,534 | ) | 89,700 | |||||
Net cash provided by operating activities |
31,549 | 377,520 | ||||||
Cash flows from investing activities |
||||||||
Purchases of property and equipment |
(61,857 | ) | (41,894 | ) | ||||
Payments for patents and trademarks |
(11,290 | ) | (3,520 | ) | ||||
Net repayments (advances) on note receivable stockholder |
(45,995 | ) | 8,083 | |||||
Net cash used by investing activities |
(119,142 | ) | (37,331 | ) | ||||
Cash flows from financing activities |
||||||||
Payments on notes payable |
(52,155 | ) | (78,577 | ) | ||||
Purchase of treasury stock |
(28,919 | ) | (64,977 | ) | ||||
Net cash used by financing activities |
(81,074 | ) | (143,554 | ) | ||||
Net increase (decrease) in cash |
(168,667 | ) | 196,635 | |||||
Cash beginning of year |
599,103 | 402,468 | ||||||
Cash end of year |
$ | 430,436 | $ | 599,103 | ||||
Supplementary disclosures of cash flow information |
||||||||
Cash paid during the year for |
||||||||
Interest |
$ | 201,491 | $ | 275,808 | ||||
Taxes |
336,414 | |
The accompanying notes are an integral part of these consolidated financial statements.
F-9
Table of Contents
DAC TECHNOLOGIES
GROUP INTERNATIONAL, INC.
GROUP INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
1. | Organization and Nature of Business |
DAC Technologies Group International, Inc. (DAC) develops, manufactures and markets
various patented and unpatented consumer products that are designed primarily for hunters, gun
owners and outdoor enthusiasts. 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.
2. | Summary of Significant Accounting Policies |
a. | Principles of consolidation 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, 2009 or 2008. | ||
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, 2009 and 2008, approximately 53% 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. |
F-10
Table of Contents
DAC TECHNOLOGIES
GROUP INTERNATIONAL, INC.
GROUP INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
2. | Summary of Significant Accounting Policies (cont.) |
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 $11,211 and $61,011 at December 31, 2009 and 2008, respectively. 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 $51,009 and $50,019 was recognized during the years ended December 31, 2009 and 2008, 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. | |||
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 $342,977 and $353,019 for the years ended December 31, 2009 and 2008, 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. |
F-11
Table of Contents
DAC TECHNOLOGIES
GROUP INTERNATIONAL, INC.
GROUP INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
2. | Summary of Significant Accounting Policies (cont.) |
The computations of basic earnings per share and diluted earnings per share are as
follows:
2009 | 2008 | |||||||
Net income |
$ | 553,555 | $ | 356,694 | ||||
Weighted-average shares outstanding, |
||||||||
basic and diluted |
5,809,483 | 6,020,485 | ||||||
Net earnings per share |
||||||||
Basic |
$ | 0.10 | $ | 0.06 | ||||
Diluted |
$ | 0.10 | $ | 0.06 | ||||
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. | ||
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, 2009 and 2008. | ||
m. | Impairment of long-lived assets The Company reviews the carrying value of long-lived assets for impairment whenever triggering 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 excess of the carrying amount over the fair value of the assets. No triggering events were identified by management for the years ended December 31, 2009 or 2008. | ||
n. | Impairment of patents and trademarks The Company reviews the carrying value of intangible assets that have finite lives for impairment whenever triggering 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 excess of the carrying amount over the fair value of the assets. No triggering events were identified by management for the years ended December 31, 2009 or 2008. |
F-12
Table of Contents
DAC TECHNOLOGIES
GROUP INTERNATIONAL, INC.
GROUP INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
2. | Summary of Significant Accounting Policies (cont.) |
o. | New accounting pronouncements The Company has adopted Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC). ASC is the single official source of authoritative, nongovernmental generally accepted accounting principles. The adoption of ASC did not have any impact on the consolidated financial statements included herein. |
In August 2009, the FASB issued ASC Update 2009-05, an update to ASC 820, Fair Value
Measurements and Disclosures. This update provides amendments to reduce potential
ambiguity in financial reporting when measuring the fair value of liabilities. Among other
provisions, this update provides clarification that, in circumstances in which a quoted
price in an active market for the identical liability is not available, a reporting entity
is required to measure fair value using one or more of the valuation techniques described in
ASC Update 2009-05. ASC Update 2009-05 will become effective for the Companys interim and
annual consolidated financial statements for the year ended December 31, 2010. The Company
has not determined the impact this update may have on the consolidated financial statements.
ASC 855, Subsequent Events, establishes general standards of accounting for and
disclosure of events that occur after the balance sheet date, but before financial
statements are issued. The effective date of ASC 855 is interim or annual financial periods
ending after June 15, 2009. This statement does not apply to subsequent events or
transactions that are within the scope of other applicable generally accepted accounting
principles that provide different guidance on the accounting treatment for subsequent events
or transactions. ASC 855 introduces the concept of financial statements being available to
be issued. It requires the disclosure of the date through which an entity has evaluated
subsequent events and the basis for that date, whether that represents the date the
financial statements were issued or were available to be issued. ASC 855 should alert all
users of financial statements that an entity has not evaluated subsequent events after that
date in the set of financial statements being presented. This statement did not have a
material impact on the consolidated financial statements as of December 31, 2009.
3. | Variable Interest Entities |
ASC 810, Consolidation of Variable Interest Entities, 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 ASC
810, 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-13
Table of Contents
DAC TECHNOLOGIES
GROUP INTERNATIONAL, INC.
GROUP INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
4. | Inventories |
Inventories consist of the following:
2009 | 2008 | |||||||
Finished goods |
$ | 3,972,207 | $ | 2,314,319 | ||||
Inventory in transit |
492,568 | 415,102 | ||||||
Parts |
14,572 | 13,142 | ||||||
$ | 4,479,347 | $ | 2,742,563 | |||||
5. | Intangible Assets |
Intangible assets consist of the following:
2009 | 2008 | |||||||
Finite-lived |
||||||||
Patents and trademarks, net of accumulated
amortization of $135,434 and $119,772 in
2009 and 2008, respectively |
$ | 117,346 | $ | 121,718 | ||||
Aggregate amortization expense related to finite-lived intangible assets was $15,662 and
$15,564 for the years ended December 31, 2009 and 2008, respectively. Future finite-lived
intangible asset amortization expenses are as follows:
2010 |
$ | 15,258 | ||
2011 |
15,258 | |||
2012 |
15,256 | |||
2013 |
13,443 | |||
2014 |
12,071 | |||
Thereafter |
46,060 | |||
$ | 117,346 | |||
During 2009 and 2008, the Company acquired patents which pertain to technology incorporated
into certain of the Companys products. The Company paid $790 and $3,520 in 2009 and 2008,
respectively, for these patents. The fair value of these patents is being amortized over the
weighted-average expected lives of 17 years.
F-14
Table of Contents
DAC TECHNOLOGIES
GROUP INTERNATIONAL, INC.
GROUP INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
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% on the gross face amount of invoice, 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 prime, which was 3.25% at
December 31, 2009, 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:
2009 | 2008 | |||||||
Accounts receivable factored |
$ | 1,081,240 | $ | 4,724,918 | ||||
Amounts advanced and outstanding |
1,053,648 | 3,182,000 | ||||||
Due from factor |
$ | 27,592 | $ | 1,542,918 | ||||
7. | Notes Payable |
Notes payable consist of the following:
2009 | 2008 | |||||||
Note payable to a bank; interest at 7.25%; payable
on demand or if no demand, November 1, 2010;
collateralized by the Companys inventories,
property and equipment, and personal guarantees
of the Companys major stockholders. |
$ | 27,722 | $ | 57,411 | ||||
Note payable to a bank; interest at 7.25%; payable
on demand or if no demand, November 12, 2010;
collateralized by the Companys inventories,
property and equipment, and personal guarantees
of the Companys major stockholders. |
24,732 | 47,198 | ||||||
$ | 52,454 | $ | 104,609 | |||||
F-15
Table of Contents
DAC TECHNOLOGIES
GROUP INTERNATIONAL, INC.
GROUP INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
7. | Notes Payable (cont.) |
The weighted-average interest rates on short-term borrowings were 7.25% and 7.15% for the
years ended December 31, 2009 and 2008, respectively. The Company recognized interest expense
of approximately $10,000 and $12,000 for the years ended December 31, 2009 and 2008,
respectively, on notes payable.
On August 10, 2009, the Company obtained a six-month line of credit with maximum available
borrowings of $1,000,000 with its local bank. The line of credit bears an interest a 6.00%
through February 10, 2010, and is collateralized by the Companys inventories and personal
guarantees of the Companys president and chief executive officer. The line of credit has no
outstanding balance at December 31, 2009. The Company renewed the line of credit with the bank
on February 10, 2010. The new line of credit has the same loan terms and matures on April 10,
2011.
8. | Equity |
During the years ended December 31, 2009 and 2008, the Company purchased 89,300 and 158,400
shares of common stock for $28,919 and $64,977, respectively. 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 warrants expired on June 28, 2009.
9. | Stock Option Plan |
During 2000, the Company adopted the 2000 Equity Incentive Plan (the Plan), a
nonqualified 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, 2009, the Company had
granted no options pursuant to this Plan.
F-16
Table of Contents
DAC TECHNOLOGIES
GROUP INTERNATIONAL, INC.
GROUP INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
10. | 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, 2008 |
$ | 393,901 | $ | 3 | $ | | $ | | ||||||||
Granted |
| | | | ||||||||||||
Outstanding December 31, 2008 |
393,901 | 3 | | | ||||||||||||
Granted |
| | | | ||||||||||||
Expired |
(393,901 | ) | | | | |||||||||||
Outstanding December 31, 2009 |
$ | | $ | | $ | | $ | | ||||||||
The warrants expired on June 28, 2009.
11. | Income Taxes |
The provision for income taxes consists of the following:
2009 | 2008 | |||||||
Current provision |
$ | 317,880 | $ | 243,570 | ||||
Deferred provision |
31,647 | 38,270 | ||||||
$ | 349,527 | $ | 281,840 | |||||
Reconciliations of the differences between income taxes computed at the federal statutory
tax rates and the provision for income taxes is as follows:
2009 | 2008 | |||||||
Income taxes computed at federal statutory
tax rate |
$ | 307,049 | $ | 217,103 | ||||
State tax provision, net of federal benefits |
38,742 | 27,393 | ||||||
Nondeductible expenses and other |
3,736 | 37,344 | ||||||
Provision for income taxes |
$ | 349,527 | $ | 281,840 | ||||
F-17
Table of Contents
DAC TECHNOLOGIES
GROUP INTERNATIONAL, INC.
GROUP INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
11. | Income Taxes (cont.) |
Temporary differences that give rise to significant deferred tax assets are as follows:
2009 | 2008 | |||||||
Allowance for doubtful accounts |
$ | 7,658 | $ | 7,658 | ||||
Allowance for excess inventory |
4,292 | 38,125 | ||||||
Accumulated tax depreciation in excess of
book depreciation |
(76,127 | ) | (78,874 | ) | ||||
Accumulated tax amortization in excess of
book amortization |
(3,025 | ) | (2,464 | ) | ||||
Net deferred tax asset (liability) |
$ | (67,202 | ) | $ | (35,555 | ) | ||
The Company adopted ASC 740-10, Accounting for Uncertainty in Income Taxes, effective
January 1, 2007. ASC 740-10 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. ASC 740-10 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, 2009. 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 2005 remain open to examination by the federal and
state taxing jurisdictions to which it is subject.
12. | Related Party Transactions |
During the years ended December 31, 2009 and 2008, the Company made periodic advances to
certain employees of the Company. At December 31, 2009 and 2008, the outstanding balances of
advances to these individuals were $29,658 and $28,617, respectively.
At December 31, 2009 and 2008, the Company held a note receivable of $216,377 and $170,382,
respectively, due from an individual, who is both an employee and a stockholder, which is due on
December 31, 2010. This note is unsecured and noninterest bearing.
At December 31, 2009 and 2008, 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, 2010. This note is unsecured and noninterest bearing. The note receivable has been
classified as noncurrent in the accompanying consolidated balance sheets because repayment is
not anticipated during the next year.
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DAC TECHNOLOGIES
GROUP INTERNATIONAL, INC.
GROUP INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
12. | Related Party Transactions (cont.) |
For the years ended December 31, 2009 and 2008, consulting service fees in the amount of
$60,000 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, 2009 and 2008.
13. | 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. |
In March 2009, the Company leased an office in Bentonville, Arkansas. The office space
lease agreement provides rent at a rate of $922.50 per month and expires on March 31, 2011,
with a renewal option through March 31, 2013.
In July 2009, the Company opened a warehouse in Los Angeles, California. The warehouse
is a third party arrangement under a month-to-month lease at a rate of $2,375 per month.
The Company utilizes this facility to service certain Walmart distribution centers located
in the western United States.
Additionally, the Company leases space from a stockholder for office space for $5,500
per month under no formal lease agreement. Total rent expense for the Company was $322,655
and $282,559 for the years ended December 31, 2009 and 2008, respectively.
At December 31, 2009, future minimum rental commitments under noncancelable operating
leases in excess of one year are as follows:
2010 |
$ | 226,899 | ||
2011 |
10,997 | |||
$ | 237,896 | |||
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. |
F-19
Table of Contents
DAC TECHNOLOGIES
GROUP INTERNATIONAL, INC.
GROUP INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
14. | Major Customers and Suppliers |
During the year ended December 31, 2009, the Company recognized aggregate sales to two
customers in the amount of approximately $8,030,000 and $2,308,000, which represented 55.3% and
15.9% of total net sales, respectively. During the year ended December 31, 2008, the Company
recognized aggregate sales to two customers in the amount of approximately $12,135,000 and
$1,736,000, which represented 71.2% and 10.2% of total net sales, respectively. Accounts
receivable related to the sales were factored without recourse (Note 6).
During the years ended December 31, 2009 and 2008, 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 it could replace this
supplier, if required to, at similar quality and terms.
15. | 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 nonrecourse basis which reduces the Companys exposure to credit
risk. Approximately 53% and 91% of the Companys accounts receivable at December 31, 2009 and
2008, 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, 2009 and 2008 and at various times throughout these years, the Company
maintained cash balances with financial institutions in excess of the federally insured limit.
16. | Financial Information by Business Segment |
During the years ended December 31, 2009 and 2008, the Company operated in five primary
business segments delineated by products or services. These segments are gun cleaning and
maintenance, hunting and camping, household, gun safety and other 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.
F-20
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DAC TECHNOLOGIES
GROUP INTERNATIONAL, INC.
GROUP INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
16. | Financial Information by Business Segment (cont.) |
Information concerning operations in these segments of business is as follows:
2009 | 2008 | |||||||
Revenues |
||||||||
Gun cleaning and maintenance |
$ | 10,124,011 | $ | 8,369,446 | ||||
Hunting and camping |
1,378,694 | 3,236,058 | ||||||
Household |
1,046,201 | 3,935,710 | ||||||
Gun safety |
2,128,381 | 1,490,196 | ||||||
Other |
3,422 | 10,951 | ||||||
Total revenues |
$ | 14,680,709 | $ | 17,042,361 | ||||
Income before income tax provision |
||||||||
Gun cleaning and maintenance |
$ | 769,677 | $ | 791,945 | ||||
Hunting and camping |
(55,779 | ) | (319,239 | ) | ||||
Household |
25,923 | 52,706 | ||||||
Gun safety |
163,680 | 127,797 | ||||||
Other |
(419 | ) | (14,675 | ) | ||||
Income before income tax provision |
$ | 903,082 | $ | 638,534 | ||||
Identifiable assets |
||||||||
Gun cleaning and maintenance |
||||||||
United States |
$ | 2,471,813 | $ | 1,135,498 | ||||
Hunting and camping |
||||||||
United States |
760,039 | 720,555 | ||||||
Household |
||||||||
United States |
612,443 | 554,351 | ||||||
Gun safety |
||||||||
United States |
666,077 | 389,944 | ||||||
China |
5,280 | 10,753 | ||||||
Other |
||||||||
United States |
76,872 | 62,948 | ||||||
China |
4,123 | 6,225 | ||||||
Corporate |
2,085,329 | 3,299,712 | ||||||
Total identifiable assets |
$ | 6,681,976 | $ | 6,179,986 | ||||
Molds used to manufacture the Companys security products and gun locks are located in
China (Note 1).
F-21
Table of Contents
DAC TECHNOLOGIES
GROUP INTERNATIONAL, INC.
GROUP INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
17. | Subsequent Events Evaluation Date |
The Company evaluated the events and transactions subsequent to its December 31, 2009,
consolidated balance sheet date and, in accordance with FASB ASC 855-10-50, Subsequent Events,
management determined there were no significant events necessary for disclosure through March
26, 2010, which is the consolidated financial statements issuance date.
F-22
Table of Contents
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, CEO and Principal Executive Officer March 31, 2010 |
|||
By: |
/s/ Robert C. Goodwin | ||
Robert C. Goodwin, Principal Accounting Officer and Principal Financial Officer March 31, 2010 |