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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
| þ | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2006
| o | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT |
For the transition period from ______ to ______
Commission File Number 000-29211
DAC Technologies Group International, Inc.
(Name of Small Business Issuer in its charter)
| Florida | 65-0847852 | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
| 1601 Westpark Drive #2 Little Rock, AR (Address of principal executive offices) | 72204 (Zip Code) |
(501) 661-9100
(Issuer’s telephone number)
(Issuer’s telephone number)
Check whether the Issuer (1) has filed all reports required to be filed by the Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
(1) Yesx Noo (2) Yesx Noo
State the number of shares outstanding of each of the issuer’s class of common equity, as of the latest practicable date. As of May 18, 2006, 6,323,364 shares of Common Stock are issued and 6,193,364 are outstanding.
Transitional Small Business Disclosure Format: Yeso Nox
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| Section 302 Certification of CEO | ||||||||
| Section 302 Certification of CFO | ||||||||
| Section 906 Certification of CEO | ||||||||
| Section 906 Certification of CFO | ||||||||
Table of Contents
PART I
ITEM 1. FINANCIAL STATEMENTS
Our financial statements are contained in pages 4 through 7 following.
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DAC TECHNOLOGIES GROUP INTERNATIONAL, INC.
Condensed Balance Sheet (Consolidated)
March 31, 2006
Unaudited
Unaudited
Assets | ||||
| Current assets | ||||
| Cash | $ | 46,578 | ||
| Accounts receivable, less allowance for doubtful accounts of $5,000 | 1,535,205 | |||
| Due from factor | 552,726 | |||
| Inventories | 2,575,625 | |||
| Prepaid expenses and deferred charges | 163,724 | |||
| Current deferred income tax benefit | 27,200 | |||
| Total current assets | 4,901,058 | |||
| Property and equipment | ||||
| Leasehold improvements | 29,049 | |||
| Furniture and fixtures | 209,557 | |||
| Molds, dies, and artwork | 500,796 | |||
| 739,402 | ||||
| Accumulated depreciation | (510,040 | ) | ||
| Net property and equipment | 229,362 | |||
| Other assets | ||||
| Patents and trademarks, net of accumulated amortization of $76,437 | 155,813 | |||
| Deposits | 1,435 | |||
| Advances to employees | 25,487 | |||
| Note receivable — related party | 72,518 | |||
| Note receivable — stockholder | 92,758 | |||
| Total other assets | 348,011 | |||
| Total assets | $ | 5,478,431 | ||
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DAC TECHNOLOGIES GROUP INTERNATIONAL, INC.
Condensed Balance Sheet (Consolidated)
March 31, 2006
Unaudited
Unaudited
Liabilities and Stockholders’ Equity | ||||
| Current liabilities | ||||
| Notes payable | $ | 225,313 | ||
| Accounts payable | 1,018,287 | |||
| Accrued payroll tax withholdings | 25,535 | |||
| Accrued expenses-other | 25,464 | |||
| Income taxes payable | 127,654 | |||
| Total current liabilities | 1,422,253 | |||
| Deferred income tax liability | 33,100 | |||
| Stockholders’ equity | ||||
| Preferred stock, $.001 par value; authorized 10,000,000 shares; none issued and outstanding | — | |||
| Common stock, $.001 par value; authorized 50,000,000 shares; 6,323,364 shares issued and 6,193,364 shares outstanding | 6,323 | |||
| Additional paid-in capital | 1,963,102 | |||
| Treasury stock, at cost | (101,400 | ) | ||
| Retained earnings | 2,155,053 | |||
| Total stockholders’ equity | 4,023,078 | |||
| Total liabilities and stockholders’ equity | $ | 5,478,431 | ||
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DAC TECHNOLOGIES GROUP INTERNATIONAL, INC.
Condensed Statements of Operations (Consolidated)
For The Three Months Ended March 31, 2006 and 2005
Unaudited
Unaudited
| 2006 | 2005 | |||||||
| Net sales | $ | 2,763,197 | $ | 2,263,078 | ||||
| Cost of sales | 1,792,411 | 1,458,170 | ||||||
| Gross profit | 970,786 | 804,908 | ||||||
| Operating expenses | ||||||||
| Selling | 340,789 | 276,818 | ||||||
| General and administrative | 246,269 | 209,270 | ||||||
| Total operating expenses | 587,058 | 486,088 | ||||||
| Income from operations | 383,728 | 318,820 | ||||||
| Other income (expense) | ||||||||
| Interest expense | (59,735 | ) | (46,061 | ) | ||||
| Total other income (expense) | (59,735 | ) | (46,061 | ) | ||||
| Income before income tax provision | 323,993 | 272,759 | ||||||
| Provision for income taxes | 126,811 | 106,317 | ||||||
| Net income | $ | 197,182 | $ | 166,442 | ||||
| Basic and diluted earnings per share | $ | 0.03 | $ | 0.03 | ||||
| Weighted-average number of shares | ||||||||
| Basic | 6,193,364 | 6,180,864 | ||||||
| Diluted | 6,193,364 | 6,260,378 | ||||||
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DAC TECHNOLOGIES GROUP INTERNATIONAL, INC.
Condensed Statements of Cash Flows (Consolidated)
For the Three Months Ended March 31, 2006 and 2005
Unaudited
Unaudited
| 2006 | 2005 | |||||||
| Cash flows from operating activities | ||||||||
| Net income | $ | 197,182 | $ | 166,442 | ||||
| Adjustments to reconcile net income to net cash provided (used) by operating activities: | ||||||||
| Depreciation | 13,773 | 13,272 | ||||||
| Amortization | 3,998 | 3,999 | ||||||
| Changes in operating assets and liabilities | ||||||||
| Accounts receivable | (842,515 | ) | (73,767 | ) | ||||
| Due from factor | 760,892 | 774,276 | ||||||
| Inventories | 128,685 | 34,185 | ||||||
| Advances to employees | (10,704 | ) | (16,175 | ) | ||||
| Prepaid expenses and deferred charges | (94,151 | ) | (80,319 | ) | ||||
| Accounts payable | 37,245 | (494,295 | ) | |||||
| Accrued payroll tax withholdings | (3,928 | ) | 267 | |||||
| Accrued expenses other | (5,074 | ) | 398 | |||||
| Income taxes payable | (253,189 | ) | (246,684 | ) | ||||
| Net cash provided (used) by operating activities | (67,786 | ) | 81,599 | |||||
| Cash flows from investing activities | ||||||||
| Purchases of property and equipment | (9,108 | ) | (5,993 | ) | ||||
| Payments for patents and trademarks | (3,280 | ) | — | |||||
| Net payments (advances) on note receivable — stockholder | 6,773 | (50,880 | ) | |||||
| Net cash used by investing activities | (5,615 | ) | (56,873 | ) | ||||
| Cash flows from financing activities | ||||||||
| Payments on notes payable | (10,907 | ) | (13,264 | ) | ||||
| Net cash used by financing activities | (10,907 | ) | (13,264 | ) | ||||
| Increase (decrease) in cash | (84,308 | ) | 11,462 | |||||
| Cash — beginning of period | 130,886 | 167,846 | ||||||
| Cash — end of period | $ | 46,578 | $ | 179,308 | ||||
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PART F/S
DAC TECHNOLOGIES GROUP INTERNATIONAL, INC.
SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Nature of Business
DAC Technologies Group International, Inc. (the “Company”), is in the business of developing, marketing and outsourcing the manufacture of various consumer products, patented and non-patented. The Company’s primary business is gun safety and gun maintenance with a target consumer base of sportsmen, hunters and outdoorsmen, and recreational enthusiasts. The Company’s products have historically been security related, evolving from various personal, home and automotive electronic security devices, to firearm safety devices such as gun and trigger locks, cable locks and safes. In 2003, the product line was expanded to include a line of gun cleaning kits and accessories. This line has continued to be expanded, and now accounts for approximately 79% of the Company’s sales revenues. In 2005, the Company added a line of food processing equipment and accessories for ATV’s (All Terrain Vehicles).
The majority of the Company’s products are manufactured and imported from mainland China and shipped to the Company’s central warehouse facility in Little Rock, Arkansas for distribution. These products, along with other items manufactured in the United States, are sold primarily to mass merchants and sporting goods retailers throughout the United States and international locations.
Organization and Summary of Significant Accounting Policies
Organization and basis of presentation
The Company was incorporated as a Florida corporation in July 1998 under the name DAC Technologies of America, Inc. In July 1999, the Company changed its name to DAC Technologies Group International, Inc.
Unaudited interim condensed consolidated financial statements
The accompanying condensed consolidated financial statements of the Company as of and for the three months ended March 31, 2006 and 2005 are unaudited, but, in the opinion of management, reflect the adjustments, all of which are of a normal recurring nature, necessary for a fair presentation of such financial statements in accordance with accounting principles generally accepted in the United States. The accompanying condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading. It is suggested that these condensed financial statements be read in conjunction with the financial statements and the notes thereto included in the Company’s latest 10-K. The results of operations for an interim period are not necessarily indicative of the results for a full year.
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 $65,974 at March 31, 2006. The Company receives inventory from overseas at terms of F.O.B. shipping point, bearing the risk of loss at that point in time. During the time period prior to receipt in the warehouse, inventory is classified and recorded as inventory in transit. Inventory held in the warehouse is classified as finished goods.
| March 31, | ||||
| 2006 | ||||
| Inventories consist of: | ||||
| Finished goods | $ | 1,881,867 | ||
| Inventory in transit | 670,791 | |||
| Parts | 22,967 | |||
| $ | 2,575,625 | |||
Earnings per Share
Basic earnings per share of common stock are computed by dividing net income applicable to common shares by the weighted average number of common shares outstanding during the period. Diluted earnings per share are computed using the weighted average number of common shares and, if dilutive, the incremental common shares issuable upon the exercise of outstanding stock warrants (using the treasury stock method). For the three months ended March 31, 2006, approximately 394,000 warrants to purchase the Company’s common stock were excluded from the calculation, as their exercise price of $2.57 was greater than the average market price of the common stock during the period. A reconciliation of the net income and number of shares
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used in computing basic and diluted earnings per share was as follows for the three-month periods ended March 31:
| Three Months Ended | ||||||||
| 2006 | 2005 | |||||||
| Numerator: | ||||||||
| Net income | $ | 197,182 | $ | 166,442 | ||||
| Denominator: | ||||||||
| Weighted average common shares for basic calculation | 6,193,364 | 6,180,864 | ||||||
| Weighted average effect of dilutive securities: | ||||||||
| Warrants | — | 79,514 | ||||||
| Denominator for diluted calculation | 6,193,364 | 6,260,378 | ||||||
| Earnings per share- basic | $ | 0.03 | $ | 0.03 | ||||
| Earnings per share- diluted | $ | 0.03 | $ | 0.03 | ||||
New Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 151, “Inventory Costs,” which amended the guidance in Accounting Research Bulletin (“ARB”) No. 43, Chapter 4, “Inventory Pricing,” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material (spoilage). This statement requires that those items be recognized as current-period charges regardless of whether they meet the criterion of “so abnormal”. In addition, this statement requires that allocation of fixed production overhead to the cost of conversion be based on the normal capacity of the production facilities. The Company currently does not believe that the adoption of SFAS No. 151 will have a material impact on the consolidated financial statements.
Subsequent Event:
Dan Lasater and members of his family, affiliates of the Company executed a stock purchase agreement as of May 4, 2006, where by Mr. Lasater and family have sold their combined 679,065 common shares ownership in the Company to several individual investors for a gross sales price of $1,174,782.45 or $1.73 per share. Of such number, the Company purchased 57,065 shares for $99,933.95. The shares will bear a restrictive legend and may only be sold by the purchasers, in absence of an effective registration statement, in a manner consistent with Rule 144, or other applicable exemption from registration. This transaction is expected to close by month end. The Company will fund the transaction by drawing on its cash reserves and through its factoring arrangement.
ITEM 2. MANAGEMENT’S 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 10QSB for any forward-looking statements made by, or on behalf of, the Company. Forward-looking statements include statements concerning plans, objectives, goals, strategies, expectations, future events or performances and underlying assumptions and other statements, which are other than statements of historical facts. Certain statements contained herein are forward-looking statements and, accordingly, involve risks and uncertainties, which could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements. The Company’s expectations, beliefs and projections are expressed in good faith and are believed by the Company to have a reasonable basis, including without limitations, management’s examination of historical operating trends, data contained in the Company’s records and other data available from third parties, but there can be no assurance that management’s expectations, beliefs or projections will result or be achieved or accomplished.
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Historically, the identification and development of new products, and expansion of the Company’s sales organization have achieved growth. There can be no assurance that we will be able to continue to develop new products or expand sales to sustain rates of revenue growth and profitability in future periods. Any future success that the Company may achieve will depend upon many factors including those that may be beyond the control of the Company or which cannot be predicted at this time. Although we believe that our expectations are based on reasonable assumptions within the bounds of our knowledge of our business and operations, actual results may differ materially from our expectations.
Factors that could cause actual results to differ from expectations include, without limitations:
| • | Achieving planned revenue and profit growth in each of the Company’s business units; | ||
| • | Renewal of purchase orders consistent with past experience; | ||
| • | Increasing price, products and services competition; | ||
| • | Emergence of new competitors or consolidation of existing competitors; | ||
| • | The timing of orders and shipments; | ||
| • | Continuing availability of appropriate raw materials and manufacturing relationships; | ||
| • | Maintaining and improving current product mix; | ||
| • | Changes in customer requirements and in the volume of sales to principal customers; | ||
| • | Changes in governmental regulations in the various geographical regions where the Company operates; | ||
| • | General economic and political conditions; | ||
| • | Attracting and retaining qualified key employees; | ||
| • | The ability of the Company to control manufacturing and operating costs; and | ||
| • | Continued availability of financing, and financial resources on the terms required to support the Company’s future business strategies. |
In evaluating these statements, you should consider various factors, including those summarized above, and, from time to time, in other reports the Company files with the SEC. These factors may cause the Company’s actual results to differ materially from any forward-looking statement. The Company disclaims any obligation to publicly update these statements, or disclose any difference between its actual results and those reflected in these statements. The information constitutes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.
(a) Background
Summary
The Company reported net income of $197,182 on net sales of $2,763,197 for the three months ended March 31, 2006, as compared to $166,442 and $2,263,078, respectively, for the three months ended March 31, 2005.
The Company continues to develop new products, as well as expanding its direct import and private label programs. A new game processing kit and gun carrying case with built-in cleaning kit are expected to be on the market in the next few months. The Company has also reached an agreement with Kmart to put its GunMaster cleaning kits into approximately 1,100 stores.
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Details
We are in the business of developing, marketing and outsourcing the manufacture of various consumer products, patented and non-patented, designed to enhance and provide security for the consumer and for his property. Our products consist of gun cleaning kits and accessories, gunlocks, trigger locks, security safes, specialty safes, personal protection devices and items such as medical alarm alerts for the health care industry. In recent years we have placed particular emphasis on gun cleaning kits and gun accessories, in addition to our standard gun safety devices.
A significant portion of our business is with mass-market retailers, primarily Wal-Mart, as well as gun manufacturers. With the addition of our “Gunmaster” gun cleaning kits, we continue to increase our business with sporting goods retailers and distributors.
The Company’s business plan and strategy for growth focuses on:
| • | Increased penetration of our existing markets, particularly in the gun cleaning and accessories market; | ||
| • | Development of new products for the sporting goods market; | ||
| • | Identification and development of new markets for gun cleaning kits, i.e. government, law enforcement and military; | ||
| • | Adoption of new technologies for safety and security products and adoption of new product lines; | ||
| • | Identification and recruitment of effective manufacturer’s representatives to actively market these products on a national and international basis; and | ||
| • | Aggressive cost containment. |
Management believes that continued growth would require the Company to continually innovate and improve its existing line of products and services to meet consumer, industry and governmental demands. In addition, we must continue to develop or acquire new and unique products that will appeal to gun owners, sportsmen and other outdoor related activities.
In addition to our traditional products, our management is actively pursuing initiatives, which may add complementary businesses, products and services. These initiatives are intended to broaden the base of revenues to make us less dependent on particular products. By developing businesses which focus on products and services which complement our current line of products, and our current customer base, management hopes to leverage these opportunities to not only develop new sources of revenue, but to strengthen the demand for our existing products.
Our products can be grouped into four main categories: (a) gun maintenance, (b) gun safety, (c) personal security, and (d) non-security products. In developing these products, we focus on developing features, establishing patents, and formulating pricing to obtain a competitive edge. We currently design and engineer our products with the assistance of our Chinese and domestic manufacturers, who are responsible for the tooling, manufacture and packaging of our products.
Gun Maintenance.We market over thirty-two (32) different gun cleaning kits, rod sets, tools and accessories used to clean and maintain virtually any firearm on the market. These kits are solid brass, and
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consist of “universal” kits designed to fit a variety of firearms, caliber specific kits, as well as replacement brushes, mops, etc. These kits are available in solid wood or aluminum cases, as well as blister packed.
Gun Safety.We market twelve (12) different gun safety locks and five (5) security and specialty safes. The gunlocks’ composition range from plastic to steel, keyed trigger locks to cable locks. The security safes are of heavy-duty, all steel construction and are designed for firearms, jewelry and other valuables. Eight of the Company’s gunlocks and two safes have been certified for sale consistent with the standards set out by the State of California.
Personal Security.We market four (4) different electronic security devices designed to protect the person. These include the Body Alarm, Key Alert, Glass Window Alert and Patient Alarm.
Non-Security Products.We market through Wal-Mart and other customers nationwide, the Sportsman’s Cigarette/Cigar Lighter, a windproof, water-resistant refillable butane lighter. We also market two licensed exclusive products, the Clampit Cupholder and Plateholder. We also market three (3) food-processing items and ATV accessories.
Our website (www.dactec.com) has been redesigned. All of our products are available via e-commerce on this new site. Our web site is intended to be the only direct link by the Company to the retail market.
(b) Financial Condition and Results of Operations
Results of Operations
For the three months ended March 31, 2006, the Company had net income of $197,182 on net sales of $2,763,197 as compared to net income of $166,442 on net sales of $2,263,078 for the same period in 2005. These represent increases of $30,740 (18%) in net income, and $500,119 (22%) in net sales, respectively.
Sales of the Company’s line of GunMaster gun cleaning kits continue to grow significantly, accounting for approximately 79%of the Company’s sales. Sales of these kits for the three months were $2,218,872, evidencing an increase of $597,674 for the three months ended March 31, 2006 as compared to the same period in 2005.
Operating expenses for the three months ended March 31, 2006 were $587,058 as compared to $486,088 for the same period in the prior year, an increase of $100,970, or 21%. Since the first quarter of 2005, the Company has added additional administrative and warehouse personnel. Rate increases in the Company’s liability insurance and employee’s health insurance have added to the increased operating expenses. These items account for 8% of the 21% increase.
Income from operations increased from $318,820 for the three months ended March 31, 2005 to $383,728 for the same period in 2006, an increase of $64,908, or 20%.
Financial Condition
A summary of the significant balance sheet items at March 31, 2006 as compared to year-end December 31, 2005 is presented below:
| Mar. 31, 2006 | Dec. 31, 2005 | |||||||
| Accounts receivable | $ | 1,535,205 | $ | 692,690 | ||||
| Due from factor | 552,726 | 1,313,618 | ||||||
| Inventories | 2,575,625 | 2,704,310 | ||||||
| Total current assets | 4,901,058 | 4,920,677 | ||||||
| Accounts payable | 1,018,287 | 981,042 | ||||||
| Total current liabilities | 1,422,253 | 1,658,106 | ||||||
| Working capital | 3,478,805 | 3,262,571 | ||||||
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The Company maintains a factoring agreement wherein it assigns its receivables (on a non-recourse basis). The factor performs all credit and collection functions, and assumes all risks associated with the collection of the receivables. The Company pays a fee of 65/100ths of 1% of the face value of each receivable for this service. In addition, in order to generate immediate cash flow, the Company may borrow against the assigned receivables prior to their collection and is charged interest on any such advances.
Accounts receivable on the Company’s 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 March 31, 2006 and year end December 31, 2005, these amounts were as follows:
| Mar 31, 2006 | Dec. 31, 2005 | |||||||
| Total accounts receivable | $ | 3,263,232 | $ | 5,512,193 | ||||
| Less: assigned receivables | (1,728,027 | ) | (4,819,503 | ) | ||||
| Net accounts receivables | $ | 1,535,205 | $ | 692,690 | ||||
| Assigned receivables | $ | 1,728,027 | $ | 4,819,503 | ||||
| Less: Funds advanced | (1,175,301 | ) | (3,505,885 | ) | ||||
| Due from factor | $ | 552,726 | $ | 1,313,618 | ||||
(c) Liquidity and Capital Resources
Our primary source of cash is funds from our operations. We believe that external sources of liquidity could be obtained in the form of bank loans, letters of credit, etc. We maintain an account receivable factoring arrangement in order to insure an immediate cash flow. The factor may also, at its discretion, advance funds prior to the collection of our accounts. 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 March 31, 2006, our factor had advanced us $1,175,301.
(d) Trends
Handgun safety remains a major concern and interest to the American public, particularly in light of the accidental and intentional shootings involving children. Moreover, the tragic terrorist attack against the United States on September 11, 2001 continues to have many Americans concerned about their personal security. As a result, many people are purchasing firearms to maintain for home defense purposes. While they are purchasing handguns, many are also concerned with the safe storage and maintenance of the firearm in the home and want to purchase affordable gun safes to increase security and cleaning kits for gun care.
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The focus continues to be one of gun safety rather than legislative attempts to ban guns possibly due to the strong gun lobby and the nature of politics. Gun safety issues have been moving from the federal level to the state level through the introduction of mandatory gun lock legislation, while those at the federal level are seemingly in accord with the approach being taken by the Consumer Products Safety Commission to set measurable standards of performance for gun locking devices. The Company, with developed products that address preventive handgun safety, anticipates that it will be in a position to benefit from this trend, although this, of course, cannot be guaranteed. We believe that the continued focus on handgun safety, the use of gun locks by law enforcement agencies, and the litigation aimed at gun manufacturers as well as the gun legislation will hopefully will enhance our product line revenues.
State legislation has been effective in increasing gun safety and minimizing gun violence. One way of accomplishing this is to require gun manufacturers to incorporate safety devices similar to the Company’s products into all handguns sold. The first regulation of this kind was passed by the Maryland state legislature in early April 2000. This legislation required gun manufacturers to incorporate safety devices similar to the Company’s products into all handguns sold. The State of California enacted legislation to establish performance standards for “firearm safety devices,” “lock-boxes,” and “safes”. These standards prevent an attack on the gunlock or safe with hand tools, such as hammers, screwdrivers, electric drills, screw and hack saws. This legislation requires manufacturers to have their products tested by an independent testing laboratory in order to be listed as an approved device. This testing has resulted in significant expenditures to the company. We anticipate that similar standards will be adopted throughout the United States in the next few years.
Because many of the Company’s competitors are not subject to public filing requirements and industry-wide data is generally not available in a timely manner, the Company is unable to compare its performance to other companies or specific current industry trends. Instead, the Company measures itself against its own historical results. The Company does not consider its overall business to be predictably seasonal; however, sales of its gun-cleaning kits have shown increased volume particularly in the in the fourth quarter of the year.
(e) Gun Legislation.
Several federal laws regulate the ownership, purchase and use of handguns, including the 1968 Gun Control Act and the Brady Bill. The Brady Bill was implemented on February 28, 1994. This law established a national five (5)-business day waiting period on handgun purchases through licensed dealers. It also required local authorities to conduct background checks on handgun purchasers. As of December 1998, an amendment to the Brady Bill replaced the five (5) business-day waiting periods with a national “instant” felon ID system. Dealers are required to conduct this background check on all gun purchases, not just handgun purchases. The “Assault Weapons Ban” was enacted on September 14, 1994. This bill banned the manufacture, possession, and importation of semiautomatic assault weapons for civilian use. Guns manufactured before September 14th, 1994 were grandfathered. Guns manufactured after this date (for use by the military, police, and government agencies) must be marked with the date they are manufactured. The law was allowed to expire in 2004.
Notwithstanding these laws, there is not any federal law that requires the use of gunlocks, despite numerous attempts in Congress to pass such legislation. Most recently, on January 5, 2005, House Bill H.R 246 (Child Gun Safety and Gun Access Prevention Act of 2005) was introduced for the purpose increasing youth gun safety by raising the age of handgun eligibility and prohibiting youth from possessing semiautomatic assault weapons. The Bill, if passed into law in its present form, will make it unlawful for any licensed importer, licensed manufacturer, or licensed dealer to sell, transfer, or deliver any firearm to
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any person (other than a licensed importer, licensed manufacturer, or licensed dealer) unless the transferee is provided with a secure gun storage or safety device.
Child Access Prevention (or CAP) Laws hold gun owners responsible if they leave guns easily accessible to children and a child improperly gains access to the weapon. In 1989, Florida became the first state to pass a CAP law because of increasing gun fatalities among children. The Florida law only applies if the minor gains access to a gun that was not stored securely. The law does not apply if the firearm is stored in a locked box, secured with an effective child-safety lock, or obtained by a minor through unlawful entry. Eighteen states have enacted standard CAP laws: California, Connecticut, Delaware, Florida, Hawaii, Illinois, Iowa, Maryland, Massachusetts, Minnesota, Nevada, New Hampshire, New Jersey, North Carolina, Rhode Island, Texas, Virginia, and Wisconsin.
In addition to the 18 standard CAP laws, Kansas courts have held that gun owners may be held civilly liable for leaving guns easily accessible to children; Maine has a “child endangerment” statute that references children under 16 obtaining firearms and requires gun stores and gun shows to post signs warning gun owners that they may be prosecuted if they leave firearms where children can access them; and Montana holds adults/guardians responsible if a child under 14 possesses a firearm in public without adult supervision.
Many CAP laws require that the guns be safely secured — this can be done easily by storing the gun in a locked box, or by attaching an effective child-safety lock. These locks can preserve quick access by the owner for self-protection in the home while preventing young children from firing the locked gun. California, Connecticut, Maryland, Massachusetts, Michigan, New Jersey, New York, Pennsylvania and Rhode Island specifically require dealers to sell child-safety locks with every handgun.
Additionally, the State of California has enacted legislation that establishes performance standards for “firearm safety devices”, “lock-boxes” and “safes”. This legislation requires manufacturers to have their products tested by an independent testing laboratory in order to be listed as an approved device. Effective January 1, 2002, this legislation required that an approved safety device accompany every firearm sold in the state. Effective January 1, 2003, the legislation was expanded in that any firearm safety device sold within the state must be approved. Our products sold in California comply with these standards. 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.
We have obtained the required approvals from the Federal Communications Commission for the Rf signals emitted by our remote control units used with our car alarms. Other than as stated above, we are not aware of any other required governmental approvals on any of our products.
(f) Critical Accounting Estimates
The Company prepares its condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States of America. The Company’s significant accounting policies are discussed in detail in Note 2 to the December 31, 2005 audited consolidated financial statements included in the Company’s Form 10KSB. The quarterly financial statements for the period ended March 31, 2006, attached hereto, should therefore be read in conjunction with that discussion. Certain of these accounting policies as discussed below require management to make estimates and assumptions about future events that could materially affect the reported amounts of assets, liabilities, revenues and expenses and disclosure of
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contingent assets and liabilities. Accounting estimates and assumptions discussed in this section are those that we consider to be the most critical to an understanding of our financial statements because they inherently involve significant judgments and uncertainties. For all of these estimates, we caution that future events rarely develop exactly as forecast, and the best estimates routinely require adjustment. Since December 31, 2005, there have been no changes in our critical accounting policies and no significant change to the assumptions and estimates related to them.
Long-lived Assets. Depreciation expense is based on the estimated useful lives of the underlying property and equipment. Although the Company believes it is unlikely that any significant changes to the useful lives of its property and equipment will occur in the near term, an increase or decrease in the estimated useful lives would result in changes to depreciation expense.
The Company continually reevaluates the carrying value of its long-lived assets, for events or changes in circumstances, which indicate that the carrying value may not be recoverable. As part of this reevaluation, if impairment indicators are present, the Company estimates the future cash flows expected to result from the use of the asset and its eventual disposal. If the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying value of the asset, an impairment loss is recognized to reduce the carrying value of the long-lived asset to the estimated fair value of the asset.
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 Company’s future consolidated operating results.
(g) Off-Balance Sheet Arrangements
Since 2003, our Chief Executive Officer, David Collins, leased a portion of his home in Miami, Florida to the Company, which serves as the Company’s executive office. The Company pays a monthly office allowance to Mr. Collins of $5,500, for approximately 1,200 square feet and secretarial support. There is no lease agreement for these premises. This office arrangement was not the product of arm’s length negotiation; however, the Company has determined the arrangement to be competitive with comparable office space and secretarial support.
The Company does not use affiliation with special purpose entities, variable interest entities or synthetic leases to finance its operations. Additionally, the Company has not entered into any arrangement requiring it to guarantee payment of third party debt or to fund losses of an unconsolidated special purpose entity.
ITEM 3. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
The Company’s management, with the participation of the Principal Executive Officer and Principal Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures as of
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the end of the period covered by this quarterly report. Based on that evaluation, the Company’s Principal Executive Officer and Principal Financial Officer have concluded that, as of March 31, 2006, such controls and procedures were effective.
(b) Definition of Disclosure Controls
Disclosure Controls are controls and other procedures of the Company designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, such as this Quarterly Report, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure Controls are also designed to ensure that such information is accumulated and communicated to our management, including the Company’s principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure.
(c) Limitations on the Effectiveness of Controls
Our CEO and CFO do not expect that our Disclosure Controls or our internal control over financial reporting will prevent all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.
These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
(d) Conclusions
Based upon the Disclosure Controls evaluation referenced above, our acting CEO and our CFO have concluded that, subject to the limitations noted above, as of the end of the period covered by this Quarterly Report, our Disclosure Controls were effective.
(e) Changes in Internal Controls
The Company’s management, with the participation of the Principal Executive Officer and Principal Financial Officer, have evaluated any changes in the Company’s internal control over financial reporting that occurred during the period covered by this quarterly report, and they have concluded that there was no material change to the Company’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
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(f) Sarbanes-Oxley Section 404 Compliance
As directed by Section 404 of the Sarbanes-Oxley Act of 2002, the Securities and Exchange Commission adopted rules requiring public companies to include a report of management on the Company’s internal controls over financial reporting in their annual reports. In addition, the independent registered public accounting firm auditing a company’s financial statements must also attest to and report on management’s assessment of the effectiveness of the company’s internal controls over financial reporting as well as the operating effectiveness of the company’s internal controls. We were not subject to these requirements for the fiscal year ended December 31, 2005 and we will also not be subject to such requirements for the current fiscal year ending December 31, 2006.
Notwithstanding, there is risk that we may not be able to comply with all of the requirements imposed by this rule. At present there is no precedent available with which to measure compliance adequacy. In the event we identify significant deficiencies or material weaknesses in our internal controls that we cannot remediate in a timely manner or we are unable to receive a positive attestation from our independent registered public accounting firm with respect to our internal controls, investors and others may lose confidence in the reliability of our financial statements and our stock price and ability to obtain equity or debt financing as needed could suffer. In addition, in the event that our independent registered public accounting firm is unable to rely on our internal controls in connection with their audit of our financial statements, and in the further event that they are unable to devise alternative procedures in order to satisfy themselves as to the material accuracy of our financial statements and related disclosures, it is possible that we would receive a qualified or adverse audit opinion on those financial statements which could also adversely affect the market price of our common stock and our ability to secure additional financing as needed.
PART II
ITEM 1. LEGAL PROCEEDINGS
On December 16, 2005, Continental Western Insurance Company filed suit against the Company in the Circuit Court of Pulaski County, Arkansas, claiming unpaid insurance premiums in the amount of $236,121 relating to the product liability potion of the policy. The premiums are calculated based upon the Company’s revenues and a classification code applied by the insurance company. The Company’s counsel believes that the Company will prevail on the merits and defeat the claim, should the matter go to trial. As a result of the dispute, the Company changed its insurance carrier for the period commencing July 12, 2005.
On November 8, 2005, the Company was sued in the Court of Common Pleas, in Dauphin County, Pennsylvania, by Marie Ann Rhayam, on a products liability claim involving a 12-year-old boy who allegedly “defeated” a gunlock manufactured by the Company, and shot and wounded the plaintiff’s son. The suit seeks unspecified damages. The Company’s attorney believes that the Company will prevail on the merits and defeat the claim. A demand has been made on the Company’s former insurance company, Continental Western Insurance Company for coverage of the claim.
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We were the plaintiff against our former manufacturer Skit International, Ltd. and Uni-Skit Technologies, Inc. which alleged breach of a manufacturing contract which required defendants to manufacture certain of our products with the range of “competitive pricing”, a defined term. We sought damages and rescission of 165,000 shares of our common stock as part of the compensation paid to the defendants. The defendants denied the allegations and counterclaimed for an outstanding balance of $182,625, for rescission of the manufacturing agreement and for damage to its business reputation.
In August of 2003, this suit went to trial before a twelve (12)-member jury in the Circuit Court of Pulaski County, Arkansas. The jury awarded the Company damages in the amount of $1,650,560, against Skit and Uni-Skit, which includes the value of the returned shares of stock previously issued to the defendants. In addition, all counterclaims of the defendants were dismissed. Pursuant to an order of the Court, the shares issued to the defendants have been cancelled and reissued to the Company. Thereafter, defendant Skit International, Ltd. filed a Motion to Set Aside Judgment. The Court denied this motion and no appeal has been filed.
On November 9, 2005, Skit International, Ltd. filed a Complaint for Declaratory Judgment in the United States District Court, Eastern District of Arkansas, Western Division, seeking once again to set aside the judgment against Skit International, Ltd., based upon the allegation that Skit International, Ltd.’s former attorney did not have authorization to act on its behalf with respect to the Pulaski County case, and that the Arkansas Court did not have personal jurisdiction over the defendant. Based upon advice from its legal counsel, the Company believes that this matter will also be dismissed, and the Company will be able to pursue the collection of the outstanding judgment against Skit International, Ltd.
On October 23, 2003, the Company initiated suit, seeking unspecified damages, in the Circuit Court of Pulaski County, Arkansas against former manufacturers, Uni-Tat International, Inc., Uni-Champion Ltd., and their respective principals, Victor Lee and Arthur Yung, for common law fraud (as to Unit-Tat, Lee and Yung), breach of contract, and violation of the Deceptive Trade Practices Act, and for vicarious liability. On January 5, 2005, the Court denied our claim, on grounds that that it was barred by the statute of limitations.
The litigation,Legel v. DAC Technologies Group International, Inc., et al, which has previously been reported in the Company’s periodic reports, involving the suit and countersuit between Larry Legel, the Company’s former director, and his wife Brenda Legel, and the Company and its CEO, David Collins, has been resolved. The litigation has been dismissed with prejudice, and the Company and its stock transfer agent have been released from all claims and liability to the Legels. Of the 177,400 shares of the Company stock which the Legels received, 115,400 will be returned to the Collins Childrens’ Trust, leaving the Legels with 62,000 shares (placed in the name of their company Glacier Marketing International, Inc.), and cash to be paid by the Trust and not the Company. The Company will not be required to compensate the Legels in any manner, other than to pay costs of the transfer of stock and the costs for any legal opinion to transfer stock. If and when the Legels, who no longer serve in any capacity with the Company except as shareholders, decide to sell the 62,000 shares of the Company’s common stock in the marketplace they may do so at the rate of no more than 5,000 shares per week. This matter had been previously reported in the Company’s 8-K on September 6, 2005.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A Form 8K was filed on September 7, 2005, and is incorporated herein by reference. The following documents are incorporated by reference from Registrant’s Form 10SB filed with the Securities and Exchange Commission (the “Commission”), File No. 000-29211, on January 28, 2000:
Exhibits
| 2 | Acquisition Agreement | |
| 3(i) | Articles of Incorporation | |
| 3(ii) | By-laws |
Exhibits required by Item 601 of Regulation S-B attached:
Exhibits
| 31.1 | Certification of David A. Collins Pursuant to Rule 13a-14(a)/15d-14(a) | |
| 31.2 | Certification of Robert C. Goodwin Pursuant to Rule 13a-14(a)/15d-14(a) | |
| 32.1 | Certification of David A. Collins Pursuant to Rule 13a-14(b) or Rule 15d-14(c) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350 | |
| 32.2 | Certification of Robert C. Goodwin Pursuant to Rule 13a-14(b) or Rule 15d-14(c) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350 |
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SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, hereunto duly authorized:
| By: | /s/ David A. Collins | |||
| David A. Collins, Chairman, CEO and Principal Executive Officer | ||||
| By: | /s/ Robert C. Goodwin | |||
| Robert C. Goodwin, Principal Accounting Officer and Principal Financial Officer | ||||
Dated: May 22, 2006
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