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Saturday, September 17, 2005

DAC Technologies (DAAT)

This company (website) makes firearm safety devices, gun cleaning kits, safes, car alarms, etc. They sell to Wal*Mart (I didn't find any DAC stuff online), Academy(no online shopping), Big 5 (nothing online), Cabela's (they show a DAC's item for $25 and a crappier generic item for $20, the DAC website has it for $30, and they have a DAC brass jag kit for $8, where the DAC website has it for $15, Cabela's also has a cheaper, smaller brass jag set for $2.50), G.I. Joes (these guys feature a $60 DAC cleaning kit very prominently and have other DAC stuff), K-Mart (I only found competitor stuff like Otis online), L.L. Bean (I only found competitor products online). They OEM through Savage Arms (nothing relevant online), Marlin Firearms (nothing relevant online), Kimber (nothing relevant online), Weatherby (expensive fancy cleaning kit, nothing from DAC unless that kit was repackaged), Glock (nothing relevant online), Sig (cleaning kit, can't tell if it's from DAC), Leatherman Tool (nothing online), Taurus International (nothing online), Ithaca Arms (nothing online), H&R 1871 (nothing online), Rossi (nothing online), Knight Rifles (they have some cleaning stuff that could be DAC but the jags don't match). They have go through several distributors. I checked the distributors and some show DAC, others don't, no surprises.

Otis seems like a strong gun cleaning supplies competitor.

Ok, let's take a look at their financials.
In the year ending Dec 31, 2004, their revenues went up 96%. This leveled off to 41% in Q2 2005 (68% in Q1) from the year earlier. Quarter over quarter from Q1 to Q2: Q1 had $2.26 million in sales, Q2 had nearly the same level of sales. On Sept 13, 2005, they announced August sales of $1.11 million. July sales were $740K.

There is legislation working its way through Congress to require a trigger lock or safe storage device for every handgun sold by a dealer. DAC would profit from this. Cabela's made a 6-figure order. Also Wal*Mart made low 7 figure commitments. At that point in August, the company was foreseeing $9 million to $11 million in revenues in 2nd half.

Let's follow the financials over time.
Dec 31, 2004:
cash = $168K
AR= $477K (allow of $7.5K) way up over prior year of $100K
due from factor = $1.3 million, way up over prior year of $223K
inventories = $1.9 million, more than double what it was a year earlier
AP doubled from the prior year

Sales doubled in 2004 from 2003.
Gross margins dropped from 40% in 2003 to 37% in 2004.
Selling cost percentages stayed the same.
G&A went from 15% to 9%.
Operating margins for 2004 were 17%. 12% in 2003.
Net margins for 2004 were 11%. 7% in 2003.
Share count increased mostly due to private placement.
Cash flow from operations sucked in 2004 (due from factor and inventories).

So the majority of receivables are factored. I view this as kind of ugly. Factoring fees are 0.65% to 1.8% monthly. The Company can get advances (currently charged 5.25%).

Bank debt is at 7%.

less than 400K stock options outstanding., ave strike $2.57.

They burned off $161K of NOLs in 2004.

One customer accounted for 55% of sales!
Their AR was factored.
Company purchased 98% of its products from one supplier.

What's to stop the 55% customer from going directly to the 98% supplier????

Bzzzt. I've seen enough. This company is selling for about 15 times trailing earnings. It doesn't seem very cheap to me at this point.

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