UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: December 31, 2004
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 1-9263
DEFENSE TECHNOLOGY SYSTEMS, INC.
-----------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Delaware 11-2816128
------------------------ ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
275K Marcus Blvd.
Hauppauge, NY 11788
------------------------------------------------------------
(Address of principal executive offices, including zip code)
Registrant's Telephone No., including area code: (631) 951-4000
Check whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days.
Yes X No
--- ---
The number of shares outstanding of each of the issuer's classes of common
stock, as of the last practicable date:
Common stock, $.001 par value 39,791,034
--------------------------------------------------------------------------------
Class Number of shares outstanding at February 14, 2005
Transitional Small Business Disclosure Format: Yes ____ No __X__
1
DEFENSE TECHNOLOGY SYSTEMS, INC.
INDEX
PART I FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of December 31, 2004
and June 30, 2004........................................................ 3
Condensed Consolidated Statements of Operations for the
three months ended December 31, 2004 and 2003............................ 4
Condensed Consolidated Statements of Operations for the
six months ended December 31, 2004 and 2003.............................. 5
Condensed Consolidated Statements of Cash Flows for the
six months ended December 31, 2004 and 2003.............................. 6
Notes to Condensed Consolidated Financial Statements..................... 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................ 16
Item 3. Controls and Procedures.................................................. 22
PART II OTHER INFORMATION
Item 1. Legal Proceedings........................................................ 23
Item 2. Changes in Securities ................................................... 23
Item 3. Defaults Upon Senior Securities.......................................... 23
Item 4. Submission of Matters to a Vote of Security Holders...................... 23
Item 5. Other Information........................................................ 23
Item 6. Exhibits and Reports on Form 8-K......................................... 23
SIGNATURES ........................................................................... 24
Exhibit 31 Section 302 Certifications
Exhibit 32 Section 906 Certifications
2
ITEM 1 FINANCIAL STATEMENTS
DEFENSE TECHNOLOGY SYSTEMS, INC.
Condensed Consolidated Balance Sheet
December 31, 2004 June 30, 2004*
(Unaudited)
----------------- ----------------
ASSETS
CURRENT ASSETS:
Cash $ 2,845 $ 3,920
Accounts receivable 103,115 87,745
Other current assets 300 1,500
------------- -------------
TOTAL CURRENT ASSETS 106,260 93,165
Property and equipment, net 13,091 15,202
Security deposits 12,119 12,119
Patent, net 400,728 -
------------- -------------
TOTAL ASSETS $ 532,198 $ 120,486
============= =============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable 2,042,911 2,932,351
Accrued expenses and other 976,491 1,008,417
Notes payable-related parties, current 656,454 160,738
Bankruptcy distributions payable 302,742 292,120
Secured subordinated debentures 92,633 92,633
------------- -------------
TOTAL CURRENT LIABILITIES 4,071,231 4,486,259
Note payable-related parties 273,071 381,087
Accrued dividends on preferred stock 95,899 62,189
------------- -------------
TOTAL LIABILITIES 4,440,201 4,929,535
------------- -------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT:
8% Series B Convertible Preferred Stock,
$.01 par value, stated value $1,000 per
share; Redeemable at $1,250 per
share; authorized, 3,000 shares;
1,192 and 1,559 shares issued and
outstanding at December 31, 2004 and
June 30, 2004, respectively 1,192,000 1,559,000
Common stock, $.001 par value; 40,000,000
Shares authorized, 39,791,034 and 34,781,755
issued and outstanding at December 31, 2004 and
June 30, 2004, respectively 39,791 34,782
Additional paid-in capital 8,966,743 8,028,629
Accumulated deficit (14,106,537) (14,431,460)
------------- -------------
TOTAL STOCKHOLDERS' DEFICIT (3,908,003) (4,809,049)
------------- -------------
TOTAL LIABILITIES AND
STOCKHOLDERS' DEFICIT $ 532,198 $ 120,486
============= =============
*Condensed from audited financial statements
See accompanying notes to condensed consolidated financial statements.
3
DEFENSE TECHNOLOGY SYSTEMS, INC.
Unaudited Condensed Consolidated Statements of Operations
Three Months ended December 31,
2004 2003
(Restated)
------------ ------------
Net sales $ 117,774 $ 92,519
Cost of goods sold 84,132 61,529
----------- -----------
Gross profit 33,642 30,990
----------- -----------
Expenses:
Selling, general and administrative expenses 188,204 2,731,627
Interest expense 100,159 111,983
Amortization of patent 6,261 -
----------- ------------
Total expenses 294,624 2,843,610
----------- -----------
(260,982) (2,812,620)
----------- -----------
Other income:
Commission income - 32,026
Gain on settlement and write off of debt 397,685 109,696
Other income 146 -
----------- ------------
Total other income 397,831 141,722
----------- -----------
Net income (loss) 136,849 (2,670,898)
Accrued dividends on preferred stock 25,400 31,180
----------- -----------
Net income (loss) attributable to common
shareholders $ 111,449 $(2,702,078)
=========== ===========
Earnings (loss) per share attributable to
common shareholders:
Basic and diluted $ 0.00 $ (0.07)
=========== ===========
Weighted average common shares outstanding:
Basic 38,663,892 36,120,911
=========== ===========
Diluted 40,000,000 36,120,911
=========== ===========
See accompanying notes to condensed consolidated financial statements.
4
DEFENSE TECHNOLOGY SYSTEMS, INC.
Unaudited Condensed Consolidated Statements of Operations
Six Months ended December 31,
2004 2003
(Restated)
------------ ------------
Net sales $ 611,951 $ 238,002
Cost of goods sold 487,281 146,243
----------- -----------
Gross profit 124,670 91,759
----------- -----------
Expenses:
Selling, general and administrative expenses 351,895 2,859,271
Interest expense 243,515 246,895
Amortization of patent 12,522 -
----------- ------------
Total expenses 607,932 3,106,166
----------- -----------
(483,262) (3,014,407)
----------- -----------
Other income:
Commission income 4,864 87,187
Gain on settlement and write off of debt 856,121 275,694
Other income 200 -
----------- ------------
Total other income 861,185 362,881
----------- -----------
Net income (loss) 377,923 (2,651,526)
Accrued dividends on preferred stock 53,000 63,284
----------- -----------
Net income (loss) attributable to common
shareholders $ 324,923 $(2,714,810)
=========== ===========
Earnings (loss) per share attributable to
common shareholders:
Basic and diluted $ 0.01 $ (0.08)
=========== ===========
Weighted average common shares outstanding:
Basic 37,807,506 34,837,779
=========== ===========
Diluted 40,000,000 34,837,779
=========== ===========
See accompanying notes to condensed consolidated financial statements.
5
DEFENSE TECHNOLOGY SYSTEMS, INC.
Unaudited Condensed Consolidated Statements of Cash Flows
Six Months ended December 31,
2004 2003
(Restated)
Cash flows from operating activities:
Net income (loss) $ 377,923 $ (2,651,526)
Adjustments to reconcile net income to cash
provided (used) by operating activities:
Depreciation and amortization 14,633 -
Amortization of note and bond discounts 2,700 720
Gain on settlement and write-off of debt (856,121) (275,694)
Interest component of beneficial conversion
feature of convertible loans 153,333 58,000
Common stock issued for consulting services - 338,000
Stock options granted for consulting services - 2,118,165
Changes in current assets and liabilities:
Accounts receivable (15,370) 110,828
Prepaid expenses and other current assets 1,200 (3,000)
Accounts payable and accrued liabilities (54,745) 154,149
Accrued interest on bankruptcy liability 10,622 11,167
------ ------
Cash used by
operating activities (365,825) (139,191)
--------- ---------
Cash flows from investing activities:
Patent acquisition costs (20,250) -
----------- ---------
Cash flows from financing activities:
Proceeds from notes and loans 460,000 -
Principal repayments on loans (75,000) (6,000)
Common stock sales - 150,000
Borrowings from asset-based lender - 303,565
Repayment of amounts due asset-based lender - (312,572)
-------- ---------
Cash provided by
financing activities 385,000 134,993
-------- --------
Decrease in cash (1,075) (4,198)
Cash, beginning of period 3,920 11,888
-------- --------
Cash, end of period $ 2,845 $ 7,690
======== ========
Supplemental disclosure of cash flow information:
Cash paid for income taxes $ 0 $ 0
======== ========
Cash paid for interest $ 3,795 $ 0
======== ========
Non-Cash Investing and Financing Activities:
Dividends accrued on preferred stock $ 53,000 $ 63,284
======== ========
Conversion of preferred stock and accrued
dividends to common stock $386,290 $ 45,505
======== ========
Conversion of notes payable and accrued
interest and dividends to common stock $ - $677,555
======== ========
Acquisition of patent for shares of common
stock $393,000 $ -
======== ========
Conversion of trade payable to shares of
common stock $ 10,500 $ -
======== ========
Conversion of accrued liability to shares
of common stock $ - $ 97,248
======== ========
See accompanying notes to condensed consolidated financial statements.
6
DEFENSE TECHNOLOGY SYSTEMS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1: Summary of Significant Accounting Policies
------------------------------------------
(A) - Unaudited Interim Financial Information
The unaudited condensed consolidated interim financial statements, and
accompanying notes included herein, have been prepared by Defense Technology
Systems, Inc., (the "Company"), pursuant to the rules and regulations of the
Securities and Exchange Commission ("SEC") and reflect all adjustments which are
of a normal recurring nature and which, in the opinion of management, are
necessary for the fair statement of the results of the three and six months
ended December 31, 2004 and 2003. Certain information and footnote disclosures
have been condensed or omitted pursuant to such rules and regulations. The
results for the current interim period are not necessarily indicative of the
results for the full year. These consolidated financial statements should be
read in conjunction with the consolidated financial statements and the notes
thereto in the Company's latest annual report filed with the SEC on Form 10-KSB
for the year ended June 30, 2004. The Company has restated the results for the
three and six months ended December 31, 2003 as a result of a gain attributable
to the write-off of debt and a correction in the calculation of stock-based
compensation related to option grants.
The accompanying financial statements include the accounts of the Company and
its wholly-owned subsidiaries on a consolidated basis. All significant
intercompany accounts and transactions have been eliminated. The preparation of
consolidated financial statements in accordance with accounting principles
generally accepted in the United States of America requires the Company to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingencies as of the date of the consolidated
financial statements and the reported amount of revenues and expenses during the
period. Actual results could differ from those estimates.
(B) - Nature of Business
The Company was incorporated in Delaware on January 7, 1998 as DataWorld
Solutions, Inc. and commenced operations on March 7, 1998. The Company became
publicly traded as a result of a reverse merger with Vertex Computer Cable &
Products, Inc. ("Vertex") in December 1998. Previously in January 1998, Vertex
secured certain financing that made effective Vertex's second amended plan of
organization under Chapter 11 of the U.S. Bankruptcy Act. In June 2004, the
Company changed its name to Defense Technology Systems. The Company consists of
two operating divisions: DWS Manufacturing is a specialty assembler of
electronic cable assemblies used in data systems and is also a distributor of
cabling systems, components and cable management solutions; DWS Defense Systems
is a distributor, installer and integrator of specialized security products.
Both divisions operate in one business segment as contemplated by generally
accepted accounting principles.
7
(C) - Revenue Recognition
The Company records sales on its long-term contracts on a
percentage-of-completion basis, based upon current estimates of costs to
complete such contracts. Contract costs include all direct materials, labor and
subcontractor costs. General and administrative expenses are accounted for as
period charges and, therefore, are not included in the calculation of the
estimates to complete. Anticipated losses are provided for in their entirety
without reference to the percentage-of-completion.
Revenue from data and security product sales is recognized when the product is
shipped. Revenue from installation contracts is recognized under the percentage
of completion method.
(D) - Net Income (Loss) Per Basic and Diluted Common Shares
Net income (loss) per basic and diluted common shares is computed on the basis
of the weighted average number of basic and diluted common shares outstanding
during the period. Only the weighted average number of shares of common stock
actually outstanding is used to compute basic income (loss) per common share.
For the diluted amounts, the effect of outstanding options and warrants and
convertible stock and debt instruments is not considered during loss periods as
their effect would be anti-dilutive. The effect of outstanding options and
warrants is considered during periods when net income is earned when their
exercise price is below the average market price of the common stock during the
period. For the three and six months ended December 31, 2004 and 2003, options
and warrants to purchase 1,800,000 and 160,000 shares of common stock,
respectively, have been excluded from the calculation of diluted income (loss)
per share for these reasons. (See Note 1-I).
For the three and six months ended December 31, 2004, outstanding convertible
preferred stock and debt enter into the calculation of diluted net income per
share on a limited basis due to two limitations as follows: (i) the convertible
stock agreement limits the preferred shareholder's common stock holdings to 9.9
percent of the total outstanding common shares; and (ii) the Company's current
common stock authorization is limited to 40 million shares. As a practical
matter, the amount of common shares issuable under outstanding convertible
instruments is so large, the applicable limitation is the 40 million share
authorization. For the three and six months ended December 31, 2004, assuming
maximum dilution to 40 million shares, earnings per share would be unchanged at
$0.00 and $0.01, respectively.
Loss per share for the three and six months ended December 31, 2003 was restated
due to the inclusion of gains of $13,458 and $179,456, respectively,
attributable to the write-off of certain statutorily barred liabilities, and an
additional expense of $153,000 related to the correction of an error in the
Black-Scholes formula application used to determine the value of stock options
granted to consultants. (See Note 1-H). Additionally, the weighted average
number of outstanding shares of common stock for such period was corrected for
the reduction of 1.2 million shares as disclosed in the Company's annual report
on Form 10-KSB for the year ended June 30, 2004. Such correction had no effect
on the per share results.
8
(E) - Income Taxes
The Company records its income taxes in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes", which
requires the recognition of deferred tax assets and liabilities for the future
tax consequences of temporary differences between the financial statement and
tax basis carrying amounts of assets and liabilities. For interim periods, the
estimated effective annual tax rate is applied to year-to-date income or loss.
(F) - Property, Equipment and Depreciation
Property and equipment at December 31, 2004, are stated at cost less accumulated
depreciation and amortization computed on a straight-line basis over the
estimated useful lives of the respective assets, which range from three to five
years. Leasehold improvements are amortized over the useful life of the
improvement, or the lease term, whichever is less. Expenditures for maintenance,
repairs and betterments, which do not materially extend the useful lives of the
assets, are charged to operations as incurred. The cost and related accumulated
depreciation of assets retired or sold are removed from the respective accounts
and any gain or loss is recognized in operations.
(G) Patent and Amortization
On July 2, 2004, the Company acquired a patent from GEORAL International, Ltd.
(US Patent No. 6,472,984) for the GIL 2001 Security Doors. The patent was valued
at $413,250 which represents the value of the common stock given in
consideration of the purchase as well as $20,250 of related professional fees
incurred in the transaction. The patent expires on January 30, 2021; the Company
is amortizing the value of the patent over the remaining 16.5 years of its
useful life in accordance with the provisions of Statement of Financial
Accounting Standards ("SFAS") 142. (See Note 3).
(H) - Write-Off of Statutorily Barred Liabilities
In the fourth quarter of fiscal 2004 the Company was advised by its counsel that
pursuant to applicable law, certain of its trade obligations are statutorily
unenforceable after periods of four or six years, as applicable, from the date
of their incurrence. Accordingly the Company has written off $397,685 and
$476,173 of accounts payable which amount is included in gain on settlement and
write-off of debt for the three and six months ended December 31, 2004,
respectively. Additionally, the Company has restated the results for the three
and six months ended December 31, 2003 to reflect $13,458 and $179,456,
respectively, of write-offs applicable to such periods.
(I) - Stock-Based Compensation
The Company accounts for stock-based compensation pursuant to SFAS Nos. 123 and
148. These pronouncements allow companies to either expense the estimated fair
value of all stock options or, as the Company has elected with respect to
options granted to employees and directors, to continue to follow the intrinsic
value method previously set forth in Accounting Principles Board ("APB") Opinion
No. 25, but disclose the pro forma effects on net income (loss) had the fair
value of those options been expensed. (See Note 1-K).
9
In October 2004, the Board of Directors of the Company granted the Company's CEO
and CFO options to purchase 500,000 shares of common stock each at an exercise
price of $0.154 per share, which was calculated at 125 percent of the
weighted-average closing price of the stock for the four weeks following the
grant date. The options vest six months from the grant date and expire five
years from the grant date. The fair value of these options at the grant date
using the Black-Scholes pricing model was $139,400, or $0.1394 per share.
The determination of the fair value of these options was based on the following
elements:
Stock price volatility: 328%
Annual interest rate: 2.07%
Dividends paid on common stock: $0.00
Estimated useful life of options: 3 years
The following is the pro forma effect of this option grant on the results for
the three and six months ended December 31, 2004:
Three months Six months
ended ended
Dec. 31, 2004 Dec. 31, 2004
------------- -------------
Net income as reported: $ 136,849 $ 377,923
--------- ----------
Pro forma net income: $ 79,404 $ 320,478
========= ==========
Net income attributable to
common shareholders as reported: $ 111,449 $ 324,923
--------- ----------
Pro forma net income attributable to
common shareholders: $ 54,004 $ 267,478
========= ==========
Earnings per share as reported: $ 0.00 $ 0.01
--------- ----------
Pro forma earnings per share $ 0.00 $ 0.01
========= ==========
(J)- Fair Value of Financial Instruments
The Company has estimated the fair value for financial instruments using
available market information and other valuation methodologies in accordance
with Financial Accounting Standards No. 107, "Disclosures about Fair Value of
Financial Instruments." Management of the Company believes that the fair value
of financial instruments, consisting of cash, accounts receivable, accounts
payable, notes payable, long-term debt and subordinated debentures approximate
carrying value for assets and is undeterminable for liabilities.
10
(K) - Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board ("FASB") issued a
revised SFAS No. 123, "Share-Based Payment". The revised Statement requires
companies to expense the value of employee stock options and similar awards and
applies to all non-vested awards granted prior to the effective date, all awards
granted after the required effective date and to awards modified, repurchased or
cancelled after that date. This Statement will be effective for the Company
beginning in fiscal 2006, with application expected to be prospective; adoption
is not anticipated to have a material effect on the Company's financial
statements.
Note 2: Going Concern
-------------
The Company has current assets of $106,260 (including $2,845 in cash)
compared with current liabilities of $4,071,231, resulting in a working capital
deficit of $3,964,971 as of December 31, 2004. Although the Company had net
income of $136,849 and $377,923 for the three and six months ended December 31,
2004, respectively, the income was entirely attributable to debt settlements and
write-offs. Additionally, the Company has incurred significant net losses in
each of the three preceding fiscal years and has a stockholder's equity deficit
of $3,908,003 at December 31, 2004. Such deficits and recurring losses raise
questions about the Company's ability to continue as a going concern.
Additionally, the Company's continuation is also threatened by the existence of
numerous judgments on trade payables, defaults on various secured indebtedness
and delinquencies on certain tax obligations. These conditions could result in
the seizure of Company assets and/or its being forced into bankruptcy. (See Note
8).
The Company is currently implementing a business plan that it believes will
strengthen the balance sheet, increase revenue and return it to profitability.
The plan involves a series of initiatives. The Company is seeking to restructure
its liabilities by negotiating with secured and unsecured creditors and vendors
for forgiveness of certain outstanding debt, or to exchange debt for equity. The
Company has also executed a letter of intent to acquire a majority interest of a
company in its industry. (See Note 9).
In the fourth quarter of fiscal 2004 the Company was advised by its counsel that
pursuant to applicable law, certain of its trade obligations are statutorily
unenforceable after periods of four or six years, as applicable, from the date
of their incurrence. Accordingly the Company has written off $397,685 and
$476,173 of accounts payable which amount is included in gain on settlement and
write-off of debt for the three and six months ended December 31, 2004,
respectively. Additionally, the Company has restated its results for the three
and six months ended December 31, 2003 to reflect gains of $13,458 and $179,456,
respectively, attributable to the write-off of debt.
If management is not successful in implementing the initiatives discussed in the
preceding paragraphs, it could result in the severe curtailment of the Company's
operations and/or the seizure of its assets and/or its being forced into
bankruptcy. There is no assurance that the Company will be successful in
accomplishing its objectives. The accompanying financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
11
Note 3: Acquisition of Patent
---------------------
In July, 2004, the Company acquired a patent from GEORAL International, Ltd. (US
Patent No. 6,472,984) for the GIL 2001 Security Doors. The patent was valued at
$413,250 which represents the value of the 1,000,000 shares of common stock
given in consideration of the purchase plus the professional fees incurred in
the transaction. The patent expires on January 30, 2021. The acquisition
agreement includes an option for the seller to re-purchase the patent on the
fifth anniversary of the agreement at a cost equal to the value of common stock
received in consideration of the purchase ($393,000) or by returning to the
Company one million shares of common stock.
Note 4: Notes Payable - Related Parties
-------------------------------
Notes payable-related parties, as of December 31, 2004, consists of the
following:
Current Long-Term Total
------- --------- -----
Augustine-revolving credit line $535,000 $ - $535,000
Augustine-term note payable - 94,500 94,500
Rosenthal & Rosenthal 71,429 178,571 250,000
Shareholder loan 50,025 - 50,025
-------- --------- ---------
$656,454 $ 273,071 $929,525
======== ========= ========
For the three and six months ended December 31, 2004, the Company's borrowings
from Augustine Capital Management ("Augustine") required the recognition of
approximately $45,000 and $153,333, respectively, of additional interest expense
related to the lender's right to convert the outstanding balance of their note
payable into shares of common stock at a 25% discount from market. In November
2004, the Company borrowed $35,000 under the terms of this convertible note
facility, and in December 2004 borrowed an additional $100,000, bringing the
total amount outstanding under this facility to $535,000 as of December 31,
2004, all of which is due on August 28, 2005. With the lender's permission, the
Company has exceeded the stated credit limit of $500,000 applicable to this
facility. Any future borrowings under this agreement either allowed in excess of
the line or subsequent to repayments of outstanding amounts will result in the
recognition of additional interest expense related to this beneficial conversion
feature. The balance of the unamortized discount on the Augustine term note
payable, due March 1, 2006, was $6,300 as of December 31, 2004. As of such date,
interest accrued on the notes was approximately $16,000 and $7,000,
respectively, all of which, pursuant to the terms of the notes, may be converted
into common shares of the Company.
The note payable to Rosenthal & Rosenthal, executed in June 2004, calls for
payment of interest only through December 2004, and repayment of principal in 42
equal payments commencing in January 2005. (See Note 10).
12
Note 5: Other Related Party Transactions
--------------------------------
As of December 31, 2004, approximately $238,000 of accrued compensation, due the
Company's Chief Executive Officer and Chief Financial Officer, was included in
accrued expenses on the Condensed Consolidated Balance Sheet.
Note 6: Income Taxes
------------
No income taxes were provided since the Company has loss carry-forwards.
As of December 31, 2004, the Company has net operating loss carry-forwards
totaling approximately $18,000,000, expiring at various dates through fiscal
2023. The Company estimates an effective tax rate of zero for the fiscal year
ending June 30, 2005, based on utilization of its net operating loss
carry-forwards.
Note 7: Capital Stock Transactions
--------------------------
(A) Preferred Stock Conversions
In July 2004, as per the terms of the 8% Convertible Preferred Stock agreement,
Augustine converted 200 shares of preferred stock with a stated value of
$200,000 plus accrued dividends of $8,153 into 1,200,883 shares of common stock
based on a conversion price of $0.173 per share.
In September 2004, Augustine, converted 38 shares of preferred stock with a
stated value of $38,000 plus accrued dividends of $2,199, into 788,216 shares of
common stock based on a conversion price of $0.051 per share.
In November 2004, Augustine converted 105 shares of preferred stock with a
stated value of $105,000 plus accrued dividends of $7,249 into 2,200,961 shares
of common stock based on a conversion price of $0.051 per share.
Additionally, in November 2004, Augustine, converted 24 shares of preferred
stock with a stated value of $24,000 plus accrued dividends of $1,689, into
508,693 shares of common stock based on a conversion price of $0.051 per share.
(B) Return of Shares by Consultant; Cancellation of Option/Consulting Agreement
In October 2004, a former consultant to the Company returned 400,000 shares
of common stock acquired pursuant to a consulting agreement together with
400,000 shares he had acquired to the Company's treasury. These shares were
valued at $88,800 or $0.111 per share, the weighted-average closing market price
for the two days before and after the date of the transaction. By resolution of
the Board of Directors, these shares were cancelled and became equivalent to
unissued shares.
Additionally, as a result of the termination of the above-referenced consulting
agreement, options to purchase 1,200,000 shares of common stock at various
prices were cancelled.
13
(C) Other Capital Stock Transactions
In July 2004, pursuant to the terms of the Patent Acquisition Agreement, the
Company issued one million shares of common stock to GEORAL International, Ltd.
for the purchase of a patent. The shares were valued at $393,000 or $0.393 per
share, the weighted-average closing market price of the stock for the two days
before and after the date of this transaction. (See Note 3).
In November 2004, a vendor converted a trade payable in the amount of $10,500
into 110,526 shares of common stock valued at $10,500 or $0.095 per share.
Following is a schedule of changes in shareholders' deficit for the six months
ended December 31, 2004:
Preferred Common Treasury Add'l
Stock Common Stock Treasury Stock Paid-In Retained Stockholder's
Amount Shares Amount Shares Amount Capital Earnings Deficit
----------- ----------- -------- --------- --------- ----------- ------------- -------------
Balance July 1, 2004 $1,559,000 34,781,755 $34,782 $8,028,629 (14,431,460) (4,809,049)
Conversion of
preferred stock
to common stock (367,000) 4,698,753 4,699 381,591 19,290
Value of beneficial
conversion
feature of convertible
loans 153,333 153,333
Return of common
shares to treasury by
consultant 800,000 (88,800) 88,800 -
Cancellation of
treasury stock (800,000) (800) (800,000) 88,800 (88,000) -
Purchase of patent 1,000,000 1,000 392,000 393,000
Conversion of trade
payable
to common stock 110,526 110 10,390 10,500
Accrued dividends on 8%
preferred stock (53,000) (53,000)
Net income for six
months
ended December 31, 2004 377,923 377,923
----------- ----------- -------- --------- --------- ----------- ------------- -------------
Balance December 31, 2004
$1,192,000 39,791,034 $39,791 - $ 0 $8,966,743 ($14,106,537) ($3,908,003)
========== =========== ======= ========= ======== ========== ============= =============
14
Note 8: Commitments and Contingencies
-----------------------------
(A) Litigation matters
The Company is a party to legal matters arising in the general course of
business. During fiscal 2001 and subsequently, the Company decided not to
dispute litigation with suppliers and other creditors for collection of amounts
owed to them. As a result, as of December 31, 2004, the Company had outstanding
judgments amounting to $527,051. This balance is included in accounts payable in
the accompanying condensed consolidated financial statements.
In September 2000, the Company began to negotiate a potential merger with
American Access Technologies ("AAT"), which resulted in a merger agreement being
signed in April 2001. In June 2001, the Company was notified by AAT that they
were unilaterally terminating the agreement claiming that the Company had
suffered material and adverse changes and that such change entitled AAT to
terminate the agreement. AAT then filed suit against the Company seeking
reimbursement of various incurred costs. The Company has filed a counter suit
against AAT alleging wrongful termination. A non-jury trial commenced on
February 7, 2005 and a decision is expected by the end of the month. The
ultimate outcome of this matter is not expected to have a material adverse
effect on the Company's results of operations or financial position.
(B) Default on debt obligations
The Company is currently in default on payments owed on its bankruptcy
distributions payable. This could result in the Company's creditors requesting
that the Company's Chapter 11 bankruptcy proceedings be re-opened. The Company
is presently accruing interest on this obligation at a rate of 8 percent
annually.
Additionally, the Company has not made payments on its Secured Subordinated
Debentures since January, 2001, and may be declared in default. This obligation
is secured by all of the Company's assets, but is subordinate to all current and
future loan facilities. The Company is presently accruing interest on this
obligation at a rate of 8 percent annually.
(C) Tax delinquencies
As of August 2001, the Company failed to remit sales taxes that it collected
from customers in four states. As of December 2004, approximately $323,000 was
due (inclusive of estimated penalties and interest). The Company is presently
negotiating a settlement of its approximately $265,000 liability with the State
of New York. Should negotiations not be successful, the Company could be forced
by the State of New York to cease operations. As part of the negotiations, the
Company is continuing to make $5,000 monthly good faith payments toward this
obligation.
As of March 2002, the Company failed to remit federal payroll taxes that it had
collected. In March 2004, the Company settled its federal payroll tax liability
which resulted in a forbearance installment plan whereby the Company is
obligated to make monthly payments of $3,000 plus a final payment of accrued
interest in full settlement of this liability. As of December 2004,
approximately $39,000 remained outstanding, which due to the nature of the
obligation is classified as a current liability.
The Company is in the process of preparing, for immediate filing, certain
delinquent federal income tax and state franchise tax returns. As the Company
sustained taxable losses during the applicable periods, there are no income tax
payments that will be due with respect to these returns. Any penalities and
interest that may be assessed on state minimum franchise taxes are expected to
be de minimis.
15
(D) Sales and purchase concentrations
For the three and six months ended December 31, 2004, two customers accounted
for 51% and 36% of sales, and 53% and 17% of sales, respectively, and two
vendors accounted for 59% and 40% of purchases, and 64% and 24% of purchases,
respectively. Loss of any of these major customers or vendors would have a
significant negative effect on the Company's business.
Note 9: Pending Acquisition
-------------------
In December 2004, the Company executed a letter of intent with NewMarket
Technology, Inc. ("NewMarket") to purchase NewMarket's 51 percent interest in
Digital Computer Integration Corp. ("DCI"). DCI is a security and defense
products manufacturer. The Company will purchase the 51 percent interest by
issuance to NewMarket of a newly created Series C Preferred Stock with certain
conversion features. The Series C shares will be subject to certain proxy rights
to be held by the Company's two executive officers. The terms and rights of this
new stock are currently being negotiated by the parties involved and once
finalized, will be incorporated into a definitive acquisition agreement. The
Company is proceeding with its due diligence and anticipates closing this
transaction during the third quarter of fiscal 2005. Additionally, Philip
Verges, the CEO of NewMarket, will join the Company's Board of Directors upon
the closing of this transaction.
Note 10: Subsequent Events
-----------------
In January 2005, the Company borrowed $95,000 from NewMarket, pursuant to a
promissory term note, bearing interest at 6% per annum. Principal and interest
are due in one year.
The Company is currently negotiating a six-month deferral of the principal
repayments on its note payable to Rosenthal & Rosenthal.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis covers material changes in the financial
condition of Defense Technology Systems, Inc., (the "Company") since June 30,
2004 and material changes in the Company's results of operations for the three
and six months ended December 31, 2004, as compared to the same period in 2003.
The Company has restated the results for the three and six months ended December
31, 2003 as a result of a gain attributable to the write-off of debt and a
correction in the expense related to the granting of stock options to
consultants. This discussion and analysis should be read in conjunction with
"Management's Discussion and Analysis" included in the Company's Annual Report
on Form 10-KSB for the year ended June 30, 2004, including audited financial
statements contained therein, as filed with the Securities and Exchange
Commission.
16
Special note regarding forward-looking statements
-------------------------------------------------
This report contains forward-looking statements within the meaning of federal
securities laws. These statements plan for or anticipate the future.
Forward-looking statements include statements about the Company's future
business plans and strategies, statements about its need for working capital,
future revenues, results of operations and most other statements that are not
historical in nature. In this Report, forward-looking statements are generally
identified by the words "intend", "plan", "believe", "expect", "estimate", and
the like. Investors are cautioned not to put undue reliance on forward-looking
statements. Except as otherwise required by applicable securities statutes or
regulations, the Company disclaims any intent or obligation to update publicly
these forward-looking statements, whether as a result of new information, future
events or otherwise. Because forward-looking statements involve future risks and
uncertainties, there are factors that could cause actual results to differ
materially from those expressed or implied.
Results of Operations
Three Months Ended December 31, 2004, vs. Three Months Ended December 31, 2003
Sales revenue increased approximately 27%, to $117,774 for the three months
ended December 31, 2004, from $92,519 for the comparative period in the prior
year. A decrease in sales in the Company's Data division from $92,519 to $56,032
for the three months ended December 31, 2004 was offset by $61,742 in sales
attributed to the Company's DWS Defense Systems subsidiary. This subsidiary was
formed in October 2003; its first sales were recorded in January, 2004.
Costs of revenue increased approximately 37%, to $84,132 for the three months
ended December 31, 2004, from $61,529 for the three months ended December 31,
2003 as a result of increased revenue during the three month period ended
December 31, 2004.
Gross profit increased approximately 9%, to $33,642 for the three months
ended December 31, 2004, from $30,990 for the three months ended December 31,
2003. The gross profit attributable to the Company's Data and Security divisions
were $19,275 and $14,367, respectively. Gross profit margin decreased to 29% for
the three months ended December 31, 2004, compared to 33% for the three months
ended December 31, 2003. The gross profit margin of the Company's Data and
Security divisions were 34% and 23%, respectively. The overall decrease was due
to the significant increase in distribution and installation of security
products which are at a lower margin than the Company's data cable assembly
business.
Selling, general and administrative expenses decreased approximately 93%, to
$188,204 for the three months ended December 31, 2004, from $2,731,627 for the
three months ended December 31, 2003. The decrease is primarily related to the
non-recurrence of a $2,456,165 non-cash charge to consulting expenses related to
the granting of common stock and options to certain individuals during the three
months ended December 31, 2003, as well as a reduction in officers' salaries
related to revisions in their compensation structure as follows: (i) the CEO is
being compensated on a commission-only basis, which reduced his compensation for
the three months ended December 31, 2004 by approximately $23,000; and (ii) the
CFO agreed to reduce his annual salary resulting in annual savings of $30,000.
17
In consideration of the aforementioned revision to the compensation structure of
the Company's officers, in October 2004 the Board of Directors granted each
officer 500,000 options to purchase shares of common stock. (See Note 1-I to the
condensed consolidated financial statements).
Interest expense decreased 11%, to $100,159 for the three months ended December
31, 2004, from $111,983 for the three months ended December 31, 2003. This
decrease was primarily related to a significant reduction in interest expense to
its asset-based lender offset by interest expense incurred as a result of the
beneficial conversion feature of the Augustine revolving credit facility. (See
Note 4 to the condensed consolidated financial statements).
Amortization expense for the three months ended December 31, 2004 related to the
acquisition of a patent was $6,261 versus zero for the three months ended
December 31, 2003. The patent was acquired in July, 2004. (See Note 1-G to the
condensed consolidated financial statements).
Gain on settlement and write-off of debt increased 263%, to $397,685 for the
three months ended December 31, 2004, from $109,696 for the three months ended
December 31, 2003. The increase was attributable to the write-off of
statutorily-barred liabilities.
The Company earned net income of $136,849 for the three months ended
December 31, 2004, as compared to a loss of $2,670,898 for the three months
ended December 31, 2003, due to debt settlements and write-offs and the
non-recurrence of the non-cash compensation charge incurred for the three months
ended December 31, 2003.
The net income applicable to common shareholders for the three months ended
December 31, 2004 was $111,449, compared to a loss of $2,702,078 for the three
months ended December 31, 2003. Dividends accrued on convertible preferred stock
were $25,400 and $31,180 for the three months ended December 31, 2004 and 2003,
respectively.
Basic and diluted earnings (loss) per share were nil and $(0.07) for the three
months ended December 31, 2004 and 2003, respectively. The dilutive effect of
outstanding options and warrants on earnings per share is considered during
periods when net income is earned when their exercise price is below the average
market price of the common stock during the period. For the three months ended
December 31, 2004, options and warrants to purchase 1,800,000 and 160,000 shares
of common stock, respectively, have been excluded from the calculation of
diluted income per share for this reason. Additionally, for the three months
ended December 31, 2004, outstanding convertible preferred stock and debt enter
into the calculation of diluted net income per share on a limited basis due to
two limitations as follows: (i) the convertible stock agreement limits the
preferred shareholder's common stock holdings to 9.9 percent of the total
outstanding common shares; and (ii) the Company's current common stock
authorization is limited to 40 million shares. As a practical matter, the amount
of common shares issuable under outstanding convertible instruments is so large,
the applicable limitation is the 40 million share authorization. For the three
months ended December 31, 2004, assuming maximum dilution to 40 million shares,
earnings per share are unchanged at $0.00.
18
Six Months Ended December 31, 2004, vs. Six Months Ended December 31, 2003
Sales revenue increased approximately 157%, to $611,951 for the six months ended
December 31, 2004, from $238,002 for the comparative period in the prior year. A
slight decrease in sales in the Company's Data division from $238,002 to
$216,973 for the six months ended December 31, 2004 was offset by $394,978 in
sales attributed to the Company's DWS Defense Systems subsidiary. Sales for this
subsidiary commenced in January 2004.
Costs of revenue increased approximately 233%, to $487,281 for the six months
ended December 31, 2004, from $146,243 for the six months ended December 31,
2003 as a result of increased revenue during the six month period ended December
31, 2004.
Gross profit increased approximately 36%, to $124,670 for the six months
ended December 31, 2004, from $91,759 for the six months ended December 31,
2003. The gross profit attributable to the Company's Data and Security divisions
were $78,662 and $46,008, respectively. Gross profit margin decreased to 20% for
the six months ended December 31, 2004, compared to 39% for the six months ended
December 31, 2003. The gross profit margin of the Company's Data and Security
divisions were 36% and 12%, respectively. The overall decrease was due to the
significant increase in distribution and installation of security products which
are at a lower margin than the Company's data cable assembly business.
Selling, general and administrative expenses decreased approximately 88%, to
$351,895 for the six months ended December 31, 2004, from $2,859,271 for the six
months ended December 31, 2003. The decrease is primarily attributable to the
non-recurrence of a $2,456,165 non-cash charge to consulting expenses related to
the granting of common stock and options to certain individuals during the six
months ended December 31, 2003, as well as a previously described reduction in
officers' salaries.
Interest expense decreased 1%, to $243,515 for the six months ended
December 31, 2004, from $246,895 for the six months ended December 31, 2003.
This decrease was primarily related to a significant reduction in interest
expense to its asset-based lender offset by interest expense incurred as a
result of the beneficial conversion feature of the Augustine revolving credit
facility. (See Note 4 to the condensed consolidated financial statements).
Amortization expense for the six months ended December 31, 2004 related to the
acquisition of a patent was $12,522 versus zero for the six months ended
December 31, 2003. The patent was acquired in July, 2004. (See Note 1-G to the
condensed consolidated financial statements).
Gain on settlement and write-off of debt increased 211%, to $856,121 for the six
months ended December 31, 2004, from $275,694 for the six months ended December
31, 2003. The increase was attributable to the write-off of statutorily-barred
liabilities.
19
The Company earned net income of $377,923 for the six months ended
December 31, 2004, as compared to a loss of $2,651,526 for the six months ended
December 31, 2003, due to debt settlements and write-offs and the non-recurrence
of the non-cash charge incurred for the six months ended December 31, 2003.
The net income applicable to common shareholders for the six months ended
December 31, 2004 was $324,923, compared to a loss of $2,714,810 for the six
months ended December 31, 2003. Dividends accrued on convertible preferred stock
were $53,000 and $63,284 for the six months ended December 31, 2004 and 2003,
respectively.
Basic and diluted earnings (loss) per share were $0.01 and $(0.08) for the six
months ended December 31, 2004 and 2003, respectively. The dilutive effect of
outstanding options and warrants on earnings per share is considered during
periods when net income is earned when their exercise price is below the average
market price of the common stock during the period. For the six months ended
December 31, 2004, options and warrants to purchase 1,800,000 and 160,000 shares
of common stock, respectively, have been excluded from the calculation of
diluted income per share for this reason. Additionally, for the six months ended
December 31, 2004, outstanding convertible preferred stock and debt enter into
the calculation of diluted net income per share on a limited basis due to two
limitations as follows: (i) the convertible stock agreement limits the preferred
shareholder's common stock holdings to 9.9 percent of the total outstanding
common shares; and (ii) the Company's current common stock authorization is
limited to 40 million shares. As a practical matter, the amount of common shares
issuable under outstanding convertible instruments is so large, the applicable
limitation is the 40 million share authorization. For the six months ended
December 31, 2004, assuming maximum dilution to 40 million shares, earnings per
share are unchanged at $0.01.
Significant Accounting Estimate
In July, 2004, the Company acquired a patent from GEORAL International, Ltd. (US
Patent No. 6,472,984) for the GIL 2001 Security Doors. (See Note 3). The patent
was valued at $413,250 which represents the value of the common stock given in
consideration of the purchase as well as the cost of professional fees incurred
in the transaction. The patent expires on January 30, 2021. The Company has
identified the accounting for this patent as a significant accounting estimate
which, due to the existence of an option for the seller to reacquire the patent
at an amount subject to future determination, may become more significant as the
option date approaches. The Company cannot presently evaluate the likelihood of
the exercise of this option or the amount of consideration it would receive if
the option were exercised. As a result of the range of possible accounting and
related economic consequences of the potential exercise of this option, the
Company will critically evaluate the carrying value of this asset on not less
than a semi-annual basis. For the six months ended December 31, 2004, the
Company has determined that no impairment of this asset has occurred.
20
Pending Acquisition
In December 2004, the Company executed a letter of intent with NewMarket
Technology, Inc. ("NewMarket") to purchase NewMarket's 51 percent interest in
Digital Computer Integration Corp. ("DCI"). DCI is a security and defense
products manufacturer. The Company will purchase the 51 percent interest by
issuance to NewMarket of a newly created Series C Preferred Stock with certain
conversion features. The Series C shares will be subject to certain proxy rights
to be held by the Company's two executive officers. The terms and rights of this
new stock are currently being negotiated by the parties involved and once
finalized, will be incorporated into a definitive acquisition agreement. The
Company is proceeding with its due diligence and anticipates closing this
transaction during the third quarter of fiscal 2005. Additionally, Philip
Verges, the CEO of NewMarket, will join the Company's Board of Directors upon
the closing of this transaction.
Liquidity and Capital Resources
The Company has current assets of $106,260 (including $2,845 in cash) compared
with current liabilities of $4,071,231, resulting in a working capital deficit
of $3,964,971 as of December 31, 2004. Although the Company had net income of
$136,849 and $377,923 for the three and six months ended December 31, 2004, the
income was entirely attributable to debt settlements and write-offs.
Additionally, the Company has incurred significant net losses in each of the
three preceding fiscal years and has a stockholder's equity deficit of
$3,908,003 at December 31, 2004. Such deficits and recurring losses raise
questions about the Company's ability to continue as a going concern.
Additionally, the Company's continuation is also threatened by the existence of
numerous judgments on trade payables, defaults on various secured indebtedness
and delinquencies on certain tax obligations. These conditions could result in
the seizure of Company assets and/or its being forced into bankruptcy. (See Note
8 to the Condensed Consolidated Financial Statements).
In the fourth quarter of fiscal 2004 the Company was advised by its counsel
that pursuant to applicable commercial law, certain of its trade obligations are
statutorily unenforceable after periods of four or six years, as applicable,
from the date of their incurrence. Accordingly the Company has written off
$397,685 and $476,173 of accounts payable which amount is included in gain on
settlement and write-off of debt for the three and six months ended December 31,
2004, respectively. Additional amounts will likely be written off in subsequent
periods as the applicable statutory periods are exceeded.
The Company is currently implementing a business plan that it believes will
strengthen the balance sheet, increase revenue and return it to profitability.
The plan involves a series of initiatives. The Company is seeking to restructure
its liabilities by negotiating with secured and unsecured creditors and vendors
for forgiveness of certain outstanding debt, or to exchange debt for equity. For
the six months ended December 31, 2004, the Company settled a total of
approximately $437,000 in exchange for a series of cash payments totaling
$57,000 resulting in a gain of approximately $380,000. The Company continues to
seek settlements of outstanding debt.
The Company may also pursue strategic acquisitions that provide it with growth
and vertical integration within the security business. The pending acquisition
of a 51% interest in DCI is an example of the type of growth that is being
sought. There is no assurance that the Company will be successful in
accomplishing its objectives. If the Company is not successful in these
initiatives, it may be forced to severely curtail operations or seek protection
under the bankruptcy laws.
21
The Company's cash balance at June 30, 2004 decreased
$1,075 from $3,920 to $2,845 as of December 31, 2004. The decrease was the
result of a combination of cash used for the repayment of stockholder loans
totaling $75,000, and operating and investing activities requiring $365,825, and
$20,250, respectively, offset by cash proceeds from notes totaling $460,000.
Operating activities exclusive of changes in current assets and liabilities
required $307,532, in addition to an increase in receivables and other current
assets of $14,170, and a decrease in accounts payable and accrued liabilities of
$44,123.
Historically, the Company's capital resources have been private stock sales and
loans and advances from principal shareholders. During the three month period
ended December 31, 2004, the Company borrowed $135,000 under the terms of its
convertible loan agreements with Augustine. The total borrowings may be
converted to common stock at a 25 percent discount to the market price of the
stock at the time of conversion, subject to the lender's holdings not exceeding
9.9 percent of the total outstanding shares of common stock. In November 2004,
the Company borrowed $35,000 under the terms of this convertible note facility,
and in December 2004 borrowed an additional $100,000, bringing the total amount
outstanding under this facility to $535,000 as of December 31, 2004, all of
which is due August 28, 2005. With the lender's permission, the Company has
exceeded the stated credit limit of $500,000 applicable to this facility. In
January 2005, the Company received a loan of $95,000 from NewMarket Technology,
Inc. In addition, the Company is currently negotiating a six-month deferral of
the principal repayments on its note payable to Rosenthal & Rosenthal.
The Company recognizes that its current capitalization structure does not
presently facilitate raising additional equity capital due to the limitation of
40 million authorized shares of common stock and the large number of shares
issuable upon conversion of its various convertible instruments. Therefore in
order to facilitate raising capital in the future, the Company will likely
explore various means of restructuring its capitalization. This may include a
shareholder proxy to increase share authorization.
ITEM 3. CONTROLS AND PROCEDURES
Daniel McPhee, Chief Executive Officer and Philip J. Rauch, Chief Financial
Officer of Defense Technology Systems, Inc. have established and are currently
maintaining disclosure controls and procedures for the Company. The disclosure
controls and procedures have been designed to ensure that material information
relating to the Company is made known to them as soon as it is known by others
within the Company.
22
The Company's Chief Executive Officer and Chief Financial Officer conduct an
update and a review and evaluation of the effectiveness of the Company's
disclosure controls and procedures and have concluded, based on their evaluation
within 90 days of the filing of this Report, that the Company's disclosure
controls and procedures are effective for gathering, analyzing and disclosing
the information it is required to disclose in its reports filed under the
Securities Exchange Act of 1934. There have been no significant changes in the
Company's internal controls or in other factors that could significantly affect
these controls subsequent to the date of the previously mentioned evaluation.
PART II. OTHER INFORMATION
-------- -----------------
Item 1 - Legal Proceedings:
There were no new legal proceedings or significant developments in existing
proceedings that occurred during the three months ended December 31, 2004.
Item 2 - Changes in Securities:
As a result of three transactions, the Company issued 2,820,180 shares of common
stock during the three month period ended December 31, 2004, as disclosed in
Notes 7A and 7C to the Condensed Consolidated Financial Statements.
Item 3 - Defaults Upon Senior Securities:
As of December 31, 2004, the Company is in default on the following obligations,
as disclosed in Note 8B to the Condensed Consolidated Financial Statements: the
Secured Subordinated Debentures, and the Class 7 Bankruptcy Distributions.
Additionally, as disclosed in Notes 8A and 8C, the Company has approximately
$527,000 in judgments entered against it for unpaid trade payables and is
delinquent on payment of certain sales and payroll tax obligations.
Item 4 - Submission of Matters to a Vote of Security Holders:
None.
Item 5 - Other information:
The Company is in the process of adopting a formal Code of Ethics,
pursuant to Section 406 of the Sarbanes-Oxley Act of 2002.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits:
---------
Exhibit No. Description
31 Section 302 Certifications
32 Section 906 Certifications
(b) Reports on Form 8-K:
--------------------
None.
23
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DEFENSE TECHNOLOGY SYSTEMS, INC.
Date: February 14, 2005 By: /s/ Daniel McPhee
------------------------- -------------------
Daniel McPhee
President and Chief Executive Officer
Date: February 14, 2005 By: /s/ Philip J. Rauch
------------------------- ---------------------
Philip J. Rauch,
Chief Financial Officer
24