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DETONICS SMALL ARMS LTD - 10-Q - : Management's Discussion and Analysis of Financial Condition and Results of Operations

May 7, 2014

The partnership does not conduct any operations. Income is booked when royalties or fees only at such time are paid to the partnership.

No royalties or other income were booked in the first quarter of 2014.

The partnership originally had licensed the manufacturing and sale of its products to Detonics Manufacturing Corporation (DMC) a subsidiary of Energy Sciences Corporation, (ESC). DMC, ESC and the Partnership entered Chapter 11 bankruptcy proceedings on April 29, 1986. In late 1987, the Bankruptcy Court approved a sale of all of DMC's assets to a new entity, formed by outside third parties, called New Detonics Manufacturing Corporation, (NDMC). By subsequent majority vote of the limited partners of the Partnership, a new license was entered into between the Partnership and NDMC, which called for royalties to begin in late 1991 at the rate of 4% of gross sales. No partnership income was expected before that time.

On May 13, 1988, ESC's bankruptcy was dismissed and all remaining assets were repossessed by the sole secured creditor of ESC, the firm of Murphy & Elgot. These assets are primarily amounts owed to ESC by the partnership and the rights to produce products owned by the partnership. The general partners had discussions with Mr. Murphy, (who was also counsel for ESC and the partnerships), on the elimination of most or all the debt owed by the Partnership to ESC, (and, therefor to Murphy & Elgot).

As previously reported, the general partners learned in late 1991 that production of firearms at NDMC was suspended in 1991. The general partners have subsequently been advised that Murphy& Elgot, the sole secured creditors of the original DMC, have moved to have the "soft" assets (the name "Detonics" and the right to manufacture the Detonics designs) which were assigned to NDMC by the Bankruptcy Court be returned to Murphy & Elgot and Moore. This occured in September 1992. Mr. Murphy passed away in 1997. The general partners have had discussions with Mr. Elgot regarding future attempts to recommercialize the products and he indicated he would approve any recommercialization plan that the general partners would be able to obtain. The general partners had been discussing such plans with a third party, Mr.Jerry Ahern. Royalty amounts of 5% of gross sales had been verbally agreed to, but no written agreement had been prepared or signed as of December 31, 2002. It was learned in April 2003 that this plan would not take place. Mr. Ahern continued to explore other financing sources and the partnership signed a three year agreement with Mr. Ahern giving him the exclusive right to seek funding or a partner to reestablish production.

Mr. Ahern was successful in finding a backer and a new company named Detonics USA LLC was formed (not owned by the partnership) The partnership signed a license agreement with Detonics USA LLC which involves a royalty of about 5% of gross sales of each of the partnership's products manufactured and sold, appropriately divided among all the firearms partnerships and shared with Mark Elgot and Richard Moore in the ratio of 35% to Elgot and Moore combined and 65% to the partnership(s) whose products have been sold.

Detonics USA was subsequently purchased by Double Nickel LLC in late 2007 and operates as a division of that company and has been renamed Detonics Defence Technologies. The partnership payments have been changed to a flat $25.00 per Detonics/1911 style gun sold and $5.00 per non-Detonics gun sold. The split between the partnership and Mark Elgot and Richard Moore remains the same 65%/35%. There can be no assurance that Double Nickel will succeed and that royalties/fees will be paid.

Parts are being manufactured by Detonics Defense Technologies and some firearms assembly has been started.

Sid Woodcock, the co-General Partner of the partnership, who was involved solely in early stage technical design and production matters, passed away in June 2011 at age 87. Michel Maes is now sole General Partner of the partnership. He is a co-owner of an electronics company and is not a stock holder and does not play any role in the Double Nickel, dba Detonics Defense Technologies.

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Source: Edgar Glimpses

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