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UNITED STATES
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 September 30, 2004 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
    
    72204(Address of principal executive offices)
    
    (Zip Code)
 (501) 661-9100
(Issuers telephone number) Check whether the Issuer (1) has filed all reports required to be filed by
the Section 13 or15(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) YesxNoo(2) YesxNoo State the number of shares outstanding of each of the issuers class of
common equity, as of the latest practicable date. As of November 4, 2004,
6,180,864 shares of Common Stock are issued and outstanding. Transitional Small Business Disclosure Format: YesoNox




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TABLE OF CONTENTS PagePART I
    
    
    
    
    3ITEM 1.
    
    FINANCIAL STATEMENTS
    
    
    3PART F/S
    
    
    
    
    10ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF PLAN OF OPERATIONSummary
    
    
    11Financial Condition and Results of Operations
    
    
    13Liquidity and Capital Resources
    
    
    15Trends
    
    
    15Critical Accounting Estimates
    
    
    16ITEM 3.
    
    CONTROLS AND PROCEDURES
    
    
    17PART II
    
    
    
    
    17ITEM 1.
    
    LEGAL PROCEEDINGS
    
    
    17ITEM 2.
    
    CHANGES IN SECURITIES
    
    
    18ITEM 3.
    
    DEFAULTS UPON SENIOR SECURITIES
    
    
    18ITEM 4.
    
    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    
    18ITEM 5.
    
    OTHER INFORMATION
    
    
    18ITEM 6.
    
    EXHIBITS AND REPORTS ON FORM 8-K
    
    
    19SIGNATURES
    
    
    
    
    20Section 302 Certification of CEOSection 302 Certification of CFOSection 906 Certification of CEOSection 906 Certification of CFO
 2




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PART I 
 ITEM 1. FINANCIAL STATEMENTS Our financial statements are contained in pages 4 through 9 following. 3




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DAC TECHNOLOGIES GROUP INTERNATIONAL, INC. Balance Sheet (Consolidated) September 30, 2004
Unaudited AssetsCurrent assetsCash
    
    $
    230,200Accounts receivable, less allowance for doubtful
accounts of $5,500
    
    
    337,528Due from factor
    
    
    513,558Inventories
    
    
    1,952,718Prepaid expenses and deferred charges
    
    
    117,517Current deferred income tax benefit
    
    
    9,000Total current assets
    
    
    3,160,521Property and equipmentFurniture and fixtures
    
    
    145,003Leasehold improvements
    
    
    21,909Molds, dies, and artwork
    
    
    478,169645,081Accumulated depreciation
    
    
    (423,684
    )Net property and equipment
    
    
    221,397Other assetsPatents and trademarks, net of
accumulated amortization of $51,836
    
    
    159,412Advances to employees
    
    
    3,325Deposits
    
    
    1,435Note receivable  related party
    
    
    106,927Note receivable  stockholder
    
    
    58,771Total other assets
    
    
    329,870Total assets
    
    $
    3,711,788
 4




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DAC TECHNOLOGIES GROUP INTERNATIONAL, INC. Balance Sheet (Consolidated) September 30, 2004
Unaudited Liabilities and Stockholders EquityCurrent liabilitiesNotes payable
    
    $
    306,390Accounts payable-trade
    
    
    1,061,947Accrued payroll tax withholdings
    
    
    86,253Accrued expenses-other
    
    
    20,725Income taxes payable
    
    
    58,241Total current liabilities
    
    
    1,533,556Long-term liabilitiesDeferred tax liability
    
    
    44,000Total liabilities
    
    
    1,577,556Stockholders equityCommon stock, $.001 par value; authorized
50,000,000 shares; issued 6,310,864 shares;
outstanding 6,180,864 shares
    
    
    6,311Preferred stock, $.001 par value; authorized
10,000,000 shares; none issued and outstanding
    
    
    Treasury stock, at cost
    
    
    (101,400
    )Additional paid-in capital
    
    
    1,962,753Retained earnings (deficit)
    
    
    266,568Total stockholders equity
    
    
    2,134,232Total liabilities and stockholders equity
    
    $
    3,711,788
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DAC TECHNOLOGIES GROUP INTERNATIONAL, INC. Statements of Operations (Consolidated) For The Nine Months Ended September 30, 2004 and 2003
Unaudited 2004
    
    2003Net sales
    
    $
    5,053,397
    
    
    $
    2,793,927Cost of sales
    
    
    3,079,983
    
    
    
    1,664,880Gross profit
    
    
    1,973,414
    
    
    
    1,129,047Operating expensesSelling
    
    
    622,272
    
    
    
    366,848General and administrative
    
    
    618,430
    
    
    
    531,667Total operating expenses
    
    
    1,240,702
    
    
    
    898,515Income from operations
    
    
    732,712
    
    
    
    230,532Other income (expense)Interest expense
    
    
    (95,851
    )
    
    
    (77,568
    )Interest expense  stockholder notes
    
    
    (6,334
    )
    
    
    (17,885
    )Other income
    
    
    335
    
    
    
    76,610Total other income (expense)
    
    
    (101,850
    )
    
    
    (18,843
    )Income before income tax expense
    
    
    630,862
    
    
    
    211,689Provision for income taxes
    
    
    129,708
    
    
    
    82,522Net income
    
    $
    501,154
    
    
    $
    129,167Numerator  net income
    
    $
    501,154
    
    
    $
    129,167Denominator  weighted average number of shares outstanding
    
    
    5,880,374
    
    
    
    5,791,005Basic earnings (loss) per share
    
    $
    0.09
    
    
    $
    0.02
 6




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DAC TECHNOLOGIES GROUP INTERNATIONAL, INC. Statements of Operations (Consolidated) For The Three Months Ended September 30, 2004 and 2003
Unaudited 2004
    
    2003Net sales
    
    $
    2,095,876
    
    
    $
    1,107,385Cost of sales
    
    
    1,277,655
    
    
    
    657,248Gross profit
    
    
    818,221
    
    
    
    450,137Operating expensesSelling
    
    
    255,215
    
    
    
    169,968General and administrative
    
    
    215,659
    
    
    
    181,317Total operating expenses
    
    
    470,874
    
    
    
    351,285Income from operations
    
    
    347,347
    
    
    
    98,852Other income (expense)Interest expense
    
    
    (33,161
    )
    
    
    (29,318
    )Interest expense  stockholder notes
    
    
    (815
    )
    
    
    (3,860
    )Other income
    
    
    
    
    
    
    75,133Total other income (expense)
    
    
    (33,976
    )
    
    
    41,955Income before income tax expense
    
    
    313,371
    
    
    
    140,807Provision for income taxes (benefit)
    
    
    123,441
    
    
    
    58,356Net income
    
    $
    189,930
    
    
    $
    82,451Numerator  net income
    
    $
    189,930
    
    
    $
    82,451Denominator  weighted average number of shares outstanding
    
    
    6,180,864
    
    
    
    5,773,817Basic earnings (loss) per share
    
    $
    0.03
    
    
    $
    0.01
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DAC TECHNOLOGIES GROUP INTERNATIONAL, INC. Statements of Cash Flows (Consolidated) For the Nine Months Ended September 30, 2004 and 2003
Unaudited 2004
    
    2003Cash flows from operating activitiesNet income
    
    $
    501,154
    
    
    $
    129,167Adjustments to reconcile net income to
net cash (used in) provided by operating activities:Issuance of common stock for services
    
    
    
    
    
    
    12,873Receipt of treasury stock in lawsuit settlement
    
    
    
    
    
    
    (101,400
    )Depreciation
    
    
    44,494
    
    
    
    43,642Amortization
    
    
    10,868
    
    
    
    9,744Imputed interest on note receivable
    
    
    (335
    )
    
    
    (1,985
    )Deferred income tax provision
    
    
    71,467
    
    
    
    82,522Changes in operating assets and liabilitiesAccounts receivable
    
    
    (238,228
    )
    
    
    (115,679
    )Due from factor
    
    
    (290,529
    )
    
    
    32,113Inventories
    
    
    (1,043,366
    )
    
    
    (537,876
    )Deposits
    
    
    (1,435
    )
    
    
    Prepaid expenses
    
    
    (76,413
    )
    
    
    28,470Accounts payable  trade
    
    
    544,367
    
    
    
    643,156Accrued payroll tax withholdings
    
    
    7,382
    
    
    
    (39,744
    )Accrued expenses other
    
    
    1,646
    
    
    
    465Income taxes payable
    
    
    58,241
    
    
    
    Net cash (used in) provided by operating activities
    
    
    (410,687
    )
    
    
    185,468Cash flows from investing activitiesPurchases of property and equipment
    
    
    (41,793
    )
    
    
    (13,710
    )Purchases of patents and trademarks
    
    
    
    
    
    
    (60,000
    )Payments on note receivable
    
    
    45,000
    
    
    
    Advances to employees
    
    
    
    
    
    
    698Advances on note receivable  related party
    
    
    (34,409
    )
    
    
    (28,655
    )Payments on note receivable  stockholder
    
    
    32,467
    
    
    
    10,348Net cash provided by (used in) investing activities
    
    
    1,265
    
    
    
    (91,319
    )Cash flows from financing activitiesIssuance of common stock for cash
    
    
    714,156
    
    
    
    Repayments on notes payable
    
    
    (36,191
    )
    
    
    (60,748
    )Repayments on notes payable  stockholders
    
    
    (142,719
    )
    
    
    (20,865
    )Net cash provided by (used) in financing activities
    
    
    535,246
    
    
    
    (81,613
    )Increase (decrease) in cash
    
    
    125,824
    
    
    
    12,536Cash  beginning of period
    
    
    104,376
    
    
    
    13,378Cash  end of period
    
    $
    230,200
    
    
    $
    25,914
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DAC TECHNOLOGIES GROUP INTERNATIONAL, INC. Statements of Cash Flows (Consolidated) For the Three Months Ended September 30, 2004 and 2003
Unaudited 2004
    
    2003Cash flows from operating activitiesNet income
    
    $
    189,930
    
    
    $
    82,451Adjustments to reconcile net income to
net cash (used in) provided by operating activities:Receipt of treasury stock in lawsuit settlement
    
    
    
    
    
    
    (101,400
    )Depreciation
    
    
    16,023
    
    
    
    14,501Amortization
    
    
    3,623
    
    
    
    Imputed interest on note receivable
    
    
    
    
    
    
    (682
    )Deferred income tax provision
    
    
    65,200
    
    
    
    58,356Changes in operating assets and liabilitiesAccounts receivable
    
    
    (13,109
    )
    
    
    (84,434
    )Due from factor
    
    
    (344,459
    )
    
    
    (21,046
    )Inventories
    
    
    (293,278
    )
    
    
    (535,312
    )Prepaid expenses
    
    
    (25,483
    )
    
    
    32,055Accounts payable  trade
    
    
    (124,225
    )
    
    
    685,455Accrued payroll tax withholdings
    
    
    (5,831
    )
    
    
    (18,410
    )Accrued expenses other
    
    
    (6,983
    )
    
    
    4,476Income taxes payable
    
    
    58,241
    
    
    
    Net cash (used in) provided by operating activities
    
    
    (480,351
    )
    
    
    116,010Cash flows from investing activitiesPurchases of property and equipment
    
    
    (12,589
    )
    
    
    (6,074
    )Purchases of patents and trademarks
    
    
    
    
    
    
    (60,000
    )Advances to employees
    
    
    
    
    
    
    2,668Payments on note receivable  stockholder
    
    
    31,694
    
    
    
    348Net cash provided by (used in) investing activities
    
    
    19,105
    
    
    
    (63,058
    )Cash flows from financing activitiesRepayments on notes payable
    
    
    (12,705
    )
    
    
    (17,128
    )Repayments on notes payable  stockholders
    
    
    (108,776
    )
    
    
    (13,640
    )Net cash provided by (used) in financing activities
    
    
    (121,481
    )
    
    
    (30,768
    )Increase (decrease) in cash
    
    
    (582,727
    )
    
    
    22,184Cash  beginning of period
    
    
    812,927
    
    
    
    3,730Cash  end of period
    
    $
    230,200
    
    
    $
    25,914
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PART F/S DAC TECHNOLOGIES GROUP
INTERNATIONAL, INC.
SELECTED NOTES TO 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 outdoors men, 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. The majority of the Companys products are manufactured and imported from
mainland China and shipped to a central location 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 consolidated financial statements- The accompanying
consolidated financial statements of the Company as of and for the nine months
ended September 30, 2004 and 2003 and for the three months ended September 30,
2004 and 2003 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 significant accounting
policies applied to these interim financial statements are consistent with
those applied to the Companys December 31, 2003 audited financial statements
included in the Companys Form 10KSB. The results of operations for an interim
period are not necessarily indicative of the results for a full year.  
    
    Equity Transactions On March 11, 2004, the Company engaged Keane Securities Co., Inc., our
placement agent, to raise a maximum of $1.7 million with a minimum of $500,000
through a private placement offering of the Companys common stock. The
offering closed on June 29, 2004, and raised approximately $800,000 before
issuance costs. A total of 467,808 shares of common stock were sold at a price
of $1.71 per share. In addition to the shares, investors were also issued
233,904 warrants, and our placement agent was issued 160,000 warrants, which
upon collective exercise, will enable the warrant holders to purchase an
additional 393,904 shares at a price of $2.57 per share. These warrants were
not included in a computation of diluted net earnings per share, as the effect
would have been antidilutive. On October 20,2004, the Company filed a registration statement with the
Securities and Exchange Commission on Form SB-2, pursuant to its obligations
under the Registration Rights Agreement between the Company and the
aforementioned investors in the private placement. The registration statement
is presently pending before the SEC.  
    
    Income Taxes During 2003, the Company received a final audit determination letter from
the Internal Revenue Service which disallowed the S-Corporation status of DAC
Technologies of America, Inc., the predecessor to the Company. As a result of
this determination, net tax losses recognized by the members of DAC
Technologies of America, Inc. were disallowed resulting in such losses inuring
to the Company and as such, becoming additional net operating losses.
Previously, the tax impact to be recorded by the Company based on this event
had been undeterminable. However, during the second quarter of 2004, the
amount of these net tax losses was determined to be $420,634. Pursuant to
Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes, the full effect of these net operating losses was recorded in the
second quarter. These net operating losses have been fully utilized to offset
2004 net income earned. 10




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ITEM 2.
    MANAGEMENTS DISCUSSION AND ANALYSIS OF PLAN OF OPERATION 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. Factors that could cause actual results to differ from expectations include, without limitation:  
    
    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) Summary The third quarter saw the Company continue to improve its sales and profits for
2004 over prior periods. Net sales for the third quarter, for the first time in
Company history, exceeded two million dollars on a quarterly basis. The key to
this success, and continued success in the future, has been managements
ability to identify, develop and bring to market new products of high quality,
and at prices at or below its competition. The development of these new
products, particularly the Companys GunMaster line of gun cleaning kits in
2003, has enabled the Company to significantly increase its revenues and net
income during the first nine months of 2004 over the prior year. For the nine months ended September 30, 2004, net sales and net income were
$5,053,397 and $501,154, respectively. These represent increases of 81% and
288%, respectively, over the same nine month period in 2003. Earnings per
share for the nine months was nine cents per share as compared with two cents
for the same period in 2003. 11




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The fourth quarter has historically been the Companys strongest quarter in
terms of both sales and profits. Management still expects sales for 2004 to be
in the $8,000,000 to $10,000,000 range with earnings in the 18 to 20 cents per
share range. We have introduced a new product in October, our GunMaster wooden tool
box/workbench. This new item is currently being run as a Christmas
promotion in Wal-Mart. We have also been working on our product line for
2005, and anticipate adding 20 to 30 new products to
complement our existing
line. These new
products will be
primarily additional gun
cleaning kits, a line of
accessories for All
Terrain Vehicles and
softline (cut & sew)
items for the hunting
accessory market. 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. We have
placed particular emphasis on Original Equipment Manufacturers (OEM) gun
manufacturers, gun cleaning kits and gun accessories. In particular, our
products consist of gun locks, trigger locks, gun cleaning and accessory items,
security safes, specialty safes, personal protection devices and items for the
health care industry. A significant portion of our business is with mass market retailers such
as Wal Mart and Kmart, as well as OEM 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;
    
    identify and develop 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 will 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. 12




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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,
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 safety, (b)
gun maintenance, (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.  (A)
    
    Gun Safety. We market ten (10) different gun safety locks
and five security and specialty safes. The gun locks 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. Nine of the
Companys gun locks and three safes have been certified for sale
consistent with the standards set out by the State of California.
These standards have been adopted by other states and by a variety
of gun manufacturers.(B)
    
    Gun Maintenance.We market over thirty-five 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 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.(C)
    
    Personal Security. We market over seven (7) different
electronic security devices designed to protect the person, as well
as pepper spray and tear gas.(D)
    
    Non-Security Products.We market two licensed products, the
Clampit Cupholder and Plateholder. We also market through Wal-Mart
and other customers nationwide, the
Sportsmanss Lighter, a windproof, water resistant, refillable
butane lighter. Our website (www.dactec.com) has been redesigned. All of our products will
be 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 Financial Condition The Companys overall financial condition continues to improve greatly. A
summary of significant balance sheet items as of September 30, 2004 as compared
to December 31, 2003 is summarized below: Sept. 30, 2004
    
    Dec. 31, 2003
    
    $IncreaseCash
    
    $
    230,200
    
    
    $
    104,376
    
    
    $
    125,824Accounts receivable
    
    $
    337,528
    
    
    $
    99,300
    
    
    $
    238,228Due from factor
    
    $
    513,558
    
    
    $
    223,029
    
    
    $
    290,529Inventories
    
    $
    1,952,718
    
    
    $
    909,352
    
    
    $
    1,043,366Total current assets
    
    $
    3,160,521
    
    
    $
    1,458,293
    
    
    $
    1,702,228Total current liabilities
    
    $
    1,533,556
    
    
    $
    1,100,830
    
    
    $
    432,726Net working capital
    
    $
    1,626,965
    
    
    $
    357,463
    
    
    $
    1,269,502Total assets
    
    $
    3,711,788
    
    
    $
    2,019,752
    
    
    $
    1,692,036Stockholders equity
    
    $
    2,134,232
    
    
    $
    918,922
    
    
    $
    1,215,310
 13




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The primary reasons for the Companys improved financial condition are the
income for the nine month period ended September 30, 2004, and the net
proceeds of $714,156 from the private placement of the Companys stock in the
second quarter of 2004. Cash, accounts receivable and due from factor are inter-related. The
Company maintains a factoring agreement wherein it assigns its receivables.
The Company is able to borrow against these receivables prior to their
collection as a means of generating immediate cash if needed. For financial
statement purposes, the Companys total accounts receivables are reduced by the
total assigned receivables. The total assigned receivables are reduced by the
outstanding loan balance with the factor to arrive at Due from factor, which
represents the net cash available to the Company upon collection of the
receivables by the factor. The Companys Accounts receivable therefore
represent receivables that have not yet been legally assigned to the factor. A summary of this allocation is summarized below: Sept. 30, 2004
    
    Dec. 31, 2003Total accounts receivable
    
    $
    1,874,140
    
    
    $
    1,665,143Assigned receivables
    
    
    (1,536,612
    )
    
    
    (1,565,843
    )Net accounts receivable
    
    $
    337,528
    
    
    $
    99,300Assigned receivables
    
    $
    1,536,612
    
    
    $
    1,565,543Loan balance from factor
    
    
    (1,023,054
    )
    
    
    (1,342,814
    )Due from factor
    
    $
    513,558
    
    
    $
    223,029
 The increase in inventories is due to our anticipated increase in sales in
the fourth quarter of 2004, thereby increasing inventory requirements. The increase in current liabilities is directly related to the increase in
inventory. Results of Operations: Summary. A summary of the significant operating items for both the nine month and
three month periods ended September 30, 2004 as compared to the same periods in
2003 is summarized below: Nine Months Ended September 30, 2004 and 20039/30/2004
    
    9/30/2003
    
    Increase
    
    % IncreaseNet sales
    
    $
    5,053,397
    
    
    $
    2,793,927
    
    
    $
    2,259,470
    
    
    
    81
    %Gross profit
    
    $
    1,973,414
    
    
    $
    1,129,047
    
    
    $
    844,367
    
    
    
    75
    %Operating expenses
    
    $
    1,240,702
    
    
    $
    898,515
    
    
    $
    342,187
    
    
    
    38
    %Income from operations
    
    $
    732,712
    
    
    $
    230,532
    
    
    $
    502,180
    
    
    
    218
    %Net income
    
    $
    501,154
    
    
    $
    129,167
    
    
    $
    371,987
    
    
    
    288
    %Earnings per share
    
    $
    0.09
    
    
    $
    0.02
    
    
    $
    0.07
    
    
    
    350
    %
 Three Months Ended September 30, 2004 and 20039/30/2004
    
    9/30/2003
    
    Increase
    
    % IncreaseNet sales
    
    $
    2,095,876
    
    
    $
    1,107,385
    
    
    $
    988,492
    
    
    
    89
    %Gross profit
    
    $
    818,221
    
    
    $
    450,137
    
    
    $
    368,085
    
    
    
    82
    %Operating expenses
    
    $
    470,874
    
    
    $
    351,285
    
    
    $
    119,589
    
    
    
    34
    %Income from operations
    
    $
    347,347
    
    
    $
    98,852
    
    
    $
    248,496
    
    
    
    251
    %Net income
    
    $
    189,930
    
    
    $
    82,451
    
    
    $
    107,480
    
    
    
    130
    %Earnings per share
    
    $
    0.03
    
    
    $
    0.01
    
    
    $
    0.02
    
    
    
    200
    %
 Details. The increases in sales and net income are due primarily to our
GunMaster gun cleaning kits. Sales of these gun cleaning kits accounted for
$3,193,339 of the total sales for the nine months and $1,480,660 for the three
months ended September 30, 2004, or 63% and 71% of total sales, respectively. 14




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Sales volume of our other major product line, gunlocks, remains stable,
accounting for $1,174,824 of the total sales for the nine months and $331,394
for the three months ended September 30, 2004, or 23% and 16% of total sales,
respectively. Gross margins for both the nine month and three month periods ended
September 30, 2004 was 39%. This is down slightly from 40% and 41% for the
same periods in 2003. The primary reason for the increases is in operating expenses is the cost
associated with increased sales. Variable costs directly related to sales,
such as sales commissions, freight costs, insurance and warehouse labor
accounts for 66% of the increase for the nine month period and 63% for the
three month period. In addition, we have been exploring possible acquisitions and development
of products related to the less than lethal market. Expenses incurred directly
related to these activities accounts for 14% and 25% of the increases in
operating expenses for the nine month and three month periods, respectively. During the quarter ended September 30, 2003, we recorded income of $74,450
from the receipt of treasury stock awarded in our lawsuit against our former
manufacturer. Adjusting net income for the net after tax effect of this one
time, non-operating event, would result in an increase in net income from
operations of 498% and 393% for the nine month and three month periods over the
prior year. We have benefitted from the income tax effect of net operating losses
incurred prior to 2002. As of June 30, 2004, these net operating losses have
been fully utilized. Consequently, beginning in the third quarter of 2004, we
will no longer receive any benefit from these prior losses. 
 (c) Liquidity and Capital Resources Our primary source of cash are funds generated from our operations. We
believe that external sources of liquidity could be obtained in the form of
bank loans, letters of credit, etc., or from the sale of our equity as was
recently demonstrated with our private placement. 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 September 30, 2004, our factor had advanced us $1,023,054. 
 (d) Trends As we have discussed in previous reports, 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. 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, the litigation aimed at gun manufacturers and
corresponding about-face regarding gun safety locks begun by Smith & Wesson, as
well as the gun legislation will hopefully enhance our product line revenues.
In March 2000, Smith & Wesson entered into a legal settlement with the federal
administration in which it pledged to equip its handguns with safety features
on a schedule similar to the one proposed in the Maryland legislation, and
specifically to put built-in locks in all of its handguns within the next few
years. 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 permit an attack
on the gun lock 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. 15




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##### Table of Contents



(e) Critical Accounting Estimates The Company prepares its 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, 2003 audited consolidated financial statements included in
the Companys Form 10K-SB. Certain of these accounting policies as discussed
below require management to make estimates and assumptions about future events
that could materially affect the reported amounts of assets, liabilities,
revenues and expenses and disclosure of contingent assets and liabilities.
Accounting estimates and assumptions discussed in this section are those that
we consider to be the most critical to an understanding of our financial
statements because they inherently involve significant judgements and
uncertainties. For all of these estimates, we caution that future events
rarely develop exactly as forecast, and the best estimates routinely require
adjustment. 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. 16




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##### Table of Contents



ITEM 3. CONTROLS AND PROCEDURES  (a)
    
    Evaluation of disclosure controls and procedures.  The term disclosure controls and procedures (defined in SEC Rule
13a-15(e)) refers to the controls and other procedures of a company that
are designed to ensure that information required to be disclosed by a
company in the reports that it files under the Securities Exchange Act of
1934 (the Exchange Act) is recorded, processed, summarized and reported
within required time periods. The Companys management, with the
participation of the Chief Executive Officer and Chief Financial Officer,
has evaluated the effectiveness of the Companys disclosure controls and
procedures as of the end of the period covered by this quarterly report
(the Evaluation Date). Based on that evaluation, the Companys Chief
Executive Officer and Chief Financial Officer have concluded that, as of
the Evaluation Date, such controls and procedures were effective.(b)
    
    Changes in internal controls.The term internal control over financial reporting (defined in SEC Rule
13a-15(f)) refers to the process of a company that is designed to provide
reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. The Companys
management, with the participation of the Chief Executive Officer and
Chief 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 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. 
 PART II 
 ITEM 1. LEGAL PROCEEDINGS 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
recision 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 recision of the manufacturing
agreement and for damage to its business reputation. In August of 2003, this suit went to trial before a twelve member jury in
the Circuit Court of Pulaski County, Arkansas. The jury awarded the Company
damages in the amount of $1,650,560, 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. We have not yet been successful in collecting the damage award,
thus it has not been provided for in the Companys consolidated financial
statements, with the exception of the return of the shares of common stock into
the Companys treasury. 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. We instituted suit along with The Collins Family Trust, our affiliate in
which David Collins, our Chairman claims a beneficial interest, and DAC
Technologies of America, Inc., our
predecessor, against Larry Legel, our former CPA, Director and the Trustee
of The Collins Family Trust. The suit, commenced in March 2001 alleged a
transfer of 180,000 shares of our common stock for services which the Defendant
did not provide. The suit also alleges that the Defendant breached an
agreement not to sell his shares before certain private investors had recouped
their investment. In October 2002, the Arkansas Court ordered the transfer
rescinded and the stock returned to David Collins. Mr. Legal has noticed the
appeal of the Courts October Order. Subsequent to the Arkansas action, Mr. Legal instituted against the
Company in August, 2001, alleging failure by the Company and its officers to
permit the sale of his shares of the Company, which were the same shares that
were the subject of the Arkansas action. A Motion to Dismiss was filed and
granted. In February,2003, Legal filed an amended complaint, alleging that the
Company failed to honor his request to sell the shares. The Company has
answered the Amended Complaint, denying the substantive allegations, and
affirmatively asserts that the Amended Complaint be abated or dismissed due to
the decision and pendency of the Arkansas Courts determination. 17




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##### Table of Contents



ITEM 2. CHANGES IN SECURITIES On March 11, 2004, the Company engaged Keane Securities Co., Inc., our
placement agent, to raise a maximum of $1.7 million with a minimum of $500,000
through a private placement offering of the Companys common stock. The
offering closed on June 29, 2004, and raised $800,000. A total of 467,808
shares of common stock were sold at a price of $1.71 per share. In addition to
the shares, investors were also issued 233,904 warrants, which upon exercise,
will be able to purchase an additional 233,904 shares at a price of $2.57 per
share. Keane Securities Co., Inc. received a $69,000 fee and was issued
160,000 warrants that allows it to purchase up to 160,000 shares of the
Companys common stock at a price of $2.57 per share. Additionally, legal
expenses incurred related to the private placement were $16,844. The warrant
holders have until June 28, 2009 to exercise the warrants. The effect of this
private placement was to increase the issued and outstanding shares by 8%
(exclusive of the exercise of the warrants). The proceeds are to be used to
reduce outstanding debt, effectuate product development and acquisitions, and
provide additional working capital. On October 20,2004, we filed a registration statement with the SEC on form
SB-2, pursuant to our obligations under the Registration Rights Agreement
between us and the aforementioned investors in the private placement. The
registration statement is presently pending before the SEC. 
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 
 ITEM 5. OTHER INFORMATION None. 18




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##### Table of Contents



ITEM 6. EXHIBITS AND REPORTS ON FORM 8 -K No Form 8K was filed during this reporting period. The following
documents required by Item 601 of Regulation S-B 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: Exhibit
    
    Description2
    
    Asset Purchase Agreement3(i)
    
    Articles of Incorporation3(ii)
    
    By-laws
 Exhibits required by Item 601 of Regulation S-B attached: Exhibit
    
    Description31.1
    
    Certification of David A. Collins
Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.31.2
    
    Certification of Robert C. Goodwin
Pursuant to Section 302 of the Sarbanes-Oxley Act of
200232.1
    
    Certification of David A. Collins
Pursuant to 18 U.S.C. Section 1350, Section 906 of the
Sarbanes-Oxley Act of 200232.2
    
    Certification of Robert C. Goodwin
Pursuant to 18 U.S.C. Section 1350, Section 906 of the
Sarbanes-Oxley Act of 2002
 19




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##### Table of Contents



SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned, hereunto duly authorized DAC Technologies Group International, Inc.By:
    /s/ David A. CollinsDavid A. Collins, Chairman and CEO By:
    /s/ Robert C. GoodwinRobert C. Goodwin, CFO, November  , 2004 20