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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 June 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 August 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 PART I
    
    
    
    
    3ITEM 1.
    
    FINANCIAL STATEMENTS
    
    
    3PART F/S
    
    
    
    
    10ITEM 2.
    
    MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONSSummary
    
    
    12Financial Condition and Results of Operations
    
    
    14Liquidity and Capital Resources
    
    
    16Trends
    
    
    16Critical Accounting
Estimates
    
    
    17ITEM 3.
    
    CONTROLS AND PROCEDURES
    
    
    18PART II
    
    
    
    
    18ITEM 1.
    
    LEGAL PROCEEDINGS
    
    
    19ITEM 2.
    
    CHANGES IN SECURITIES
    
    
    20ITEM 3.
    
    DEFAULTS UPON SENIOR SECURITIES
    
    
    20ITEM 4.
    
    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    
    20ITEM 5.
    
    OTHER INFORMATION
    
    
    20ITEM 6.
    
    EXHIBITS AND REPORTS ON FORM 8-K
    
    
    21SIGNATURES
    
    
    
    
    22
 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) June 30, 2004
Unaudited 2004AssetsCurrent assetsCash
    
    $
    812,927Accounts receivable, less allowance for doubtful
accounts of $5,500
    
    
    324,419Due from factor
    
    
    169,099Inventories
    
    
    1,659,440Prepaid expenses and deferred charges
    
    
    92,034Current deferred income tax benefit
    
    
    76,500Total current assets
    
    
    3,134,419Property and equipmentFurniture and fixtures
    
    
    136,346Leasehold improvements
    
    
    19,760Molds, dies, and artwork
    
    
    476,386632,492Accumulated depreciation
    
    
    (407,661
    )Net property and equipment
    
    
    224,831Other assetsPatents and trademarks, net of
accumulated amortization of $48,213
    
    
    163,035Advances to employees
    
    
    3,325Deposits
    
    
    1,435Note receivable  related party
    
    
    106,927Note receivable  stockholder
    
    
    90,465Total other assets
    
    
    365,187Total assets
    
    $
    3,724,437
 4




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DAC TECHNOLOGIES GROUP INTERNATIONAL, INC. Balance Sheet (Consolidated) June 30, 2004
Unaudited 2004Liabilities and Stockholders EquityCurrent liabilitiesNotes payable
    
    $
    319,095Notes payable  stockholders
    
    
    108,776Accounts
payable  trade
    
    
    1,186,172Accrued payroll tax withholdings
    
    
    92,084Accrued
expenses  other
    
    
    27,708Total current liabilities
    
    
    1,733,835Long-term liabilitiesDeferred tax liability
    
    
    46,300Total liabilities
    
    
    1,780,135Stockholders 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)
    
    
    76,638Total stockholders equity
    
    
    1,944,302Total liabilities and stockholders equity
    
    $
    3,724,437
 5




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DAC TECHNOLOGIES GROUP INTERNATIONAL, INC. Statements of Operations (Consolidated) For The Six Months Ended June 30, 2004 and 2003
Unaudited 2004
    
    2003Net sales
    
    $
    2,957,521
    
    
    $
    1,686,542Cost of sales
    
    
    1,802,328
    
    
    
    1,007,631Gross profit
    
    
    1,155,193
    
    
    
    678,911Operating expensesSelling
    
    
    367,058
    
    
    
    196,880General and administrative
    
    
    402,770
    
    
    
    350,350Total operating expenses
    
    
    769,828
    
    
    
    547,230Income from operations
    
    
    385,365
    
    
    
    131,681Other income (expense)Interest expense
    
    
    (62,690
    )
    
    
    (48,250
    )Interest expense  stockholder notes
    
    
    (5,519
    )
    
    
    (14,025
    )Other income
    
    
    335
    
    
    
    1,477Total other income (expense)
    
    
    (67,874
    )
    
    
    (60,798
    )Income before income tax expense
    
    
    317,491
    
    
    
    70,883Income tax
provision
    
    
    6,267
    
    
    
    24,166Net income
    
    $
    311,224
    
    
    $
    46,717Numerator  net income
    
    $
    311,224
    
    
    $
    46,717Denominator  weighted average number of shares outstanding
    
    
    5,728,478
    
    
    
    5,830,479Basic earnings per share
    
    $
    0.05
    
    
    $
    0.01
 6




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DAC TECHNOLOGIES GROUP INTERNATIONAL, INC. Statements of Operations (Consolidated) For The Three Months Ended June 30, 2004 and 2003
Unaudited 2004
    
    2003Net sales
    
    $
    1,620,069
    
    
    $
    917,200Cost of sales
    
    
    1,000,485
    
    
    
    553,885Gross profit
    
    
    619,584
    
    
    
    363,315Operating expensesSelling
    
    
    204,046
    
    
    
    106,709General and administrative
    
    
    215,373
    
    
    
    187,468Total operating expenses
    
    
    419,419
    
    
    
    294,177Income from operations
    
    
    200,165
    
    
    
    69,138Other income (expense)Interest expense
    
    
    (27,329
    )
    
    
    (24,812
    )Interest expense  stockholder notes
    
    
    (2,641
    )
    
    
    (5,012
    )Other income
    
    
    0
    
    
    
    683Total other income (expense)
    
    
    (29,970
    )
    
    
    (29,141
    )Income before income tax expense
    
    
    170,195
    
    
    
    39,997Income tax
provision (benefit)
    
    
    (21,973
    )
    
    
    14,715Net income
    
    $
    192,168
    
    
    $
    25,282Numerator  net income
    
    $
    192,168
    
    
    $
    25,282Denominator  weighted average number of shares outstanding
    
    
    5,743,900
    
    
    
    5,842,781Basic earnings per share
    
    $
    0.03
    
    
    $
    0.00
 7




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DAC TECHNOLOGIES GROUP INTERNATIONAL, INC. Statements of Cash Flows (Consolidated) For the Six Months Ended June 30, 2004 and 2003
Unaudited 2004
    
    2003Cash flows from operating activitiesNet income
    
    $
    311,224
    
    
    $
    46,717Adjustments to reconcile net income to
net cash provided by operating activities:Issuance of common stock for services
    
    
    
    
    
    
    12,873Depreciation
    
    
    28,471
    
    
    
    29,141Amortization
    
    
    7,245
    
    
    
    9,744Imputed
interest on note receivable
    
    
    (335
    )
    
    
    (1,303
    )Deferred income tax provision
    
    
    6,267
    
    
    
    24,166Changes in operating assets and liabilitiesAccounts receivable
    
    
    (225,119
    )
    
    
    (31,245
    )Due from factor
    
    
    53,930
    
    
    
    53,159Inventories
    
    
    (750,088
    )
    
    
    (2,564
    )Deposits
    
    
    (1,435
    )Prepaid expenses
    
    
    (50,930
    )
    
    
    (3,585
    )Accounts payable  trade
    
    
    668,592
    
    
    
    (42,299
    )Accrued payroll tax withholdings
    
    
    13,213
    
    
    
    (21,334
    )Accrued expenses other
    
    
    8,629
    
    
    
    (4,012
    )Net cash provided by operating activities
    
    
    69,664
    
    
    
    69,458Cash flows from investing activitiesPurchases of property and equipment
    
    
    (29,204
    )
    
    
    (7,636
    )Payments on
note receivable
    
    
    45,000
    
    
    
    Advances on note receivable  related party
    
    
    (34,409
    )
    
    
    (28,655
    )Payments on note receivable  stockholder
    
    
    773
    
    
    
    10,000Advances to
employees
    
    
    
    
    
    
    (1,970
    )Net cash used in investing activities
    
    
    (17,840
    )
    
    
    (28,261
    )Cash flows from financing activitiesIssuance of common stock
    
    
    714,156
    
    
    
    Repayments on notes payable
    
    
    (23,486
    )
    
    
    (43,620
    )Repayments on notes payable  stockholders
    
    
    (33,943
    )
    
    
    (7,225
    )Net cash provided by (used) in financing activities
    
    
    656,727
    
    
    
    (50,845
    )Increase (decrease) in cash
    
    
    708,551
    
    
    
    (9,648
    )Cash  beginning of period
    
    
    104,376
    
    
    
    13,378Cash  end of period
    
    $
    812,927
    
    
    $
    3,730
 8




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DAC TECHNOLOGIES GROUP INTERNATIONAL, INC. Statements of Cash Flows (Consolidated) For the Three Months Ended June 30, 2004 and 2003
Unaudited 2004
    
    2003Cash flows from operating activitiesNet income
    
    $
    192,168
    
    
    $
    25,282Adjustments to reconcile net income to
net cash provided by operating activities:Issuance of common stock for services
    
    
    
    
    
    
    12,833Depreciation
    
    
    14,882
    
    
    
    14,688Amortization
    
    
    3,622
    
    
    
    4,872Imputed
interest on note receivable
    
    
    
    
    
    
    (683
    )Deferred income tax provision
    
    
    (21,973
    )
    
    
    14,715Changes in operating assets and liabilitiesAccounts receivable
    
    
    18,285
    
    
    
    56,105Due from factor
    
    
    (63,705
    )
    
    
    (33,005
    )Inventories
    
    
    (509,234
    )
    
    
    (42,608
    )Deposits
    
    
    (1,435
    )Prepaid expenses
    
    
    16,331
    
    
    
    25,941Accounts payable  trade
    
    
    439,146
    
    
    
    (61,747
    )Accrued payroll tax withholdings
    
    
    6,897
    
    
    
    (7,902
    )Accrued expenses other
    
    
    2,208
    
    
    
    (2,072
    )Net cash provided by operating activities
    
    
    97,192
    
    
    
    6,419Cash flows from investing activitiesPurchases of property and equipment
    
    
    (27,572
    )
    
    
    (1,427
    )Payments on note receivable  stockholder
    
    
    773
    
    
    
    (10,835
    )Advances to
employees
    
    
    
    
    
    
    (1,020
    )Net cash used in investing activities
    
    
    (26,799
    )
    
    
    (13,282
    )Cash flows from financing activitiesIssuance of common stock
    
    
    714,156
    
    
    
    Repayments (advances) on notes payable
    
    
    (12,489
    )
    
    
    (17,534
    )Repayments on notes payable  stockholders
    
    
    (19,678
    )
    
    
    (7,225
    )Net cash provided by (used) in financing activities
    
    
    681,989
    
    
    
    (24,759
    )Increase (decrease) in cash
    
    
    752,382
    
    
    
    (31,622
    )Cash  beginning of period
    
    
    60,545
    
    
    
    35,352Cash  end of period
    
    $
    812,927
    
    
    $
    3,730
 9




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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), a Florida
corporation, is in the business of developing, manufacturing and marketing
various consumer products, patented and unpatented, which are designed to
provide security for the consumer and their property. These products include
gun locks and other gun accessories such as gun cleaning kits. In addition, the
Company has developed a wide range of security and non-security products for
the home, automobile and individual. The majority of the Companys products are
manufactured and imported from mainland China and are shipped to the Companys
central warehouse facility in Little Rock, Arkansas. 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 financial statements  The accompanying financial statements
of the Company as of and for the six months ended June 30, 2004 and 2003 and
for the three months ended June 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.  
    
    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 computed 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 have been
recorded in the second quarter. These net operating losses have been offset by
the utilization expected by 2004 net income earned through June 30, 2004,
resulting in a net increase in net income of $21,973 for the three
months ended June 30, 2004. 10




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ITEM 2.
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS The following Management Discussion and Analysis of Financial Condition is
qualified by reference to and should be read in conjunction with our 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. 11




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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 Sales and profits continue to improve significantly over 2003
figures. For the six months ended June 30, 2004, net sales and net
income were $2,957,521 and $311,224, respectively. These figures
represent increases of 75% and 566%, respectively, over the same six
month period in 2003. In June 2004, the Company shipped six of the new GunMaster gun
cleaning kits to Wal-Mart as permanent additions to the gun accessory
module. Daily reorders for all of the Companys items in this module
have more than tripled in July and August over second quarter levels. As
of the first week in August 2004, the Wal Mart retail sales derived from
GunMaster gun cleaning kits have exceeded the Companys expectations,
even though the new module has not been set in all the Wal Mart stores.
As the Wal Mart stores continue to come on line, the Company expects
retail sales at Wal Mart to increase significantly. In addition to Wal
Mart, our gun cleaning accessories also are offered by other retail
chains and distributors. In June 2004, the Company completed a private placement offering of its
common stock, which raised a total of $800,000 of which sum $714,156 was net to
the Company. The Company has used approximately $375,000 of these proceeds to
reduce its outstanding debt. The remaining funds will be used for new product development
or possible acquisitions. The Company continues to explore through its
attorneys and engineers the possibility of entry into the less than lethal
electronic standoff device (ESD) market, as well as other new
products, to
complement its existing product line for the sporting goods and hunting
markets. 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 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. 12




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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  
    
    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. 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 locks 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 others 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. 13




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##### 



(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 Lighter, a
windproof, water resistant, refillable butane lighter. We
are in the process of improving and redesigning our website
(www.dactec.com). 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 As a result of the Companys continued increases in profits, as well as
the $800,000 raised from the private placement offering, the Companys
financial condition is improved greatly as of June 30, 2004 as compared to June
30, 2003. A summary of significant items is presented below: June 30, 2004
    
    June 30, 2003
    
    $IncreaseCash
    
    $
    812,927
    
    
    $
    3,730
    
    
    $
    809,197Inventories
    
    $
    1,659,440
    
    
    $
    599,331
    
    
    $
    1,060,109Total current assets
    
    $
    3,134,419
    
    
    $
    933,125
    
    
    $
    2,201,294Total current liabilities
    
    $
    1,733,835
    
    
    $
    909,496
    
    
    $
    824,339Net working capital
    
    $
    1,400,584
    
    
    $
    23,629
    
    
    $
    1,376,955Total assets
    
    $
    3,724,437
    
    
    $
    1,657,451
    
    
    $
    2,066,986Stockholders equity
    
    $
    1,944,302
    
    
    $
    747,955
    
    
    $
    1,196,347
 The increase in cash is primarily related to the net proceeds from the
private placement offering of $714,156. The increase in inventories is due to the inventory requirements for the
expected increases in sales during the third quarter of 2004. This increase in
inventories is also directly responsible for the increase in current
liabilities. The
increase in stockholders equity is due to increased
profitability since June 30, 2003, and the net proceeds from the offering. 14




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Results of Operations Summary A summary of the significant operating items for both the six month and
three month periods ended June 30, 2004 as compared to the same periods in 2003
is summarized below: Six Months Ended June 30, 2004 and 20036/30/2004
    
    6/30/2003
    
    Increase
    
    % IncreaseNet sales
    
    $
    2,957,521
    
    
    $
    1,686,542
    
    
    $
    1,270,979
    
    
    
    75
    %Gross profit
    
    $
    1,155,193
    
    
    $
    678,911
    
    
    $
    476,282
    
    
    
    70
    %Operating expenses
    
    $
    769,828
    
    
    $
    547,230
    
    
    $
    222,598
    
    
    
    41
    %Net income
    
    $
    311,224
    
    
    $
    46,717
    
    
    $
    264,507
    
    
    
    566
    %Earnings per share
    
    $
    0.05
    
    
    $
    0.01
    
    
    $
    0.04
    
    
    
    400
    %
 Three Months Ended June 30, 2004 and 20036/30/2004
    
    6/30/2003
    
    Increase
    
    % IncreaseNet sales
    
    $
    1,620,069
    
    
    $
    917,200
    
    
    $
    702,869
    
    
    
    77
    %Gross profit
    
    $
    619,584
    
    
    $
    363,315
    
    
    $
    256,269
    
    
    
    71
    %Operating expenses
    
    $
    419,419
    
    
    $
    294,177
    
    
    $
    125,242
    
    
    
    43
    %Net income
    
    $
    192,168
    
    
    $
    25,282
    
    
    $
    166,886
    
    
    
    660
    %Earnings per share
    
    $
    0.03
    
    
    $
    0.00
    
    
    $
    0.03
    
    
    
    N/A
 Details The
increases in sales and net income are due primarily to the Companys
GunMaster gun cleaning kits, which were not introduced until late in the second
quarter of 2003. Sales of these gun cleaning kits accounted for $1,712,679 of
the Companys total sales for the six months and $792,918 for the three months
ended June 30, 2004 or 58% and 49% of total sales respectively. Sales volume of the Companys other major product line, gunlocks, remains
stable, accounting for $862,471 of the Companys total sales for the six months
and $413,188 for the three months ended June 30, 2004, or 29% and 26% of total
sales, respectively. Thus, while percentage of sales has declined for
gunlocks, the dollar value has approximated that for the same periods in 2003. The
Companys gross margins continue to hold steady at 38% to 39%, for
both the six month and three month periods ended June 30, 2004. The primary reason for the increase 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
account for 78% of the increase for the six month period and 76% for the three
month period. 15




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(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 or from the issuance 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 June 30, 2004, our factor had advanced us $931,459. We expect to reduce
this sum with funds derived from the private placement. 
 (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 will 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. 16




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(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. 17




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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. 18




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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 recission 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 recission 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 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 filed
a motion to dismiss or abate the Amended Complaint due to the decision and
pendency of the Arkansas appeal. 19




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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 shares sold in the private
placement offering and those underlying the warrants are the subject of a
registration rights agreement requiring the Company, at its own cost, on or
before September 30, 2004, to file a Registration Statement with the SEC on
Form S-3 (or any successor form to Form S-3) for a public offering covering the
resale of all of the shares, which Registration Statement shall state that, in
accordance with Rule 416 promulgated under the 1933 Act, such Registration
Statement shall also cover such indeterminate number of additional shares of
Common Stock as may become issuable upon exercise of the Warrants (i) to
prevent dilution resulting from stock splits, stock dividends or similar
transactions. The Company is required to use commercially reasonable efforts to
cause such Registration Statement to be declared effective as soon thereafter
as practicable. 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. 
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 
 ITEM 5. OTHER INFORMATION None. 20




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##### 



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
 21




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##### 



SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned, hereunto duly authorized DAC Technologies Group International, Inc.By:
    /s/ David A. CollinsDavid A. Collins, Chairman and CEO By:
    /s/ Robert C. GoodwinRobert C. Goodwin, CFO, Date: August 13, 2004 22