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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10K-SB þ
    
    ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004 o
    
    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 FOR THE TRANSITION PERIOD FROMTO COMMISSION FILE NUMBER 000-29211 DAC TECHNOLOGIES GROUP INTERNATIONAL, INC.  Florida
    
    65-0847852(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 1601 Westpark Dr. #2 Little Rock, AR 72204 
  (501) 661-9100
(Issuers telephone number) Securities registered under Section 12(b) of the Act: None Name of each exchange on which registered Not applicable Securities registered under Section 12(g) of the Act: Common Stock, par value $0.001




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CHECK WHETHER THE ISSUER (1) FILED ALL REPORTS REQUIRED TO BE FILED BY
SECTION 13 OR 15(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.
YES þ NO o CHECK IF THERE IS NO DISCLOSURE OF DELINQUENT FILERS IN RESPONSE TO
ITEM 405 OF REGULATION S-B IS NOT CONTAINED IN THIS FORM, AND NO DISCLOSURE WILL
BE CONTAINED, TO THE BEST OF THE REGISTRANTS KNOWLEDGE, IN DEFINITIVE PROXY OR
INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-KSB OR ANY AMENDMENT
TO THIS FORM 10-KSB. o STATE ISSUERS REVENUES FOR ITS MOST RECENT FISCAL YEAR. $9,352,353 STATE THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY
NON-AFFILIATES COMPUTED BY REFERENCE TO THE PRICE AT WHICH THE STOCK WAS SOLD, OR THE
AVERAGE BID AND ASKED PRICES OF SUCH STOCK, AS OF A SPECIFIED DATE WITHIN THE PAST 60 DAYS. THE
AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY
NON-AFFILIATES AS OF MARCH 15, 2005 WAS APPROXIMATELY $16,621,847. STATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUERS CLASS OF
COMMON EQUITY, AS OF THE LATEST PRACTICABLE DATE. AS OF MARCH 15, 2005, 6,310,864 SHARES OF COMMON STOCK ARE ISSUED AND 6,180,864 ARE OUTSTANDING. DOCUMENTS INCORPORATED BY REFERENCE IF THE FOLLOWING DOCUMENTS ARE INCORPORATED BY REFERENCE, BRIEFLY
DESCRIBE THEM AND IDENTIFY THE PART OF THE FORM 10-KSB INTO WHICH THE DOCUMENT IS INCORPORATED: (1)
ANY ANNUAL REPORT TO SECURITY HOLDERS; (2) ANY PROXY OR INFORMATION STATEMENT; AND (3) ANY
PROSPECTUS FILED PURSUANT TO RULE 424(b) OF THE SECURITIES ACT OF 1933 (SECURITIES ACT). NOT
APPLICABLE. ii




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TABLE OF CONTENTS FORWARD-LOOKING STATEMENT
    
    
    1PART I
    
    
    
    
    1ITEM 1.
    
    DESCRIPTION OF BUSINESS
    
    
    1ITEM 2.
    
    DESCRIPTION OF PROPERTY
    
    
    13ITEM 3.
    
    LEGAL PROCEEDINGS
    
    
    13ITEM 4.
    
    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    
    14PART II
    
    
    
    
    14ITEM 5.
    
    MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
    
    
    14ITEM 6.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
    
    
    16Financial Condition and Results of Operations
    
    
    16ITEM 7.
    
    FINANCIAL STATEMENTS
    
    
    21ITEM 8.
    
    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
    
    
    21ITEM 8A.
    
    CONTROLS AND PROCEDURES
    
    
    21PART III
    
    
    
    
    21ITEM 9.
    
    DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
    
    
    21ITEM 10.
    
    EXECUTIVE COMPENSATION
    
    
    22ITEM 11.
    
    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
    
    
    24Security Ownership of Certain Beneficial Owners
    
    
    24Security Ownership of Management
    
    
    24ITEM 12.
    
    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
    
    
    25ITEM 13.
    
    EXHIBITS AND REPORTS ON FORM 8-K
    
    
    25ITEM 14.
    
    PRINCIPAL ACCOUNTANT FEES AND SERVICES
    
    
    264th AMENDMENT TO LEASE AGREEMENTEMPLOYMENT AGREEMENTSECTION 302 PRINCIPAL EXECUTIVE OFFICER CERTIFICATIONSECTION 302 PRINCIPAL ACCOUNTING OFFICER CERTIFICATIONSECTION 906 PRINCIPAL EXECUTIVE OFFICER CERTIFICATIONSECTION 906 PRINCIPAL ACCOUNTING OFFICER CERTIFICATION
  iii




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UNLESS THE CONTEXT OTHERWISE REQUIRES, THE TERMS COMPANY, WE, US, AND OUR, REFER TO DAC
TECHNOLOGIES GROUP INTERNATIONAL, INC. 
 FORWARD-LOOKING STATEMENTS This document includes forward looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, (the Securities Act) and Section 21E of the Securities
Exchange Act of 1934, as amended (the Exchange Act). All statements other than statements of
historical fact contained in this document, including, without limitation, the statements under
Managements Discussion and Analysis of Financial Condition and Results of Operations and
Liquidity and Sources of Capital regarding the Companys strategies, plans, objectives,
expectations, and future operating results are forward-looking statements. Such statements also
consist of any statement other than a recitation of historical fact and can be identified by the
use of forward-looking terminology such as may, expect, anticipate, estimate, or
continue or the negative thereof or other variations thereon or comparable terminology. Although
the Company believes that the expectations reflected in such forward-looking statements are
reasonable at this time, it can give no assurance that such expectations will prove to have been
correct. Actual results could differ materially based upon a number of factors including, but not
limited to, risks attending litigation and government investigation, inability to raise additional
capital or find strategic partners, leverage and debt service, governmental regulation, dependence
on key personnel, competition, including competition from other manufacturers of gun locks, costs
and risks attending manufacturing, expansion of operations, market acceptance of the Companys
products, limited public market and liquidity, shares eligible for future sale, the Companys
common stock (Common Stock) being subject to penny stock regulation and other risks detailed in
the Companys filings with the United States Securities and Exchange Commission (SEC or
Commission). 
 PART I 
 ITEM 1. DESCRIPTION OF BUSINESS (1) History and Business Development. We were incorporated as a Florida corporation in July 1998, under the name DAC Technologies of
America, Inc. for the purpose of succeeding to the interest of DAC Technologies of America, Inc.,
an Arkansas corporation (DAC Arkansas). In September 1998, we purchased substantially all of the
assets of DAC Arkansas. DAC Arkansas, formed as an Arkansas corporation in 1993, may be deemed to
be a predecessor of our company. DAC Arkansas commenced operations with the manufacture of various
safety products, which were eventually acquired by us. Our principal owners and management held
similar positions with DAC Arkansas. We have continued the operations of DAC Arkansas without any
significant changes. In July 1999, we changed our name to DAC Technologies Group International,
Inc. We have not been involved in any bankruptcy, receivership or similar proceeding. Except as
set forth herein, we have not been involved in any material reclassification, merger,
consolidation, or purchase or sale of a significant amount of assets not in the ordinary course of
business. 1




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Our primary business is gun safety and gun maintenance; our target consumer base is sportsmen,
hunters and outdoorsmen, and recreational enthusiasts. In 2002, the American Firearms Industry, a
firearms trade association, estimated that in the United States there are over 200 million
firearms, 60-65 million handguns, and 60-65 million gun owners. According to the February 2000
Commerce in Firearms in The United States published by the U.S. Bureau of Alcohol, Tobacco
and Firearms and the Department of Commerce, an estimated two million new, and two million
second-hand handguns are sold in the United States annually. And According to the Bureau of Justice
Statistics, there were 30.7 million approved (new and used) NICS firearm transactions between 2000
and 2003 . (2) Business Plan We are in the business of developing, marketing and outsourcing the manufacture of various
consumer products, patented and non-patented. Our 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, we expanded
our product line to include a line of gun cleaning kits. A significant portion of our business is with the mass-market retailer Wal-Mart. However,
we have been able to significantly increase our business with firearm manufacturers, as well as
large sporting goods retailers and distributors. Our line of GunMaster gun cleaning kits has
enabled us to establish relationships in the sporting goods market which has allowed the Company to
expand its non-gun-related product line. The majority of our products are manufactured and imported from mainland China and shipped to
a central location in Little Rock, Arkansas for distribution. The Companys business plan and strategy for growth continues to focus on:  
    increased penetration of our existing markets, particularly in the gun
cleaning market and accessories
    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
    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 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, as well as non-gun related products for our expanding sporting goods customer base. 2




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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. We have redesigned our website (www.dactec.com). All of our products are 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. (3) Products A. Introduction. Our products have historically been security related, evolving from various personal,
home and automotive electronic security devices, to firearm safety devices such as gun locks,
trigger locks, cable locks and security safes. In 2003, we introduced our line of GunMaster gun
cleaning kits and accessories, and have continued expanding this line in 2004 and into 2005. Because of the tremendous success of the GunMaster line, the Company has placed particular
emphasis on developing this product line. From the initial introduction of our gun cleaning kits
in June 2003, the Company had thirty-five separate models in this product line at the end of 2004.
In 2003, sales of the GunMaster gun cleaning kits totaled $1,990,000 or 42% of sales. In 2004,
sales increased to $6,765,926, or 72% of sales. The Company currently has six varieties of its
GunMaster gun cleaning kits carried as permanent items in the 2,900 Wal-Mart stores that carry gun
accessories. The Company plans to add additional items to its GunMaster line in 2005. Because of the
success of the GunMaster line, the Company has been able to add to its customer base a number of
large sporting goods retailers and distributors such as Dicks Sporting Goods, RSR Group, Inc.,
Jerrys, AcuSport, Academy Sports and Cabelas. The addition of these sporting goods customers has
positioned the Company to expand its product line into other, non-gun related sporting goods items. 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. B. Security Products  (1)
    Gun Safety.We market ten (10) different gun safety locks and five security
and specialty safes. The locks composition ranges 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 of the 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. 3




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(2)
    Gun Maintenance. We market over thirty-five (35) 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.(3)
    Personal Security.We market seven (7) different electronic security devices
designed to protect the person. These include our Body Alarm, Key Alert, SWAT Steering
Wheel Alarm, SWAT Talking Car Alarm, Warning Module, Glass Window Alert and Patient
Alarm. We also market non-electronic security devices such as pepper spray and tear
gas.(4)
    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 Lighter, a windproof, water resistant, refillable butane lighter. (4) Manufacturing, Suppliers and Distribution. Through our foreign and domestic manufacturing agents, we manufacture, design and build our
tooling, molds and products. Currently, at least 99% of our products, in particular our gun locks,
cleaning kits, gun accessories, and security safes, are manufactured in mainland China, and the
balance, in Little Rock, Arkansas and Sandwich, Illinois. We customarily develop our manufacturing
through trading companies located in China. Our principal agents are Nimax and MDD Trading, Ltd.,
which are trading companies/agents that are responsible for locating manufacturers for our gun
safety, gun cleaning kits, security safes, and electronics products. These companies typically
provide us with price lists for the manufacture and tooling of our products, which we may or may
not negotiate. The products are then purchased from the manufacturers by the trading companies and
sold to us at marked-up costs. Domestically, Personal Security Products, a Little Rock, Arkansas company, manufactures our
pepper spray and tear gas products, and Taico Design Products, located in Sandwich, Illinois,
manufactures our Clampit Cupholder and Plateholder. We believe our relationships with our suppliers and manufacturers are satisfactory.
Nonetheless, we are dependent upon our primary Chinese supplier continuing in business and its
ability to ship to the United States, but believe that we could replace this supplier, if required
to, at similar quality and terms. However, should any of the manufacturers cease providing for us,
we believe they can be replaced within 30 days, without difficulty and at competitive cost, due to
the numerous manufacturing facilities in China capable of manufacturing our products. Our administrative offices and warehouse facilities are located in Little Rock, Arkansas; our
executive office is located in Miami Beach, Florida. We distribute the majority of our domestic,
and certain of our international business out of our Little Rock facility. Most of our
international business is shipped directly to our customers direct from the Shanghai, China
location. Products are delivered to our Little Rock facility complete and ready for delivery to
our customers.Countries outside the U. S. where we have a presence include: Ireland/England,
France, Germany, Russia, Canada, New Zealand and Australia. 4




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We utilize both internal sales personnel and commissioned independent sales
representatives. We have increased our sales promotions and sales development activities to
provide assistance to the independent sales representatives through the use of brochures, product
samples and demonstration products. Our web site, www.dactec.com, will serve both as a
marketing tool and a platform from which we will be able to provide various support services for
our independent sales representatives. We have added e-commerce capability to our web site. We
also utilize trade shows, both on a regional and national level to promote our products and to
attract qualified sales representatives. Our management attempts to maintain sufficient inventory levels to meet customers demands,
but there can be no assurance that we will be successful in doing so. Turnaround time from the
date we place an order with our manufacturers until the product is received in our distribution
center is normally between four to six weeks. This quick turnaround time allows us to maintain
minimum inventory levels. However, since we outsource our manufacturing, a good portion of which
is done in China, it is difficult to predict the efficiency of our vendors. Outsourcing to a
foreign country also subjects our manufacturing to the risk of political instability, currency
fluctuation and reliability. See, Risk Factors. (5) Competition We operate in a very competitive industry, dominated by national and international companies
with well-established brands, all of whom are better capitalized, have more experience in our
industry and have established varying degrees of consumer loyalty. There are no assurances we will
ever be successful in establishing our brands or penetrating our target markets. Our products
compete with other competitors gun cleaning kits, lock boxes, trigger locks, cable locks, ring
locks and the evolving smart guns. Many of these products are more widely known than the Companys
products. While we believe that our products are favorably priced to comparable products on the
current market, we nevertheless expect competitors to develop and market similar products at
competitive prices, possibly reducing the Companys sales or profit margins or both. (See, Risk
Factors) Some of our competitors in the business sectors which we operate in are:  
    Gun Safety- Master Lock (which presently controls 60%-70% of the market), Smith &
Wesson, and Shot Lock.
    Gun Cleaning Kits -Outers and Hoppes
    Security Safes- Sentry Safes, GunLocker and Gun Vault.
    Personal security- competitors are varied and mostly smaller vendors.
    Non-security products- competitors are various small and large vendors. We are subject to competition that is expected to intensify in the future because we believe
that the number of competitors is increasing. There are no significant barriers to entry into our
markets. We feel our greatest difficulties in competing come in areas such as gun maintenance, gun
safety and security safes where our competitors generally are bigger, better known, and have
greater resources including capital and personnel. 5




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We realize it is important to achieve brand name recognition in establishing a market share, which,
in turn generates additional market share giving consumers preferences for brand names. We believe
that while brand names operate effectively in mainstream product distribution, there is significant
opportunity for lesser known names with specific products and solutions that appeal to consumers.
The keys to our maintaining a competitive position are product design, pricing, quality of the
product and the maintenance of favorable relationships with various mass merchandisers. (6) Market and Customers. The ultimate users of our products include sportsmen, hunters, collectors, and law enforcement
agencies. Because of the uncertain size of the potential market for our gun products and the
number of competitors, we cannot state with any degree of certainty, the size of our market share.
Although we sell our products both foreign and domestically, our U.S. sales account for 95% of our
overall revenues. Although we have numerous customers, we generally sell on the basis of purchase orders, rather
than fixed contracts, primarily to:  
    national retail chains Wal-Mart and Kmart (in 2004, these national chains represent 57% of sales);
    distributors such as Dicks Sporting Goods, RSR Group, Inc., Jerrys Sport Center, Inc, Acu-Sport Corp., and Cabelas
Catalogue Co. (representing 23% of sales); and,
    gun manufacturers such as Savage Arms, Browning, Marlin, Glock and SIG-Arms (representing 12% of sales) Wal-Mart is the largest national discount retailer in the United States. Prior to filing its
Chapter 11 bankruptcy reorganization in January 2002, K-Mart was the countrys second largest
discount retailer and the fourth largest general merchandise retailer. K-Mart continues to operate
and is currently a subsidiary of Sears Holding Co. Demand for our gun cleaning kits has presented opportunities in the sporting goods market for
our existing products and development of new products. By developing these new markets we will be
able to be less dependent on our primary customers. While our arrangements with customers vary, we generally sell on the basis of purchase orders
rather than fixed contracts. A purchase order represents a written contract to purchase a
specified product(s) at a specified price. Any future orders from a particular customer would be
dependant upon that customers ability to sell the product. Some customers do issue Blanket
purchase orders, which requests delivery of a specified quantity over a specified period of time. Credit is extended to customers, generally on 30 or 60 day terms. Credit approval is
performed by the Companys factor. Any credit approved by the factor is on a non-recourse basis,
thus there is no risk of loss due to non-payment to the Company. For any customers whose credit is
not approved by the factor, the Company will make other arrangements, such as prepayment or COD (Cash on Delivery). 6




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The Company does have a limited warranty on most of its products, typically for one year from
date of purchase. The Company does accept return of defective products, and will either replace at
no charge or issue credit to the customer for the defective product. The cost to the Company for
defective products in 2004 was 1% of sales. The Company maintains a standard price list for its customers, depending upon whether they are
a distributor or a dealer. This protects our distributor customers from having to compete with the
Company for our dealer customers. The Company does not set mandatory retail pricing for its
customers to use. (7) Intellectual Property. We believe that protection of proprietary rights to our products is important because,
as we are in a highly competitive market, a patent provides us with a competitive advantage by
limiting or eliminating similarly designed competitive products. To this end, we have obtained
U.S. patents on certain of our products as follows: Model
    
    Patent No.
    
    ExpirationTVP095 Trigger Lock
    
    Des. 375,342
    
    2009SWA 03 SWAT Steering Wheel
Alarm
    
    Des. 365,774
    
    2009KAL 201 Personal Safety Alarm
    
    Des. 355,863
    
    2008Key Chain Alarm
    
    5,475,368
    
    2008GWA 001 Glass/Window Alarm
    
    Des. 371,086
    
    2009Defense Spray and Flashlight
    
    Des. 375,994
    
    2009
 In addition, we have entered into licensing agreements giving us the exclusive right to sell
the patented DAC Lok, a gun lock designed specifically for Glock handguns, and the Clampit
Cupholder and Plateholder in the U.S., with certain minor exceptions. We have not to date registered or trademarked any of our product names. (See, Risk Factor)
We rely on our patents and licensing arrangements with 3rd parties to avoid infringing
on the products of others. We also use the services of patent attorneys to insure that our
unlicensed and unpatented products do not infringe. We dont patent or trademark all our products
because of the cost and we have been advised by patent counsel that certain of the products are not
patentable. However, the Company is currently looking at the possibility of registering the name
Gunmaster. Depending upon the development of our business, we may also wish to develop and market
products which incorporate patented or patent-pending formulations, as well as products covered by
design patents or other patent applications. 7




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While we may seek to protect our intellectual property, in general, there can be no assurance
that our efforts to protect our intellectual property rights through copyright, trademark and trade
secret laws will be effective to prevent misappropriation of our products. See, Risk Factors.
Our failure or inability to protect our proprietary rights could have a material adverse affect on
our business, financial condition and results of operations. Moreover, inasmuch as we will often
seek to manufacture products which are similar to those manufactured by others, it is critical for
us to insure that our manufactured products do not infringe upon existing patents of others. (8) Governmental Regulations. Several federal laws regulate the ownership, purchase and use of handguns, including the 1968
Gun Control Actand the Brady Bill. The Brady Bill was implemented on February 28, 1994. This law
established a national five (5) business day waiting period on handgun purchases through licensed
dealers. It also required local authorities to conduct background checks on handgun purchasers. As
of December 1998, an amendment to the Brady Bill replaced the five (5) business-day waiting period
with a national instant felon ID system. Dealers are required to conduct this background check on
all gun purchases, not just handgun purchases. The Assault Weapons Ban was enacted on September
14, 1994. This bill banned the manufacture, possession, and importation of semiautomatic assault
weapons for civilian use. Guns manufactured before September 14th, 1994 were grandfathered. Guns
manufactured after this date (for use by the military, police, and government agencies) must be
marked with the date they are manufactured. The law was allowed to expire in 2004. Notwithstanding these laws, there is not any federal law that requires the use of gunlocks,
despite numerous attempts in Congress to pass such legislation. Most recently, on January 5, 2005,
House Bill H.R 246 (Child Gun Safety and Gun Access Prevention Act of 2005) was introduced for the
purpose increasing youth gun safety by raising the age of handgun eligibility and prohibiting youth
from possessing semiautomatic assault weapons. The Bill, if passed into law in its present form,
will make it unlawful for any licensed importer, licensed manufacturer, or licensed dealer to sell,
transfer, or deliver any firearm to any person (other than a licensed importer, licensed
manufacturer, or licensed dealer) unless the transferee is provided with a secure gun storage or
safety device. Child Access Prevention (or CAP) Laws hold gun owners responsible if they leave guns easily
accessible to children and a child improperly gains access to the weapon. In 1989, Florida became
the first state to pass a CAP law because of increasing gun fatalities among children. The Florida
law only applies if the minor gains access to a gun that was not stored securely. The law does not
apply if the firearm is stored in a locked box, secured with an effective child-safety lock, or
obtained by a minor through unlawful entry. Eighteen states have enacted standard CAP laws:
California, Connecticut, Delaware, Florida, Hawaii, Illinois, Iowa, Maryland, Massachusetts,
Minnesota, Nevada, New Hampshire, New Jersey, North Carolina, Rhode Island, Texas, Virginia, and
Wisconsin. In addition to the 18 standard CAP laws, Kansas courts have held that gun owners may be held
civilly liable for leaving guns easily accessible to children; Maine has a child endangerment
statute that references children under 16 obtaining firearms and requires gun stores and gun shows
to post signs warning gun owners that they may be prosecuted if they leave firearms where children can access them; and Montana
holds adults/guardians responsible if a child under 14 possesses a firearm in public without adult
supervision. 8




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Many CAP laws require that the guns be safely secured  this can be done easily by storing the
gun in a locked box, or by attaching an effective child-safety lock. These locks can preserve quick
access by the owner for self-protection in the home while preventing young children from firing the
locked gun. California, Connecticut, Maryland, Massachusetts, Michigan, New Jersey, New York,
Pennsylvania and Rhode Island specifically require dealers to sell child-safety locks with every
handgun. Additionally, the State of California has enacted legislation that establishes performance
standards for firearm safety devices, lock-boxes and safes. This legislation requires
manufacturers to have their products tested by an independent testing laboratory in order to be
listed as an approved device. Effective January 1, 2002, this legislation required that every
firearm sold in the state be accompanied by an approved safety device. Effective January 1, 2003,
the legislation was expanded in that any firearm safety device sold within the state must be
approved. Our products sold in California comply with these standards. The fact that gun safety laws are passed by federal state, or local governments does not
ensure that the demand for our products will increase. We have obtained the required approvals from the Federal Communications Commission for the Rf
signals emitted by our remote control units used with our car alarms. Other than as stated above,
we are not aware of any other required governmental approvals on any of our products. (9) Research and Development. Research and development costs are expensed as incurred. We develop our products internally,
utilizing the expertise of our manufacturers, input from an engineering consulting firm and input
from our customers. Any R & D cost incurred by our manufacturers is passed on to us in the pricing
of the tooling, molds and products. We do not pass such costs onto our customers. Because of our
close relationships with our customers, we are able to determine the level of interest in a
particular product before investing significant time or capital in its development. Once a
potential new product is identified, we utilize the services of a patent attorney to assure that we
do not infringe upon anyones patent rights. We also design our own packaging internally. Working closely with our manufacturers and engineers, a final design for a product and cost
estimations are completed. If management determines that a product can be produced at competitive
prices, and the interest level justifies production, we proceed with having tooling made. We own
the molds and tooling for all of our gunlock products. After pre-production samples are approved,
full production begins. (10) Environmental Laws. We incur no costs and suffer no adverse effects by complying with environmental laws (federal,
state and local). 9




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(11) Employees. We currently employ eight (8) employees, all of whom are full-time: President & Chief
Executive Officer, Chief Financial Officer, Vice President of Manufacturing, Salesman,
receptionist/clerk, shipping manager and two full-time warehouse workers. There are no collective
bargaining agreements. (12) Reports to Security Holders. We file reports with the SEC as a small business issuer. Copies of this report, including
exhibits to the Report and other materials filed with the SEC that are not included herein, may be
inspected and copied, without charge, at the Public Reference Room, 450 Fifth Street, N.W.,
Washington, DC 20549. Information on the operation of the Public Reference Room may be obtained by
calling the Commission at 1-800-SEC-0330. In addition, the Commission maintains an Internet site
on the World Wide Web at http://www.sec.gov that contains reports, proxy and information
statements and other information regarding registrants that file electronically with the
Commission. (14) Certain Risk Factors. If we are to expand our operations, we may need additional capital.Our ability to timely
expand our product operations and, in particular, the production and marketing of our products is
largely dependent upon our revenues or the acquisition of additional funding. In the event that
additional capital is not obtained or our revenues fall off, we may be unable to timely complete
and/or implement our plans to expand our operations. While we believe we have accurately identified
strategic and viable business opportunities to pursue, there is no assurance that these will become
profitable operations. Technology is a rapidly developing industry and our success is dependent on,
among other things, developing commercially acceptable products and pursuing the correct
distribution channels. Anti-gun sentiments and a weak economy are potential risk factors, as they
may inhibit consumer purchases of guns. Our growth program and future profitability remains uncertain.We believe that operating
results will be adversely affected if start-up expenses associated with our new product lines are
incurred without sufficient revenues. Moreover, future events, including unanticipated expenses or
increased competition could have an adverse effect on our long-term operating margins and results
of operations. Consequently, there can be no assurance that our Companys growth program will
result in an increase in the profitability of our operations. Our success depends on maintaining relationships with key customers.We have several
customers upon which we depend on for the sale of a large percentage of our products. For example,
more than 50% of our business is through Wal-Mart. Customer orders are dependent upon their markets
and may vary significantly in the future based upon the demand for our products. The loss of one
or more of such customers, or a declining market in which such customers reduce orders or request
reduced prices, could have a material adverse effect on our business. 10




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We depend on purchase orders and have no long-term contractual relationship with our
customers.Our business relationship is based upon purchase orders with our customers. We have no
contracts which require any of our customers to continue to purchase our products. Although we have
had long-term relationships with many of our customers, there can be no assurance that such
relationships will continue or that customers will continue ordering our products. We depend on foreign contract manufacturers for substantially all of our manufacturing
requirements.During 2004 the Company purchased 98% of its products from one major supplier. The
Company is dependent upon this supplier continuing in business and its ability to ship to the
United States, but believes that it could replace this supplier, if required to, at similar quality
and terms. We rely on contract manufacturers to procure components, assemble, and package our
products. The inability of our contract manufacturers to provide us with adequate supplies of high
quality products or the loss of any of our contract manufacturers would have an adverse effect on
our business. In addition, the outsourcing production of our products is almost universally with non-U.S
manufacturers. Our primary relationship with our foreign contract manufacturers has been
accomplished through our agents located in Shanghai, China. Because our primary manufacturer is
located in mainland China, we are exposed to risks of political uncertainty, including U.S. foreign
trade treaties, foreign laws and currency fluctuations. While we believe there are alternative
manufacturing companies available at competitive prices, any interruption in the operations of one
or more of these foreign contract manufacturers or delays in their shipment of products would
adversely affect our ability to meet scheduled product deliveries to our customers and as a
consequence adversely impact our business. While we manufacture a variety of products, we rely primarily on the sale of gun cleaning kits
and gun-locks as our major source of revenue.Although we sell a number of different products, we
rely primarily on two products -gun cleaning kits and gun locks-which account for approximately 93%
of our total revenues. Should our sales of either of these products significantly decline due to
the loss of customers, or a declining market in which such customers reduce orders or request
reduced prices, it could have a material adverse effect on our business. We may be unable to compete favorably in the highly competitive gun cleaning, security
products and gun lock industry.The manufacture and sale of gun cleaning kits, security safes and
gun lock products is highly competitive and there are no substantial barriers to entry into the
market. Most of our competitors are large, well-established companies with considerably greater
financial, marketing, sales and technical resources than those available to us. Additionally, many
of our present and potential competitors have research and development capabilities that may allow
such competitors to develop new or improved products that may compete with our product lines.
These companies may succeed in developing proposed products that are more effective or less costly
than our proposed products or such companies may be more successful in manufacturing and marketing
their proposed products. An increase in competition could result in a loss of market share. We may not be able to attract and retain the qualified personnel we need to succeed in the
future.At present the success of our company is highly dependent on our chief executive officer,
David A. Collins and our Chief Financial Officer, Robert Goodwin. Our future success will depend in part on our
ability to attract and retain qualified personnel to manage the development and future growth of
our company. There can be no assurance that we will be successful in attracting and retaining such
personnel. 11




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We anticipate eventual state and federal gun lock legislation and regulation which may cause
the Company to incur unanticipated expenses.While gun locking devices are currently not regulated
under federal or most state statutes or regulations, it is likely that such devices will be
regulated in the future. At the present time, the state of California has established standards for
gun locks which must accompany the sale of any firearm. Other states have adopted or are
considering such legislation. In an effort to develop a national standard, the firearms industry
is working with the U.S. Consumer Products Safety Commission to develop reasonable performance
standards for gun locks. If new laws create design specifications, it may require the Company to
retool its current products to meet those specifications, thus creating additional expenses that
will result in the reduction of profit. Moreover, there can be no assurances that our devices will
meet the requirements of such future regulations, in which case, sales of such devices by us would
be adversely affected. We may be adversely affected by legislation and regulation over firearms.The business of all
producers and marketers of firearms and firearms parts, is subject to thousands of federal, state
and local laws and governmental regulations and protocols. The basic federal laws are the National
Firearms Act, the Federal Firearms Act, and the Gun Control Act of 1968. These laws generally
prohibit the private ownership of fully automatic weapons and place certain restrictions on the
interstate sale of firearms unless certain licenses are obtained. From time to time, congressional
committees review proposed bills and various states enact laws relating to the regulation of
firearms. These proposed bills and enacted state laws generally seek either to restrict or ban the
sale and, in some cases, the ownership of various types of firearms. When such laws restrict the
ownership of guns, they will have a material adverse effect on our business since our major
products are gun related. Such laws, rules, regulations and protocols are subject to change. There
can be no assurance that the regulation of firearms will not become more restrictive in the future
and that any such restriction would not have a material adverse effect on the business of the
Company. We extend credit to our customers and should our customers default on their obligations to
us, we may be subject to credit risk.The Company provides credit in the normal course of business
to its customers and performs ongoing credit evaluations of its customers. Approximately 87% of
these trade receivables were subject to a factoring agreement. These accounts are factored on a
non-recourse basis which reduces the Companys exposure to credit risk. We also maintain allowances
for doubtful accounts and provisions for returns and credits based on factors surrounding the
specific customers and circumstances. The Company generally does not require collateral from its
customers. Credit risk is considered by management to be limited due to the Companys customer
base and its customers financial resources. We have not to date registered or trademarked any of our product names.While we may seek to
protect our intellectual property, there can be no assurance that our efforts to protect our
intellectual property rights through copyright, trademark and trade secret laws will be effective
to prevent misappropriation of our products. Our failure or inability to protect our proprietary
rights could have a material adverse affect on our business, financial condition and results of
operations. Among other things, it could foster more competition or create identical products sold
under different labels. Moreover, inasmuch as we will often seek to manufacture products which are similar to those manufactured by others, it is critical for us to insure that
our manufactured products do not infringe upon existing patents of others. Patent and other type
intellectual property lawsuits are extremely expensive to prosecute or defend, and in either case
success cannot be assured. 12




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The Company has engaged in several related-party transactions which were not effected in
arms-length transaction.On occasion, we have engaged with related parties, including our chief
executive officer and certain shareholders in related party transactions. These transactions
include loans made by and to the Company, and were not arms-length. See, Certain Relationships and
Related Transaction at Item 12 below. There has been no independent evaluation of the
transactions, and therefore there can be no assurance that these transaction are fair to the
Company. 
 ITEM 2. DESCRIPTION OF PROPERTY Our corporate headquarters are located to 1601 Westpark Drive, Suite 2, Little Rock, Arkansas
72204. This location consists of approximately 2,000 square feet of office space and 14,000 square
feet of warehouse space. All of the administrative, accounting and shipping functions are
performed at this location, as well as some sales. This space is leased at a monthly rent of
$5,537 for one year, and expires April 30, 2005. There are two one-year renewal options at a
monthly rental of $6,436. The Company also maintains an executive office in Miami Beach, Florida
at the residence of its president, David A. Collins. The Company pays a monthly office allowance to
Mr. Collins, the Companys President, of $5,500, for approximately 1200 square feet and secretarial
support. There is no lease agreement for these premises. This office arrangement was not the
product of arms length negotiation; however, the Company has determined the arrangement to be
competitive with comparable office space and secretarial support. 
 ITEM 3. 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 rescission 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 rescission of the manufacturing agreement and for damage to
its business reputation. In August of 2003, this suit went to trial before a twelve (12) 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. On January 5, 2005, the Court denied our claim, on grounds that that it was
barred by the statute of limitations. 13




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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. Larry Legel appealed the Courts Order and then dismissed his appeal. Subsequent to the Arkansas action, an amended Complaint was filed in February, 2003 in Broward
County, Florida by Larry Legel and his wife, seeking damages against the Company and others for
breach of duty pursuant to § 678.4011 Fla. Stat. for failing to register and transfer to him and
his wife securities of the Company and the 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. The Court stayed the Florida action pending the Arkansas action. Upon the appeal being
dismissed in the Arkansas action, Legel had the stay lifted. Thereafter, the Company filed a
Counterclaim, seeking final judgments determining Legels lack of ownership rights over the shares
in question as well as costs and attorneys fees. Finally, an Answer was filed on October 2, 2004
in response to Legels Amended Complaint, wherein all allegations are denied and DAC Technologies
requests a dismissal of Legels Complaint as well as costs and fees. 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There are no matters submitted during the fourth quarter of the fiscal year covered by this
report to a vote of security holders, through the solicitation of proxies or otherwise. 
 PART II 
 ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS On June 19, 2000, our common stock began trading on the NASDAQ Over-the-Counter Bulletin Board
market under the trading symbol DAAT. The high and low bid information for each quarter is
presented below. These prices reflect inter-dealer prices, without retail markup, markdown or
commission and may not represent actual transactions. 14




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##### Table of Contents



Quarter Ended
    
    High
    
    LowMarch 31, 2003
    
    $1.01
    
    $0.51June 30, 2003
    
    $0.92
    
    $0.38September 30, 2003
    
    $0.87
    
    $0.47December 31, 2003
    
    $1.30
    
    $0.62March 31, 2004
    
    $2.25
    
    $1.09June 30, 2004
    
    $2.30
    
    $1.60September 30, 2004
    
    $2.20
    
    $1.51December 31, 2004
    
    $2.99
    
    $1.67
 As of March 15, 2005, there were approximately 66 holders of record, excluding those held in
street name, of our 6,180,864 shares of common stock outstanding. We have not paid a cash dividend on the common stock since inception. The payment of
dividends may be made at the discretion of our Board of Directors and will depend upon, among other
things, our operations, our capital requirements and our overall financial condition. Although
there is no restriction to pay dividends, as of the date of this registration statement, we have no
present intention to declare dividends. We have an Equity Compensation Plan in place in order to promote the interests of the
Company by enabling us to motivate, attract, and retain the services of persons upon whose
judgment, efforts, and contributions the success of the Companys business depends. The maximum
number of shares that can be granted under this Plan is 1,000,000 shares of common stock.  Equity Compensation Plan InformationNumber ofsecurities remainingNumber of
    
    
    
    
    
    available for futuresecurities to be
    
    
    
    
    
    issuance underissued upon exercise
    
    
    Weighted-average
    
    
    equity compensationof outstanding
    
    
    exercise price of
    
    
    plans (excludingoptions, warrants
    
    
    outstanding options,
    
    
    securities reflectedand rights
    
    
    warrants and rights
    
    
    in column (a))Plan category
    
    
    (a)
    
    
    (b)
    
    
    (c)Equity
compensation
plans
approved by
security
holders
    
    None none outstanding
    
    zero none outstanding
    
    1,000,000Equity
compensation
plans not
approved by
security
holders
    
    Nonenone outstanding
    
    zeronone outstanding
    
    NoneTotal
    
    None
    
    None
    
    1,000,000
 15




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##### Table of Contents



ITEM 6. MANAGEMENTS DISCUSSION AND ANALYSIS OR 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 Financial Statements and the Notes thereto
as set forth at the end of this document. We include the following cautionary statement in this
Form 10K-SB 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. (1) Managements Discussion and Analysis of Financial Condition and Results of Operations 2004 Summary During 2004, the Company reported net income of $1,011,910 on net sales of $9,352,353,
representing increases of 217% and 97%, respectively, over 2003 figures. This success is a direct result of the tremendous response the Company has received from its
line of GunMaster gun cleaning kits. From the initial introduction of four items in 2003, this
line of high quality, solid brass kits has grown to sixteen cleaning kits and rod sets by the end
of 2004, as well as over forty accessory items to complement the kits. Also added in 2004 was the
GunMaster wooden tool box, which has also been well received. The Company continues to develop and expand its GunMaster line of gun cleaning products, as
well as adding products for the sporting goods, hunting and outdoorsmans markets. At the SHOT Show
in January 2005, the Company introduced over thirty new products, including meat processing
equipment, three new security safes and over twenty gun- cleaning items. These new products were
well received at our trade shows and will begin shipping in the second quarter of 2005. 
 Financial Condition The Companys overall financial condition continues to improve greatly as a result of
increasing profits and the raising of additional capital in a private placement during 2004. 16




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A summary of the significant balance sheet items is summarized below: 2004
    
    
    2003Accounts receivable
    
    $
    477,150
    
    
    $
    99,300Due from factor
    
    $
    1,261,480
    
    
    $
    223,029Inventories
    
    $
    1,933,112
    
    
    $
    909,352Notes payable-stockholders
    
    $
    0
    
    
    $
    142,719Accounts payable-trade
    
    $
    1,158,562
    
    
    $
    517,580Income taxes payable
    
    $
    341,701
    
    
    $
    0Total current assets
    
    $
    3,909,358
    
    
    $
    1,458,293Total current liabilities
    
    $
    1,839,338
    
    
    $
    1,100,830Net working capital
    
    $
    2,070,020
    
    
    $
    357,463Total assets
    
    $
    4,467,562
    
    
    $
    2,019,752Stockholders equity
    
    $
    2,612,724
    
    
    $
    918,922
 Accounts receivable and Due from factor The Company maintains a factoring agreement wherein it assigns its receivables (on a
non-recourse basis). The factor performs all credit and collection functions, and assumes all
risks associated with the collection of the receivables. The Company pays a fee of 65/100ths of 1%
of the face value of each receivable for this service. In addition, in order to generate immediate
cash flow, the Company may borrow against the assigned receivables prior to their collection and is
charged interest on any such advances. Accounts receivable on the Companys balance sheet represents those receivables that have not
yet been legally assigned to the factor. Due from factor represents the net equity the Company has
in its assigned receivables reduced by any funds advanced by the factor. At December 31, 2004 and
2003, these amounts are calculated as follows: 2004
    
    
    2003Total accounts receivable
    
    $
    3,669,863
    
    
    $
    1,665,143Less: assigned receivables
    
    
    (3,192,713
    )
    
    
    (1,565,843
    )Net accounts receivables
    
    $
    477,150
    
    
    $
    99,300Assigned receivables
    
    $
    3,192,713
    
    
    $
    1,565,843Less: Funds advanced
    
    
    (1,931,233
    )
    
    
    (1,342,814
    )Due from factor
    
    $
    1,261,480
    
    
    $
    223,029
 The increase in accounts receivable is related to the seasonal aspect of the Companys
business, as well as the increase in sales. The major portion of the Companys sales are
derived from gun cleaning kits and accessories, and sales of these items increase during the fourth
quarter as most areas of the country are into the hunting season. Many of the Companys products
also experience increases in sales at the retail level during the Christmas buying season. Fourth
quarter sales increased from $1,962,603 in 2003 to $4,298,955 in 2004. This increase in fourth quarter sales and receivables also accounts for the increase in Due
from factor line item. While funds advanced from factor increased from $1,342,814 in 2003 to
$1,931,233 in 2004, the amount of the advances as a percentage of total receivables decreased from
81% in 2003 to 53% in 2004. 17




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Inventories Inventories increased $1,023,760, or 113% from 2003 to 2004. This increase is directly
related to the increase in sales and the inventory levels required to meet those sales. Liabilities During 2004, the Company paid off the notes payable to stockholders using a
portion of the funds raised in the private placement of the Companys common stock. Accounts payable increased $640,982, or 124% over 2003. This increase is directly related to
balances owed by the Company for the increased inventory. During 2002 and 2003, the Company had net operating losses for tax purposes to offset its
taxable income, thereby not incurring any cash outlay for income taxes. These net operating loss carry forwards were completely utilized during 2004,
resulting in the Company recording a liability for income taxes in the amount of $341,701. Results of Operations Significant operating items for the past two years are summarized below: 2004
    
    
    2003Net sales
    
    $
    9,352,353
    
    
    $
    4,756,530Income from operations
    
    $
    1,583,115
    
    
    $
    590,848Income before income taxes
    
    $
    1,395,978
    
    
    $
    519,681Net income
    
    $
    1,011,910
    
    
    $
    319,084Earnings per share
    
    $
    0.17
    
    
    $
    0.06
 The increase in 2004 net sales of $4,595,823 represents a 97% increase over 2003. Sales of
the Companys gun cleaning kits and accessories increased $4,775,059, or 240%, and accounted for
71% of the Companys gross sales. Sales of the Companys gun locks increased $76,066, or 5%.
These increases, particularly in the sales of gun cleaning kits, are reflective of the shift in the
focus of the Companys product line. Operating expenses increased from $1,299,235 in 2003 to $1,901,254 in 2004. This is an
increase of $602,019, or 46%. However, as a percentage of sales, operating expenses decreased from
27% to 20% of net sales. While the Company experienced increases in almost every expense category,
management believes the increases were held to a minimum, based on the increase in sales. Those
variable expenses that are directly related to sales levels, actually increased at a lesser rate
than the increase in sales. Gross profit margins decreased from 40% of net sales in 2003 to 37% of net sales in 2004.
This decrease was caused by two main factors. First, due to the increase in commodity prices
during 2004 (particularly brass and steel), the Company experienced a price increase from its
overseas manufacturers. 18




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##### Table of Contents



Second, due to increased competition in the gun cleaning market, and in an
effort to increase its market share, management decided not to pass these price increases on to the
Companys customers. The Company believes this trend will continue and gross profit margins will
most likely decrease slightly again in 2005. Liquidity and Capital Resources Our primarily source of cash is funds from our operations. We believe that external sources
of liquidity could be obtained in the form of bank loans, letters of credit, etc. 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 December 31, 2004, our factor had advanced to us
$1,931,233. The Company has three demand notes with a local bank. The loans bear interest at 7.00% and
mature in 2005 and 2006. The collective principal balance of these loans on December 31, 2004
totaled $293,405. We believe our revenues will be sufficient to pay these obligations. If not, we
will seek to refinance them or request our shareholders to pay their guarantees. Off-Balance Sheet Arrangements The Company is a party to a lease agreement for its corporate headquarters.
Information pertaining to this arrangement is presented in
Item 2  Description of Property. The Company does not use affiliation with special purpose entities,
variable interest entities or synthetic leases to finance its operations. Additionally, the Company has not entered into any arrangement requiring it to guarantee payment of third party debt
or to fund losses of an unconsolidated special purpose entity. Trends 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, and the litigation aimed at gun manufacturers as well as the gun
legislation hopefully will enhance our product line revenues. 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 prevent 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. 19




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##### Table of Contents



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 consolidated financial
statements. 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 consolidated financial statements because they inherently involve
significant judgments 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. 
 ITEM 7. FINANCIAL STATEMENTS Our financial statements are contained in pages F-1 through F-18 following. 20




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##### Table of Contents



ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE None 
 ITEM 8A. CONTROLS AND PROCEDURES As of December 31, 2004, the Company carried out an evaluation, under the supervision and with
the participation of the Companys management, including the Companys Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and operation of the Companys
disclosure controls and procedures. Based upon that evaluation, the Companys management,
including the Chief Executive Officer and Chief Financial Officer, concluded the Companys
disclosure controls and procedures were effective as of December 31, 2004. There have been no
significant changes during the period covered by this report in the Companys internal control over
financial reporting or in other factors that could significantly affect internal control over
financial reporting. 
 PART III 
 ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The following sets forth the names and ages of our executive officers and directors.
Directors are typically elected at annual meetings of stockholders, and serve for the term for
which they are elected and until their successors are duly elected and qualified. The Company,
however, has not held an annual meeting for the election of its directors. Our officers are
appointed by the board of directors and serve at the boards discretion. Name
    
    Age
    
    Position1
    
    TermDavid A. Collins
    
    59
    
    
    
    President, CEO, Director
    
    2004-2005Robert C. Goodwin
    
    48
    
    
    
    CFO/Director
    
    2004-2005
 David A. Collins is a founder of the Company and it predecessors, and previously served as its
President, CEO and Director from inception in 1993 until July 11, 2001. From July 2001 until May,
2002, Mr. Collins served as a consultant to the Company, particularly in the areas of sales and
marketing. May 2002, Mr. Collins was reappointed as President, CEO and Chairman upon the
resignation of James R. Pledger.   1
 21




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##### Table of Contents



Robert C. Goodwin has served as the Companys CFO since its inception in July 1998, as well as
DAC Arkansas continuously since 1993. In July 1998, Mr. Goodwin was elected to the Companys
board. Compliance with Section 16(a) of the Securities Act of 1934 Section 16(a) of the Exchange Act requires the Companys directors, executive officers and
persons who own more than 10% of the Companys Common Stock (collectively, Reporting Persons) to
file with the SEC initial reports of ownership and changes in ownership of the Companys Common
Stock. Reporting Persons are required by SEC regulations to furnish the Company with copies of all
Section 16(a) reports they file. To the Companys knowledge, based solely on its review of the
copies of such reports received or written representations from certain Reporting Persons that no
other reports were required, the Company believes that
during its fiscal year ended December 31, 2004, all Reporting Persons complied with all
applicable filing requirements except as follows: Each of the following Reporting Persons failed to timely file: Form 4: David Collins-one transaction filed late
Form 5: David Collins-one transaction filed late
Form 4: Dan R. Lasater-one transaction filed late
Form 5: Dan R. Lasater-one transaction delinquent. The Company is not aware of any failures by the Section 16 Reporting Persons to file the forms
required to be filed by them pursuant to Section 16 of the Exchange Act. The Company at this point in time does not have a Code of Ethics but is working diligently at
developing one, fitting to the Companys needs and views. 
 ITEM 10. EXECUTIVE COMPENSATION The following table sets forth summary information concerning the compensation received for
services rendered to us during the past three (3) fiscal years. 22




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##### Table of Contents



SUMMARY COMPENSATION TABLE Annual Compensation
    
    
    Long-Term Compensation
  Name &
    
    
    Year
    
    
    
    Bonus
    
    
    
    Other
    
    
    
    Restricted
    
    
    
    Securities
    
    
    
    LTIP

 
 

    
    AllPrincipal Position
    
    
    
    
    
    
    
    
    
    
    
    
    Annual
    
    
    
    Stock
    
    
    
    Underlying
    
    
    
    Payouts
    
    
    
    OtherCompens
    
    
    
    Awards
    
    
    
    Options/
    
    
    
    
    
    
    
    
    Compenation
    
    
    
    
    
    
    
    
    SARs
    
    
    
    
    
    
    
    
    sationRobert C.
    
    
    
    2004
    
    
    
    
    
    
    
    
    
    73,500Goodwin, CFO
    
    
    
    2003
    
    
    
    
    
    
    
    
    
    66,0002002
    
    
    
    
    
    
    
    
    
    58,750David A. Collins
    
    
    
    2004
    
    
    
    
    
    
    
    
    
    120,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    293,141Pres. CEO(1)
    
    
    
    2003
    
    
    
    
    
    
    
    
    
    120,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    57,0002002
    
    
    
    
    
    
    
    
    
    35,000
 Board of Directors Our directors do not receive compensation in any form for their services as Directors. Employment Contracts David A. Collins serves in the capacity of Chairman and CEO under a five (5) year Employment
Agreement commencing December 1, 2000. This Agreement may not be terminated by the Company except
for cause, defined as a felony conviction, embezzlement, or violation of the non-compete or
confidentiality provisions. If cause is found, Mr. Collins will cease to receive compensation.
Furthermore, Mr. Collins may terminate his agreement at any time upon 30 days advance written
notice to the Company; should he elect to do so, the Company will discontinue payment of benefits,
except that any stock options already granted will remain in force. Should Mr. Collins be
terminated from his position with the Company, he agrees not to compete with the Company for a
period of twelve (12) months following the date of termination. All other officers and employees serve at the discretion of the Board of Directors, and do not
have employment contracts. 
 ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The following table sets forth certain information regarding the beneficial ownership
of our common stock as of March 15, 2005 by (a) each person known by us to be the beneficial owner
of five (5) percent or more of the outstanding common stock and (b) all executive officers and
directors both individually and as a group. 23




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##### Table of Contents



Included are any securities that any person or group
identified has the right to acquire within sixty (60) days pursuant to options, warrants,
conversion privileges or other rights. Unless otherwise indicated in the footnotes to this table
and subject to community property laws where applicable, we believe that each of the shareholders
named in this table has sole or shared voting and investment power with respect to the shares
indicated as beneficially owned. Applicable percentages are based upon 6,180,864 shares of common
stock outstanding. 
 (1) Security Ownership of Certain Beneficial Owners. Name and Address of
    
    Number of Shares
    
    PercentTitle of Class
    
    Beneficial Owner
    
    Beneficially Owned
    
    of ClassCommon Stock
    
    Dan R. Lasater
    

    926,265
 
    
    
    15.0%Little Rock, ARCommon Stock
    
    David A. Collins
    

    500,500[1]
 
    
    
    8.1%Miami Beach, FL
    
 (2) Security Ownership of Management Name and Address of
    
    Number of Shares
    
    PercentTitle of Class
    
    Beneficial Owner
    
    Beneficially Owned
    
    of ClassCommon Stock
    
    Robert C. Goodwin
    
    5,000
    

    
    
    0.08%Sherwood, ARCommon Stock
    
    David A. Collins
    
    500,500
    

    
    
    8.1%Miami Beach, FL
 There are no arrangements which may result in a change in control of the Company. 
 ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS At December 31, 2004 and 2003, the Company has a non-interest bearing note receivable of
$98,400 and $91,238, respectively, from David A. Collins, Chairman and CEO. This note is due
December 31, 2005. 24




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##### Table of Contents



This note was not negotiated
in an arms length transaction, and the Company
has not undertaken any independent evaluation to determine the fairness of the transaction. At December 31, 2004 and 2003, the Company has a non-interest bearing note receivable
of $72,518 and $72,518, respectively, from DAC Investment and Consulting, Inc., a company
wholly-owned by David A. Collins, Chairman and CEO. This note is due December 31, 2005. This
note was not negotiated in an arms length transaction, and the Company has not undertaken any
independent evaluation to determine the fairness of the transaction. David A. Collins, Chairman and CEO, has personally guaranteed loans obtained by the Company
from a local bank. The total of these loans at December 31, 2004 and 2003 was $293,406 and
$342,581, respectively. The Notes are due on various dates in 2005 and 2006. The Company intends
to refinance the loans when they mature; in the event they cannot be refinanced the Company
believes it will have adequate resources to pay off the loans. Mr. Collins has also personally
guaranteed repayment of funds borrowed by the Company under its factoring agreement. The amounts
borrowed under this factoring agreement at December 31, 2004 and 2003 were $1,931,233 and $1,342,814, respectively. Although the Company has not
undertaken any independent evaluation to determine the fairness of the transaction, management
believes that the terms of this transaction are at least as favorable as the terms the Company
could have obtained from an unaffiliated third party. During 2004 and 2003, the Company maintained note payable agreements with Dan R. Lasater, a
15% shareholder. These notes had an interest ranging from 8% to 10% and were payable on various
dates during 2004. The notes were retired in 2004. Interest of $7,113 and $10,833 was paid on
these notes during 2004 and 2003, respectively. Although the Company has not undertaken any
independent evaluation to determine the fairness of the transaction, Management believes that the
terms of this transaction are at least as favorable as the terms the Company could have obtained
from an unaffiliated third party. For the years 2003 and 2004, our Chief Executive Officer, David Collins, leased a portion of
his home in Miami, Florida to the Company, which serves as the Companys executive office. The
Company pays a monthly office allowance to Mr. Collins, the Companys President of $5,500, for
approximately 1200 square feet and secretarial support. There is no lease agreement for these
premises. This office arrangement was not the product of arms length negotiation; however the
Company has determined the arrangement to be competitive with comparable office space and
secretarial support. 
 ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K. The following documents are incorporated by reference from the Registrants Form 10-SB filed
with the Securities and Exchange Commission (the commission) file #000-29211, on January 28,
2000. Exhibit
    
    Description2
    
    
    Asset Purchase Agreement3.1
    
    
    Articles of Incorporation
 25




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##### Table of Contents



3.2
    
    
    Bylaws10.1
    
    
    Lease*10.2
    
    
    Factoring Agreement10.3
    
    
    Employment contract of David A. Collins*31.1
    
    
    Certification of Principal
Executive Officer pursuant to Rule 13a-14(a)/15d-14(a)*31.2
    
    
    Certification of Principal
Financial Officer pursuant to Rule 13a-14(a)/15d-14(a)*32.1
    
    
    Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350*32.2
    
    
    Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350*
    The
Company has not reported on Form 8-K this year. 
 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES Audit Fees The Company incurred the following fees to Moore Stephens Frost, PLC, the Companys
independent auditors, for services rendered during the fiscal year ended December 31, 2004 a total
of $26,352 for the audit of the Companys financial statements for fiscal 2003 and $27,475 for the
review of the financial statements included in each of the Companys Quarterly Reports on Form
10-QSB for the fiscal year ended December 31, 2004. The Company incurred the following fees to
Moore Stephens Frost, PLC, the Companys independent auditors, for services rendered during the
fiscal year ended December 31, 2003 a total of $25,526 for the audit
of the Companys financial statements for fiscal 2002 and $13,024 for the reviews of the
financial statements included in each of the Companys Quarterly Reports on Form 10-QSB for the
fiscal year ended December 31, 2003. Tax Fees The Companys Board of Directors determined that the services performed by Moore Stephens
Frost, PLC, other than audit services are not incompatible with maintaining its independence. The
additional fee for non audit related services was approximately $2,830 in 2004 and $1,200 in 2003. Audit committee The Company does not have a standing Audit Committee of its Board of Directors. 26




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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. Collins David
A. Collins, Chairman, CEO and Principal Executive Officer March 29, 2005By:
    
    /s/ Robert
C. Goodwin Robert
C. Goodwin, Principal Accounting Officer and Principal Financial Officer March
29, 2005
 27




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##### Table of Contents



DAC TECHNOLOGIES GROUP INTERNATIONAL, INC. December 31, 2004 and 2003 Consolidated Financial Statements With Report of Independent Registered Public Accounting Firm




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##### Table of Contents



(MOORE STEPHENS FROST LETTERHEAD) Report of Independent Registered Public Accounting Firm Board of Directors and Stockholders
DAC Technologies Group International, Inc.
Little Rock, Arkansas We have audited the accompanying consolidated balance sheets of DAC Technologies Group
International, Inc. as of December 31, 2004 and 2003, and the related consolidated statements of
income, stockholders equity and cash flows for the years then ended. These consolidated
financial statements are the responsibility of the Companys management. Our responsibility
is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the consolidated financial statements are free of
material misstatement. The Company has determined that it is not required to have, nor were we
engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration
of internal control over financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purposes of expressing an opinion on the effectiveness of the Companys internal
control over financial reporting. Accordingly, we express no such opinion. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of DAC Technologies Group
International, Inc. as of December 31, 2004 and 2003, and the consolidated results of its
operations and its cash flows for the years then ended, in conformity with accounting principles
generally accepted in the United States of America. -s- Moore Stephens FrostIndependent Registered Public Accounting Firm Little Rock, Arkansas
March 16, 2005 (MOORE STEPHENS FROST LETTERHEAD)




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##### Table of Contents



DAC TECHNOLOGIES GROUP INTERNATIONAL, INC. Consolidated Balance Sheets December 31, 2004 and 2003 2004
    
    
    2003AssetsCurrent assetsCash
    
    $
    167,846
    
    
    $
    104,376Accounts receivable, less allowance for doubtful accounts of
$7,500 and $5,500 in 2004 and 2003, respectively
    
    
    477,150
    
    
    
    99,300Due from factor
    
    
    1,261,480
    
    
    
    223,029Inventories
    
    
    1,933,112
    
    
    
    909,352Note receivable
    
    
    
    
    
    
    44,665Prepaid expenses and deferred charges
    
    
    60,170
    
    
    
    41,104Current deferred income tax benefit
    
    
    9,600
    
    
    
    36,467Total current assets
    
    
    3,909,358
    
    
    
    1,458,293Property and equipmentLeasehold improvements
    
    
    29,049
    
    
    
    Furniture and fixtures
    
    
    147,010
    
    
    
    129,847Molds, dies, and artwork
    
    
    481,481
    
    
    
    473,441657,540
    
    
    
    603,288Accumulated depreciation
    
    
    (441,176
    )
    
    
    (379,190
    )Net property and equipment
    
    
    216,364
    
    
    
    224,098Other assetsPatents and trademarks, net of accumulated amortization of
$56,446 and $40,968 in 2004 and 2003, respectively
    
    
    164,662
    
    
    
    170,280Deposit
    
    
    1,435
    
    
    
    Advances to employees
    
    
    4,825
    
    
    
    3,325Note receivable - related party
    
    
    72,518
    
    
    
    72,518Note receivable - stockholder
    
    
    98,400
    
    
    
    91,238Total other assets
    
    
    341,840
    
    
    
    337,361Total assets
    
    $
    4,467,562
    
    
    $
    2,019,752
 F-1




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##### Table of Contents



2004
    
    
    2003Liabilities and Stockholders EquityCurrent liabilitiesNotes payable
    
    $
    293,406
    
    
    $
    342,581Notes payable - stockholders
    
    
    
    
    
    
    142,719Accounts payable
    
    
    1,158,562
    
    
    
    517,580Accrued payroll tax withholdings
    
    
    22,127
    
    
    
    78,871Accrued expenses - other
    
    
    23,542
    
    
    
    19,079Income taxes payable
    
    
    341,701
    
    
    
    Total current liabilities
    
    
    1,839,338
    
    
    
    1,100,830Deferred income tax liability
    
    
    15,500
    
    
    
    Commitments and contingencies (Note 15)Stockholders equityCommon stock, $.001 par value; authorized
50,000,000 shares; 6,310,864 shares issued and 6,180,864
shares oustanding at December 31, 2004; 5,843,056 shares issued
and 5,713,056 shares outstanding at December 31, 2003
    
    
    6,311
    
    
    
    5,843Preferred stock, $.001 par value; authorized
10,000,000 shares; no shares issued and outstanding
    
    
    
    
    
    
    Additional paid-in capital
    
    
    1,930,489
    
    
    
    1,249,065Treasury stock, at cost
    
    
    (101,400
    )
    
    
    (101,400
    )Retained earnings (accumulated deficit)
    
    
    777,324
    
    
    
    (234,586
    )Total stockholders equity
    
    
    2,612,724
    
    
    
    918,922Total liabilities and stockholders equity
    
    $
    4,467,562
    
    
    $
    2,019,752
 The accompanying notes are an integral part of these consolidated financial statements. F-2




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##### Table of Contents



DAC TECHNOLOGIES GROUP INTERNATIONAL, INC. Consolidated Statements of Income For the Years Ended December 31, 2004 and 2003 2004
    
    
    2003Net sales
    
    $
    9,352,353
    
    
    $
    4,756,530Cost of sales
    
    
    5,867,984
    
    
    
    2,866,447Gross profit
    
    
    3,484,369
    
    
    
    1,890,083Operating expensesSelling
    
    
    1,043,537
    
    
    
    574,009General and administrative
    
    
    857,717
    
    
    
    725,226Total operating expenses
    
    
    1,901,254
    
    
    
    1,299,235Income from operations
    
    
    1,583,115
    
    
    
    590,848Other income (expense)Interest expense
    
    
    (181,138
    )
    
    
    (126,635
    )Interest expense - stockholder notes
    
    
    (6,334
    )
    
    
    (21,490
    )Interest income
    
    
    335
    
    
    
    2,508Other income
    
    
    
    
    
    
    74,450Total other income (expense)
    
    
    (187,137
    )
    
    
    (71,167
    )Income before income tax provision
    
    
    1,395,978
    
    
    
    519,681Provision for income taxes
    
    
    384,068
    
    
    
    200,597Net income
    
    $
    1,011,910
    
    
    $
    319,084Earnings per share:Numerator - net income
    
    $
    1,011,910
    
    
    $
    319,084Denominator - basic weighted average number of

shares outstanding
    
    
    5,955,907
    
    
    
    5,786,600Basic earnings per share
    
    $
    0.17
    
    
    $
    0.06Denominator - diluted weighted average number of
shares outstanding
    
    
    5,974,203
    
    
    
    5,786,600Diluted earnings per share
    
    $
    0.17
    
    
    $
    0.06
 The accompanying notes are an integral part of these consolidated financial statements. F-3




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##### Table of Contents



DAC TECHNOLOGIES GROUP INTERNATIONAL, INC. Consolidated Statements of Stockholders Equity For the Years Ended December 31, 2004 and 2003 RetainedAdditional
    
    
    
    
    
    
    
    
    
    
    earningsCommon stock
    
    
    paid-in
    
    
    Treasury Stock
    
    
    (accumulatedShares
    
    
    Amount
    
    
    capital
    
    
    Shares
    
    
    Cost
    
    
    deficit)
    
    
    TotalBalances - December 31, 2002
    
    
    5,817,956
    
    
    $
    5,818
    
    
    $
    1,236,217
    
    
    
    
    
    
    $
    
    
    
    $
    (553,670
    )
    
    $
    688,365Issuance of stock as a tradeshow incentive
    
    
    100
    
    
    
    
    
    
    
    40
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    40Issuance of stock for services
    
    
    25,000
    
    
    
    25
    
    
    
    12,808
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,833Treasury stock received in lawsuit settlement
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    130,000
    
    
    
    (101,400
    )
    
    
    
    
    
    
    (101,400
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    319,084
    
    
    
    319,084Balances - December 31, 2003
    
    
    5,843,056
    
    
    
    5,843
    
    
    
    1,249,065
    
    
    
    130,000
    
    
    
    (101,400
    )
    
    
    (234,586
    )
    
    
    918,922Issuance of stock through private placement
    
    
    467,808
    
    
    
    468
    
    
    
    681,424
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    681,892Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,011,910
    
    
    
    1,011,910Balances - December 31, 2004
    
    
    6,310,864
    
    
    $
    6,311
    
    
    $
    1,930,489
    
    
    
    130,000
    
    
    $
    (101,400
    )
    
    $
    777,324
    
    
    $
    2,612,724
 The accompanying notes are an integral part of these consolidated financial statements. F-4




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##### Table of Contents



DAC TECHNOLOGIES GROUP INTERNATIONAL, INC. Consolidated Statements of Cash Flows For the Years Ended December 31, 2004 and 2003 2004
    
    
    2003Cash flows from operating activitiesNet income
    
    $
    1,011,910
    
    
    $
    319,084Adjustments to reconcile net income to net
cash provided by (used in) operating activitiesIssuance of common stock for services and incentives
    
    
    
    
    
    
    12,873Receipt of treasury stock in lawsuit settlement
    
    
    
    
    
    
    (101,400
    )Depreciation
    
    
    61,986
    
    
    
    58,810Amortization
    
    
    15,478
    
    
    
    11,815Imputed interest on notes receivable
    
    
    
    
    
    
    (2,333
    )Deferred income tax provision
    
    
    42,367
    
    
    
    200,597Changes in operating assets and liabilitiesAccounts receivable
    
    
    (377,850
    )
    
    
    (45,237
    )Due from factor
    
    
    (1,038,451
    )
    
    
    (63,885
    )Inventories
    
    
    (1,023,760
    )
    
    
    (312,585
    )Prepaid expenses and deferred charges
    
    
    (19,066
    )
    
    
    41,597Deposits
    
    
    (1,435
    )
    
    
    Advances to employees
    
    
    (1,500
    )
    
    
    698Accounts payable
    
    
    640,982
    
    
    
    245,412Accrued payroll tax withholdings
    
    
    (56,744
    )
    
    
    (52,640
    )Accrued expenses other
    
    
    4,463
    
    
    
    818Income taxes payable
    
    
    341,701
    
    
    
    Net cash provided by (used in) operating activities
    
    
    (399,919
    )
    
    
    313,624Cash flows from investing activitiesPayments received on note receivable
    
    
    44,665
    
    
    
    Payments received on note receivable - stockholder
    
    
    
    
    
    
    17,100Purchases of property and equipment
    
    
    (54,252
    )
    
    
    (26,085
    )Payments for patents and trademarks
    
    
    (9,860
    )
    
    
    (60,000
    )Advances on note receivable - related party
    
    
    
    
    
    
    (28,655
    )Advances on note receivable - stockholder
    
    
    (7,162
    )
    
    
    (4,240
    )Net cash used in investing activities
    
    
    (26,609
    )
    
    
    (101,880
    )Cash flows from financing activitiesAdvances on notes payable - stockholders
    
    $
    
    
    
    $
    15,000Payments on notes payable
    
    
    (49,175
    )
    
    
    (70,965
    )Payments on notes payable - stockholders
    
    
    (142,719
    )
    
    
    (64,781
    )Proceeds from issuance of common stock through private
placement
    
    
    681,892
    
    
    
    Net cash provided by (used in) financing activities
    
    
    489,998
    
    
    
    (120,746
    )Net increase in cash
    
    
    63,470
    
    
    
    90,998Cash - beginning of year
    
    
    104,376
    
    
    
    13,378Cash - end of year
    
    $
    167,846
    
    
    $
    104,376Supplemental disclosure of cash flow informationCash paid during the year for Interest
    
    $
    199,723
    
    
    $
    152,439
 The accompanying notes are an integral part of these consolidated financial statements. F-5




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DAC TECHNOLOGIES GROUP INTERNATIONAL, INC. Notes to Consolidated Financial Statements December 31, 2004 and 2003  1.
    Organization and Nature of BusinessDAC Technologies Group International, Inc. (DAC) was originally incorporated under the
name DAC Technologies of America, Inc. In July 1999, the Company changed its name to DAC
Technologies Group International, Inc. DAC is in the business of developing, manufacturing and
marketing various patented and unpatented consumer products that are designed to provide
security for the consumer and their property. In addition, DAC has developed a wide range of
security and non-security products for the home, automobile and individual. The majority of
DACs products are manufactured and imported from mainland China and are shipped to DACs
central warehouse facility in Little Rock, Arkansas. These products, along with other items
manufactured in the United States, are sold primarily to major retail chains in the United
States.In February 2001, DAC formed a wholly owned subsidiary, Summit Training International
(STI), an Arkansas corporation. STI was formed with the primary objective of providing
training to law enforcement agencies through courses, seminars and conferences. During the
early part of 2002, the Company decided not to pursue further development of STI due to changes
in the perceived market. In July 2002, the Company sold certain assets of STI, including its
name for $50,000, which consisted of $5,000 in cash and a $45,000 note, maturing no later than
eighteen (18) months from the date of the note. The Company had suspended operations of STI
earlier in 2002 due to unprofitability. In connection with this sale, the Company has entered
into a noncompete agreement in regards to educational or instructional services for a four year
period.2.
    Summary of Significant Accounting Policies  a.
    Basis of presentation The accompanying consolidated financial statements include the
accounts of DAC Technologies Group International, Inc. and its wholly owned subsidiary,
Summit Training International (collectively, the Company). All material intercompany
accounts and transactions have been eliminated in the consolidation.b.
    Revenue recognition The Company recognizes sales revenue when the following criteria
are met: persuasive evidence of an agreement exists, risk of loss has been transferred
which is generally F.O.B shipping point, the Companys price to the buyer is fixed and
determinable, and collectibility is reasonably assured.Interest income associated with notes receivable is recognized in the period in which
it is earned based upon the terms of the note. As such time that management would deem a
note to be uncollectible, interest income would cease to be recognized. Based on
managements analysis, there were no conditions that existed in the years ended December 31,
2004 and 2003 to indicate the need for the nonaccrual of interest income.c.
    Cash equivalents The Company considers all highly liquid investments with original
maturities of three months or less at the time of purchase to be cash equivalents. At
December 31, 2004 and 2003, the Company had no cash equivalents. F-6




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DAC TECHNOLOGIES GROUP INTERNATIONAL, INC. Notes to Consolidated Financial Statements December 31, 2004 and 2003  2.
    Summary of Significant Accounting Policies(cont.)  d.
    Accounts and notes receivable The majority of the Companys receivables are factored
pursuant to a factoring agreement (Note 6). At December 31, 2004 and 2003, approximately
87% and 94%, respectively, of the Companys accounts receivable, gross of the balance due
to factor, were covered by this agreement. For receivables that are not covered under this
agreement, the Company evaluates these customer accounts on a periodic basis and records an
allowance for amounts estimated to be uncollectible. Past due status is determined based
upon contractual terms. Amounts that are determined to be uncollectible are written off
against this allowance when collection attempts on the accounts have been exhausted.
Management uses significant judgment in estimating uncollectible accounts. In estimating
uncollectible amounts, management considers factors such as current overall economic
conditions, industry-specific economic conditions, historical customer performance and
anticipated customer performance. While management believes the Company processes
effectively address its exposure to doubtful accounts, changes in economy, industry or
specific customer conditions may require adjustment to the allowance recorded by the
Company.e.
    Inventories Inventories are stated at the lower of average cost or market. Costs
include freight and applicable customs fees. The Company receives inventory from overseas
at terms of F.O.B. shipping point, and thereby bearing the risk of loss at that point in
time. During the time period prior to the time it is received in the warehouse, this
inventory is classified as inventory in transit. Inventory held in the warehouse is
classified as finished goods.f.
    Property and equipment Property and equipment are stated at cost. Depreciation is
provided using the straight-line method over the following useful lives: Leasehold improvements
    
    
    3 yearsFurniture and fixtures
    
    
    10 yearsMolds, dies and artwork
    
    
    10 years
  Depreciation expense of $61,986 and $58,810 was recognized during the years ended
December 31, 2004 and 2003, respectively. Maintenance and repairs are charged to expense as
incurred. Major additions and improvements of existing facilities are capitalized. For
retirements or sales of property, the Company removes the original cost and the related
accumulated depreciation from the accounts and the resulting gain or loss is reflected in
other income (expense), net in the accompanying consolidated statements of operations.g.
    Patents and trademarks Costs incurred in connection with the acquisition of patents
and trademarks are capitalized and amortized over their estimated useful lives, which range
from five to seventeen years.h.
    Income taxes The Company utilizes the liability method of accounting for deferred
income taxes. The liability method requires the recognition of deferred tax liabilities
and assets for the expected future tax consequences of temporary differences between tax
basis and financial reporting basis of assets and liabilities as of the year-end date at
the presently enacted tax rates. A valuation allowance is established when necessary to
reduce deferred tax assets to the amount that is expected to be realized. F-7




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DAC TECHNOLOGIES GROUP INTERNATIONAL, INC. Notes to Consolidated Financial Statements December 31, 2004 and 2003  2.
    Summary of Significant Accounting Policies(cont.)  i.
    Shipping and handling All shipping and handling costs are included in selling expense
in the accompanying consolidated statement of operations. These costs totaled $260,221 and
$155,298 for the years ended December 31, 2004 and 2003, respectively.j.
    Earnings per share Basic earnings per share has been calculated using the weighted
average number of common shares outstanding for each year. The dilutive effect of
potential common shares outstanding is included in diluted earnings per share. The
computations of basic earnings per share and diluted earnings per share for 2004 and 2003
are as follows: 2004
    
    
    2003Net earnings from continuing operations
    
    $
    1,011,910
    
    
    $
    319,084Basic weighted average shares
    
    $
    5,955,907
    
    
    $
    5,786,600Effect of dilutive securities:Common stock warrants
    
    
    18,296
    
    
    
    Dilutive potential common shares
    
    $
    5,974,203
    
    
    $
    5,786,600Net earnings per share from continuing operations:Basic
    
    $
    0.17
    
    
    $
    0.06Diluted
    
    $
    0.17
    
    
    $
    0.06
  k.
    Estimates The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date of the
consolidated financial statements, and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.l.
    Fair value of financial instruments The fair values of cash and cash equivalents,
accounts receivables and notes payable approximate their carrying values due to the
short-term nature of the instruments. F-8




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DAC TECHNOLOGIES GROUP INTERNATIONAL, INC. Notes to Consolidated Financial Statements December 31, 2004 and 2003  2.
    Summary of Significant Accounting Policies(cont.)  m.
    Impairment of long-lived assets Statement of Financial Accounting Standards (SFAS)
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets requires that
long-lived assets be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amounts of any asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is measured by the amount the
carrying amount of the assets exceeds the fair value of the assets. Based upon
managements assessment of the impairment indicators, no impairment testing is necessary
during the years ended December 31, 2004 and 2003.n.
    Impairment of intangible assets SFAS No. 142, Goodwill and Other Intangible Assets,
requires that goodwill and indefinite lived intangible assets no longer be amortized;
however, these assets must be tested at least annually, or more frequently if impairment
indicators arise, for impairment. Separate intangible assets that have finite lives are to
be amortized over their useful lives. Based on managements assessment of the existing
assets, no impairment had occurred at December 31, 2004 and 2003.o.
    New accounting pronouncements In December 2004, the Financial Accounting Standards
Board (FASB) issued SFAS No. 151, Inventory Costs (SFAS No. 151). SFAS No. 151
requires abnormal amounts of inventory costs related to idle facility, freight handling and
wasted material expenses to be recognized as current period charges. Additionally, SFAS
No. 151 requires that allocation of fixed production overheads to the costs of conversion
be based on the normal capacity of the production facilities. The standard is effective
for fiscal years beginning after June 15, 2005. The Company believes the adoption of SFAS
No. 151 will not have a material impact on its consolidated financial statements.In December 2004, the FASB issued SFAS No. 123(R), Share-Based Payment (SFAS No.
123(R)), which is a revision of SFAS No. 123 and supersedes APB Opinion No. 25. SFAS No.
123(R) requires all share-based payments to employees, including grants of employee stock
options, to be valued at fair value on the date of grant, and to be expensed over the
applicable vesting period. Pro forma disclosure of the income statement effects of
share-based payments is no longer an alternative. SFAS No. 123(R) is effective for all
stock-based awards granted on or after July 1, 2005. In addition, companies must also
recognize compensation expense related to any awards that are not fully vested as of the
effective date. Compensation expense for the unvested awards will be measured based on the
fair value of the awards previously calculated in developing the pro forma disclosures in
accordance with the provisions of SFAS No. 123. The Company is currently assessing the
impact of adopting SFAS 123(R) to its consolidated results of operations. F-9




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DAC TECHNOLOGIES GROUP INTERNATIONAL, INC. Notes to Consolidated Financial Statements December 31, 2004 and 2003  3.
    Variable Interest EntitiesFASB Interpretation No. 46 (Revised December 2003), Consolidation of Variable Interest
Entities (FIN 46), requires that if an enterprise is the primary beneficiary of a variable
interest entity, the assets, liabilities, and results of operations of the variable interest
entity should be included in the consolidated financial statements of the enterprise. The
Company held an investment, or variable interest, that for purposes of FIN 46, was evaluated and
the Company determined that it was not the primary beneficiary.The Company has a note receivable from DAC Investment and Consulting, Inc. (DAC
Investment) of $72,518. Since 2001, DAC Investment has provided consulting and sales services
to the Company. The balance of the note receivable represents the Companys maximum exposure to
loss as a result of its involvement with DAC Investment.4.
    InventoriesInventories consist of: 2004
    
    
    2003Finished goods
    
    $
    1,055,407
    
    
    $
    605,941Inventory in transit
    
    
    854,738
    
    
    
    280,444Parts
    
    
    22,967
    
    
    
    22,967$
    1,933,112
    
    
    $
    909,352
  5.
    Intangible AssetsIntangible assets consisted of the following at December 31: 2004
    
    
    2003Finite lived:Patents and trademarks, net of accumulated
amortization of $56,446 and $40,968 in 2004
and 2003, respectively
    
    $
    164,662
    
    
    $
    170,280
 F-10




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DAC TECHNOLOGIES GROUP INTERNATIONAL, INC. Notes to Consolidated Financial Statements December 31, 2004 and 2003  5.
    Intangible Assets(cont.)Aggregate amortization expense related to finite lived intangible assets was $15,478 and
$11,815 for the years ended December 31, 2004 and 2003, respectively. Future finite lived
intangible asset amortization expenses are as follows: 2005
    
    $
    15,5222006
    
    
    14,6672007
    
    
    14,2842008
    
    
    14,0092009
    
    
    12,748Thereafter
    
    
    93,432$
    164,662
  6.
    Due From FactorThe Company factors a majority of its receivables without recourse under a credit risk
factoring agreement, which is renewable annually. This agreement provides for factoring fees of
 .65% to 1.8% monthly, depending on the creditworthiness and location of an account (domestic or
foreign). An additional fee of .25% is charged for each thirty-day period, or part thereof,
when the terms of sale exceed ninety-days. Fees are calculated on the gross face value of each
invoice. Additionally, this agreement provides for advances of funds on the factored
receivable. Interest is charged at a greater of 4% or 0.50% above prime (5.25% at December 31,
2004) on the outstanding funds in use. The amounts borrowed are collateralized by the
outstanding accounts receivable, and are reflected as a reduction to accounts receivable in the
accompanying consolidated balance sheets. These amounts are as follows: 2004
    
    
    2003Accounts receivable factored
    
    $
    3,192,713
    
    
    $
    1,565,843Amounts advanced and outstanding
    
    
    1,931,233
    
    
    
    1,342,814Due from factor
    
    $
    1,261,480
    
    
    $
    223,029
 F-11




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DAC TECHNOLOGIES GROUP INTERNATIONAL, INC. Notes to Consolidated Financial Statements December 31, 2004 and 2003  7.
    Notes PayableNotes payable consist of: 2004
    
    
    2003Note payable with a bank; interest at 7.00%;
payable on demand or if no demand,
November 1, 2005; collateralized by the
Companys receivables and personal guarantees
of the Companys major stockholders.
    
    $
    148,113
    
    
    $
    167,496Note payable with a bank; interest at 7.00%;
payable on demand or if no demand,
November 12, 2005; collateralized by the
Companys receivables and personal guarantees
of the Companys major stockholders.
    
    
    121,785
    
    
    
    137,747Note payable with a bank; interest at 7.00%;
payable on demand or if no demand, April 30,
2006; secured by the Companys inventories
and personal guarantees of the Companys
major stockholders.
    
    
    23,508
    
    
    
    37,338$
    293,406
    
    
    $
    342,581
  The weighted average interest rates on short-term borrowings, including notes payable 
stockholders for the years ended December 31, 2004 and 2003 were 7.00% and 7.45%, respectively.
The Company recognized interest expense of approximately $28,500 and $51,100 for the years ended
December 31, 2004 and 2003, respectively, on notes payable and notes payable  stockholders.8.
    Notes Payable  StockholdersDuring 2004 and 2003, the Company maintained note payable agreements with certain
stockholders of the Company. Repayments under these agreements during 2004 were $142,719.
Borrowings and repayments under these agreements during 2003 were $15,000 and $64,781,
respectively. These notes bore interest at rates ranging from 6% to 10% and were paid off
during 2004. At December 31, 2003, outstanding borrowings under these agreements totaled
$142,719. During 2004 and 2003, the Company recognized interest expense of $6,334 and $21,490,
respectively, on these notes. F-12




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DAC TECHNOLOGIES GROUP INTERNATIONAL, INC. Notes to Consolidated Financial Statements December 31, 2004 and 2003  9.
    EquityOn June 24, 2004, the Company issued 467,808 shares of common stock through private
placement valued at $681,892. 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. The placement agent received a $69,000 fee and was issued 160,000 warrants
that will allow 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.On January 16, 2003, the Company issued 100 shares of restricted common stock as a door
prize at a trade show. These shares were valued at $40 on the date of issuance.On April 1, 2003, the Company issued 25,000 shares of restricted common stock for services
valued at $12,833.On July 7, 2002, the Company issued 25,000 shares of restricted common stock valued at
$15,000 as additional interest on note payable to a stockholder. The value of these shares was
recognized as interest expense over the term of note payable of ten months, which expired on May
7, 2003.10.
    Treasury StockIn August 2000, the Company filed suit against a former manufacturer alleging breach of a
manufacturing contract and seeking damages and rescission of 165,000 shares of its common stock
as part of the amounts which had been previously paid to the manufacturer. During 2003, a jury
awarded the Company damages in the amount of $1,650,560, which included the value of the
returned shares of common stock. The treasury stock was received during the year at a
court-mandated value of $0.78 per share. Of the total shares, 35,000 were paid to legal counsel
as consideration for legal fees. The remaining 130,000 shares are reflected as treasury stock
in the accompanying balance sheet at the $0.78 per share, or $101,400. The Company is
attempting to collect the remainder of the award, $1,521,860, by filing suit in October 2003
against the owners of the former manufacturer. As collection of this award is uncertain, this
gain contingency has not been recorded in the accompanying consolidated statements of
operations. F-13




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DAC TECHNOLOGIES GROUP INTERNATIONAL, INC. Notes to Consolidated Financial Statements December 31, 2004 and 2003  11.
    Stock Option PlanDuring 2000, the Company adopted the 2000 Equity Incentive Plan (the Plan), a
non-qualified stock option plan. Under the terms of the Plan, officers, directors, employees
and other individuals may be granted options to purchase the Companys common stock at exercise
prices determined by the Companys Board of Directors. The terms and conditions of any options
granted under the Plan, to include vesting period and restrictions or limitations on the
options, will be determined by the Board of Directors. The maximum number of shares that can be
granted under this Plan is one million shares of stock. At December 31, 2004, the Company had
granted no options pursuant to this Plan.12.
    WarrantsA summary of warrant activity for 2004 is as follows: Weighted
    
    
    
    
    
    
    Weightedaverage
    
    
    
    
    
    
    averageNumber of
    
    
    exercise
    
    
    Warrants
    
    
    exercisewarrants
    
    
    price
    
    
    exercisable
    
    
    priceOutstanding, December 31, 2003
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    Granted
    
    
    393,304
    
    
    
    2.57
    
    
    
    
    
    
    
    Outstanding, December 31, 2004
    
    
    393,304
    
    
    $
    2.57
    
    
    
    
    
    
    $
    
  At December 31, 2004, all warrants outstanding have an exercise price of $2.57 and expire
on June 28, 2009.13.
    Income TaxesThe provisions for income taxes consist of: 2004
    
    
    2003Current provision
    
    $
    341,701
    
    
    $
    Deferred provision
    
    
    42,367
    
    
    
    200,597$
    384,068
    
    
    $
    200,597
 F-14




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DAC TECHNOLOGIES GROUP INTERNATIONAL, INC. Notes to Consolidated Financial Statements December 31, 2004 and 2003  13.
    Income Taxes(cont.)Reconciliations of the differences between income taxes computed at the federal
statutory tax rates and the provision for income taxes is as follows: 2004
    
    
    2003Income taxes computed at federal

statutory tax rate
    
    $
    474,633
    
    
    $
    176,692State tax provision, net of federal benefits
    
    
    59,887
    
    
    
    22,294Recognition of DAC Technologies of
America, Inc. net operating losses
    
    
    (161,061
    )
    
    
    Nondeductible expenses and other
    
    
    10,609
    
    
    
    1,611Provision for income taxes
    
    $
    384,068
    
    
    $
    200,597
  Temporary differences that give rise to significant deferred tax assets (liabilities) are
as follows: 2004
    
    
    2003Net operating loss carryforward
    
    $
    
    
    
    $
    28,240Allowance for doubtful accounts
    
    
    2,872
    
    
    
    2,106Allowance for excess inventory
    
    
    6,767
    
    
    
    6,744Accumulated tax depreciation in
excess of book depreciation
    
    
    (14,618
    )
    
    
    Accumulated tax amortization in
excess of book amortization
    
    
    (878
    )
    
    
    Other accrued liabilities
    
    
    (43
    )

    
    
    (623
    )Net deferred tax asset (liability)
    
    $
    (5,900
    )
    
    $
    36,467
  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.
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 becoming net operating losses of the
Company. Previously, the tax impact to be recorded by the Company based on this event had been
undeterminable. However, during 2004, the amount of these net tax losses was determined to be
$420,634. Pursuant to SFAS No. 109, Accounting for Income Taxes, the full effect of these net
operating losses was recorded in 2004.During the year ended December 31, 2004, the Company utilized all of these net operating
losses as well as its previously recorded net operating loss carryforward in the amount of
approximately $74,000 to offset its current federal and state income tax liability. F-15




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DAC TECHNOLOGIES GROUP INTERNATIONAL, INC. Notes to Consolidated Financial Statements December 31, 2004 and 2003  14.
    Related Party TransactionsDuring the years ended December 31, 2004 and 2003, the Company made periodic advances to
certain employees of the Company. At December 31, 2004 and 2003, the outstanding balances of
advances to these individuals were $4,825 and $3,325, respectively. These advances have been
classified as noncurrent in the accompanying consolidated balance sheets because repayment is
not anticipated during the next year.At December 31, 2004 and 2003, the Company has a note receivable of $98,400 and $91,238,
respectively, due from an individual, who is both an employee and a stockholder, which is due on
December 31, 2005. This note is unsecured and non-interest bearing. The note receivable has
been classified as noncurrent in the accompanying consolidated balance sheets because repayment
is not anticipated during the next year.At December 31, 2004 and 2003, the Company has a note receivable of $72,518 due from a
related party, which is owned by the individual discussed above, that is due on December 31,
2005. This note is unsecured and non-interest bearing. The note receivable has been classified
as noncurrent in the accompanying consolidated balance sheets because repayment is not
anticipated during the next year.For the years ended December 31, 2004 and 2003, consulting service fees in the amount of
$60,000 were paid to a related party, which is owned by the individual discussed above. The
related party provides consulting services to the Company on an ongoing basis.Certain stockholders of the Company have personally guaranteed the Companys outstanding
borrowings with a bank at December 31, 2004 and 2003.15.
    Commitments and ContingenciesThe Company leases office and warehouse space for $5,537 per month under a lease that
expires on April 30, 2005. The lease agreement provides for renewal options through April 30,
2007 at a rate of $6,436 per month. The Company also leases space from a shareholder for office
space for $5,500 per month, which increased from $3,000 beginning July 1, 2004, under no formal
lease agreement. Total rent expense for the years ended December 31, 2004 and 2003 was $128,775
and $83,283, respectively.The Company is involved in various legal actions arising in the normal course of business.
In the opinion of management, the ultimate resolution of these matters will not have a material
adverse effect on the Companys consolidated financial position or results of operations.During 1998, the Company entered into an asset purchase agreement, wherein it acquired
certain assets and assumed certain liabilities of DAC Technologies of America, Inc. in a
combination that was accounted for in a manner similar to a pooling of interest. Assets and
liabilities that were not included in this transaction consisted of a receivable from a major
stockholder and President, certain bridge loans, stockholder advances, an automobile, certain
accounts payable, accrued commissions and accrued payroll totaling $200,488. The Company could
be held liable in the event of litigation, for the outstanding balances of certain unsecured
liabilities of DAC Technologies of America, Inc. totaling approximately $119,000. No accrual
has been made for this contingency. F-16




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DAC TECHNOLOGIES GROUP INTERNATIONAL, INC. Notes to Consolidated Financial Statements December 31, 2004 and 2003  16.
    Major Customers and SuppliersDuring the years ended December 31, 2004 and 2003, the Company had aggregate sales to one
customer that exceeded ten percent of total net sales. Sales to this individual customer were
approximately $5,111,000 and $2,478,000 during 2004 and 2003, respectively. Accounts receivable
related to the sales were factored without recourse (Note 6).During the years ended December 31, 2004 and 2003, the Company purchased 98% and 94%,
respectively, of its products from one major supplier. The Company is dependent upon this
supplier continuing in business and its ability to ship to the United States, but believes that
it could replace this supplier, if required to, at similar quality and terms.17.
    Concentration of Credit RiskFinancial instruments which potentially subject the Company to concentrations of credit
risk consist primarily of trade accounts receivable with a variety of customers. As discussed
in Note 6, the Company factors a majority of its receivables under a factoring agreement. These
accounts are factored on a non-recourse basis which reduces the Companys exposure to credit
risk. Approximately 87% and 94% of the Companys accounts receivable at December 31, 2004 and
2003, respectively, were factored. The Company provides credit in the normal course of business
to its customers and performs ongoing credit evaluations of its customers. It maintains
allowances for doubtful accounts and provisions for returns and credits based on factors
surrounding the specific customers and circumstances. The Company generally does not require
collateral from its customers. Credit risk is considered by management to be limited due to the
Companys customer base and its customers financial resources.At December 31, 2004 and at various times throughout the year, the Company maintained cash
balances with financial institutions in excess of the federally insured limit.18.
    Financial Information by Business SegmentDuring the years ended December 31, 2004 and 2003, the Company operates in five primary
business segments delineated by products or services. These segments are security products, gun
locks, safes, non-security products and training. The accounting policies of the Companys
segments are the same as those described in Note 2. The Companys long-lived assets are located
in the United States and China. F-17




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DAC TECHNOLOGIES GROUP INTERNATIONAL, INC. Notes to Consolidated Financial Statements December 31, 2004 and 2003  18.
    Financial Information by Business Segment(cont.)Information concerning operations in these segments of business is as follows: 2004
    
    
    2003RevenuesSecurity products
    
    $
    159,104
    
    
    $
    394,367Gun-locks
    
    
    1,571,453
    
    
    
    1,485,253Safes
    
    
    374,657
    
    
    
    565,740Non-security products
    
    
    7,247,139
    
    
    
    2,311,170Total
    
    $
    9,352,353
    
    
    $
    4,756,530Income before income tax expenseSecurity products
    
    $
    44,806
    
    
    $
    80,167Gun-locks
    
    
    182,661
    
    
    
    93,548Safes
    
    
    62,454
    
    
    
    50,759Non-security products
    
    
    1,106,057
    
    
    
    295,207Total
    
    $
    1,395,978
    
    
    $
    519,681Identifiable assetsSecurity productsUnited States
    
    $
    172,563
    
    
    $
    182,114China
    
    
    53,628
    
    
    
    51,105Gun-locksUnited States
    
    
    321,109
    
    
    
    271,898China
    
    
    36,413
    
    
    
    45,483SafesUnited States
    
    
    102,900
    
    
    
    154,368China
    
    
    12,398
    
    
    
    14,362Non-security productsUnited States
    
    
    1,474,835
    
    
    
    476,613Corporate
    
    
    2,293,716
    
    
    
    823,809Total
    
    $
    4,467,562
    
    
    $
    2,019,752
 Molds used to manufacture the Companys security products and gun locks are located in
China (Note 1). F-18