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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
  o
    
    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
   DAC TECHNOLOGIES GROUP INTERNATIONAL, INC.
  Florida
    
    65-0847852(State or other jurisdiction of
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)
 1601 Westpark Dr. #2 Little Rock, AR
    
    72204(Address of principal executive offices)
    
    (Zip code)
 
        o
 x o
 o
 o x




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##### 



FORWARD-LOOKING STATEMENT
    
    
    1PART I
    
    
    1ITEM 1.
    
    DESCRIPTION OF BUSINESS
    
    
    1ITEM 2.
    
    DESCRIPTION OF PROPERTY
    
    
    14ITEM 3.
    
    LEGAL PROCEEDINGS
    
    
    14ITEM 4.
    
    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    
    15PART II
    
    
    16ITEM 5.
    
    MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
    
    
    16ITEM 6.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
    
    
    17ITEM 7.
    
    FINANCIAL STATEMENTS
    
    
    22ITEM 8.
    
    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
    
    
    22ITEM 8A.
    
    CONTROLS AND PROCEDURES
    
    
    22ITEM 8B.
    
    OTHER INFORMATION
    
    
    22PART III
    
    
    23ITEM 9.
    
    DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
    
    
    23ITEM 10.
    
    EXECUTIVE COMPENSATION
    
    
    24ITEM 11.
    
    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
    
    
    25ITEM 12.
    
    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
    
    
    26ITEM 13.
    
    EXHIBITS
    
    
    27ITEM 14.
    
    PRINCIPAL ACCOUNTANT FEES AND SERVICES
    
    
    28Section 302 Principal Executive Officer CertificationSection 302 Principal Financial Officer CertificationSection 906 Principal Executive Officer CertificationSection 906 Principal Financial Officer Certification




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FORWARD-LOOKING STATEMENTS
  
  
 ITEM 1. DESCRIPTION OF BUSINESS
 (1)
    
    History and Business Development.
   1




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
    
    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
 2




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(3)
    
    Products
 A. Introduction.
     B. Security Products
 (1)
    
    Gun Safety.We market twelve (12) 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. Eight of the
Companys gun locks and two of the safes have been certified for sale consistent with
the standards set out by the State of California. These
California 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-two (32) different gun cleaning kits and
rod sets 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. We also
carry a full line of replacement pieces for each kit.(3)
    
    Personal Security.We market four (4) different electronic security devices
designed to protect the person. These include our Body Alarm, Key Alert, Glass Window
Alert and Patient Alarm.(4)
    
    Non-security Consumer 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. We have
also added in 2005 three (3) meat processors and a portable light for ATVs.
 (4)
    
    Manufacturing, Suppliers and Distribution.
    .
 4




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www.dactec.com
  (5)
    
    Competition
   
    
    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.
 5




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(6)
    
    Market and Customers.
   
    
    National retail chains Wal-Mart and Kmart (in 2005, 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 13% of sales); and,
    
    Gun manufacturers such as Savage Arms, Browning, Marlin, Glock and SIG-Arms (representing 7% of sales)
    
    Regional retail chains and sole proprietors (representing 23% of sales)
    6




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(7)
    
    Intellectual Property.
  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
    
    2009Gun Cleaning Kit case
    
    7,020,994
   7




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rd
   (8)
    
    Governmental Regulations.
    8




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
    
    The penalty is a misdemeanor unless the minor injures someone in which case it is a felony.
    
    Child is defined as anyone under the age of 16.
 9




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(9)
    
    Research and Development.
   (10)
    
    Environmental Laws.
  (11)
    
    Employees.
  (12)
    
    Reports to Security Holders.
 http://www.sec.gov
 10




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(14)
    
    Certain Risk Factors.
 If we are to expand our operations, we may need additional capital.
 Our growth program and future profitability remains uncertain.
 Our success depends on maintaining relationships with key customers.
 We depend on purchase orders and have no long-term contractual relationship with our
customers.
 We depend on foreign contract manufacturers for substantially all of our manufacturing
requirements.
 11




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While we manufacture a variety of products, we rely primarily on the sale of gun cleaning kits
and gunlocks as our major source of revenue.
 We may be unable to compete favorably in the highly competitive gun cleaning, security
products and gunlock industry.
 We may not be able to attract and retain the qualified personnel we need to succeed in the
future.
 We anticipate eventual state and federal gunlock legislation and regulation, which may cause
the Company to incur unanticipated expenses.
 12




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We may be adversely affected by legislation and regulation over firearms.
 We extend credit to our customers and should our customers default on their obligations to
us, we may be subject to credit risk.
 We have not registered or trademarked any of our product names to date.
 The Company has engaged in several related-party transactions, which were not effected in
arms-length transactions.
 13




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The Company at present is without a lease for its premises.
 
 ITEM 2. DESCRIPTION OF PROPERTY
  
 ITEM 3. LEGAL PROCEEDINGS
    14




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Legel v. DAC Technologies Group International, Inc., et al,
 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  15




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ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
  Quarter Ended
    
    High
    
    
    LowMarch 31, 2004
    
    $
    2.25
    
    
    $
    1.09June 30, 2004
    
    $
    2.30
    
    
    $
    1.60September 30, 2004
    
    $
    2.20
    
    
    $
    1.51December 31, 2004
    
    $
    2.99
    
    
    $
    1.67March 31, 2005
    
    $
    3.65
    
    
    $
    2.30June 30, 2005
    
    $
    2.84
    
    
    $
    2.24September 30, 2005
    
    $
    2.85
    
    
    $
    2.14December 31, 2005
    
    $
    2.60
    
    
    $
    2.14
   16




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Equity Compensation Plan InformationNumber ofsecuritiesremaining availablefor future issuanceNumber of securities
    
    
    
    
    
    under equityto be issued upon
    
    
    Weighted-average
    
    
    compensation plansexercise of
    
    
    exercise price of
    
    
    (excludingoutstanding options,
    
    
    outstanding options,
    
    
    securitieswarrants and rights
    
    
    warrants and rights
    
    
    reflected 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
 
 ITEM 6. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
  (1)
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
 2005 Summary
  17




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Financial Condition
   2005
    
    
    2004Accounts receivable
    
    $
    692,690
    
    
    $
    477,150Due from factor
    
    $
    1,313,618
    
    
    $
    1,261,480Inventories
    
    $
    2,704,310
    
    
    $
    1,933,112Accounts payable-trade
    
    $
    981,042
    
    
    $
    1,158,562Income taxes payable
    
    $
    380,843
    
    
    $
    341,701Total current assets
    
    $
    4,920,677
    
    
    $
    3,909,358Total current liabilities
    
    $
    1,658,106
    
    
    $
    1,839,338Net working capital
    
    $
    3,262,571
    
    
    $
    2,070,020Total assets
    
    $
    5,499,502
    
    
    $
    4,467,562Stockholders equity
    
    $
    3,825,896
    
    
    $
    2,612,724
 Accounts receivable and due from factor
  18




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2005
    
    2004Total accounts receivable
    
    $
    5,512,193
    
    
    $
    3,669,863Less: assigned receivables
    
    
    (4,819,503
    )
    
    
    (3,192,713
    )Net accounts receivables
    
    $
    692,690
    
    
    $
    477,150Assigned receivables
    
    $
    4,819,503
    
    
    $
    3,192,713Less: Funds advanced
    
    
    (3,505,885
    )
    
    
    (1,931,233
    )Due from factor
    
    $
    1,313,618
    
    
    $
    1,261,480
   Inventories
  Liabilities
  Results of Operations
  2005
    
    2004Net sales
    
    $
    13,351,115
    
    
    $
    9,352,353Income from operations
    
    $
    2,195,083
    
    
    $
    1,583,115Income before income taxes
    
    $
    1,963,464
    
    
    $
    1,395,978Net income
    
    $
    1,180,547
    
    
    $
    1,011,910Earnings per share
    
    $
    0.19
    
    
    $
    0.17
 19




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Liquidity and Capital Resources
   Off-Balance Sheet Arrangements
  20




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Trends
    Critical Accounting Estimates
  21




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Long-lived Assets
   Patents and Trademarks
  Inventories
  
 ITEM 7. FINANCIAL STATEMENTS
  
 ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
  
 ITEM 8A. CONTROLS AND PROCEDURES
  
 ITEM 8B. OTHER INFORMATION
  22




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ITEM 9.
    
    DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
  Name
    
    Age
    
    Position
    
    TermDavid A. Collins
    
    60
    
    President, CEO, Director
    
    2005-2006Robert C. Goodwin
    
    49
    
    CFO/Director
    
    2005-2006
   23




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Compliance with Section 16(a) of the Securities Act of 1934
   Form 4: David Collins-four transactions
filed late
Form 5: David Collins-one transaction filed late
Form 5 Dan Lasater- one transaction filed late
   
 ITEM 10. EXECUTIVE COMPENSATION
   Annual Compensation
    
    
    Long-Term CompensationAwards PayoutsSecuritiesName &
    
    
    
    
    
    
    
    
    
    
    
    
    Other Annual
    
    
    Restricted Stock
    
    
    Underlying Options/
    
    
    
    
    
    
    
    All OtherPrincipal Position
    
    
    Year
    
    
    Salary
    
    
    Compensation
    
    
    Awards
    
    
    SARs
    
    
    LTIP Payouts
    
    
    CompensationRobert C.
    
    
    
    2005
    
    
    
    
    77,400Goodwin, CFO
    
    
    
    2004
    
    
    
    
    73,5002003
    
    
    
    
    66,000David A. Collins
    
    
    
    2005
    
    
    
    
    120,000
    
    
    
    
    391,047Pres. CEO(1)
    
    
    
    2004
    
    
    
    
    120,000
    
    
    
    
    293,1412003
    
    
    
    
    120,000
    
    
    
    
    57,000
 24




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Board of Directors
  Employment Contracts
   
 ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
  (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
    
    
    740,865
    
    
    
    12.0
    %Little Rock, ARCommon Stock
    
    Praetorian Capital Management LLCMiami Beach, FL
    
    
    700,000
    
    
    
    11.3
    %Common Stock
    
    David A. Collins
    
    
    500,500
    [1]
    
    
    8.1
    %Miami Beach, FL
 
 [1]
    
    Includes 32,000 shares owned by the Collins Family Trust. David Collins acknowledges
beneficial ownership and control of the shares held in this Trust. The beneficiaries of
the Collins Family Trust are Payton P. Collins and David A. Collins, Jr. (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
    
    
    19,073
    
    
    
    0.31
    %Sherwood, ARCommon Stock
    
    David A. Collins
    
    
    500,500
    
    
    
    8.1
    %Miami Beach, FL
  25




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ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
     26




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ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
  Exhibit
    
    Description2
    
    
    Asset Purchase Agreement3.1
    
    
    Articles of Incorporation3.2
    
    
    Bylaws10.1
    
    
    Lease10.2
    
    
    Factoring Agreement10.3
    
    
    Employment contract of David A. Collins31.1
    
    
    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*
 
 *
    
    These exhibits are enclosed within this filing.  27




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ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
       28




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By:
    /s/ David A. CollinsMarch 31, 2006
    
    David A. Collins, Chairman,

CEO and Principal Executive OfficerBy:
    /s/ Robert C. GoodwinMarch 31, 2006
    
    Robert C. Goodwin, Principal
Accounting Officer and Principal Financial Officer 29




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DAC TECHNOLOGIES GROUP INTERNATIONAL, INC.
 December 31, 2005 and 2004
 Consolidated Financial Statements
 With
 Report of Independent Registered Public Accounting Firm




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Report of Independent Registered Public Accounting Firm




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DAC TECHNOLOGIES GROUP INTERNATIONAL, INC.
 Consolidated Balance Sheet
 December 31, 2005 and 2004
 2005
    
    
    2004AssetsCurrent assetsCash
    
    $
    130,886
    
    
    $
    167,846Accounts receivable, less allowance for doubtful accounts of
$5,000 and $7,500 in 2005 and 2004, respectively
    
    
    692,690
    
    
    
    477,150Due from factor
    
    
    1,313,618
    
    
    
    1,261,480Inventories
    
    
    2,704,310
    
    
    
    1,933,112Prepaid expenses and deferred charges
    
    
    69,573
    
    
    
    60,170Deferred income tax asset
    
    
    9,600
    
    
    
    9,600Total current assets
    
    
    4,920,677
    
    
    
    3,909,358Property and equipmentLeasehold improvements
    
    
    29,049
    
    
    
    29,049Furniture and fixtures
    
    
    201,108
    
    
    
    147,010Molds, dies and artwork
    
    
    500,137
    
    
    
    481,481730,294
    
    
    
    657,540Accumulated depreciation
    
    
    (496,267
    )
    
    
    (441,176
    )Net property and equipment
    
    
    234,027
    
    
    
    216,364Other assetsPatents and trademarks, net of accumulated amortization of
$72,439 and $56,446 in 2005 and 2004, respectively
    
    
    156,531
    
    
    
    164,662Deposit
    
    
    1,435
    
    
    
    1,435Advances to employees
    
    
    14,783
    
    
    
    4,825Note receivable  related party
    
    
    72,518
    
    
    
    72,518 stockholder
    
    
    99,531
    
    
    
    98,400Total other assets
    
    
    344,798
    
    
    
    341,840Total assets
    
    $
    5,499,502
    
    
    $
    4,467,562Liabilities and Stockholders EquityCurrent liabilitiesNotes payable
    
    $
    236,220
    
    
    $
    293,406Accounts payable
    
    
    981,042
    
    
    
    1,158,562Accrued payroll tax withholdings
    
    
    29,463
    
    
    
    22,127Accrued expenses  other
    
    
    30,538
    
    
    
    23,542Income taxes payable
    
    
    380,843
    
    
    
    341,701Total current liabilities
    
    
    1,658,106
    
    
    
    1,839,338Deferred income tax liability
    
    
    15,500
    
    
    
    15,500Commitments and contingencies (Note 15)Stockholders equityPreferred stock, $.001 par value; authorized 10,000,000 shares;
no shares issued and outstanding
    
    
    
    
    
    
    Common stock, $.001 par value; authorized 50,000,000 shares;
6,323,364 shares issued and 6,193,364 shares outstanding at
December 31, 2005; 6,310,864 shares issued and 6,180,864
shares outstanding at December 31, 2004
    
    
    6,323
    
    
    
    6,311Additional paid-in capital
    
    
    1,963,102
    
    
    
    1,930,489Treasury stock, at cost
    
    
    (101,400
    )
    
    
    (101,400
    )Retained earnings
    
    
    1,957,871
    
    
    
    777,324Total stockholders equity
    
    
    3,825,896
    
    
    
    2,612,724Total liabilities and stockholders equity
    
    $
    5,499,502
    
    
    $
    4,467,562
  2




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DAC TECHNOLOGIES GROUP INTERNATIONAL, INC.
 Consolidated Statements of Income
 For the Years Ended December 31, 2005 and 2004
 2005
    
    
    2004Sales, net of returns and allowances
    
    $
    13,351,115
    
    
    $
    9,352,353Cost of sales
    
    
    8,625,762
    
    
    
    5,867,984Gross profit
    
    
    4,725,353
    
    
    
    3,484,369Operating expensesSelling
    
    
    1,538,715
    
    
    
    1,043,537General and administrative
    
    
    991,555
    
    
    
    857,717Total operating expenses
    
    
    2,530,270
    
    
    
    1,901,254Income from operations
    
    
    2,195,083
    
    
    
    1,583,115Other income (expense)Interest expense
    
    
    (231,619
    )
    
    
    (181,138
    )Interest expense  stockholder notes
    
    
    
    
    
    
    (6,334
    )Interest income
    
    
    
    
    
    
    335Total other income (expense)
    
    
    (231,619
    )
    
    
    (187,137
    )Income before income tax provision
    
    
    1,963,464
    
    
    
    1,395,978Provision for income taxes
    
    
    782,917
    
    
    
    384,068Net income
    
    $
    1,180,547
    
    
    $
    1,011,910Basic and diluted earnings per share
    
    $
    0.19
    
    
    $
    0.17Weighted-average number of common sharesBasic
    
    
    6,189,905
    
    
    
    5,955,907Diluted
    
    
    6,209,784
    
    
    
    5,974,203
  3




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##### Table of Contents



DAC TECHNOLOGIES GROUP INTERNATIONAL, INC.
 Consolidated Statements of Stockholders Equity
 For the Years Ended December 31, 2005 and 2004
 RetainedCommon Stock
    
    
    Additional
    
    
    Treasury Stock
    
    
    EarningsPaid-in
    
    
    
    
    
    
    
    
    
    
    (AccumulatedShares
    
    
    Amount
    
    
    Capital
    
    
    Shares
    
    
    Cost
    
    
    Deficit)
    
    
    TotalBalance  January 1, 2004
    
    
    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
    
    
    
    1,011,910Balance  December 31, 2004
    
    
    6,310,864
    
    
    
    6,311
    
    
    
    1,930,489
    
    
    
    130,000
    
    
    
    (101,400
    )
    
    
    777,324
    
    
    
    2,612,724Issuance of stock for services
    
    
    12,500
    
    
    
    12
    
    
    
    32,613
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    32,625Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,180,547
    
    
    
    1,180,547Balance  December 31, 2005
    
    
    6,323,364
    
    
    $
    6,323
    
    
    $
    1,963,102
    
    
    
    130,000
    
    
    $
    (101,400
    )
    
    $
    1,957,871
    
    
    $
    3,825,896
  4




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##### Table of Contents



DAC TECHNOLOGIES GROUP INTERNATIONAL, INC.
 Consolidated Statements of Cash Flows
 For the Years Ended December 31, 2005 and 2004
 2005
    
    
    2004Cash flows from operating activitiesNet income
    
    $
    1,180,547
    
    
    $
    1,011,910Adjustments to reconcile net income to net cash
provided (used) by operating activitiesIssuance of common stock for services
    
    
    32,625
    
    
    
    Depreciation
    
    
    55,091
    
    
    
    61,986Amortization
    
    
    15,993
    
    
    
    15,478Deferred income tax provision
    
    
    
    
    
    
    42,367Changes in operating assets and liabilitiesAccounts receivable
    
    
    (215,540
    )
    
    
    (377,850
    )Due from factor
    
    
    (52,138
    )
    
    
    (1,038,451
    )Inventories
    
    
    (771,198
    )
    
    
    (1,023,760
    )Prepaid expenses and deferred charges
    
    
    (9,403
    )
    
    
    (19,066
    )Deposits
    
    
    
    
    
    
    (1,435
    )Advances to employees
    
    
    (9,958
    )
    
    
    (1,500
    )Accounts payable
    
    
    (177,520
    )
    
    
    640,982Accrued payroll tax withholdings
    
    
    7,336
    
    
    
    (56,744
    )Accrued expenses other
    
    
    6,996
    
    
    
    4,463Income taxes payable
    
    
    39,142
    
    
    
    341,701Net cash provided (used) by operating activities
    
    
    101,973
    
    
    
    (399,919
    )Cash flows from investing activitiesPayments received on note receivable
    
    
    
    
    
    
    44,665Purchases of property and equipment
    
    
    (72,754
    )
    
    
    (54,252
    )Payments for patents and trademarks
    
    
    (7,862
    )
    
    
    (9,860
    )Net advances on note receivable  stockholder
    
    
    (1,131
    )
    
    
    (7,162
    )Net cash used by investing activities
    
    
    (81,747
    )
    
    
    (26,609
    )Cash flows from financing activitiesPayments on notes payable
    
    
    (57,186
    )
    
    
    (49,175
    )Payments on notes payable  stockholders
    
    
    
    
    
    
    (142,719
    )Proceeds from issuance of common stock through private placement
    
    
    
    
    
    
    681,892Net cash provided (used) by financing activities
    
    
    (57,186
    )
    
    
    489,998Net increase (decrease) in cash
    
    
    (36,960
    )
    
    
    63,470Cash  beginning of year
    
    
    167,846
    
    
    
    104,376Cash  end of year
    
    $
    130,886
    
    
    $
    167,846Supplemental disclosures of cash flow informationCash paid during the year forInterest
    
    $
    230,204
    
    
    $
    199,723Taxes
    
    
    743,775
    
    
    
    
  5




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##### Table of Contents



DAC TECHNOLOGIES GROUP INTERNATIONAL, INC.
 Notes to Consolidated Financial Statements
 December 31, 2005 and 2004
 Organization and Nature of Business
   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.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, 2005 and 2004, the Company held no cash equivalents.d.
    
    Accounts and notes receivable The majority of the Companys receivables are factored
pursuant to a factoring agreement (Note 6). At December 31, 2005 and 2004, approximately 87%
of the Companys accounts receivable, gross of the balance due to factor, was covered by this
agreement. For receivables which are not covered under this agreement, the Company evaluates
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
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##### Table of Contents



DAC TECHNOLOGIES GROUP INTERNATIONAL, INC.
 Notes to Consolidated Financial Statements
 December 31, 2005 and 2004
 Summary of Significant Accounting Policies (cont.)
   e.
    
    Inventories Inventories are stated at the lower of weighted average cost or market.
Costs include freight and applicable customs fees. Market is determined based on net
realizable value. Appropriate consideration is given to obsolescence, excessive levels,
deterioration and other factors in evaluating net realizable value. Inventories are shown
net of a valuation reserve of $52,924 and $17,674 at December 31, 2005 and 2004,
respectively. The Company receives inventory from overseas at terms of F.O.B. shipping
point, bearing the risk of loss at that point in time. During the time period prior to
receipt in the warehouse, inventory is classified and recorded 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
  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.
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DAC TECHNOLOGIES GROUP INTERNATIONAL, INC.
 Notes to Consolidated Financial Statements
 December 31, 2005 and 2004
 Summary of Significant Accounting Policies (cont.)
 i.
    
    Shipping and handling All shipping and handling costs are included in selling
expense in the accompanying consolidated statements of income. These costs totaled
$389,511 and $260,221 for the years ended December 31, 2005 and 2004, 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 2005 and 2004
are as follows:
 2005
    
    
    2004Net earnings from continuing operations
    
    $
    1,180,547
    
    
    $
    1,011,910Basic weighted average shares
    
    $
    6,189,905
    
    
    $
    5,955,907Effect of dilutive securitiesCommon stock warrants
    
    
    19,879
    
    
    
    18,296Dilutive potential common shares
    
    $
    6,209,784
    
    
    $
    5,974,203Net earnings per share from continuing operationsBasic
    
    $
    0.19
    
    
    $
    0.17Diluted
    
    $
    0.19
    
    
    $
    0.17
 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. The fair value of notes receivable, which is based
on discounted cash flows using current interest rates, approximates the carrying value at
December 31, 2005 and 2004.
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DAC TECHNOLOGIES GROUP INTERNATIONAL, INC.
 Notes to Consolidated Financial Statements
 December 31, 2005 and 2004
 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 was necessary
during the years ended December 31, 2005 and 2004.n.
    
    Impairment of patents and trademarks SFAS No. 144 requires that separate intangible
assets that have finite lives 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 on
managements assessment of the impairment indicators, no impairment testing was necessary
during the years ended December 31, 2005 and 2004.o.
    
    New accounting pronouncements In December 2004, the Financial Accounting Standards
Board (FASB) issued SFAS No. 151, Inventory Costs. 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 is currently evaluating the effect of SFAS No.
151 on its consolidated financial statements.
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##### Table of Contents



DAC TECHNOLOGIES GROUP INTERNATIONAL, INC.
 Notes to Consolidated Financial Statements
 December 31, 2005 and 2004
 Variable Interest Entities
  Inventories
  2005
    
    
    2004Finished goods
    
    $
    2,282,743
    
    
    $
    1,055,407Inventory in transit
    
    
    398,600
    
    
    
    854,738Parts
    
    
    22,967
    
    
    
    22,967$
    2,704,310
    
    
    $
    1,933,112
 Intangible Assets
  2005
    
    
    2004Finite-livedPatents and trademarks, net of accumulated
amortization of $72,439 and $56,446 in 2005
and 2004, respectively
    
    $
    156,531
    
    
    $
    164,662
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DAC TECHNOLOGIES GROUP INTERNATIONAL, INC.
 Notes to Consolidated Financial Statements
 December 31, 2005 and 2004
 Intangible Assets (cont.)
  2006
    
    $
    15,1292007
    
    
    14,7462008
    
    
    14,4712009
    
    
    13,2102010
    
    
    12,224Thereafter
    
    
    86,751$
    156,531
  Due From Factor
  2005
    
    
    2004Accounts receivable factored
    
    $
    4,819,503
    
    
    $
    3,192,713Amounts advanced and outstanding
    
    
    3,505,885
    
    
    
    1,931,233Due from factor
    
    $
    1,313,618
    
    
    $
    1,261,480
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##### Table of Contents



DAC TECHNOLOGIES GROUP INTERNATIONAL, INC.
 Notes to Consolidated Financial Statements
 December 31, 2005 and 2004
 Notes Payable
  2005
    
    
    2004Note payable with a bank; interest at 7.70%; payable
on demand or if no demand, November 1, 2008;
collateralized by the Companys receivables and
personal guarantees of the Companys major
stockholders
    
    $
    125,580
    
    
    $
    148,113Note payable with a bank; interest at 7.70%; payable
on demand or if no demand, November 12, 2008;
collateralized by the Companys receivables and
personal guarantees of the Companys major
stockholders
    
    
    104,674
    
    
    
    121,785Note 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
    
    
    5,966
    
    
    
    23,508$
    236,220
    
    
    $
    293,406
  Notes Payable  Stockholders
  12




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##### Table of Contents



DAC TECHNOLOGIES GROUP INTERNATIONAL, INC.
 Notes to Consolidated Financial Statements
 December 31, 2005 and 2004
 Equity
   Treasury Stock
  Stock Option Plan
  13




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##### Table of Contents



DAC TECHNOLOGIES GROUP INTERNATIONAL, INC.
 Notes to Consolidated Financial Statements
 December 31, 2005 and 2004
 Warrants
  Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    AverageNumber of
    
    
    Exercise
    
    
    Warrants
    
    
    ExerciseWarrants
    
    
    Price
    
    
    Exercisable
    
    
    PriceOutstanding, December 31, 2004
    
    
    393,304
    
    
    $
    2.57
    
    
    
    
    
    
    $
    Granted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Outstanding, December 31, 2005
    
    
    393,304
    
    
    $
    2.57
    
    
    
    
    
    
    $
    
  Income Taxes
  2005
    
    
    2004Current provision
    
    $
    782,917
    
    
    $
    341,701Deferred provision
    
    
    
    
    
    
    42,367$
    782,917
    
    
    $
    384,068
  2005
    
    
    2004Income taxes computed at federal
statutory tax rate
    
    $
    667,578
    
    
    $
    474,633State tax provision, net of federal benefits
    
    
    84,233
    
    
    
    59,887Recognition of DAC Technologies of
America, Inc. net operating losses
    
    
    
    
    
    
    (161,061
    )Non-deductible expenses and other
    
    
    31,106
    
    
    
    10,609Provision for income taxes
    
    $
    782,917
    
    
    $
    384,068
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##### Table of Contents



DAC TECHNOLOGIES GROUP INTERNATIONAL, INC.
 Notes to Consolidated Financial Statements
 December 31, 2005 and 2004
 Income Taxes
  2005
    
    
    2004Allowance for doubtful accounts
    
    $
    1,915
    
    
    $
    2,872Allowance for excess inventory
    
    
    22,389
    
    
    
    6,767Accumulated tax depreciation in
excess of book depreciation
    
    
    (28,857
    )
    
    
    (14,618
    )Accumulated tax amortization in
excess of book amortization
    
    
    (1,347
    )
    
    
    (878
    )Other accrued liabilities
    
    
    
    
    
    
    (43
    )Net deferred tax asset (liability)
    
    $
    (5,900
    )
    
    $
    (5,900
    )
   Related Party Transactions
    15




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##### Table of Contents



DAC TECHNOLOGIES GROUP INTERNATIONAL, INC.
 Notes to Consolidated Financial Statements
 December 31, 2005 and 2004
 Related Party Transactions
   Commitments and Contingencies
    Major Customers and Suppliers
   16




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DAC TECHNOLOGIES GROUP INTERNATIONAL, INC.
 Notes to Consolidated Financial Statements
 December 31, 2005 and 2004
 Concentrations of Credit Risk
   Financial Information by Business Segment
   2005
    
    
    2004RevenuesSecurity products
    
    $
    66,388
    
    
    $
    159,104Gun-locks
    
    
    1,461,309
    
    
    
    1,571,453Safes
    
    
    355,406
    
    
    
    374,657Non-security products
    
    
    11,468,012
    
    
    
    7,247,139Total revenues
    
    $
    13,351,115
    
    
    $
    9,352,353Income (loss) before income tax expenseSecurity products
    
    $
    (3,492
    )
    
    $
    44,806Gun-locks
    
    
    (11,972
    )
    
    
    182,661Safes
    
    
    11,180
    
    
    
    62,454Non-security products
    
    
    1,967,748
    
    
    
    1,106,057Total income (loss) before income tax expense
    
    $
    1,963,464
    
    
    $
    1,395,978
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##### Table of Contents



DAC TECHNOLOGIES GROUP INTERNATIONAL, INC.
 Notes to Consolidated Financial Statements
 December 31, 2005 and 2004
 Financial Information by Business Segment (cont.)
 2005
    
    
    2004Identifiable assetsSecurity productsUnited States
    
    $
    130,770
    
    
    $
    172,563China
    
    
    41,587
    
    
    
    53,628Gun-locksUnited States
    
    
    347,045
    
    
    
    321,109China
    
    
    28,041
    
    
    
    36,413SafesUnited States
    
    
    148,721
    
    
    
    102,900China
    
    
    10,434
    
    
    
    12,398Non-security productsUnited States
    
    
    2,209,052
    
    
    
    1,474,835Corporate
    
    
    2,583,852
    
    
    
    2,293,716Total identifiable assets
    
    $
    5,499,502
    
    
    $
    4,467,562
  18