SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------------
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JANUARY 31, 2005
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE EXCHANGE ACT
Commission file number 0-33285
DYNAMIC INTERNATIONAL, INC.
(exact name of small business issuer as specified in its charter)
NEVADA
(State or other jurisdiction of
incorporation or organization)
11-3563216
(IRS Employer Identification No.)
58 SECOND AVENUE, BROOKLYN, NY 11215
(Address of principal executive offices)
(718) 369-4160
(Registrant's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 of 15(d) of the Exchange Act during the past 12 months, and (2) has been
subject to such filing requirements for the past 90 days.
YES [X] NO [ ]
As of March 15, 2005 the Registrant had 4,418,258 shares of its Common Stock
outstanding
Transitional Small Business Disclosure Format: YES [ ] NO [X]
Index to Form 10-QSB
For the Quarter ended January 31, 2005
Page
-----
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets as of January 31, 2005 (unaudited) and 1
April 30,2004
Condensed Statements of Operations for the nine months and
three months ended January 31, 2005 (unaudited)
and January 31, 2004 (unaudited) 2
Condensed Statements of Cash Flows for the nine months ended
January 31, 2005 (unaudited) and January 31, 2004 (unaudited) 3
Notes to the Financial Statements for the nine months ended
January 31, 2005 and January 31, 2004 (unaudited) 4 -9
Item 2. Management's Discussion and Analysis 10-14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DYNAMIC INTERNATIONAL, INC.
CONDENSED BALANCE SHEETS
JANUARY 31, 2005 APRIL 30, 2004
(UNAUDITED)
CURRENT ASSETS
Cash $ 0 $ 6,783
Accounts receivable, less
allowance of $185,000 at January 31 and $137,000
at April 30, 2004 579,996 835,889
Due from affiliated Company 88,706 72,767
Inventories 1,416,071 750,872
Deferred income taxes-current - 270,000
Prepaid taxes 30,379 -
Other current assets 125,031 120,707
---------- ----------
Total Current Assets 2,240,183 2,057,018
---------- ----------
Fixed Assets- Net of accumulated
depreciation 7,144 40,912
---------- ----------
OTHER ASSETS
Deferred income taxes - 270,000
Other 1,000 1,000
---------- ----------
Total Other Assets 1,000 271,000
---------- ----------
TOTAL ASSETS $2,248,327 $2,368,930
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued expenses $ 714,311 $ 822,337
Amounts due affiliated company 1,713,803 1,128,803
Income taxes payable - 32,619
---------- ----------
Total Current Liabilities 2,428,114 1,983,759
---------- ----------
COMMITMENTS and CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock 4,419 4,419
Additional paid in capital 5,119,796 5,119,796
Accumulated deficit (5,303,999) (4,739,041)
---------- ----------
(179,784) 385,174
Less: Treasury stock (3) (3)
---------- ----------
Total Stockholders' Equity (179,787) 385,171
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $2,248,327 $2,368,930
========== ==========
SEE ACCOMPANYING NOTES TO CONDENSED FINANCIAL STATEMENTS
1
DYNAMIC INTERNATIONAL, INC.
CONDENSED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED THREE MONTHS ENDED
JANUARY 31,2005 JANUARY 31,2004 JANUARY 31,2005 JANUARY 31,2004
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
Net sales $4,777,481 $5,586,142 $1,620,410 $1,566,132
Cost of sales 2,915,990 3,470,046 996,621 972,236
---------- ---------- ---------- ----------
Gross profit 1,861,491 2,116,096 623,789 593,896
---------- ---------- ---------- ----------
Operating expenses 1,851,847 1,279,246 698,746 371,692
Interest 9,471 8,880 1,925 2,247
Interest - related party 23,657 57,685 14,772 12,495
---------- ---------- ---------- ----------
1,884,975 1,345,811 715,443 386,434
---------- ---------- ---------- ----------
Income (loss) before taxes (23,484) 770,285 (91,654) 207,462
Provision for taxes 541,474 18,801 540,374 18,801
---------- ---------- ---------- ----------
Net income (loss) $ (564,958) $ 751,484 $(632,028) $188,661
========== ========== ========== ==========
Basic and diluted
income (loss) per
common share $ (.13) $ .17 $ ( .15) $ .04
========== ========== ========== ==========
Basic and diluted weighted average
number of Common shares
outstanding 4,417,718 4,417,718 4,417,718 4,417,718
========== ========== ========== ==========
Cash dividends per
Common share None None None None
SEE ACCOMPANYING NOTES TO CONDENSED FINANCIAL STATEMENTS
2
DYNAMIC INTERNATIONAL, INC.
CONDENSED STATEMENTS OF CASH FLOWS
For the Nine
Months ended January 31,
2005 2004
(Unaudited) (Unaudited)
Operating activities:
Net income $(564,958) $751,484
--------- --------
Adjustments to reconcile net income
to net cash provided by/ (used for) operating
activities
Depreciation 3,069 7,866
Impairment loss 30,700 -
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable 239,954 119,304
Inventory (665,199) 333,138
Deferred income taxes 540,000 -
Prepaid Taxes (30,379) -
Prepaid expense and other ( 4,324) ( 83,227)
Increase (decrease) in:
Accounts payable and accrued expenses-
non-related (108,027) 30,383
Income taxes payable (32,619) -
--------- --------
Total adjustments (26,825) 407,464
Net cash (used)/ provided by operating activities (591,783) 1,158,948
--------- ---------
Financing activities:
Accounts payable and accrued expenses-
related party 585,000 (1,150,072)
--------- ---------
Net cash - (used)/ provided by financing activities 585,000 (1,150,072)
--------- ---------
Increase (Decrease) in cash and equivalents (6,783) 8,876
Cash and equivalents- beginning of period 6,783 36,648
--------- --------
Cash and equivalents - end of period $0 $45,524
====== ======
SEE ACCOMPANYING NOTES TO CONDENSED FINANCIAL STATEMENTS
3
DYNAMIC INTERNATIONAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JANUARY 31, 2005 AND 2004
(UNAUDITED)
1. BASIS OF PRESENTATION
The Condensed Balance Sheet as of January 31, 2005 and the related
Condensed Statements of Operations and Cash Flows for the nine
months and three months ended January 31, 2005 and 2004 are
unaudited. In the opinion of management, the unaudited condensed
financial statements include all adjustments (which include only
normal recurring adjustments) necessary to present fairly the
financial position of the Company as of January 31, 2005 and April
30, 2004 and the results of their operations for the nine months and
three months ended January 31, 2005 and 2004.
The April 30, 2004 Balance Sheet data was derived from audited
financial statements but does not include all disclosures required
by generally accepted accounting principles. The interim condensed
financial statements and notes thereto should be read in conjunction
with the financial statements and the notes included in the
Company's filing on Form 10K-SB. The results of operations for the
nine months ended January 31, 2005 and 2004 are not necessarily
indicative of the operating results for the entire year or any
future interim periods.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting policies followed by the Company are set forth in the
notes to the Company's financial statements included in the
Company's Form 10K-SB for the year ended April 30, 2004
4
DYNAMIC INTERNATIONAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR NINE MONTHS ENDED JANUARY 31, 2005 AND 2004
(UNAUDITED)
3. RELATED PARTY TRANSACTIONS
Pursuant to a Warehouse and Service Agreement dated as of September 21,
2000 (the "Warehousing Agreement") between the Company and a related
party (the "Related Entity") wholly owned by a major stockholder, the
Related Entity provided occupancy space and performed certain
administrative services on behalf of the Company. Under the Warehousing
Agreement, the Related Entity, among other things, assisted in the
maintenance of financial and accounting books and records, in the
preparation of monthly financial accounts receivable aging schedules
and other reports and in the performance of credit checks on the
Company's customers. In consideration for these services, the Related
Entity received an annual fee, payable monthly, calculated at a
percentage of the Company's invoiced sales originating at the warehouse
ranging from 4% of the invoiced sales under $30 million annually to 3%
of sales of $60 million or more. For sales which do not originate at
the warehouse, the Related Entity received a service fee in the amount
of 1.5% of the Company's invoiced sales to customers and accounts
located in the United States if payment is made by letter of credit and
1% if such customers and accounts are located outside the United
States, irrespective of manner of payment. In addition, under the
Warehousing Agreement, the Related Entity provided warehousing services
consisting of receiving, shipping, and storing the Company's
merchandise. The Company paid the Related Entity a monthly fee of 3% of
its invoiced sales originating at the warehouse in connection with
these warehousing services performed by the Related Entity under the
Warehousing Agreement. As part of the Warehousing Agreement, the
Company applied an offset for certain shared expenses.
The Warehousing Agreement, which was renewed on September 21, 2000, had
a term of two years and then automatically renewed from year to year
unless written notice of termination was given at least six months
prior to the commencement of a renewal period.
On August 1, 2004, the Company entered into a new Warehouse and Service
Agreement (the" Agreement") with the Related Entity. Under the
Agreement, the Related Entity provides occupancy space and performs
certain administrative services on behalf of the Company. Under the
Agreement, the Related Entity, among other things, assists in the
maintenance of financial and accounting books and records, in the
preparation of monthly financial accounts receivable aging schedules
and other reports and in the performance of credit checks on the
Company's customers. In addition, under the Agreement, the Related
Entity provides warehousing services consisting of receiving, shipping,
and storing the Company's merchandise. In consideration for these
services, the Related Entity receives an annual fee, payable monthly,
calculated at 15% of the Company's invoiced sales.
The Agreement has a term of two years and then automatically renews
from year to year unless written notice of termination is given at
least six months prior to the commencement of a renewal period.
Total warehousing and administrative expenses charged to operations
were $567,005 and $270,499 for the nine months ended January 31, 2005
and 2004, respectively.
5
DYNAMIC INTERNATIONAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR NINE MONTHS ENDED JANUARY 31, 2005 AND 2004
(UNAUDITED)
In addition, the Related Entity has purchased inventory for the Company
and has charged the Company for the invoiced amount of the inventory.
Pursuant to an unwritten understanding, the Related Entity arranges for
the issuance, by its financial lender, of letters of credit in favor of
the Company's overseas suppliers, thereby enabling the Company to
finance the purchases of its inventory.
Pursuant to a Security Agreement dated as of January 2, 2001, between
the Company and the Related Entity, the Related Entity has perfected
its security interest in all of the Company's assets.
Amounts due to the Related Entity totaled $1,128,803 and $1,713,803 at
April 30, 2004 and January 31, 2005, respectively. The Company records
simple interest on the unpaid balance due to the Related Entity at the
JPMorganChase prime rate plus 1%. Total interest expense charged to
operations was $23,657 and $57,685 for the nine months ended January
31, 2005 and 2004, respectively.
5. SIGNIFICANT RISKS AND UNCERTAINTIES
The Company's luggage products compete with products designed by a
number of the largest companies in the industry. Accordingly, there can
be no assurance that the Company will be able to effectively compete
with these companies as well as with other smaller entities.
Most of the Company's products are purchased from China. The Company
believes that, if necessary, it will be able to obtain its products
from firms located in other countries at little, if any, additional
expense. The Company believes that an interruption in deliveries by a
manufacturer located in a particular country will not have a material
adverse impact on the business of the Company. Nevertheless, because of
political instability in a number of the supply countries, occasional
import quotas and other restrictions on trade or otherwise, there can
be no assurance that the Company will at all times have access to a
sufficient supply of merchandise.
6
DYNAMIC INTERNATIONAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR NINE MONTHS ENDED JANUARY 31, 2005 AND 2004
(UNAUDITED)
7. LEGAL PROCEEDINGS
The Company settled a lawsuit filed by 3L Associates. The Company
entered into a license agreement with 3L Associates in September of
2000, under which agreement the Company was given the license to use
the trademark Adolfo in connection with luggage and accessories. The
complaint alleged that the Company did not pay minimum royalties of
$25,000 for the period April 1, 2002 to March 31, 2003. The complaint
also alleged that the Company did not give the required notice to 3L
Associates that the Company did not wish to extend the term of the
license agreement. In the complaint, 3L Associates demanded judgment
against the Company in the amount of $300,000, together with its
expenses and reasonable attorney's fees, legal interest and costs, and
such other and further relief as shall seem just and proper to the
court. On October 27, 2004, the Company entered into a settlement
agreement with 3L Associates whereby the Company agreed to pay 3L
Associates $175,000. The payment was made on November 5,2004
8. REVERSE SPLIT
The Board of Directors of the Company and the holders of a majority of
the shares entitled to vote thereon have adopted by written consent in
lieu of a meeting resolutions to reverse split the Common Stock on a
one (1) for five hundred ten (510) basis (the "Reverse Split"). As a
result of the Reverse Split, the effective date of which is March 18,
2005 (the "Record Date"), (A) each five hundred ten (510) shares of
Common Stock owned by any shareholder on the Record Date will be one
share of Common Stock, and (B) any number of shares less than five
hundred ten (510) owned by a shareholder on the Record Date, will be
deemed to be a fractional share interest (a "Fractional Share
Interest"). A Fractional Share Interest shall constitute the right to
receive payment in cash from the Company in an amount calculated in the
manner described below.
All Fractional Share Interests that result from the Reverse Split will
be purchased by the Company for cash. The Board has set the total value
of the Company ("Dynamic's Value") at $423,158.00 representing its book
value as of December 31, 2004. The Board did not obtain a fairness
report, opinion, appraisal or other independent assessment of the value
of the Company. Each shareholder who owns a Fractional Share Interest
as a result of the Reverse Split will be paid an amount equal to the
product of that Fractional Share Interest multiplied by a value (the
"Per Share Value") obtained by dividing Dynamic's Value by a fraction,
the numerator of which is the total number of shares of Common Stock
outstanding on the Record Date and the denominator of which is 510.
Based upon the number of shares outstanding as of February 14, 2005,
the Per Share Value is $47.57. Management does not anticipate the
occurrence of any transactions which would result in any change,
between February 14, 2005 and the Record Date, of the number of
outstanding shares of Common Stock. Accordingly, management projects
that the Per
7
DYNAMIC INTERNATIONAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR NINE MONTHS ENDED JANUARY 31, 2005 AND 2004
(UNAUDITED)
Share Value as of the Record Date will be $47.57. Based upon this
projection, a total of $26,428.32 is anticipated to be paid by the
Company to holders of Fractional Share Interests.
The purpose of this action is to enable the Company to discontinue the
filing of periodic and other reports with the Securities and Exchange
Commission ("SEC") and to relieve it of the costs and other burdens of
being a reporting company. The professional and other fees associated
with complying with the reporting requirements are, in the judgment of
the Board, not warranted at the present time in light of the fact that
the Company receives no significant benefit from being a reporting
company under the Securities Exchange Act of 1934 ("1934 Act") and is
not listed on any national securities exchange nor authorized to be
quoted on any inter-dealer quotation system. The Rules of the SEC under
the 1934 Act permit a reporting company that has fewer that five
hundred (500) shareholders of record to file a form with the SEC
eliminating its reporting requirements. The Board has projected that
the Reverse Split and the purchase of the Fractional Share Interests
will cause the Company to have approximately three hundred fifty (350)
shareholders of record. Currently, the Company has no plans to enter
into additional transactions which would have the effect of further
reducing the number of shareholders. The Board has authorized its
officers to take the necessary additional steps to terminate the
Company's filing and reporting requirements under the 1934 Act as soon
as practicable following the Reverse Split. Following the Reverse Split
and termination of our public reporting, the Company will operate as a
private company.
After the Reverse Split, shareholders will have no rights as
shareholders with respect to the pre-Split shares of Common Stock or
the fractional shares that would have resulted from a reverse stock
split if the Board had not authorized the issuance of Fractional Share
Interests representing the right to receive a cash payment.
As stated above, the Board has set the price at which Fractional Share
Interests will be purchased for cash based on the Company's book value
of $423,158. A shareholder who feels aggrieved by that determination
can exercise dissenter's appraisal rights under Nevada law. A notice
regarding the rights of dissenting shareholders is set forth below.
The Board of Directors of the Company has unanimously approved the
Reverse Split. Holders of record of 2,842,977 shares of the Common
Stock, representing 64.4% of all shares of Common Stock outstanding
have consented to the Reverse Split. No further corporate action is
required under Nevada law for the implementation of the Reverse Split.
After the Record Date, American Stock Transfer and Trust Company ,
acting as exchange agent for the Company, will send each shareholder of
record a Letter of Transmittal. The Letter of Transmittal will contain
instructions for the surrender of stock certificates in exchange for
new certificates and the payment of the cash consideration
8
DYNAMIC INTERNATIONAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR NINE MONTHS ENDED JANUARY 31, 2005 AND 2004
(UNAUDITED)
for any Fractional Share Interest. No payment will be made in respect
of any Fractional Share Interest until the shareholder has surrendered
his or her outstanding certificates, together with a completed Letter
of Transmittal in accordance with the instructions provided
9. IMPAIRMENT LOSS
The Company recorded an impairment loss of $30,700 for all costs
incurred in prior years for the design of a website. The Company has
never made use of the site and management believes that no future
benefits will be received from it.
10. INCOME TAXES
The Company recorded an income tax provision of $ 541,474 for the nine
months ended January 31,2005. This consisted of taxes currently payable
of $1,474 and deferred tax expense of $540,000. The deferred tax
expense resulted from the Company's reassessment, in the latest
quarter, of it's expectation of future income based upon increased
costs.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion should be read in conjunction with the financial
statements and related notes that are included under Item 1. Statements made
below which are not historical facts are forward-looking statements.
Forward-looking statements involve a number of risks and uncertainties
including, but not limited to, general economic conditions, our ability to
complete development and then market our services, competitive factors and other
risk factors as stated in other of our public filings with the Securities and
Exchange Commission.
Dynamic International, Inc. ("the Company") was formed on August 31, 2000 as a
wholly owned company of Dynamic International Ltd. ("Ltd."). Pursuant to an
Equity Transfer and Reorganization Agreement dated August 10, 2000, (the
Agreement) by and among Ltd., certain of its shareholders, Emergent Management
Company, LLC ("Emergent"), and several holders of membership interests in
Emergent Ventures, LLC (an affiliate of Emergent), Ltd. transferred all of its
assets to the Company. In addition the Company assumed all of the liabilities of
Ltd. (other than outstanding bank debt in the amount of $250,000).
GENERAL
The following discussion should be read in conjunction with the Financial
Statements and related notes thereto of the Company included elsewhere herein.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED JANUARY 31, 2005 COMPARED TO THE
NINE MONTHS ENDED JANUARY 31, 2004.
The following table sets forth the results of operations for the periods
discussed below:
Nine Months % of Nine Months % of
Ended Net Ended Net
January 31, 2005 Sales January 31, 2004 Sales
Gross Sales $5,320,000 $6,049,000
Allowances (543,000) (463,000)
-------------- --------------
Net Sales 4,777,000 100.00 5,586,000 100.00
Cost of Goods
Sold 2,916,000 61.04 3,470,000 62.12
-------------- --------------
Gross Margin 1,861,000 38.96 2,116,000 37.88
-------------- --------------
Operating Expenses 1,852,000 38.77 1,279,000 22.90
Interest 9,000 .19 9,000 .16
Interest - related 24,000 .50 58,000 1.03
party -------------- --------------
1,885,000 39.46 1,346,000 24.09
-------------- --------------
Income before provision
for Income Taxes $(24,000) (.50) $ 770,000 13.79
============== ==============
10
Sales for the nine months ended January 31,2005, decreased by $809,000 or 14.5%
to $4,777,000 from $5,586,000 for the nine months ended January 31, 2004. During
the nine months ended January 31,2005, Sales to JC Penney decreased by
approximately $390,000 due to a transition period for the introduction of a new
luggage collection. In addition, sales to Sears Roebuck and BJ'S Wholesale Club
decreased by $517,000 and $96,000, respectively. These decreases were offset by
an increase in sales to TJMaxx of approximately $232,000. Allowances granted to
customers were 11.4% of net sales for the nine months ended January 31,2005 as
compared to 8.3% of net sales for the nine months ended January 31,2004.
The Company's gross profit decreased by approximately $255,000 and the Company's
gross margin, as a percentage of sales, increased by 1.08% to 38.96% from 37.88%
for the nine months ended January 31, 2004. The gross margin decreased due
primarily to the decrease in sales. A major factor contributing to the increase
in the gross margin percentage is competitive prices the Company has received
from the Peoples Republic of China.
Operating expenses, exclusive of interest expense, for the nine months ended
January 31, 2005 were $573,000 higher than the nine months ended January
31,2004. This increase is represented approximately by changes in the following
expenses:
Increase
(Decrease)
Royalty Expense $210,000
Shipping Fees $297,000
Salesman Salaries $22,000
Advertising and Promotion ($5,000)
Legal Fees $29,000
Impairment loss $31,000
Royalty expense increased by $210,000 due to the settlement of a lawsuit between
the Company and 3L Associates that was related to an agreement under which the
Company was given the license to use the trademark Adolfo in connection with
luggage and accessories. This settlement added $150,000 in royalty expense to
the nine months ended January31, 2005. (see Note. 7 Legal Proceedings) In
addition, Minimum royalty payments for the Company's Jeep Royalty agreement
increased. Shipping Fees increased by $297,000 due primarily to the Company
entering into a new Warehouse and Service agreement with a related party. Under
the new agreement, dated August 1,2004, the Company will pay 15% of sales for
services as opposed to the previous agreement under which the Company paid a
maximum of 7% for services. (see Note. 3 Related Party Transactions) Salesman
salaries increased by $22,000 due to an increase in compensation. Legal Fees
increased by 29,000 due to the lawsuit between the Company and 3L Associates.
Impairment loss increased by $31,000 due to the write off the costs of web site
design.
11
Interest expense for the nine months ended January 31, 2005 remained constant.
Interest expense related party for the nine months ended January 31,2005
decreased by $34,000 from the nine months ended January 31,2004. This decrease
was due to the decrease in the amounts due to Achim Importing Co. Inc.
("Achim").
The Company recorded an income tax provision of $ 541,474 for the nine months
ended January 31,2005. This consisted of taxes currently payable of $1,474 and
deferred tax expense of $540,000. The deferred tax expense resulted from the
Company's reassessment, in the latest quarter, of it's expectation of future
income based upon increased costs.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JANUARY 31, 2005 COMPARED TO
THE THREE MONTHS ENDED JANUARY 31, 2004.
The following table sets forth the results of operations for the periods
discussed below:
Three Months % of Three Months % of
Ended Net Ended Net
January 31, 2005 Sales January 31, 2004 Sales
Net Sales $1,871,000 $1,756,000
Allowances (251,000) (190,000)
-------------- --------------
Net Sales 1,620,000 100.00 1,566,000 100.00
Cost of Goods
Sold 997,000 61.54 972,000 62.07
-------------- --------------
Gross Margin 623,000 38.46 594,000 37.93
-------------- --------------
Operating Expenses 697,000 43.02 372,000 23.75
Interest 2,000 .12 2,000 .12
Interest - related 16,000 1.00 13,000 .84
party -------------- --------------
715,000 44.14 387,000 24.71
-------------- --------------
Income/(Loss) before provision
for Income Taxes $ (92,000) (5.68) $ 207,000 13.22
============== ==============
Sales for the three months ended January 31, 2005, increased by $54,000 or 3.4%
to $1,620,000 from $1,566,000 for the three months ended January 31, 2004.
During the three months ended January 31,2005, Sales to JC Penney increased by
approximately $279,000 due to the introduction of a new luggage collection in
November 2004. This increase was offset by a decrease in sales to Sears Roebuck
of $ $203,000 for the three months ended January 31,2005.Allowances granted to
customers were 15.49% of net sales for the three months ended January 31,2005 as
compared to 12.13% of net sales for the three months ended January 31,2004.
12
The Company's gross profit increased by approximately $29,000 due to the
increase in sales. The Company's gross margin, as a percentage of sales,
increased by .53% to 38.46% from 37.93% for the three months ended January 31,
2004. A major factor contributing to the increase in the gross margin percentage
is competitive prices the Company has received from the Peoples Republic of
China.
Operating expenses, exclusive of interest expense, for the three months ended
January 31, 2005 were $325,000 higher than the three months ended January
31,2004. This increase is represented approximately by changes in the following
expenses:
Increase
Royalty Expense $68,000
Shipping Fees $205,000
Legal Fees $18,000
Impairment Loss $31,000
Royalty expense increased by $68,000 due to an increase in the minimum royalty
payments for the Company's Jeep Royalty agreement. Shipping Fees increased by
$205,000 due primarily to the Company entering into a new Warehouse and Service
agreement with a related party. Under the new agreement, dated August 1,2004,
the Company will pay 15% of sales for services as opposed to the previous
agreement under which the Company paid a maximum of 7% for services. (see Note.
3 Related Party Transactions) Legal fees increased by $18,000 due to the lawsuit
between the Company and 3L Associates. (see Note. 7 Legal Proceedings)
Impairment loss increased by $31,000 due to the write off the costs of web site
design.
Interest expense for the three months ended January 31, 2005 remained constant
Interest expense related party for the three months ended January 31,2005
increased by $3,000 from the three months ended January 31, 2004. This increase
was due the increase in the amounts due to Achim Importing Co. Inc. ("Achim").
The Company recorded an income tax provision of $ 540,374 for the three months
ended January 31,2005. This consisted of taxes currently payable of $374 and
deferred tax expense of $540,000. The deferred tax expense resulted from the
Company's reassessment, in the latest quarter, of it's expectation of future
income based upon increased costs 13
RELATED PARTY TRANSACTIONS
Pursuant to a Warehouse and Service Agreement dated as of September 21, 2000(the
"Warehousing Agreement") and a new Warehousing and Service Agreement( the "
Agreement") dated as of August 1, 2004 between the Company and a related party
("Achim") wholly owned by a major stockholder, Achim provides occupancy space
and performs certain administrative and shipping services to the Company.
Achim has purchased inventory for the Company and has charged the Company for
the invoiced amount of the inventory. In addition, pursuant to an unwritten
understanding, the related party arranged for the issuance by its financial
lender of letters of credit in favor of the Company's overseas suppliers thereby
enabling the Company to finance the purchases of its inventory.
SEASONALITY AND INFLATION
The Company's business is seasonal with higher sales typically in the second and
third quarters of the fiscal year.
Management does not believe that the effects of inflation will have a material
impact on the Company.
LIQUIDITY AND CAPITAL RESOURCES
Operating activities for the nine months ended January 31,2005 used cash of
$592,000 compared to operating activities during the nine months ended January
31,2004 which provided cash of $1,158,000.
Cash of $585,000 was provided by an increase in the amount due to Achim.
The Company has received substantial financial support from Achim. Achim is
wholly owned by Marton B. Grossman, the Chairman and President of the Company.
Advances from Achim are due upon demand. The Company records simple interest on
the unpaid balance due to Achim at the JPMorganChase prime rate plus 1%. The
amount of interest recorded for the nine months ended January 31, 2005 and 2004
was $23,657 and $57,685, respectively.
The Company will continue to utilize the financial support of Achim for
inventory purchases. Achim is not obligated to continue providing any support.
In the event Achim chooses not to support the Company, we would have to reduce
operations or seek to find financial support from other third parties.
14
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company settled a lawsuit filed by 3L Associates. The Company
entered into a license agreement with 3L Associates in September of
2000, under which agreement the Company was given the license to use
the trademark Adolfo in connection with luggage and accessories. The
complaint alleged that the Company did not pay minimum royalties of
$25,000 for the period April 1,2002 to March 31,2003. The complaint
also alleged that the Company did not give the required notice to 3L
Associates that the Company did not wish to extend the term of the
license agreement. In the complaint, 3L Associates demanded judgment
against the Company in the amount of $300,000, together with its
expenses and reasonable attorney's fees, legal interest and costs,
and such other and further relief as shall seem just and proper to
the court. On October 27, 2004, the Company entered into a
settlement agreement with 3L Associates whereby the Company agreed
to pay 3L Associates $175,000. The payment was made on November
5,2004
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
Exhibit 31.1 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-
OXLEY ACT OF 2002
Exhibit 31.2 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-
OXLEY ACT OF 2002
Exhibit 32.1 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-
OXLEY ACT OF 2002
Exhibit 32.2 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-
OXLEY ACT OF 2002
15
SIGNATURES
In accordance with Section 13 or 15(d) of the 1934 Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereto duly
authorized.
DYNAMIC INTERNATIONAL, INC.
By /s/ William P. Dolan
- -----------------------
William P. Dolan
VP Finance
March 17, 2005