FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
QUARTERLY REPORT UNDER SECTION 13 or 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter ended January 31, 1999 Commission File Number 0-21475
DYNAMIC INTERNATIONAL, LTD.
(Exact Name of Registrant As Specified In Its Charter
Nevada 93-1215401
(State or other jurisdiction of I.R.S. employer
incorporation or organization) identification no.)
58 Second Ave., Brooklyn, New York 11215
(Address of principal executive office) (Zip Code)
718-369-4160
(Registrant's telephone no.)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding twelve 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 ninety days.
Yes X No
As of February 28, 1999, 4,418,798 shares of the Registrant's common stock par
value $.001 were issued and outstanding.
Consolidated Condensed Balance Sheets
(Unaudited)
January 31,1999 April 30, 1998
Current Assets
Cash $ 29,045 $1,575,248
Accounts Receivable - (Net of allowance for
doubtful accounts of $122,000) 1,283,292 810,447
Due from Suppliers 36,142 36,142
Inventory 3,544,022 2,359,022
Prepaid Expenses 1,595,455 669,133
Prepaid and Refundable Income Taxes 29,206 26,201
---------- ----------
Total Current Assets 6,517,162 5,476,193
Fixed Assets, at Cost, Less Accumulated
Depreciation 113,210 124,846
Security Deposits 6,800 2,050
Reorganization value in excess of amounts
allocable to identifiable assets, net 103,221 112,328
---------- ----------
Total Assets $6,740,393 $5,715,417
========== ==========
Liabilities and Shareholders' Equity
Current Liabilities
Notes Payable-Bank $ 650,000 0
Accounts Payable & Accrued Expenses, Non-related 757,678 $ 458,359
Accounts Payable & Accrued Expenses, Related 483,579 19,186
Income Taxes Payable 0 79,422
---------- ----------
1,891,257 556,967
Shareholders' Equity
Common Stock 4,419 4,419
Additional Paid-In Capital 4,869,796 4,869,796
Retained Earnings (Accumulated Deficit) (25,076) 284,238
----------- ----------
Totals 4,849,139 5,158,453
Less Treasury Stock (3) (3)
----------- -----------
Total Shareholders' Equity 4,849,136 5,158,450
---------- ----------
Total Liabilities & Shareholders' Equity $6,740,393 $5,715,417
========== ==========
See Accompanying Notes to Consolidated Condensed Financial Statements.
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Consolidated Condensed Statements of Operations
(Unaudited)
For the Nine For the Three For the Nine For the Three
Months Ended Months Ended Months Ended Months Ended
January 31, 1999 January 31, 1999 January 31, 1998 January 31, 1998
Net Sales $4,783,849 $1,500,067 $6,148,447 $2,454,022
Other Income 35,123 3,372 24,286 13,428
-------------- ------------- -------------- ----------------
4,818,972 1,503,439 6,172,733 2,467,450
Cost of Goods Sold 3,631,167 1,224,640 4,253,902 1,829,948
-------------- -------------- -------------- -----------------
Gross Profit 1,187,805 278,799 1,918,831 637,502
Selling, General
and Administrative 1,436,750 491,984 1,469,933 541,751
Expenses
Interest 60,369 24,379 145,164 26,237
-------------- --------------- --------------- ------------------
1,497,119 516,363 1,615,097 567,988
Net Income (Loss)
Before Taxes (309,314) (237,564) 303,734 69,514
Provision for Taxes 0 0 124,421 27,163
-------------- --------------- --------------- ------------------
Net Income (Loss) ($309,314) ($237,564) $179,313 $42,351
=============== =============== =============== ===================
Income (Loss) Per
Common Share (0.07) (0.05) 0.05 0.01
Weighted Average Number of
Common Shares Outstanding 4,418,798 4,418,798 3,369,687 3,706,954
Cash Dividends Per
Common Share NONE NONE NONE NONE
See Accompanying Notes to Consolidated Condensed Financial Statements.
-3-
Consolidated Condensed Statements of Cash Flows
(Unaudited)
For the Nine For the Nine
Months Ended Months Ended
January 31,1999 January 31,1998
Operating Activities
Net income (loss) $ (309,314) $ 179,313
Adjustments to Reconcile Net Income
to Net Cash Provided (Used for)
Depreciation and Amortization 39,728 60,367
Changes in Assets and Liabilities:
(Increase) decrease in:
Accounts Receivable and Due From Suppliers (472,845) (354,439)
Inventory (1,185,000) 818,665
Prepaid Expenses (926,322) (361,503)
Prepaid Taxes (3,005) 39,914
Security Deposits (4,750) 1,600
Increase (decrease) in:
Accounts Payable and Accrued Expenses 763,712 (2,271,148)
Income Taxes Payable (79,422) (57,015)
----------- -----------
Net Cash - Operating Activities (2,177,218) (1,944,246)
-------------------------------
Investing Activities:
Purchase of Property and Equipment (18,985) 0
Financing Activities:
Proceeds from Banker's Acceptances 650,000
Proceeds from Stock Acceptances 4,882,922
Repayment of Capital Lease Obligations (23,020)
Payment of Deferred Offering Costs 116,023
Payment of Note Payable to Related Party (1,059,785)
-----------
Net Cash - Financing Activities 650,000 3,916,140
------------------------------- ----------- ----------
Increase (decrease) in Cash and Equivalents (1,546,203) 1,971,894
Cash and Cash Equivalents, Beginning of Period 1,575,248 43,543
----------- ----------
Cash and Cash Equivalents, End of Period $ 29,045 $2,015,437
=========== ==========
See Accompanying Notes to Consolidated Condensed Financial Statements.
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Notes to Consolidated Condensed Financial Statements
for the Nine-Month Periods Ended January 31, 1999 and 1998
(Unaudited)
1. BASIS OF PRESENTATION
The Consolidated Condensed Balance Sheet as of January 31, 1999 and the related
Consolidated Condensed Statements of Operations and Consolidated Condensed
Statements of Cash Flows for the nine-month periods ended January 31, 1999 and
1998 are unaudited. In the opinion of management, all adjustments (which include
only normally recurring adjustments) necessary for a fair presentation of such
financial statements have been made.
The April 30, 1998 Balance Sheet data was derived from audited financial
statements but does not include all disclosures required by generally accepted
accounting principles. The interim financial statements and notes thereto should
be read in conjunction with the financial statements and notes included in the
Company's latest annual report on Form 10-K. The results of operations for the
nine-month period ended January 31, 1999 are not necessarily indicative of the
operating results for the entire year.
2. REORGANIZATION AND MANAGEMENT PLAN
On August 23, 1995, the Company filed a voluntary petition for relief under
Chapter 11 of the United States Bankruptcy Code. A Plan or Reorganization was
filed by the Company on October 30, 1995 and subsequently amended and modified
on February 22, 1996. On April 5, 1996, the creditors voted to accept the
amended and modified Plan (the "Plan"), and on May 23, 1996, the court confirmed
the Plan. The Plan was substantially consummated in August 1996. For accounting
purposes, the Company assumed the Plan was consummated on July 31, 1996.
As contemplated by the Plan, a new company, Dynamic International, Ltd. was
formed on July 29, 1996. On August 8, 1996, the Company merged into Dynamic
International, Ltd. The capital structure and the balance sheet of the combined
entity, immediately after the merger, were substantially the same as those of
the Company prior to the merger. The "new common stock" is referred to below as
the common stock of Dynamic International, Ltd.
Chapter 11 claims filed against the Company and subsequently allowed in the
bankruptcy proceeding totaled approximately $17,200,000. The Plan discharged
such claims through distributions of cash of approximately $515,000 and issuance
of shares of new common stock. The cash distributions were paid in August 1996.
A total of 3,198,798 shares of new common stock was issued on July 25, 1996, out
of which 2,976,000 shares were issued to one secured creditor; 160,000 shares
were issued to unsecured creditors; and 62,798 shares were issued to the
preconfirmation common stock equity interest holder.
The discharge of claims was reflected in the April 30, 1996 financial
statements. The stock distribution value is based on the reorganization value of
the Company determined by projecting cash flows over an eleven-year period and
discounting such cash flows at a cost of capital rate of 15% and the statutory
federal, state and local tax rates currently in effect. The discounted residual
value at the end of the forecast period is based on the capitalized cash flows
for the last year of that period. Cash distributions and the estimated stock
distribution value totaling $531,561 has been recorded as Other Liabilities as
of April 30, 1996. The gain of approximately $16,700,000 resulting from the
excess of the allowed claims over the total value of the cash and the common
stock distributed to the secured and unsecured creditors has been recorded as an
extraordinary gain for the year ended April 30, 1996.
Continued.....
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(Continued)
Notes to Consolidated Condensed Financial Statements
for the Nine-Month Periods Ended January 31, 1999 and 1998
(Unaudited)
The eleven-year cash flow projection was based on estimates and assumptions
about circumstances and events that have not yet taken place. Such estimates and
assumptions are inherently subject to significant economic and competitive
uncertainties and contingencies beyond the control of the Company, including,
but not limited to, those with respect to the future courses of the Company's
business activity. Accordingly, there will usually be differences between
projections and actual results because events and circumstances frequently do
not occur as expected, and those differences may be material.
As part of the reorganization, the Company will continue to sell hand and light
exercise equipment and sports bags/luggage, all of which have a proven market
acceptance. Management believes it can increase revenues by increasing its focus
on direct response marketing. Therefore, it intends to develop plans to use
infomercials to market these products. The Company adopted "fresh-start
reporting" in accordance with Statement of Position ("SOP") 90-7 issued July 31,
1996 by the American Institute of Certified Public Accountants. SOP 90-7 calls
for the adoption of fresh-start reporting if the reorganization value of the
emerging entity immediately before the date of confirmation is less than the
total of all post-Petition and allowed claims, and if holders of existing voting
shares immediately before confirmation receive less than fifty percent of the
voting shares of the emerging entity, both conditions of which were satisfied by
the Company. Although the confirmation date was May 23, 1996, fresh-start
reporting was adopted on July 31, 1996. There were no material fresh-start
related adjustments during the period May 23, 1996 to July 31, 1996.
Under fresh-start accounting, all assets and liabilities are restated to reflect
their reorganization value, which approximates book value at date of
reorganization. Therefore, no reorganization value has been allocated to the
assets and liabilities. In addition, the accumulated deficit of the predecessor
company at July 31, 1996 totaling $713,601 was eliminated, and at August 1,
1996, the reorganized company's financial statements reflected no beginning
retained earnings or deficit. The reorganization value in excess of amounts
allocable to identifiable assets is being amortized over an eleven-year period
on the straight-line method.
Continued....
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(Continued)
Notes to Consolidated Condensed Financial Statements
for the Nine-Month Periods Ended January 31, 1999 and 1998
(Unaudited)
3. Inventories
The inventories consist of finished goods. During the three month
period ended January 31, 1998 the Company changed its method of
determining the cost of inventories from the LIFO method to the FIFO
method. Under the current economic environment of low inflation, the
Company believes that the FIFO method will result in a better
measurement of operating results.
4. Debt Financing:
On April 30, 1998 the Company entered into a credit agreement with
Chase Manhattan Bank ("Chase") for maximum borrowing of $1,500,000 in
the form of letters of credit and bankers acceptances. The agreement
also provided for a security interest in the inventory and notes and
accounts receivables of the Company. In addition, the agreement
provides for the personal guarantee of the President and major
shareholder of the Company in the amount of $250,000. As of January 31,
1999 the Company's aggregate balance of $817,708 consisted of $650,000
in bankers acceptances and $167,708 of outstanding letters of credit.
The bankers acceptances were discounted at 6.25% per annum.
-7-
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Nine Months Ended January 31, 1999
as Compared to Nine Months Ended January 31, 1998
GENERAL
Statements contained herein 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, the
Company's ability to complete development and then market its products and
competitive factors and other risk factors detailed herein.
The following discussion should be read in conjunction with the Consolidated
Financial Statements and related notes thereto of the Company included elsewhere
herein. The discharge of claims under the bankruptcy proceedings described
immediately below has been reflected in the financial statements for the fiscal
year ended April 30, 1996. Effective August 8, 1996, the Company completed a
migratory merger from Delaware to Nevada by merging into a newly formed Nevada
entity, thereby changing its name from Dynamic Classics, Ltd. to Dynamic
International, Ltd. The balance sheet of the combined entity was substantially
identical to that of the Company prior to the merger. The Company and its
predecessor are herein together referred to as the "Company".
Because of the application of fresh-start reporting, the financial statements
for the periods after reorganization are not comparable in any respects to the
financial statements for the periods prior to the reorganization.
PLAN OF REORGANIZATION
On August 23, 1995, the Company filed a voluntary petition for relief under
Chapter 11 of the United States Bankruptcy Code. In May 1996, the Bankruptcy
Court approved a plan of reorganization pursuant to which creditors would
receive partial satisfaction of their claims. The amount of claims allowed under
the bankruptcy proceedings aggregated approximately $17,223,800, which exceeded
the assets as recorded immediately subsequent to the confirmation of the Plan by
approximately $12,970,400. Under the Plan, the Company made cash payments in the
amount of approximately $515,800. MG Holding Corp. ("MG"), which had purchased a
promissory note from the Company's principal financial institution, received
2,976,000 shares of Common Stock, in satisfaction of such promissory note,
representing approximately 93% of the issued and outstanding shares thereby
gaining absolute control over the Company's affairs. An additional 160,000
shares and 62,798 shares were issued to the Company's unsecured creditors and
the Company's existing security holders, respectively. The value of the cash and
securities distributed under the Plan aggregated $531,561. An amount of
$16,692,193, representing the difference between the value of the total
distribution and the amount of allowable claims under the bankruptcy was
recorded as an extraordinary gain.
Continued.....
-8-
(Continued)
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Nine Months Ended January 31, 1999
as Compared to Nine Months Ended January 31, 1998
RESULTS OF OPERATIONS
Sales for the nine months ended January 31, 1999, decreased by $1,364,000 or 22%
to $4,784,000 from $6,148,000 for the nine months ended January 31, 1999. Sales
of sports bags/luggage products of $2,548,000 for the nine months ended January
31, 1999, were $1,037,000 or 29% less than the $3,585,000 of sports bags/luggage
sales for the nine months ended January 31, 1998. Sales of exercise products of
$2,194,000 for the nine months ended January 31, 1999 were $370,000 or 14% less
than the $2,564,000 of exercise product sales for the nine months ended January
31, 1998.
The Company's gross profit of $1,188,000 for the nine months ended January 31,
1999 was $731,000 less than the gross profit of $1,919,000 for the nine months
ended January 31, 1998. The reduced gross profit was primarily the result of the
lower sales for the nine months ended January 31, 1999.
Operating expenses for the nine months ended January 31, 1999 were $33,000
lower than the nine months ended January 31, 1998. This increase is represented
approximately by changes in the following expenses:
Increase
(Decrease)
Patent and Trademark Expenses ($16,000)
Sale Representative Commissions ($44,000)
Shipping Expenses $26,000
Travel and Entertainment ($18,000)
Promotional and Selling Materials $23,000
Trade Advertising $31,000
Office Salaries ($43,000)
Postage $11,000
Legal Fees $17,000
Depreciation ($20,000)
-9-
Continued
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Nine Months Ended January 31, 1999
as Compared to Nine Months Ended January 31, 1999
Patent and Trademark expenses decreased by $16,000 due to reduced expenditures
for patent searches, analysis and acquisitions. Sales representative commissions
decreased by $44,000 due to decreased sales volume. Shipping expenses increased
due to increases in shipping fees. Travel and entertainment expenses decreased
by $18,000. Increased expenditures for promotional materials of $23,000 related
primarily to the Company's sports bags/luggage products. Trade advertising was
$31,000 for nine months ended January 31, 1999 because the Company has started
to utilize specialty magazines to advertise its sports bags/luggage products.
Office salaries decreased by $43,000 due to personnel reductions. Postage
expenses increased by $11,000. Legal fees increased by $17,000 due to an
increase in expenditures related to securities registration and filings with the
Securities Exchange Commission. Depreciation expense decreased by $20,000 due to
a reduction in capital expenditures.
Interest expense for nine months ended January 31, 1999 decreased by $85,000
from the nine months ended January 31, 1998. This reduction was a result of the
partial use of the proceeds of a stock offering, which was completed on December
27, 1997, to payoff current debt.
The Company's pretax loss of $309,000 for the nine months ended January 31, 1999
represents a $613,000 change from a pretax profit of $304,000 for nine months
ended January 31, 1998.
-10-
Continued
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Nine Months Ended January 31, 1999
as Compared to Nine Months Ended January 31, 1998
The following table sets forth the results of operations for the periods
discussed above.
Nine Months Nine Months
Ended Ended
January 31, 1999 January 31, 1998
Net Sales $4,784,000 $6,148,000
Other Income 35,000 24,000
---------- ----------
4,819,000 6,172,000
Cost of Goods Sold 3,631,000 4,253,000
---------- -----------
Gross margin 1,188,000 1,919,000
24.65% 31.09%
Operating Expenses 1,437,000 1,470,000
Interest 60,000 145,000
---------- ----------
1,497,000 1,615,000
---------- ----------
Pretax Income (Loss) (309,000) 304,000
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended January 31, 1999, cash used by operating activities
amounted to $2,177,000. This was the result of a net loss and increases in
accounts receivable and due from supplier, inventory and prepaid expenses and a
decrease in income taxes payable of $309,000, $473,000, $1,185,000, $926,000 and
$79,000, respectively. These uses of cash were offset by an increase in accounts
payable and accrued expenses of $764,000.
Investing activities used cash of $19,000 for molds related to new products.
Financing activities provided proceeds from a banker's acceptance of $650,000.
CURRENT POSITION
On December 27, 1997, the Company completed a stock offering which provided
proceeds of approximately $4,800,000, which were used to purchase inventory and
to pay for advertising and marketing in the amount of approximately $2,800,000
and related party debt of $1,059,785.
-11-
On April 30, 1998 the Company entered into a credit agreement with Chase
Manhattan Bank ("Chase") for maximum borrowing of $1,500,000 in the form of
letters of credit and bankers acceptances. The agreement also provided for a
security interest in the inventory and notes and accounts receivable of the
Company. In addition, the agreement provides for the personal guarantee of
Marton B. Grossman, the Company's President and largest shareholder in the
amount of $250,000. As of January 31, 1999 the Company's aggregate balance of
$817,708 consisted of $650,000 in bankers acceptances and $167,708 of
outstanding letters of credit. The bankers acceptances were discounted at
6.25% per annum.
The Company believes that the proceeds from the stock offering and the Chase
credit line will be sufficient to finance its operation for the next twelve
months.
SEASONALITY AND INFLATION
The Company's business is highly seasonal with higher sales typically in the
second and third quarter of the fiscal year as a result of shipments of exercise
equipment and sports bags/luggage related to the holiday season.
Management does not believe that the effects of inflation will have a material
impact on the Company, nor is it aware of changes on prices of material or other
operating costs or in the selling price of its products and services that will
materially affect the Company's profits.
YEAR 2000 COMPLIANCE
Pursuant to a warehousing agreement with Achim Importing Co. Inc., ("Achim")
which is wholly owned by Marton B. Grossman, the Company's Chairman and
President, the Company relies exclusively on Achim's software and operating
systems for operations, financial accounting systems and various other
administrative functions. Achim has assured the Company that it has reviewed
its computer systems to identify those areas that could be adversely affected
by Year 2000 software failures and has taken the appropriate steps to avoid
Year 2000 problems. Currently, the Company cannot predict the effect of the
Year 2000 problem on entities with which it transacts business and there can be
no assurance it will not have a material adverse impact on the Company's
business, financial condition, results of operations or cash flows.
-12-
Continued
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Three Months Ended January 31, 1999
as Compared to Three Months Ended January 31, 1998
RESULTS OF OPERATIONS
Sales for the three months ended January 31, 1999, decreased by $954,000 or 39%
to $1,500,000 from $2,454,000 for the three months ended January 31, 1998. Sales
of sports bags/luggage products of $576,000 for the three months ended January
31, 1999, were $878,000 or 60% less than the $1,453,000 of sports bags/luggage
sales for the three months ended January 31, 1998. Sales of exercise products of
$911,000 for the three months ended January 31, 1999 were $91,000 or 9% less
than the $1,002,000 of exercise product sales for the three months ended January
31, 1998.
The Company's gross profit of $279,000 for the three months ended January 31,
1999 was $359,000 less than the gross profit of $638,000 for the three months
ended January 31, 1998. The reduced gross profit was primarily the result of the
lower sales for the three months ended January 31, 1999.
Operating expenses for the three months ended January 31, 1999 were $50,000 less
than the three months ended January 31, 1998. This decrease is represented
approximately by changes in the following expenses:
Increase
(Decrease)
Product Development ($15,000)
Shipping Expenses $17,000
Sales Representative Commissions ($45,000)
Trade Advertising $15,000
Office Salaries ($17,000)
Postage $ 2,000
Depreciation ($ 7,000)
-13-
Continued
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Three Months Ended January 31, 1999
as Compared to Three Months Ended January 31, 1998
Product development expenses increased by $15,000 due to increased consulting
fees. Shipping expenses increased due to increased shipping fees. Sales
representative commissions decreased by $45,000 due to the decreased sales
volume. Trade advertising was $15,000 for three months ended January 31, 1999
because the Company has started to utilize specialty magazines to advertise the
sports bags/luggage products. Office salaries decreased by $17,000 due to
personnel reductions. Postage increased by $2,000. Depreciation expense
decreased by $7,000 because of low capital expenditures.
Interest expense for the three months ended January 31, 1999 decreased by $
2,000 from the three months ended January 31, 1998. This reduction was the
result of the partial use of the proceeds of a stock offering, which was
completed on December 27, 1997, to payoff current debt.
The Company's pretax loss of $237,000 for the three months ended January 31,
1999 represents a $306,000 change from a pretax profit of $69,000 for three
months January 31, 1998.
-14-
Continued
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Three Months Ended January 31, 1999
as Compared to Three Months Ended January 31, 1999
The following table sets forth the results of operations for the periods
discussed above.
Three Months Three Months
Ended Ended
January 31, 1999 January 31, 1998
Net Sales $1,500,000 $2,454,000
Other Income 3,000 13,000
------------- -------------------
$1,503,000 $2,467,000
Cost of Goods
Sold $1,224,000 $1,830,000
----------- -------------------
Gross Margin 279,000 637,000
18.50% 25.82%
Operating Expenses 492,000 542,000
Interest 24,000 26,000
------------ -------------------
516,000 568,000
Pretax Income (Loss) (237,000) 69,000
-15-
Part II. Other Information
Not Applicable
-16-
Signatures
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DYNAMIC INTERNATIONAL, LTD.
Date 3/17/99 By /s/ William P. Dolan
William P. Dolan, Vice President, Finance
-17-