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, 2002
[ ] 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, 2002 the Registrant had 4,417,218 shares of its Common Stock
outstanding
Transitional Small Business Disclosure Format: YES [ ] NO [X]
Index to Form 10-QSB
For the Nine and Three Months ended January 31, 2002 and 2001
-------------------------------------------------------------
Page
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets as of January 31, 2002 (unaudited) and 1
April 30,2001
Condensed Statements of Operations for the nine months and three months 2
ended January 31, 2002 and January 31, 2001 (unaudited)
Condensed Statements of Cash Flows for the nine months ended 3
January 31, 2002 and January 31,2001 (unaudited)
Notes to the Financial Statements 4-6
Item 2. Management's Discussion and Analysis 7-12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 2. Changes in Securities 12
Item 3. Defaults Upon Senior Securities 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
Dynamic International, Inc.
Condensed Balance Sheets
January 31, 2002 April 30, 2001
(Unaudited)
CURRENT ASSETS
Cash $77,136 $58,542
Accounts receivable, less
allowance of $340,000 and $527,000 600,611 1,488,943
Inventories 2,393,963 3,115,360
Other current assets 13,612 52,261
--------- ---------
Total Current Assets $3,085,322 $4,715,106
Fixed Assets- Net of accumulated
depreciation 37,840 40,900
Security Deposits 1,000 1,000
--------- --------
TOTAL ASSETS $3,124,162 $4,757,006
========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued expenses $495,721 $ 584,766
Amounts due affiliated company 2,876,062 4,413,966
--------- ---------
Total Current Liabilities 3,371,783 4,998,732
COMMITMENT and CONTINGENCIES
STOCKHOLDERS' DEFICIT
Common stock 4,419 4,419
Additional paid in capital 5,119,796 5,119,796
Accumulated deficit (5,371,833) (5,365,938)
----------- -----------
(247,618) (241,723)
Less: Treasury stock (3) (3)
----------- -----------
Total Stockholders' Deficit (247,621) (241,726)
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS'
DEFICIT $3,124,162 $4,757,006
=========== ===========
See accompanying notes to condensed financial statements
1
Dynamic International, Inc.
Condensed Statements of Operations
Nine Months Ended Three Months Ended
January 31,2002 January 31,2001 January 31,2002 January 31,2001
Unaudited Unaudited Unaudited Unaudited
Net sales $6,184,412 $7,487,698 $ 924,619 $1,917,209
Other income 72 8,329 15 159
----------- ----------- ---------- ------------
6,184,484 7,496,027 924,634 1,917,368
Cost of sales 4,674,718 5,902,448 737,570 1,670,297
----------- ----------- ---------- ------------
Gross profit 1,509,766 1,593,579 187,064 247,071
---------- ----------- ---------- ------------
Operating expenses 1,500,852 2,312,457 339,345 1,011,279
Interest 14,809 20,858 3,534 2,241
---------- ----------- ---------- ------------
1,515,661 2,333,315 342,879 1,013,520
---------- ----------- ---------- ------------
Loss before taxes (5,895) (739,736) (155,815) (766,449)
Provision for taxes 0 0 0 0
---------- ----------- ---------- ------------
Net loss $ (5,895) $(739,736) $(155,815) $(766,449)
========== =========== ========== ============
Basic and diluted
income (loss) per
common share $ .00 $ (.17) $ (.04) $ (.17)
========== =========== ========== ============
Weighted average number
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 31,2002 January 31,2001
(Unaudited) (Unaudited)
Operating activities:
Net income (loss) ($5,895) ($739,735)
-------- ----------
Adjustments to reconcile net income (loss)
to net cash provided (used for) operating
activities
Depreciation 3,060 11,966
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable 888,332 483,275
Inventory 721,397 1,217,831
Prepaid expense and other 38,649 294,803
Increase (decrease) in:
Accounts payable and accrued expenses-
non-related (89,045) (246,629)
Total adjustments 1,562,393 1,761,246
--------- ---------
Net cash provided by operating activities 1,556,498 1,021,511
--------- ---------
Investing activities
Purchase of property and equipment 0 (15,500)
--------- ---------
Financing activities:
Net borrowing from banker's acceptances -- (350,000)
Accounts payable and accrued expenses-
related party (1,537,904) (619,615)
---------- ---------
Net cash used by financing activities (1,537,904) (969,615)
---------- ---------
Increase (decrease) in cash and equivalents 18,594 36,396
Cash and equivalents beginning of period 58,542 38,833
------ ------
Cash and equivalents - end of period $77,136 $75,229
====== ======
Assumption of bank indebtedness by predecessor
prior to spin-off $250,000
See Accompanying Notes to Condensed Financial Statements
3
Dynamic International, Inc.
Notes to Condensed Financial Statements
For Nine Months and Three Months Ended January 31,2002 and 2001
(Unaudited)
1. Basis of Presentation
The Condensed Balance Sheet as of January 31, 2002 and the related
Condensed Statements of Operations and Cash Flows for the nine months and
three months ended January 31, 2002 and 2001 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, 2002
and 2001 and the results of their operations for the nine and three months
ended January 31, 2002 and 2001.
The April 30, 2001 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 10-SB.
The results of operations for the nine months ended January 31, 2002 and
2001 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 10-SB
filed October 30, 2001.
3. Going Concern
The Company's financial statements are prepared in conformity with
generally accepted accounting principles, which contemplates the
realization of assets and settlements of liabilities in the normal course
of business. The Company incurred net losses of approximately $945,000 and
$1,371,000 for the years ended April 30, 2001 and 2000, and utilized
approximately $786,000 in cash for operating activities for the year ended
April 30, 2001 and $2,431,000 for the year ended April 30, 2000. The
Company continued to incur losses from operations as disclosed in the
interim financial statements for the nine and three months ended January
31, 2002. Additionally, the Company has a working capital deficiency of
approximately $287,000. In addition, as a result of the terminated credit
arrangement with Chase Manhattan Bank in June of 2000, the Company will
need to continue and possibly increase its borrowing facility with an
affiliate unless alternative funding can be arranged. These factors create
uncertainty about whether the Company can continue as a going concern. The
affiliate is not obligated to continue providing any support. In the event
the affiliate chooses not to support the Company, the Company would have to
reduce operations or seek to find financial support from other third
parties.
4
Dynamic International, Inc.
Notes to Condensed Financial Statements
For Nine Months and Three Months Ended January 31,2002 and 2001
(Unaudited)
Management plans rely, to an substantial extent, on the continued funding
of its cash flow needs by its affiliate. In addition, management plans to
reduce operating expenses and anticipates a return to normalized revenue
growth in future periods. However, there can be no assurance that revenues
will improve in future periods, or that if they do, that the increases will
be sufficient to mitigate the factors previously discussed. Additionally,
management believes that the terrorist attacks which took place on
September 11, 2001 in the United States are having a negative impact on
travel, generally, and the Company's business, specifically. As a result,
the Company expects that sales of its luggage products will likely be
negatively impacted, at least for the near term. Management believes that
it is not currently practicable to quantify the impact of these events on
the Company's business. The financial statements do not include any
adjustments relating to the recoverability and classification of recorded
assets, or the amounts and classification of liabilities that might be
necessary in the event the Company cannot continue in existence.
4. Related Party Transactions
Pursuant to a Warehouse and Service Agreement dated as of September 1, 2000
(the "Warehousing Agreement") between the Company and a related party (the
"Related Entity") wholly owned by a major stockholder, the Related Entity
provides occupancy space and performs certain administrative services on
behalf of the Company. Under the Warehousing 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 consideration for these
services, the Related Entity receives 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 receives 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 provides warehousing services
consisting of receiving, shipping, and storing of the Company's
merchandise. The Company pays 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 applies an
offset for certain shared expenses.
The Warehousing Agreement, which was renewed on September 1, 2000, has a
term of one year 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 $312,228 and $430,389 for the nine
months ended January 31, 2002 and 2001, respectively, and were $37,047 and
$142,965 for the three months ended January 31, 2002 and 2001,
respectively.
5
Dynamic International, Inc.
Notes to Condensed Financial Statements
For Nine Months and Three Months Ended January 31,2002 and 2001
(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 $4,413,966 and $2,876,062, at
April 30, 2001 and January 31, 2002, respectively. The amounts due to the
Related Entity are non interest bearing and are due on demand.
5. Significant risks and Uncertainties
The Company's luggage products compete with products designed by a number
of the largest companies in the industry. The Company believes that because
of its concentration on the upscale lifestyle and more specialized leisure
market that are associated with its use of trademark names, the Company
will be able to continue to grow its luggage business. Nevertheless, 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 Indonesia, Thailand,
China and Sri Lanka. 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
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, 2002 Compared to the
Nine Months Ended January 31, 2001.
Sales for the nine months ended January 31, 2002, decreased by $1,312,000 or
17.5% to $6,184,000 from $7,496,000 for the nine months ended January 31,2001.
Sales for the nine months ended January 31,2001 included the sale of the
Company's exercise products, under an agreement with Bollinger Industries, L.P.
("Bollinger"), for approximately $871,000. After excluding the sale to
Bollinger, the Company's sales for the nine months ended January 31,2002
decreased by $441,000 or 6.7% as compared to the nine months ended January
31,2001. The Company believes that this decrease was primarily the result of
reduced sales of luggage due to the decrease in travel subsequent to the
terrorist attacks of September 11, 2001.
The Company's gross profit decreased by approximately $84,000 due primarily to
the decrease in sales. The Company's gross margin as a percentage of sales,
increased by 3% to 24% from 21% for the nine months ended January 31, 2001.After
excluding the sale of exercise products to Bollinger from the nine months ended
January 31,2001,the gross margin for this period increases to 24%. This sale did
not contribute to the gross profit as the sale of $871,000 was approximately
equal to the cost of merchandise sold.
7
Operating expenses, exclusive of interest expense, for the nine months ended
January 31, 2002 were $811,000 less than the nine months ended January 31,2001.
This decrease is represented approximately by changes in the following expenses:
Increase
(Decrease)
Royalty Expense ($26,000)
Research & Development ($12,000)
Advertising and Promotion ($383,000)
Shipping Expenses ($125,000)
Salesman Commissions ($92,000)
Salesman Salaries ($12,000)
Travel Expenses ($18,000)
Legal Fees ($95,000)
Office Salaries ($25,000)
Other Corporate Items ($23,000)
Royalty expense, research and development, advertising and promotion and
salesman commission expenses decreased due to the write off of prepaid marketing
costs of $475,000 in January of 2001. These prepaid marketing costs were
expensed to royalties, research and development, advertising and promotion and
salesman commissions in the amount of $112,000, $12,000, $345,000 and $6,000,
respectively. The royalty expense was offset by a settlement of royalties due to
Spalding for a contract which expired on September 30,2000. The Company received
a net savings on the settlement of $164,000 in October of 2000. This savings was
offset by increased royalties paid for the Company's sportsbags /luggage
products. Advertising and promotion expenses were further reduced by decreases
in expenditures for promotional and selling material and trade advertising of
$21,000 and $17,000, respectively. Shipping expenses decreased by $125,000 due
to sales related decreases in freight out and shipping fees of $27,000 and
$99,000, respectively. Salesman commissions decreased by $92,000 due to the
decrease in sales, lower commission rates paid on approximately $820,000 for the
nine months ended January 31,2002 and the write off of prepaid marketing fees in
January of 2001.Salesman salaries decreased by $12,000 due to the elimination of
a position. Travel expenses decreased by $18,000 due to the elimination of a
position. Legal fees decreased by $95,000 due primarily to the Company's defense
against a complaint of patent infringement for which expenses were incurred in
the prior nine month period. Office salaries decreased by $25,000 due to the
elimination of a position. Other corporate expenses decreased by $23,000 as a
result of a decrease in payroll taxes due to the elimination of a position,
reduced transfer agent fees and lower insurance premiums.
Interest expense for the nine months ended January 31, 2002 decreased by $6,000
from the nine months ended January 31,2001. This decrease was primarily the
result of a decrease in the discounts paid on banker's acceptances.
8
The following table sets forth the results of operations for the periods
discussed above:
Nine Months Nine Months
Ended Ended
January 31, 2002 January 31, 2001
Net Sales $6,184,000 $7,496,000
Cost of Goods
Sold 4,674,000 5,902,000
------------- ---------------
Gross Margin 1,510,000 1,594,000
---------- -----------
As a Percentage of Net Sales 24.41% 21.26%
Operating Expenses 1,501,000 2,312,000
Interest 15,000 21,000
-------------- ---------------
1,516,000 2,333,000
--------- ---------
Loss before provision
for Income Taxes ($6,000) ($739,000)
======= =======
Results of Operations for the Three Months Ended January 31, 2002 Compared to
the Three Months Ended January 31, 2001.
Sales for the three months ended January 31, 2002, decreased by $993,000 or
51.8% to $924,000 from $1,917,000 for the three months ended January 31, 2001.
The Company believes this decrease was primarily the result of reduced sales of
luggage due to decrease in travel subsequent to the terrorist attacks of
September 11, 2001.
The Company's gross profit decreased by approximately $60,000 due primarily to
the decreased revenues. The Company's gross profit, as a percentage of sales,
increased by 7% to 20%from 13% for the three months ended January 31,2001.This
increase is the result of an increase in the inventory reserve for slow moving
items of $135,000, as of January 31, 2001.The increase in the reserve for slow
moving inventory as of January 31,2002 was $29,000, $106,000 less than the
increase as of January 31, 2001. For the three months ended January 31, 2002,
the Company's gross margin, as a percentage of sales, was 4% less than the gross
margin for the nine months ended January 31, 2002. This decrease was the result
of increases in discounts and promotional allowances given to customers and the
reserve for slow moving inventory of $14,000 and $29,000, respectively, as of
January 31, 2001.
9
Operating expenses, exclusive of interest expense, for the three months ended
January 31,2002 were $672,000 less than the three months ended January 31, 2001.
This decrease is represented approximately by changes in the following expenses:
Increase
(Decrease)
Royalty Expense ($132,000)
Research & Development ($12,000)
Advertising and Promotion ($357,000)
Shipping Expenses ($112,000)
Salesman Commissions ($40,000)
Other Corporate Items ($19,000)
Royalty expense, research and development, advertising and promotion and
salesman commission expenses decreased due to the write off of prepaid marketing
costs of $475,000 in January of 2001. These prepaid marketing costs were
expensed to royalties, research and development, advertising and promotion and
salesman commissions in the amount of $112,000, $12,000, $345,000 and $6,000,
respectively. Advertising and promotion expenses were further reduced by a
decrease in expenditures for trade advertising of $11,000. Shipping expenses
decreased by $112,000 due to sales related decreases in freight out and shipping
fees of $7,000 and $105,000, respectively. Salesman commissions decreased by
$40,000 due to the decrease in sales, lower commission rates paid on
approximately $50,000 of sales for the three months ended January 31, 2002 and
the write off of prepaid marketing fees in January of 2001. Other corporate
expenses decreased by $19,000 as a result of a decrease in accounting fees and
lower insurance premiums.
Interest expense for the three months ended January 31, 2002 increased by $2,000
from the three months ended January 31, 2001. This increase was primarily the
result of an increase in bank fees for merchandise purchases.
10
The following table sets forth the results of operations for the periods
discussed above:
Three Months Three Months
Ended Ended
January 31, 2002 January 31, 2001
Net Sales $924,000 $1,917,000
Cost of Goods
Sold 737,000 1,670,000
-------------- -------------
Gross Margin 187,000 247,000
-------------- -------------
As a Percentage of Net Sales 20.24% 12.88%
Operating Expenses 339,000 1,011,000
Interest 4,000 2,000
-------------- ------------
343,000 1,013,000
Income (Loss) before provision
for Income Taxes ($156,000) ($766,000)
======== ========
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 "Entity")
wholly owned by a major stockholder, the Entity provides occupancy space and
performs certain administrative and shipping services to the Company.
The related party has purchased inventory for the Company and and has charged
the Company for the invoiced amount of the inventory. In addition, pursuant to
an unwritten understanding, the related party 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.
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.
11
Liquidity and Capital Resources
During the nine months ended January 31, 2002, cash provided by operations was
$1,556,000. This was primarily the result of decreases in accounts receivable,
inventory and prepaid expenses and other assets of $888,000, $721,000 and
$39,000, respectively.
The Company used cash of $ 1,538,000 during the period to partially repay
amounts due to Achim Importing Co., Inc. ("Achim").
The Company's monthly fixed expenses, not including expenses related directly to
sales, are approximately $83,000. As of February 1, 2002, the Company had
approximately $77,000 in cash. Historically, the Company's cash flows have been
enhanced by support provided by Achim. Achim is wholly owned by Marton B.
Grossman the Chairman and President of the Company. 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.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
None.
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.
None
12
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 25, 2002
13