SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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 July 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 September 15, 2002 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 July 31, 2002
Page
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Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets as of July 31, 2002 (unaudited) and April 1
30,2002
Condensed Statements of Operations for the three months ended July 31, 2
2002 (unaudited) and July 31, 2001 (unaudited)
Condensed Statements of Cash Flows for the three months ended July 31, 2002 3
(unaudited) and July 31,2001(unaudited)
Notesto the Financial Statements for the three months ended July 31, 2002 4-7
(unaudited)
Item 2. Management's Discussion and Analysis 8-11
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
July 31, 2002 April 30, 2002
(Unaudited)
CURRENT ASSETS
Cash $ 95,426 $ 38,006
Accounts receivable, less
allowance of $381,000 at July 31 and April 30, 2002 2,140,367 948,619
Inventories 1,251,097 1,735,890
Other current assets 24,873 89,947
--------- ---------
Total Current Assets 3,511,763 2,812,462
Fixed Assets- Net of accumulated
depreciation 36,208 36,820
Security Deposits 1,000 1,000
--------- --------
TOTAL ASSETS $3,548,971 $2,850,282
========== ==========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current Liabilities
Accounts payable and accrued expenses $ 907,034 $ 773,280
Amounts due affiliated company 3,997,061 3,489,830
--------- ----------
Total Current Liabilities 4,904,095 4,263,110
COMMITMENT and CONTINGENCIES
STOCKHOLDERS' DEFICIT
Common stock 4,419 4,419
Additional paid in capital 5,119,796 5,119,796
Accumulated deficit (6,479,336) (6,537,040)
----------- -----------
(1,355,121) (1,412,825)
Less: Treasury stock (3) (3)
---------------- ---------------
Total Stockholders' Deficit (1,355,124) (1,412,828)
------------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS'
DEFICIT $3,548,971 $2,850,282
========== ==========
See accompanying notes to condensed financial statements
1
Dynamic International, Inc.
Condensed Statements of Operations
Three Months Ended July 31,
2002 2001
(Unaudited) (Unaudited)
(Restated)
Net sales $2,542,570 $3,079,302
Other income 12 32
-------- ----------
2,542,582 3,079,334
Cost of sales 1,870,995 2,284,644
--------- ---------
Gross profit 671,587 794,690
-------- ---------
Operating expenses 566,428 643,737
Interest 3,385 7,025
Interest-related party 44,070 72,246
------ ------
613,883 723,008
------- -------
Income before taxes 57,704 71,682
Provision for taxes 0 0
- -
Net income $ 57,704 $71,682
======== =========
Basic and diluted
income (loss) per
common share $ .01 $ .02
======== =========
Weighted average number
Common shares
Outstanding 4,417,718 4,417,718
========= =========
Cash dividends per
Common share None None
See accompanying notes to condensed financial statements
2
Dynamic International, Inc.
Condensed Statements of Cash Flows
For the Three
Months ended July 31,
2002 2001
(Unaudited) (Unaudited)
(Restated)
Operating activities:
Net income (loss) $57,704 $71,682
------- ------
Adjustments to reconcile net income
to net cash provided by/ (used for) operating
activities
Depreciation 612 1,020
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable (1,191,748) (226,957)
Inventory 484,793 449,797
Prepaid expense and other 65,074 34,740
Increase (decrease) in:
Accounts payable and accrued expenses-
non-related 133,754 221,788
------- -------
Total adjustments (507,515) 480,388
--------- -------
Net cash (used)/ provided by operating activities ( 449,811) 552,070
-------- -------
Financing activities:
Accounts payable and accrued expenses-
related party 507,231 (509,293)
-------- ---------
Net cash - (used)/ provided by financing activities 507,231 (509,293)
------- ---------
Increase (decrease) in cash and equivalents 57,420 42,777
Cash and equivalents- beginning of period 38,006 58,542
------ ------
Cash and equivalents - end of period $95,426 $101,319
======= ========
See Accompanying Notes to Condensed Financial Statements
3
Dynamic International, Inc.
Notes to Condensed Financial Statements
For The Three Months Ended July 31, 2002 and 2001
(Unaudited)
1. Basis of Presentation
The Condensed Balance Sheet as of July 31, 2002 and the related Condensed
Statements of Operations and Cash Flows for the three months ended July 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 July 31, 2002 and 2001 and the results of
their operations for the three months ended July 31, 2002 and 2001.
The April 30, 2002 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 three months ended July 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 10K-SB
for the year ended April 30, 2002
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 $696,000 and
$1,239,000 for the years ended April 30, 2002 and 2001, respectively.
Additionally, the Company has a working capital deficiency of approximately
$1,392,000 at July 31,2002. In addition, 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.
4
Dynamic International, Inc.
Notes to Condensed Financial Statements
For Three Months Ended July 31, 2002 and 2001
(Unaudited)
Management has implemented various cost controls and succeeded in reducing
certain operating expenses and costs. However, the Company believes that the
terrorist attacks in the United States on September 11, 2001 continue to have a
chilling effect on travel, and the economy in general. Consequently, consumer
demand for luggage is likely to continue to be adversely affected. As a result,
the Company currently expects that sales of its luggage products will continue
to be negatively impacted for at least the near term. It is not practicable at
this time to quantify the extent of any downturn. 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 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 $146,235 and $150,111 for the three
months ended July 31, 2002 and 2001, respectively.
5
Dynamic International, Inc.
Notes to Condensed Financial Statements
For Three Months Ended July 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 $3,489,830 and $3,997,061, at
April 30, 2002 and July 31, 2002, respectively. The Company records
interest on the unpaid balance due to the Related Entity at the
JPMorganChase prime rate plus 1%. Total interest expense charged to
operations was $44,070 and $72,246 for the three months ended July 31, 2002
and 2001, 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. 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
6. Restatement
During the fourth quarter of the fiscal year ended April 30, 2002, the
Company made a determination to record interest on advances from
affiliates, and restate previously issued financial statements for the
correction of this error based on guidance provided by the Securities and
Exchange Commission.
The adjustment decreased net income for the three months ended July 31,
2001 as follows:
Net income, as originally reported $143,928
Interest-affiliate 72,246
--------
Net income, as adjusted $ 71,682
========
7
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.
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 $696,000 and $1,239,000 for the years ended
April 30, 2002 and 2001,respectively. Additionally, the Company has a working
capital deficiency of approximately $1,392,000 at July 30,2002. In addition, 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.
Results of Operations for the Three Months Ended July 31, 2002 Compared to the
Three Months Ended July 31, 2001.
Sales for the three months ended July 31,2002, decreased by $536,000 or 17.4% to
$2,543,000 from $3,079,000 for the three months ended July 31, 2001. 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.
Allowances granted to customers were 5.3% of net sales for the three months
ended July 31,2002 as compared to 7.7% of net sales for the three months ended
July 31, 2001. Allowances for the three months ended July 31 2001 included
approximately $110,000 in promotional allowances given to two customers with the
introduction of new luggage collections. Allowances for the three months ended
July 31,2002 included approximately $50,000 in promotional allowances for a new
customer.
8
The Company's gross profit decreased by approximately $123,000 due primarily to
the decrease in sales. The Company's gross margin as a percentage of sales,
increased by .6% to 26.41% from 25.82% for the three months ended July 31, 2001.
Operating expenses, exclusive of interest expense, for the three months ended
July 31, 2002 were $77,000 less than the three months ended July 31,2001. This
decrease is represented approximately by changes in the following expenses:
Increase
(Decrease)
Royalty Expense ($64,000)
Salesman Commissions ($10,000)
Salesman Salaries ($7,000)
Other Corporate Items $4,000
Royalty expense decreased due to the decreased sales and the discontinuation of
Rotaflex home gym products and thus the related minimum royalty payments.
Salesman commissions decreased by $10,000 due to the decrease in sales. Salesman
salaries decreased by $7,000 due to a reduction in salary paid to one employee.
Other corporate expenses increased by $4,000 including an increase in legal fees
which was offset by decreased accounting fees.
Interest expense for the three months ended July 31, 2002 decreased by $4,000
from the three months ended July 31,2001. This decrease was due to reduced
inventory purchases.
Interest expense related party for the three months ended July 31,2002 decreased
by $28,000 from the three months ended July 31,2001. This decrease was due to
reduced interest rates and the reduction of the amounts due to Achim Importing
Co. Inc. ("Achim").
9
The following table sets forth the results of operations for the periods
discussed above:
Three Months Three Months
Ended Ended
July 31, 2002 July 31, 2001
Net Sales $2,543,000 $3,079,000
Cost of Goods
Sold 1,871,000 2,284,000
---------- ----------
Gross Margin 672,000 795,000
-------- ----------
As a Percentage of Net Sales 26.41 % 25.82%
Operating Expenses 567,000 644,000
Interest 3,000 7,000
Interest -related party 44,000 72,000
---------- ----------
614,000 723,000
------- -------
Income before provision
for Income Taxes $ 58,000 $ 72,000
========== ===========
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("Achim") wholly
owned by a major stockholder, the 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 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.
10
Liquidity and Capital Resources
During the three months ended July 31, 2002, cash utilized by operations was
$450,000. This was primarily the result of an increase in accounts receivable of
$1,192,000 which was offset by net income, decreases in inventory, prepaid
expenses and other assets and an increase in accounts payable and accrued
expenses of $58,000, $485,000 and $65,000 and $134,000, respectively.
An increase in the amount due to Achim provided cash from financing activities
of $507,000. 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 interest on the
unpaid balance due to Achim at the JPMorganChase prime rate plus 1%. The amount
of interest recorded for the three minths ended July 31, 2002 and 2001 was
$44,070 and $72,246, respectively.
Through June, 2000,the Company was able to fund a portion of its working capital
requirements pursuant to an agreement with the JPMorganChase ("Chase"), which
had provided for maximum borrowings of $1,500,000 in the form of letters of
credit and bankers acceptances. This agreement also provided for a security
interest in the inventory and notes and accounts receivable of the Company. In
addition, the agreement provided for the personal guarantee of the President and
major shareholder of the Company for the entire balance. The Chase credit line
was discontinued in June 2000.
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.
11
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
September 23, 2002
13