1
FORM 10-Q/A
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 July 31, 1996 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 / / No /x/
As of June 30, 1997, 15,993,991 shares of the Registrant's common stock par
value $.001 were issued and outstanding.
2
INDEX
Page No.
Part I. Financial Information
Consolidated Condensed Balance Sheets
as of July 31, 1996 and April 30, 1996........................................... 3
Consolidated Condensed Statements of Operations
for the Three Months Ended July 31, 1996 and 1995................................ 4
Consolidated Condensed Statements of Cash Flows
for the Three Months Ended July 31, 1996 and 1995................................ 5
Notes to Consolidated Condensed Financial Statements
for the Three-Month Periods Ended July 31, 1996 and 1995......................... 6
Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Three Months
Ended July 31, 1996 as Compared to Three Months Ended
July 31, 1995.................................................................... 10
Part II. Other Information................................................................ 13
Signatures..................................................................................... 14
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3
Consolidated Condensed Balance Sheets
(Unaudited)
(See Note 2)
Reorganized Predecessor
Company Company
July 31, 1996 April 30, 1996
------------- -------------
Current Assets
Cash $ 4,957 $ 26,515
Accounts Receivable - Trade (Net of allowance for
doubtful accounts of $167,000 in 1996 & $167,000
in 1995) 1,258,182 1,036,927
Due from Suppliers 10,704 26,760
Inventory 2,268,853 2,384,469
Prepaid Expenses 182,289 81,693
Miscellaneous Receivables 135,037 135,039
Prepaid & Refundable Income Taxes 291,960 291,146
---------- ----------
Total Current Assets 4,151,982 3,982,549
Fixed Assets, at Cost, Less Accumulated
Depreciation 203,863 230,055
Due from Suppliers 52,198 36,142
Security Deposits 4,650 4,650
Reorganization value in excess of amounts
allocable to identifiable assets 133,580 ---
---------- ----------
Total Assets $4,546,273 $4,253,396
========== ==========
Liabilities and Shareholders Equity (Deficit)
Current Liabilities
Notes payable trade $ 62,020 $ ---
Accounts Payable & Accrued Expenses, Non-Related 702,654 1,009,248
Accounts Payable & Accrued Expenses, Related 2,592,271 2,129,893
Capital Lease Obligations, Current 32,226 48,732
Loans payable, Related Party 593,670 557,000
Other liabilities 515,638 531,560
---------- ----------
Total Current Liabilities 4,498,479 4,276,433
Other Liabilities
Capital Lease Obligations 21,658 23,965
---------- ----------
Total Liabilities 4,520,137 4,300,398
Shareholders Equity
Common Stock, par value $.001 per share ($.01 in
1995); authorized 50,000,000 shares (5,000,000
in 1995); issued 15,993,991 (1,744,396 in 1995) 15,994 17,444
Additional Paid-In Capital 10,145 590,291
Retained Earnings (since July 31, 1996, date
of reorganization, total deficit eliminated
was $713,601) --- ---
Accumulated deficit --- (637,237)
---------- ----------
Total 26,139 (29,502)
Less Treasury Stock (3) (17,500)
---------- ----------
Total Shareholders' Equity (Deficit) 26,136 (47,002)
---------- ----------
Total Liabilities & Shareholders Equity (Deficit) $4,546,273 $4,253,396
========== ==========
See Accompanying Notes to Consolidated Condensed Financial Statements
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4
Consolidated Condensed Statements of Operations
For the Three Months Ended July 31
(Unaudited)
Predecessor Company
----------------------------------
For the 3 For the 3
Months Ended Months Ended
July 31, 1996 July 31, 1995
------------- -------------
Net Sales $1,993,365 $ 191,229
Cost of Goods Sold 1,454,637 3,341,320
---------- -----------
Gross Profit $ 538,728 ($3,150,091)
Operating Expenses 557,822 1,561,789
Interest Expense 57,270 220,514
---------- -----------
Income (Loss) Before Provision for Income Taxes ($ 76,364) ($4,932,394)
Provision for (Recovery of) Income Taxes - Current --- ---
- Deferred --- ---
---------- -----------
Net Income ($ 76,364) ($4,932,394)
========== ===========
Number of Common Shares Outstanding 15,993,991 ---
---------- -----------
Earnings (Loss) per Common Share (.005) ---
---------- -----------
Cash Dividends per Common Share None None
See Accompanying Notes to Consolidated Condensed Financial Statements
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5
Consolidated Condensed Statements of Cash Flows
for the Three Months Ended July 31
(Unaudited)
Predecessor Company
-------------------------------
For the 3 For the 3
Months Ended Months Ended
July 31, 1996 July 31, 1995
------------- -------------
Net Cash Used in Operating Activities $(64,766) $(1,430,760)
Cash Flows from Investing Activities
Acquisition of Property and Equipment -- (7,218)
-------- -----------
Net Cash Used in Investing Activities -- (7,218)
Cash Flows from Financing Activities
Proceeds from Notes Payable $ -- $ 3,632,988
Repayments of Notes Payable -- (36,000)
Proceeds from Bankers Acceptances -- 343,711
Repayments of Bankers Acceptances -- (3,211,332)
Proceeds from Officer's Loan Payable -- 147,000
Repayments of Capital Leases (18,812) (17,323)
Proceeds from Insurance Note Payable 77,225 230,735
Repayments of Insurance Note Payable (15,205) (32,374)
-------- -----------
Net Cash Provided by Financing Activities $ 43,208 $ 1,057,405
Net Decrease in Cash (21,558) (380,573)
Cash and Cash Equivalents--Beginning of Period 26,515 342,571
-------- -----------
Cash and Cash Equivalents--End of Period $ 4,957 $ (38,002)
======== ===========
Supplemental disclosures of Cash Flow information:
Debt Note: Interest paid during the three months ended July 31, 1996
and 1995 was $1,553 and $49,792, respectively.
Income Tax Note: The Company made no income tax payments during the three-month
periods ending July 31, 1996 and 1995, respectively.
See Accompanying Notes to Consolidated Condensed Financial Statements
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6
Notes to Consolidated Condensed Financial Statements
for the Three-Month Periods Ended July 31, 1996 and 1995
(Unaudited)
1. BASIS OF PRESENTATION
The Consolidated Condensed Balance Sheet as of July 31, 1996 and the related
Consolidated Condensed Statements of Operations and Consolidated Condensed
Statements of Cash Flows for the three-month periods ended July 31, 1996 and
1995 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, 1996 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
three-month period ended July 31, 1996 are not necessarily indicative of the
operating results for the entire year.
2. REORGANIZATION AND MANAGEMENT PLAN
In 1994, the Company added a new line of products consisting primarily of
treadmills and ski machines. Initially, the Company was successful in marketing
these products. However, due to defective products delivered by the Company's
manufacturers, primarily located in the People's Republic of China, the Company
was forced to allow substantial returns by its customers. Although pursuant to a
written agreement, the manufacturers acknowledged the defects and agreed to pay
for returns and to provide replacement goods at no cost, they breached this
agreement soon thereafter. For the year ended April 30, 1996, the Company
suffered significant losses in the amount of approximately $3,700,000 from its
venture into this line of business.
On August 23, 1995, the Company filed a voluntary petition for relief under
Chapter 11 of the United States Bankruptcy Code. A Plan of 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 that 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 $17.2 million. 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 15,993,991 shares of new common stock were issued on July 25, 1996,
out of which 14,880,000 shares were issued to one secured creditor, which also
satisfied $15,923 of loans made by the chief executive officer of the Company to
the Company; 800,000 shares were issued to unsecured creditors; and 313,990
shares were issued to the reconfirmation common stock equity interest holders.
Continued.....
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7
(Continued)
Notes to Consolidated Condensed Financial Statements
for the Three-Month Periods Ended July 31, 1996 and 1995
(Unaudited)
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 $16.7 million 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.
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 exercise,
light exercise equipment, and luggage and sports bags, 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. Management believes
these increased marketing efforts, adequate financing through its related
entity, Achim Importing, discontinuance of the unprofitable products, and
sustainable gross profit percentages, can be effectively implemented within the
next twelve months. The Company adopted "fresh-start reporting" in accordance
with Statement of Position ("SOP") 90-7 issued by the American Institute of
Certified Public Accountants on July 31, 1996. 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 50% 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.
The following is a proforma Balance Sheet of the reorganized Company based on
the discounted cash flows as discussed above:
Continued.....
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8
(Continued)
Notes to Consolidated Condensed Financial Statements
for the Three-Month Periods Ended July 31, 1996 and 1995
(Unaudited)
Balance Reorganized
Sheet Stock Company
7/31/96 Exchange Fresh Start 7/31/96
---------- -------- ----------- -----------
Current Assets:
Cash 4,957 -- -- 4,957
Accounts receivable, net 1,258,182 -- -- 1,258,182
Inventory 2,268,853 -- -- 2,268,853
Prepaid & refundable income
taxes 291,960 -- -- 291,960
Other assets 328,030 -- -- 328,030
---------- -------- -------- ----------
Total Current Assets 4,151,982 -- -- 4,151,982
Fixed assets, net 203,863 -- -- 203,863
Other assets 56,848 -- -- 56,848
Reorganization value in excess
of amounts allocable to
identifiable assets -- -- 133,580 133,580
---------- -------- -------- ----------
TOTAL ASSETS 4,412,693 -- 133,580 4,546,273
========== ======== ======== ==========
Current Liabilities:
Loans payable - MG 593,670 -- -- 593,670
Loans payable - Trade 62,020 -- -- 62,020
Accounts payable & accrued
expenses 3,294,925 -- -- 3,294,925
Capital lease obligations 32,226 -- -- 32,226
Other current liabilities 531,561 (15,923) -- 515,638
---------- -------- -------- ----------
Total Current Liabilities 4,514,402 (15,923) -- 4,498,479
Other Liabilities:
Non-current 21,658 -- -- 21,658
---------- -------- -------- ----------
Total Liabilities 4,536,060 (15,923) -- 4,520,137
---------- -------- -------- ----------
Common stock par value 17,444 (17,444) -- 15,994
15,994
Additional paid-in capital 590,290 (590,291) (580,021) 10,145
590,167
Accumulated deficit (713,601) -- 713,601 --
---------- -------- -------- ----------
(105,867) (1,574) 133,580 26,139
Treasury Stock (17,500) 17,497 -- (3)
---------- -------- -------- ----------
Total Equity (Deficit) (123,367) 15,923 133,580 26,136
---------- -------- -------- ----------
TOTAL LIABILITIES AND
EQUITY (DEFICIT) 4,412,693 -- 133,580 4,546,273
========== ======== ======== ==========
The other current liabilities adjustment is all comprised of loans from MG
Holdings Corp. to pay creditors pursuant to the reorganization plan. The
liability to the reorganized company is $515,638.
Continued.....
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9
(Continued)
Notes to Consolidated Condensed Financial Statements
for the Three-Month Periods Ended July 31, 1996 and 1995
(Unaudited)
3. INVENTORIES
The inventories consist of finished goods.
4. PER SHARE INFORMATION
Per share information for the period ended July 31, 1996 is based on the new
shares issued in the reorganization. Therefore, the Company believes that per
share information for the period ended July 31, 1995 is not meaningful.
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10
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Three Months Ended July 31, 1996
as Compared to Three Months Ended July 31, 1995
GENERAL
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".
PLAN OF REORGANIZATION
In 1994, the Company added a new line of products consisting primarily of
treadmills and ski machines. Initially, the Company was successful in marketing
these products. For the fiscal year ended April 30, 1995, sales of these
products represented approximately 53% of the Company's gross sales. However,
due to serious manufacturing defects and poor construction of the Company's
products delivered by the Company's manufacturers, primarily located in the
People's Republic of China, the Company was forced to allow substantial
chargebacks by its customers. Although, pursuant to a written agreement, one of
the manufacturers, China National Metals and Minerals ("CNM"), acknowledged the
defects and agreed to pay for returns and to provide replacement goods at no
cost, it breached this agreement soon thereafter. In March 1995, CNM sued the
Company for monetary damages, alleging, among other things, breach of contract.
The Company and CNM subsequently settled the matter by releasing each other from
any claims and allowing CNM to collect an aggregate of $15,000 from the Company.
The Company suffered severe losses from its venture into this line of business
and in August 1995 was forced to seek protection from its creditors under
Chapter 11 of the 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. MG Holding Corp., which
had purchased a promissory note from the Company's principal financial
institution, received 14,880,000 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. See
"Security Ownership of Certain Beneficial Owners and Management" and "Certain
Relationships and Related Transactions". An additional 800,000 shares and
313,900 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 of reorganization 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.
In addition, under the Plan, the Company merged with a newly-formed Nevada
corporation for the purpose of changing its state of incorporation. The balance
sheet of the combined entity was substantially similar to the balance sheet of
the Company prior to the merger.
Continued.....
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11
(Continued)
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Three Months Ended July 31, 1996
as Compared to Three Months Ended July 31, 1995
Upon emergence from bankruptcy, the Company adopted fresh-start accounting on
July 31, 1996 (see Note 2 to the Financial Statements). Under fresh-start
accounting, all assets and liabilities were restated to reflect their
reorganization value which approximated book value at July 31, 1996. The
reorganization value in excess of amounts allocable to identifiable assets is
amortized over a period of eleven years. In connection with the bankruptcy
proceedings, the Company restructured its operations and relocated its
administrative headquarters and warehouse facilities.
RESULTS OF OPERATIONS
Sales for the three months ended July 31, 1996 increased from $191,000 to
$1,983,000, totaling $1,802,000 or 943% from the three months ended July 31,
1995. Sales of the Company's exercise equipment and sports bags/luggage lines
decreased by $581,000 and $752,000, respectively, during the three months ended
July 31, 1996. During the three-month period ended July 31, 1995, sales of the
Company's Exercise and Luggage lines of $1,460,000 and $1,866,000, respectively,
were offset by credits of $3,177,000 issued to customers in connection with the
discontinued line of manual treadmills and ski machines.
The Company does not believe that the decrease in sales of its products
represents a material trend. The Company believes that the decrease is
primarily the result of the reorganization prodeedings. The Company will
attempt to reverse this trend by expanding its product lines and increasing the
attractiveness of its products by developing new packaging. There can be no
assurance that the Compny will be successful in this effort.
Operating expenses decreased by approximately $1,004,000. As a result of the
Company's reorganization, the Company had decreases in the following expenses:
Office salaries $211,000
Payroll taxes $ 35,000
Insurance $ 61,000
Professional fees $164,000
Freight out $209,000
Promotion $ 56,000
Travel & entertainment $ 37,000
Research & development $ 25,000
Warehouse salaries $ 92,000
Fringe benefits $ 25,000
Pension costs $ 23,000
Promotional expense $ 56,000
Repairs & maintenance $ 6,000
Office salaries decreased by $211,000 due to the overall reduction of the office
staff as a part of the reorganization. Payroll taxes decreased by $35,000 as a
result of the employees eliminated due to the reorganization. Insurance expense
decreased by $61,000 due to lower liability premiums. Professional fees
decreased by $164,000 due to decreased accounting fees. Freight decreased by
$209,000 due to decreased shipments. Promotional expenses decreased by $56,000
due to decreased expenditures for these materials. Travel & entertainment
decreased by $37,000 due to improved cost management. Research & development
decreased by $25,000 due to improved cost management. Warehouse salaries
decreased by $92,000 due to the elimination of warehouse employees under the
reorganization. Fringe benefits decreased by $25,000 due to the employees and
positions eliminated as a part of the reorganization. Pension costs decreased by
$23,000 because the pension plan was terminated under the reorganization.
Promotional expenses decreased due to decreased spending for these items.
Repairs & maintenance decreased by $6,000 due to the elimination of the
warehouse facility under the reorganization.
Interest expense decreased by approximately $163,000. This decrease was due
primarily to a decrease in current debt of approximately $12,000,000 as of July
31, 1996, compared to July 31, 1995. This decrease in debt was the result of the
Company's reorganization.
Continued.....
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12
(Continued)
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Three Months Ended July 31, 1996
as Compared to Three Months Ended July 31, 1995
The Company had a pretax loss of $76,000 compared to a pretax loss of $4,932,000
in the prior year's three-month period.
The following table sets forth the results of operations for the periods
discussed above:
Predecessor Company
----------------------------------
3 Months Ended 3 Months Ended
July 31, 1996 July 31, 1995
------------- -------------
Sales $ 1,983,000 $ 191,000
Other income 10,000 --
----------- -----------
1,993,000 191,000
Cost of sales 1,454,000 3,341,000
----------- -----------
Gross profit 539,000 (3,150,000)
----------- -----------
Operating Expenses 558,000 1,562,000
Interest 57,000 220,000
-----------
615,000 1,782,000
Pretax income (76,000) (4,932,000)
Tax provision -- --
----------- -----------
Loss $ (76,000) $(4,932,000)
=========== ===========
LIQUIDITY AND CAPITAL RESOURCES
During the three months ended July 31, 1996, cash used by operating activities
amounted to $64,800. This was primarily the result of a net loss of $76,400,
increases in accounts receivable and due from suppliers, and prepaid expenses of
$221,300 and $100,600, respectively, which were offset by a decrease in
inventory and an increase in accounts payable and accrued expenses (related and
non-related combined) of $115,600 and $155,800, respectively, and a net increase
in insurance note payable of $62,020.
Financing activities provided cash of $43,200. Proceeds from insurance notes
payable of $77,200 were offset by repayments of insurance notes payable and
repayments of capital lease obligations of $15,200 and $18,800, respectively.
The Company had a negative cash flow of $21,600 for the three months ended July
31, 1996.
Pursuant to an unwritten understanding, Achim makes its lines of credit
available to the Company which will enable it to finance the purchases of its
inventory from its overseas suppliers. Also, from time to time, Achim will
purchase the products directly from the manufacturer and resell them to the
Company without markup. Achim charges the Company interest on the unpaid balance
of the purchases. The Company believes that cash generated by operations and the
availability of Achim's credit line to finance the Company's purchase of
inventory will be sufficient to finance its operations for the next twelve
months.
SEASONALITY
The Company's business is highly seasonal with higher sales typically in the
second and third quarters of the fiscal year as a result of shipments of
exercise equipment and luggage/sports bags related to the holiday season.
-12-
13
Part II. Other Information
Not Applicable
-13-
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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 November 28, 1997 By /s/ William P. Dolan
----------------- -----------------------------------------
William P. Dolan, Vice President, Finance
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