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 JULY 31, 2004
[ ] 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 14, 2004 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, 2004
Page
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets as of July 31, 2004 (unaudited) and 1
April 30,2004
Condensed Statements of Operations for the three months 2
ended July 31, 2004 (unaudited) and July 31, 2003(unaudited)
Condensed Statements of Cash Flows for the three months ended 3
July 31, 2004 (unaudited) and July 31,2003 (unaudited)
Notes to the Financial Statements for the three months ended
July 31, 2004 (unaudited) and July 31,2003(unaudited) 4-6
Item 2. Management's Discussion and Analysis 7-10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 10
Item 2. Changes in Securities 10
Item 3. Defaults Upon Senior Securities 11
Item 4. Submission of Matters to a Vote of Security Holders 11
Item 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 11
Exhibits 12-14
Signatures 15
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DYNAMIC INTERNATIONAL, INC.
CONDENSED BALANCE SHEETS
JULY 31, 2004 APRIL 30, 2004
(UNAUDITED)
CURRENT ASSETS
Cash $ 65,787 $ 6,783
Accounts receivable, less
allowance of $125,000 at July 31 and $137,000
at April 30, 2004 1,143,657 835,889
Due from affiliated Company 29,808 72,767
Inventories 716,686 750,872
Defered income taxes-current 270,000 270,000
Other current assets 109,606 120,707
---------- ----------
Total Current Assets 2,335,544 2,057,018
---------- ----------
Fixed Assets- Net of accumulated
depreciation 39,890 40,912
---------- ----------
OTHER ASSETS
Deferred income taxes 270,000 270,000
Other 1,000 1,000
---------- ----------
Total Other Assets 271,000 271,000
---------- ----------
TOTAL ASSETS $2,646,434 $2,368,930
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued expenses $ 813,677 $ 822,337
Amounts due affiliated company 1,114,277 1,128,803
Income taxes payable 4,920 32,619
---------- ----------
Total Current Liabilities 1,932,874 1,983,759
---------- ----------
COMMITMENTS and CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock 4,419 4,419
Additional paid in capital 5,119,796 5,119,796
Accumulated deficit (4,410,652) (4,739,041)
---------- ----------
713,563 385,174
Less: Treasury stock (3) (3)
---------- ----------
Total Stockholders' Equity 713,560 385,171
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $2,646,434 $2,368,930
========== ==========
SEE ACCOMPANYING NOTES TO CONDENSED FINANCIAL STATEMENTS
1
DYNAMIC INTERNATIONAL, INC.
CONDENSED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JULY 31,
2004 2003
(UNAUDITED) (UNAUDITED)
Net sales $1,966,074 $1,990,278
Cost of sales 1,164,712 1,229,710
---------- ----------
Gross profit 801,362 760,568
---------- ----------
Operating expenses 457,171 448,590
Interest 3,128 4,116
Interest-related party 3,510 26,864
---------- ----------
463,809 479,570
---------- ----------
Income before taxes 337,553 280,998
Provision for taxes 9,164 0
---------- ----------
Net income $ 328,389 $280,998
========== ==========
Basic and diluted
income per
common share $ .07 $ .06
========== ==========
Basic and diluted 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,
2004 2003
(Unaudited) (Unaudited)
Operating activities:
Net income $328,389 $280,998
-------- --------
Adjustments to reconcile net income
to net cash provided by operating
activities
Depreciation 1,023 2,622
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable (307,768) (61,784)
Due from affiliate 42,959 -
Inventory 34,186 (58,199)
Prepaid expense and other 11,101 (1,042)
Increase (decrease) in:
Accounts payable and accrued expenses-
non-related (8,661) 1,002
Income taxes payable (27,699) -
-------- --------
Total adjustments (254,859) (117,401)
-------- --------
Net cash provided by operating activities 73,530 163,597
-------- --------
Cash flows from financing activities
Amounts due affiliated company (14,526) (172,955)
-------- --------
Increase (decrease) in cash and equivalents 59,004 (9,358)
Cash and equivalents- beginning of period 6,783 36,648
-------- --------
Cash and equivalents - end of period $65,787 $27,290
======== ========
SEE ACCOMPANYING NOTES TO CONDENSED FINANCIAL STATEMENTS
3
DYNAMIC INTERNATIONAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JULY 31, 2004 AND 2003
(UNAUDITED)
1. BASIS OF PRESENTATION
The Condensed Balance Sheet as of July 31, 2004 and the related
Condensed Statements of Operations and Cash Flows for the three months
ended July 31, 2004 and 2003 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,
2004 and April 30,2004 and the results of their operations for the
three months ended July 31, 2004 and 2003.
The April 30, 2004 Balance Sheet data was derived from audited
financial statements but does not include all disclosures required by
generally accepted accounting principles. The interim condensed
financial statements and notes thereto should be read in conjunction
with the financial statements and the notes included in the Company's
filing on Form 10K-SB. The results of operations for the three months
ended July 31, 2004 and 2003 are not necessarily indicative of the
operating results for the entire year or any future interim periods.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting policies followed by the Company are set forth in the
notes to the Company's financial statements included in the Company's
Form 10K-SB for the year ended April 30, 2004.
4
DYNAMIC INTERNATIONAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THREE MONTHS ENDED JULY 31, 2004 AND 2003
(UNAUDITED)
3. RELATED PARTY TRANSACTIONS
Pursuant to a Warehouse and Service Agreement dated as of September 21,
2000 (the "Warehousing Agreement") between the Company and a related
party (the "Related Entity") wholly owned by a major stockholder, the
Related Entity 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 21, 2000, had a
term of two years and then automatically renews from year to year unless
written notice of termination is given at least six months prior to the
commencement of a renewal period. Total warehousing and administrative
expenses charged to operations were $89,214 and $83,948 for the three
months ended July 31, 2004 and 2003, respectively.
In addition, the Related Entity has purchased inventory for the Company
and has charged the Company for the invoiced amount of the inventory.
Pursuant to an unwritten understanding, the Related Entity arranges for
the issuance, by its financial lender, of letters of credit in favor of
the Company's overseas suppliers, thereby enabling the Company to finance
the purchases of its inventory.
Pursuant to a Security Agreement dated as of January 2, 2001, between the
Company and the Related Entity, the Related Entity has perfected its
security interest in all of the Company's assets.
Amounts due to the Related Entity totaled $1,128,803 and $1,114,277, at
April 30, 2004 and July 31, 2004, 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 $3,510 and $26,864 for the three months ended July 31,
2004 and 2003, respectively.
5
DYNAMIC INTERNATIONAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THREE MONTHS ENDED JULY 31, 2004 AND 2003
(UNAUDITED)
4. SIGNIFICANT RISKS AND UNCERTAINTIES
The Company's luggage products compete with products designed by a number
of the largest companies in the industry. Accordingly, there can be no
assurance that the Company will be able to effectively compete with these
companies as well as with other smaller entities.
Most of the Company's products are purchased from China. The Company
believes that, if necessary, it will be able to obtain its products from
firms located in other countries at little, if any, additional expense.
The Company believes that an interruption in deliveries by a manufacturer
located in a particular country will not have a material adverse impact
on the business of the Company. Nevertheless, because of political
instability in a number of the supply countries, occasional import quotas
and other restrictions on trade or otherwise, there can be no assurance
that the Company will at all times have access to a sufficient supply of
merchandise.
5. LEGAL PROCEEDINGS
The Company has answered a complaint filed by 3L Associates. The Company
entered into a license agreement with 3L Associates in September of 2000,
under which agreement the Company was given the license to use the
trademark Adolfo in connection with luggage and accessories. The
complaint alleges that the Company did not pay minimum royalties of
$25,000 for the period April 1, 2002 to March 31, 2003. The complaint
also alleges that the Company did not give the required notice to 3L
Associates that the Company did not wish to extend the term of the
license agreement. In the complaint, 3L Associates demands judgment
against the Company in the amount of $300,000, together with its expenses
and reasonable attorney's fees, legal interest and costs, and such other
and further relief as shall seem just and proper to the court. The
Company is vigorously defending against the suit.
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 THREE MONTHS ENDED JULY 31, 2004 COMPARED TO THE
THREE MONTHS ENDED JULY 31, 2003.
The following table sets forth the results of operations for the periods
discussed below:
Three Months % of Three Months % of
Ended Net Ended Net
July 31, 2004 Sales July 31, 2003 Sales
Gross Sales $2,135,000 $2,100,000
Allowances (169,000) (110,000)
---------- ----------
Net Sales 1,966,000 100.00 1,990,000 100.00
Cost of Goods
Sold 1,165,000 59.26 1,230,000 61.81
---------- ----------
Gross Margin 801,000 40.74 760,000 38.19
Operating Expenses 456,000 23.20 448,000 22.51
Interest 3,000 .15 4,000 .20
Interest - related party 4,000 .20 27,000 1.36
---------- ----------
463,000 23.55 479,000 24.07
---------- ----------
Income before provision
for Income Taxes $ 338,000 17.19 $ 281,000 14.12
========== ==========
7
Sales for the three months ended July 31,2004, decreased by $24,000 or 1.2% to
$1,966,000 from $1,990,000 for the three months ended July 31, 2003.During the
three months ended July 31,2004, sales to Sears Roebuck, Mervyn's Department
Stores, Ross Stores, BJ'S Wholesale Club, and JC Penney's decreased by $248,000,
$146,000, $97,000, $94,000 and $62,000, respectively. These decreases were
offset by increased sales to TJ Maxx, Kohl's Department Stores, Shopko and
Alcone Marketing of $355,000, $156,000, $85,000 and $26,000, respectively.
Allowances granted to customers were 8.6% of net sales for the three months
ended July 31,2004 as compared to 5.5% of net sales for the three months ended
July 31,2003.This increase was due to returns and price support given to Sears
Roebuck of $58,000.
The Company's gross profit increased by approximately $41,000 and the Company's
gross margin, as a percentage of sales, increased by 2.55% to 40.74% from 38.19%
for the three months ended July 31, 2003.
Operating expenses, exclusive of interest expense, for the three months ended
July 31, 2004 were $8,000 more than the three months ended July 31,2003. This
increase is represented approximately by changes in the following expenses:
Increase
(Decrease)
Shipping Fees $5,000
Salesman Salaries $6,000
Sales commissions ($2,000)
Shipping fees increased by $5,000 because gross revenues (revenues before
customer allowances) which are used to calculate shipping fees, increased by
$35,000 for the three months ended July 31,2004. Salesman salaries increased by
$6,000 due to an increase in compensation. Sales commissions decreased by $2,000
due to an increase in sales to customers that are not subject to sales
commissions.
Interest expense for the three months ended July 31, 2004 decreased by $1,000
from the three months ended July 31, 2003.
Interest expense related party for the three months ended July 31,2004 decreased
by $23,000 from the three months ended July 31, 2003. This decrease was due to
the reduction of the amounts due to Achim Importing Co. Inc. ("Achim").
8
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.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities for the three months ended July 31,2004
amounted to $74,000 compared to $164,000 for the three months ended July
31,2003.
The company used cash of $15,000 to reduce the amount due to Achim.
The Company has received substantial financial support from Achim. Achim is
wholly owned by Marton B. Grossman, the Chairman and President of the Company.
Advances from Achim are due upon demand. The Company records interest on the
unpaid balance due to Achim at the JPMorganChase prime rate plus 1%. The amount
of interest recorded for the three months ended July 31, 2004 and 2003was $4,000
and $27,000, respectively
The Company will continue to utilize the financial support of Achim for
inventory purchases. Achim is not obligated to continue providing any support.
In the event Achim chooses not to support the Company, we would have to reduce
operations or seek to find financial support from other third parties.
9
ITEM 3. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed in the Company's filings under
the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the periods specified in the rules and forms of the Securities
and Exchange Commission. Such information is accumulated and communicated to the
Company's management, including its Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding required
disclosure. The Company's management, including the Chief Executive Officer and
the Chief Financial Officer, recognizes that any set of controls and procedures,
no matter how well designed and operated, can provide only reasonable assurance
of achieving the desired control objectives.
Within 90 days prior to the filing date of the annual report on Form 10KSB for
the fiscal year ended April 30, 2004, the Company carried out an evaluation,
under the supervision and with the participation of the Company's management,
including the Company's Chief Executive Officer and the Company's Chief
Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures. Based on such evaluation, the
Company's Chief Executive Officer and Chief Financial Officer concluded that the
Company's disclosure controls and procedures are effective.
There were no significant changes in the Company's internal controls or in other
factors which could significantly affect the controls subsequent to the date of
their evaluation.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company has answered a complaint filed by 3L Associates. The Company
entered into a license agreement with 3L Associates in September of 2000,
under which agreement the Company was given the license to use the
trademark Adolfo in connection with luggage and accessories. The complaint
alleges that the Company did not pay minimum royalties of $25,000 for the
period April 1, 2002 to March 31, 2003. The complaint also alleges that
the Company did not give the required notice to 3L Associates that the
Company did not wish to extend the term of the license agreement. In the
complaint, 3L Associates demands judgment against the Company in the
amount of $300,000, together with its expenses and reasonable attorney's
fees, legal interest and costs, and such other and further relief as shall
seem just and proper to the court. The Company is vigorously defending
against the suit.
ITEM 2. CHANGES IN SECURITIES
None.
10
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2
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 14, 2004