<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
QUARTERLY REPORT UNDER SECTION 13 or 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter ended October 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 January 31, 1997, 15,993,991 shares of the Registrant's common stock par
value $.001 were issued and outstanding.
-1-
<PAGE> 2
Form 10-Q FQE 10/31/96 DYNAMIC INTERNATIONAL, LTD.
INDEX
Page No.
--------
Part I. Financial Information
Consolidated Condensed Balance Sheets
as of October 31, 1996 and April 30, 1996 3
Consolidated Condensed Statements of Operations
for the Six Months and Three Months Ended
October 31, 1996 and 1995 4
Consolidated Condensed Statements of Cash Flows
for the Six Months Ended October 31, 1996 and 1995 5
Notes to Consolidated Condensed Financial Statements
for the Six-Month Periods Ended October 31, 1996
and 1995 6, 7, 8
Management's Discussion and Analysis of Financial
Condition and Results of Operations for Six Months
Ended Oct. 31, 1996 As Compared to Six Months Ended
Oct. 31, 1995 9, 10
Management's Discussion and Analysis of Financial
Condition and Results of Operations for Three Months
Ended Oct. 31, 1996 As Compared to Three Months Ended
Oct. 31, 1995 11
Part II. Other Information 12
Signatures 13
-2-
<PAGE> 3
Form 10-Q FQE 10/31/96 DYNAMIC INTERNATIONAL, LTD.
Consolidated Condensed Balance Sheets
As of October 31, 1996 and April 30, 1996
(Unaudited)
<TABLE>
<CAPTION>
Reorganized Predecessor
Company Company
Oct. 31, 1996 April 30, 1996
------------- --------------
<S> <C> <C>
Current Assets
Cash $ 2,135 $ 26,515
Accounts Receivable - Trade (Net of allowance for
doubtful accounts of $167,000 in 1996 & $167,000
in 1995) 1,982,694 1,036,927
Due from Suppliers 10,704 26,760
Inventory 2,010,466 2,384,469
Prepaid Expenses 164,156 81,693
Miscellaneous Receivables 135,039 135,039
Prepaid & Refundable Income Taxes 182,656 291,146
----------- -----------
Total Current Assets 4,487,850 3,982,549
Fixed Assets, at Cost, Less Accumulated
Depreciation 177,674 230,055
Due from Suppliers 52,198 36,142
Security Deposits 4,650 4,650
Reorganization value in excess of amounts
allocable to identifiable assets 121,332 --
----------- -----------
Total Assets $ 4,843,704 $ 4,253,396
=========== ===========
Liabilities and Shareholders Equity (Deficit)
Current Liabilities
Notes payable bank, trade $ 35,440 $ --
Accounts Payable & Accrued Expenses 3,417,967 3,139,141
Capital Lease Obligations 29,190 48,732
Loans payable - related party 1,205,109 557,000
Other liabilities -- 531,560
----------- -----------
Total Current Liabilities 4,687,706 4,276,433
Other Liabilities
-----------
Capital Lease Obligations 10,530 23,965
----------- -----------
Total Liabilities 4,698,236 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 3,335 590,291
Retained Earnings (since July 31, 1996, date
of reorganization, total deficit eliminated
was $710,986) 126,142 --
Accumulated deficit -- (637,237)
----------- -----------
Total 145,471 (29,502)
Less Treasury Stock (3) (17,500)
----------- -----------
Total Shareholders' Equity (Deficit) 145,468 (47,002)
----------- -----------
Total Liabilities & Shareholders Equity (Deficit) $ 4,843,704 $ 4,253,396
=========== ===========
</TABLE>
See Accompanying Notes to Consolidated Condensed Financial Statements.
-3-
<PAGE> 4
Form 10-Q FQE 10/31/96 DYNAMIC INTERNATIONAL, LTD.
Consolidated Condensed Statements of Operations
For the Six Months and Three Months Ended October 31, 1996 and 1995
(Unaudited)
<TABLE>
<CAPTION>
For the Six Months Ended For the Three Months Ended
Oct. 31, 1996 Oct. 31, 1995 Oct. 31, 1996 Oct. 31, 1995
---------------------------- ----------------------------
<S> <C> <C> <C> <C>
Net Sales $5,815,042 $1,454,895 $3,653,321 $1,263,666
Cost of Goods Sold 4,188,080 4,084,355 2,563,612 743,035
---------- ---------- ---------- ----------
Gross Profit 1,626,962 (2,629,460) 1,089,709 520,631
---------- ---------- ---------- ----------
Selling, General and
Administrative Expenses 1,299,081 4,544,752 744,384 2,982,963
---------- ---------- ---------- ----------
Interest 139,700 191,448 82,323 (29,066)
---------- ---------- ---------- ----------
1,438,781 4,736,200 826,707 2,953,897
--------- ---------- ---------- ----------
Bankruptcy Administration 28,370 402,050 28,370 402,050
---------- ---------- ---------- ----------
Net Income (Loss)
Before Tax 159,811 (7,767,710) 234,632 (2,835,316)
---------- ---------- ---------- ----------
Provision for Income Taxes 108,490 0 108,490 0
---------- ---------- ---------- ----------
Net Income (Loss) 51,321 (7,767,710) 126,142 (2,835,316)
========== =========== ========== ===========
Loss per Common Share 0.003 0.01
Number of Common Shares
Outstanding 15,993,991 15,993,991
Cash Dividends per Common
Share NONE NONE NONE NONE
</TABLE>
See Accompanying Notes to Consolidated Condensed Financial Statements.
-4-
<PAGE> 5
Form 10-Q FQE 10/31/96 DYNAMIC INTERNATIONAL, LTD.
Consolidated Condensed Statements of Cash Flows
for the Six Months Ended October 31, 1996 and 1995
(Unaudited)
<TABLE>
<CAPTION>
For the 6 For the 6
Months Ended Months Ended
Oct. 31, 1996 Oct. 31, 1995
------------- -------------
<S> <C> <C>
Net Cash Used in Operating Activities $(143,392) $(1,457,512)
Cash Flows from Investing Activities
Acquisition of Property and Equipment -- $ (37,272)
--------- -----------
Net Cash Used in Investing Activities -- (37,272)
Cash Flows from Financing Activities
Proceeds from Notes Payable $ -- $ 3,393,628
Repayments of Notes Payable -- --
Proceeds from Bankers Acceptances -- 1,118,516
Repayments of Bankers Acceptances -- (4,127,139)
Proceeds from Officer's Loan Payable -- --
Repayments of Capital Leases (32,976) (36,082)
Increase in Insurance Note Payable 35,440 157,522
Increase in Note Payable to Related Party 116,548 725,395
--------- -----------
Net Cash Provided by Financing Activities $ 119,012 $ 1,231,840
Net Decrease in Cash (24,380) (262,944)
Cash and Cash Equivalents--Beginning of 26,515 342,571
Period
--------- -----------
Cash and Cash Equivalents--End of Period $ 2,135 $ 79,627
========= ===========
</TABLE>
Supplemental disclosures of Cash Flow information:
Debt Note: Interest paid during the six months ended Oct. 31, 1996
and 1995 was $0 and $203,964, respectively.
Income Tax Note: The Company made no income tax payments during the six-month
periods ending Oct. 31, 1996 and 1995, respectively.
See Accompanying Notes to Consolidated Condensed Financial Statements.
-5-
<PAGE> 6
Form 10-Q FQE 10/31/96 DYNAMIC INTERNATIONAL, LTD.
Notes to Consolidated Condensed Financial Statements
for the Six-Month Periods Ended October 31, 1996 and 1995
(Unaudited)
1. Basis of Presentation:
The consolidated condensed balance sheet as of October 31, 1996 and the related
consolidated condensed statements of operations and consolidated condensed
statements of cash flows for the six-month periods ended October 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
six-month period ended October 31, 1996 are not necessarily indicative of the
operating results for the entire year.
2. Reorganization:
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. The amended and modified plan (the "Plan") was confirmed
on May 23, 1996 and substantially consummated in August, 1996. For accounting
purposes, the effective date of the reorganization is 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" as referred to below is the
common stock of Dynamic International, Ltd.
Chapter 11 claims filed against the Company and subsequently allowed in the
bankruptcy proceeding totaled approximately $17,200,000. The Plan discharged
claims through distributions of cash and issuance of shares of new common stock.
The cash distributions totaled approximately $515,000 and was funded from loans
by a secured creditor. A total of 15,993,991 shares of new common stock was
issued, out of which 14,880,000 shares were issued to one secured creditor,
800,000 shares were issued to unsecured creditors, and 313,991 shares were
issued to the pre-confirmation common stock equity holders. The total value of
the allowed claims exceeded the value of the cash and the common stock
distributed to the secured and unsecured creditors by approximately $16,700,000
which has been recorded as an extraordinary gain.
The Company accounted for the reorganization using "fresh start reporting" in
accordance with the Statement of Position ("SOP") 90-7 in preparing its balance
sheet as of July 31, 1996, which is based on the reorganized value of the
Company and which reduced the accumulated deficit to zero. Such reorganization
value was determined by projecting cash flows over an eleven-year period and
discounting the cash flows at the cost of capital rate of 11.5%. The fair value
of the assets was determined to approximate book value. The excess of the
reorganization value over the fair value of the assets is recorded as
reorganization value in excess of amounts allocable to identifiable assets
which will be amortized over eleven years.
Continued.....
-6-
<PAGE> 7
Form 10-Q FQE 10/31/96 DYNAMIC INTERNATIONAL, LTD.
(Continued)
Notes to Consolidated Condensed Financial Statements
for the Six-Month Periods Ended October 31, 1996 and 1995
(Unaudited)
The eleven-year cash flow projection was based on estimates and assumptions
about circumstances and events that have not yet taken place. Such estimates and
assumptions are inherently subject to significant economic and competitive
uncertainties and contingencies beyond the control of the Company, including,
but not limited to, those with respect to the future courses of the Company's
business activity. Accordingly, there will usually be differences between
projections and actual results because events and circumstances frequently do
not occur as expected, and those differences may be material.
3. Inventories:
The inventories consist of finished goods.
4. Per Share Information:
Per share information for the period ended October 31, 1996 is based on the new
shares issued in the reorganization. Therefore, the Company believes that per
share information for the period ended October 31, 1995 is not meaningful.
-7-
<PAGE> 8
Form 10-Q FQE 10/31/96 DYNAMIC INTERNATIONAL, LTD.
The effect of the Plan of reorganization on the Company's balance sheet as of
July 31, 1996 is as follows:
<TABLE>
<CAPTION>
Balance Reorganized
Sheet Stock B/S
7/31/96 Exchange Fresh Start 7/31/96
------- -------- ----------- -------
<S> <C> <C> <C> <C>
Cash 4,951 4,951
Accounts receivable, net 1,412,931 1,412,931
Inventory 1,910,525 1,910,525
Prepaid & refundable income
taxes 291,959 291,959
Other assets 328,029 328,029
--------- ---------
Total Current Assets 3,948,395 3,948,395
Fixed assets, net 203,863 203,863
Other assets 56,848 56,848
Reorganization value in excess
of amounts allocable to
Identifiable assets 0 124,154 124,154
--------- -------- ---------
TOTAL ASSETS 4,209,106 0 124,154 4,333,260
========= ======== ======== =========
Loans payable - MG 593,670 593,670
Loans payable - Trade 62,020 62,020
Accounts payable & accrued
expenses 3,604,440 3,604,440
Capital lease obligations -
Current 32,226 32,226
Other liabilities 15,923 (15,923) 0 (0)
--------- --------- ------- ----------
Total Current Liabilities 4,308,279 (15,923) 0 4,292,356
Capital Lease Obligations -
Non-current 21,578 21,578
--------- -------- ------- ---------
Total Other Liabilities 21,578 21,578
Common stock 17,444 (17,444) 15,994
15,994
Additional paid-in capital 590,291 (590,291) (586,832) 3,335
590,167
Accumulated deficit (710,986) 710,986 0
Treasury stock (17,500) 17,497 (3)
---------- -------- -------- ----------
Total Equity (Deficit) (120,751) 15,923 124,154 19,326
---------- -------- -------- ---------
TOTAL LIABILITIES AND
DEFICIT 4,209,106 (0) 124,154 4,333,260
========= ========= ======== =========
</TABLE>
-8-
<PAGE> 9
Form 10-Q FQE 10/31/96 DYNAMIC INTERNATIONAL, LTD.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Six Months Ended Oct. 31, 1996
as Compared to
Six Months Ended Oct. 31, 1995
General
The Company is the successor to Dynamic Classics, Ltd., a Delaware corporation
incorporated in 1986 ("DCL" together with "DIL", the "Company"), which was the
successor to a New York company incorporated in 1964. In August 1996, DCL merged
with and into DIL, which had been newly formed for the purpose of this merger.
The sole objective of the merger was to change the Company's state of
incorporation from Delaware to Nevada.
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, 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. 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. MG Holdings
Corp., which had purchased a promissory note from the Company's principal
financial institution, received 14,880,000 shares of common stock, representing
approximately 93% of the issued and outstanding shares, thereby gaining absolute
control over the Company's affairs.
Results of Operations
Sales for the six months ended October 31, 1996 increased from $1,454,000 to
$5,815,000, totaling $4,360,000, or 300% from the six months ended October 31,
1995. Sales of the Company's exercise equipment and luggage lines increased by
$416,000 and $1,007,000, respectively, to $2,336,000 and $3,479,000,
respectively, over the six-month period ended October 31, 1995. For the period
ended October 31, 1995, sales of the Company's exercise equipment and luggage
lines of $1,998,000 and $2,589,000, respectively, were offset by credits of
$3,211,000 issued to customers in connection with the discontinued line of
manual treadmills and ski machines.
The Company's gross profit increased from a gross loss of $2,629,000 to a gross
profit of $1,627,000. This increase is due to the credits of $3,211,000 issued
to customers in connection with the discontinued line of manual treadmills and
ski machines which reduced the sales for the six months ended October 31, 1995.
Operating expenses decreased by approximately $3,246,000. As a result of the
Company's reorganization, the Company had decreases in the following expenses:
Continued.....
-9-
<PAGE> 10
Form 10-Q FQE 10/31/96 DYNAMIC INTERNATIONAL, LTD.
(Continued)
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Six Months Ended Oct. 31, 1996
as Compared to
Six Months Ended Oct. 31, 1995
<TABLE>
<S> <C>
Officers' Salaries $ 90,870
Office Salaries $457,244
Payroll Taxes $ 47,748
Fringe Benefits $ 14,296
Pension Costs $766,609
Rent $279,252
Insurance $162,276
Insurance Claims $289,352
Professional Fees $140,455
Consulting Fees $107,623
Freight Out $210,797
Promotion $114,622
Provision for Bad Debts $504,890
</TABLE>
Interest expense decreased by approximately $52,000 due to decreased borrowing.
Bankruptcy administration costs decreased by $374,000 to $28,000 due primarily
to a decrease of $282,000 in the legal and accounting fees related to the
reorganization.
The Company had a pretax profit of $160,000 compared to a pretax loss of
$7,767,000 in the prior year's six-month period.
Liquidity and Capital Resources
During the six months ended October 31, 1996, cash used in operating activities
was $143,392. This was primarily the result of increases in accounts receivable
and prepaid expenses of $945,767 and $82,463, respectively, which were offset by
a decreased inventory, accounts payable, and prepaid taxes of $374,003,
$279,900, and $108,490, respectively.
Financing activities provided cash of $119,012.
Pursuant to an unwritten understanding, Achim Importing Co., Inc. ("Achim"), an
entity owned by Marton B. Grossman, Chairman and President of the Company, 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.
-10-
<PAGE> 11
Form 10-Q FQE 10/31/96 DYNAMIC INTERNATIONAL, LTD.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Three Months Ended Oct. 31, 1996
as Compared to
Three Months Ended Oct. 31, 1995
Results of Operations
Sales for the three months ended October 31, 1996 increased from $1,264,000 to
$3,653,000, totaling $2,390,000 or 189% from the three months ended October 31,
1995. Sales of the Company's exercise equipment and luggage lines increased by
$918,000 and $1,472,000, respectively, to $1,458,000 and $2,195,000,
respectively, over the three-month period ended October 31, 1995.
The Company's gross profit increased from $520,000 to $1,090,000. This increase
was due primarily to the increased volume.
Operating expenses decreased by approximately $2,239,000 as a result of the
Company's reorganization. The Company had decreases in the following expenses:
<TABLE>
<S> <C>
Office Salaries $245,944
Payroll Taxes $ 25,231
Pension Costs $743,472
Rent $257,364
Insurance $ 95,488
Insurance Claims $289,352
Professional Fees $ 79,335
Consulting Fees $ 94,878
Provision for Bad Debts $519,343
</TABLE>
Interest expense increased by approximately $111,000. As a result of the Chapter
11 filing, the Company did not have to pay interest on pre-Petition debt during
the three months ended October 31, 1995.
Bankruptcy administration costs decreased by $374,000 to $28,000 due primarily
to a decrease of $282,000 in the legal and accounting fees related to the
reorganization.
The Company had a pretax profit of $235,000 compared to a pretax loss of
$2,835,000 in the prior year's three-month period.
-11-
<PAGE> 12
Form 10-Q FQE 10/31/96 DYNAMIC INTERNATIONAL, LTD.
Part II. Other Information
Not Applicable
-12-
<PAGE> 13
Form 10-Q FQE 10/31/96 DYNAMIC INTERNATIONAL, LTD.
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.
By: /s/ William P. Dolan
Date: February 3, 1997 -----------------------------------------
William P. Dolan, Vice President, Finance
-13-
<TABLE> <S> <C>
<ARTICLE> 5
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> APR-30-1997
<PERIOD-START> MAY-01-1996
<PERIOD-END> OCT-31-1996
<EXCHANGE-RATE> 1
<CASH> 2,135
<SECURITIES> 0
<RECEIVABLES> 1,982,694
<ALLOWANCES> 167,000
<INVENTORY> 2,010,466
<CURRENT-ASSETS> 4,487,850
<PP&E> 1,386,215
<DEPRECIATION> 1,208,541
<TOTAL-ASSETS> 4,843,704
<CURRENT-LIABILITIES> 4,687,706
<BONDS> 0
0
0
<COMMON> 15,994
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 4,843,704
<SALES> 5,815,042
<TOTAL-REVENUES> 5,815,042
<CGS> 4,188,080
<TOTAL-COSTS> 4,188,080
<OTHER-EXPENSES> 1,299,081
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 139,700
<INCOME-PRETAX> 159,811
<INCOME-TAX> 108,490
<INCOME-CONTINUING> 51,321
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 51,321
<EPS-PRIMARY> .003
<EPS-DILUTED> .003
</TABLE>
