<PAGE>
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, 1997 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 x/ No
------ ------
As of November 30, 1997, 3,198,798 shares of the Registrant's common stock par
value $.001 were issued and outstanding.
<PAGE>
INDEX
Page No.
--------
PART I FINANCIAL INFORMATION
Consolidated Condensed Balance Sheets
as of October 31, 1997 and April 30, 1997......................3
Consolidated Condensed Statements of Operations
for Six and Three Months Ended October 31, 1997, Three Months
Ended October 31, 1996, Three Months Ended
July 31, 1996..................................................4
Consolidated Condensed Statements of Cash Flows for
Six Months Ended October 31, 1997, Three Months Ended
October 31, 1996, Three Months Ended July 31, 1996.............5
Notes to Consolidated Condensed Financial Statements
for Six-Month Periods Ended October 31, 1997 and
1996...........................................................6
1. Basis of Presentation.................................6
2. Reorganization and Management Plan....................6
3. Inventories...........................................9
4. Per Share Information.................................9
5. Public Offering.......................................9
Management's Discussion and Analysis of Financial
Condition and Results of Operations for Six Months
Ended October 31, 1997 As Compared to Six Months
Ended October 31, 1996........................................10
General..................................................10
Plan of Reorganization...................................10
Results of Operations....................................11
Liquidity and Capital Resources..........................12
Seasonality..............................................13
Management's Discussion and Analysis of Financial
Condition and Results of Operations for Three Months
Ended October 31, 1997 As Compared to Three Months
Ended October 31, 1996........................................14
Results of Operations....................................14
Part II OTHER INFORMATION.............................................16
SIGNATURES..................................................................17
<PAGE>
Consolidated Condensed Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
Oct. 31, 1997 April 30, 1997
-------------- ---------------
<S> <C> <C>
Current Assets
- --------------
Cash $ 14,628 $ 43,543
Accounts Receivable - (Net of allowance
for doubtful accounts of $167,000) 1,032,209 887,089
Due from Suppliers 23,378 65,273
Inventory 2,385,644 3,301,735
Prepaid Expenses 192,845 60,272
Miscellaneous 2,658 2,658
Income Taxes Receivable --- 39,914
---------- ----------
Total Current Assets 3,651,362 4,400,484
Fixed Assets, at Cost, Less Accumulated
Depreciation 91,118 125,291
Due from Suppliers 36,142 36,142
Security Deposits 3,050 4,650
Deferred Stock Offering Costs 296,544 116,023
Reorganization value in excess of amounts
allocable to identifiable assets, net 118,400 124,472
---------- ----------
Total Assets $4,196,616 $4,807,062
========== ==========
Liabilities and Shareholders Equity
- -----------------------------------
Current Liabilities
- -------------------
Accounts Payable & Accrued Expenses,
Non-related $ 726,802 $ 846,234
Accounts Payable & Accrued Expenses,
Related 2,146,636 2,627,580
Capital Lease Obligations, Current 12,294 24,228
Income Taxes Payable 3,494 103,700
Loans payable - related party 1,059,785 844,531
---------- ----------
Total Current Liabilities $3,949,011 4,446,273
Other Liabilities
- -----------------
Loan Payable - related party --- 215,254
---------- ----------
Total Liabilities 3,949,011 4,661,527
Shareholders Equity
- -------------------
Common Stock 3,199 3,199
Additional Paid-In Capital 22,940 22,940
Retained Earnings (since July 31, 1996,
date of reorganization, total deficit
eliminated was $713,601) 221,469 119,399
---------- ----------
Total 247,608 145,538
Less Treasury Stock (3) (3)
---------- ----------
Total Shareholders' Equity 247,605 145,535
---------- ----------
Total Liabilities & Shareholders Equity $4,196,616 $4,807,062
========== ==========
</TABLE>
See Accompanying Notes to Consolidated Condensed Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
Consolidated Condensed Statements of Operations
for Six Months Ended October 31, 1997, Three Months Ended October 31, 1997,
Three Months Ended October 31, 1996, Three Months Ended July 31, 1996,
(Unaudited)
Predecessor
Reorganized Company Company
-------------------------------------------------------- -------------
For 6 Months For 3 Months For 3 Months For 3 Months
Ended Ended Ended Ended
Oct. 31, 1997 Oct. 31, 1997 Oct. 31, 1996 July 31, 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net Sales $3,694,425 $1,860,262 $ 3,653,321 $ 1,993,365
Other Income 10,858 2,900 --- ---
--------- --------- ---------- -------
3,705,283 1,863,162 3,653,321 1,993,365
Cost of Goods Sold 2,487,510 1,205,176 2,563,612 1,454,637
---------- ---------- ---------- ----------
Gross Profit 1,217,773 657,986 1,089,709 538,728
Operating Expenses 927,088 489,941 744,384 557,822
Interest 118,927 59,001 82,323 57,270
--------- ---------- --------- ---------
1,046,015 548,942 826,707 615,092
--------- ---------- --------- ---------
Bankruptcy Administration 1,094 1,094 28,370 ---
--------- ---------- --------- -------
Pretax Income (Loss) 170,664 107,950 234,632 (76,364)
Provision for Income Taxes 68,594 44,544 108,490 ---
---------- ---------- --------- -------
Net Income (Loss) $ 102,070 $ 63,406 $ 126,142 $ (76,364)
========== ========== =========== ============
Income per Common Share 0.03 0.02 0.04 ---
Number of Common Shares
Outstanding 3,198,258 3,198,258 3,198,258 ---
Cash Dividends per Common
Share NONE NONE NONE NONE
</TABLE>
See Accompanying Notes to Consolidated Condensed Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
Consolidated Condensed Statements of Cash Flows
for Six Months Ended October 31, 1997, Three Months Ended October 31, 1996,
and Three Months Ended July 31, 1996
(Unaudited)
Reorganized Company
--------------------------------------------------------
For 6 Months For 3 Months For 3 Months
Ended Ended Ended
10/31/97 10/31/96 7/31/96
------------- ------------- -------------
<S> <C> <C> <C>
Net Cash Provided (Used)
by Operating Activities $ 165,884 $ (57,879) $ (64,766)
Cash Flows from Investing
- -------------------------
Activities
----------
Acquisition of Property and
Equipment --- --- ---
--------- -------- ---------
Net Cash Used in Investing
Activities --- --- ---
Cash Flows from Financing
- -------------------------
Activities
----------
Repayments of Capital Leases (14,278) (14,164) (18,812)
Proceeds from Insurance Note Payable --- --- 77,225
Payments of Insurance Notes Payable --- (26,580) (15,205)
Increase in Note Payable to Related
Party --- 95,801 ---
Payments of Deferred Offering Costs (180,521) --- ---
---------- --------- ----------
Net Cash Provided by Financing
Activities (194,799) 55,057 43,208
Net Decrease in Cash (28,915) (2,822) (21,558)
Cash and Cash Equivalents--
Beginning of Period 43,543 4,957 26,515
--------- ------ ----------
Cash and Cash Equivalents--
End of Period $ 14,628 $ 2,135 $ 4,957
========= ======= ==========
<FN>
Supplemental disclosures of Cash Flow information:
Debt Note: Interest paid during the six months ended October 31, 1997
and the three months ended July 31, 1996 was $0 and $1,553,
respectively.
Income Tax Note: The Company made income tax payments of
$163,534 during the six months ended October 31,
1997. The Company made no income tax payments during
the three months ended October 31, 1996 and the three
months ended July 31, 1996.
</TABLE>
See Accompanying Notes to Consolidated Condensed Financial Statements.
<PAGE>
Notes to Consolidated Condensed Financial Statements
for Six-Month Periods Ended October 31, 1997 and 1996
(Unaudited)
1. BASIS OF PRESENTATION:
The consolidated condensed balance sheet as of October 31, 1997 and the related
consolidated condensed statements of operations and consolidated condensed
statements of cash flows for the six-month periods ended October 31, 1997 and
1996 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, 1997 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, 1997 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.
At April 30, 1995, the Company was not in compliance with certain of the
financial covenants which enabled the bank to declare the outstanding balances
of all amounts due the bank to be immediately due and payable. In July 1995, the
lender bank effectively terminated its relationship with the Company as it
experienced difficulty in complying with the terms of the loans. As a result,
certain collateral was liquidated by the lender bank. On August 22, 1995, the
lender bank sold and assigned the loan balance of $6,800,000. The assigned loan
was secured by a security interest in substantially all of the Company's assets.
As discussed below, the assignor was issued 2,976,000 shares of new common stock
in consideration of forgiving the $6,800,000 outstanding loan.
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 (the
"Plan") 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, 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 $17,200,000. 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 3,198,798 shares of new common stock was issued on July 25, 1996, out
of which 2,976,000 shares were issued to one secured creditor which also
<PAGE>
(Continued)
Notes to Consolidated Condensed Financial Statements
for Six-Month Periods Ended October 31, 1997 and 1996
(Unaudited)
satisfied $15,923 of loans made by the chief executive officer of the Company to
the Company; 160,000 shares were issued to unsecured creditors, and 62,798
shares were issued to the reconfirmation common stock equity interest holders.
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 $16,700,000 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/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 Co., Inc. ("Achim"), an entity owned by Marton B.
Grossman, Chairman and President of the Company, 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 wee satisfied by the Company. Although the confirmation date was May 23,
1996, fresh-start reporting was adopted on July 31, 1996. Thee 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:
<PAGE>
(Continued)
Notes to Consolidated Condensed Financial Statements
for Six-Month Periods Ended October 31, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
Balance Reorganized
Sheet Stock B/S
7/31/96 Exchange Fresh Start 7/31/96
---------- -------- ----------- -----------
<S> <C> <C> <C> <C>
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--
Current 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 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
Less: Treasury stock (17,500) 17,497 (3)
---------- -------- -------- ----------
Total Equity (123,367) 15,923 133,580 26,136
---------- -------- -------- ---------
TOTAL LIABILITIES AND
EQUITY 4,412,693 --- 133,580 4,546,273
========= ========= ======== =========
</TABLE>
The other Current Liabilities adjustment is comprised of loans from MG Holdings
Corp. to pay creditors pursuant to the Plan. The liability to the reorganized
company is $515,638.
<PAGE>
(Continued)
Notes to Consolidated Condensed Financial Statements
for Six-Month Periods Ended October 31, 1997 and 1996
(Unaudited)
3. INVENTORIES:
The inventories consist of finished goods.
4. PER SHARE INFORMATION:
Per share information for the period ended October 31, 1997 is based on the new
shares issued in the reorganization. Therefore, the Company believes that per
share information for the period ended July 31, 1996 is not meaningful. All
share data for the reorganized Company has been adjusted for a one-for-five
reverse stock split which was completed in September 1997.
5. PUBLIC OFFERING:
The Company is offering for public sale 1,200,000 units, each consisting of one
share of common stock, on Class A Warrant and one Class B Warrant at $5.00 per
unit. Although no assurance can be given that the sale will be completed, the
Company intends to utilize the net proceeds of approximately $4,920,000 for the
repayment of current debt, purchase of inventory, general corporate services,
and working capital.
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Six Months Ended October 31, 1997 as Compared to
Six Months Ended October 31, 1996
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".
As a consequence of the Company's fresh-start accounting as described below,
which the Company adopted effective on July 31, 1996, financial results for the
six months ended October 31, 1996 are reported by combining the financial
results for the three-month period ended October 31, 1996 and the three months
ended July 31, 1996.
Because of the application of fresh-start reporting, the financial statements
for the periods after reorganization are not comparable in any respects to the
financial statements for the periods prior to the reorganization.
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, they 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 (the "Plan")
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. Under
the Plan, the Company made cash payments in the amount of approximately
$515,800. MG Holdings Corp., which had purchased a promissory note from the
Company's principal financial institution, received 2,976,000 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. An additional 160,000 shares and 62,798 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
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.
<PAGE>
(Continued)
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Six Months Ended October 31, 19976 as Compared to
Six Months Ended October 31, 1996
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.
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 six months ended October 31, 1997 decreased by $1,952,000, or
34.6% to $3,694,000 from $5,646,000 for the combined periods of the three months
ended October 31, 1996 and July 31, 1996 of $3,653,000 and $1,993,000,
respectively. Sales of sports bags/luggage products of $2,132,000 for the six
months ended October 31, 1997 were $1,178,000, or 35.5% less than the $3,310,000
of combined sports bags/luggage sales for the three months ended October 31,
1996 and the three months ended July 31, 1996 of $2,196,000 and $1,114,000,
respectively. Sales of exercise products of $1,562,000 for the six months ended
October 31, 1997 were $774,000, or 32.7% less than the $2,336,000 of combined
sales of exercise products for the three months ended October 31, 1996 and the
three months ended July 31, 1996 of $1,457,000 and $879,000, respectively.
The Company's gross profit of $1,218,000 for the six months ended October 31,
1997 was $411,000 less than the combined gross profit of $1,629,000 for the
three months ended October 31, 1996 and the three months ended July 31, 1996 of
$1,090,000 and $539,000, respectively. The reduced gross profit is the result of
the lower sales for the six months ended October 31, 1997. Notwithstanding the
decline in sales and the resulting decrease in gross profit, the gross profit
percentage increased by 4% over the combined six-month period ended October 31,
1996 due to sales of merchandise with a higher gross profit.
The Company's pretax profit of $171,000 for the six months ended October 31,
1997 was $13,000 higher than the combined pretax profit of $158,000 for the
three months ended October 31, 1996 and the three months ended July 31, 1996.
The Company believes that the decline in sales for this period is primarily
attributable to a shift in focus from increasing sales volume to generating
revenues from merchandise that produces a higher gross profit. As a result,
approximately $294,000 and $904,000 of the decrease in the Company's exercise
and sports bags/luggage products, respectively, were due to a decrease in sales
to one customer to whom the Company no longer wished to sell products at prices
that would have an adverse impact on its gross profit percentage. The balance of
the decrease in sales of the Company's sports bags/luggage line was caused
primarily by a large shipment of merchandise which occurred in October 1996
while the current year's shipment of merchandise occurred in November 1997. The
Company believes that the decision to shift its focus from an emphasis on
revenues to profit as discussed above, represents a positive development that
has already resulted in an increase in the gross profit percentage. There can be
no assurance that this trend will continue in the future.
<PAGE>
(Continued)
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Six Months Ended October 31, 19976 as Compared to
Six Months Ended October 31, 1996
The following table sets forth the results of operations for the
periods discussed above:
<TABLE>
<CAPTION>
Predecessor
Reorganized Company Company
------------------------------------- -------------
For 6 Months For 3 Months For 3 Months
Ended Ended Ended
Oct. 31, 1997 Oct. 31, 1996 July 31, 1996
------------- ------------- -------------
<S> <C> <C> <C>
Net Sales $3,694,000 $3,653,000 $1,993,000
Other Income 11,000 --- ---
--------- ---------- ----------
3,705,000 3,653,000 1,993,000
Cost of Goods
Sold 2,488,000 2,564,000 1,455,000
--------- ---------- ----------
Gross Profit 1,217,000 1,089,000 538,000
Operating
Expenses 927,000 744,000 558,000
Interest 118,000 82,000 57,000
--------- --------- ---------
1,045,000 826,000 615,000
--------- --------- ---------
Bankruptcy
Administration 1,000 28,000 ---
--------- --------- ---------
Pretax Income
(Loss) 171,000 235,000 (77,000)
Provision for
Income Taxes 69,000 108,000 ---
--------- --------- ---------
Net Income
(Loss) $ 102,000 $ 127,000 $ (77,000)
========== ========== ===========
</TABLE>
Due to the application of fresh-start accounting, the financial statements for
the periods after reorganization are not comparable in any respects to the
financial statements for the periods prior to the reorganization. Therefore, a
discussion of the changes in operating expense will compare the three months
ended October 31, 1997 with the three months ended October 31, 1996. For this
discussion, see "Management's Discussion and Analysis of Financial Condition for
the Three Months Ended October 31, 1997 as Compared to the Three Months Ended
October 31, 1996".
LIQUIDITY AND CAPITAL RESOURCES
Operating activities provided cash of $165,000 for the six months ended
October 31, 1997. Net income of $102,000, along with a decrease in inventory of
$916,000 due to lower purchases, were the primary providers of cash from
operations during the six months ended October 31, 1997.
Net income and inventory reductions were offset by increased accounts
receivable, increases in prepaid expenses and a decrease in accounts payable and
accrued expenses of $145,000, $132,000 and $600,000, respectively.
Financing activities used cash of $195,000 due primarily to an increase of
$181,000 in costs related to a stock offering. The Company had a negative cash
flow of $29,000 for the six months ended October 31, 1997.
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.
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Three Months Ended October 31, 1997 as Compared to
Three Months Ended October 31, 1996
RESULTS OF OPERATIONS
Sales for the three months ended October 31, 1997 were $1,793,000, or 49% lower
than the three months ended October 31, 1996. Sales of exercise equipment of
$768,000 for the three months ended October 31, 1997 were $690,000, or 47% less
than the three months ended October 31, 1996. Sales of the sports bags/luggage
products of $1,095,000 for the three months ended October 31, 1997 were
$1,103,000, or 50% less than the three months ended October 31, 1996. The
Company believes that the decline in sales for this period is primarily
attributable to a shift in focus from increasing sales volume to generating
revenues from merchandise that produces a higher gross profit. As a result,
approximately $294,000 and $904,000 of the decrease in the Company's exercise
and sports bags/luggage products, respectively, were due to a decrease in sales
to one customer to whom the Company no longer wished to sell products at prices
that would have an adverse impact on its gross profit percentage. The balance of
the decrease in sales of the Company's sports bags/luggage line was caused
primarily by a large shipment of merchandise which occurred in October 1996
while the current year's shipment of merchandise occurred in November 1997. The
Company believes that the decision to shift its focus from an emphasis on
revenues to profit as discussed above, represents a positive development that
has already resulted in an increase in the gross profit percentage. There can be
no assurance that this trend will continue in the future.
The Company's gross profit decreased by $432,000 for the three months ended
October 31, 1997 compared to the three months ended October 31, 1996. The
decrease in the gross profit was primarily the result of the decreased sales.
Notwithstanding the decline in sales and the resulting decrease in gross profit,
the gross profit percentage increased by 5.5% for the three months ended October
31, 1997 compared to the three months ended October 31, 1996 due to sales of
merchandise with a higher gross profit.
Operating expenses for the three months ended October 1997 were $254,000 less
than the three months ended October 31, 1996. This decrease is represented
approximately by net changes in the following expenses:
Shipping fees................................$120,000
Promotional expenses.........................$ 13,000
Officer salaries.............................$ 38,000
Insurance....................................$ 30,000
Professional fees............................$ 58,000
Shipping fees decreased by $120,000 due to the decrease in sales. Promotional
expenses decreased by $13,000 due to decreased expenditures in this area.
Officer salaries decreased by $38,000 as a result of the departure by the former
president of the Company in March 1997. Insurance expense decreased by $30,000
due to lower product liability premiums. Professional fees decreased due to
lower expenditures in this area.
Pretax income for the three months ended October 31, 1997 of $107,000 was
$128,000, or 54.4% less than the three months ended October 31, 1996, due
primarily to the decrease in sales.
The following table sets forth the results of operations for the periods
discussed above:
<PAGE>
(Continued)
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Three Months Ended October 31, 1997 as Compared to
Three Months Ended October 31, 1996
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
Oct. 31, 1997 Oct. 31, 1996
------------- -------------
<S> <C> <C>
Sales $ 1,860,000 $ 3,653,000
Other income 3,000 ---
--------- ---------
1,863,000 3,653,000
Cost of sales 1,205,000 2,564,000
--------- ---------
Gross profit 658,000 1,089,000
Operating expenses 490,000 744,000
Interest 59,000 82,000
--------- ---------
549,000 826,000
Bankruptcy administration 1,000 28,000
--------- ---------
Pretax income 108,000 235,000
Provision for income taxes 45,000 109,000
--------- ---------
Net income $ 63,000 $ 126,000
=========== ===========
</TABLE>
<PAGE>
Part II
OTHER INFORMATION
Not Applicable
<PAGE>
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 December 16, 1997 By /s/ William P. Dolan
______________________________________________
William P. Dolan, Vice President, Finance
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information
extracted from (A) and is qualified in its entirety
by reference to such (B)
</LEGEND>
<CIK> 0001021097
<NAME> Dynamic International, Ltd.
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<S> <C>
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