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 July 31, 1998 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 August 31, 1998, 4,418,798 shares of the Registrant's common stock par
value $.001 were issued and outstanding.
<PAGE>
Form 10-Q FQE 7/31/98 dynamic international, ltd.
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Consolidated Condensed Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
July 31, 1998 April 30, 1998
------------- --------------
<S> <C> <C>
Current Assets
Cash $1,077,669 $1,575,248
Accounts Receivable - (Net of allowance for
doubtful accounts of $122,000) 1,092,439 810,447
Due from Suppliers 36,142 36,142
Inventory 2,631,967 2,359,022
Prepaid Expenses 1,065,865 669,133
Prepaid and Refundable Income Taxes 0 26,201
---------- ----------
Total Current Assets 5,904,082 5,476,193
Fixed Assets, at Cost, Less Accumulated
Depreciation 124,789 124,846
Security Deposits 6,800 2,050
Reorganization value in excess of amounts
allocable to identifiable assets, net 109,293 112,328
---------- ----------
Total Assets $6,144,964 $5,715,417
========== ==========
Liabilities and Shareholders' Equity
Current Liabilities
Note Payable-Bank $ 500,000 0
Accounts Payable & Accrued Expenses, Non-related 301,957 $ 458,359
Accounts Payable & Accrued Expenses, Related 128,033 19,186
Income Taxes Payable 9,814 79,422
---------- ----------
939,804 556,967
Shareholders' Equity
Common Stock 4,419 4,419
Additional Paid-In Capital 4,869,796 4,869,796
Retained Earnings 330,948 284,238
---------- ----------
Totals 5,205,163 5,158,453
Less Treasury Stock (3) (3)
----------- -----------
Total Shareholders' Equity 5,205,160 5,158,450
---------- ----------
Total Liabilities & Shareholders' Equity $6,144,964 $5,715,417
========== ==========
</TABLE>
See Accompanying Notes to Consolidated Condensed Financial Statements.
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Form 10-Q FQE 7/31/98 dynamic international, ltd.
===============================================================================
Consolidated Condensed Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
For the Three For the Three
Months Ended Months Ended
July 31, 1998 July 31, 1997
------------- -------------
(Restated)
<S> <C> <C>
Net Sales $1,702,009 $ 1,834,162
Other Income 20,927 7,959
---------- -----------
1,722,936 1,842,121
Cost of Goods Sold 1,133,319 1,251,283
---------- -----------
Gross Profit 589,617 590,838
---------- -----------
Selling, General and Administrative Expenses 493,710 437,146
Interest 18,452 59,926
---------- -----------
512,162 497,072
---------- -----------
Income Before Tax 77,455 93,766
Provision for Income Taxes 30,745 35,957
---------- -----------
Net Income $ 46,710 $ 57,809
========== ===========
Income per Common Share .01 .02
Weighted Average Number of Common Shares
Outstanding 4,418,798 3,198,258
Cash Dividends per Common Share None None
</TABLE>
See Accompanying Notes to Consolidated Condensed Financial Statements.
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Form 10-Q FQE 7/31/98 dynamic international, ltd.
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Consolidated Condensed Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
For the Three For the Three
Months Ended Months Ended
July 31,1998 July 31,1997
------------ ------------
(Restated)
------------
<S> <C> <C>
Cash Flows from Operating Activities
Net income $ 46,710 $ 57,809
Adjustments to Reconcile Net Income
to Net Cash Provided (Used for)
Depreciation and Amortization 13,243 20,124
Changes in Assets and Liabilities:
(Increase) decrease in:
Accounts Receivable and Due From Suppliers (281,992) (156,220)
Inventory (272,945) 484,387
Prepaid Expenses (396,732) (95,346)
Prepaid Taxes 26,201 (16,089)
Security Deposits (4,750)
Increase (decrease) in:
Accounts Payable and Accrued Expenses (47,555) (107,320)
Income Taxes Payable (69,608) (91,832)
---------- ----------
Net Cash - Operating Activities (987,428) 95,513
Investing Activities:
Purchase of Property and Equipment (10,151) 0
Financing Activities:
Proceeds from Banker's Acceptances 500,000
Repayment of Capital Lease Obligations (5,967)
Payment of Deferred Offering Costs (73,844)
---------- ----------
Net Cash - Financing Activities 500,000 (79,811)
---------- ----------
Increase (decrease) in Cash and Equivalents (497,579) 15,702
Cash and Cash Equivalents, Beginning of Period 1,575,248 43,543
---------- ----------
Cash and Cash Equivalents, End of Period $1,077,669 $ 59,245
========== ==========
See Accompanying Notes to Consolidated Financial Statements.
</TABLE>
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Form 10-Q FQE 7/31/98 dynamic international, ltd.
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Notes to Consolidated Condensed Financial Statements
for the Three-Month Periods Ended July 31, 1998 and 1997
(Unaudited)
1. Basis of Presentation
The Consolidated Condensed Balance Sheet as of July 31, 1998 and the related
Consolidated Condensed Statements of Operations and Consolidated Condensed
Statements of Cash Flows for the three-month periods ended July 31, 1998 and
1997 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, 1998 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, 1998 are not necessarily indicative of the
operating results for the entire year.
2. Reorganization and Management Plan
On August 23, 1995, the Company filed a voluntary petition for relief under
Chapter 11 of the United States Bankruptcy Code. A Plan or 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 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; 160,000 shares
were issued to unsecured creditors; and 62,798 shares were issued to the
preconfirmation common stock equity interest holder.
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.
Continued.....
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Form 10-Q FQE 7/31/98 dynamic international, ltd.
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(Continued)
Notes to Consolidated Condensed Financial Statements
for the Three-Month Periods Ended July 31, 1998 and 1997
(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.
As part of the reorganization, the Company will continue to sell hand and light
exercise equipment and sports bags/luggage, 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. The Company adopted "fresh-start
reporting" in accordance with Statement of Position ("SOP") 90-7 issued July 31,
1996 by the American Institute of Certified Public Accountants. 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 fifty percent 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.
Continued....
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Form 10-Q FQE 7/31/98 dynamic international, ltd.
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(Continued)
Notes to Consolidated Condensed Financial Statements
for the Three-Month Periods Ended July 31, 1998 and 1997
(Unaudited)
3. Inventories
The inventories consist of finished goods. During the three month
period ended January 31, 1998 the Company changed its method of
determining the cost of inventories from the LIFO method to the FIFO
method. Under the current economic environment of low inflation, the
Company believes that the FIFO method will result in a better
measurement of operating results. This change has been applied by
retroactively restating the accompanying consolidated financial
statements. This change increases net income for three months ended
July 31, 1997 by $19,144 or .006 per share.
4. Debt Financing
On April 30, 1998 the Company entered into a credit agreement with
Chase Manhattan Bank ("Chase") for maximum borrowing of $1,500,000 in
the form of letters of credit and bankers acceptances. The agreement
also provided for a security interest in the inventory and notes and
accounts receivables of the Company. In addition, the agreement
provides for the personal guarantee of the President and major
shareholder of the Company in the amount of $250,000. As of July 31,
1998 the Company's aggregate balance of $871,504.75 consisted of
$500,000 in bankers acceptances and $371,504.75 of outstanding letters
of credit. The bankers acceptances were discounted at 6.25% per annum.
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Form 10-Q FQE 7/31/98 dynamic international, ltd.
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Management's Discussion and Analysis of
Financial Condition and Results of Operations
Three Months Ended July 31, 1998
as Compared to Three Months Ended July 31, 1997
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".
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
On August 23, 1995, the Company filed a voluntary petition for relief under
Chapter 11 of the United States 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. Under the Plan, the Company made cash payments in the
amount of approximately $515,800. MG Holding Corp. ("MG"), 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.
Continued.....
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Form 10-Q FQE 7/31/98 dynamic international, ltd.
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(Continued)
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Three Months Ended July 31, 1998
as Compared to Three Months Ended July 31, 1997
Results of Operations
Financial results for the three months ended July 31, 1997, have been restated
for a change in the method of determining the cost of inventories from the
last-in, first-out (LIFO) method to the first-in, first-out (FIFO) method.
Sales for the three months ended July 31, 1998, decreased by $132,000 or 7.2% to
$1,702,000 from $1,834,000 for the three months ended July 31, 1997. Sales of
sports bags/luggage products of $1,016,000 for the three months ended July 31,
1998, were $24,000 or 2.3% less than the $1,040,000 of sports bags/luggage sales
for the three months ended July 31, 1997. Sales of exercise products of $686,000
for the three months ended July 31, 1998 were $108,000 or 13.6% less than the
$794,000 of exercise product sales for the three months ended July 31, 1997.
The Company's gross profit of $590,000 for the three months ended July 31, 1998,
was $1,000 less than the three months ended July 31, 1997. Despite lower
revenues, the gross profit remained relatively constant because of improved
profit margins.
Operating expenses for the three months ended July 31, 1998 were $57,000 higher
than the three months ended July 31, 1997. This increase is represented
approximately by changes in the following expenses:
Increase
Salesmen Salaries $9,000
Sales Representative Commissions $14,000
Promotional and Selling Materials $28,000
Trade Advertising $3,000
Salesmen salaries increased by $9,000 because a salesman, who was employed by
the Company during the three months ended July 31, 1997, was replaced with a
more highly paid executive vice president of sales. Sales representative
commissions increased by $14,000 because sales to customers for which the
Company does not use the services of sales representative organizations
decreased while sales to customers for which the Company does use the services
of sales representatives organizations increased. Promotional and selling
materials increased by $28,000 due to increased expenditures related to the
Company's sports bag/luggage products. Trade advertising was $3,000 for the
three months ended July 31, 1998 because the Company has started to utilize
specialty magazines to advertise the sports bags/luggage products.
Interest expense for the three months ended July 31, 1998 decreased by $42,000
from the three months ended July 31, 1997. This reduction was a result of the
partial use of the proceeds of stock offering, which was completed on December
27, 1997, to payoff current debt. Pretax income for the three months ended July
31, 1998 of $78,000 was $16,000 or 17% less than the three months ended July 31,
1997 due primarily to the decrease in interest expense as offset by the
increased operating expenses.
Continued.....
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<PAGE>
Form 10-Q FQE 7/31/98 dynamic international, ltd.
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The following table sets forth the result of operations for the periods
discussed above.
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
July 31, 1998 July 31, 1997
<S> <C> <C>
Net Sales $1,702,000 $1,834,000
Other Income 21,000 8,000
---------- ----------
1,723,000 1,842,000
Cost of Goods Sold 1,133,000 1,251,000
---------- -----------
Gross margin 590,000 591,000
Operating Expenses 494,000 437,000
Interest 18,000 60,000
---------- ----------
512,000 497,000
---------- ----------
Pretax Income 78,000 94,000
</TABLE>
Liquidity and Capital Resources
During the three months ended July 31, 1998, cash used by operating activities
amounted to $987,000. This was the result of increases in accounts receivable
and due from supplier, inventory and prepaid expenses and decreases in accounts
payable and accrued expenses and income taxes payable of $282,000, $273,000,
$396,000, $48,000 and $70,000, respectively. These uses of cash were offset by
net income and a decrease in prepaid taxes of $47,000 and $26,000, respectively.
Investing activities used cash of $10,000 for molds related to a new product.
Financing activities provided proceeds from a banker's acceptance of $500,000.
Current Position
On December 27, 1997, the Company completed a stock offering which provided
proceeds of approximately $4,800,000, which were used to pay accounts payable
and accrued expenses of approximately $2,800,000 and related party debt of
$1,059,785.
On April 30, 1998 the Company entered into a credit agreement with Chase
Manhattan Bank ("Chase") for maximum borrowing of $1,500,000 in the form of
letters of credit and bankers acceptances. The agreement also provided for a
security interest in the inventory and notes and accounts receivables of the
Company. In addition, the agreement provides for the personal guarantee of the
President and major shareholder of the Company in the amount of $250,000. As of
July 31, 1998 the Company's aggregate balance of $871,504.75 consisted of
$500,000 in bankers acceptances and $371,504.75 of outstanding letters of
credit.
The Company believes that the proceeds from the stock offering and the Chase
credit line will be sufficient to finance its operations for the next twelve
months.
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Form 10-Q FQE 7/31/98 dynamic international, ltd.
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Seasonality and Inflation
The Company's business is highly seasonal with higher sales typically in the
second and third quarter of the fiscal year as a result of shipments of exercise
equipment and sports bags/luggage related to the holiday season.
Management does not believe that the effects of inflation will have a material
impact on the Company, nor is it aware of changes on prices of material or other
operating costs or in the selling price of its products and services that will
materially affect the Company's profits. Statements contained herein 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, the Company's ability to complete development and
then market its products and competitive factors and other risk factors
detailed herein.
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Form 10-Q FQE 7/31/98 dynamic international, ltd.
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Part II. Other Information
Not Applicable
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Form 10-Q FQE 7/31/98 dynamic international, ltd.
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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 9/14/98 By /s/ William P. Dolan
---------------- -----------------------------------------
William P. Dolan, Vice President, Finance
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<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 4-mos
<FISCAL-YEAR-END> APR-30-1999
<PERIOD-START> MAY-01-1998
<PERIOD-END> JUL-31-1998
<CASH> 1,077,669
<SECURITIES> 0
<RECEIVABLES> 1,214,439
<ALLOWANCES> 122,000
<INVENTORY> 2,631,967
<CURRENT-ASSETS> 5,904,082
<PP&E> 1,464,265
<DEPRECIATION> 1,339,476
<TOTAL-ASSETS> 6,144,964
<CURRENT-LIABILITIES> 939,804
<BONDS> 0
0
0
<COMMON> 4,419
<OTHER-SE> 5,200,741
<TOTAL-LIABILITY-AND-EQUITY> 6,144,964
<SALES> 1,702,009
<TOTAL-REVENUES> 20,927
<CGS> 1,133,319
<TOTAL-COSTS> 1,133,319
<OTHER-EXPENSES> 493,710
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18,452
<INCOME-PRETAX> 77,455
<INCOME-TAX> 30,745
<INCOME-CONTINUING> 46,710
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 46,710
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
</TABLE>
