10QSB 1 dgi05q1.txt FORM 10QSB FOR PERIOD ENDED MARCH 31, 2005 UNITED STATES 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 period ended: March 31, 2005 Or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ______________ to _________________ Commission file number: 0-17385 DYNA GROUP INTERNATIONAL, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) NEVADA 87-0404753 ------------------------------- ---------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1661 S. Seguin Ave., New Braunfels, Texas 78130 ----------------------------------------- ---------- (Address of principal executive offices) (Zip Code) 830-620-4400 ---------------------------------------------------- (Registrant's telephone number, including area code) 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 12 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 90 days. [X] Yes [ ] No The number of shares outstanding of the registrant's common stock as of March 31, 2005 was 7,474,258. Page 2 DYNA GROUP INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (unaudited) March 31, December 31, ASSETS 2005 2004 ---------- ---------- Current Assets Cash $ 11,038 $ 485,755 Marketable Securities 999,753 - Accounts receivable, net of allowance of $50,837 and $17,340 1,651,694 1,996,612 Inventory 2,814,298 2,293,389 Receivable from equity-method foreign investee - 7,740 Prepaid expenses 91,109 241,191 Prepaid income taxes 45,469 - Deferred income tax 2,713 2,713 Other 2,182 2,634 ---------- ---------- Total Current Assets 5,618,256 5,030,034 Property and equipment, net of accumulated depreciation of $1,577,176 and $1,521,857 746,678 742,354 Investment in equity-method foreign investee 336,563 299,970 Cash surrender value of life insurance 152,559 152,559 Note receivable from related party 6,940 9,661 ---------- ---------- $ 6,860,997 $ 6,234,578 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Bank revolving line of credit $ 629,000 $ - Accounts payable 916,288 488,723 Accrued expenses 173,426 340,496 Payable to equity-method foreign investee 39,628 - Federal income tax payable - 252,032 ---------- ---------- Total Current Liabilities 1,758,342 1,081,251 Deferred income tax 83,280 96,645 ---------- ---------- Total Liabilities 1,841,622 1,177,896 ---------- ---------- Commitments and Contingencies - - Stockholders' Equity Common stock, $.001 par value, 100,000,000 shares authorized, 7,474,258 and 7,474,258 shares issued and outstanding 7,474 7,474 Paid in capital 991,837 991,837 Retained earnings 4,020,311 4,057,371 Other comprehensive loss (247) - ---------- ---------- Total Stockholders' Equity 5,019,375 5,056,682 ---------- ---------- $ 6,860,997 $ 6,234,578 ========== ========== DYNA GROUP INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME Three Months Ended March 31, 2005 and 2004 2005 2004 ---------- ---------- Revenue $ 3,220,677 $ 3,061,798 Cost of sales 2,365,105 2,071,451 Selling 351,623 380,663 Royalties 250,588 182,530 General & administrative 373,383 318,190 ----------- ---------- Total operating expenses 3,340,699 2,952,834 ----------- ---------- Operating income (loss) (120,022) 108,964 Interest expense 2,998 (4,786) Equity in net income of unconsolidated Affiliate - joint venture 72,593 58,333 ---------- ---------- Income (loss) before income taxes (50,427) 162,511 Income tax benefit (expense) 13,365 (55,254) ---------- ---------- Net income (loss) (37,062) 107,257 Other comprehensive loss Unrealized loss on marketable securities (247) - ---------- ---------- Comprehensive income (loss) $ (37,309) $ 107,257 ========== ========== Basic and diluted earnings (loss) per share $ (.00) $ .01 Weighted average shares outstanding 7,474,258 7,487,591 DYNA GROUP INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOW Three Months Ended March 31, 2005 and 2004 (unaudited) 2005 2004 ---------- ---------- Cash Flows From Operating Activities Net income (loss) $ (37,062) $ 107,257 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation 58,841 67,172 Earnings from equity-method foreign investee (72,593) (58,333) Net write-off slow moving inventory (124,063) 153,707 Bad debts 39,973 25,732 Loss on the sale of fixed assets 7,477 - Changes in: Accounts receivable 304,946 432,762 Inventory (396,846) (779,084) Due to/from equity-method foreign investee 83,368 16,687 Prepaid expenses 150,082 146,762 Prepaid income taxes (45,469) - Other current assets 667 262 Note receivable from related party 2,505 2,505 Accounts payable & accrued expenses 260,497 74,572 Federal income tax payable (252,032) (144,746) Deferred tax liability (13,365) - ---------- ---------- Net Cash Provided by (Used in) Operating Activities (33,074) 45,255 ---------- ---------- Cash Flows From Investing Activities Purchase of marketable securities (1,000,000) - Purchase of property and equipment (78,143) (53,140) Proceeds from the sale of fixed assets 7,500 - ---------- ---------- Net Cash Used in Investing Activities (1,070,643) (53,140) ---------- ---------- Net Cash From Financing Activities Net change in bank revolving line of credit 629,000 79,910 Re-purchase of stock - (10,000) Payments on note payable to stockholder - (48,827) ---------- ---------- Cash Flows Provided by Financing Activities 629,000 21,083 ---------- ---------- Net change in cash (474,717) 13,198 Cash at beginning of period 485,755 72,672 ---------- ---------- Cash at end of period $ 11,038 $ 85,870 ========== ========== Supplemental Disclosures: Income taxes paid $ 300,000 $ 200,000 Interest paid $ 2,998 $ 4,786 Page 5 DYNA GROUP INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS NOTE 1 - BASIS OF PRESENTATION The accompanying unaudited interim financial statements of Dyna Group International, Inc. "Dyna Group" have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission ("SEC"), and should be read in conjunction with the audited financial statements and notes thereto contained in Dyna Group's 2004 Annual Report filed with the SEC on Form 10-KSB. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the financial statements which would substantially duplicate the disclosure contained in the audited financial statements for 2004 as reported in the 10-KSB have been omitted. Stock Compensation. Dyna Group adopted the disclosure requirements of Financial Accounting Standard No. 123, Accounting for Stock-Based Compensation (FAS No. 123) and FAS No. 148 with respect to pro forma disclosure of compensation expense for options issued. For purposes of the pro forma disclosures, the fair value of each option grant is estimated on the grant date using the Black-Scholes option-pricing model. Dyna Group applies APB No. 25 in accounting for its stock option plans and, accordingly, no compensation cost has been recognized in Dyna Group financial statements for stock options under any of the stock plans which on the date of grant the exercise price per share was equal to or exceeded the fair value per share. However, no compensation cost has been recognized for warrants or options granted to non-employees for services provided. There were 220,000 options granted to employees as of March 31, 2005. The following table illustrates the effect on net loss and net loss per share if Dyna Group had applied the fair value provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation. 2004 2003 --------- --------- Net income (loss) as reported $ (37,062) $ 107,257 Add: stock based compensation determined under intrinsic value-based method - - Less: stock based compensation determined under fair value- based method (204,916) - --------- --------- Pro forma net loss $ (241,978) $ 107,257 ========= ========= Basic and diluted net loss per common share: As reported $(.00) $.01 Pro forma (.03) .01 The weighted average fair value of the stock options granted during the quarter ended March 31, 2005 and 2004 was $.90 and $.00, respectively. Variables used in the Black-Scholes option-pricing model include (1) 3.0% risk-free interest rate, (2) expected option life is the actual remaining life of the options as of each year end, (3) expected volatility was 141.94%, and (4) zero expected dividends. NOTE 2 - STOCK COMPENSATION PLAN In February 2005, the Board of Directors adopted a 2005 Stock Compensation Plan ("the Plan") under which 750,000 shares of Dyna Group's common stock have been reserved for issuance to employees, officers, directors and consultants. Options granted under the Plan may be either incentive stock options or nonqualified stock options. Incentive stock options ("ISO") may be granted only to Dyna Group's employees (including officers and directors who are also employees). Nonqualified stock options ("NSO") may be granted to Dyna Group's employees and consultants. Options under the Plan may be granted for periods of up to ten years and at an exercise price equal to the estimated fair value of the shares on the date of grant as determined by the Board of Directors, provided, however, that the exercise price of an ISO and NSO granted to a 10% shareholder shall not be less than 110% of the estimated fair value of the shares on the date of grant. To date, options granted generally are exercisable immediately as of the effective date of the option agreement. During February 2005, 220,000 five year options were granted to employees. The exercise price was $1.04 and all 220,000 vested immediately. Option expense for the year ended December 31, 2004 was $0. Summary information regarding options is as follows: Weighted Average Options Share Price -------- ----------- Outstanding at December 31, 2004 - $ - Quarter ended March 31, 2005: Granted 220,000 1.04 Exercised - - -------- ---- Outstanding at March 31, 2005 220,000 $1.04 ======== ==== NOTE 3 - INVENTORIES Inventories consist of the following: March 31, 2005 December 31, 2004 -------------- ----------------- Raw materials-Pewter $ 146,621 $ 172,597 Pewter Manufacturing Items 752,595 509,060 Items Purchased for Resale 1,202,384 1,257,891 Supplies 712,698 353,841 ---------- ---------- $ 2,814,298 $ 2,293,389 ========== ========== Item 2. Management's Discussion and Analysis of Financial Condition and --------------------------------------------------------------- Results of Operations --------------------- Liquidity and Capital Resources ------------------------------- The Company's working capital ratio at March 31, 2005 was 3.20, which is lower from December 31, 2004 of 4.65. This is a result of an increase in inventories and marketable securities along with an increase accounts payable and bank credit line. During the first quarter of 2005 financing activities provided $629,000. The operating activities for the first quarter used $33,074. The inventory is stated net of obsolete inventory. Obsolete inventory is defined as an inventory for which no sales have been generated in the one year period preceding the latest Balance Sheet date. For period ending March 31, 2005, the obsolete inventory is $677,347, which is a decrease from $801,410 at December 31, 2004. The obsolete inventory activity for the 1st quarter is as follows: of the $801,410 obsolete inventory at December 31, 2004, $98,620 was sold and $189,729 was melted down and recast. We also identified additional $164,286 of obsolete inventory during the first quarter of 2005. This made the total obsolete inventory at March 31, 2005 $677,347. The royalty expense as a percentage of sales has increased from 6% in 2004 to 7.8% in 2005 for the three months ended. The increase is related to the product mix being sold. In 2004 for the three months ended, NFL and MLB sales were $656,382 as opposed to 2005 sales of $846,515. The General and Administration expenses increased in 2005, from 10.4% of sales in 2004 to 11.6% in 2005. We have experienced the normal economy increases in expenses such as real estate and property taxes and insurance expenses. As of March 31, 2005, there are no material commitments for future capital expenditures, and management does not anticipate any major expenditures in the foreseeable future. It is management's belief that the Company's present facilities will be adequate to meet our current and future needs. Results of Operations --------------------- Net sales for the quarter ended March 31, 2005 as compared to the quarter ended March 31, 2004 increased $158,879 or 5.2%. This increase is primarily from higher buckle sales. Buckle sales during the first quarter of 2004 were $362,665 and $575,848 in 2005. The gross profit margin percent decreased to 26.56% as compared to 32.4% in 2004. The cost of goods sold was higher due to the rising price of pewter. During the first quarter of 2004 the contracted price of pewter was $2.70 per pound. This price has increased steadily, and the current contracted price per pound is $4.40. The total selling, general and administrative expenses increased by 3.74%, from $698,853 in 2004 to $725,006 in 2005. This increase is reflected in higher insurance and bad debt expenses incurred during the first quarter. For the first quarter of 2005, the Company's net loss was $37,062 as compared to the net income for 2004 of $107,257. The gross profit margin was lower due to the rising price of pewter and product mix sold this quarter, which affected our net earnings. Item 3. Legal Proceeding ------------------------ None. Item 4. Controls and Procedures -------------------------------- As of the end of the period covered by this report, the Company conducted an evaluation, under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer, of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")). Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. There was no change in the Company's internal control over financial reporting during the Company's most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DYNA GROUP INTERNATIONAL, INC. (Registrant) Date: May 16, 2005 /s/ Roger R. Tuttle -------------------------------------- (Signature) Roger R. Tuttle, Chairman of the Board and Chief Executive Officer