<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 18, 1997
REGISTRATION NO. 33-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
------------------------
DYNAMIC INTERNATIONAL, LTD.
(NAME OF ISSUER IN ITS CHARTER)
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NEVADA 5099 93-1215401
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR CLASSIFICATION CODE) IDENTIFICATION NUMBER)
ORGANIZATION)
58 SECOND AVENUE MARTON GROSSMAN, PRESIDENT
BROOKLYN, NEW YORK 11215 58 SECOND AVENUE
718-369-4160 BROOKLYN, NEW YORK 11215
(ADDRESS AND TELEPHONE NUMBER 718-469-3160
OF REGISTRANT'S PRINCIPAL (NAME, ADDRESS AND TELEPHONE
EXECUTIVE NUMBER OF AGENT FOR SERVICE)
OFFICES AND PRINCIPAL PLACE OF
BUSINESS)
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Copies to:
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RICHARD F. HOROWITZ, ESQ. ELIAS LAUER, ESQ.
LOUIS A. BRILLEMAN, ESQ. 292 Madison Avenue
Heller, Horowitz & Feit, P.C. New York, New York 10017
292 Madison Avenue Telephone: 212-697-3330
New York, New York 10017
Telephone: (212) 685-7600
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC:
As soon as practicable after the effective date of the registration
statement
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. [X]
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CALCULATION OF REGISTRATION FEE
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PROPOSED
PROPOSED MAXIMUM
MAXIMUM AGGREGATE
TITLE OF EACH CLASS OF AMOUNT OFFERING PRICE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED TO BE REGISTERED PER SECURITY PRICE(1) REGISTRATION FEE
<S> <C> <C> <C> <C>
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Units, each consisting of one share of
Common Stock and two Warrants (2).... 1,380,000 $5.00 $6,900,000 $2,090.91
- -------------------------------------------------------------------------------------------------------
Common Stock underlying A
Warrants(3).......................... 1,380,000 $6.00 $8,280,000 $2,509.09
- -------------------------------------------------------------------------------------------------------
Common Stock underlying B
Warrants(3).......................... 1,380,000 $10.00 $13,800,000 $4,181.82
- -------------------------------------------------------------------------------------------------------
Underwriter's Warrants(3).............. 120,000 $0.001 $120 $0.04
- -------------------------------------------------------------------------------------------------------
Units included in Underwriter's
Warrants............................. 120,000 $8.25 $990,000 $300.00
- -------------------------------------------------------------------------------------------------------
Common Stock underlying A Warrants(3)
included in the Underwriter's
Warrants............................. 120,000 $9.90 $1,188,000 $360.00
- -------------------------------------------------------------------------------------------------------
Common Stock underlying B Warrants(3)
included in the Underwriter's
Warrants............................. 120,000 $16.50 $1,980,000 $600.00
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Total.................................. $33,138,120 $10,041.86
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(1) Estimated solely for the purpose of calculating the registration fee
pursuant to rule 457 under the Securities Act of 1933.
(2) Includes up to 180,000 Units which may be purchased by the Underwriter to
cover over-allotments, if any.
(3) Pursuant to Rule 416, this Registration Statement also covers any additional
shares of Common Stock which may be issuable by virtue of the anti-dilution
provisions in the Warrants.
THE REGISTRANT HEREBY AMENDS THE REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE> 2
DYNAMIC INTERNATIONAL, LTD.
Cross Reference Sheet Showing Location in Prospectus of Information
Required Therein by Items 1 through 12 of Form S-1
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REGISTRATION STATEMENT PROSPECTUS CAPTION
ITEM AND HEADING OR LOCATION
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1. Forepart of Registration Statement and
Outside Front Cover Page of Prospectus.... Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages
of Prospectus............................. Inside Front and Outside Back Cover
Pages of Prospectus
3. Summary Information, Risk Factors and
Ratio of Earnings to Fixed Charges........ Prospectus Summary, Risk Factors
4. Use of Proceeds........................... Use of Proceeds
5. Determination of Offering Price........... Cover Page, Risk Factors, Underwriting
6. Dilution.................................. Dilution
7. Selling Security Holders.................. Not Applicable
8. Plan of Distribution...................... Underwriting
9. Description of Securities to be
Registered................................ Description of Securities
10. Interests of Named Experts and Counsel.... Legal Matters; Experts
11. Information With Respect to Registrant.... Business; Selected Financial Data;
Management Discussion and Analysis of
Financial Condition and Results of
Operations
12. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities............................... Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities
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<PAGE> 3
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION DATED APRIL 18, 1997
------------------------
DYNAMIC INTERNATIONAL, LTD.
------------------------
1,200,000 UNITS
EACH CONSISTING OF ONE SHARE OF COMMON STOCK
ONE CLASS A REDEEMABLE WARRANT AND
ONE CLASS B REDEEMABLE WARRANT
Dynamic International, Ltd., a Nevada corporation (the "Company"), hereby
offers 1,200,000 units ("Units"), each Unit consisting of one share of Common
Stock, $.001 par value (the "Common Stock"), one redeemable Class A Warrant (the
"Class A Warrants) and one redeemable Class B Warrant (the Class B Warrants,
together with the Class A Warrants, the "Warrants") at a price of $5.00 per
Unit. The Units, the Common Stock and the Warrants are herein sometimes referred
to as the "Securities." The Common Stock and the Warrants will be separately
tradable commencing [90 days after the effective date], or earlier at the
sole discretion of Patterson Travis & Co., the underwriter for the offering (the
"Underwriter") (the "Separation Date"). Each Class A Warrant entitles the holder
to purchase one share of Common Stock at $6.00, commencing on the Separation
Date until [18 months from the date of this Prospectus]. Each Class B Warrant
entitles the holder to purchase one share of Common Stock at $10.00, commencing
on the Separation Date until [three years from the date of this Prospectus]. The
A Warrants and the B Warrants are redeemable by the Company at $.01 per Warrant
on thirty days' prior written notice at any time provided that the average
closing bid price for the Common Stock is no less than $9.00 per share with
respect to the A Warrants and $15.00 with respect to the B Warrants for any ten
trading days within a period of 30 consecutive trading days as reported on the
principal exchange or market on which the Common Stock is then traded. The
Units, and, commencing on the Separation Date, the Common Stock and Warrants are
expected to trade on the Nasdaq SmallCap Market ("Nasdaq") under the symbols
DYNIU, DYNI and DYNIW, respectively. No assurance can be given that an active
trading market will develop, or if developed, will be sustained. See
"Description of Securities."
Currently, no active public market exists for the Units, Common Stock or
Warrants and there can be no assurance that such a market will develop after the
completion of this offering. The offering price of the Units and the exercise
price of the Warrants have been arbitrarily determined by the Company and the
Underwriter and do not necessarily bear any relationship to the Company's
assets, book value, results of operations or other generally accepted criteria
of value.
THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK AND SUBSTANTIAL DILUTION AS
DESCRIBED HEREIN. SEE "RISK FACTORS" AND "DILUTION."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE
COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
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PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNTS(1) COMPANY
<S> <C> <C> <C>
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Per Unit(2)........................................ $5.00 $0.50 $4.50
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Total.............................................. $6,000,000 $600,000 $5,400,000
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(1) Does not include additional compensation to the Underwriter in the form of
(a) a non-accountable expense allowance of three percent of the gross
proceeds of this offering and (b) warrants, purchasable at a nominal price,
to acquire 120,000 Units at an initial exercise price of $8.25 per Unit (the
"Underwriter's Warrants"). In addition, the Company has agreed to indemnify
the Underwriters against certain liabilities, including liabilities under
the Securities Act of 1933, as amended, and to retain the Underwriter as a
financial consultant for the three years following the closing of this
offering for a fee of $20,000 payable at closing. See "Underwriting."
(2) For the purpose of covering over-allotments, if any, the Company has granted
to the Underwriter an option, exercisable within forty five days of the date
hereof, to purchase up to an additional 180,000 Units upon the same terms
and conditions as the Securities offered hereby. If such over-allotment
option is exercised in full, the Total Price to Public will be $6,900,000,
the Total Underwriting Discount will be $690,000 and the Total Proceeds to
the Company will be $6,210,000. See "Underwriting."
PATTERSON TRAVIS, INC.
The date of the Prospectus is , 1997.
<PAGE> 4
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMPANY'S
SECURITIES AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED IN THE OVER-THE-COUNTER MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
The Securities are being offered on a "firm commitment" basis subject to
receipt and acceptance of the Securities by the Underwriter, subject to approval
of certain legal matters by its counsel and subject to prior sale. The
Underwriter reserves the right to withdraw, cancel or modify the offering and to
reject any order in whole or in part. It is expected that delivery of
certificates representing the Securities will be made at the offices of the
Underwriter against payment therefor in New York on or about ,
1997.
ADDITIONAL INFORMATION
The Company has filed with the headquarters office of the Securities and
Exchange Commission located at 450 Fifth Street, N.W., Washington, D.C. 20549, a
Registration Statement on Form S-1 under the Securities Act of 1933 with respect
to the Securities offered hereby. This Prospectus filed as part of such
Registration Statement does not contain all the information set forth in, or
annexed as exhibits to, the Registration Statement. For further information
pertaining to the Securities offered hereby and the Company, reference is made
to the Registration Statement and the exhibits thereto. The Registration
Statement and exhibits thereto may be inspected at the Headquarters Office of
the Securities and Exchange Commission located at 450 Fifth Street, N.W., Room
1024, Washington, D.C. 20549 and at certain of the Commission's regional offices
at the following addresses: 7 World Trade Center, 13th Floor, New York, New York
10048; and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies
of such material may be obtained from the Public Reference Section of the SEC,
at 450 Fifth Street, N.W., Room 1024, Washington, D.C. at prescribed rates. The
Commission also maintains a Web Site that contains reports, proxy and
information statements and other information regarding registrants such as the
Company, that file electronically with the Commission. This material can be
found at http://www.sec.gov.
2
<PAGE> 5
PROSPECTUS SUMMARY
Prospective investors should read this Prospectus carefully before making
any investment decision regarding the Company, and should pay particular
attention to the information contained in this Prospectus under the heading
"Risk Factors" and in the financial statements and related notes appearing
elsewhere in this Prospectus. In addition, prospective investors should consult
their own advisors in order to understand fully the consequences of an
investment in the Company. Unless indicated otherwise, the information contained
herein gives effect to a one for five reverse split of the Company's issued and
outstanding Common Stock that was completed in 1997 (the "Reverse
Stock Split"). The following summary does not purport to be complete and is
qualified by the more detailed information appearing elsewhere in this
Prospectus.
THE COMPANY
Dynamic International, Ltd., a Nevada corporation ("DIL"), is engaged in
the design, marketing and sale of a diverse line of hand exercise and light
exercise equipment, including hand grips, running weights, jump ropes and
aerobic steps and slides. It markets these products under the licensed
trademarks SPALDING(R) and KATHY IRELAND(R) as well as under its own trademarked
name SHAPE SHOP(R). In addition, it designs and markets sports bags and luggage,
which are marketed primarily under the licensed name JEEP(R) and under its own
names PROTECH(R) and SPORTS GEAR(R). The Company's objective is to become a
designer and marketer of goods that are associated with a free-spirited
lifestyle and leisure time.
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 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 charge
backs 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 Reform Act of 1978 (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. ("MG Holdings"), which had purchased a promissory note from
the Company's principal lender, received 14,880,000 shares of Common Stock in
full satisfaction of the promissory note. The number of shares issued to MG
Holdings (which has not been adjusted for the reverse stock split) represented
93% of the issued and outstanding shares. As a result, MG Holdings acquired
absolute control over the Company's affairs. MG Holdings is wholly-owned by
Marton Grossman, the Company's Chairman and President. See "Principal
Stockholders" and "Certain Relationships and Related Transactions." In addition,
as part of the plan of reorganization, the Company, then known as DCL, merged
into DIL, a newly formed Nevada corporation, for the purpose of changing its
state of incorporation. See "Legal Proceedings" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
3
<PAGE> 6
THE OFFERING
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Securities Offered............ 1,200,000 Units, each consisting of one share of Common
Stock, one Class A Warrant and one Class B Warrant(1)
Price Per Unit................ $5.00
Common Stock Outstanding 3,198,798 shares
Before Offering.............
Common Stock Outstanding After 4,398,798 shares(2)
Offering....................
Estimated Net Proceeds........ $5,100,000 ($5,890,000 if the over-allotment option is
exercised in full), after deducting commissions and filing,
printing, legal, accounting and miscellaneous expenses
payable by the Company estimated at $900,000.
Use of Proceeds............... To purchase inventory, debt repayment, advertising, marketing
and for working capital. See "Use of Proceeds."
Proposed Nasdaq Symbols
Units....................... DYNIU
Common Stock................ DYNI
Warrants.................... DYNIW
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(1) The A Warrants will be exercisable at $6.00 per share for a period of 18
months from the date of this Prospectus. The B Warrants will be exercisable
at $10.00 per share for a period of three years from the date of this
Prospectus. The Warrants will be redeemable at $.01 per Warrant upon the
giving of thirty (30) days prior written notice provided that the price of
the Common Stock has equaled or exceeded $9.00 with respect to the A
Warrants and $15.00 with respect to the B Warrants for ten consecutive
trading days within a period of 30 consecutive trading days.
(2) Assumes the Underwriter's over allotment option for 180,000 Units is not
exercised. See "Underwriting." Excludes (i) up to 2,400,000 shares of
authorized but unissued Common Stock reserved for issuance upon exercise of
the Warrants included in the offering (ii) up to 120,000 shares of Common
Stock issuable upon exercise of the Underwriter's Warrants; (iii) up to
240,000 shares of Common Stock issuable upon exercise of the Warrants
underlying the Underwriter's Warrants; (iv) up to an additional 540,000
shares of Common Stock (including 360,000 shares of Common Stock underlying
warrants) issuable upon exercise of the Underwriter's over-allotment option;
and (v) 2,000,000 shares of Common Stock issuable to Mr. Grossman, the
Company's Chairman and President over a three year period, provided the
Company meets certain earnings criteria. See "Description of Securities,"
"Underwriting" and "Management."
4
<PAGE> 7
SUMMARY FINANCIAL INFORMATION
Set forth below are selected financial data with respect to the Company for
the nine months ended January 31, 1997 and the years ended April 30, 1996, 1995
and 1994. The unaudited financial data for the interim periods reflect, in the
opinion of management, all adjustments necessary to present fairly the data for
such periods. The results of operations for the interim periods are not
necessarily indicative of operating results for the entire year. These data
should be read in conjunction with the financial statements of the Company and
the related notes included elsewhere herein. Effective August 8, 1996, the
Company emerged as the surviving entity in a merger with DCL. The balance sheet
of the combined entity was substantially similar to that of DCL immediately
prior to the merger. As a consequence, the financial data of the Company for the
reporting periods prior to July 31, 1996 consist of those of DCL.
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YEAR ENDED APRIL 30
NINE MONTHS ENDED ---------------------------------------
JANUARY 31, 1997 1996 1995 1994
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Net Sales................................ $ 8,376,861 $7,151,715 $ 32,533,097 $29,497,353
Income/(Loss) for period................. 83,303 6,945,299 (11,227,335) 244,308
Net Income (Loss) per Share.............. .03
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SELECTED BALANCE SHEET
DATA: JANUARY 31, 1997 AS ADJUSTED(1)
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Working Capital
(Deficit)................ (135,785) 4,964,215 (293,884) (7,493,435) 3,094,821
Total Assets............... 4,938,224 8,738,224 4,253,396 6,414,185 16,677,772
Long term obligations,
including capitalized
lease obligations........ 1,443 1,443 23,965 116,124 127,877
</TABLE>
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(1) Gives effect to the application of the net proceeds of this offering. Does
not give effect to (i) up to 2,400,000 shares of authorized but unissued
Common Stock reserved for issuance upon exercise of the Warrants included in
the offering (ii) up to 120,000 shares of Common Stock issuable upon
exercise of the Underwriter's Warrants; (iii) up to 240,000 shares of Common
Stock issuable upon exercise of the Warrants underlying the Underwriter's
Warrants; (iv) up to an additional 540,000 shares of Common Stock (including
360,000 shares of Common Stock underlying warrants) issuable upon exercise
of the Underwriter's over-allotment option; and (v) 2,000,000 shares of
Common Stock issuable to Mr. Grossman, the Company's Chairman and President,
over a three year period, provided the Company meets certain earnings
criteria. See "Description of Securities," "Underwriting" and "Management."
5
<PAGE> 8
RISK FACTORS
The purchase of the Securities offered hereby involves a high degree of
risk, including, but not necessarily limited to, the risks described below.
Before subscribing for the Securities offered hereby, each prospective investor
should consider carefully the general investment risks enumerated elsewhere in
this Prospectus and the following risk factors, as well as the other information
contained in this Prospectus.
EMERGENCE FROM BANKRUPTCY. In August 1995, the Company 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. The Company
believes that the losses that forced it into bankruptcy were caused by the
manufacturing defects and poor construction of treadmills and rowing machines
delivered to the Company by its manufacturers. As a result, the Company has
abandoned the sale of these products. Nevertheless, there can be no assurance
that the Company has accurately identified the precise source of its financial
problems and that it has sufficiently addressed such problems. Any failure by
the Company to adequately deal with its financial difficulties may lead to new
problems that, as in the past, may have a material adverse impact on the
condition and prospects of the Company. In addition, there can be no assurance
that the Company will be able to fully recover from the bankruptcy proceedings
and regain acceptance as a reputable company. Further, the Company's bankruptcy
proceedings may hamper its ability to establish new relationships with
commercial lenders and, as a result, complicate its efforts to obtain
financings. See "Business -- Plan of Reorganization."
SHIFTING CONSUMER PREFERENCES. The market for exercise and luggage
products is impacted by short-term trends. Therefore, the business of designing,
manufacturing and marketing such products is highly susceptible to fast changing
consumer preferences. The Company's luggage business is greatly affected by
demographic trends, frequent shifts in prevailing fashions and styles and
retailer practices. The Company's success in this area is dependent on its
ability to quickly and effectively initiate and/or respond to changes in market
trends and other consumer preferences. The ongoing competitive nature of the
luggage industry presents a continuous risk that new products may emerge and
compete with the Company's existing luggage products.
Similarly, the success of the Company's exercise products is mostly a
product of the perceived needs by consumers to improve their health and fitness.
In addition, the type of exercise equipment used by consumers may vary from time
to time based on which part of the body is perceived by consumers to require the
most exercise and how such consumers believe they may attain maximum results
from their efforts to stay fit. Therefore, the Company's ability to market its
exercise equipment will be dependent on its ability to anticipate consumers'
perceived fitness needs.
DEPENDENCE ON AFFILIATED PARTIES. Pursuant to an unwritten understanding
with Achim Importing Co., Inc. ("Achim"), 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 purchases
products directly from the manufacturer and resells them to the Company without
markup. Achim charges the Company interest on the unpaid balance of the
purchases. As of April 30, 1996, the Company owed $2,129,893 in principal and
interest under this arrangement. As of February 28, 1997, this sum had increased
to $2,423,714. Achim is wholly owned by Mr. Marton Grossman, the Company's
Chairman and President. If Achim were to terminate this arrangement for any
reason, it would have a material adverse effect on the ability of the Company to
purchase inventory and finance its operations. In addition, all of the Company's
assets are subject to a lien in favor of MG Holding Corp., an entity that is
wholly owned by Mr. Grossman ("MGH Corp."), to secure repayment of a promissory
note in the principal amount of approximately $1,200,000. This sum represents
debtor in possession financing advanced by MGH Corp. pursuant to an order by the
Bankruptcy Court.
In addition, the Company is party to a number of other agreements with
affiliated parties. Specifically, the Company is party to an agreement pursuant
to which the Company pays Achim a fee to perform a great number of
administrative functions on behalf of the Company. Further, the Company's
offices and warehouse are made available to it by Sym Holding, which is
controlled by Isaac Grossman, the Company's Vice Chairman, Treasurer and
Secretary, on an at will basis.
6
<PAGE> 9
CONSUMER ACCEPTANCE OF THE COMPANY'S PRODUCTS. The Company's revenues are
substantially dependent on its luggage products. The marketing success of those
products depends, among other things, upon rapidly changing consumer acceptance,
which is difficult to predict and over which the Company has little, if any,
control. In addition, the upscale market for luggage products is dominated by
name brands and fashion designers with wide name recognition and consumer
acceptance. As a result, the Company's ability to market its products and
effectively compete is mostly dependent on its ability to anticipate consumer
preferences and design luggage products that will appeal to its customers.
Although the Company believes that it has the ability and experience to
recognize potentially valuable products and to gauge trends in the luggage
business, no assurance can be given that the Company will at all times be able
to make accurate predictions as to the preference of its customers.
RELIANCE ON LICENSES. The market for exercise equipment is dominated by a
number of well known name brands. Although the Company believes that its license
with respect to the trademarks SPALDING and KATHY IRELAND provides it with some
of the most prominent names in exercise equipment, the Company's success in
marketing its exercise products will be greatly dependent on its continuing
right to use these trademarks as well as its ability to secure additional
licenses. Any interruption in the Company's rights to use certain trademarks,
including SPALDING and KATHY IRELAND, may have a materially adverse impact on
the Company's revenues. See "Business -- Intellectual Property -- License
Agreements."
DEPENDENCE ON FOREIGN SUPPLIERS. Approximately 72% of the Company's
products are manufactured overseas, notably in the Far East. The Company's
arrangements with foreign suppliers are subject to the risks of doing business
abroad, including currency fluctuations and revaluations, restrictions on the
transfer of funds and, in certain parts of the world, political instability,
changes in import duties and quotas, disruptions or delays in shipments and
transportation and labor disputes. The Company is also exposed to risks
associated with changes in the laws and policies that govern foreign investment
in countries where it acquires inventory and, to a lesser extent, changes in
U.S. laws and regulations relating to foreign trade and investment. While the
Company believes that alternative sources of supply are available, any serious
disruptions could materially impair the Company's ability to deliver exercise
and luggage products in a timely manner. See "Business -- Products."
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. Although the Company does not believe that the effects of seasonality
have had a material impact on the Company to date, seasonality of the business
requires advance planning and other special preparations to fully benefit from a
short period during which most of the Company's revenues are generated. If the
Company fails to generate sufficient revenues during this period, this may have
a material adverse impact on the Company's business. See "Management's
Discussion and Analysis of Financial Conditions and Results of Operations."
POTENTIAL NEED FOR ADDITIONAL FINANCING. Significant additional funding
may be required following this offering in order for the Company to further
expand the marketing of its products. Therefore, the Company will likely be
required to raise additional funds through alternative financing methods. There
can be no assurance that the Company will be able to obtain additional funding
when needed, or that such funding, if available, will be obtainable on terms
acceptable to the Company.
DEPENDENCE ON KEY PERSONNEL. The success of the Company depends in part
upon the successful performance of the Company's Chief Executive Officer and
Chairman, who is 66 years old, for the continued marketing and operation of the
Company. Although the Company has employed, and will likely employ in the
future, additional qualified employees, if Mr. Marton Grossman fails to perform
his duties for any reason, the ability of the Company to market, operate and
support its products may be adversely affected. The Company is currently
investigating the possibility of obtaining key-man life insurance on the life of
Mr. Grossman. See "Management."
COMPETITION. Although the Company believes that the products it sells are
unique in several ways, there are other companies that have similar products,
many of which companies have substantially greater financial and other resources
than the Company. Moreover, there can be no assurance that there are no products
that
7
<PAGE> 10
would compete effectively with the Company's proposed products or that other
companies, many of which have financial resources, marketing staffs and
facilities greater than those of the Company, are not currently developing, or
in the future will not develop, products that may have advantages over the
Company's proposed products or that may undercut what the Company believes are
the advantages of the Company's products. See "Business -- Competition."
DEPENDENCE ON PRINCIPAL CUSTOMERS. For the year ended April 30, 1996,
three of the Company's customers accounted for approximately 19% 18% and 14%,
respectively, of the Company's sales. Although the Company hopes to diversify
its customer base in the future, any significant decline in sales to the
Company's principal customers could have a material adverse effect on the
Company. See "Business."
NEED TO INCREASE MARKETING CAPABILITY. In order to achieve continued
growth following the offering, the Company will need to expand its marketing and
sales and develop a network of marketing and sales representatives. There can be
no assurance that the Company will be able to build such a marketing staff or
sales force, that the cost of establishing such a marketing staff or sales force
will not exceed any product revenues, or that the Company's direct sales and
marketing efforts will be successful. Alternatively, the Company may enter into
co-marketing or other licensing arrangements. To enter into co-marketing or
other licensing arrangements, the Company must establish and maintain corporate
relationships. There can be no assurance that such corporate relationships can
be established or maintained on terms acceptable to the Company, if at all. To
the extent the Company enters into co-marketing or other licensing arrangements,
any revenues received by the Company will be dependent on the efforts of third
parties, and there can be no assurance that such efforts will be successful.
Although the Company believes that future corporate partners, if any, will have
an economic motivation to commercialize any such products, the Company may not
have any direct control over such partners' commercialization efforts. See
"Business."
LIMITED LIABILITY INSURANCE. The marketing and sale of the Company's
products entails a risk of product liability claims and claims of omission by
consumers and others. The Company has a general policy of disclaiming liability
arising from its products. The Company also maintains liability insurance
covering these areas. Nevertheless, in the event of a successful liability claim
against the Company, there can be no assurance that the current insurance
coverage will be adequate. Any successful liability claim that exceeds the
Company's insurance coverage could have a material adverse effect on the
Company.
DILUTION; CHEAP STOCK. Purchasers of the Units offered hereby will
experience immediate and substantial dilution in the net tangible book value of
shares of Common Stock (including the shares underlying the Warrants) included
in the Units in that the net tangible book value of such shares will be
substantially less than the offering price per share of such shares.
Specifically, the investors in this offering will experience immediate dilution
of $3.83 per share of Common Stock, or approximately 77% of the $5.00 offering
price. In addition, since the current stockholders of the Company have acquired
their respective equity interests at a cost substantially below the offering
price, the public investors will bear most of the risk of loss. See "Dilution."
VOTING CONTROL; POTENTIAL ANTI-TAKEOVER EFFECT. After the completion of
this offering, the executive officers and directors of the Company will
beneficially own approximately 68% of the Company's outstanding Common Stock
and, accordingly, will be able to continue to elect all of the directors and,
therefore, to absolutely control the Company's affairs. As a result of the
absolute control exercisable by current management, potential takeover bids for
the Company may be deterred. This may have a depressive effect on the price of
the Securities offered hereby. In addition, pursuant to an agreement with Mr.
Grossman, the Company has agreed to issue to him an additional 2,000,000 shares
of Common Stock over a three year period if the Company meets certain earnings
criteria. See "Security Ownership of Certain Beneficial Owners and Management"
and "Management."
NO PAYMENT OF DIVIDENDS. The Company has not paid any dividends on its
Common Stock. For the foreseeable future, the Company anticipates that all
earnings, if any, that may be generated from the Company's operations will be
used to finance the growth of the Company and that cash dividends will not be
paid to holders of the Common Stock. See "Description of Securities."
8
<PAGE> 11
ARBITRARY DETERMINATION OF OFFERING PRICE AND WARRANT EXERCISE PRICE. The
offering price of the Units and the exercise price of the Warrants have been
arbitrarily determined by negotiation between the Company and the Underwriter
and do not necessarily bear any relationship to the assets, book value,
operating or financial results or net worth of the Company or other generally
accepted criteria of value and should not be considered as indicating any
intrinsic value for the Securities. See "Underwriting."
NO ASSURANCE OF PUBLIC MARKET FOR THE UNITS, COMMON STOCK OR
WARRANTS. Prior to the Company's filing for protection under the Bankruptcy
Code, the Company's securities were traded on Nasdaq. However, immediately prior
to this offering, there was no active public market for the Units, Common Stock
or Warrants, and there can be no assurance that such markets will develop or, if
developed, will be sustained after completion of this offering. While the
Underwriter has informed the Company that it will endeavor to make a market in
the Units and, after the Separation Date, the Common Stock and Warrants, there
can be no assurance that a trading market will develop or be sustained or that
the securities offered hereby will be saleable at or near their offering price.
In the event the Underwriter, for any reason, ceases making a market in the
Company's securities, the trading market in the Company's securities will likely
be materially adversely affected. See "Underwriting."
While the Company expects the Securities to be listed for trading on
Nasdaq, no assurance can be given that an active and liquid trading market for
the securities will develop or, if developed, will be sustained. Moreover, no
assurance can be given that the Company will meet the criteria for maintaining a
listing on Nasdaq. The current Nasdaq maintenance criteria will require the
Company to have: (i) two registered and active market makers, (ii) total assets
of at least $2 million, (iii) minimum bid price per share of $1 or a market
value of public float of $1 million and $2 million in capital and surplus, (iv)
300 stockholders, and (v) 100,000 shares held by non-insiders which shares must
have a market value of at least $200,000.
EXERCISE OF WARRANTS SUBJECT TO CURRENT EFFECTIVE REGISTRATION AND
QUALIFICATION. Any exercise of the Warrants must be made pursuant to a
prospectus which is current at the time of exercise. The Company will endeavor
to maintain a current effective registration statement under the Securities Act
of 1933, as amended (the "Securities Act"), relating to the Common Stock
issuable upon exercise of the Warrants. If the Company is unable to maintain a
current registration statement for any reason, the Warrants may not be
exercised. Although the Securities offered hereby will not knowingly be sold to
purchasers in jurisdictions in which they are not registered or otherwise
qualified for sale, purchasers may buy Warrants in the aftermarket which may
develop for the Warrants in, or purchasers of the Warrants may move to,
jurisdictions in which the shares of Common Stock underlying the Warrants are
not registered or qualified during the period when the Warrants are exercisable.
In such event, the Company would be unable to issue shares to those persons
desiring to exercise their Warrants unless and until the shares could be
registered or qualified for sale in jurisdictions in which such purchasers
reside, or an exemption to such qualification exists in such jurisdictions. No
assurance can be given that the Company will be able to effect any required
registration or qualifications. See "Description of Securities -- Warrants."
POSSIBLE DEPRESSIVE EFFECT OF RULE 144 SALES. At the time of the
completion of this offering, approximately 2,976,000 shares of Common Stock may
be deemed to be "restricted securities" under Rule 144 promulgated under the
Securities Act. Under Rule 144, such shares are expected to be able to be
publicly sold beginning August 1997, subject to volume restrictions (i.e. during
any three month period an amount equal to the greater of the average weekly
trading volume for the four weeks preceding the date of sale or 1% of the then
outstanding shares). Any such sales could have a depressive effect on the market
price for the Securities being offered hereby. See "Description of
Securities -- Shares Available for Future Sale."
Investors should be aware that sales of the Company's Common Stock pursuant
to options and warrants may have a depressive effect on the price of the Common
Stock and the Warrants, and that the issuance of additional shares of Common
Stock upon the exercise of options, warrants, the Warrants and the Warrants
included in the Units underlying the Underwriter's Warrants will also dilute the
proportionate ownership of the then current stockholders of the Company. See
"Description of Securities -- Warrants."
POSSIBLE ISSUANCE OF SUBSTANTIAL AMOUNTS OF ADDITIONAL SHARES WITHOUT
STOCKHOLDER APPROVAL. After this offering, the Company will have a large
number of shares of
9
<PAGE> 12
Common Stock authorized but unissued and reserved for issuance pursuant to (i)
exercise of the Warrants being offered hereby, (ii) exercise by the Underwriter
of the Underwriter's Warrants and the exercise of the Warrants included in the
Units underlying the Underwriter's Warrants (the Underwriter's Warrants,
including the underlying Units, the Common Stock and the Warrants included
therein are collectively sometimes referred to herein as the "Underwriter's
Securities"), and (iii) an agreement to issue an aggregate of 2,000,000 shares
of Common Stock to the Company's Chairman and President over a three year
period, provided the Company meets certain earnings criteria. All of such shares
and any additional shares may be issued without any action or approval by the
Company's stockholders. Although, other than as set forth in the previous
sentence, there are no present plans, agreements, commitments or undertakings
with respect to the issuance of additional shares, or securities convertible
into any such shares by the Company, any additional shares issued would further
dilute the percentage ownership of the Company held by the public stockholders
and would likely have an adverse impact on the market price of the Common Stock.
See "Description of Securities."
In addition, the Company is authorized to issue 10,000,000 shares of
Preferred Stock of which, as of the date hereof, none are outstanding. Shares of
Preferred Stock are issuable at any time and from time to time, by action of the
Board of Directors without further authorization from the Company's
stockholders, except as otherwise required by applicable law or rules and
regulations to which the Company may be subject, to such persons and for such
consideration as the Board of Directors determines. The issuance of preferred
stock by the Board of Directors could adversely affect the rights of the holders
of Common Stock. For example, such issuance could result in a class of
securities outstanding that would have preferences with respect to voting rights
and dividends and in liquidation over the Common Stock, and could (upon
conversion or otherwise) enjoy all of the rights appurtenant to Common Stock.
The authority possessed by the Board of Directors to issue preferred stock could
potentially be used to discourage attempts by others to obtain control of the
Company through a merger, tender offer, proxy contest or otherwise by making
such attempts more difficult or more costly to achieve. There are no agreements
or understandings regarding the issuance of preferred stock.
UNDERWRITER'S WARRANTS. In connection with this offering, the Company will
sell to the Underwriter for a nominal amount, warrants to purchase up to 120,000
Units. The Underwriter's Warrants will be exercisable commencing one year after
the effective date of this Prospectus and will continue to be exercisable until
five years from the date hereof at an exercise price of $8.25 per Unit, with the
Class A Warrants and Class B Warrants underlying the Units included in the
Underwriter's Warrants allowing the purchase of Common Stock at $9.90 and $16.50
per share, respectively. As long as the Underwriter's Warrants are outstanding,
the terms on which the Company could obtain additional capital may be adversely
affected because the holder of the Underwriter's Warrants might be expected to
exercise them if the Company were able to obtain any needed additional capital
in a new offering of securities at a price greater than the exercise price of
the Underwriter's Warrants. See "Underwriting."
POTENTIAL ADVERSE EFFECT OF REDEMPTION OF WARRANTS. The Class A Warrants
and the Class B Warrants are redeemable by the Company at $.01 per Warrant on
thirty day's prior written notice at any time provided that the average closing
bid price for the Common Stock is no less than $9.00 per share with respect to
the Class A Warrants and $15.00 with respect to the Class B Warrants for any ten
consecutive trading days within a period of 30 consecutive trading days as
reported on the principal exchange on which the Common Stock is traded. Notice
of redemption of the Warrants could force the Warrant holders to exercise the
Warrants at a time when it might be disadvantageous for the holders to do so or
to sell the Warrants at their then current market price when the holders might
otherwise wish to hold the Warrants for possible appreciation. Alternatively,
the holders may accept the redemption price, when it is likely to be
substantially less than the market value of the Warrants at the time of
redemption. Any holders who do not exercise Warrants prior to their expiration
or redemption, as the case may be, will forfeit the right to purchase the shares
of Common Stock underlying the Warrants. While the Company may legally be
permitted to give notice to redeem the Warrants at a time when a current
prospectus is not available thereby leaving the Warrant holders no opportunity
to exercise their Warrants prior to redemption, the Company does not intend to
redeem the Warrants unless a current prospectus is available at the time of the
redemption. See "Description of Securities -- Warrants."
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<PAGE> 13
UNDERWRITER'S INFLUENCE ON THE MARKET. A significant amount of the
Securities offered hereby will be sold to customers of the Underwriter. Such
customers subsequently may engage in transactions for the sale or purchase of
such Securities through or with the Underwriter. Although it has no legal
obligation to do so, the Underwriter has indicated that it intends to act as a
market-maker and otherwise effect transactions in the Securities offered hereby.
To the extent the Underwriter acts as a market-maker in the Common Stock or
Warrants, they may be dominating influences in those markets. The degree of
participation in those markets by the Underwriter may significantly effect the
price and liquidity of the Securities. The Underwriter may discontinue such
activities at any time or from time to time. Moreover, pursuant to Regulation M,
if the Underwriter solicits exercise of any of the Warrants, including the
Underwriter's Warrants, it will be unable to act as a market-maker with respect
to the Securities for a period of two or nine business days prior to any
solicitation by it of the exercise of any of the Warrants, including the
Underwriter's Warrants, until the termination of such activity. Accordingly, the
Underwriter will not be able to act as a market-maker during certain periods
and, as a result, holders of the Company's Securities may find it more difficult
to sell their holdings. Also, the same restriction may arise if the Underwriter
becomes involved in a distribution of any of the currently restricted
securities.
PENNY STOCK REGULATION. Broker-dealer practices in connection with
transactions in "penny stocks" are regulated by certain penny stock rules
adopted by the Securities and Exchange Commission. Penny stocks generally are
equity securities with a price of less than $5.00 (other than securities
registered on certain national securities exchanges or quoted on the Nasdaq
system). The penny stock rules require a broker-dealer, prior to a transaction
in a penny stock not otherwise exempt from the rules, to deliver a standardized
risk disclosure document that provides information about penny stocks and the
nature and level of risks in the penny stock market. The broker-dealer also must
provide the customer with current bid and offer quotations for the penny stock,
the compensation of the broker-dealer and its salesperson in the transaction,
and, if the broker-dealer is the sole market-maker, the broker-dealer must
disclose this fact and the broker-dealer's presumed control over the market, and
monthly account statements showing the market value of each penny stock held in
the customer's account. In addition, broker-dealers who sell such securities to
persons other than established customers and accredited investors (generally,
those persons with assets in excess of $1,000,000 or annual income exceeding
$200,000, or $300,000 together with their spouse), the broker-dealer must make a
special written determination that the penny stock is a suitable investment for
the purchaser and receive the purchaser's written agreement to the transaction.
Consequently, these requirements may have the effect of reducing the level of
trading activity, if any, in the secondary market for a security that becomes
subject to the penny stock rules. If the Securities become subject to the penny
stock rules, investors in this offering may find it more difficult to sell their
shares and/or Warrants.
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<PAGE> 14
SELECTED FINANCIAL DATA
Set forth below are selected financial data with respect to the Company for
the three months ended July 31, 1996, the nine months ended January 31, 1997 and
January 31, 1996 and the years ended April 30, 1996, 1995, 1994, 1993 and 1992.
The unaudited financial data for the interim periods reflect, in the opinion of
management, all adjustments necessary to present fairly the data for such
periods. The results of operations for the interim periods are not necessarily
indicative of operating results for the entire year. These data should be read
in conjunction with the financial statements of the Company and the related
notes included elsewhere herein. Effective August 8, 1996, the Company emerged
as the surviving entity in a merger with DCL. The balance sheet of the combined
entity was substantially similar to that of DCL immediately prior to the merger.
As a consequence, the financial data of the Company for the reporting periods
prior to July 31, 1996, consist of those of DCL.
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
------------------------------------------------------------------------------------
REORGANIZED COMPANY
----------------------------- YEAR ENDED APRIL 30
THREE MONTHS NINE MONTHS NINE MONTHS --------------------------------------------------------------------
ENDED 7/31/96 ENDED 1/31/97 ENDED 1/31/96 1996 1995 1994 1993 1992
------------- ------------- ------------- ----------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Sales... $ 2,161,721 $ 8,376,861 $ 5,205,149 $ 7,151,715 $ 32,533,097 $29,497,353 $25,735,479 $27,500,376
Net
Income/(Loss)
from
Continuing
Operations... (73,749) 83,303 (7,681,518) (2,235,894) (11,227,335) 244,308 (427,409) 317,619
Net
Income/(Loss)... (73,749) 83,303 (7,681,518) 6,945,299 (11,227,335) 244,308 (427,409) 317,619
Net Income
(Loss) per
Share...... (0.02) 0.03
Selected
Balance
Sheet Data:
Working
Capital
(Deficit)... (343,961) (135,785) (14,965,331) (293,884) (7,493,435) 3,094,821 3,173,751 3,688,385
Total
Assets..... 4,333,260 4,938,224 6,015,521 4,253,396 6,414,185 16,677,772 13,373,816 11,849,748
Total
Liabilities... 4,313,934 4,761,846 20,689,340 4,300,398 13,406,486 12,442,738 9,383,090 7,431,613
Retained
Earnings... 0 157,052 0 0 0 3,644,799 3,400,491 3,827,900
Accumulated
Deficit.... 0 0 (15,264,054) (637,237) (7,582,536) 0 0 0
Shareholders'
Equity
(Deficit)... 19,326 176,378 (14,673,819) (47,002) (6,992,301) 4,235,034 3,990,726 4,418,135
</TABLE>
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<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
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."
PLAN OF REORGANIZATION
In August 1995, the Company sought 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
14,880,000 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. See "Principal
Stockholders" and "Certain Relationships and Related Transactions." An
additional 800,000 shares and approximately 320,000 shares were issued to the
Company's unsecured creditors and the Company's existing security holders,
respectively. The numbers of shares issued do not account for the Reverse Stock
Split. See "Prospectus Summary." The value of the cash and securities
distributed under the plan of reorganization aggregated $531,600. An amount of
$16,692,200, before income tax provisions, 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.
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.
Pending the resolution of the bankruptcy proceedings, the Company
restructured its operations and relocated its administrative headquarters and
warehouse facilities.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED JANUARY 31, 1997 AND 1996
Sales for the nine months ended January 31, 1997 increased by $3,172,000
from $5,205,000 to $8,377,000, or 61% from the nine months ended January 31,
1996. Sales of the Company's exercise equipment line decreased by $195,000,
while sales of the Company's luggage line increased by $148,000, to $4,285,000
and $4,091,000, respectively. For the period ended January 31, 1996, sales of
the Company's exercise equipment and luggage lines of $4,480,000 and $3,943,000,
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 $1,489,000 to a
gross profit of $2,557,000. 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 gross profit for the nine months
ended January 31, 1996.
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<PAGE> 16
During the nine months ended January 31, 1997, operating expenses decreased
by approximately $3,440,000. As a result of the Company's reorganization, the
Company had decreases in the following expenses:
<TABLE>
<S> <C>
Officers' Salaries................................................ $ 39,800
Office Salaries................................................... $596,700
Payroll Taxes..................................................... $ 59,800
Pension Costs..................................................... $792,600
Rent.............................................................. $279,200
Insurance......................................................... $232,500
Insurance Claims.................................................. $289,400
Professional Fees................................................. $ 51,300
Consulting Fees................................................... $107,600
Freight Out....................................................... $224,700
Promotion......................................................... $119,300
Provision for Bad Debts........................................... $493,200
</TABLE>
Interest expense decreased by approximately $63,000 due to decreased
borrowing. Bankruptcy administration costs decreased by $383,000 to $34,000 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 $251,000 compared to a
pretax loss of $7,681,000 in the prior year's nine-month period.
RESULTS OF OPERATIONS FOR THE YEARS ENDED APRIL 30, 1996 AND 1995
Sales for the years ended April 30, 1996 were $7,151,700, a decrease of
$25,381,400 or 78% from the previous fiscal year. The decrease was primarily due
to the discontinuation of a line of manual treadmills and ski machines. Sales of
this equipment alone accounted for approximately $15,580,000 during the fiscal
year ended April 30, 1995. During the fiscal year ended April 30, 1996, as a
result of the Company's bankruptcy proceedings, it was forced to reduce its
sales of other exercise equipment and of its luggage products which lead to a
decline in sales of $5,334,700 and $1,333,600 respectively, to $5,615,600 and
$4,701,800, respectively. Sales of exercise equipment and luggage products
during this period were offset by credits of $3,210,900 issued to customers in
connection with the discontinued line of manual treadmills and ski machines. In
addition, the Company's operating expenses decreased by approximately $1,083,300
to $6,683,200.
For the fiscal year ended April 30, 1996, after giving effect to an
extraordinary gain as a result of the discharge of pre-petition liabilities in
the amount of $16,692,200, the Company recorded net income of $6,945,300,
compared to a net loss of $11,227,300 during the previous fiscal year. For the
current fiscal year, the Company would have recorded a net loss of $9,746,900
before the extraordinary gain, or a decrease of $1,562,500 from the prior fiscal
year. This decrease primarily reflected a reduction in the Company's selling and
administrative expenses of approximately $1,083,300 and a reduction in interest
expense of $1,001,400 primarily as a result of the bankruptcy proceedings which
for the most part exempted the Company from making interest payments on
outstanding debt.
RESULTS OF OPERATIONS FOR THE YEARS ENDED APRIL 30, 1995 AND 1994
Sales for the year ended April 30, 1995 increased from $29,497,400 to
$32,533,100, totalling $3,035,700, or 10% from the previous fiscal year. This
increase was primarily the result of the introduction of a new line of manual
treadmills and ski machines. Sales of these products amounted to approximately
$15,580,000. Sales of the Company's "Jeep" license sport/bag/luggage increased
by approximately $219,000. Increases in these product lines were offset by
declines in all of the Company's other product lines of approximately
$12,763,000.
The Company's gross profit margin declined from approximately $8,134,000 in
fiscal 1994 to a gross loss of approximately $2,158,000 in fiscal 1995. This
decrease was due primarily to the disposal of approximately $1,247,000 of
defective manual treadmills and return credits issued to customers for defective
manual treadmills totalling approximately $7,000,000. In addition, the Company
incurred expenses in the amount of
14
<PAGE> 17
$589,200 in connection with the disposals of other discontinued products. The
inventory was further reduced by a lower cost or market reserve of approximately
$705,000.
Operating expenses increased by approximately $902,000. This increase was
due primarily to increases in the provision for bad debts of $474,000, an
increase in officer salaries of $39,800, an increase in office salaries of
$129,000, an increase in severance pay of $71,000 and an increase in legal fees
of $107,600. Interest expense increased by $531,900 due to higher interest
rates.
For the fiscal year ended April 30, 1995, the Company had a pre-tax
operating loss of $11,309,400 as compared to a pre-tax operating income of
$416,400 for the prior fiscal year. The decrease can be attributed to the severe
losses from its venture into a new line of manual treadmills.
LIQUIDITY AND CAPITAL RESOURCES
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 enables it to
finance the purchases of its inventory from its overseas suppliers. Also, from
time to time, Achim purchases 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. As of February 28, 1997, the Company owed
an amount of $2,423,714 to Achim under this arrangement.
After deducting expenses, the Company estimates the net proceeds from this
offering to be approximately $5,100,000. It intends to allocate such proceeds to
the purchase of inventory, debt repayment, advertising and marketing. The
Company believes that the proceeds from this offering together with anticipated
cash flows generated by operations and the availability of the Achim credit line
to finance the purchase of inventory are sufficient to continue its operations
for the next twelve months. Thereafter, the Company expects that it may have to
raise additional capital through a private placement, public offering or
otherwise.
The Company intends to utilize approximately $500,000 from the proceeds of
this offering to promote its current product line, primarily by buying
advertisements in various media. In addition, the Company will allocate
approximately $800,000 toward augmenting its sales and marketing staff. The
Company believes that these expenditures will result in a growth of sales and
revenues and in an increased ability to compete more effectively with its
competitors. Nevertheless, there can be no assurance that the Company's focus on
these activities and the allocation of a portion of the proceeds from this
offering to these efforts will result in increased sales and revenues.
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 luggage/sports bag 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 in prices of material
or other operating costs or in the selling price of its products and services
that will materially effect the Company.
15
<PAGE> 18
DILUTION
At January 31, 1997, the Company had a net tangible book value of $50,396
or $.02 per share of Common Stock. Net tangible book value per share represents
the amount of total tangible assets less liabilities, divided by 3,198,798, the
number of shares of Common Stock outstanding. After giving effect to the sale of
the 1,200,000 Units hereby, the pro forma net tangible book value at January 31,
1997, would have been $5,150,396 or $1.17 per share of Common Stock. This
represents an immediate increase in pro forma net tangible book value of $1.15
per share to the existing stockholders and an immediate dilution of $3.83 per
share to investors in this offering. The following table illustrates this per
share dilution:
<TABLE>
<S> <C> <C>
Public offering price per share.............................................. $5.00
Net tangible book value per share before offering.......................... $ .02
Increase per share attributable to the sale of the Units offered hereby.... $1.15
-----
Net tangible book value per share after offering (1)......................... $1.17
-----
Dilution per share to investors in offering (2).............................. $3.83
=====
</TABLE>
- ---------------
(1) After deduction of underwriting discounts and commissions, the Underwriter's
non-accountable expense allowance and other estimated expenses of the
offering. See "Use of Proceeds" and "Underwriting."
(2) Does not give effect to (i) up to 2,400,000 shares of authorized but
unissued Common Stock reserved for issuance upon exercise of the Warrants
included in the offering (ii) up to 120,000 shares of Common Stock issuable
upon exercise of the Underwriter's Warrants; (iii) up to 240,000 shares of
Common Stock issuable upon exercise of the Warrants underlying the
Underwriter's Warrants; (iv) up to an additional 540,000 shares of Common
Stock (including 360,000 shares of Common Stock underlying warrants)
issuable upon exercise of the Underwriter's overallotment option; and (v)
2,000,000 shares of Common Stock issuable to Mr. Grossman, the Company's
Chairman and President, provided the Company meets certain earnings criteria
over a three year period. See "Description of Securities," "Underwriting"
and "Management."
The following table presents as of January 31, 1997, the relative share
purchases, percentages of equity ownership in the Company, total cash paid,
percentage of total cash invested, and the average price per share of Common
Stock to the current and public shareholders after giving effect solely to the
sale of the shares of Common Stock offered hereby:
COMMON STOCK ONLY
<TABLE>
<CAPTION>
PERCENTAGE PERCENTAGE
SHARES OF EQUITY TOTAL OF TOTAL AVERAGE PRICE
PURCHASED OWNERSHIP CASH PAID CASH INVESTED PER SHARE
--------- ---------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Public Investors............... 1,200,000 27.3% 6,000,000 99.9% $5.00
Current Stockholders........... 3,198,798 72.7% 19,329 0.1% $0.01
--------- ------ --------- ------
Total................ 4,398,798 100.00% 6,019,329 100.00%
========= ====== ========= ======
</TABLE>
16
<PAGE> 19
USE OF PROCEEDS
The net proceeds of this offering, after deducting discounts and
commissions, the Underwriter's expense allowance and expenses of this offering,
will be approximately $5,100,000 ($5,890,000 if the over-allotment option is
exercised in full). The Company intends to use such net proceeds as follows:
<TABLE>
<S> <C>
Purchase of Inventory............................................ $2,000,000
Debt Repayment (1)............................................... $1,300,000
Advertising (2).................................................. $ 500,000
Marketing (3).................................................... $ 800,000
Working Capital.................................................. $ 500,000
</TABLE>
- ---------------
(1) The entire amount will be paid to MG Holding Corp., which is wholly owned by
Marton Grossman, the Company's Chairman and President, in total repayment of
loans, including accrued interest, made during the Company's Chapter 11
proceedings.
(2) The Company intends to market its products through the placement of
advertisements in various media.
(3) The Company intends to hire a number of marketing professionals who are
expected to be paid a salary as well as commissions.
The amount of net proceeds to be received by the Company reflects the
Company's best estimate of the amount of expenses incurred in the offering of
$300,000 paid or to be paid by the Company at or around the closing of this
offering out of proceeds.
The foregoing table represents the Company's best estimate of the
allocation of the proceeds of this offering based upon the current state of the
Company's development, its current plans and current economic and industry
conditions, and is subject to reapportionment of proceeds among the categories
listed above or to new categories in the event of changes to the current
economic and industry conditions or an entirely unforeseen opportunity,
acquisition or otherwise, is presented to the Company. While the Company has no
specific current acquisition plans, it currently intends to simultaneously focus
its energies and assets towards growing its business internally, while at the
same time exploring opportunities to expand its business through acquisitions.
The Company expects that the net proceeds of this offering will be sufficient
for it to reach its objectives over at least the next 12 months.
Until used, the Company intends to invest the proceeds of this offering in
government securities, certificates of deposit, money market securities,
commercial paper or other top-rated income-producing investments.
17
<PAGE> 20
CAPITALIZATION
The following table sets forth the capitalization of the Company at January
31, 1997, and as adjusted to reflect receipt of the net proceeds from this
offering:
<TABLE>
<CAPTION>
JANUARY 31, 1997
----------------------------
ACTUAL(1) AS ADJUSTED(2)
--------- --------------
<S> <C> <C>
Short term debt.................................................... $1,242,521 $ -0-
========== ==========
Long term debt..................................................... 1,443 1,443
Stockholders' Equity
Common stock, $.001 par value, 50,000,000 shares authorized;
Issued and outstanding 3,198,798 at January 31, 1997, and
4,398,798 as adjusted......................................... 3,199 4,399
Preferred Stock, $.001 par value, 10,000,000 shares authorized;
None outstanding
Additional paid-in capital....................................... 16,130 5,114,930
Retained earnings................................................ 157,052 157,052
Less: Treasury Stock............................................. (3) (3)
----------- ----------
Total Stockholders' Equity....................................... 176,378 5,276,378
---------- ----------
Capitalization Total..................................... $ 177,821 $5,277,821
========== ==========
</TABLE>
- ---------------
(1) Does not give effect to (i) up to 2,400,000 shares of authorized but
unissued Common Stock reserved for issuance upon exercise of the Warrants
included in the offering (ii) up to 120,000 shares of Common Stock issuable
upon exercise of the Underwriter's Warrants; (iii) up to 240,000 shares of
Common Stock issuable upon exercise of the Warrants underlying the
Underwriter's Warrants; (iv) up to an additional 540,000 shares of Common
Stock (including 360,000 shares of Common Stock underlying warrants)
issuable upon exercise of the Underwriter's over-allotment option; and (v)
2,000,000 shares of Common Stock issuable to Mr. Grossman, the Company's
Chairman and President over a three year period, provided the Company meets
certain earnings criteria. See "Description of Securities," "Underwriting"
and "Management."
(2) Gives effect to the issuance and sale of the Units and the anticipated
application of the net proceeds of this offering.
18
<PAGE> 21
BUSINESS
GENERAL
Dynamic International, Ltd., a Nevada corporation ("DIL"), is engaged in
the design, marketing and sale of a diverse line of hand exercise and light
exercise equipment, including hand grips, running weights, jump ropes and
aerobic steps and slides. It markets these products under the licensed
trademarks SPALDING(R) and KATHY IRELAND(R) as well as under its own
trademarked name SHAPE SHOP.(R) In addition, it designs and markets sports bags
and luggage, which are marketed primarily under the licensed name JEEP(R) and
under its own names PROTECH(R) and SPORTS GEAR.(R) The Company's objective is
to become a designer and marketer of goods that are associated with a
free-spirited lifestyle and leisure time.
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 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 charge
backs 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 lender, received (without giving effect to the Reverse Stock Split)
14,880,000 shares of Common Stock in full satisfaction of the promissory note,
representing approximately 93% of the issued and outstanding shares thereby
gaining absolute control over the Company's affairs. See "Principal
Stockholders" and "Certain Relationships and Related Transactions." In addition,
as part of the plan of reorganization, the Company, then known under the name
DCL, merged into DIL, a newly formed Nevada corporation, for the purpose of
changing its state of incorporation. See "Legal Proceedings" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
PRODUCTS
Exercise Equipment
The Company's line of exercise equipment consists primarily of handheld
products, including dumbbells, ankle and wrist weights, hand grips, jump ropes,
exercise suits, slimmer belts and strength training products. In addition, the
Company markets light weight equipment such as aerobic steps and slides and
exercise mats. The Company also carries a line of small electronic devices
designed to monitor physical activity such as stopwatches, pedometers, pulse
meters and calorie counters.
Luggage
The Company's line of luggage consists primarily of duffle bags, weekend
bags, garment bags, suitcases, pilot cases and flight attendant wheeled cases.
Some of the models are equipped with wheels and/or retractable handles.
19
<PAGE> 22
Other Products
The Company intends to begin marketing an insulated bag incorporating a
wrap-around gel pack or freeze pack with the ability to cool and preserve food
and other products for an extended period of time. The Company, through a wholly
owned subsidiary, obtained the exclusive rights to the patents underlying the
technology as well as the trademarks FREEZY-BAG(TM) and FREEZYGEL(TM) under
which the products are sold. See "Intellectual Property-License Agreements."
The Company may from time to time manufacture and/or market additional
products under its own names or under licensed names.
Design and Development
The Company usually designs its own exercise equipment and, with the
assistance of outside consultants, creates its own molds and tooling. Such molds
and tooling are used by the manufacturers to produce the equipment. The Company
retains an ownership interest in the molds which are returned to it upon the
termination of the Company's relationship with a particular manufacturer. The
Company has been granted a number of design patents with respect to certain of
its products. See "Intellectual Property." The Company employs a designer on a
full-time basis for the design of its luggage products. During the most recent
fiscal year the Company spent approximately $102,000 on design activities,
including fees to designers and patent attorneys.
Most of the Company's products are manufactured in the United States,
Philippines, Korea and Taiwan, which in the most recent fiscal year accounted
for approximately 28%, 26%, 17% and 12% of the Company's products, respectively.
In addition, the Company's products are manufactured in the People's Republic of
China, Hong Kong and Indonesia. Exercise equipment is usually shipped by the
manufacturers to the Company within 45 days of the placement of an order. Orders
for luggage and sports bags, which for the most part are produced in the
Philippines and China, usually require a period of 90 to 120 days before they
are shipped. The Company ordinarily has its products manufactured based on
purchase orders and it has no long term relationships with any of its
manufacturers. The Company believes that, if necessary, it will be able to
obtain its products from firms located in other countries at little if any
additional expense. As a consequence, the Company believes that an interruption
in deliveries by a manufacturer located in a particular country will not have a
material adverse impact on the business of the Company. Nevertheless, because of
political instability in a number of the supply countries, occasional import
quotas and other restrictions on trade or otherwise, there can be no assurance
that the Company will at all times have access to a sufficient supply of
merchandise.
SALES AND MARKETING
The Company sells its products on a wholesale basis only. Most of its
products are sold to catalog showrooms, drug chains, discount stores and
sporting goods chains. For the fiscal year ended April 30, 1996 approximately
19%, 18% and 14% of the Company's revenues were derived from sales to Service
Merchandise, K-Mart and Wal-Mart, respectively. No other customer accounted for
more than ten percent of the Company's revenues. For the fiscal year ended April
30, 1996, sales of exercise equipment accounted for approximately 34% of the
Company's revenues while 66% of the Company's revenues were derived from the
sale of luggage.
The Company sells its products primarily through independent sales agents
on a commission-only basis. The Company currently engages approximately 23 sales
agents either on an individual basis or through independent sales organizations.
Although it has written agreements with a number of its agents, all of such
agreements are terminable at will. The Company has no long term arrangements
with any of its agents. The Company usually pays commissions ranging from 1% to
5% of the net sale price of its products.
The Company currently anticipates that it may increasingly focus its
attention on direct response marketing. The Company believes that its products
are particularly well suited for so-called impulse buys.
20
<PAGE> 23
Therefore, it intends to develop plans to use infomercials to market its
products. To date, no significant expenditures have been made in connection with
this effort.
In addition, the Company may commence the marketing of existing products to
retailers for resale under their own private labels. The Company has already
began deliveries to one retailer and has had preliminary talks with at least one
additional retailer who has expressed an interest in an arrangement of this
nature.
COMPETITION
The Company's exercise products compete with products marketed and sold by
a number of companies. The Company believes that its main competitors are Icon
Health and Fitness, Inc. and Bollinger Industries. Both of these companies
possess far greater financial and other resources, including sales forces, than
the Company's. However, the Company believes that as a result of its ability to
use the trademarked names SPALDING(TM) and KATHY IRELAND(TM) it will be able to
retain its share of the market. Nevertheless, there can be no assurance that the
Company will be able to effectively compete with these companies as well as with
other smaller entities.
The Company's luggage products compete with products designed by a number
of the largest companies in the industry, including Samsonite, Sky Way and
American Tourister. The Company believes that because of its concentration on
the upscale lifestyle and more specialized leisure market that are associated
with the trademark JEEP(TM) the Company will be able to continue to grow its
luggage business. Nevertheless, there can be no assurance that the Company will
be able to effectively compete with these companies as well as with other
smaller entities.
INTELLECTUAL PROPERTY
The Company owns a number of trademarks, including POCKETSPLUS, PROTECH
TRAVEL SYSTEMS & DESIGN and EXER-SLIDE.
License Agreements
The Company sells a number of its products under licensed names. The
Company has entered into licensee agreements which provide for the grant of
licenses to the Company and the payment of royalties by the Company, as follows:
JEEP -- Under an agreement dated January 8, 1993, as amended by letter
amendment dated January 8, 1996, between the Company and the Chrysler
Corporation (as so amended, the "Jeep Agreement"), the Company was granted
the exclusive license to use the names JEEP, WRANGLER and RENEGADE in
connection with the manufacture, sale and distribution of luggage products.
The current expiration date of the Jeep Agreement is December 31, 1998. The
parties have informally agreed to start negotiations regarding the terms of
an extension of the current agreement.
SPALDING -- Under an agreement between the Company and Spalding &
Evenflo Companies Inc. dated April 1, 1994, the Company was granted the
exclusive right to use the name SPALDING in connection with the sale and
distribution of a number of products, including weight bars and large
exercise machines. The current expiration date of the agreement is
September 30, 1997. However, the Company is currently negotiating a renewal
of the agreement.
KATHY IRELAND -- Under an agreement with Kathy Ireland, Inc., dated
December 22, 1994, Ms. Ireland approves and endorses certain exercise
equipment designed and manufactured by the Company. Under the agreement,
the Company has the right to use her name in connection with the equipment
and Ms. Ireland will make appearances to promote such equipment. In
addition, the Company has the right to use her photograph and likeness in
connection with the sale of the equipment. The agreement is currently
scheduled to expire in June 1998 but is subject, at the Company's option,
to renewal until June 2000.
21
<PAGE> 24
FREEZY-BAG/FREEZYGEL -- Under an agreement dated November 1, 1996,
between New Century Marketing & Distributors, Inc. and a wholly-owned
subsidiary of the Company, the Company obtained the exclusive rights to a
patented technology as well as to the trademarked names FREEZY-BAG and
FREEZYGEL. The technology has the ability to cool foods and other products
and is used in the wrapping of such products. The agreement has a term of
two years but is renewable, at the option of the Company, for additional
one year periods.
MANAGEMENT AGREEMENT WITH ACHIM IMPORTING CO., INC.
Pursuant to a Warehousing and Service Agreement dated as of September 1,
1996 (the "Warehousing Agreement") between the Company and Achim Importing Co.,
Inc. ("Achim"), Achim performs certain administrative services on behalf of the
Company. Under the Warehousing Agreement, Achim assists, among other things, in
the maintenance of financial and accounting books and records, in the
preparation of monthly financial accounts receivable aging schedules and other
reports and in the performance of credit checks on the Company's customers.
Achim also provides warehousing services consisting of receiving, shipping and
storing of the Company's merchandise. The Warehousing Agreement has a term of
two years and is automatically renewable for additional one year periods unless
written notice of termination is given at least six months prior to the
commencement of a renewal period.
In consideration for the services performed under the Warehousing
Agreement, Achim receives an annual fee, payable monthly, calculated as a
percentage of the Company's invoiced sales ranging from 4% of invoiced sales
under $30 million to 3% for sales of $60 million or more. In addition, Achim
receives a service fee in the amount of 1.5% of the Company's invoiced sales to
customers and accounts located in the United States if payment is made by letter
of credit and 1% if such customers and accounts are located outside the United
States, irrespective of manner of payment. The Company also pays a monthly fee
of 3% of the Company's invoiced sales in connection with the warehousing
services performed by Achim under the Warehousing Agreement.
Achim is controlled by Marton Grossman, the Company's Chairman and
President. The Company believes that the terms of the Warehousing Agreement with
Achim are at least as favorable as would have been obtained from an unaffiliated
third party.
In addition, 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
outstanding balance of the purchases. As of April 30, 1996, the Company owed an
amount of $2,129,893 under this arrangement. As of February 28, 1997, this sum
had increased to $2,423,714.
EMPLOYEES
As of March 31, 1997 the Company employed 10 persons, of whom four were
engaged in administrative and clerical activities, four were engaged in sales
and two were involved in warehousing and shipping.
PROPERTIES
The Company occupies a warehouse consisting of approximately 54,400 square
feet, of which 4,500 square feet are dedicated to office space, located at 58
Second Avenue, Brooklyn, New York. The property is owned by Sym Holding which is
owned by Isaac Grossman and one of his siblings. Mr. Grossman is the Company's
Vice Chairman, Treasurer and Secretary. The property is leased to Achim which
makes the property available to the Company on an at will basis. Other than the
service fees paid by the Company under the Warehousing Agreement, the Company
pays no rent for the property. See "Certain Relationships and Related
Transactions" and "Management Agreement with Achim Importing Co., Inc."
22
<PAGE> 25
LEGAL PROCEEDINGS
On August 23, 1995, the Company filed a petition under Chapter 11 of the
Bankruptcy Code in the United States Bankruptcy Court for the Southern District
of New York (the "Court"). On May 23, 1996, the Court entered an Order
confirming the Company's plan of reorganization. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
CHANGE IN ACCOUNTANTS
On June 26, 1996, the Company dismissed Hoberman, Miller & Co., P.C. as its
independent accountants ("Hoberman"). This action had been approved by the
Company's Board of Directors. During the past two years Hoberman did not issue a
report on the Company's financial statements that either contained an adverse
opinion or a disclaimer of opinion, or was qualified or modified as to
uncertainty, audit scope or accounting principles.
During the period of their engagement from June 30, 1973 until June 26,
1996, there were no disagreements between the Company and Hoberman on any matter
of accounting principles or practices, financial statement disclosure, or audit
scope and procedure, which disagreement, if not resolved to the satisfaction of
Hoberman, would have caused them to make reference to the subject matter of the
disagreement in connection with any report that was to have been, or will be,
prepared for the Company.
On July 11, 1996 the Board of Directors of the Company appointed Moore
Stephens, P.C. as its independent accountants, subject to ratification by the
Company's shareholders.
23
<PAGE> 26
MANAGEMENT
OFFICERS AND DIRECTORS
The officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
----------------------------------------- --- ---------------------------------------
<S> <C> <C>
Marton Grossman.......................... 66 Chairman and President
Isaac Grossman........................... 34 Vice Chairman, Treasurer and Secretary
William Dolan............................ 44 Vice President -- Finance
</TABLE>
MARTON GROSSMAN has been the Chairman and President of the Company since
July 29, 1996. For the past 34 years, he has been President of Achim Importing
Co., a privately held company engaged in the import and export of window
coverings and accessories ("Achim"). In addition, he has been President of MG
Holding Co., Inc., a privately held financial holding company. Mr. Grossman is
the father of Isaac Grossman, the Company's Vice Chairman, Treasurer and
Secretary.
ISAAC GROSSMAN has been the Company's Vice Chairman, Treasurer and
Secretary since July 1996. He has been Vice President of Achim since 1989. Prior
thereto, Mr. Grossman worked in various positions at Achim, including in sales
and marketing and warehousing. Mr. Grossman is the son of Marton Grossman, the
Company's Chairman and President.
WILLIAM DOLAN has been the Company's Vice President-Finance since July
1996. Prior thereto, he had been the Company's Treasurer and Secretary since
1989. Mr. Dolan is a certified public accountant.
BOARD OF DIRECTORS
Each director is elected at the Company's annual meeting of stockholders
and holds office until the next annual meeting of stockholders, or until his
successor is elected and qualified. At present, the Company's bylaws require no
fewer than one director. Currently, there are two directors of the Company. The
bylaws permit the Board of Directors to fill any vacancy and the new director
may serve until the next annual meeting of stockholders or until his successor
is elected and qualified. Officers are elected by the Board of Directors and
their terms of office are, except to the extent governed by employment
contracts, at the discretion of the Board.
24
<PAGE> 27
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid or accrued by the
Company during the three fiscal years ended April 30, 1996 (i) to its Chief
Executive Officer and (ii) to the three highest paid employees of the Company
whose cash compensation exceeded $100,000 per year in any such year (other than
the individuals listed in the table, no employee of the Company received
compensation in excess of $100,000):
SUMMARY COMPENSATION TABLE(1)(2)
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
----------------------
(A) (B)
NAME/PRINCIPAL YEAR ENDED (C) (D) (E)
POSITION APRIL 30 SALARY($) BONUS($) ALL OTHER COMPENSATION
- --------------------------------------- ---------- --------- -------- ----------------------
<S> <C> <C> <C> <C>
Marvin Cooper,......................... 1996 182,876
President and Director(3) 1995 250,099
1994 250,099
David Richman,......................... 1996 76,263
Vice President(4) 1995 112,079
1994 128,201
William P. Dolan....................... 1996 100,000
Vice President-Finance 1995 97,691
1994 74,414
John Black,............................ 1996 6,100
Vice President(5) 1995 215,063
1994 160,192
Wayne Hammaker......................... 1996 125,000
Vice President(6)(7) 1995 138,049
1994 97,846
John Holodnicki........................ 1996 120,000
Vice President(7)(8) 1995 97,046
1994
</TABLE>
- ---------------
(1) The above compensation does not include the use of an automobile and other
personal benefits, the total value of which do not exceed as to any named
officer or director or group of executive officers the lesser of $50,000 or
10% of such person's or persons' cash compensation.
(2) Pursuant to the regulations promulgated by the Securities and Exchange
Commission, the table omits columns reserved for types of compensation not
applicable to the Company.
(3) Mr. Cooper resigned his positions from the Company in March 1997.
(4) Mr. Richman resigned his position in July 1996. However, he is still
affiliated with the Company.
(5) Mr. Black resigned his position in January 1995.
(6) Mr. Hammaker left his position in June 1996.
(7) Not an executive officer.
(8) Mr. Holodnicki joined the Company after April 1994.
None of the individuals listed in the table above received any long-term
incentive plan awards during the fiscal years.
Marton Grossman, the Company's Chairman and President, does not have an
employment agreement and is not being paid a salary. However, in April 1997 the
Company entered into a Bonus Agreement with Mr. Grossman which provides for the
issuance to Mr. Grossman of an aggregate of 2,000,000 shares of Common Stock if
the Company reaches certain earnings milestones, as follows: if the Company's
earnings before taxes for the fiscal year ending April 30, 1998, are no less
than $500,000, he will be issued 400,000 shares; if the Company's earnings
before taxes for the fiscal year ending April 30, 1999, are no less than
25
<PAGE> 28
$1,000,000, he will be issued 600,000 shares; and if the Company's earnings
before taxes for the fiscal year ending April 30, 2000, are no less than
$1,500,000, he will be issued 1,000,000 shares. The stated earnings criteria are
cumulative so that in the event of an earnings shortfall during a fiscal year,
shares relating to two years fiscal years will be issued provided that the
Company during the succeeding fiscal year realizes earnings that in the
aggregate are equal to two years of earnings as set forth in the agreement. The
agreement also provides for piggyback registration rights with respect to the
Common Stock to be issued.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission.
Officers, directors and greater than ten-percent shareholders are required by
SEC regulation to furnish the Company with copies of all Section 16(a) forms
they file.
Based solely on review of the copies of such forms furnished to the
Company, or written representations that no Forms 5 were required, the Company
believes that during the period from May 1, 1995 through April 30, 1996 all
Section 16(a) filing requirements applicable to its officers, directors and
greater than ten-percent beneficial owners were complied with.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In connection with the plan of reorganization, MG Holdings purchased
from the Company's principal lender a note in the principal amount of
approximately $6,822,530. MG Holdings is wholly owned by Marton Grossman, the
Company's Chairman and President. The note was subsequently repaid by the
Company through the issuance of 14,880,000 shares of Common Stock to MG
Holdings. MG Holdings assigned the Common Stock to a trust for the benefit of
members of Mr. Grossman's family.
Also in connection with the plan of reorganization, MG Holdings loaned
approximately $1,205,000 to the Company to consummate the plan and for related
expenses. The Company issued a promissory note to MG Holdings evidencing the
loan and granted it a security interest in all of the Company's assets.
Pursuant to the Warehousing Agreement between the Company and Achim, Achim
performs certain administrative services on behalf of the Company. Under the
Warehousing Agreement, Achim assists, among other things, in the maintenance of
financial and accounting books and records, the preparation of monthly financial
accounts receivable aging schedules and other reports and in the performance of
credit checks on the Company's customers. Achim also provides warehousing
services consisting of receiving, shipping and storing of the Company's
merchandise. The Warehousing Agreement has a term of two years and is
automatically renewable for successive one year periods unless written notice of
termination shall have been given at least six months prior to the commencement
of a renewal period.
In consideration for the services performed under the Warehousing
Agreement, Achim receives an annual fee, payable monthly, calculated as a
percentage of the Company's invoiced sales ranging from 4% of invoiced sales
under $30 million to 3% for sales of $60 million or more. Achim receives a
service fee in the amount of 1.5% of the Company's invoiced sales to customers
and accounts located in the United States if payment is made by letter of credit
and 1% in connection with customers and accounts located outside the United
States, irrespective of manner of payment. The Company also pays a monthly fee
of 3% of the Company's invoiced sales in connection with the warehousing
services performed by Achim under the Warehousing Agreement.
Achim is controlled by Marton Grossman, the Company's Chairman and
President. The Company believes that the terms of the Warehousing Agreement with
Achim are at least as favorable as would have been obtained from an unaffiliated
third party.
In addition, 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
26
<PAGE> 29
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. As of April 30, 1996, the
Company owed an amount of $2,129,893 in principal and interest under this
arrangement. As of February 28, 1997, this sum had increased to $2,423,714.
The Company occupies a warehouse consisting of approximately 54,400 square
feet, of which 4,500 square feet are dedicated to office space, located at 58
Second Avenue, Brooklyn, New York. The property is owned by Sym Holding which is
owned by Isaac Grossman and one of his siblings. Mr. Grossman is the Company's
Vice Chairman, Treasurer and Secretary. The property is leased to Achim which
makes the property available to the Company on an at will basis. Other than the
service fees paid by the Company under the Warehousing Agreement, the Company
pays no rent for the property. See "Certain Relationships and Related
Transactions" and "Management Agreement with Achim Importing Co., Inc."
DISCLOSURE OF COMMISSION POSITION ON
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Section 78.751 of the Nevada Revised Statutes, as amended, authorizes the
Company to indemnify any director or officer under certain prescribed
circumstances and subject to certain limitations against certain costs and
expenses, including attorneys' fees actually and reasonably incurred in
connection with any action, suit or proceeding, whether civil, criminal,
administrative or investigative, to which such person is a party by reason of
being a director or officer of the Company if it is determined that such person
acted in accordance with the applicable standard of conduct set forth in such
statutory provisions. Article 10 of the Company's Bylaws contains provisions
relating to the indemnification of directors and officers.
The Company may also purchase and maintain insurance for the benefit of any
director or officer which may cover claims for which the Company could not
indemnify such person.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the foregoing provisions, or otherwise, the Company has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of April 15, 1997, information regarding
the beneficial ownership of the Company's Common Stock based upon the most
recent information available to the Company for (i) each person known by the
Company to own beneficially more than five (5%) percent of the Company's
outstanding Common Stock, (ii) each of the Company's officers and directors and
(iii) all officers and directors of the Company as a group. Unless otherwise
indicated, each stockholder's address is c/o the Company, 58 Second Avenue,
Brooklyn, New York 11215.
<TABLE>
<CAPTION>
SHARES OWNED BENEFICIALLY
AND OF RECORD(1)
-------------------------
NAME AND ADDRESS NO. OF SHARES % OF TOTAL
- ---------------------------------------------------------- ------------- -------------------------
<S> <C> <C>
Marton Grossman(2)........................................ 2,976,000 93.0
Isaac Grossman(3)......................................... 2,976,000 93.0
William P. Dolan.......................................... 123 *
All Officers and Directors as a Group (3 persons)......... 2,976,123 93.0
</TABLE>
- ---------------
* Less than 1%
(1) Includes shares issuable within 60 days upon the exercise of all options and
warrants. Shares issuable under options or warrants are owned beneficially
but not of record.
27
<PAGE> 30
(2) Consists of shares of Common Stock held by a series of trusts (collectively,
the "Grossman Trust") for the benefit of relatives of Mr. Grossman. Under
its terms, the Grossman Trust will return to Mr. Grossman annually until
August 1998, a portion of the shares held by the Grossman Trust. The number
of shares to be returned to Mr. Grossman is based on the then current market
price of the Common Stock and can therefore not be determined at the present
time. Mr. Grossman disclaims beneficial ownership in the shares held by the
Grossman Trust that will not be returned to him.
(3) Consists of shares held by the Grossman Trust of which Mr. Isaac Grossman is
currently a beneficiary as to 464,600 shares. The actual number of shares
held by the Grossman Trust as to which Isaac Grossman is a beneficiary may
be smaller since under the terms of the Grossman Trust, a portion of the
shares may be returned to Marton Grossman as described in footnote 2. Mr.
Grossman is a trustee of the Grossman Trust and in that capacity shares
voting power as to the shares held by the Grossman Trust.
DESCRIPTION OF SECURITIES
The Company is authorized to issue 50,000,000 shares of Common Stock, par
value $.001 per share. As of the date of this Prospectus, 3,198,798 shares of
Common Stock are issued and outstanding.
The following are brief descriptions of the securities offered hereby and
other securities of the Company. The rights of the holders of shares of the
Company's capital stock are established by the Company's Certificate of
Incorporation, the Company's Bylaws and Nevada Law. The following statements do
not purport to be complete or give full effect to statutory or common law, and
are subject in all respects to the applicable provisions of the Certificate of
Incorporation, Bylaws and state law.
UNITS
The Company is hereby offering 1,200,000 Units, each Unit consisting of one
share of Common Stock, one Class A Warrant and one Class B Warrant.
COMMON STOCK
The holders of Common Stock have no preemptive or subscription rights in
later offerings of Common Stock and are entitled to share ratably (i) in such
dividends as may be declared by the Board of Directors out of funds legally
available for such purpose and (ii) upon liquidation, in all assets of the
Company remaining after payment in full of all debts and obligations of the
Company and any preferences granted in the future to any preferred stock. The
Company has not paid any dividends on the Common Stock.
Holders of Common Stock are entitled to one vote for each share held and
have no cumulative voting rights. Accordingly, the holders of more than 50% of
the issued and outstanding shares of Common Stock entitled to vote for election
of directors can elect all the directors if they choose to do so. After
completion of this offering, the current stockholders collectively will continue
to own more than 50% of the outstanding shares of Common Stock. All shares of
Common Stock now outstanding are fully paid and nonassessable and all shares of
Common Stock which are the subject of this offering, when issued, will be fully
paid and nonassessable. The Board of Directors is authorized to issue additional
shares of Common Stock within the limits authorized by the Company's Certificate
of Incorporation without stockholder action.
WARRANTS
The Warrants offered hereby will be issued in registered form under a
Warrant Agreement (the "Warrant Agreement") between the Company and American
Stock Transfer & Trust Company, as Warrant Agent (the "Warrant Agent"). The
following summary of the provisions of the Warrants is qualified in its entirety
by reference to the Warrant Agreement, a copy of which is filed as an exhibit to
the registration statement of which this Prospectus is a part. The Class A
Warrants and the Class B Warrants are identical except that (i) each Class A
Warrant is exercisable at $6.00 and each Class B Warrant is exercisable at
$10.00, and (ii) the market price that will allow redemption to take place is
$9.00 for the Class A Warrant and $15.00 for the Class B Warrants.
28
<PAGE> 31
Each Class A Warrant will be separately transferable commencing on the
Separation Date and will entitle the registered holder thereof to purchase one
share of Common Stock at $6.00 per share (subject to adjustment as described
below) for a period of 18 months from the date of this Prospectus. Each Class B
Warrant will be separately transferable commencing on the Separation Date and
will entitle the registered holder thereof to purchase one share of Common Stock
at $10.00 (subject to adjustment as described below) for a period of three years
commencing on the date of this Prospectus. Holders of Warrants may exercise such
Warrants by surrendering the certificate evidencing such Warrants to the Warrant
Agent, together with the form of election to purchase on the reverse side of
such certificate attached thereto properly completed and executed and the
payment of the exercise price and any transfer tax. If less than all of the
Warrants evidenced by a Warrant certificate are exercised, a new certificate
will be issued for the remaining number of Warrants. See "Underwriting."
For a holder of a Warrant to exercise the Warrants, there must be a current
registration statement on file with the Securities and Exchange Commission and
various state securities commissions. The Company will be required to file
post-effective amendments to the registration statement when events require such
amendments and to take appropriate action under state securities laws. While it
is the Company's intention to file post-effective amendments when necessary and
to take appropriate action under state securities laws, there is no assurance
that the registration statement will be kept effective or that such appropriate
action under state securities laws will be effected. If the registration
statement is not kept current for any reason, the Warrants will not be
exercisable, and holders thereof may be deprived of value.
The Company has authorized and reserved for issuance a number of shares of
Common Stock sufficient to provide for the exercise of the Warrants. When
issued, upon exercise of the Warrants, each share of Common Stock will be fully
paid and nonassessable. Warrant holders will not have any voting or other rights
as shareholders of the Company unless and until Warrants are exercised and
shares issued pursuant thereto. The exercise price and the number of shares of
Common Stock issuable upon the exercise of each Warrant are subject to
adjustment in the event of a stock split, stock dividend, recapitalization,
merger, consolidation or certain other events.
At any time, The Class A Warrants and the Class B Warrants are redeemable
by the Company at $.01 per Warrant on thirty day's prior written notice at any
time provided that the average closing bid price for the Common Stock is no less
than $9.00 per share with respect to the Class A Warrants and $15.00 with
respect to the Class B Warrants for any ten consecutive trading days within a
period of 30 consecutive trading days as reported on the principal exchange or
market on which the Common Stock is traded. The right to purchase the Common
Stock issuable upon exercise by the Warrants noticed for redemption will be
forfeited unless the Warrants are exercised prior to the date specified in the
notice of redemption. While the Company may legally be permitted to give notice
to redeem the Warrants at a time when a current prospectus is not available
thereby leaving the Warrant holders no opportunity to exercise their Warrants
prior to redemption, the Company does not intend to redeem the Warrants unless a
current prospectus is available at the time of redemption.
SHARES AVAILABLE FOR FUTURE SALE
Upon completion of this offering, the Company will have 4,398,798 shares of
Common Stock outstanding (4,578,798 shares if the Underwriter's over-allotment
option is exercised in full). Of these shares, the shares included in the Units
and 224,000 shares held by existing security holders will be freely tradeable
without restriction or further registration under the Securities Act except for
any shares purchased by an "affiliate" of the Company (in general, a person who
has a control relationship with the Company) which will be subject to the
limitations of Rule 144 adopted under the Securities Act. Except as described
below, all of the remaining shares of Common Stock may be deemed "restricted
securities," as that term is defined under Rule 144 promulgated under the
Securities Act. Such shares may become available for sale to the public
commencing August 1997, subject to volume restrictions, as described below.
In general, under Rule 144 as currently in effect, subject to the
satisfaction of certain other conditions, a person, including an affiliate of
the Company (or persons whose shares are aggregated with an affiliate of the
29
<PAGE> 32
Company), who has owned restricted shares of Common Stock beneficially for at
least one year is entitled to sell, within any three-month period, a number of
shares that does not exceed the greater of 1% of the total number of outstanding
shares of the same class or the average weekly trading volume of the Company's
Common Stock on all exchanges and/or reported through the automated quotation
system of a registered securities association during the four calendar weeks
preceding the date on which notice of the sale is filed with the Securities and
Exchange Commission. Sales under Rule 144 are also subject to certain manner of
sale provisions, notice requirements and the availability of current public
information about the Company. A person who has not been an affiliate of the
Company for at least the three months immediately preceding the sale and who has
beneficially owned shares of Common Stock for at least two years is entitled to
sell such shares under Rule 144 without regard to any of the limitations
described above.
DIVIDEND POLICY
The Company has paid no dividends and does not expect to pay dividends on
its Common Stock in the foreseeable future as it intends to retain earnings to
finance the growth of its operations.
TRANSFER AGENT
American Stock Transfer & Trust Company, 40 Wall Street, New York, New York
10005, acts as Transfer Agent for the Company's Common Stock and Warrants.
30
<PAGE> 33
UNDERWRITING
Subject to the terms and conditions contained in the underwriting agreement
between the Company and Patterson Travis, Inc. (the "Underwriter") (a copy of
which agreement is filed as an exhibit to the Registration Statement of which
this prospectus forms a part), the Company has agreed to sell to the
Underwriter, and the Underwriter has agreed to purchase, the Units offered
hereby. All 1,200,000 Units offered must be purchased by the Underwriter if any
are purchased. The Units are being offered by the Underwriter subject to prior
sale, when, as and if delivered to and accepted by the Underwriter and subject
to approval of certain legal matters by counsel and to certain other conditions.
The Underwriter has advised the Company that it proposes to offer the Units
to the public at the offering prices set forth on the cover page of this
Prospectus and that the Underwriter may allow to certain dealers who are members
in good standing of the National Association of Securities Dealers, Inc.
("NASD") concessions of $ per Unit. After the initial public offering,
the public offering price and concessions may be changed by the Underwriter.
The Company has granted the Underwriter an option, exercisable for 45 days
from the date of this Prospectus, to purchase from it up to 180,000 Units at the
public offering prices less the underwriting discounts set forth on the cover
page of this Prospectus. The Underwriter may exercise this option solely to
cover over-allotments in the sale of the Units offered hereby.
The Company has agreed to pay the Underwriter a non-accountable expense
allowance of 3% of the gross proceeds to the Company of the Units sold in the
offering (including the over-allotment option).
The Underwriter will (i) receive a Warrant solicitation fee equal to 10%
(or the maximum amount permissible under NASD rules) of the exercise price of
all Warrants it causes to be exercised and (ii) enter into a three year
consulting agreement with the Company providing for a fee of $20,000 payable
at the closing of this offering.
The underwriting agreement provides for reciprocal indemnification between
the Company and the Underwriter against certain civil liabilities, including
liabilities under the Securities Act.
The Company has agreed to sell to the Underwriter or its designees, at a
price of $120, 120,000 warrants to purchase 120,000 Units (the "Underwriter's
Warrants"). Other than a one-year restriction on transferability and a higher
exercise price of the Warrants included in the Units, the Units underlying the
Underwriter's Warrants are identical in all respects to the Units offered to the
public hereby. The Warrants will be exercisable at a price of $8.25 per Unit for
a period of five years. The Class A Warrants and Class B Warrants underlying the
Units included in the Underwriter's Warrants will be exercisable at a price of
$9.90 and $16.50, respectively, or 165% of the then exercise price of the
Warrants offered to the public, for a period of five years commencing on the
date hereof (unless redeemed earlier). The Underwriter's Securities will not be
transferable for one year from the date hereof except to officers of the
Underwriter. Any profit realized upon any resale of the Underwriter's Securities
may be deemed to be additional underwriter's compensation. The Company has
agreed to register, or file a post-effective amendment with respect to any
registration statement registering, the Underwriter's Securities under the
Securities Act at its expense on one occasion during the five years following
the date of this Prospectus and at the expense of the holders thereof on another
occasion, upon the request of a majority of the holders thereof. The Company has
also agreed to "piggy-back" registration rights for the holders of the
Underwriter's Securities at the Company's expense during the five years
following the date of this Prospectus.
The Underwriter has informed the Company that it does not expect sales of
Units to be made to discretionary accounts to exceed 2% of the Units offered
hereby.
PRICING OF THE OFFERING
Immediately prior to this offering, there has been no active public trading
market for any of the Company's securities. Consequently, the initial offering
prices of the Units and the exercise prices of the Warrants have been determined
by negotiations between the Company and the Underwriter. Among the
31
<PAGE> 34
factors considered in determining the offering prices were the Company's
financial condition and prospects, the industry in which the Company is engaged,
certain financial and operating information of companies engaged in activities
similar to those of the Company and the general market condition of the
securities markets. The offering prices do not necessarily bear any relationship
to any established standard or criteria of value based upon assets, earnings,
book value or other objective measures.
LEGAL MATTERS
The validity of the issuance of the Units offered hereby will be passed
upon for the Company by the law firm of Heller, Horowitz & Feit, P.C., New York,
New York. Elias Lauer, Esq., New York, New York, will pass on certain aspects of
this offering on behalf of the Underwriter.
EXPERTS
The audited financial statements of the Company as of April 30, 1995 and
1996 and for the fiscal years then ended are included herein and in the
registration statement in reliance upon the reports of Moore Stephens, P.C., and
Hoberman, Miller & Co., P.C., independent certified public accountants,
appearing elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing.
32
<PAGE> 35
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
CONTENTS
<TABLE>
<CAPTION>
PAGE
-------------
<S> <C>
Independent Auditors' Reports................................................ F-1 to F-2
Consolidated Financial Statements:
Balance Sheets as of January 31, 1997 (unaudited) and April 30, 1996 and
1995.................................................................... F-3 to F-4
Balance Sheet as of July 31, 1996 (unaudited).............................. F-5 to F-6
Statements of Operations for the nine months ended January 31, 1997 and
1996 (unaudited) and the years ended April 30, 1996, 1995, and 1994..... F-7
Statement of Operations for the three months ended July 31, 1996
(unaudited)............................................................. F-8
Statements of Stockholders' Equity for the nine months ended January 31,
1997 and 1996 (unaudited) and the years ended April 30, 1996, 1995, and
1994.................................................................... F-9
Statements of Cash Flows for the nine months ended January 31, 1997 and
1996 (unaudited) and the years ended April 30, 1996, 1995, and 1994..... F-10 to F-11
Statement of Cash Flows for the three months ended July 31, 1996
(unaudited)............................................................. F-12
Notes to Financial Statements.............................................. F-13 to F-23
Independent Auditors' Reports on Supplemental Schedule....................... F-24 to F-25
Schedule II -- Valuation and Qualifying Accounts........................... F-26
</TABLE>
33
<PAGE> 36
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Shareholders
Dynamic International, Ltd.
We have audited the accompanying consolidated balance sheet of Dynamic
International, Ltd. (formerly Dynamic Classics, Ltd., see Note 11) and its
subsidiary as of April 30, 1996, and the related consolidated statements of
operations, stockholders' equity, and cash flows for the year then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Dynamic International, Ltd. (formerly Dynamic Classics, Ltd.) and its subsidiary
as of April 30, 1996, and the results of their operations and their cash flows
for the year then ended in conformity with generally accepted accounting
principles.
As discussed more fully in Note 11 to the consolidated financial
statements, on August 23, 1995, the Company filed a voluntary petition
requesting relief under Chapter 11 of the United States Bankruptcy Code. On May
23, 1996, the United States Bankruptcy Court for the Southern District of New
York confirmed the Company's Amended and Modified Plan of Reorganization dated
February 22, 1996.
Moore Stephens, P.C.
Certified Public Accountants
New York, New York
August 30, 1996, except as
to Note 11, for which the
date is October 24, 1996
F-1
<PAGE> 37
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Dynamic Classics, Ltd.
We have audited the accompanying consolidated balance sheet of Dynamic
Classics, Ltd. and Subsidiary as of April 30, 1995, and the related consolidated
statements of operations, shareholders' equity (deficit) and cash flows for each
of the years in the two-year period ended April 30, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall consolidated
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Dynamic
Classics, Ltd. and Subsidiary as of April 30, 1996, and the results of their
operations and their cash flows for each of the years in the two-year period
ended April 30, 1995 in conformity with generally accepted accounting
principles.
As more fully discussed in Note 11 the Company, on August 23, 1995, filed a
voluntary petition for relief under Chapter 11 of the United States Bankruptcy
Act.
/s/ Hoberman, Miller & Co., P.C.
New York, New York
June 26, 1996
F-2
<PAGE> 38
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
---------------------------
APRIL 30,
---------------------------
1996 1995
REORGANIZED ----------- -----------
COMPANY
-----------
JANUARY 31,
1997
-----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents......................... $ 21,688 $ 26,515 $ 342,571
Accounts receivable -- trade (net of allowance for
doubtful accounts of $167,000 in 1997 and 1996
and $-0- in 1995).............................. 1,666,166 1,036,927 1,424,809
Due from suppliers................................ 55,403 26,760 10,704
Inventory......................................... 2,620,591 2,384,469 3,450,290
Prepaid expenses.................................. 134,470 81,693 250,549
Miscellaneous receivables......................... 3,257 135,039 26,858
Prepaid and refundable income taxes............... 123,043 291,146 291,146
----------- ----------- -----------
Total Current Assets...................... 4,624,618 3,982,549 5,796,927
----------- ----------- -----------
PROPERTY AND EQUIPMENT
Tools and dies.................................... 707,939 707,939 1,447,257
Furniture and equipment........................... 102,205 102,205 900,437
Leasehold improvements............................ -- -- 111,646
Capitalized equipment leases...................... 576,071 576,071 637,589
Patents and trademarks............................ -- -- 149,982
----------- ----------- -----------
1,386,215 1,386,215 3,246,911
Accumulated depreciation.......................... (1,234,733) (1,156,160) (2,773,359)
----------- ----------- -----------
Total Property and Equipment, net......... 151,482 230,055 473,552
----------- ----------- -----------
OTHER ASSETS
Due from suppliers................................ 36,142 36,142 52,198
Security deposits................................. 4,650 4,650 91,508
Reorganization value in excess of amounts
allocable to identifiable assets............... 121,332 -- --
----------- ----------- -----------
Total Other Assets........................ 162,124 40,792 143,706
----------- ----------- -----------
TOTAL ASSETS........................................ $ 4,938,224 $ 4,253,396 $ 6,414,185
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 39
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(CONTINUED)
<TABLE>
<CAPTION>
PREDECESSORY COMPANY
--------------------------
APRIL 30,
--------------------------
1996 1995
REORGANIZED ---------- -----------
COMPANY
-----------
JANUARY 31,
1997
-----------
(UNAUDITED)
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Notes payable bank, trade and bankers acceptances
payable.......................................... $ 8,860 $ -- $ 8,191,782
Note payable, officer, current portion.............. -- -- 17,904
Accounts payable and accrued expenses............... 3,517,882 3,139,141 4,967,856
Capital lease obligations -- current................ 28,552 48,731 112,820
Loans payable -- related party...................... 1,205,109 557,000 --
Other liabilities................................... -- 531,561 --
---------- ---------- -----------
Total Current Liabilities................... 4,760,403 4,276,433 13,290,362
---------- ---------- -----------
OTHER LIABILITIES
Capital lease obligations........................... 1,443 23,965 101,832
Note payable, officer............................... -- -- 14,292
---------- ---------- -----------
Total Other Liabilities..................... 1,443 23,965 116,124
---------- ---------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, par value $.01 per share; authorized
5,000,000 shares; issued 1,744,396 shares........ -- 17,444 17,444
Common stock, par value $.001 per share; authorized
50,000,000 shares; issued 3,198,798 shares....... 3,199 -- --
Additional paid in capital.......................... 16,130 590,291 590,291
Accumulated deficit................................. -- (637,237) (7,582,536)
Retained Earnings (since July 31, 1996, date of
reorganization, total deficit eliminated was
$710,986)........................................ 157,052 -- --
---------- ---------- -----------
176,381 (29,502) (6,974,801)
Less: Treasury stock, at cost, 15,000 shares........ -- (17,500) (17,500)
Less: Treasury stock, at cost, 540 shares........... (3) -- --
---------- ---------- -----------
Total Stockholders' Equity (Deficit)........ 176,378 (47,002) (6,992,301)
---------- ---------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)........................................... $ 4,938,224 $4,253,396 $ 6,414,185
========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 40
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
REORGANIZED
COMPANY
-----------
JULY 31,
1996
-----------
(UNAUDITED)
<S> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents..................................................... $ 4,951
Accounts receivable -- trade (net of allowance for doubtful accounts of
$167,000).................................................................. 1,412,931
Due from suppliers............................................................ 10,704
Inventory..................................................................... 1,910,525
Prepaid expenses.............................................................. 182,288
Miscellaneous receivables..................................................... 135,037
Prepaid and refundable income taxes........................................... 291,959
-----------
Total Current Assets.................................................. 3,948,395
-----------
PROPERTY AND EQUIPMENT
Tools and dies................................................................ 707,939
Furniture and equipment....................................................... 102,205
Capitalized equipment leases.................................................. 576,071
-----------
1,386,215
Accumulated depreciation...................................................... (1,182,352)
-----------
Total Property and Equipment, net..................................... 203,863
-----------
OTHER ASSETS
Due from suppliers............................................................ 52,198
Security deposits............................................................. 4,650
Reorganization value in excess of amounts allocable to identifiable assets.... 124,154
-----------
Total Other Assets.................................................... 181,002
-----------
TOTAL ASSETS.................................................................... $ 4,333,260
===========
</TABLE>
The July 31, 1995 consolidated balance sheet is not presented as it relates
to the predecessor company which presentation would not be meaningful due to the
reorganization.
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 41
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(CONTINUED)
<TABLE>
<CAPTION>
REORGANIZED
COMPANY
-----------
JULY 31,
1996
-----------
(UNAUDITED)
<S> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Notes payable bank, trade and bankers acceptances payable...................... $ 62,020
Accounts payable and accrued expenses.......................................... 3,604,440
Capital lease obligations -- current........................................... 32,226
Loans payable -- related party................................................. 593,670
----------
Total Current Liabilities.............................................. 4,292,356
----------
OTHER LIABILITIES
Capital lease obligations...................................................... 21,578
----------
Total Other Liabilities................................................ 21,578
----------
STOCKHOLDERS' EQUITY
Common stock, par value $.001 per share; authorized 50,000,000 shares; issued
3,198,798 shares............................................................ 3,199
Additional paid in capital..................................................... 16,130
----------
19,329
Less: Treasury stock, 540 shares............................................... (3)
----------
Total Stockholders' Equity............................................. 19,326
----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY....................................... $ 4,333,260
==========
</TABLE>
The July 31, 1995 consolidated balance sheet is not presented as it relates
to the predecessor company which presentation would not be meaningful due to the
reorganization.
The above common stock issued and outstanding of 3,198,798 shares has been
restated to reflect the 1 for 5 reverse stock split (see Note 12). The common
stock issued and outstanding at July 31, 1996, the date fresh-start reporting
was adopted (see Note 11) was 15,993,991 shares, the par value and additional
paid in capital of which were $15,994 and $3,335, respectively.
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 42
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
REORGANIZED PREDECESSOR
COMPANY COMPANY
---------- -----------
PREDECESSOR COMPANY
FOR THE NINE MONTHS ENDED
JANUARY 31, FOR THE YEARS ENDED APRIL 30,
-------------------------- --------------------------------------------
1997 1996 1996 1995 1994
---------- ----------- ----------- ------------ -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES
Sales........................... $8,376,861 $ 5,205,149 $ 7,151,715 $ 32,533,097 $29,497,353
Other income.................... -- 85,823 98,272 70,638 35,255
---------- ----------- ----------- ------------ -----------
8,376,861 5,290,972 7,249,987 32,603,735 29,532,608
COST OF SALES..................... 5,819,163 6,780,195 9,480,484 34,761,846 21,398,895
---------- ----------- ----------- ------------ -----------
GROSS PROFIT (LOSS)............... 2,557,698 (1,489,223) (2,230,497) (2,158,111) 8,133,713
---------- ----------- ----------- ------------ -----------
OPERATING EXPENSES
Research and development........ 22,489 101,050 101,992 44,962 35,136
Shipping expenses............... 462,060 641,578 738,681 1,198,563 1,005,593
Selling expenses................ 698,783 949,940 1,254,006 2,455,493 2,380,774
Advertising and promotion....... 57,661 176,988 389,672 346,400 528,927
General and administrative...... 816,890 3,628,093 4,198,800 3,720,998 2,913,960
Interest and bank charges....... 214,257 277,650 383,553 1,384,898 852,954
---------- ----------- ----------- ------------ -----------
2,272,140 5,775,299 7,066,704 9,151,314 7,717,344
---------- ----------- ----------- ------------ -----------
REORGANIZATION ITEMS:
Bankruptcy administration
costs......................... 34,159 416,996 449,693 -- --
---------- ----------- ----------- ------------ -----------
INCOME (LOSS) BEFORE PROVISION FOR
INCOME TAXES.................... 251,399 (7,681,518) (9,746,894) (11,309,425) 416,369
INCOME TAX PROVISION (BENEFIT)
Current......................... 168,096 -- -- (396,143) 244,797
Deferred........................ -- -- (7,511,000) 314,053 (72,736)
---------- ----------- ----------- ------------ -----------
168,096 -- (7,511,000) (82,090) 172,061
---------- ----------- ----------- ------------ -----------
INCOME (LOSS) BEFORE EXTRAORDINARY
ITEM............................ 83,303 (7,681,518) (2,235,894) (11,227,335) 244,308
---------- ----------- ----------- ------------ -----------
EXTRAORDINARY ITEM:
Gain on discharge of prepetition
liabilities................... -- -- 16,692,193 -- --
Income tax provision............ -- -- 7,511,000 -- --
---------- ----------- ----------- ------------ -----------
Extraordinary gain, net
of income tax.......... -- -- 9,181,193 -- --
---------- ----------- ----------- ------------ -----------
NET INCOME (LOSS)................. $ 83,303 $(7,681,518) $ 6,945,299 $(11,227,335) $ 244,308
========== =========== =========== ============ ===========
INCOME PER SHARE OF COMMON
STOCK........................... $ 0.03
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES.......................... 3,198,798
</TABLE>
The earnings per share as it relates to the predecessor company is not
meaningful due to the reorganization.
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE> 43
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
REORGANIZED
COMPANY
---------------
FOR THE THREE
MONTHS ENDED
JULY 31,
1996
---------------
(UNAUDITED)
<S> <C>
SALES.......................................................................... $ 2,161,721
COST OF SALES.................................................................. 1,624,468
----------
GROSS PROFIT................................................................... 537,253
----------
OPERATING EXPENSES
Shipping expenses............................................................ 116,894
Selling expenses............................................................. 198,993
Advertising and promotion.................................................... 1,819
General and administrative................................................... 234,594
Interest and bank charges.................................................... 57,377
----------
609,677
----------
REORGANIZATION ITEMS........................................................... 1,325
----------
NET LOSS....................................................................... (73,749)
==========
LOSS PER SHARE OF COMMON STOCK................................................. $ (0.02)
WEIGHTED AVERAGE NUMBER OF COMMON SHARES....................................... 3,198,798
</TABLE>
The consolidated statement of operations for the three months ended July
31, 1995 is not presented as it relates to the predecessor company which
presentation would not be meaningful due to the reorganization.
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
<PAGE> 44
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
ADDITIONAL RETAINED TREASURY STOCKHOLDERS'
COMMON PAID IN EARNINGS STOCK EQUITY
STOCK CAPITAL (DEFICIT) AT COST (DEFICIT)
------- ---------- ------------ -------- -------------
<S> <C> <C> <C> <C> <C>
Balance -- May 1, 1993................ $17,444 $ 590,291 $ 3,400,491 $(17,500) $ 3,990,726
Net Income............................ 244,308 244,308
------- -------- ---------- --------- ------------
Balance -- April 30, 1994............. 17,444 590,291 3,644,799 (17,500) 4,235,034
Net Loss.............................. (11,227,335) (11,227,335)
------- -------- ---------- --------- ------------
Balance -- April 30, 1995............. 17,444 590,291 (7,582,536) (17,500) (6,992,301)
Net Income............................ 6,945,299 6,945,299
------- -------- ---------- --------- ------------
Balance -- April 30, 1996............. 17,444 590,291 (637,237) (17,500) (47,002)
Net Loss for Period Ended July 31,
1996................................ (73,749) (73,749)
------- -------- ---------- --------- ------------
Balance -- July 31, 1996
(Unaudited)......................... 17,444 590,291 (710,986) (17,500) (120,751)
Eliminate predecessor equity accounts
and to reflect new issuance of
shares in connection with fresh
start............................... (1,450) (586,956) 710,986 17,497 140,077
------- -------- ---------- --------- ------------
15,994 3,335 -- (3) 19,326
To reflect 1 for 5 reverse stock
split............................... (12,795) 12,795 --
------- -------- ---------- --------- ------------
Balance -- July 31, 1996
(Unaudited)......................... 3,199 16,130 -- (3) 19,326
Net Income for Period Ended
January 31, 1997.................... 157,052 157,052
------- -------- ---------- --------- ------------
Balance -- January 31, 1997
(Unaudited)......................... $ 3,199 $ 16,130 $ 157,052 $ (3) $ 176,378
======= ======== ========== ========= ============
</TABLE>
The par value of the common stock prior to July 31, 1996 was $.01 per
share. The par value of the common stock from July 31, 1996 to January 31, 1997
was $.001 per share.
The accompanying notes are an integral part of these consolidated financial
statements.
F-9
<PAGE> 45
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
REORGANIZED PREDECESSOR
COMPANY COMPANY
--------- -----------
PREDECESSORY COMPANY
FOR THE -----------------------------------------
NINE MONTHS ENDED
JANUARY 31, FOR THE YEARS ENDED APRIL 30,
----------------------- -----------------------------------------
1997 1996 1996 1995 1994
--------- ----------- ------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (loss)...................... $ 83,303 $(7,681,518) $ 6,945,299 $(11,227,335) $ 244,308
Adjustments to reconcile net income
(loss) to net cash provided (used)
by operating activities:
Depreciation........................ 78,573 181,186 220,400 268,148 260,677
Amortization of deferred interest
under capital leases.............. -- -- -- 17,979 18,509
Amortization of reorganization
value............................. 2,822 -- -- -- --
Reserve for bad debts............... -- -- 167,000 -- --
Loss on disposal of property and
equipment......................... -- 71,030 71,030 -- --
Deferred income taxes............... -- -- -- 313,039 18,418
Income on partial discharge of
capital lease obligations......... -- (77,403) (77,403) -- --
Reorganization item:
Gain on discharge of debt......... -- -- (16,692,193) -- --
Changes in stockholders' equity... 15,920 -- -- -- --
Changes in operating assets and
liabilities:
(Increase) Decrease in operating
assets:
Accounts receivable and due
from suppliers............... (657,881) (1,644,403) 220,882 6,843,636 (3,351,168)
Inventory...................... (236,122) 1,385,422 1,065,821 3,260,017 (379,281)
Prepaid expenses............... (52,777) 15,074 168,856 (183,186) 400,241
Miscellaneous receivables...... 131,782 24,201 (108,179) 51,352 (71,749)
Prepaid income taxes........... 168,103 -- -- (291,146) 346,140
Security deposits.............. -- 86,858 86,858 (3,537) (13)
Increase (Decrease) in operating
liabilities:
Prepetition liabilities........... -- -- 8,614,728 -- --
Accounts payable and accrued
expenses....................... 379,815 6,284,530 (1,828,715) 1,951,001 1,167,239
Income taxes payable.............. -- -- -- (200,770) 200,770
--------- ----------- ------------ ------------ -----------
Net Cash Provided (Used) by
Operating Activities.............. (86,462) (1,355,023) (1,145,616) 799,198 (1,145,909)
--------- ----------- ------------ ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment..... -- (37,272) (47,933) (143,995) (93,993)
--------- ----------- ------------ ------------ -----------
Net Cash Used by Investing
Activities........................ $ -- $ (37,272) $ (47,933) $ (143,995) $ (93,993)
--------- ----------- ------------ ------------ -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-10
<PAGE> 46
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
<TABLE>
<CAPTION>
REORGANIZED PREDECESSOR
COMPANY COMPANY
----------- -----------
PREDECESSOR COMPANY
FOR THE -----------------------------------------
NINE MONTHS ENDED
JANUARY 31, FOR THE YEARS ENDED APRIL 30,
--------------------------- -----------------------------------------
1997 1996 1996 1995 1994
----------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM FINANCING
ACTIVITIES
Proceeds from notes
payable.................. $ -- $ 3,393,628 $ 3,393,628 $ 24,250,741 $ 10,136,006
Repayment of notes
payable.................. -- -- -- (26,460,130) (6,311,012)
Proceeds from loans
payable.................. -- -- 557,000 -- --
Proceeds from bankers
acceptances.............. -- 1,118,516 1,118,556 9,321,558 8,853,407
Repayment of bankers
acceptances.............. -- (4,127,139) (4,127,139) (7,876,394) (11,068,227)
Repayment of officer's loans
payable.................. (32,196) -- (2,373) (8,600)
Repayment of capital lease
obligations.............. (42,702) (46,504) (64,552) (109,308) (87,830)
Increase in insurance note
payable.................. 7,788 26,124 -- -- --
Increase in note payable to
related party............ 116,549 743,298 -- -- --
--------- ----------- ----------- ------------ ------------
Net Cash Provided (Used)
by Financing
Activities............. 81,635 1,075,727 877,493 (875,906) 1,513,744
--------- ----------- ----------- ------------ ------------
Net Increase (Decrease) in
Cash and Cash Equivalents... (4,827) (316,568) (316,056) (220,703) 273,842
Cash and Cash Equivalents,
beginning of period......... 26,515 342,571 342,571 563,274 289,432
--------- ----------- ----------- ------------ ------------
Cash and Cash Equivalents, end
of period................... $ 21,688 $ 26,003 $ 26,515 $ 342,571 $ 563,274
========= =========== =========== ============ ============
SUPPLEMENTAL CASH FLOW
INFORMATION
Cash paid during the periods
for:
Interest.................... $ -- $ 203,964 $ 203,964 $ 1,196,322 $ 807,131
Income tax.................. $ -- $ -- $ -- $ 116,319 $ 7,120
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
During the years ended April 30, 1995 and 1994 the Company incurred capital
lease obligations of $143,855 and $177,696, respectively, in connection with
lease agreements to acquire equipment.
The accompanying notes are an integral part of these consolidated financial
statements.
F-11
<PAGE> 47
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
REORGANIZED
COMPANY
------------
FOR THE
THREE MONTHS
ENDED
JULY 31,
1996
------------
(UNAUDITED)
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss...................................................................... $ (73,749)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation............................................................... 26,192
Reorganization item:
Changes in stockholders' equity.......................................... 15,920
Changes in operating assets and liabilities:
(Increase) Decrease in operating assets:
Accounts receivable and due from suppliers............................ (376,005)
Inventory............................................................. 473,944
Prepaid expenses...................................................... (100,595)
Miscellaneous receivables............................................. 2
Prepaid income taxes.................................................. (813)
Decrease in operating liabilities:
Accounts payable and accrued expenses.................................... (66,338)
---------
Net cash used by operating activities...................................... (101,442)
---------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of capital lease obligations........................................ (18,811)
Increase in insurance note payable............................................ 62,020
Increase in note payable to related party..................................... 36,669
---------
Net cash provided by financing activities............................. 79,878
---------
Net decrease in cash and cash equivalents....................................... (21,564)
Cash and cash equivalents, beginning of period.................................. 26,515
---------
Cash and cash equivalents, end of period........................................ $ 4,951
=========
</TABLE>
The consolidated statement of cash flows for the three months ended July
31, 1995 is not presented as it relates to the predecessor company which
presentation would not be meaningful due to the reorganization.
The accompanying notes are an integral part of these consolidated financial
statements.
F-12
<PAGE> 48
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE PERIODS ENDED JANUARY 31, 1997 AND 1996 ARE
UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. The Company
Dynamic International, Ltd. (the "Company") is engaged in the sale and
distribution of a diverse line of hand exercise and light exercise equipment,
sports bags/luggage and gift products which are distributed nationwide.
b. Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned inactive subsidiary. All significant intercompany accounts
and transactions have been eliminated.
c. Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
d. Inventories
Inventories consist principally of finished goods and are stated at the
lower of cost (last-in, first-out method) or market.
e. Property, Equipment and Depreciation
Property and equipment are stated at cost. Depreciation is provided
generally by accelerated methods over the estimated useful lives of the assets.
Expenditures for maintenance and repairs are charged against income. Estimated
useful lives used in calculating depreciation are as follows:
<TABLE>
<S> <C>
Tools and dies................................. 5 years
Furniture and equipment........................ 5 to 7 years
Leasehold improvements......................... Life of lease
Patents and trademarks......................... 2 years
</TABLE>
f. Earnings Per Share
Earnings (loss) per share are based on the weighted average number of
shares outstanding, as adjusted for the 1 for 5 reverse split. Amounts for the
predecessor company (see Note 11) are not presented as they are not meaningful.
g. Reclassification
Certain 1994 account balances have been reclassified to conform to the 1995
presentation.
h. Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-13
<PAGE> 49
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. INVENTORIES
If the first-in, first-out (FIFO) method of accounting had been used by the
Company, reported net income would have been increased by $263,000 in fiscal
1996. The net loss would have been increased by $246,000 in fiscal 1995 and the
net income would have been decreased by $40,000 in fiscal 1994. On a FIFO basis,
reported year end inventories would have increased by $318,180 in 1996, $55,000
in 1995 and $428,000 in 1994.
3. CREDIT FACILITIES
Notes payable, bank, trade and bankers acceptances payable consist of the
following:
<TABLE>
<CAPTION>
APRIL 30,
1995
----------
<S> <C>
Notes payable, bank.............................. $ 766,684
Notes payable, bank.............................. 1,107,197
Bankers' acceptances payable..................... 6,317,901
----------
$8,191,782
==========
</TABLE>
The weighted average interest rate at April 30, 1995 was 9%.
On April 29, 1994, the Company restructured its then existing credit
facility with a bank, providing for maximum borrowings of $7,500,000 in the form
of notes payable, letters of credit and bankers' acceptances, expiring on
September 30, 1994.
The agreement with the bank was extended on a month to month basis until
such time as a new agreement was signed. Advances were made on a revolving basis
based on a percentage of eligible accounts receivable and inventory, as defined.
Interest was charged at the bank's "base" rate plus 1.25% on notes payable, the
bank's prevailing discount rate plus 2.5% on time letters of credit and the
bank's prevailing discount rate plus 2% on bankers' acceptances. The base rate
and discount rate were 9.00% and 6.85%, respectively, at April 30, 1995. The
agreement also provided for a security interest in all of the assets of the
Company, the personal guarantee of the Company's president and major shareholder
in the amount of $250,000, the assignment of an existing life insurance policy
to the bank in the name of the president and major shareholder in the amount of
$2,000,000, the maintenance of certificates of deposit in an amount not less
than $350,000 and the maintenance of compensating balances equal to 6% of the
average monthly outstanding balance of notes payable and bankers' acceptances.
The terms of the agreement also provided for certain restrictive covenants with
respect to borrowing limitations, maintenance of tangible net worth and working
capital, debt to tangible net worth and inventory ratios.
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.
The Company was contingently liable under outstanding letters of credit in
the amount of approximately $242,000 at April 30, 1995.
The Company was also party to various credit arrangements with certain of
the suppliers in the form of letter of credit and draft acceptance agreements
for the purchase of inventory. The agreements are generally for periods of 90 to
120 days, are unsecured, and bear interest at rates ranging from 5% to 13.5%.
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
F-14
<PAGE> 50
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
bank. On August 22, 1995, the lender bank sold and assigned the loan balance of
$6.8 million. The assigned loan was secured by a security interest in
substantially all of the Company's assets.
Pursuant to the reorganization as discussed in Note 11, the assignor was
issued 14,880,000 shares of new common stock in consideration of forgiving the
$6.8 million outstanding loan.
4. INCOME TAXES
The provision (benefit) for income taxes for the years ended April 30 are
as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------- --------- --------
<S> <C> <C> <C>
CURRENT:
Federal............................................... $ -- $(401,529) $215,513
State and local....................................... -- 5,386 29,284
----------- --------- --------
-- (396,143) 244,797
----------- --------- --------
DEFERRED:
Federal............................................... (5,675,000) 313,039 (68,549)
State and local....................................... (1,836,000) 1,014 (4,187)
----------- --------- --------
(7,511,000) 314,053 (72,736)
----------- --------- --------
$(7,511,000) $ (82,090) $172,061
=========== ========= ========
</TABLE>
The deferred income tax assets and liabilities at April 30 consist of the
following:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
DEFERRED TAX ASSETS:
Bad debt reserves............................................... $ 75,000 $ -0-
Difference in book and tax treatment for advertising costs...... 16,000 59,000
Net operating loss carryforwards................................ 8,783,000 2,448,000
Other deferred tax assets....................................... 50,000 -0-
---------- -----------
Total Deferred Tax Assets............................... 8,924,000 2,507,000
---------- -----------
DEFERRED TAX LIABILITY (ALLOCATED TO EXTRAORDINARY GAIN):
Gain on discharge of prepetition liabilities.................... 7,511,000 -0-
---------- -----------
7,511,000 -0-
---------- -----------
Valuation allowance for deferred tax assets..................... (1,413,000) (2,507,000)
---------- -----------
$ -0- $ -0-
========== ===========
</TABLE>
The reconciliation of the federal statutory income tax to the Company's
effective income tax for the years ended April 30 is as follows:
<TABLE>
<CAPTION>
1995 1994
----------- --------
<S> <C> <C>
U.S. federal income taxes at statutory rate................. $(3,845,205) $141,565
Losses for which no benefit was provided.................... 982,371 -0-
Change in valuation allowance............................... 2,506,820 -0-
Reversal of previously established tax asset................ 313,039 -0-
Tax effect of permanent differences......................... 17,035 9,537
Other....................................................... (56,150) 20,959
----------- --------
$ (82,090) $172,061
=========== ========
</TABLE>
F-15
<PAGE> 51
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company had a net operating loss for the year ended April 30, 1995 of
approximately $8,400,000 of which $1,200,000 was carried back to prior years.
The Company has filed prior year amended returns to claim the net operating loss
carryback which results in refundable income taxes of approximately $287,000.
At April 30, 1996, the net operating loss carryforward totaled
approximately $19,500,000 of which approximately $16,700,000 will be utilized by
the Company in its final tax return for the period May 1, 1996 to August 8, 1996
(see Note 11 re: merger into Dynamic International, Ltd.). Based on ownership
changes resulting from the reorganization (see Note 11), the balance of the net
operating loss carryforward is expected to be limited by the current provisions
of Section 382 of the Internal Revenue Code.
5. COMMITMENTS AND CONTINGENCIES
a. Capital Leases
The Company is the lessee of equipment under capital leases expiring in
various years through 1998.
In September 1995, the lessor of the Company's capital leases agreed to
forgive the balance of the unpaid lease payments through September 1995 and to
accept 60% of the remaining balance of the lease payments. As a result, the
Company recognized $77,403 of income on the adjustment of the lease term. Such
income is included in other income.
Minimum future lease payments due under the revised capital leases in the
aggregate are as follows:
<TABLE>
<CAPTION>
YEAR ENDING APRIL 30,
--------------------------------------------------
<S> <C>
1997......................................... $ 54,943
1998......................................... 28,654
--------
$ 83,597
Less: interest portion............................ (10,901)
--------
$ 72,696
========
</TABLE>
b. Operating Leases
Prior to August, 1995 the Company occupied space for its sales, executive
offices, assembly and storage facilities under long term operating leases
expiring August 1998. The leases provided for additional payments for insurance,
taxes and other charges related to the premises. As part of the bankruptcy
proceeding, the Company was discharged of the obligations of the leases. In
October 1995 the Company relocated its premises, where the Company is charged
warehousing fees and administration fees based on sales volume (see Note 6).
Rent expense for the years ended April 30, 1996, 1995, and 1994 was
$341,427, $583,596, and $435,209, respectively.
c. Royalty Obligations
The Company has entered into various royalty, licensing, and commission
agreements for products sold by the Company. These agreements provide for
minimum payments and a percentage of specific product sales, over a period of
one to eight years. Royalty expense for the years ended April 30, 1996, 1995,
and 1994 was approximately $275,000, $779,000, and $524,000, respectively.
d. Defined Benefit Pension Plan
On September 26, 1996, the Defined Benefit Employees Retirement Plan was
terminated under a distress termination approved by the United States Bankruptcy
Court. The defined benefit pension obligation prior to
F-16
<PAGE> 52
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the termination was $860,945. As part of the bankruptcy proceeding, the
obligation was settled for $38,743 resulting in a gain of $822,202 which is
reflected in the extraordinary gain on discharge of prepetition liabilities.
e. 401(k) Plan
On January 1, 1990, the Company adopted a 401(k) plan. The plan covers all
eligible employees. Eligible employees may contribute from 1% to 15% of their
salaries subject to the statutory maximum of $9,240 for the 1995 and 1994
calendar years. The plan also provided matching contributions by the Company of
25% of the employees' contributions to a maximum contribution of 1% of the
employees' salaries. On May 31, 1996, the plan's summary plan description was
modified to make matching contributions discretionary. No matching contributions
will be made by the Company for the 1996 calendar year.
The 401(K) expense amounted to $2,600, $9,460 and $6,260 for the years
ended April 30, 1996, 1995 and 1994, respectively.
f. Union Pension Plan
Certain union employees participate in a multiemployer retirement plan
sponsored by their union. The Company is required to pay seven cents ($.07) per
hour per employee to the plan. Pension expense for the union employees for the
years ended April 30, 1996, 1995, and 1994 was $3,745, $1,680, and $3,957,
respectively. The data available from administrators of the multiemployer plan
is not sufficient to determine the accumulated benefit obligation, nor the net
assets attributable to the multiemployer plan in which Company employees
participate. As of October 1995, the Company no longer has any union employees.
g. Litigation
In the normal course of its operations, the Company has been named as a
defendant in several product liability lawsuits that in the opinion of
management are not material and are substantially covered by the Company's
product liability insurance.
6. RELATED PARTY TRANSACTIONS
The Company has an agreement with an entity ("Related Party") owned by a
major shareholder whereby the entity agreed to provide warehousing and general
administrative services to the Company. The agreement is for a period of two
years with automatic year to year renewals.
The monthly fee for the warehousing services is 3% of monthly sales. The
fee for general administrative services is payable monthly and is based on
annual sales in percentages ranging from 3% to 4% of invoiced sales. Total
warehousing and administrative expenses charged to operations for the year ended
April 30, 1996 were approximately $164,000.
The Related Party also purchases inventory for the Company and charges the
Company for the invoiced amount of the inventory.
Interest is chargeable at an annual rate of prime plus 3% of the balance
owing on inventory purchases, warehousing fees, and general administrative fees
and is payable monthly. Total interest charged on such balances was $115,004 for
fiscal 1996.
At April 30, 1996, the balance owed to the Related Party was $2,129,893 and
is included in accounts payable and accrued expenses.
The Company also has loans outstanding with the Related Party totaling
$557,000 at April 30, 1996. The loan is secured by all of the Company's assets.
Interest at Citibank prime rate plus three percent is payable
F-17
<PAGE> 53
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
monthly. The prime rate used in fiscal 1996 was 8.5 percent. Interest charged to
operations for the year ended April 30, 1996 was $19,924.
7. MAJOR CUSTOMERS
During the year ended April 30, 1996, sales to three major customers were
approximately 19%, 18%, and 14% ($1,359,000, $1,287,000, and $1,001,000,
respectively) of the Company's net sales. During the year ended April 30, 1995,
sales to two major customers were approximately 26% and 14% ($8,459,000 and
$4,555,000, respectively) of the Company's net sales. During the year ended
April 30, 1994, sales to three major customers were 16%, 16% and 10%
($4,720,000, $4,719,000 and $2,950,000, respectively) of the Company's net
sales. The Company sells a limited amount to foreign customers. There were
no material receivables subject to foreign currency fluctuations.
8. CREDIT RISK/FINANCIAL INSTRUMENTS
Due to the nature of its business and the volume of sales activity, the
Company's cash balance occasionally exceeds the $100,000 protection of FDIC
insurance. At April 30, 1996 and 1995, such excess balances totaled
approximately $207,000 and $398,000, respectively.
The Company routinely assesses the financial strength of its customers and,
based upon factors surrounding the credit risk of its customers, establishes an
allowance for uncollectible accounts and, as a consequence, believes that its
accounts receivable credit risk exposure beyond such allowances is limited. The
Company provides credit to customers under standard terms without requiring
collateral.
The carrying amounts of short-term debt reported in the balance sheets
approximate fair value. The fair value of the Company's long-term debt
(including the current portion) also approximates its carrying amount in the
balance sheets based on the rates currently available to the Company for similar
debt with similar terms.
9. AUTHORITATIVE PRONOUNCEMENTS
a. The Financial Accounting Standard Board ("FASB") issued Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", in March of
1995. SFAS No. 121 establishes accounting standards for the impairment of
long-lived assets, certain identifiable intangibles, and goodwill related to
those assets to be held and used, and for long-lived assets and certain
identifiable intangibles to be disposed of. SFAS No. 121 is effective for
financial statements issued for fiscal years beginning after December 15, 1995.
The Company adopted SFAS 121 on May 1, 1996. In light of the reorganization as
discussed in Note 11, the Company expects to recover the carrying amount of its
long-lived assets and adoption of SFAS No. 121 is not expected to have a
material impact on the Company's financial statements.
b. The FASB issued SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities" in June of 1996. SFAS No.
125 provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishment of liabilities. SFAS No. 125 is effective
for financial statements issued for fiscal years occurring after December 31,
1996 and is to be applied prospectively. SFAS No. 125 is not expected to have an
impact on the Company.
c. The Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings per Share," and SFAS
No. 129, "Disclosure of Information about Capital Structure" in February 1997.
SFAS No. 129 does not change any previous disclosure requirements, but
rather consolidates existing disclosure requirements for ease of retrieval.
F-18
<PAGE> 54
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SFAS No. 128 simplifies the earnings per share (EPS) calculations required
by Accounting Principles Board (APB) Opinion No. 15, and related
interpretations, by replacing the presentation of primary EPS with a
presentation of basic EPS. SFAS No. 128 requires dual presentation of basic and
diluted EPS by entities with complex capital structures. Basic EPS includes no
dilution and is computed by dividing income available to common stockholders by
the weighted-average number of common shares outstanding for the period. Diluted
EPS reflects the potential dilution of securities that could share in the
earnings of an entity similar to the fully diluted EPS of APB Opinion No. 15.
SFAS No. 128 is effective for financial statements issued for periods ending
after December 15, 1997, including interim periods; earlier application is not
permitted. The Company expects that adoption of SFAS No. 128 will not have a
material impact on the financial statements.
10. SIGNIFICANT RISKS AND UNCERTAINTIES
a. The Company's exercise products compete with products marketed and sold
by a number of companies. The Company's main competitors in this area possess
far greater financial and other resources, including sales forces, than the
Company. However, the Company believes that as a result of its ability to use
trademark names for which it pays royalties, it will be able to retain its share
of the market. Nevertheless, there can be no assurance that the Company will be
able to effectively compete with these companies as well as with other smaller
entities.
The Company's luggage products compete with products designed by a number
of the largest companies in the industry. The Company believes that because of
its concentration on the upscale lifestyle and more specialized leisure market
that are associated with its use of trademark names, the Company will be able to
continue to grow its luggage business. Nevertheless, there can be no assurance
that the Company will be able to effectively compete with these companies as
well as with other smaller entities.
b. Most of the Company's exercise products are purchased from Philippines,
Korea, and Taiwan. The Company believes that, if necessary, it will be able to
obtain its products from firms located in other countries at little, if any,
additional expense. As a consequence, the Company believes that an interruption
in deliveries by a manufacturer located in a particular country will not have a
material adverse impact on the business of the Company. Nevertheless, because of
political instability in a number of the supply countries, occasional import
quotas and other restrictions on trade or otherwise, there can be no assurance
that the Company will at all times have access to a sufficient supply of
merchandise.
11. 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.
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. 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 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
F-19
<PAGE> 55
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 $17.2 million. 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 15,993,991 shares of new common stock were issued on July 25, 1996
out of which 14,880,000 shares were issued to one secured creditor (see Note 3),
800,000 shares were issued to unsecured creditors, and 313,991 shares were
issued to the reconfirmation common stock equity interest holders.
The discharge of claims has been 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 11.5%. 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 $16.7 million 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 and 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, 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 that the total of all postpetitition and
allowed claims, and if holders of existing voting shares immediately before
confirmation receive less that 50 percent of the voting shares of the emerging
entity, both conditions of which were satisfied by the Company.
Under fresh-start accounting, all assets and liabilities are restated to
reflect their reorganization value, which approximates fair value at date of
reorganization. In addition the accumulated deficit of the predecessor company
at July 31, 1996 totaling $710,986 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. Amortization expense for the six months ended January 31,
1997 was $2,822.
F-20
<PAGE> 56
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following is a proforma balance sheet of the reorganized Company based
on the projected discounted cash flows as discussed above:
<TABLE>
<CAPTION>
REORGANIZED
BALANCE COMPANY
SHEET STOCK FRESH -------------
JULY 31, 1996 EXCHANGE START JULY 31, 1996
------------- --------- --------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Current Assets:
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........ 124,154 124,154
---------- --------- ----------
Total Assets.................... $ 4,209,106 $ 124,154 $ 4,333,260
========== ========= ==========
Current liabilities:
Loans Payable -- MG..................... 593,670 593,670
Loans Payable -- Trade.................. 62,020 62,020
Accounts payable and accrued expenses... 3,604,440 3,604,440
Capital Lease Obligations............... 32,226 32,226
Other current liabilities............... 15,923 (15,923) 0
---------- --------- --------- ----------
Total Current Liabilities....... 4,308,279 (15,923) 0 4,292,356
---------- --------- --------- ----------
Other liabilities......................... 21,578 21,578
---------- --------- ----------
Common stock, par value................... 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
---------- --------- --------- ----------
(103,251) (1,574) 124,154 19,329
Less: Treasury stock...................... (17,500) 17,497 (3)
---------- --------- --------- ----------
Total Equity.................... (120,751) 15,923 124,154 19,326
---------- --------- --------- ----------
Total Liabilities and Equity.............. $ 4,209,106 $ 0 $ 124,154 $ 4,333,260
========== ========= ========= ==========
</TABLE>
F-21
<PAGE> 57
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. SUBSEQUENT EVENTS (UNAUDITED)
a. Public Offering
The Company is offering for public sale 1,200,000 units, each consisting of
one share of common stock, one Class A Warrant and one Class B Warrant at $5.00
per unit. Although no assurance can be given that the sale will be successful,
the Company intends to utilize the net proceeds of approximately $5,100,000 for
the repayment of current debt, purchase of inventory, general corporate
services, and working capital.
Simultaneous with the public offering, the Company intends to declare a one
for five reverse stock split. All share data for the reorganized company has
been adjusted for the split.
b. Note Payable
On August 30, 1996, certain payables to a related party (see Note 6) plus
accrued interest totaling $1,205,109 were formalized into a promissory note.
Payments of principal and interest are to be made in 24 equal monthly
installments beginning September 5, 1996. The interest rate is the Citibank
Prime Rate plus one percent (approximately 9.25%). As of January 31, 1997, the
Company was in default in the amount of $274,273 consisting of principal and
interest. The note holder has agreed to defer the arrearage to June 1997, at
which time the Company anticipates making the monthly payments when due.
c. Earn Out Agreement
In March 1997 the Company entered into an agreement with Marton Grossman,
the Company's chairman and president which provides for the issuance to Mr.
Grossman an aggregate 2,000,000 shares of common stock if the Company reaches
certain earning criteria as follows:
<TABLE>
<CAPTION>
EARNINGS BEFORE SHARES TO
YEAR ENDING INCOME TAX BE ISSUED
----------------------------------- --------------- ----------
<S> <C> <C>
April 30, 1998..................... $ 500,000 400,000
April 30, 1999..................... $ 1,000,000 600,000
April 30, 2000..................... $ 1,500,000 1,000,000
</TABLE>
If the earning criteria is not met in any one of the above years but is
cumulatively met in the subsequent year then the number of shares to be issued
will be the cumulative number of shares at that year end.
Issuance of the shares will result in compensation expense to the Company.
d. Consulting Agreement
The Company anticipates entering into a three year consulting agreement
with the underwriter to provide financial consulting services for a fee of
$20,000.
e. Underwriter's Purchase Warrants
As part of the consideration of its services in connection with the
registration statement, the Company has agreed to issue to the underwriter, for
nominal consideration, warrants to purchase up to 120,000 units at an exercise
price of $8.25 per unit for a period of five years. The Class A Warrants and
Class B Warrants underlying the units included in the underwriter's warrants
will be exercisable at a price of $9.90 and $16.50 per share, respectively, or
165% of the then exercise price of the warrants offered to the public, for a
period of five years commencing with the closing of the registration statement.
The non-cash cost of such warrants representing a cost of raising capital will
be recorded as a charge and credit to stockholders' equity when the warrants are
issued.
F-22
<PAGE> 58
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
f. Underwriter Option
The Company has granted the underwriter an option exercisable for 45 days
from the registration statement to purchase up to 180,000 units at the public
offering price less the underwriting discounts.
13. UNAUDITED INTERIM FINANCIAL STATEMENTS
The financial statements as of January 31, 1997 and 1996, July 31, 1996,the
nine months ended January 31, 1997 and 1996, and for the three months ended July
31, 1996 are unaudited; however in the opinion of management all adjustments
necessary for a fair presentation of the financial statements for the interim
periods have been made. The results of the interim period are not necessarily
indicative of the results to be obtained for a full fiscal year.
F-23
<PAGE> 59
INDEPENDENT AUDITOR'S REPORT
ON SUPPLEMENTAL SCHEDULE
To the Board of Directors and Shareholders
Dynamic International, Ltd.
Our report on the consolidated financial statements of Dynamic International,
Ltd. and its subsidiary as of April 30, 1996 and for the year then ended is
included on page F-1 of this form 10-K. In connection with our audit of such
financial statements, we have also audited the related accompanying financial
statement Schedule II-Valuation and Qualifying Accounts for the year ended
April 30, 1996.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information required to be
included therein.
Moore Stephens, P.C.
Certified Public Accountants
New York, New York
August 30, 1996
F-24
<PAGE> 60
INDEPENDENT AUDITOR'S REPORT ON SUPPLEMENTAL SCHEDULE
Board of Directors
Dynamic Classics, Ltd.
Our report on the consolidated financial statements of Dynamic Classics,
Ltd. and Subsidiary as of April 30, 1995 and for each of the two fiscal years in
the period ended April 30, 1995 is included on page F-2 of this form 10-K. In
connection with our audits of such financial statements, we have also audited
the related accompanying financial statement Schedule II -- Valuation and
Qualifying Accounts for the years ended April 30, 1995 and 1994.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information required to be
included therein.
Hoberman, Miller & Co., P.C.
June 26, 1996
F-25
<PAGE> 61
DYNAMIC CLASSICS, LTD. AND SUBSIDIARY
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
REORGANIZED PREDECESSOR
COMPANY COMPANY
-------- --------
PREDECESSOR COMPANY
FOR THE -------------------------------
NINE MONTHS ENDED
JANUARY 31, FOR THE YEARS ENDED APRIL 30,
--------------------- -------------------------------
1997 1996 1996 1995 1994
-------- -------- -------- --------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts
balance -- beginning................... $167,000 $ -- $ -- $ 578,119 $417,760
Additions charged to income.............. -- -- 167,000 -- 156,665
Recovery of uncollectible
accounts -- net........................ -- -- -- -- 3,694
Writeoffs of uncollectible amounts....... -- -- -- (578,119) --
-------- -------- -------- --------- --------
Allowance for doubtful accounts
balance -- ending...................... $167,000 $ -- $167,000 $ -- $578,119
======== ======== ======== ========= ========
</TABLE>
<TABLE>
<CAPTION>
REORGANIZED
COMPANY
------------
FOR THE
THREE
MONTHS ENDED
JULY 31,
1996
------------
(UNAUDITED)
<S> <C>
Allowance for doubtful accounts balance -- beginning... $167,000
Additions charged to income............................ --
Recovery of uncollectible accounts -- net.............. --
Writeoffs of uncollectible amounts..................... --
--------
Allowance for doubtful accounts balance -- ending...... $167,000
========
</TABLE>
F-26
<PAGE> 62
===============================================================
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR BY THE UNDERWRITER.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER
ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE HAD BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES
OFFERED HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION
IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS
NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Additional Information........................
Prospectus Summary............................
Risk Factors..................................
Management's Discussion and Analysis of
Financial Conditions and Results of
Operations..................................
Dilution......................................
Use of Proceeds...............................
Capitalization................................
Business......................................
Management....................................
Executive Compensation........................
Certain Relationships and Related
Transactions................................
Disclosure of Commission Position on
Indemnification For Securities Act
Liability...................................
Security Ownership of Certain Beneficial
Owners and Management.......................
Description of Securities.....................
Underwriting..................................
Legal Matters.................................
Experts.......................................
Index to Financial Statements................. F-1
</TABLE>
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS) ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
===============================================================
======================================================
1,200,000 UNITS
DYNAMIC INTERNATIONAL, LTD.
------------------------
PROSPECTUS
------------------------
, 1997
======================================================
<PAGE> 63
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following statement sets forth the estimated expenses in connection
with the offering described in the Registration Statement, all of which will be
borne by the Registrant.
<TABLE>
<S> <C>
Securities and Exchange Commission Fee.................................... $ 10,000
NASD Fee.................................................................. $ 5,000
NASDAQ Listing Fee........................................................ $ 10,000
Accountants' Fees......................................................... $ 50,000
Legal Fees................................................................ $130,000
Blue Sky Qualification, Fees and Expenses................................. $ 35,000
Company's Administrative Expenses......................................... $ 20,000
Printing and engraving.................................................... $ 30,000
Miscellaneous............................................................. $ 10,000
--------
TOTAL........................................................... $300,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Registrant's Articles of Incorporation provide that no officer or director
shall have any personal liability for damages as a result of breach of fiduciary
duty as a director or officer, except (i) for acts or omissions that involve
intentional misconduct, fraud or a knowing violation of law, or (ii) the payment
of distributions in violation of law. Article 10 of the Registrant's By-Laws
provides that:
"(a) Any person made a party to any action, suit or proceeding, by
reason of the fact that he, his testator or intestate representative is or
was a director, officer or employee of the Corporation, or of any
Corporation in which he served as such at the request of the Corporation,
shall be indemnified by the Corporation against the reasonable expenses,
including attorney's fees, actually and necessarily incurred by him in
connection with the defense of such action, suit or proceedings, or in
connection with any appeal therein that such officer, director or employee
is liable for negligence or misconduct in the performance of his duties.
(b) The foregoing right of indemnification shall not be deemed
exclusive of any other rights to which any officer or director or employee
may be entitled apart from the provisions of this section.
(c) The amount of indemnity to which any officer or any director may
be entitled shall be fixed by the Board of Directors, except that in any
case where there is no disinterested majority of the Board available, the
amount shall be fixed by arbitration pursuant to then existing rules of the
American Arbitration Association."
Sections 78.751 and 78.752 of the Nevada Revised Statutes are set forth
below:
78.751. Indemnification of officers, directors, employees and agents;
advancement of expenses.
1. A corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal administrative or investigative,
except an action by or in the right of the corporation, by reason of the fact
that he is or was a director, officer, employee or agent of the corporation, or
is or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise, against expenses, including attorneys' fees, judgments, fines
and amounts paid in settlement actually and reasonably incurred by him in
connection with the action, suit or proceeding if he acted in good faith and in
a manner which he reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful. The
II-1
<PAGE> 64
termination of any action, suit or proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent, does not, of
itself, create a presumption that the person did not act in good faith and in a
manner which he reasonably believed to be in or not opposed to the best
interests of the corporation, and that, with respect to any criminal action or
proceeding, he had reasonable cause to believe that his conduct was unlawful. A
corporation may indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action or suit by or in
the right of the corporation to procure a judgment in its favor by reason of the
fact that he is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against expenses, including amounts paid in
settlement and attorneys' fees actually and reasonably incurred by him in
connection with the defense or settlement of the action or suit if he acted in
good faith and in a manner which he reasonably believed to be in or not opposed
to the best interest of the corporation. Indemnification may not be made for any
claim, issue or matter as to which such a person has been adjudged by a court of
competent jurisdiction, after exhaustion of all appeals therefrom, to be liable
to the corporation or for amounts paid in settlement to the corporation, unless
and only to the extent that he court in which the action or suit was brought or
other court of competent jurisdiction determines upon application that in view
of all the circumstances of the case, the person is fairly and reasonably
entitled to indemnity for such expenses as the court deems proper. To the extent
that a director, officer, employee or agent of a corporation has been successful
on the merits or otherwise in defense of any action, suit or proceeding referred
to in subsections 1 and 2, or in defense of any claim, issue or matter therein,
he must be indemnified by the corporation against expenses, including attorneys'
fees, actually and reasonably incurred by him in connection with the defense.
Any indemnification under subsections 1 and 2, unless ordered by a court or
advanced pursuant to subsection 5, must be made by the corporation only as
authorized in the specific case upon a determination that indemnification of the
director, officer, employee or agent is proper in the circumstances. The
determination must be made:
(a) By the stockholders;
(b) By the board of directors by majority vote of a quorum consisting
of directors who were not parties to the act, suit or proceeding;
(c) If a majority vote of a quorum consisting of directors who were
not parties to the act, suit or proceeding so orders, by independent legal
counsel in a written quorum opinion; or
(d) If a quorum consisting of directors who were not parties to the
act, suit or proceeding cannot be obtained, by independent legal counsel in
a written opinion.
2. The articles of incorporation, the bylaws or an agreement made by the
corporation may provide that the expenses of officers and director incurred in
defending a civil or criminal action, suit or proceeding must be paid by the
corporation as they are incurred and in advance of the final disposition of the
action, suit or proceeding, upon receipt of an undertaking by or on behalf of
the director or officer to repay the amount if it is ultimately determined by a
court of competent jurisdiction that he is not entitled to be indemnified by the
corporation. The provisions of this subsection do not affect any rights to
advancement of expenses to which corporate personnel other than directors or
officers may be entitled under any contract or otherwise by law. The
indemnification and advancement of expenses authorized in or ordered by a court
pursuant to this section:
(a) Does not exclude any other rights to which a person seeking
indemnification or advancement of expenses may be entitled under the
articles of incorporation or any bylaw, agreement, vote of stockholders or
disinterested directors or otherwise, for either an action in his official
capacity or an action in another capacity while holding his office, except
that indemnification, unless ordered by a court pursuant to subsection 2 or
for the advancement of expenses made pursuant to subsection 5, may not be
made to or on behalf of any director or officer if a final adjudication
established that his acts or omissions involved intentional misconduct,
fraud or a knowing violation of the law and was material to the cause of
action.
(b) Continues for a person who has ceased to be a director, officer,
employee or agent and inures to the benefit of the heirs, executors and
administrators of such a person.
II-2
<PAGE> 65
78.752. Insurance and other financial arrangements against liability
of directors, officers, employees and agents.
1. A corporation may purchase and maintain insurance or make other
financial arrangements on behalf of any person who is or was a director,
officer, employee or agent of the corporation, or is or was serving at the
request of the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise for any
liability asserted against him and liability and expenses incurred by him in his
capacity as a director, officer, employee or agent, or arising out of his status
as such, whether or not the corporation has the authority to indemnify him
against such liability and expenses.
2. The other financial arrangements made by the corporation pursuant to
subsection 1 may include the following:
(a) The creation of a trust fund.
(b) The establishment of a program of self-insurance.
(c) The securing of its obligation of indemnification by granting a
security interest or other lien on any assets of the corporation.
(d) The establishment of a letter of credit, guaranty or surety.
No financial arrangement made pursuant to this subsection may provide
protection for a person adjudged by a court of competent jurisdiction,
after exhaustion of all appeal therefrom, to be liable for intentional
misconduct, fraud or a knowing violation of law, except with respect to the
advancement of expenses or indemnification ordered by a court.
3. Any insurance or other financial arrangement made on behalf of a person
pursuant to this section may be provided by the corporation of any other person
approved by the board of directors, even if all or part of the other person's
stock or other securities is owned by the corporation.
4. In the absence of fraud:
(a) The decision of the board of directors as to the propriety of the
terms and conditions of any insurance or other financial arrangement made
pursuant to this section and the choice of the person to provide the
insurance or other financial arrangement is conclusive; and
(b) The insurance or other financial arrangement:
(1) Is not void or voidable; and
(2) Does not subject any director approving it to personal
liability for his action,
even if a director approving the insurance or other financial
arrangement is a beneficiary of the insurance or other financial
arrangement.
5. A corporation or its subsidiary which provides self-insurance for itself
or for another affiliated corporation pursuant to this section is not subject to
the provisions of Title 57 of NRS.
The Registrant may also purchase and maintain insurance for the benefit of
any director or officer which may cover claims for which the Registrant could
not indemnify such persons.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In August and September 1996 Registrant issued an aggregate of
approximately 16,000,000 shares of Common Stock (without giving effect to the
Reverse Stock Split) to existing shareholders and to its creditors in settlement
of claims under the Plan of Reorganization that was confirmed by the Bankruptcy
Court in May 1996. The issuances were exempt from registration under Section
1145 of the Bankruptcy Code.
Also during August and September 1996, Registrant, in connection with its
merger with Dynamic Classics, Ltd., Registrant's predecessor corporation
("DCL"), issued shares of Common Stock in exchange for all issued and
outstanding shares of DCL Common Stock. The capital structure and balance sheet
of the
II-3
<PAGE> 66
combined entity were substantially identical to those of the DCL prior to the
merger. As a result, the issuances pursuant to this exchange were exempt from
registration under Rule 145 promulgated under the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES.
<TABLE>
<C> <C> <S>
1 Form of Underwriting Agreement
1.01 Form of Underwriter's Warrant Agreement(1)
1.02 Form of Financial Advisory and Consulting Agreement(1)
2.01 Agreement of Merger dated July 19, 1996 between the Company and Dynamic
Classics, Ltd.(2)
2.02 Second Amended and Modified Plan of Reorganization dated February 22, 1996
(the "Plan")(3)
2.03 Errata Sheet and Correction Statement with respect to the Plan dated May 7,
1996(3)
2.04 Order Confirming the Plan dated May 23, 1996(3)
3.01 Certificate of Incorporation(2)
3.02 By-laws(2)
4.01 Form of Warrant Agreement to be entered into between the Company and
American Stock Transfer & Trust Company(1)
4.02 Form of Common Stock Certificate(2)
4.03 Form of Warrant Certificate(1)
5 Legal Opinion of Heller, Horowitz & Feit, P.C.
10.01 License Agreement with Spalding Sports Worldwide dated April 1, 1994(4)
10.02 License Agreement dated January 8, 1993 with Chrysler Corporation (4)
10.03 Endorsement Agreement dated December 22, 1994 with Kathy Ireland (5)*
10.04 Warehousing and Service Agreement dated as of September 1, 1996 with Achim
Importing Inc.(5)
10.05 License Agreement dated November 1, 1996 by and between New Century
Marketing & Distributors, Inc. and Dynamic Insulated Products, Inc.
10.06 Bonus Agreement with Marton Grossman
16.01 Letter from Hoberman Miller & Co. dated October 23, 1996 (6)
23.01 Consent by Heller, Horowitz & Feit, P.C. (included in Exhibit 5)
23.02 Consent by Moore Stephens, P.C.
23.03 Consent by Hoberman, Goldstein and Lesser, Miller & Co., P.C.
</TABLE>
- ---------------
(1) To be filed by amendment.
(2) Incorporated by reference to the Company's Form 8-B filed October 3, 1996.
(3) Incorporated by reference to the Company's Report on Form 8-K filed October
3, 1996.
(4) Incorporated by reference to the Annual Report on Form 10-K for 1994 for
Dynamic Classics, Ltd. (File No. 0-8376).
(5) Incorporated by reference to the Current Report on Form 8-K/A dated
October 23, 1996
(6) Incorporated by reference to the Current Report on Form 8-K/A
dated October 23, 1996
* Subject to a request for confidential treatment by the Securities and Exchange
Commission. Specific portions of the document for which confidential treatment
has been requested have been blacked out. Such portions have been filed
separately with the Commission pursuant to the application for confidential
treatment.
II-4
<PAGE> 67
ITEM 28. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by section 10(a)(3) of the
Securities Act;
(ii) Reflect in the prospectus any facts or events which, individually
or together, represent a fundamental change in the information in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high and of the estimated maximum offering range
may be reflected in the form of prospectus filed with Commission pursuant
to Rule 424(b) if, in the aggregate, the changes in volume and price
represent no more than 20 percent change in he maximum aggregate offering
price set forth in the "Calculation of Registration Fee" table in the
effective registration statement.
(iii) Include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement provided,
however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if the
registration statement is on Form S-3, Form S-8 or Form F-3, and the
information required to be included in post-effective amendment by those
paragraphs is contained in periodic reports filed with or furnished to the
Commission by the registrant pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 that are incorporated by reference in the
registration statement.
(2) For determining liability under the Securities Act, each post-effective
amendment shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(3) File a post-effective amendment to remove from registration by means of
a post-effective amendment any of the securities that remain unsold at the end
of the offering.
Insofar as indemnification for liabilities arising under the Securities Act
(the "Act") may be permitted to directors, officers and controlling persons of
the Company pursuant to the foregoing provisions, or otherwise, the Company has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the Company of expenses incurred or paid by a
director, officer or controlling person of the Company in the successful defense
of any action, suit or proceedings) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Company will, unless in the opinion of its counsel the matter has been settled
by controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
For determining any liability under the Securities Act, the Company will
treat the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Company under Rule 424(b)(1), or (4) or 497(h) under the
Securities Act as part of this registration statement as of the time the
Commission declared it effective.
The Company will provide to the Underwriter at the closing specified in
the Underwriting Agreement certificates in such denominations and registered
in such names as required by the Underwriter to permit prompt delivery
to each purchaser.
II-5
<PAGE> 68
SIGNATURES
In accordance with the requirements of the Securities Act, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements of filing on Form S-1 and has authorized this registration
statement or amendment to be signed on its behalf by the undersigned, in the
City of New York State of New York on the 17th day of April, 1997.
DYNAMIC INTERNATIONAL, LTD.
By: /s/ Marton Grossman
--------------------------------------
Marton Grossman, Chairman
and President
In accordance with the requirements of the Securities Act, this
registration statement or amendment was signed by the following persons in the
capacities and on the dates stated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- -------------------------------- ---------------
<C> <C> <S>
/s/ Marton Grossman Chairman and President April 17, 1997
- ---------------------------------------------
Marton Grossman
/s/ Isaac Grossman Director April 17, 1997
- ---------------------------------------------
Isaac Grossman
/s/ William P. Dolan Vice President
- --------------------------------------------- Chief Financial and Accounting April 17, 1997
William P. Dolan Officer
</TABLE>
II-6
<PAGE> 69
EXHIBIT INDEX
<TABLE>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGE
<C> <C> <S> <C>
1 Form of Underwriting Agreement
1.01 Form of Underwriter's Warrant Agreement(1)
1.02 Form of Financial Advisory and Consulting Agreement(1)
2.01 Agreement of Merger dated July 19, 1996 between the Company and Dynamic
Classics, Ltd.(2)
2.02 Second Amended and Modified Plan of Reorganization dated February 22, 1996
(the "Plan")(3)
2.03 Errata Sheet and Correction Statement with respect to the Plan dated May 7,
1996(3)
2.04 Order Confirming the Plan dated May 23, 1996(3)
3.01 Certificate of Incorporation(2)
3.02 By-laws(2)
4.01 Form of Warrant Agreement to be entered into between the Company and
American Stock Transfer & Trust Company(1)
4.02 Form of Common Stock Certificate(2)
4.03 Form of Warrant Certificate(1)
5 Legal Opinion of Heller, Horowitz & Feit, P.C.
10.01 License Agreement with Spalding Sports Worldwide dated April 1, 1994(4)
10.02 License Agreement dated January 8, 1993 with Chrysler Corporation (4)
10.03 Endorsement Agreement dated December 22, 1994 with Kathy Ireland (5)*
10.04 Warehousing and Service Agreement dated as of September 1, 1996 with Achim
Importing Inc.(5)
10.05 License Agreement dated November 1, 1996 by and between New Century
Marketing & Distributors, Inc. and Dynamic Insulated Products, Inc.
10.06 Bonus Agreement with Marton Grossman
16.01 Letter from Hoberman Miller & Co. dated October 23, 1996 (6)
23.01 Consent by Heller, Horowitz & Feit, P.C. (included in Exhibit 5)
23.02 Consent by Moore Stephens, P.C.
23.03 Consent by Hoberman, Goldstein and Lesser, Miller, P.C.
</TABLE>
- ---------------
(1) To be filed by amendment.
(2) Incorporated by reference to the Company's Form 8-B filed October 3, 1996.
(3) Incorporated by reference to the Company's Report on Form 8-K filed October
3, 1996.
(4) Incorporated by reference to the Annual Report on Form 10-K for 1994 for
Dynamic Classics, Ltd. (File No. 0-8376).
(5) Incorporated by reference to the Annual Report on Form 10-K for 1996.
(6) Incorporated by reference to the Current Report on Form 8-K/A dated October
23, 1996
* Subject to a request for confidential treatment by the Securities and Exchange
Commission. Specific portions of the document for which confidential treatment
has been requested have been blacked out. Such portions have been filed
separately with the Commission pursuant to the application for confidential
treatment.
<PAGE> 1
EXHIBIT 1
1,200,000 UNITS, EACH UNIT CONSISTING OF ONE SHARE OF COMMON STOCK,
ONE CLASS A WARRANT AND ONE CLASS B WARRANT
DYNAMIC INTERNATIONAL, LTD.
UNDERWRITING AGREEMENT
New York, New York
__________, 1997
PATTERSON TRAVIS, INC.
One Battery Park Plaza
New York, New York 10004
Ladies and Gentlemen:
Dynamic International, Ltd., a Nevada corporation (the "Company")
confirms its agreement with Patterson Travis, Inc. ("Patterson" or the
"Underwriter") with respect to the sale by the Company and the purchase by the
Underwriter of an aggregate of 1,200,000 Units ("Units"), each consisting of one
share of Common Stock, par value $.001 per share, of the Company ("Common
Stock") and one Class A Redeemable Common Stock Purchase Warrant ("Class A
Warrants") and one Class B Redeemable Common Stock Purchase Warrant ("Class B
Warrants" and collectively with the Class A Warrants, the "Warrants"). The Class
A Warrants, upon exercise, entitles the holder thereof to purchase one share of
Common Stock during the eighteen months following the date hereof at a price of
$6.00 per share from the Company. The Class B Warrants, upon exercise, entitles
the holder thereof to purchase one share of Common Stock during the three years
following the date hereof at a price of $10.00 per share from the Company. The
Common Stock and Warrants are hereinafter collectively referred to as the
"Securities."
Upon your request, as provided in Section 2(b) of this Agreement, the
Company shall also sell to the Underwriter up to an aggregate of 180,000 Units
(the "Option
1
<PAGE> 2
Securities") for the purpose of covering over-allotments, if any. The Company
also proposes to issue and sell to you warrants (the "Underwriter's Warrants")
pursuant to the Underwriter's Warrant Agreement (the "Underwriter's Warrant
Agreement") for the purchase of an additional 120,000 Units. The Common Stock,
Warrants and Common Stock underlying the Warrants issuable upon exercise of the
Underwriter's Warrants are hereinafter referred to as the "Underwriter's
Securities." The Securities, the Option Securities, the Underwriter's Warrants
and the Underwriter's Securities are more fully described in the Registration
Statement and the Prospectus referred to below.
1. Representations and Warranties of the Company. The Company
represents and warrants to, and agrees with, the Underwriter as of the date
hereof, and as of the Closing Date (hereinafter defined) and the Option Closing
Date (hereinafter defined), if any, as follows:
(a) The Company has prepared and filed with the Securities and
Exchange Commission (the "Commission") a registration statement, and an
amendment or amendments thereto, on Form S-1 (No. 333-____), including any
related preliminary prospectus ("Preliminary Prospectus"), for the registration
of the Securities, the Option Securities, the Underwriter's Warrants and the
Underwriter's Securities (collectively, hereinafter referred to as the
"Securities"), under the Securities Act of 1933, as amended (the "Act"), which
registration statement and amendment or amendments have been prepared by the
Company in conformity with the requirements of the Act, and the rules and
regulations (the "Rules and Regulations") of the Commission under the Act. The
Company will promptly file a further amendment to said registration statement in
the form heretofore delivered to the Underwriter and will not file any other
amendment thereto to which the Underwriter shall have objected in writing after
having been furnished with a copy thereof. Except as the context may otherwise
require, such registration statement, as amended, on file with the Commission at
the time the registration statement becomes effective (including the prospectus,
financial statements, schedules, exhibits and all other documents filed as a
part thereof or incorporated therein (including, but not limited to those
documents or information incorporated by reference therein) and all information
deemed to be a part thereof as of such time pursuant to paragraph (b) of Rule
430(A) of the Rules and Regulations), is hereinafter called the "Registration
Statement", and the form of prospectus in the form first filed with the
Commission pursuant to Rule 424(b) of the Rules and Regulations, is hereinafter
called the "Prospectus." For purposes hereof, "Rules and Regulations" mean the
rules and regulations adopted by the Commission under either the Act or the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), as applicable.
(b) Neither the Commission nor any state regulatory authority
has issued any order preventing or suspending the use of any Preliminary
Prospectus, the Registration Statement or Prospectus or any part of any thereof
and no proceedings for a stop order suspending the effectiveness of the
Registration Statement or any of the
2
<PAGE> 3
Company's securities have been instituted or are pending or threatened. Each of
the Preliminary Prospectus, the Registration Statement and Prospectus at the
time of filing thereof conformed with the requirements of the Act and the Rules
and Regulations, and none of the Preliminary Prospectus, the Registration
Statement or Prospectus at the time of filing thereof contained an untrue
statement of a material fact or omitted to state a material fact required to be
stated therein and necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading; provided, however,
that this representation and warranty does not apply to statements made or
statements omitted in reliance upon and in conformity with written information
furnished to the Company with respect to the Underwriter by or on behalf of the
Underwriter expressly for use in such Preliminary Prospectus, Registration
Statement or Prospectus.
(c) When the Registration Statement becomes effective and at
all times subsequent thereto up to the Closing Date (as defined herein) and each
Option Closing Date (as defined herein), if any, and during such longer period
as the Prospectus may be required to be delivered in connection with sales by
the Underwriter or a dealer, the Registration Statement and the Prospectus will
contain all statements which are required to be stated therein in accordance
with the Act and the Rules and Regulations, and will conform to the requirements
of the Act and the Rules and Regulations; neither the Registration Statement nor
the Prospectus, nor any amendment or supplement thereto, will contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading; provided, however,
that this representation and warranty does not apply to statements made or
statements omitted in reliance upon and in conformity with information furnished
to the Company in writing by or on behalf of the Underwriter expressly for use
in the Preliminary Prospectus, Registration Statement or Prospectus or any
amendment thereof or supplement thereto.
(d) The Company has been duly organized and is validly
existing as a corporation in good standing under the laws of the state of
Nevada. Except as set forth in the Prospectus, the Company does not own an
interest in any corporation, partnership, trust, joint venture or other business
entity. The Company is duly qualified and licensed and in good standing as a
foreign corporation in each jurisdiction in which its ownership or leasing of
any properties or the character of its operations require such qualification or
licensing. The Company has all requisite power and authority (corporate and
other), and has obtained any and all necessary authorizations, approvals,
orders, licenses, certificates, franchises and permits of and from all
governmental or regulatory officials and bodies, to own or lease its properties
and conduct its business as described in the Prospectus; the Company is and has
been doing business in compliance with all such authorizations, approvals,
orders, licenses, certificates, franchises and permits; and the Company has not
received any notice of proceedings relating to the revocation or modification of
any such authorization, approval, order, license, certificate, franchise, or
permit which, singly or in the aggregate, if the subject of an unfavorable
decision, ruling
3
<PAGE> 4
or finding, would materially and adversely affect the condition, financial or
otherwise, or the earnings, position, prospects, value, operation, properties,
business or results of operations of the Company. The disclosures in the
Registration Statement concerning the effects of federal, state, local, and
foreign laws, rules and regulations on the Company's business as currently
conducted and as contemplated are correct in all material respects and do not
omit to state a material fact necessary to make the statements contained therein
not misleading in light of the circumstances in which they were made.
(e) The Company has a duly authorized, issued and outstanding
capitalization as set forth in the Prospectus, under "Capitalization" and
"Description of Securities" and will have the adjusted capitalization set forth
therein on the Closing Date based upon the assumptions set forth therein, and
the Company is not a party to or bound by any instrument, agreement or other
arrangement providing for it to issue any capital stock, rights, warrants,
options or other securities, except for this Agreement, the Underwriter's
Warrant Agreement and as described in the Prospectus. The Securities and all
other securities issued or issuable by the Company conform or, when paid for and
issued, will conform, in all respects to all statements with respect thereto
contained in the Registration Statement and the Prospectus. All issued and
outstanding securities of the Company have been duly authorized and validly
issued and are fully paid and non-assessable and the holders thereof have no
rights of rescission with respect thereto, and are not subject to personal
liability by reason of being such holders; and none of such securities were
issued in violation of the preemptive rights of any holders of any security of
the Company or similar contractual rights granted by the Company. The Securities
are not and will not be subject to any preemptive or other similar rights of any
shareholder, have been duly authorized and, when paid for, issued and delivered
in accordance with the terms hereof, will be validly issued, fully paid and
nonassessable and will conform to the description thereof contained in the
Prospectus; the holders thereof will not be subject to any liability solely as
such holders; all corporate action required to be taken for the authorization,
issue and sale of the Securities has been duly and validly taken; and the
certificates representing the Securities will be in due and proper form. Upon
the issuance and delivery pursuant to the terms hereof of the Securities to be
sold by the Company hereunder, the Underwriter will acquire good and marketable
title to such Securities free and clear of any lien, charge, claim, encumbrance,
pledge, security interest, defect or other restriction of any kind whatsoever.
(f) The financial statements of the Company together with the
related notes and schedules thereto, included in the Registration Statement,
each Preliminary Prospectus and the Prospectus fairly present the financial
position, income, changes in cash flow, changes in shareholders' equity and the
results of operations of the Company at the respective dates and for the
respective periods to which they apply and such financial statements have been
prepared in conformity with generally accepted
4
<PAGE> 5
accounting principles and the Rules and Regulations, consistently applied
throughout the periods involved. There has been no adverse change or development
involving a material prospective change in the condition, financial or
otherwise, or in the earnings, position, prospects, value, operations,
properties, business, or results of operations of the Company whether or not
arising in the ordinary course of business, since the date of the financial
statements included in the Registration Statement and the Prospectus and the
outstanding debt, the property, both tangible and intangible, and the businesses
of the Company conform in all respects to the descriptions thereof contained in
the Registration Statement and the Prospectus. Financial information set forth
in the Prospectus under the headings "Summary Financial Information," "Selected
Financial Data," "Capitalization," and "Management's Discussion and Analysis of
Financial Condition and Results of Operations," fairly present, on the basis
stated in the Prospectus, the information set forth therein, and have been
derived from or compiled on a basis consistent with that of the audited and
unaudited financial statements included in the Prospectus.
(g) The Company (i) has paid, accrued or otherwise reserved
for, all federal, state, local, and foreign taxes required to be paid,
including, but not limited to, withholding taxes and amounts payable under
Chapters 21 through 24 of the Internal Revenue Code of 1986 (the "Code"), and
has furnished all information returns it is required to furnish pursuant to the
Code, (ii) has established adequate reserves for such Taxes which are not due
and payable, and (iii) does not have any tax deficiency or claims outstanding,
proposed or assessed against it.
(h) No transfer tax, stamp duty or other similar tax is
payable by or on behalf of the Underwriter in connection with (i) the issuance
by the Company of the Securities, (ii) the purchase by the Underwriter of the
Securities from the Company and the purchase by the Underwriter of the
Underwriter's Warrants from the Company, (iii) the consummation by the Company
of any of its obligations under this Agreement, or (iv) resales of the
Securities in connection with the distribution contemplated hereby.
(i) The Company has, including, but not limited to, general
liability, product and property insurance, which insures the Company and its
employees against such losses and risks generally insured against by comparable
businesses. The Company (A) has not failed to give notice or present any
insurance claim with respect to any matter, including but not limited to the
Company's business, property or employees, under the insurance policy or surety
bond in a due and timely manner, (B) has no disputes or claims against any
underwriter of such insurance policies or surety bonds or has failed to pay any
premiums due and payable thereunder, or (C) has not failed to comply with all
conditions contained in such insurance policies and surety bonds. There are no
facts or circumstances under any such insurance policy or surety bond which
would relieve any insurer of its obligation to satisfy in full any valid claim
of the Company.
5
<PAGE> 6
(j) There is no action, suit, proceeding, inquiry,
arbitration, investigation, litigation or governmental proceeding, domestic or
foreign, pending or, to its knowledge, threatened against (or circumstances that
may give rise to the same), or involving the properties or business of, the
Company which (i) questions the validity of the capital stock of the Company,
this Agreement or the Underwriter's Warrant Agreement, or of any action taken or
to be taken by the Company pursuant to or in connection with this Agreement or
the Underwriter's Warrant Agreement, (ii) is required to be disclosed in the
Registration Statement which is not so disclosed (and such proceedings as are
summarized in the Registration Statement are accurately summarized in all
respects), or (iii) might materially and adversely affect the condition,
financial or otherwise, or the earnings, position, prospects, shareholders'
equity, value, operations, properties, business or results of operations of the
Company.
(k) The Company has full legal right, power and authority to
authorize, issue, deliver and sell the Securities, Option Securities,
Underwriter's Warrants, and the Underwriter's Securities, enter into this
Agreement and the Underwriter's Warrant Agreement and to consummate the
transactions provided for in such agreements; and this Agreement, and the
Underwriter's Warrant Agreement have each been duly and properly authorized,
executed and delivered by the Company. Each of this Agreement and the
Underwriter's Warrant Agreement constitutes a legal, valid and binding agreement
of the Company enforceable against the Company in accordance with its terms
subject to bankruptcy, insolvency, and creditor's rights and the application of
equitable principles in any action, legal or equitable, and none of the
Company's issue and sale of the Securities, Option Securities, Underwriter's
Warrants, and the Underwriter's Securities, execution or delivery of this
Agreement or the Underwriter's Warrant Agreement its performance hereunder and
thereunder, its consummation of the transactions contemplated herein and
therein, or the conduct of its business as described in the Registration
Statement, the Prospectus, and any amendments or supplements thereto, conflicts
with or will conflict with or results or will result in any breach or violation
of any of the terms or provisions of, or constitutes or will constitute a
default under, or result in the creation or imposition of any lien, charge,
claim, encumbrance, pledge, security interest, defect or other restriction or
equity of any kind whatsoever upon, any property or assets (tangible or
intangible) of the Company pursuant to the terms of, (i) the articles of
incorporation or bylaws of the Company, (ii) any license, contract, indenture,
mortgage, deed of trust, voting trust agreement, shareholders agreement, note,
loan or credit agreement or any other agreement or instrument to which the
Company is a party or by which it is or may be bound or to which its properties
or assets (tangible or intangible) is or may be subject, or any indebtedness, or
(iii) any statute, judgment, decree, order, rule or regulation applicable to the
Company of any arbitrator, court, regulatory body or administrative agency or
other governmental agency or body (including, without limitation, those having
jurisdiction over environmental or similar matters), domestic or foreign, having
jurisdiction over the Company or any of its activities or properties.
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<PAGE> 7
(l) Except as described in the Prospectus, no consent,
approval, authorization or order of, and no filing with, any court, regulatory
body, government agency or other body, domestic or foreign, is required for the
issuance of the Securities pursuant to the Prospectus and the Registration
Statement, the issuance of the Underwriter's Warrants, the performance of this
Agreement and the Underwriter's Warrant Agreement and the transactions
contemplated hereby and thereby, including without limitation, any waiver of any
preemptive, first refusal or other rights that any entity or person may have for
the issue and/or sale of any of the Securities, or the Underwriter's Warrants,
except such as have been or may be obtained under the Act or may be required
under state securities or Blue Sky laws in connection with the Underwriter'
purchase and distribution of the Securities, and the Underwriter's Warrants to
be sold by the Company hereunder.
(m) All executed agreements, contracts or other documents or
copies of executed agreements, contracts or other documents filed as exhibits to
the Registration Statement to which the Company is a party or by which they may
be bound or to which its assets, properties or business may be subject have been
duly and validly authorized, executed and delivered by the Company and
constitute the legal, valid and binding agreements of the Company enforceable
against the Company, as the case may be, in accordance with respective terms.
The descriptions in the Registration Statement of agreements, contracts and
other documents are accurate and fairly present the information required to be
shown with respect thereto by Form S-1, and there are no contracts or other
documents which are required by the Act to be described in the Registration
Statement or filed as exhibits to the Registration Statement which are not
described or filed as required, and the exhibits which have been filed are
complete and correct copies of the documents of which they purport to be copies.
(n) Subsequent to the respective dates as of which information
is set forth in the Registration Statement and Prospectus, and except as may
otherwise be indicated or contemplated therein, the Company has not (i) issued
any securities or incurred any liability or obligation, direct or contingent,
for borrowed money, (ii) entered into any transaction other than in the ordinary
course of business, or (iii) declared or paid any dividend or made any other
distribution on or in respect of its capital stock of any class, and there has
not been any material change in or affecting the general affairs, management,
financial operations, shareholders equity or results of operations of the
Company.
(o) No default exists in the due performance and observance of
any term, covenant or condition of any material license, contract, indenture,
mortgage, installment sale agreement, lease, deed of trust, voting trust
agreement, shareholders agreement, partnership agreement, note, loan or credit
agreement, purchase order, or any other material agreement or instrument
evidencing an obligation for borrowed money, or any other material agreement or
instrument to which the Company is a party
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<PAGE> 8
or by which the Company may be bound or to which the property or assets
(tangible or intangible) of the Company is subject or affected.
(p) The Company has generally enjoyed a satisfactory
employer-employee relationship with its employees and is in material compliance
with all federal, state, local, and foreign laws and regulations respecting
employment and employment practices, terms and conditions of employment and
wages and hours. There are, to the Company's knowledge, no pending
investigations involving the Company by the U.S. Department of Labor, or any
other governmental agency responsible for the enforcement of such federal,
state, local, or foreign laws and regulations. There is, to the Company's
knowledge, no unfair labor practice charge or complaint against the Company
pending before the National Labor Relations Board or any strike, picketing,
boycott, dispute, slowdown or stoppage pending or threatened against or
involving the Company, or any predecessor entity, and none has ever occurred. No
representation question exists respecting the employees of the Company, and no
collective bargaining agreement or modification thereof is currently being
negotiated by the Company. No grievance or arbitration proceeding is pending
under any expired or existing collective bargaining agreements of the Company.
No labor dispute with the employees of the Company exists, or to the Company's
knowledge, is imminent.
(q) Except as described in the Prospectus, the Company does
not maintain, sponsor or contribute to any program or arrangement that is an
"employee pension benefit plan," an "employee welfare benefit plan" or a
"multi-employer plan" as such terms are defined in Sections 3(2), 3(1) and
3(37), respectively, of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA") ("ERISA Plans"). The Company does not maintain or contribute,
now or at any time previously, to a defined benefit plan, as defined in Section
3(35) of ERISA. No ERISA Plan (or any trust created thereunder) has engaged in a
"prohibited transaction" within the meaning of Section 406 of ERISA or Section
4975 of the Code, which could subject the Company to any tax penalty on
prohibited transactions and which has not adequately been corrected. Each ERISA
Plan is in compliance with all material reporting, disclosure and other
requirements of the Code and ERISA as they relate to any such ERISA Plan.
Determination letters have been received from the Internal Revenue Service with
respect to each ERISA Plan which is intended to comply with Code Section 401(a),
stating that such ERISA Plan and the attendant trust are qualified thereunder.
The Company has never completely or partially withdrawn from a "multi-employer
plan."
(r) The Company, nor any of its officers, directors, partners,
"affiliates" or "associates" (as these terms are defined in Rule 405 promulgated
under the Rules and Regulations) has ever taken or will take, directly or
indirectly, any action designed to or which has constituted or which might be
expected to cause or result in, under the
8
<PAGE> 9
Exchange Act, or otherwise, stabilization or manipulation of the price of any
security of the Company to facilitate the sale or resale of the Securities or
otherwise.
(s) Except as otherwise disclosed in the Prospectus, none of
the patents, patent applications, trademarks, service marks, trade names and
copyrights, and licenses and rights to the foregoing presently owned or held by
the Company are in dispute so far as known by the Company or are in any conflict
with the right of any other person or entity. The Company (i) owns or has the
right to use, free and clear of all liens, charges, claims, encumbrances,
pledges, security interests, defects or other restrictions or equities of any
kind whatsoever, all patents, trademarks, service marks, trade names and
copyrights, technology and licenses and rights with respect to the foregoing,
used in the conduct of its business as now conducted or proposed to be conducted
without infringing upon or otherwise acting adversely to the right or claimed
right of any person, corporation or other entity under or with respect to any of
the foregoing; and (ii) except as disclosed in the Prospectus is not obligated
or under any liability whatsoever to make any payment by way of royalties, fees
or otherwise to any owner or licensee of, or other claimant to, any patent,
trademark, service mark, trade name, copyright, know-how, technology or other
intangible asset, with respect to the use thereof or in connection with the
conduct of its business or otherwise.
(t) The Company owns and has the unrestricted right to use all
trade secrets, know-how (including all other unpatented and/or unpatentable
proprietary or confidential information, systems or procedures), inventions,
designs, processes, works of authorship, computer programs and technical data
and information (collectively herein "intellectual property") that are material
to the development, manufacture, operation and sale of all products and services
sold or proposed to be sold by the Company free and clear of and without
violating any right, lien, or claim of others, including without limitation,
former employers of its employees; provided, however, that the possibility
exists that other persons or entities, completely independently of the Company,
as the case may be, or its employees or agents, could have developed trade
secrets or items of technical information similar or identical to those of the
Company. The Company is not aware of any such development of similar or
identical trade secrets or technical information by others.
(u) The Company has taken reasonable security measures to
protect the secrecy, confidentiality and value of all its intellectual property
in all material aspects.
(v) The Company has good and marketable title to, or valid and
enforceable leasehold estates in, all items of real and personal property stated
in the Prospectus, to be owned or leased by it free and clear of all liens,
charges, claims, encumbrances, pledges, security interests, defects, or other
restrictions or equities of any kind whatsoever, other than those referred to in
the Prospectus and liens for taxes not yet due and payable.
9
<PAGE> 10
(w) Moore Stephens, P.C. and Hoberman Miller & Co., P.C.,
whose reports are filed with the Commission as a part of the Registration
Statement, are independent certified public accountants as required by the Act
and the Rules and Regulations and have been retained by the Company as its
auditors.
(x) There are no claims, payments, issuances, arrangements or
understandings, whether oral or written, for services in the nature of a
finder's or origination fee with respect to the sale of the Securities hereunder
or any other arrangements, agreements, understandings, payments or issuances
with respect to the Company, or any of its officers, directors, shareholders,
partners, employees or affiliates that may affect the Underwriter' compensation,
as determined by the National Association of Securities Dealers, Inc. ("NASD");
additionally, the Company further represents that no payments of consideration
of any type have been made by it over the twelve (12) months prior to the
execution of this letter to any person or entity who has had an affiliation with
an NASD brokerage firm.
(y) The Common Stock and Warrants have been approved for
quotation on the National Association of Securities Dealers Automated Quotation
System as a small cap issue ("NASDAQ/SmallCap").
(z) To the Company's best knowledge, no funds or assets of the
Company have been used for illegal purposes; no unrecorded funds or assets of
the Company been established for any purpose; no accumulation or use of the
Company's corporate funds or assets have been made without being properly
accounted for in the respective books and records of the Company; all payments
by or on behalf of the Company have been duly and properly recorded and
accounted for in the Company's books and records; no false or artificial entry
has been made in the books and records of the Company for any reason; no payment
has been made by or on behalf of Company with the understanding that any part of
such payment is to be used for any purpose other than that described in the
documents supporting such payments; the Company has not made, directly or
indirectly, any illegal contributions to any political party or candidate. The
Company's internal accounting controls are sufficient to cause the Company to
comply with the Foreign Corrupt Practices Act of 1977, as amended.
(i) Except as set forth in the Prospectus, no officer,
director, shareholder or partner of the Company, or any "affiliate" or
"associate" (as these terms are defined in Rule 405 promulgated under the Rules
and Regulations) of any of the foregoing persons or entities has or has had,
either directly or indirectly, (i) an interest in any person or entity which (A)
furnishes or sells services or products which are furnished or sold or are
proposed to be furnished or sold by the Company; or (B) purchases from or sells
or furnishes to the Company any goods or services, or (ii) a beneficiary
interest in any contract or agreement to which the Company is a party or by
which it may be bound or affected. Except as set forth in the Prospectus under
"Management" or "Certain
10
<PAGE> 11
Transactions," there are no existing material agreements, arrangements,
understandings or transactions, or proposed agreements, arrangements,
understandings or transactions, between or among the Company, and any officer,
director, Principal Shareholder (as such term is defined in the Prospectus) of
the Company, or any partner, affiliate or associate of any of the foregoing
persons or entities.
(bb) Any certificate signed by any officer of the Company and
delivered to the Underwriter or to Underwriter's Counsel (as defined herein)
shall be deemed a representation and warranty by the Company to the Underwriter
as to the matters covered thereby.
(cc) The minute book of the Company has been made available to
the Underwriter and contains a complete summary of all meetings and actions of
the directors and shareholders of the Company since the time of its
incorporation, and reflects all transactions referred to in such minutes
accurately in all respects.
(dd) Except and to the extent described in the Prospectus, no
holders of any securities of the Company or of any options, warrants or other
convertible or exchangeable securities of the Company have the right to include
any securities issued by the Company in the Registration Statement or any
registration statement to be filed by the Company or to require the Company to
file a registration statement under the Act and no person or entity holds any
anti-dilution rights with respect to any securities of the Company.
(ee) The Company has as of the effective date of the
Registration Statement (i) entered into a bonus agreement with Marton Grossman
in the form filed as Exhibit 10.06 to the Registration Statement, and (ii)
purchased, or will purchase within thirty (30) days of the Closing Date term
keyman life insurance on the life of Marton Grossman. The policy shall provide
for coverage in the amount of $_________, and the policy shall name the Company
as the sole beneficiary thereof.
2. Purchase, Sale and Delivery of the Securities and Underwriter's
Warrants.
(a) On the basis of the representations, warranties, covenants
and agreements herein contained, but subject to the terms and conditions herein
set forth, the Company agrees to sell to the Underwriter, and the Underwriter
agrees to purchase from the Company at a price of $4.50 (90% of the public
offering price) per Unit, 1,200,000 Units.
(b) In addition, on the basis of the representations,
warranties, covenants and agreements, herein contained, but subject to the terms
and conditions herein set forth, the Company hereby grants an option to the
Underwriter to purchase all or any part of the Option Securities (up to an
aggregate of an additional 180,000
11
<PAGE> 12
Units) at a price of $4.50 (90% of the public offering price) per Unit. The
option granted hereby will expire 45 days after (i) the date the Registration
Statement becomes effective, if the Company has elected not to rely on Rule 430A
under the Rules and Regulations, or (ii) the date of this Agreement if the
Company has elected to rely upon Rule 430A under the Rules and Regulations, and
may be exercised in whole or in part from time to time only for the purpose of
covering over-allotments which may be made in connection with the offering and
distribution of the Securities upon notice by the Underwriter to the Company
setting forth the number of Option Securities as to which the Underwriter is
then exercising the option and the time and date of payment and delivery for any
such Option Securities. Any such time and date of delivery (an "Option Closing
Date") shall be determined by the Underwriter, but shall not be later than seven
full business days after the exercise of said option, nor in any event prior to
the Closing Date, as hereinafter defined, unless otherwise agreed upon by the
Underwriter and the Company. Nothing herein contained shall obligate the
Underwriter to make any over-allotments. No Option Securities shall be delivered
unless the Securities shall be simultaneously delivered or shall theretofore
have been delivered as herein provided.
(c) Payment of the purchase price for, and delivery of
securities for, the Securities shall be made at the offices of the Underwriter
at One Battery Park Plaza, New York, New York 10004, or at such other place as
shall be agreed upon by the Underwriter and the Company. Such delivery and
payment shall be made at 10:00 a.m. (New York time) on __________, 1997, or at
such other time and date as shall be agreed upon by the Underwriter and the
Company, but not less than three (3) nor more than seven (7) full business days
after the effective date of the Registration Statement (such time and date of
payment and delivery being herein called "Closing Date"). In addition, in the
event that any or all of the Option Securities are purchased by the Underwriter,
payment of the purchase price for and delivery of certificates for, such Option
Securities shall be made at the above-mentioned firm office of the Underwriter
or at such other place as shall be agreed upon by the Underwriter and the
Company on the Option Closing Date as specified in the notice from the
Underwriter to the Company. Delivery of the certificates for the Securities and
the Option Securities, if any, shall be made to the Underwriter against payment
by the Underwriter of the purchase price for the Securities and the Option
Securities, if any, by New York Clearing House funds. Certificates for the
Securities and the Option Securities, if any, shall be in definitive, fully
registered form, shall bear no restrictive legends and shall be in such
denominations and registered in such names as the Underwriter may request in
writing at least two (2) business days prior to the Closing Date or the Option
Closing Date, as the case may be. The certificates for the Securities and the
Option Securities, if any, shall be made available to the Underwriter at such
office or such other place as the Underwriter may designate for inspection,
checking and packaging no later than 9:30 a.m. on the last business day prior to
the Closing Date or the Option Closing Date, as the case may be.
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<PAGE> 13
(d) On the Closing Date, the Company shall issue and sell to
the Underwriter the Underwriter's Warrants at an aggregate purchase price of
$120, which warrants shall entitle the holders thereof to purchase an aggregate
of 120,000 Units. The Underwriter's Warrants shall be exercisable for a period
of five years commencing one year following the effective date of the
Registration Statement at a price equaling one hundred sixty five percent (165%)
($8.25 per Unit) of the initial public offering price of the Securities. The
Underwriter's Warrant Agreement and form of Warrant Certificate shall be
substantially in the form filed as Exhibit 1.2 to the Registration Statement.
Payment for the Underwriter's Warrants shall be made on the Closing Date.
3. Public Offering of the Securities. As soon after the Registration
Statement becomes effective as the Underwriter deems advisable, the Underwriter
shall make a public offering of the Securities (other than to residents of or in
any jurisdiction in which qualification of the Securities is required and has
not become effective) at the price and upon the terms set forth in the
Prospectus. The Underwriter may from time to time increase or decrease the
public offering price after distribution of the Securities has been completed to
such extent as the Underwriter, in its sole discretion deems advisable. The
Underwriter may enter into one or more agreements as it, in its sole discretion,
deems advisable with one or more broker-dealers who shall act as dealers in
connection with such public offering.
4. Covenants and Agreements of the Company. The Company covenants and
agrees with the Underwriter as follows:
(a) The Company shall use its best efforts to cause the
Registration Statement and any amendments thereto to become effective as
promptly as practicable and will not at any time, whether before or after the
effective date of the Registration Statement, file any amendment to the
Registration Statement or supplement to the Prospectus or file any document
under the Act or Exchange Act before termination of the offering of the
Securities by the Underwriter of which the Underwriter shall not previously have
been advised and furnished with a copy, or to which the Underwriter shall have
objected or which is not in compliance with the Act, the Exchange Act or the
Rules and Regulations.
(b) As soon as the Company is advised or obtains knowledge
thereof, the Company will advise the Underwriter and confirm the notice in
writing, (i) when the Registration Statement, as amended, becomes effective, if
the provisions of Rule 430A promulgated under the Act will be relied upon, when
the Prospectus has been filed in accordance with said Rule 430A and when any
post-effective amendment to the Registration Statement becomes effective; (ii)
of the issuance by the Commission of any stop order or of the initiation, or the
threatening, of any proceeding, suspending the effectiveness of the Registration
Statement or any order preventing or suspending the use of the Preliminary
Prospectus or the Prospectus, or any amendment or supplement
13
<PAGE> 14
thereto, or the institution of proceedings for that purpose; (iii) of the
issuance by the Commission or by any state securities commission of any
proceedings for the suspension of the qualification of any of the Securities for
offering or sale in any jurisdiction or of the initiation, or the threatening,
of any proceeding for that purpose; (iv) of the receipt of any comments from the
Commission; and (v) of any request by the Commission for any amendment to the
Registration Statement or any amendment or supplement to the Prospectus or for
additional information. If the Commission or any state securities commission
authority shall enter a stop order or suspend such qualification at any time,
the Company will make every effort to obtain promptly the lifting of such order.
(c) The Company shall file the Prospectus (in form and
substance satisfactory to the Underwriter) or transmit the Prospectus by a means
reasonably calculated to result in filing with the Commission pursuant to Rule
424(b)(1) (or, if applicable and if consented to by the Underwriter, pursuant to
Rule 424(b)(4)) not later than the Commission's close of business on the earlier
of (i) the second business day following the execution and delivery of this
Agreement; and (ii) the fifth business day after the effective date of the
Registration Statement.
(d) The Company will give the Underwriter notice of its
intention to file or prepare any amendment to the Registration Statement
(including any post-effective amendment) or any amendment or supplement to the
Prospectus (including any revised prospectus which the Company proposes for use
by the Underwriter in connection with the offering of the Securities which
differs from the corresponding prospectus on file at the Commission at the time
the Registration Statement becomes effective, whether or not such revised
prospectus is required to be filed pursuant to Rule 424(b) of the Rules and
Regulations) and will furnish the Underwriter with copies of any such amendment
or supplement a reasonable amount of time prior to such proposed filing or use,
as the case may be, and will not file any such prospectus to which the
Underwriter or Elias Lauer, Esq. ("Underwriter's Counsel"), shall object.
(e) The Company shall endeavor in good faith, in cooperation
with the Underwriter, at or prior to the time the Registration Statement becomes
effective, to qualify the Securities for offering and sale under the securities
laws of such jurisdictions as the Underwriter may designate to permit the
continuance of sales and dealings therein for as long as may be necessary to
complete the distribution, and shall make such applications, file such documents
and furnish such information; however, the Company shall not be required to
qualify as a foreign corporation or file a general consent to service of process
in any such jurisdiction. In each jurisdiction where such qualification shall be
effected, the Company will, unless the Underwriter agrees that such action is
not at the time necessary or advisable, use all reasonable efforts to file and
make such statements or reports at such times as are or may reasonably be
required by the laws of such jurisdiction to continue such qualification.
14
<PAGE> 15
(f) During the time when a prospectus is required to be
delivered under the Act, the Company shall use all reasonable effort to comply
with all requirements imposed upon it by the Act and the Exchange Act, as now
and hereafter amended and by the Rules and Regulations, as from time to time in
force, so far as necessary to permit the continuance of sales of or dealings in
the Securities in accordance with the provisions hereof and the Prospectus, or
any amendments or supplements thereto. If at any time when a prospectus relating
to the Securities or the Underwriter's Securities is required to be delivered
under the Act, any event shall have occurred as a result of which, in the
opinion of counsel for the Company or Underwriter's Counsel, the Prospectus, as
then amended or supplemented, includes an untrue statement of a material fact or
omits to state any material fact required to be stated therein or necessary to
make the statements therein, in the light of the circumstances under which they
were made, not misleading, or if it is necessary at any time to amend the
Prospectus to comply with the Act, the Company will notify the Underwriter
promptly and prepare and file with the Commission an appropriate amendment or
supplement in accordance with Section 10 of the Act, each such amendment or
supplement to be reasonably satisfactory to Underwriter's Counsel, and the
Company will furnish to the Underwriter copies of such amendment or supplement
as soon as available and in such quantities as the Underwriter may reasonably
request.
(g) As soon as practicable, but in any event not later than 45
days after the end of the 12-month period beginning on the day after the end of
the fiscal quarter of the Company during which the effective date of the
Registration Statement occurs (90 days in the event that the end of such fiscal
quarter is the end of the Company's fiscal year), the Company shall make
generally available to its securityholders, in the manner specified in Rule
158(b) of the Rules and Regulations, and will deliver to the Underwriter, an
earnings statement which will be in the detail required by, and will otherwise
comply with, the provisions of Section 11(a) of the Act and Rule 158(a) of the
Rules and Regulations, which statement need not be audited unless required by
the Act, covering a period of at least twelve (12) consecutive months after the
effective date of the Registration Statement.
(h) During a period of three years after the date hereof, the
Company will furnish to its shareholders, as soon as practicable, annual reports
(including financial statements audited by independent public accountants) and
will deliver to the Underwriter:
i) Concurrently with furnishing such quarterly
reports to its shareholders, statements of income of the Company for
each quarter in the form furnished to the Company's shareholders and
certified by the Company's principal financial or accounting officer;
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<PAGE> 16
ii) concurrently with furnishing such annual reports
to its shareholders, a balance sheet of the Company as at the end of
the preceding fiscal year, together with statements of operations,
shareholders' equity, and cash flows of the Company for such fiscal
year, accompanied by a copy of the certificate thereon of independent
certified public accountants;
iii) as soon as they are available, copies of all
reports (financial or other) mailed to shareholders;
iv) as soon as they are available, copies of all
reports and financial statements furnished to or filed with the
Commission, the NASD, NASDAQ/SmallCap or any other securities exchange;
v) every press release and every material news item
or article of interest to the financial community in respect of the
Company, or its affairs which was released or prepared by or on behalf
of the Company; and
vi) any additional information of a public nature
concerning the Company or its business which the Underwriter may
request.
During such three-year period, if the Company has active
subsidiaries, the foregoing financial statements will be on a consolidated basis
to the extent that the accounts of the Company and its subsidiary are
consolidated, and will be accompanied by similar financial statements for any
significant subsidiary which is not so consolidated.
(i) The Company will maintain a Transfer Agent and, if
necessary under the jurisdiction of incorporation of the Company, a Registrar
(which may be the same entity as the Transfer Agent) for its Common Stock.
(j) The Company will furnish to the Underwriter or on the
Underwriter's order, without charge, at such place as the Underwriter may
designate, copies of each Preliminary Prospectus, the Registration Statement and
any pre-effective or post-effective amendments thereto (two of which copies will
be signed and will include all financial statements and exhibits), the
Prospectus, and all amendments and supplements thereto, including any prospectus
prepared after the effective date of the Registration Statement, in each case as
soon as available and in such quantities as the Underwriter may reasonably
request.
(k) The Company shall apply the net proceeds from the sale of
the Securities in the manner, and subject to the conditions, set forth under
"Use of Proceeds" in the Prospectus. No portion of the net proceeds will be
used, directly or indirectly, to acquire any securities issued by the Company.
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<PAGE> 17
(l) The Company shall timely file all such reports, forms or
other documents as may be required (including, but not limited to, a Form SR as
may be required pursuant to Rule 463 under the Act) from time to time, under the
Act, the Exchange Act, and the Rules and Regulations, and all such reports,
forms and documents filed will comply as to form and substance with the
applicable requirements under the Act, the Exchange Act, and the Rules and
Regulations.
(m) The Company shall furnish to the Underwriter as early as
practicable prior to each of the date hereof, the Closing Date and each Option
Closing Date, if any, but no later than two full business days prior thereto, a
copy of the latest available unaudited interim financial statements of the
Company (which in no event shall be as of a date more than thirty (30) days
prior to the date of the Registration Statement) which have been read by the
Company's independent public accountants, as stated in their letters to be
furnished pursuant to Section 7(1) hereof.
(n) The Company shall cause the Common Stock and Warrants to
be quoted on NASDAQ SmallCap and for a period of three years from the date they
are separated from the Unit, use its best efforts to maintain the NASDAQ
SmallCap quotation of the Common Stock, as well as the Warranta during their
lifetime or, upon the written consent of the Underwriter, quotation on a
principal stock exchange.
(o) For a period of three years from the Closing Date, the
Company shall furnish to the Underwriter at the Company's sole expense, (i)
daily consolidated transfer sheets relating to the Common Stock if such transfer
sheets have been furnished to the Company by its transfer agent at no additional
cost, (ii) the list of holders of all of the Company's securities and (iii) a
Blue Sky "Trading Survey" for secondary sales of the Company's securities
prepared by counsel.
(p) As soon as practicable, but in no event more than 30 days
from the effective date of the Registration Statement, take all necessary and
appropriate actions to be included in Standard and Poor's Corporation
Descriptions and to continue such inclusion for a period of not less than five
(5) years.
(q) Until the completion of the distribution of the
Securities, the Company shall not without the prior written consent of the
Underwriter and Underwriter's Counsel, issue, directly or indirectly any press
release or other communication or hold any press conference with respect to the
Company or its activities or the offering contemplated hereby, other than trade
releases issued in the ordinary course of the Company's business consistent with
past practices with respect to the Company's operations.
(r) For a period equal to the lesser of (i) five (5) years
from the date hereof, and (ii) the sale to the public of the Underwriter's
Securities, the Company will not take any action or actions which may prevent or
disqualify the Company's use of
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<PAGE> 18
Form SB-2 (or other appropriate form) for the registration under the Act of the
Underwriter's Securities.
(s) For a period of two (2) years after the effective date of
the Registration Statement, the Company shall timely notify the Underwriter of
each meeting of the Company's Board of Directors (the "Board") and an individual
selected by the Underwriter shall be permitted to attend all meetings of the
Board. In addition, the Company shall send to the Underwriter's designee all
notices and other correspondence and communications sent by Company to members
of the Board at least two (2) days before any meeting, if applicable. The
Company shall reimburse the Underwriter's designee for all reasonable expenses
incurred in connection with his service on, or attendance of, meetings of the
Board to the same extent as is provided to all non-employee members of the Board
of Directors.
(t) On or before the effective date of the Registration
Statement, the Company shall have an authorized capital stock acceptable to the
Underwriter including, without limitation, any stock option plans of the
Company.
(u) On or before the effective date of the Registration
Statement, the Company shall have (i) entered into a bonus agreement with Marton
Grossman in the form filed as Exhibit 10.06 to the Registration Statement, and
(ii) purchased, or will purchase within thirty (30) days of the Closing Date
term keyman life insurance on the life of Marton Grossman. The policy shall
provide for coverage in the amount of $_________, and the policy shall name the
Company as the sole beneficiary thereof.
(v) If the transactions contemplated by this Agreement are
consummated, during the three (3) year period from the Effective Date, the
Underwriter and its successors will have the right of first refusal (the "Right
of First Refusal") to act (1) as underwriter, placement agent or investment
banker for any and all public or private offerings of the securities, whether
equity, debt or a combination of equity and debt of the Company, or any
successor to or any current or future subsidiary of the Company (collectively
referred to in this Section (w) as the "Company") by the Company (the
"Subsequent Company Offerings") or any secondary offering (the "Secondary
Offering") of the Company's securities by any principal shareholder of the
Company (the "Principal Shareholders") and (2) to act as the Company's
investment banker on such other transactions as may arise from time to time,
including without limitation, acting as financial advisor or intermediary in
connection with merger and acquisition opportunities "introduced to the Company"
by Patterson. Accordingly, if during such period the Company intends to make a
Subsequent Company Offering, the Company receives notification from any of the
such Principal Shareholders of its securities of such holders' intention to make
a Secondary Offering, or the Company proposes a merger, acquisition or
disposition of assets, the Company shall notify the Underwriter in writing of
such intention and of the proposed terms of the offering or transaction. The
Company shall
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<PAGE> 19
thereafter promptly furnish the Underwriter with such information concerning the
business, condition and prospects of the Company as the Underwriter may
reasonably request. If, within thirty (30) business days of the receipt of such
notice of intention and statement of terms, the Underwriter does not accept in
writing such offer to act as underwriter, placement agent or investment banker
with respect to such offering upon the terms proposed, the Company and each of
the Principal Shareholders shall be free to negotiate terms with other
underwriters with respect to such offering and to effect such offering on such
proposed terms within six (6) months after the end of such ten (10) business
days. Before the Company and/or any of the Principal Shareholders shall accept
any modified proposal from such other underwriter, placement agent or investment
banker, the Underwriter's preferential right shall be reinstated in the same
procedure with respect to such modified proposal as provided above shall be
adopted. The failure by the Underwriter to exercise its Right of First Refusal
in any particular instance shall not affect in any way such right with respect
to any other Subsequent Company Offering or Secondary Offering.
(w) The Underwriter and its successors will have a Right of
First Refusal for a period of three (3) years from the Effective Date to
purchase for the Underwriter's account or to sell for the account of the
Company's principal stockholders any securities sold pursuant to Rule 144 under
the Act. Each of the principal stockholders agrees to consult with the
Underwriter with respect to any such sales and will offer the Underwriter the
exclusive opportunity to purchase or sell such securities on terms at least as
favorable to such principal stockholders as they can secure elsewhere. If the
Underwriter fails to accept in writing any such proposal for sale by such
principal stockholders within three (3) business days after receipt of a notice
containing such proposal, then the Underwriter shall have no claim or right with
respect to any such sales contained in any such notice. If, thereafter, such
proposal is modified in any material respect, such principal stockholders shall
adopt the same procedure as with respect to the original proposal.
(x) The Company agrees to pay the Underwriter a warrant
solicitation fee of 10.0% (or the maximum amount permissible under NASD rules)
of the exercise price of any of the Warrants exercised if (a) the market price
of the Company's Common Stock on the date the Warrant is exercised is greater
than the exercise price of the Warrant, (b) the exercise of the Warrant was
solicited by the Underwriter, (c) the Warrant is not held in a discretionary
account, (d) disclosure of the compensation arrangement is made upon the sale
and exercise of the Warrants, (e) soliciting the exercise is not in violation of
Rule 10b-6 under the Exchange Act, and (f) solicitation of the exercise is in
compliance with the NASD Notice to Members 81-38 (September 22, 1981), including
without limitation, the designation of the soliciting agent in writing by a
warrantholder.
(y) The Company shall on the Closing Date, enter into a
financial advisory agreement ("Consulting Agreement") with the Underwriter for a
term of three
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<PAGE> 20
(3) years commencing on the Effective Date which will provide that the
Underwriter will be paid a consulting fee of $_________ per annum, payable in
full ($______) on the Closing Date.
5. Payment of Expenses.
(a) The Company hereby agrees to pay on each of the Closing
Date and the Option Closing Date (to the extent not paid as fees of
Underwriter's Counsel, except as provided in (iv) below) incident to the
performance of the obligations of the Company under this Agreement and the
Underwriter's Warrant Agreement, including, without limitation, (i) the fees and
expenses of accountants and counsel for the Company, (ii) all costs and expenses
incurred in connection with the preparation, duplication, printing, filing,
delivery and mailing (including the payment of postage with respect thereto) of
the Registration Statement and the Prospectus and any amendments and supplements
thereto and the printing, mailing and delivery of this Agreement, the Agreement
Among Underwriter, the Selected Dealer Agreements, if any, the Selling
Agreements, if any, and related documents, including the cost of all copies
thereof and of the Preliminary Prospectuses and of the Prospectus and any
amendments thereof or supplements thereto supplied to the Underwriter and such
dealers as the Underwriter may request, in quantities as hereinabove stated,
(iii) the printing, engraving, issuance and delivery of the Securities
including, but not limited to, (x) the purchase by the Underwriter of the
Securities and the purchase by the Underwriter of the Underwriter's Warrants
from the Company, and (y) the consummation by the Company of any of its
obligations under this Agreement and the Underwriter's Warrant Agreement, (iv)
the qualification of the Securities under state or foreign securities or "Blue
Sky" laws and determination of the statues of such securities under legal
investment laws, including the costs of printing and mailing the "Preliminary
Blue Sky Memorandum," the "Supplemental Blue Sky Memorandum," "Legal Investments
Survey," if any, and the "Final Blue Sky Memorandum" and disbursements and fees
of counsel in connection therewith, it being agreed that Underwriter's Counsel
shall perform the required "Blue Sky" legal services for the account of the
Company, (v) advertising costs and expenses, consisting of the Company's travel
costs and preparation expenses in connection with the "road show," information
meetings and presentations, bound volumes and prospectus memorabilia and one
"tomb-stone" advertisement in The Wall Street Journal, (vi) fees and expenses of
the transfer agent and registrar, (vii) the fees payable to the Commission and
the NASD, and (viii) the fees and expenses incurred in connection with the
listing of the Securities with the NASDAQ/SmallCap and any other exchange.
(b) If this Agreement is terminated by the Underwriter in
accordance with the provisions of Section 6 or Section 12, the Company shall
reimburse and indemnify the Underwriter for all of its actual out-of-pocket
expenses, including the fees and disbursements of Underwriter's Counsel, less
any amounts already paid pursuant to Section 5(c) hereof.
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<PAGE> 21
(c) The Company further agrees that, in addition to the
expenses payable pursuant to subsection (a) of this Section 5, it will pay to
the Underwriter on the Closing Date by deduction from the proceeds of the
offering contemplated herein a non-accountable expense allowance equal to three
percent (3%) of the gross proceeds received by the Company from the sale of the
Securities and Option Securities, if any. The Company also agrees to pay certain
due diligence fees and expenses incurred by the Underwriter in connection with
(i) background investigation of officers, directors and the shareholder of the
Company, pursuant to judgment, UCC and Commission searches and (ii) due
diligence meetings for syndicate members and others.
6. Conditions of the Underwriter's Obligations. The obligations of the
Underwriter hereunder shall be subject to the continuing accuracy of the
representations and warranties of the Company herein as of the date hereof and
as of the Closing Date and each Option Closing Date, if any, with respect to the
Company as if they had been made on and as of the Closing Date or each Option
Closing Date, as the case may be; the accuracy on and as of the Closing Date of
the statements of the officers of the Company made pursuant to the provisions
hereof; and the performance by the Company and on and as of the Closing Date and
each Option Closing Date, if any, of its covenants and obligations hereunder and
to the following further conditions:
(a) The Registration Statement shall have become effective not
later than 12:00 P.M., New York time, on the date of this Agreement or such
later date and time as shall be consented to in writing by the Underwriter, and,
at the Closing Date and each Option Closing Date, if any, no stop order
suspending the effectiveness of the Registration Statement shall have been
issued and no proceedings for that purpose shall have been instituted or shall
be pending or contemplated by the Commission and any request on the part of the
Commission for additional information shall have been complied with to the
reasonable satisfaction of Underwriter's Counsel. If the Company has elected to
rely upon Rule 430A of the Rules and Regulations, the price of the Securities
and any price-related information previously omitted from the effective
Registration Statement pursuant to such Rule 430A shall have been transmitted to
the Commission for filing pursuant to Rule 424(b) of the Rules of Regulations
within the prescribed time period, and prior to Closing Date the Company shall
have provided evidence satisfactory to the Underwriter of such timely filing, or
a post-effective amendment providing such information shall have been promptly
filed and declared effective in accordance with the requirements of Rule 430A of
the Rules and Regulations.
(b) The Underwriter shall not have advised the Company that
either the Registration Statement, or any amendment thereto, or the Prospectus,
contains an untrue statement of fact which, in the Underwriter's opinion, is
material, or omits to state a fact which, in the Underwriter's opinion, is
material and is required to be stated therein
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<PAGE> 22
or is necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading.
(c) On or prior to the Closing Date, the Underwriter shall
have received from Company's Counsel (as defined below), and shall have used its
best efforts to cause such counsel to deliver such opinion or opinions with
respect to the organization of the Company, the validity of the Securities, the
Underwriter's Warrants, the Registration Statement, the Prospectus and other
related matters as the Underwriter may request and Underwriter's Counsel shall
have received such papers and information as they request to enable them to pass
upon such matters.
(d) At the Closing Date, the Underwriter shall have received
the favorable opinion of Heller, Horowitz & Feit, P.C. ("Company's Counsel"),
dated the Closing Date, addressed to the Underwriter and in form and substance
reasonably satisfactory to Underwriter's Counsel, to the effect that:
i) the Company (A) has been duly organized and is
validly existing as a corporation in good standing under the laws of
its jurisdiction, (B) is duly qualified and licensed and in good
standing as a foreign corporation in each jurisdiction where the nature
of its properties or the conduct of its business requires such
registration and the failure to register or so qualify would have a
material adverse effect on the Company, (C) has all requisite corporate
power and authority, and has obtained any and all necessary
authorizations, approvals, orders, licenses, certificates, franchises
and permits of and from all governmental or regulatory officials and
bodies (including, without limitation, those having jurisdiction over
environmental or similar matters), to own or lease its properties and
conduct its business as described in the Prospectus; (D) the Company is
and has been doing business in material compliance with all such
authorizations, approvals, orders, licenses, certificates, franchises
and permits and all federal, state and local laws, rules and
regulations; and, (E) the Company has not received any notice of
proceedings relating to the revocation or modification of any such
authorization, approval, order, license, certificate, franchise or
permit which, singly or in the aggregate, if the subject of an
unfavorable decision, ruling or finding, would materially adversely
affect the business, condition, financial or otherwise, or the
earnings, affairs, position, prospects, value, operation, properties,
business or results of operations of the Company. The disclosures in
the Registration Statement concerning the effects of federal, state and
local laws, rules and regulations on the Company's business as
currently conducted and as contemplated are correct in all material
respects or do not omit to state a material fact necessary to make the
statements contained therein not misleading in light of the
circumstances in which they were made.
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<PAGE> 23
ii) the Company does not own an interest in any
corporation, partnership, joint venture, trust or other business
entity;
iii) the Company has a duly authorized, issued and
outstanding capitalization as set forth in the Prospectus, and any
amendment or supplement thereto, under "Capitalization", and to our
knowledge, the Company is not a party to or bound by any instrument,
agreement or other arrangement providing for it to issue any capital
stock, rights, warrants, options or other securities, except for this
Agreement and the Underwriter's Warrant Agreement and as described in
the Prospectus. The Securities, the Underwriter's Warrants and all
other securities issued or issuable by the Company conform in all
material respects to all statements with respect thereto contained in
the Registration Statement and the Prospectus. All issued and
outstanding securities of the Company have been duly authorized and
validly issued and are fully paid and non-assessable; the holders
thereof have no rights to rescission with respect thereto, and are not
subject to personal liability by reason of being such holders; and none
of such securities were issued in violation of the preemptive rights of
any holders of any security of the Company. The Securities and the
Underwriter's Securities to be sold by the Company hereunder and under
the Underwriter's Warrant Agreement are not and will not be subject to
any preemptive or other similar rights of any shareholder, have been
duly authorized and, when issued, paid for and delivered in accordance
with the terms hereof, will be validly issued, fully paid and
non-assessable and conform to the description thereof contained in the
Prospectus; the holders thereof will not be subject to any liability
solely as such holders; all corporate action required to be taken for
the authorization, issue and sale of the Securities and the
Underwriter's Securities has been duly and validly taken; and the
certificates representing the Securities and the Underwriter's Warrants
are in due and proper form. Subject to compliance with the registration
provisions of the Act and applicable state registration and
qualification provisions, the Underwriter's Warrants constitute valid
and binding obligations of the Company to issue and sell, upon exercise
thereof and payment therefor, the number and type of securities of the
Company called for thereby. Upon the issuance and delivery pursuant to
this Agreement of the Securities and the Underwriter's Warrants to be
sold by the Company, and upon payment in full therefor, the Underwriter
will acquire good and marketable title to the Securities and
Underwriter Warrants free and clear of any pledge, lien, charge, claim,
encumbrance, security interest, or other restriction (excluding
securities law restrictions) or equity of any kind whatsoever, except
with respect to any actions that may have been taken or omitted to be
taken by the Underwriter after the date hereof. No transfer tax is
payable by or on behalf of the Underwriter in connection with (A) the
issuance by the Company of the Securities, (B) the purchase by the
Underwriter of the Securities and the Underwriter's Securities, from
the Company, (C) the consummation by the Company of any of its
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<PAGE> 24
obligations under this Agreement or the Underwriter's Warrant
Agreement, or (D) resales of the Securities in connection with the
distribution contemplated hereby.
iv) the Registration Statement has become effective
under the Act, and, if applicable, filing of all pricing information
has been timely made in the appropriate form under Rule 430A, and no
stop order suspending the use of the Preliminary Prospectus, the
Registration Statement or Prospectus or any part of any thereof or
suspending the effectiveness of the Registration Statement has been
issued and no proceedings for that purpose have been instituted or are
pending or, to the best of such counsel's knowledge, threatened or
contemplated under the Act.
v) each of the Preliminary Prospectus, the
Registration Statement, and the Prospectus and any amendments a
statements or supplements thereto (other than the financial statements
and the notes thereto and other financial and statistical data included
therein, as to which no opinion need be rendered) comply as to form in
all material respects with the requirements of the Act and the Rules
and Regulations.
vi) to the best of such counsel's knowledge, (A)
there are no agreements, contracts or other documents required by the
Act to be described in the Registration Statement and the Prospectus
and filed as exhibits to the Registration Statement other than those
described in the Registration Statement (or required to be filed under
the Exchange Act if upon such filing they would be incorporated, in
whole or in part, by reference therein) and the Prospectus and filed as
exhibits thereto, and the exhibits which have been filed are correct
copies of the documents of which they purport to be copies; (B) the
descriptions in the Registration Statement and the Prospectus and any
supplement or amendment thereto of contracts and other documents to
which the Company is a party or by which it is bound, including any
document to which the Company is a party or by which it is bound,
incorporated by reference into the Prospectus and any supplement or
amendment thereto, are accurate and fairly represent the information
required to be shown by Form S-1; or (C) there is not pending or
threatened against the Company any action, arbitration, suit,
proceeding, inquiry, investigation, litigation, legal, statutory,
regulatory, governmental or other proceeding (including, without
limitation, those having jurisdiction over environmental or similar
matters), domestic or foreign, pending or threatened against, or
involving the properties or business of the Company which (x) is
required to be disclosed in the Registration Statement which is not so
disclosed (and such proceedings as are summarized in the Registration
Statement are accurately summarized in all respects), (y) questions the
validity of the capital stock of the Company or this Agreement or the
Underwriter's Warrant Agreement, or of any action taken or to be taken
by the Company pursuant to or in connection
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<PAGE> 25
with any of the foregoing; (D) no statute or regulation or legal or
governmental proceeding required to be described in the Prospectus is
not described as required; and (E) there is no action, suit or
proceeding, pending or threatened, against or affecting the Company
before any court or arbitrator or governmental body, agency or official
(or any basis thereof known to such counsel) which in any manner draws
into question the validity or enforceability of this Agreement or the
Underwriter's Warrant Agreement;
vii) the Company has full legal right, power and
authority to enter into each of this Agreement and the Underwriter's
Warrant Agreement, and to consummate the transactions provided for
therein; and each of this Agreement and the Underwriter's Warrant
Agreement has been duly authorized, executed and delivered by the
Company. Each of this Agreement and the Underwriter's Warrant
Agreement, assuming due authorization, execution and delivery by each
other party thereto constitutes a legal, valid and binding agreement of
the Company enforceable against the Company in accordance with its
terms (except as such enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other laws of
general application relating to or affecting enforcement of creditors'
rights and the application of equitable principles in any action, legal
or equitable, and except as rights to indemnity or contribution may be
limited by applicable law), and none of the Company's execution or
delivery of this Agreement and the Underwriter's Warrant Agreement, its
performance hereunder or thereunder, its consummation of the
transactions contemplated herein or therein, or the conduct of its
business as described in the Registration Statement, the Prospectus,
and any amendments or supplements thereto, conflicts with or will
conflict with or results or will result in any breach or violation of
any of the terms or provisions of, or constitutes or will constitute a
default under, or result in the creation or imposition of any lien,
charge, claim, encumbrance, pledge, security interest, defect or other
restriction or equity of any kind whatsoever upon, any property or
assets (tangible or intangible) of the Company pursuant to the terms
of, (A) the articles of incorporation or by-laws of the Company; (B)
any license, contract, indenture, mortgage, deed of trust, voting trust
agreement, shareholders agreement, note, loan or credit agreement or
any other agreement or instrument to which the Company is a party or by
which it is or may be bound or to which any of its properties or assets
(tangible or intangible) is or may be subject, or any indebtedness, or
(C) any statute, judgment, decree, order, rule or regulation applicable
to the Company of any arbitrator, court, regulatory body or
administrative agency or other governmental agency or body (including,
without limitation, those having jurisdiction over environmental or
similar matters), domestic or foreign, having jurisdiction over the
Company or any of its activities or properties.
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<PAGE> 26
viii) no consent, approval, authorization or
order,and no filing with, any court, regulatory body, government agency
or other body (other than such as may be required under Blue Sky laws,
as to which no opinion need be rendered) is required in connection with
the issuance of the Securities pursuant to the Prospectus, the issuance
of the Underwriter's Warrants, and the Registration Statement, the
performance of this Agreement and the Underwriter's Warrant Agreement,
and the transactions contemplated hereby and thereby;
ix) the properties and business of the Company
conform in all material respects to the description thereof contained
in the Registration Statement and the Prospectus;
x) the Company is not in breach of, or in default
under, any term or provision of any material license, contract,
indenture, mortgage, installment sale agreement, deed of trust, lease,
voting trust agreement, shareholders' agreement, agreement with any
shareholder, partnership agreement, note, loan or credit agreement or
any other material agreement or instrument evidencing an obligation for
borrowed money, or any other material agreement or instrument to which
the Company is a party or by which any of the Company may be bound or
to which the property or assets (tangible or intangible) of any of the
Company is subject or affected; and the Company is not in violation of
any term or provision of its Articles of Incorporation or by-laws or in
violation of any franchise, license, permit, judgment, decree, order,
statute, rule or regulation;
xi) the statements in the Prospectus under
"PROSPECTUS SUMMARY - THE COMPANY," "BUSINESS," "MANAGEMENT," "CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS," "SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT," and "DESCRIPTION OF SECURITIES," and
have been reviewed by such counsel, and insofar as they refer to
statements of law, descriptions of statutes, licenses, rules or
regulations or legal conclusions are correct in all material respects;
xii) the Securities have been accepted for listing on
NASDAQ/ SmallCap.
xiii) the person listed under the caption "Security
Ownership of Certain Beneficial Owners and Management" in the
Prospectus are the respective "beneficial owners" (as such phrase is
defined in Regulation 13d-3 under the Exchange Act) of the securities
set forth opposite their respective names thereunder as and to the
extent set forth therein;
xiv) except as described in the Prospectus, no
person, corporation, trust, partnership, association or other entity
has the right to include
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<PAGE> 27
and/or register any securities of the Company in the Registration
Statement, require the Company to file any registration statement or,
if filed, to include any security in such registration statement;
xv) except as described in the Prospectus, there are
no claims, payments, issuances, arrangements or understandings for
services in the nature of a finder's or origination fee with respect to
the sale of the Securities hereunder or financial consulting
arrangement or any other arrangements, agreements, understandings,
payments or issuances that may affect the Underwriter' compensation, as
determined by the NASD;
xvi) except as described in the Prospectus, the
Company does not (A) maintain, sponsor or contribute to any ERISA
Plans, (B) maintain or contribute, now or at any time previously, to a
defined benefit plan, as defined in Section 3(35) of ERISA, and (C) has
never completely or partially withdrawn from a "multi-employer plan;"
xvii) except as set forth in the Prospectus, no
officer, director of shareholder of the Company, or any "affiliate" or
"associate" (as these terms are defined in Rule 405 promulgated under
the Rules and Regulations) of any of the foregoing persons or entities
has or has had, either directly or indirectly, (A) an interest in the
person or entity which (x) furnishes or sells services or products
which are furnished or sold or are proposed to be furnished or sold by
the Company, or (y) purchases from or sells or furnishes to the Company
any goods or services, or (B) a beneficial interest in any contract or
agreement to which the Company is a party or by which they may be bound
or affected. Except as set forth in the Prospectus under "Management"
or "Certain Transactions," there are no existing material agreements,
arrangements, understandings or transactions, or proposed agreements,
arrangements, understandings or transactions, between or among the
Company, and any officer, director, or Principal Shareholder of the
Company, or any affiliate or associate of any such person or entity.
Such counsel shall state that during the course of its participation in
the preparation of the Registration Statement and the Prospectus and the
amendments thereto, no facts have come to the attention of such counsel which
lead them to believe that either the Registration Statement or any amendment
thereto, at the time such Registration Statement or amendment became effective
or the Preliminary Prospectus or Prospectus or amendment or supplement thereto
as of the date of such opinion contained any untrue statement of a material fact
or omitted to state a material fact required to be stated therein or necessary
to make the statements therein not misleading (it being understood that such
counsel need express no opinion with respect to the financial statements and
schedules and other financial and statistical data included in the Preliminary
Prospectus, the Registration Statement or Prospectus).
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In rendering such opinion, such counsel may rely (A) as to matters
involving the application of laws other than the laws of the United States and
jurisdictions in which they are admitted, to the extent such counsel deems
proper and to the extent specified in such opinion, if at all, upon an opinion
or opinions (in form and substance satisfactory to Underwriter' Counsel) of
other counsel acceptable to Underwriter's Counsel, familiar with the applicable
laws; (B) as to matters of fact, to the extent they deem proper, on certificates
and written statements of responsible officers of the Company and certificates
or other written statements of officers of departments of various jurisdictions
having custody of documents respecting the corporate existence or good standing
of the Company, provided that copies of any such statements or certificates
shall be delivered to Underwriter' Counsel if requested. The opinion of such
counsel for the Company shall state that the opinion of any such other counsel
is in form satisfactory to such counsel and that the Underwriter and they are
justified in relying thereon.
(e) At each Option Closing Date, if any, the Underwriter shall
have received the favorable opinion of Heller, Horowitz & Feit, P.C., counsel to
the Company, dated the Option Closing Date, addressed to the Underwriter and in
form and substance satisfactory to Underwriter's Counsel confirming as of such
Option Closing Date the statements made by Heller, Horowitz & Feit, P.C., in the
opinion delivered on the Closing Date with respect to the Option Securities.
(i) On or prior to each of the Closing Date and the Option
Closing Date, if any, Underwriter's Counsel shall have been furnished such
documents, certificates and opinions as they may reasonably require for the
purpose of enabling them to review or pass upon the matters referred to in
subsection (c) of this Section 6, or in order to evidence the accuracy,
completeness or satisfaction of any of the representations, warranties or
conditions of the Company, or herein contained.
(ii) Prior to each of the Closing and each Option Closing
Date, if any (1) there shall been no adverse change or development involving a
prospective change in the condition, financial or otherwise, prospects,
shareholder's equity with the business activities of the Company, whether or not
in the ordinary course of business, from the latest dates as of which such
condition is set forth in the Registration Statement and Prospectus; (2) there
shall have been no transaction, not in the ordinary course of business, entered
into by the Company, from the latest date as of which the financial condition of
the Company is set forth in the Registration Statement and Prospectus which is
adverse to the Company; (3) the Company shall not be in default under any
provision of any instrument relating to any outstanding indebtedness; (4) other
than as contemplated in the Prospectus, the Company shall not have issued any
securities (other than Securities and the Underwriter Warrants) or declared or
paid any dividend or made any distribution in respect of its capital stock of
any class and there has not been any change in the capital stock or change in
the debt (long or short term) or liabilities or obligations of the Company
(contingent or otherwise); (5) no material amount of the
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assets of the Company shall have been pledged or mortgaged, except as set forth
in the Registration Statement and Prospectus; (6) no action, suit or proceeding,
at law or in equity, shall have been pending or threatened (or circumstances
giving rise to same) against the Company or affecting any of its properties or
business before or by any court or federal, state or foreign commission, board
or other administrative agency wherein an unfavorable decision, ruling or
finding may materially adversely affect the business, operations, prospects or
financial condition or income of the Company, except as set forth in the
Registration Statement and Prospectus; and (7) no stop order shall have been
issued under the Act and no proceedings therefor shall have been initiated,
threatened or contemplated by the Commission.
(f) At each of the Closing Date and each Option Closing Date,
if any, the Underwriter shall have received a certificate of the Company signed
by the principal executive officer and by the chief financial or chief
accounting officer of the Company, dated the Closing Date or Option Closing
Date, as the case may be, to the effect that each of such persons has carefully
examined the Registration Statement, the Prospectus and this Agreement, and
that:
i) The representations and warranties of the Company
in this Agreement are true and correct in all material respects, as if
made on and as of the Closing Date or the Option Closing Date, as the
case may be, and the Company has complied with all agreements and
covenants and satisfied all conditions contained in this Agreement on
its part to be performed or satisfied at or prior to such Closing Date
or Option Closing Date, as the case may be;
ii) No stop order suspending the effectiveness of the
Registration Statement or any part thereof has been issued, and no
proceedings for that purpose have been instituted or are pending or, to
the best of each of such person's knowledge, after due inquiry are
contemplated or threatened under the Act;
iii) Each Preliminary Prospectus, the Registration
Statement and the Prospectus and, if any, each amendment and each
supplement thereto, contain all statements and information required to
be included therein; and
iv) Subsequent to the respective dates as of which
information is given in the Registration Statement and the Prospectus,
(a) the Company has not incurred up to and including the Closing Date
or the Option Closing Date, as the case may be, other than in the
ordinary course of its business, any material liabilities or
obligations, direct or contingent; (b) the Company has not paid or
declared any dividends or other distributions on its capital stock; (c)
the Company has not entered into any transactions not in the ordinary
course of business; (d) there has not been any change in the capital
stock or long-term debt or any
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<PAGE> 30
increase in the short-term borrowings (other than any increase in the
short-term borrowings in the ordinary course of business) of the
Company; (e) the Company has not sustained any material loss or damage
to its property or assets, whether or not insured; (f) there is no
litigation which is pending or threatened (or circumstances giving rise
to same) against the Company or any affiliated party of the foregoing
which is required to be set forth in an amended or supplemented
Prospectus which has not been set forth; and (g) there has occurred no
event required to be set forth in an amended or supplemented
Prospectus, which has not been set forth.
References to the Registration Statement and the Prospectus in this subsection
(i) are to such documents as amended and supplemented at the date of such
certificate.
(g) The Underwriter shall have the obligation to satisfy the
requirements set forth by the rules and regulations of the NASD as to the amount
of compensation allowable or payable to the Underwriter and, accordingly, by the
Closing Date, the Underwriter will have received clearance from the NASD as to
the amount of compensation allowable or payable to the Underwriter, as described
in the Registration Statement.
(h) At the time this Agreement is executed, the Underwriter
shall have received a letter, dated such date, addressed to the Underwriter in
form and substance satisfactory (including the non-material nature of the
changes or decreases, if any, referred to in clause (iii) below) in all respects
to the Underwriter and Underwriter's Counsel, from Moore Stephens, P.C.;
i) confirming that they are independent certified
public accountants with respect to the Company within the meaning of
the Act and the applicable Rules and Regulations;
ii) stating that it is their opinion that the
financial statements and supporting schedules of the Company included
in the Registration Statement comply as to form in all material
respects with the applicable accounting requirements of the Act and the
Rules and Regulations thereunder and that the Underwriter may rely upon
the opinion of Moore Stephens, P.C. with respect to the financial
statements and supporting schedules included in the Registration
Statement;
iii) stating that, on the basis of a limited review
which included a reading of the latest available unaudited interim
financial statements of the Company (with an indication of the date of
the latest available unaudited interim financial statements), a reading
of the latest available minutes of the shareholders and board of
directors and the various committees of the boards of directors of
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<PAGE> 31
the Company, consultations with officers and other employees of the
Company responsible for financial and accounting matters and other
specified procedures and inquiries, nothing has come to its attention
which would lead it to believe that (A) the unaudited financial
statements and supporting schedules of the Company included in the
Registration Statement do not comply as to form in all material
respects with the applicable accounting requirements of the Act and the
Rules and Regulations or are not fairly presented in conformity with
generally accepted accounting principles applied on a basis
substantially consistent with that of the audited financial statements
of the Company included in the Registration Statement, or (B) at a
specified date not more than five days prior to the effective date of
the Registration Statement, there has been any change in the capital
stock or long-term debt of the Company, or any decrease in the
shareholder's equity or net assets of the Company as compared with
amounts shown in the ____________, 1996 balance sheet included in the
Registration Statement, other than as set forth in or contemplated by
the Registration Statement, or, if there was any change or decrease,
setting forth the amount of such change or decrease; and (C) during the
period from _________, 1996, to a specified date not more than five (5)
days prior to the effective date of the Registration Statement, there
was any decrease in net revenues, net earnings or increase in net
earnings per common share of the Company, as compared with the
corresponding period beginning ______________, 1996, other than as set
forth in or contemplated by the Registration Statement, or, if there
was any such decrease, setting forth the amount of such decrease;
setting forth, at a date not later than five (5) days prior to the date
of the Registration Statement, the amount of liabilities of the Company
(including a break-down of commercial paper and notes payable to
banks).
iv) stating that they have compared specific dollar
amounts, numbers of shares, percentages of revenues and earnings,
statements and other financial information pertaining to the Company
set forth in the Prospectus in each case to the extent that such
amounts, numbers, percentages, statements and information may be
derived from the general accounting records, including work sheets, of
the Company and excluding any questions requiring an interpretation by
legal counsel, with the results obtained from the application of
specified readings, inquiries and other appropriate procedures (which
procedures do not constitute an examination in accordance with
generally accepted auditing standards) set forth in the letter and
found them to be in agreement;
v) stating that they have not during the immediately
preceding five-year period brought to the attention of any of the
Company's management any "weakness," as defined in Statement of
Auditing Standard No. 60 "Communication of Internal Control Structure
Related Matters Noted in an Audit," in any of the Company's internal
controls;
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<PAGE> 32
vi) statements as to such other matters incident to
the transaction contemplated hereby as the Underwriter may reasonably
request.
(i) At Closing Date and each Option Closing Date, if any, the
Underwriter shall have received from Moore Stephens, P.C. a letter, dated as of
the Closing Date or the Option Closing Date, as the case may be, to the effect
that they reaffirm those statements made in the letter furnished pursuant to
subsection (l) of this Section, except that the specified date referred to shall
be a date not more than five days prior to Closing Date or the Option Closing
Date, as the case may be, and, if the Company has elected to rely on Rule 430A
of the Rules and Regulations, to the further effect that they have carried out
procedures as specified in subsection (l) of this Section with respect to
certain amounts, percentages and financial information as specified by the
Underwriter and deemed to be a part of the Registration Statement pursuant to
Rule 430A(b) and have found such amounts, percentages and financial information
to be in agreement with the records specified in such subsection (l).
(j) On each of Closing Date and Option Closing Date, if any,
there shall have been duly tendered to the Underwriter the appropriate number of
Securities.
(k) No order suspending the sale of the Securities in any
jurisdiction, which in the judgment of the Underwriter is material to Closing of
the transaction, designated by the Underwriter pursuant to subsection (e) of
Section 4 hereof shall have been issued on either the Closing Date or the Option
Closing Date, if any, and no proceedings for that purpose shall have been
instituted or shall be contemplated.
(l) On or before the Closing Date, the Company shall have
executed and delivered to the Underwriter, (i) the Underwriter's Warrant
Agreement substantially in the form filed as Exhibit 1.2 to the Registration
Statement in final form and substance satisfactory to the Underwriter, and (ii)
the Underwriter's Warrants in such denominations and to such designees as shall
have been provided to the Company.
(m) On or before Closing Date, the Securities and the
Underwriter's Securities shall have been duly approved for quotation on
NASDAQ/SmallCap, subject to official notice of issuance.
(n) On or before the Closing Date, the Company shall have
executed and delivered to the Underwriter the Consulting Agreement substantially
in the form filed as Exhibit 1.3.
If any condition to the Underwriter's obligations hereunder to
be fulfilled prior to or at the Closing Date or the relevant Option Closing
Date, as the case may be, is not so fulfilled, the Underwriter may terminate
this Agreement or, if the Underwriter so
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<PAGE> 33
elects, it may waive any such conditions which have not been fulfilled or extend
the time for their fulfillment.
7. Indemnification.
(a) The Company agrees to indemnify and hold harmless the
Underwriter (for purposes of this Section 7 "Underwriter" shall include the
officers, directors, partners, employees, agents and counsel of the Underwriter,
including specifically each person who may be substituted for an Underwriter as
provided in Section 12 hereof), and each person, if any, who controls the
Underwriter ("controlling person") within the meaning of Section 15 of the Act
or Section 20(a) of the Exchange Act, from and against any and all losses,
claims, damages, expenses or liabilities, joint or several (and actions in
respect thereof), whatsoever (including but not limited to any and all expenses
whatsoever reasonably incurred in investigating, preparing or defending against
any litigation, commenced or threatened, or any claim whatsoever), as such are
incurred, to which the Underwriter or such controlling person may become subject
under the Act, the Exchange Act or any other statute or at common law or
otherwise or under the laws of foreign countries, arising out of or based upon
any untrue statement or alleged untrue statement of a material fact contained
(i) in any Preliminary Prospectus, the Registration Statement or the Prospectus
(as from time to time amended and supplemented); (ii) in any post-effective
amendment or amendments or any new registration statement and prospectus in
which is included securities of the Company issued or issuable upon exercise of
the Securities; or (iii) in any application or other document or written
communication (in this Section 7 collectively called "application") executed by
the Company or based upon written information furnished by the Company in any
jurisdiction in order to qualify the Securities under the securities laws
thereof or filed with the Commission, any state securities commission or agency,
NASDAQ/SmallCap or any other securities exchange; or the omission or alleged
omission therefrom of a material fact required to be stated therein or necessary
to make the statements therein not misleading (in the case of the Prospectus, in
the light of the circumstances under which they were made), unless such
statement or omission was made in reliance upon and in conformity with written
information furnished to the Company with respect to the Underwriter by or on
behalf of the Underwriter expressly for use in any Preliminary Prospectus, the
Registration Statement or Prospectus, or any amendment thereof or supplement
thereto, or in any application, as the case may be.
The indemnity agreement in this subsection (a) shall be in
addition to any liability which the Company may have at common law or otherwise.
(b) The Underwriter agrees to indemnify and hold harmless the
Company, each of its directors, proposed directors, each of its officers who has
signed the Registration Statement, counsel for the Company, and each other
person, if any, who controls the Company within the meaning of the Act, to the
same extent as the foregoing
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<PAGE> 34
indemnity from the Company to the Underwriter but only with respect to
statements or omissions, if any, made in any Preliminary Prospectus, the
Registration Statement or Prospectus or any amendment thereof or supplement
thereto or in any application made in reliance upon, and in strict conformity
with, written information furnished to the Company with respect to any
Preliminary Prospectus, the Registration Statement or Prospectus or any
amendment thereof or supplement thereto or in any such application, provided
that such written information or omissions only pertain to disclosures in the
Preliminary Prospectus, the Registration Statement or Prospectus directly
relating to the transactions effected by the Underwriter in connection with this
Offering. The Company acknowledges that the statements with respect to the
public offering of the Securities set forth under the heading "Underwriting" and
the stabilization legend in the Prospectus have been furnished by the
Underwriter expressly for use therein and constitute the only information
furnished in writing by or on behalf of the Underwriter for inclusion in the
Prospectus.
(c) Promptly after receipt by an indemnified party under this
Section 7 of notice of the commencement of any action, suit or proceeding, such
indemnified party shall, if a claim in respect thereof is to be made against one
or more indemnifying parties under this Section 7, notify each party against
whom indemnification is to be sought in writing of the commencement thereof (but
the failure so to notify an indemnifying party shall not relieve it from any
liability which it may have under this Section 7 except to the extent that it
has been prejudiced in any material respect by such failure or from any
liability which it may have otherwise). In case any such action is brought
against any indemnified party, and it notifies an indemnifying party or parties
of the commencement thereof, the indemnifying party or parties will be entitled
to participate therein, and to the extent it may elect by written notice
delivered to the indemnified party promptly after receiving the aforesaid notice
from such indemnified party, to assume the defense thereof with counsel
reasonably satisfactory to such indemnified party. Notwithstanding the
foregoing, the indemnified party or parties shall have the right to employ its
or their own counsel in any such case but the fees and expenses of such counsel
shall be at the expense of such indemnified party or parties unless (i) the
employment of such counsel shall have been authorized in writing by the
indemnifying parties in connection with the defense of such action at the
expense of the indemnifying party, (ii) the indemnifying parties shall not have
employed counsel reasonably satisfactory to such indemnified party to have
charge of the defense of such action within a reasonable time after notice of
commencement of the action, or (iii) such indemnified party or parties shall
have reasonably concluded, based upon an opinion of counsel, that there may be
defenses available to it or them which are different from or additional to those
available to one or all of the indemnifying parties (in which case the
indemnifying parties shall not have the right to direct the defense of such
action on behalf of the indemnified party or parties), in any of which events
such fees and expenses of one additional counsel shall be borne by the
indemnifying parties. In no event shall the indemnifying parties be liable for
fees and expenses of more than one counsel, in addition to any local counsel,
separate from
34
<PAGE> 35
their own counsel for all indemnified parties in connection with any one action
or separate but similar or related actions in the same jurisdiction arising out
of the same general allegations or circumstances. Anything in this Section 7 to
the contrary notwithstanding, an indemnifying party shall not be liable for any
settlement effected without its written consent; provided, however, that such
consent was not unreasonably withheld.
(d) In order to provide for just and equitable contribution in
any case in which (i) an indemnified party makes claim for indemnification
pursuant to this Section 7, but it is judicially determined (by the entry of a
final judgment or decree by a court of competent jurisdiction and the expiration
of time to appeal or the denial of the last right of appeal) that such
indemnification may not be enforced in such case, notwithstanding the fact that
the express provisions of this Section 7 provides for indemnification in such
case or (ii) contribution under the Act may be required on the part of any
indemnified party, then each indemnifying party shall contribute to the amount
paid as a result of such losses, claims, damages, expenses or liabilities (or
actions in respect thereof) (A) in such proportion as is appropriate to reflect
the relative benefits received by each of the contributing parties, on the one
hand, and the party to be indemnified on the other hand, from the offering of
the Securities or (B) if the allocation provided by clause (A) above is not
permitted by applicable law, in such proportion as is appropriate to reflect not
only the relative benefits referred to in clause (i) above but also the relative
fault of each of the contributing parties, on the one hand, and the party to be
indemnified on the other hand in connection with the statements or omissions
that resulted in such losses, claims, damages, expenses or liabilities, as well
as any other relevant equitable considerations. In any case where the Company is
a contributing party and the Underwriter is the indemnified party, the relative
benefits received by the Company on the one hand, and the Underwriter, on the
other, shall be deemed to be in the same proportion as the total net proceeds
from the offering of the Securities (before deducting expenses) bear to the
total underwriting discounts received by the Underwriter hereunder, in each case
as set forth in the table on the Cover Page of the Prospectus. Relative fault
shall be determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged omission
to state a material fact relates to information supplied by the Company or by
the Underwriter, and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such untrue statement or
omission. The amount paid or payable by an indemnified party as a result of the
losses, claims, damages, expenses or liabilities (or actions in respect thereof)
referred to above in this subdivision (d) shall be deemed to include any legal
or other expenses reasonably incurred by such indemnified party in connection
with investigating or defending any such action or claim. Notwithstanding the
provisions of this subdivision (d), the Underwriter shall not be required to
contribute any amount in excess of the underwriting discount applicable to the
Securities purchased by the Underwriter hereunder. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to
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<PAGE> 36
contribution from any person who was not guilty of such fraudulent
misrepresentation. For purposes of this Section 7, each person, if any, who
controls the Company within the meaning of the Act, each officer of the Company
who has signed the Registration Statement, and each director of the Company
shall have the same rights to contribution as the Company, subject in each case
to this subparagraph (d). Any party entitled to contribution will, promptly
after receipt of notice of commencement of any action, suit or proceeding
against such party in respect to which a claim for contribution may be made
against another party or parties under this subparagraph (d), notify such party
or parties from whom contribution may be sought, but the omission so to notify
such party or parties shall not relieve the party or parties from whom
contribution may be sought from any obligation it or they may have hereunder or
otherwise than under this subparagraph (d), except to the extent that such party
or parties were adversely affected by such omission. The contribution agreement
set forth above shall be in addition to any liabilities which any indemnifying
party may have at common law or otherwise.
8. Representations and Agreements to Survive Delivery. All
representations, warranties and agreements contained in this Agreement or
contained in certificates of officers of the Company submitted pursuant hereto,
shall be deemed to be representations, warranties and agreements at the Closing
Date and the Option Closing Date, as the case may be, and such representations,
warranties and agreements of the Company and the indemnity agreements contained
in Section 7 hereof, shall remain operative and in full force and effect
regardless of any investigation made by or on behalf of any Underwriter, the
Company or any controlling person of the Underwriter or the Company, and shall
survive termination of this Agreement or the issuance and delivery of the
Securities to the Underwriter.
9. Effective Date. This Agreement shall become effective at 10:00 a.m.,
New York time, on the next full business day following the date hereof, or at
such earlier time after the Registration Statement becomes effective as the
Underwriter, in its discretion, shall release the Securities for the sale to the
public; provided however, that the provisions of Sections 5, 7 and 10 of this
Agreement shall at all times be effective. For purposes of this Section 9, the
Securities to be purchased hereunder shall be deemed to have been so released
upon the earlier of dispatch by the Underwriter of telegrams to securities
dealers releasing such shares for offering or the release by the Underwriter for
publication of the first newspaper advertisement which is subsequently published
relating to the Securities.
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<PAGE> 37
10. Termination.
(i) Subject to subsection (b) of this Section 10, the
Underwriter shall have the right to terminate this Agreement, (i) if any
domestic or international event or act or occurrence has disrupted, or in the
Underwriter's opinion will in the immediate future disrupt the financial
markets, and such events have a material and adverse impact on the market for
the Securities; or (ii) any material adverse change in the financial markets
shall have occurred; or (iii) if trading on the New York Stock Exchange, the
American Stock Exchange, or the over-the-counter market shall have been
suspended, or minimum or maximum prices for trading shall have been fixed, or
maximum ranges for prices for securities shall have been required on the
over-the-counter market by the NASD or by order of the Commission or any other
government authority having jurisdiction; or (iv) if the United States shall
have become involved in a war or major hostilities, or if there shall have been
an escalation in an existing war or major hostilities or a national emergency
shall have been declared in the United States; or (v) if a banking moratorium
has been declared by a state or federal authority; or (vi) if the Company shall
have sustained a loss material or substantial to the Company by fire, flood,
accident, hurricane, earthquake, theft, sabotage or other calamity or malicious
act which, whether or not such loss shall have been insured, will, in the
Underwriter's opinion, make it inadvisable to proceed with the delivery of the
Securities; or (vii) if there shall have been such a material adverse change in
the conditions or prospects of the Company as in the Underwriter's judgment
would make it inadvisable to proceed with the offering, sale and/or delivery of
the Securities; or (viii) if there shall have been a material adverse change in
the general market, political or economic conditions, in the United States or
elsewhere, that have a material and adverse impact on the securities market
generally
(ii) If this Agreement is terminated by the Underwriter in
accordance with the provisions of Section 10(a), the Company shall promptly
reimburse and indemnify the Underwriter for all of its actual and reasonable
out-of-pocket expenses, including the fees and disbursements of counsel for the
Underwriter (less amounts previously paid pursuant to Section 5(c) above).
Notwithstanding any contrary provision contained in this Agreement, if this
Agreement shall not be carried out within the time specified herein, or any
extension thereof granted to the Underwriter, by reason of any failure on the
part of the Company to perform any undertaking or satisfy any condition of this
Agreement by it to be performed or satisfied (including, without limitation,
pursuant to Section 6 or Section 11) then, the Company shall promptly reimburse
and indemnify the Underwriter for all of its actual out-of-pocket expenses,
including the fees and disbursements of counsel for the Underwriter (less
amounts previously paid pursuant to Section 6(d) above). In addition, the
Company shall remain liable for all reasonable Blue Sky counsel fees and
expenses and Blue Sky filing fees. Notwithstanding any contrary provision
contained in this Agreement, any election hereunder or any termination of this
Agreement (including, without limitation, pursuant to Sections 6, 10, and 11
hereof), and
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<PAGE> 38
whether or not this Agreement is otherwise carried out, the provisions of
Section 5 and Section 7 shall not be in any way affected by such election or
termination or failure to carry out the terms of this Agreement or any part
hereof.
11. Default by the Company. If the Company shall fail at the Closing
Date at any Option Closing Date, to sell and deliver the number of Securities
which it is obligated to sell hereunder on such date, then this Agreement shall
terminate (or, if such default shall occur with respect to any Option Securities
to be purchased on an Option Closing Date, the Underwriter may by notice to the
Company, terminate the Underwriter' obligation to purchase Option Securities
from the Company on such date) without any liability on the part of any
non-defaulting party other than pursuant to Section 5, Section 7 and Section 10
hereof. No action taken pursuant to this Section shall relieve the Company from
liability, if any, in respect of such default.
12. Notices. All notices and communications hereunder, except as herein
otherwise specifically provided, shall be in writing and shall be deemed to have
been duly given if mailed or transmitted by any standard form of
telecommunication. Notices to the Underwriter shall be directed to Patterson
Travis, Inc., One Battery Plaza, New York, New York 10004, Attention: Judah L.
Wernick with a copy to Elias Lauer, Esq. 292 Madison Avenue, New York, New York
10017. Notices to the Company shall be directed to the Company at 58 Second
Avenue, Brooklyn, New York 11215, Attention: Mr. Marton Grossman, President,
with a copy to Heller, Horowitz & Feit, P.C., 292 Madison Avenue, New York, New
York 10017, Attention: Richard F. Horowitz, Esq.
13. Parties. This Agreement shall inure solely to the benefit of and
shall be binding upon, the Underwriter, the Company and the controlling persons,
directors and officers referred to in Section 7 hereof, and their respective
successors, legal representatives and assigns, and no other person shall have or
be construed to have any legal or equitable right, remedy or claim under or in
respect of or by virtue of this Agreement or any provisions herein contained. No
purchaser of Securities from any Underwriter shall be deemed to be a successor
by reason merely of such purchase.
14. Construction. This Agreement shall be governed by and construed and
enforced in accordance with the laws of the State of New York without giving
effect to the choice of law or conflict of laws principles. The parties hereto
agree that any action, proceeding or claim against it arising out of or in any
way related to this Agreement shall be brought and enforced in the courts of the
State of New York or the United States of America for the Southern District of
New York and irrevocably submit to such exclusive jurisdiction, and hereby
irrevocably waive any objection to such exclusive jurisdiction or inconvenient
forum.
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<PAGE> 39
15. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, and all of which
taken together shall be deemed to be one and the same instrument.
16. Entire Agreement; Amendments. This Agreement and the Underwriter's
Warrant Agreement constitute the entire agreement of the parties hereto and
supersede all prior written or oral agreements, understandings and negotiations
with respect to the subject matter hereof. This Agreement may not be amended
except in a writing, signed by the Underwriter and the Company.
If the foregoing correctly sets forth the understanding between the
Underwriter and the Company, please so indicate in the space provided below for
that purpose, whereupon this letter shall constitute a binding agreement among
us.
Very truly yours,
DYNAMIC INTERNATIONAL, LTD.
By:_____________________________________
Marton B. Grossman, President
Confirmed and accepted as of
the date first above written.
PATTERSON TRAVIS, INC.
By:_________________________________
Judah L. Wernick, President
39
<PAGE> 1
Exhibit 5
April 17, 1997
Dynamic International, Ltd.
58 Second Avenue
Brooklyn, New York 11215
Gentlemen:
As counsel for your Company, we have examined your Articles of
Incorporation, By-Laws, such other corporate records, documents and proceedings
and such questions of law as we have deemed relevant for the purpose of this
opinion.
We have also, as such counsel, examined the Registration
Statement of your Company on Form S-1 (the "Registration Statement"), covering
the registration under the Securities Act of 1933, as amended (the "Act"), of
the proposed offer and sale of (i) 1,380,000 Units (the "Units"), each Unit
consisting of one share of Common Stock, par value $.001 (the "Common Stock"),
one Redeemable Class A Warrant (the "Class A Warrants") and one Class B Warrant
(the "Class B Warrants," together with the Class A Warrants, the "Warrants," and
collectively with the Units and the Common Stock, the "Securities"), including
Units issuable upon exercise of the over-allotment option by the underwriter for
the offering (the "Over-allotment Option"), (ii) 2,760,000 shares of Common
Stock underlying the Warrants, including Common Stock underlying Warrants
issuable upon exercise of the Over-allotment Option, (iii) up to 120,000 Units
issuable pursuant to the Underwriter's Warrants (the "Underwriter's Warrants"),
(iv) 240,000 shares of Common Stock underlying the Warrants included in the
Underwriter's Warrants.
On the basis of such examination, we are of the opinion that:
1. The shares of Common Stock have been duly and validly
authorized and, when issued and sold, will be duly and validly issued and fully
paid and nonassessable shares of Common Stock of the Company.
2. The Warrants have been duly and validly authorized and
created and when exercised in accordance their respective terms, the shares of
Common Stock will be issued as fully paid and nonassessable shares of Common
Stock of the Company.
<PAGE> 2
Dynamic International, Ltd.
April 17, 1997
Page 2
We hereby consent to the filing of this opinion as an exhibit
to the Registration Statement and to the use of our name under the caption
"Legal Matters." In giving such consent, we do not thereby admit that we come
within the category of persons whose consent is required under Section 7 of the
Act or the rules and regulations of the Securities and Exchange Commission
promulgated thereunder.
This opinion is to be used only in connection with the offer and sale
of the Securities as variously referred to herein while the Registration
Statement is in effect.
Very truly yours,
/s/
HELLER, HOROWITZ & FEIT, P.C.
HH & F: mm
<PAGE> 1
Exhibit 10.05
LICENSE AGREEMENT
This Agreement made this first day of November, 1996, by and between
New Century Marketing & Distributors Inc., a New York corporation, having its
principal place of business at 2262 East 7th Street, Brooklyn, New York 11223
(hereinafter referred to as the "Licensor") and Dynamic Insulated Products, Inc.
a New York corporation, having its principal place of business at 58 Second
Avenue, Brooklyn, New York 11215 (hereinafter referred to as the "Licensee").
WITNESSETH:
WHEREAS, Licensor has developed and is the owner and/or licenses of
certain information, know-how;, techniques, methods, and trade secrets,
including U.S. patent #4,324,111 and Patent applications filed with the United
States Patent and Trademark office, and with the International Patent Office,
copies of which are annexed hereto and marked Exhibit "A", which are proprietary
and which relate to the development, design, operation, and manufacture of the
Licensed Technology. Licensor is also the owner of the Trademarks for use with
the Licensed Products, copies of which are annexed hereto and marked Exhibit
"B". Licensor has also developed a business relationship with a manufacturer of
Soft Sided Coolers and Insulated Bags and is bringing to the attention of
Licensee the opportunity to start a Soft Sided Cooler line and to use such
manufacturer in Licensee's discretion; and
WHEREAS, Licensee acknowledges the uniqueness and advanced design of
the Licensed Technology as well as the benefits of information and expertise
provided by Licensor relating to the manufacture and sale of Soft Sided Coolers/
Insulated Bags and further acknowledges that Licensor has warranted the validity
and enforceability of the Licensed Patents and Trademarks and Licensee desires
to obtain from Licensor the right to manufacture, whether or not utilizing, in
its sole discretion, the manufacturer introduced by Licensor, distribute and
sell the Licensed Products; and
WHEREAS, Licensor, by this Agreement, grants to Licensed the exclusive
right during the Term to manufacture and/or, in Licensee's discretion, utilize
the manufacturer introduced by Licensor to manufacture, and then to distribute
and sell the Licensed Products using the Trademarks through the Distribution
Channels in the Territory subject to and in accordance with the terms and
conditions of this Agreement.
NOW, THEREFORE in consideration of the mutual covenants herein set
forth the parties do hereby agree as follows:
1. Defined Terms. The following terms utilized and capitalized in this
Agreement shall have, at all times, the meanings as hereinafter set forth:
<PAGE> 2
A. Licensed Technology. The proprietary information, know-how,
techniques, methods and trade secrets relating to the development, design,
operation, and manufacture of an insulated bag incorporating a uniquely designed
wrap-around Gel Pack (Freeze-Pack), for cooling and maintaining products cold
for an extended duration and a sectional wrap-around Gel Pack, Soft Sided
Cooler/Insulated Bag for the purpose of cooling and/or heating products as well
as maintaining their temperature for an extended duration including, but not
limited to Patent No.: 4,324,111. The term Licensed Technology shall not include
any information, know-how, techniques or methods which are otherwise known by or
available to the trade or third parties, or which are not trade secrets or
proprietary information known only to or owned only by the Licensor.
B. TRADEMARKS-"FREEZY-BAG" and "FREEZYGEL, are registered trademarks
owned by Licensor. Licensor grants permission to Licensee to print and utilize
these Trademarks on the Licensed Product or their packaging or sales literature
in accordance with this Agreement. Copies of the Trademarks are annexed as
Exhibit "B".
C. Licensed Products. An insulated bag incorporating a uniquely
designed wrap-around Freeze-Pack for cooling and maintaining products cold for
an extended duration and a flexible wrap-around freeze-pack and/or soft sided
coolers/insulated bags for cooling and/or heating products and/or maintaining
their temperature.
D. Territory. Worldwide, including the United States but excluding only
Israel and Mexico. Licensor acknowledges that it may not manufacture in or sell
to the Territory.
E. Distribution Channels. Sales, shipment and distribution to retail
stores and merchants for direct sale and/or to jobbers, wholesalers and
distributors for sale at wholesale or retail, mail order catalogs, shipment and
distribution to the public and the sale, distribution and shipment of Licensed
Products by any other means in, to or from the Territory.
F. Term. (i) The period commencing as of the date of this Agreement and
expiring on December 31, 1998; provided, however, that the Term shall be deemed
automatically extended each year thereafter if Gross Sales of Licensed Products
during the prior year were at least $XXXXXXXX* up to an initial total period of
5 years ending on December 31, 2001. The Term shall be deemed automatically
extended for each year thereafter if Gross Sales of
- ---------------------
* A request for confidential treatment of this information has been
filed with the Securities and Exchange Commission
2
<PAGE> 3
Licensed Products during the prior year were at least $XXXXXXXX* up to a total
period of an additional 5 years ending on December 31, 2006; thereafter The Term
shall be deemed, automatically extended for each year thereafter if Gross Sales
of Licensed Products during the prior year were at least $XXXXXXXXXXX* up to a
total period of an additional 5 years ending on December 31, 2011; and
thereafter The Term shall be deemed automatically extended for each year
thereafter if Gross Sales of Licensed Products during the prior year were at
least $XXXXXXXXX* up to a total period of an additional 5 period ending on
December 31, 2016; after which date the Term of this Agreement shall be deemed
to expire.
(ii) All Term extensions as above set forth shall be in Licensee's
discretion. Licensee shall, within 30 days following the end of the initial two
year term and at any time during each year thereafter, notify Licensor in
writing if it elects to cancel this Agreement, or if the required Sales were not
reached in the prior year. If no notice of cancellation is given by Licensee, or
if Licensor does not desire to cancel because the required Sales were not
reached during the prior year, then the Agreement shall be deemed automatically
renewed for the next year.
G. Royalties. A sum to be paid in the manner provided for payment in
Section 10 of this Agreement by Licensee to Licensor for each year during the
Term as follows:
(i) XXXXXXX* percent of the Net Invoice Amount for all "Soft
Sided Coolers/Insulated Bags" sold without wraparound gel-pack;
(ii) XXXXXXX* percent of the Net Invoice Amount for all
coolers sold with the wrap-around gel-pack; and
(iii) XXXXXXX* percent of the Net Invoice Amount for
wrap-around gel-packs sold separately as to the first 0 units sold, whenever
achieved and XXXXXXX* percent on Net Invoice Amount for sales of said gel-packs
sold separately thereafter.
(iv) Licensee agrees to code or mark License Products so that
identification may be made as to which royalty category The Item sold applies
to.
H. Net Invoice Amount. The sales price of Licensed Products charged by
Licensee to wholesalers, retailers or any other third party, as reflected on an
invoice evidencing such sales, less however: actual returns, credits,
advertising or promotional allowances or rebates. If such returns, credits,
allowances or
- ---------------------
* A request for confidential treatment of this information
has been filed with the Securities and Exchange Commission
3
<PAGE> 4
rebates are charged to or against Licensee after Royalties have been paid
concerning such sale then Licensee shall be entitled to a credit against the
next Royalty payment due. Net Invoice Amount shall not include shipping/handling
charges or sales or any other type of taxes, tariffs or governmental
impositions.
I. Patent, Copyright and Trademark Notices.
(i) Patent Notice: To be furnished by Licensor and approved
by Licensee in a separate writing signed by the parties;
(ii) Copyright Notice: To be furnished by Licensor and
approved by Licensee in a separate writing signed by the parties;
(iii) Trademark Notice: To be furnished by Licensor and
approved by Licensee in a separate writing signed by the parties;
(iv) The Patent, Copyright and Trademark Notices will appear
on all Licensed Products, artwork, packaging, advertising and promotional
materials. Licensee shall include these notices on all Licensed Products,
artwork, packaging, advertising and promotional materials in a manner selected
by Licensee.
2. Artwork and Packaging. Licensee shall, in its discretion, develop
such Packaging, informative booklets, sales catalogues and/or sales sheets as it
deems necessary in order to promote and sell the Licensed Products. Licensor
shall provide Licensee with ArtWork and Packaging already developed and prepared
by Licensor, if any.
3. Product Development. Licensor shall pay for all expenses necessary,
in its opinion, for the further development of the Licensed Products as opposed
to the manufacture of existing Licensed Technology which shall be Licensee's
responsibility. All modifications or further developments shall be deemed to be
part of the Licensed Technology hereunder.
4. Licensee Warranties. Licensee warrants and represents that the
Licensed Products will be distributed, advertised, promoted and sold in
accordance with all applicable laws, rules and regulations. Licensee is entitled
solely during the Term or any renewals to use the Licensed Technology, Patents
and Trademarks as it sees fit in advertising material or otherwise to promote
the sale of the Licensed Products.
5. Defects. Intentionally omitted.
6. Sublicense. Licensee may sublicense, assign or
4
<PAGE> 5
encumber the rights granted to it hereunder or delegate its obligations
hereunder, in whole or in part without Licensor's prior approval, but upon
notice to Licensor and upon the understanding that Licensee shall not be
relieved of its obligations hereunder with respect to such sublicense, or
assignment.
7. Governing Law. This Agreement shall be governed by the laws of New
York, applicable to agreements made and to be wholly performed therein.
8. Expiration. (i) Upon expiration of the Term and Licensee's right to
sell Licensed Products, or upon earlier termination for any reason, Licensee
agrees that Licensor shall have the right (but not the obligation) to purchase
from Licensee all or part of Licensee's then existing inventory of Licensed
Products at Licensee's actual-manufacturing cost therefor plus 50%. If Licensor
elects not to so purchase all or part of such inventory within fifteen (15) days
following expiration or termination, Licensee shall thereupon be free to sell
said Licensed Products in any manner and at any price. Royalties shall be due
Licensor on such sales.
(ii) Upon the expiration or termination of this Agreement, the
rights granted to Licensee hereunder shall revert to Licensor, except as
provided in Paragraph 8(i) and Licensee shall return all other materials which
may have been used or created by Licensee in connection with this Agreement.
Upon expiration of this Agreement, Licensee agrees that Licensor shall also have
the right (but not the obligation) within fifteen (15) days after the end of the
Term, to purchase the following items from Licensee if same are owned by
Licensee: Licensed Products molds, clips, plates, tools, silkscreens and/or
other technical materials relating to and/or embodying any of the Licensed
Technology and Licensed Trademarks at their actual cost.
9. Obligation of Performance. Licensee shall manufacture and distribute
the Licensed Products in accordance with customary business practice and shall
always maintain adequate inventory of the Licensed Products as necessary in its
sole discretion.
10. Accounting and Payment.
(i) All payments of Royalties shall be deemed earned and shall
be due within thirty (30) days after Licensee has received payment for a Net
Invoiced Amount. All amounts payable hereunder shall be paid by check to: New
Century Marketing & Distributors, Inc., c/o Morris I. Douer, 2262 East 7th
Street, Brooklyn, New York 11223. Payment shall be due upon 30 days after
Licensee receives payment of the Net Invoice Amount.
5
<PAGE> 6
(ii) The Royalties shall be accounted for on not less than a
calendar quarter basis. All payments to Licensor shall be in United States
Dollars. Statements of account accompanied by payments, if any, shown to be due
shall be delivered to Licensor or such party or parties as Licensor shall
designate, no later than thirty (30) days after the end of each calendar
quarter.
(iii) The statements of account shall be reasonably detailed
and contain information relevant to the computation of payments to Licensor.
Licensee shall keep and preserve for at least two (2) years after the expiration
of this Agreement accurate records of all transactions relating to this
Agreement. Licensor, or a representative as Licensor shall designate, shall at
any time during business hours, at Licensee's office, on prior five (5) days,
written notice to Licensee, be entitled to inspect Licensee's books and records
pertaining to the Licensed Products and the manufacture and distribution thereof
and the computation of Royalties hereunder.
(iv) If Licensee is in default with the payment of any
Royalties, then without limiting any of Licensor's rights or remedies, Licensee
shall pay Licensor interest on such unpaid amount at a rate equal to two percent
(2%) above the then current "prima" rate quoted by the Chase Manhattan Bank, in
New York, or the highest interest rate allowed by law, if less.
11. Licensor Warranties. Licensor represents and warrants that it has
the right to enter into this Agreement and to grant the rights herein granted to
Licensee in connection with the Licensed Technology and Trademarks, subject to
the terms hereof. Licensor also represents that: (a) it owns the Trademarks and
Licensed Technology free and clear of any liens or encumbrances; (b) it has full
right to enter into and comply with this Agreement in all respects and it is not
a party to any agreement which might impair or effect such right or the terms
hereof; (c) no actions are pending or threatened against it which in any manner
affect its rights hereunder or which in any way adversely impair same; (d) it
will and hereby does indemnify Licensee against all claims of any kind relating
to ownership of the rights which are the subject of this License Agreement.
12. Infringements. Licensee shall promptly notify Licensor, in writing,
of any imitations or infringements of the Licensed Technology and Trademarks or
the rights licensed hereunder which may come to Licensee's attention. Licensee
and Licensor shall endeavor to jointly determine whether or not any demand, suit
or other action shall be taken on account of or with reference to any such
infringements or imitations. Licensee however shall have the right (but not the
obligation) to commence or prosecute any suits or make any such demands in its
own name or in the name of Licensor or join Licensor as a party thereto.
Licensor shall cooperate with
6
<PAGE> 7
'Licensee as a party thereto and/or in any manner that Licensee may request in
connection with any such demand, suits, claims or other actions. Any
infringement or imitation action, claim or suit brought by Licensee against a
third party shall be at Licensee's cost and any recoveries therefrom shall
belong to Licensee. A royalty fee equal to 7% of any recovery, less legal fees
and costs, shall be due to Licenser. With respect to all claims and suits,
including suits in which Licensee is joined as a party, Licensee shall have the
sole right to employ counsel of its choosing, at Licensee's exclusive cost, and
to direct the handling of the litigation and any settlement thereof. In the
event Licensee decides not to take action hereunder, then Licensor shall be free
to do so at its expense and any recovery in that case shall belong to Licensor.
13. Rights in the Licensed Technology and Trademarks.
(i) All rights not specifically granted to Licensee are hereby
reserved by Licensor. Licensee shall not be entitled to have design patents,
trademarks, or any other rights in connection with the Licensed Products
registered nor to claim any such rights without the prior written consent of
Licensor, which may be withheld in its sole discretion.
(ii) Without limiting the other provisions hereof, Licenses is
not hereby granted, and Licensor hereby reserves for itself, the right to
manufacture, advertise, promote, distribute and otherwise exploit the Licensed
Products outside the Territory.
(iii) Licensee acknowledges that as between Licensor and
Licensee, Licensor is the owner of all right, title and interest in and to the
Licensed Technology and Trademarks (collectively the "Licensed Property") and in
all patents, copyrights, trademarks, and other rights associated therewith, and
the goodwill pertaining to all of the foregoing. Licensee hereby acknowledges
that Licensor is the owner of all right, title and interest in all patents,
copyrights and renewals and extensions of such patents and copyrights, relating
to the Licensed Technology and Trademarks, and warrants that Licensor will have
the right to use and exploit and authorize the exploitation of such materials in
any manner as Licensor elects without obligation to Licensee or any other entity
whatsoever except as otherwise provided in this Agreement. Licensee will not
during or after the Term attack the validity of the license granted hereunder,
or do or cause to be done any act which impairs or tends to impair Licensor's
right and title to the Licensed Property. Licensee shall not acquire and shall
not claim any title to the Licensed Property by virtue or through the license
granted to Licensee or through Licensee's use thereof.
7
<PAGE> 8
14. Termination of this Agreement.
(i) In the event of a material default by Licensee hereunder,
Licensor may forward written notice specifying such default to Licensee.
Licensee shall thereupon have thirty (30) days within which to cure such default
or, if the default is not capable of a cure within such time, to commence such
cure and continue such cure diligently until completion. If not cured or if such
cure is not thereafter commenced and diligently pursued, Licensor may thereafter
terminate this agreement by sending a further ten (10) day notice, in writing
sent by certified mail, return receipt requested to Licensee at its address
first above mentioned.
(ii) If proceedings for bankruptcy or insolvency are filed or
instituted by or against Licensee, or if Licensee ceases to be actively involved
in the business of selling or distributing Licensed Products for more than 90
days, Licensor may terminate this Agreement upon fifteen (15) days prior written
notice to Licensee, which termination shall be effective on the date of giving
such notice unless such condition has been cured or a cure commenced by
Licensee.
(iii) In the event of termination, without limiting any of
Licensor's rights or remedies including, without limitation, Licensor's right to
injunctive or other equitable relief, any and all Royalty payments shall become
immediately due and payable to Licensor upon such termination, and the rights
granted hereunder shall automatically terminate and revert immediately to
Licensor.
15. Confidentiality. Licensee agrees that it will use reasonable
efforts to maintain Licensed Technology in a confidential manner, and will use
such Licensed Technology only in accordance with this Agreement. Any information
otherwise available to the public is not deemed proprietary hereunder and is
excluded from this representation. Licensee shall have no liability for
non-willful breach or unauthorized disclosure to third parties.
16. Licensor's Sales Commissions. Notwithstanding anything to the
contrary contained herein, Licensor shall have the right, to solicit independent
sales of the Licensed Products in the Territory provided such solicitations are
not made to the customers or prospective customers of Licensee or its sales
representatives. Licensor shall notify Licensee in writing in advance of such
solicitations of all parties who it intends to solicit. If Licensor shall obtain
a purchase order for the Licensed Product (the "Purchase order") and forwards
the Purchase Order to Licensee for fulfillment, or shall direct a customer which
it solicits to Licensee and a Purchase Order is established, then, in addition
to Licensor's Royalty on the Net Invoice Amount of the sale resulting
8
<PAGE> 9
from the Purchase Order, Licensor shall also be entitled to a sales commission
in an amount equal to five (5%) percent of the Net Invoice Amount of the
Purchase Order which shall be payable in accordance with Licensee's payment
policy hereinafter set forth. Licensee may refuse to accept Purchase Orders
directed from Licensor if the Customer does not meet its Credit or other
customary requirements is unwilling to open an L.C. or pay C.O.D. for the
Licensed Products or is already a customer or prospective customer of Licensee.
17. Notice. Any notice hereunder, if mailed by certified mail, return
receipt requested, shall be deemed given and received two (2) business days
after mailing, and if sent by professional express service, notice shall be
deemed given and received at the time of actual delivery. Notices shall be sent
to the following addresses, or such other addresses as the parties shall
designate in writing from time to time:
New Century Marketing and Distributors, Inc.
2262 East 7th Street
Brooklyn, New York 11223
Attn: Morris Douer
Achim Importing Co., Inc.
58 Second Avenue
Brooklyn, New York 11215
Attn: Marton B. Grossman
18. Entire-Agreement. This Agreement constitutes the entire
understanding and agreement between the parties. Any amendments to this
Agreement must be in writing and signed by a duly authorized officer of each
party hereto.
19. Severability . In case any one or more of the provisions contained
in this Agreement shall for any reason be held to be invalid, illegal, or
unenforceable in any respect, such invalidity, illegality, or unenforceability
shall not affect any other provision hereof, and this Agreement shall be
construed as if such invalid, illegal, or unenforceable provision had never been
contained herein.
9
<PAGE> 10
IN WITNESS WHEREOF the parties have hereto set their hand on
the date first above written.
NEW CENTURY MARKETING AND
DISTRIBUTORS, INC.
By:_____________________________
President
DYNAMIC INSULATED PRODUCTS, INC.
By:______________________________
President
Witnessed by:
_____________________________
Julia Kraus
10
<PAGE> 1
Exhibit 10.06
Dynamic International, Ltd.
58 Second Avenue
Brooklyn, New York 11215
April 10, 1997
Dear Mr. Grossman:
This is to memorialize our mutual understanding with respect to the
matters set forth herein.
1. In consideration for your best efforts to make the Company
profitable, the Company agrees to issue to you shares of the Company's Common
Stock (the "Common Stock"), as follows:
a. If during the fiscal year ending April 30, 1998
("Fiscal 1998"), the Company's Earnings Before Taxes shall be $500,000,
the Company will issue to you 400,000 shares of Common Stock;
b. If during the fiscal year ending April 30, 1999,
the Company's Earnings Before Taxes shall be $1,000,000, the Company
will issue to you 600,000 shares of Common Stock, provided, that in the
event that the Company shall not have achieved Earnings Before Taxes
for Fiscal 1998 as set forth in subsection (a) hereof and the
cumulative Earnings Before Taxes for the two years ending April 30,
1999, shall be no less than $1,500,000, the Company will issue to you
an aggregate of 1,000,000 shares of Common Stock; and
c. If during the fiscal year ending April 30, 2000
the Company's Earnings Before Taxes shall be $1,500,000, the Company
will issue to you 1,000,000 shares of Common Stock, provided, that in
the event that the Company shall have achieved Earnings Before Taxes
for the three years ending April 30, 2000 that are no less than
$2,000,000, the Company will issue to you an aggregate of 1,400,000
shares of Common Stock, provided further, that in the event that the
Company shall have achieved Earnings Before Taxes for the three years
ending April 30, 2000 that are no less than $3,000,000, the Company
will issue to you an aggregate of 2,000,000 shares of Common Stock.
In no event shall the total number of shares of Common Stock to be issued to you
hereunder exceed 2,000,000.
<PAGE> 2
Earnings Before Taxes shall mean the pre-tax income of the Company on a
consolidated basis for any fiscal year as determined by the independent
accountants for the Company. The determination of the Company's independent
accountants as to Earnings Before Taxes shall be conclusive and binding.
2. Any stock issuances hereunder shall be made within ten
business days of the submission by the Company's independent accountants of
their signed report relating to the applicable fiscal year.
3. Numbers of shares of Common Stock set forth herein assume
the completion of a contemplated one for five reverse stock split of the
Company's issued and outstanding Common Stock.
4. You hereby absolutely and unconditionally warrant and
represent, and at the time of each issuance hereunder, will confirm that:
a. you are acquiring the Common Stock hereunder only
for your own account, for investment, and without a view to the
distribution thereof.
b. you understand that you may sell or otherwise
transfer the Common Stock only if such transaction is duly registered
under the Securities Act of 1933, as amended (the "Act"), or if you
shall have received the favorable opinion of counsel to the Company to
the effect that such sale or other transfer may be made in the absence
of registration under the Act;
c. you acknowledge that the certificates representing
the Common Stock will be legended to reflect these restrictions, and
stop transfer instructions will apply; and
d. you realize that the Common Stock is not a liquid
investment, and that you may lose the entire investment as a result of
your receipt of the Common Stock.
5. The Company will until April 30, 2001, afford you the right
to add the Common Stock to be issued hereunder to any registration statement
filed by the Company, without expense or cost to you.
<PAGE> 3
To indicate your agreement to the foregoing, please countersign a copy
of this letter and return it to the Company.
Very truly yours,
Dynamic International, Ltd.
By: ________________________
Agreed this ___ day of April 1997:
___________________________________
Marton Grossman
<PAGE> 1
Exhibit 23.02
CONSENT OF INDEPENDENT AUDITORS
We consent to the use in this Registration Statement of
Dynamic International, Ltd. on Form S-1 of our report dated August 30, 1996,
appearing in the Prospectus, which is part of this Registration Statement.
We also consent to the reference to us under the heading
"Experts" in such Prospectus.
Moore Stephens, P.C.
New York, New York
April 16, 1997
<PAGE> 1
Exhibit 23.03
CONSENT OF INDEPENDENT AUDITORS
We consent to the use in this Registration Statement and Prospectus of
Dynamic International, Ltd. (formerly Dynamic Classics, Ltd.) on Form S-1
relating to the offering of 1,200,000 units (each unit consisting of one share
of common stock, one redeemable Class A warrant and one redeemable Class B
warrant), of our report dated June 26, 1996 on the consolidated financial
statements of Dynamic Classics, Ltd. and subsidiary contained in this
Registration Statement, and to the use of our name, and the statements with
respect to us, under the heading "Experts" in the Prospectus.
/s/ Hoberman, Miller, Goldstein & Lesser, P.C.
HOBERMAN, MILLER, GOLDSTEIN & LESSER, P.C.
New York, New York
April 16, 1997
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