<PAGE> 1
As filed with the Securities and Exchange Commission on October 15, 1997
Registration No. 333-25425
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
---------------------------------------
DYNAMIC INTERNATIONAL, LTD.
(Name of issuer in its charter)
<TABLE>
<CAPTION>
NEVADA 5099 93-1215401
<S> <C> <C>
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code) Identification Number)
58 SECOND AVENUE MARTON GROSSMAN, PRESIDENT
BROOKLYN, NEW YORK 11215 58 SECOND AVENUE
718-369-4160 BROOKLYN, NEW YORK 11215
718-369-4160
(Address and telephone number (Name, address and telephone
of registrant's principal executive number of agent for service)
offices and principal place of business)
</TABLE>
------------------------------------
Copies to:
<TABLE>
<CAPTION>
<S> <C>
RICHARD F. HOROWITZ, ESQ.
LOUIS A. BRILLEMAN, ESQ. GERALD A. KAUFMAN, ESQ.
Heller, Horowitz & Feit, P.C. 33 Walt Whitman Road
292 Madison Avenue Huntington Station, New York 11746
New York, New York 10017 Telephone: 516-271-2055
Telephone: (212) 685-7600
</TABLE>
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]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Title of Each Class of Securities Amount To Be Proposed Maximum Proposed Maximum Amount of
to be Registered Registered Offering Price Per Aggregate Offering Registration Fee
Security Price(1)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Units 1,380,000 $5.00 $6,900,000 $2,090.91
Common Stock included in the Units 1,380,000 ____ ____ ____
Class A Warrants included in the Units 1,380,000 ____ ____ ____
Class B Warrants included in the Units(2) 1,380,000 ____ ____ ____
- ----------------------------------------------------------------------------------------------------------------------------------
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
Units underlying Underwriter's Warrants 120,000 ____ ____ ____
Common Stock included in the Units 120,000 ____ ____ ____
Class A Warrants included in the Units 120,000 ____ ____ ____
Class B Warrants included in the Units 120,000 ____ ____ ____
- ----------------------------------------------------------------------------------------------------------------------------------
Common Stock underlying A 120,000 $9.90 $1,188,000 $360.00
Warrants(3) included in the
Underwriter's Warrants
- ----------------------------------------------------------------------------------------------------------------------------------
Common Stock underlying B 120,000 $16.50 $1,980,000 $600.00
Warrants(3) included in the
Underwriter's Warrants
- ----------------------------------------------------------------------------------------------------------------------------------
Total (4) $33,138,120 $10,041.86
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 2
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to rule 457 promulgated under the Securities Act of 1933.
(2) Includes up to 180,000 of each of the listed securities 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.
(4) Previously paid.
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.
2
<PAGE> 3
DYNAMIC INTERNATIONAL, LTD.
Cross Reference Sheet Showing Location in Prospectus of Information Required
Therein by Items 1 through 12 of Form S-1
<TABLE>
<CAPTION>
REGISTRATION STATEMENT PROSPECTUS CAPTION
ITEM AND HEADING OR LOCATION
---------------- -----------
<S> <C> <C>
1. Forepart of Registration
Statement and Outside Front Outside Front Cover Page
Cover Page of Prospectus......................
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
</TABLE>
3
<PAGE> 4
SUBJECT TO COMPLETION DATED OCTOBER 15, 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, upon
prior written notice to each holder of Units, earlier if, at the sole discretion
of Patterson Travis & Co., the underwriter for the offering (the "Underwriter"),
such early separation is warranted by market circumstances (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. The Company has made an application for inclusion with the Nasdaq of
the securities offered hereby. Although the Company does not meet the
requirements for initial inclusion on the Nasdaq at the present time, it
anticipates that it will meet such requirements upon completion of this
Offering. See "Risk Factors-No Assurance for Public Market for the Units, Common
Stock or Warrants." Nevertheless, there can be no assurance that an active
public 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" COMMENCING ON PAGES 7 AND
13, RESPECTIVELY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION
OR ANY SUCH STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
========================================================================================================================
Price to Public Underwriting Proceeds to
Discount(1) Company
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Unit (2) $5.00 $0.50 $4.50
- ------------------------------------------------------------------------------------------------------------------------
Total $6,000,000 $600,000 $5,400,000
========================================================================================================================
</TABLE>
(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"), subject to adjustment in the event of issuances of
securities by the Company below the then current exercise price of
the Underwriter's Warrants, or a reorganization, consolidation,
merger or similar corporate transaction involving the Company.
Also, under certain circumstances, in accordance with NASD rules
and regulations, the Underwriter will receive a warrant
solicitation fee equal to 8% of the exercise price of the Warrants
it causes to be exercised. 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 two years
following the closing of this offering for an aggregate 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 Proceeds to the
Company will be $6,210,000. See "Underwriting."
PATTERSON TRAVIS, INC.
The date of the Prospectus is ________, 1997.
<PAGE> 5
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> 6
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 September 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, one of the
manufacturers, China National Metals and Minerals ("CNM"), acknowledged the
defects and agreed to pay for returns and to provide replacement goods at no
cost, it breached this agreement soon thereafter. In March 1995, CNM sued the
Company for monetary damages alleging, among other things, breach of contract.
The Company and CNM subsequently settled the matter by releasing each other from
any claims and allowing CNM to collect an aggregate of $15,000 from the Company.
The Company suffered severe losses from its venture into this line of business
and in August 1995 filed a voluntary petition for relief 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 received partial satisfaction of their claims. MG
Holdings Corp. ("MG Holdings"), which had purchased a promissory note from the
Company's principal lender, received 2,976,000 shares of Common Stock in full
satisfaction of the promissory note. The number of shares issued to MG Holdings
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 "Business--Plan of Reorganization" and
"--Legal Proceedings" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
3
<PAGE> 7
THE OFFERING
<TABLE>
<S> <C>
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 Before
Offering.................................... 3,198,798 shares
Common Stock Outstanding After
Offering.................................... 4,398,798 shares (2)
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
</TABLE>
- ------------------------------
(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 any ten 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."
BENEFITS OF OFFERING TO COMPANY'S CHAIRMAN AND PRESIDENT
A portion of the proceeds of this offering will be used for the benefit
of affiliates of the Company. Specifically, approximately $1.2 million will be
paid to MG Holdings, which is wholly owned by the Company's Chairman and
President, in repayment of loans, including accrued interest, made during the
Company's Chapter 11 proceedings. See "Use of Proceeds" and "Certain
Relationships and Related Transactions."
4
<PAGE> 8
SUMMARY FINANCIAL INFORMATION
Set forth below are selected financial data with respect to the Company
for the three months ended July 31, 1997, the nine months ended April 30, 1997,
the three months ended July 31, 1996, and the years ended April 30, 1996, 1995
and 1994. 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>
Reorganized Company
---------------------------------------------------------------
3 Months Ended 9 Months Ended
July 31, 1997 April 30, 1997
-------------- ----------------
<S> <C> <C> <C>
Net Sales $1,834,162 $7,492,729
Income/(Loss) for period 38,665 119,399
Net Income per Share .01 .04
July 31, 1997
Selected Balance Sheet Data: July 31, 1997 As Adjusted(1) April 30, 1997
------------- -------------- --------------
Working Capital (Deficit) $(221,664) $4,823,901 $(45,789)
Total Assets 4,628,741 8,606,657 4,807,062
Long term obligations,
including capitalized lease
obligations 54,435 -0- 215,254
</TABLE>
<TABLE>
<CAPTION>
Predecessor Company
---------------------------------------------------------------------------------------
Year ended April 30
----------------- ----------- ------------ -----------
3 Months Ended
July 31, 1996 1996 1995 1994
----------------- ---- ---- ----
<S> <C> <C> <C> <C>
Net Sales $1,983,164 $7,151,715 $32,533,097 $29,497,353
Income/(Loss) for period (76,364) 6,945,299 (11,227,335) 244,308
Selected Balance Sheet Data:
- ----------------------------
Working Capital (Deficit) $(293,884) $(7,493,435) $3,094,821
Total Assets 4,253,396 6,414,185 16,677,772
Long term obligations,
including capitalized lease
obligations 23,965 116,124 127,877
</TABLE>
- ------------------
(1) Gives effect to the application of the net proceeds of this
offering estimated to be $5,100,000. 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> 9
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 filed a voluntary
petition for relief under Chapter 11 of the Bankruptcy Code. In May 1996, the
Bankruptcy Court approved a plan of reorganization pursuant to which creditors
received partial satisfaction of their claims. The Company believes that the
losses that led to the bankruptcy proceedings 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 sports bag/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 sports bags/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,
Achim Importing Co. ("Achim") arranges for the issuance by its financial lender
of letters of credit in favor of the Company's overseas suppliers thereby
enabling the Company to finance the purchases of its inventory. Also, from time
to time, when taking deliveries from domestic suppliers, Achim purchases
products from the manufacturer and resells them to the Company in order to
accommodate Achim's commercial lenders who often require a security interest in
the merchandise until it has been sold and the lender has been repaid. The
Company pays Achim for the amount actually paid to the supplier (including any
applicable discounts) without markup, reimburses Achim for its bank charges and
pays it interest at the prime rate plus one percent on the unpaid balance of the
purchases. As of April 30, 1997, the Company owed an amount of $2,590,360 in
principal and interest under this arrangement. As of September 30, 1997, this
sum had decreased to $1,440,476. See "Certain Relationships and Related
Transactions." The weighted average interest rate paid by the Company to Achim
at September 30, 1997, April 30, 1997 and April 30, 1996 was 9.37%, 9.25% and
11.5%, respectively. Achim is wholly owned by Mr. Marton Grossman, the Company's
Chairman and President. If Achim were to terminate this arrangement for any
reason, the Company would be forced to arrange for its own commercial financing
which would likely result in higher interest rates, fees and other charges, and
which would therefore have a material adverse effect on the ability of the
Company to purchase inventory and finance its operations.
6
<PAGE> 10
In addition, all of the Company's assets are subject to a lien in favor of
MG Holdings, an entity that is wholly owned by Mr. Grossman, 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 MG Holdings pursuant
to an order by the Bankruptcy Court.
Also, the Company is party to an agreement pursuant to which Achim assists
the Company in the performance of a great number of administrative functions,
including, among other things, the maintenance of financial and accounting books
and records, the preparation of monthly financial accounts receivable aging
schedules and other reports and the performance of credit checks on the
Company's customers. In consideration for these services, Achim receives an
annual fee, payable monthly, calculated as a percentage of the Company's
invoiced sales originating at the warehouse ranging from 4% of invoiced sales
under $30 million to 3% for sales of $60 million or more. For sales not
originating at the warehouse, 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. Achim also provides warehousing services consisting of receiving,
shipping and storing of the Company's merchandise. The Company pays a monthly
fee of 3% of the Company's invoiced sales originating at the warehouse in
connection with the warehousing services performed by Achim under this
agreement. Achim's business is unrelated to the Company's business, and it does
not render to any other entity services similar in nature to the services
performed for the Company.
Further, the Company's offices and warehouse are made available to it on an
at will basis by Achim which leases the property from Sym Holding, an entity
controlled by Isaac Grossman, the Company's Vice Chairman, Treasurer and
Secretary. See "Business - Management Agreement with Achim Importing Co.," -
Properties" and "Certain Relationships and Related Transactions."
CONSUMER ACCEPTANCE OF THE COMPANY'S PRODUCTS. The Company's revenues are
substantially dependent on its sports bag/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 sports
bags/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 sports bags/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
licenses with respect to the trademarks SPALDING and KATHY IRELAND provide 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 75% 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
7
<PAGE> 11
of supply are available, any serious disruptions could materially impair the
Company's ability to deliver exercise and sports bag/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 sports bag/luggage 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. The Company anticipates that the
proceeds from this offering together with the projected cash flows from
operations and the availability of the Achim credit line will be sufficient to
fund its contemplated cash requirements for the twelve months following the
consummation of this offering. Nevertheless, 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. The Company does not have an employment agreement with Mr.
Grossman, who spends approximately 20% of his time working for 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 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, 1997,
K-Mart and Service Merchandise accounted for approximately 25% and 13%,
respectively, of the Company's sales. Although the Company intends 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. The Company has no written agreements with any of its customers. 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
8
<PAGE> 12
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. Neither Achim nor any party
related to Messrs. Marton and Isaac Grossman presently intends to provide
marketing services to the Company. 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 which
provides for coverage of up to $10,000,000 per occurrence. 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 $3.87 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 Company's current principal stockholders and 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, the Company has agreed to issue to its Chairman and President 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 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."
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. The Company anticipates that at least two
additional broker-dealers will attempt to make a market in the Company's
securities in accordance with the applicable Nasdaq rules. See "Underwriting."
9
<PAGE> 13
Initial listing requirements for the Nasdaq include net tangible assets of
$4 million; a minimum of 1 million shares held by the non-insiders which must
have a market value of $5 million; a minimum bid price of $4; three market
makers; 300 stockholders; and a one year operating history. Other than the
number of stockholders and its operating history, the Company does not currently
meet the requirements for initial listing on the Nasdaq SmallCap Market. While
the Company, upon completion of the offering, expects that it will meet Nasdaq's
initial listing requirements and that the Securities will 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)
net tangible assets of at least $2 million, (iii) minimum bid price per share of
$2, (iv) 300 stockholders, and (v) 1 million shares held by non-insiders which
shares must have a market value of at least $1 million.
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 has agreed to
use its best efforts 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. 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 may be
publicly sold immediately, 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. Although no lock-up agreements are in
effect with respect to any of the currently issued and outstanding shares of
Common Stock, the Company has been advised that there is no current intent to
resell any securities held by the affiliates of Mr. Marton Grossman. See
"Description of Securities - Shares Available for Future Sale" and "Security
Ownership of Certain Beneficial Owners and Management."
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 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
10
<PAGE> 14
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
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."
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, it may be a dominating influence 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
11
<PAGE> 15
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 (the "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.
POSSIBLE NON-RENEWAL OF LICENSE AGREEMENTS. The Company is party to two
separate agreements with Spalding & Evenflo Companies Inc. pursuant to which the
Company has the 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. For the fiscal year ended April 30, 1997, sales of these products
represented approximately 6% of the Company's total revenues. The two agreements
expired in September 1997. The Company is currently negotiating a renewal of the
agreements. In the event that the agreements are not renewed, the Company's
revenues will likely be reduced by approximately 6%, which the Company believes
is not material. See "Business-Intellectual Property."
DILUTION
At July 31, 1997, the Company had a net tangible book value deficit of
$(131,753) or $(.04) per share of Common Stock. Net tangible book value per
share represents the amount of total tangible assets less liabilities, divided
by 3,198,258, 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 July 31, 1997, would have been $4,968,247 or $1.13 per share of
Common Stock. This represents an immediate increase in pro forma net tangible
book value of $1.17 per share to the existing stockholders and an immediate
dilution of $3.87 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 $(.04)
Increase per share attributable to the sale of the
Units offered hereby $1.17
----
Net tangible book value per share after offering (1) $1.13
----
Dilution per share to investors in offering (2) $3.87
====
</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."
12
<PAGE> 16
(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 over-allotment 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.
Pursuant to a Bonus Agreement, the Company will issue to Mr. Grossman, the
Company's Chairman and President, an aggregate of 2,000,000 shares of Common
Stock provided the Company meets certain earnings criteria over a three year
period. See "Management." Giving effect to the issuance of such 2,000,000 shares
as of July 31, 1997, and the attainment by the Company of the earnings criteria
required for the issuance of these shares, the pro forma net tangible book value
would have been approximately $1,668,247 or $.32 per share. After giving effect
to the sale of the 1,200,000 Units hereby, the pro forma net tangible book value
at July 31, 1997, would have been approximately $6,768,247 or $1.06 per share of
Common Stock. This represents an immediate increase in pro forma net tangible
book value of $.74 per share to the existing stockholders and an immediate
dilution of $3.94 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 $.32
Increase per share attributable to the sale of the
Units offered hereby $.74
Net tangible book value per share after offering (1) $1.06
----
Dilution per share to investors in offering (2) $3.94
====
</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; and (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.
The following table presents as of July 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 99.6% $5.00
Current Stockholders 3,198,798 72.7% 26,139 0.4% $0.01
--------- ----- --------- ------
Total 4,398,798 100.00% 6,026,139 100.00%
========= ======= ========= ======
</TABLE>
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<PAGE> 17
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>
<CAPTION>
Amount of Percentage of
Proceeds Proceeds
-------- --------
<S> <C> <C>
Purchase of Inventory $2,100,000 41%
Debt Repayment (1) $1,200,000 23%
Advertising (2) $ 500,000 10%
Marketing (3) $ 800,000 16%
Working Capital $ 500,000 10%
</TABLE>
- --------------------
(1) The entire amount will be paid to MG Holdings, which is wholly owned by
Marton Grossman, the Company's Chairman and President, in full repayment of a
loan, evidenced by a promissory note, made during the Company's Chapter 11
proceedings. The note accrues interest at the Citibank Prime Rate plus one
percent. The weighted average interest rate at April 30, 1997, and as of the
date hereof was 9.25% and 9.35%, respectively. As of April 30, 1997 the Company
had accrued interest in the amount of $37,219 in connection with this loan. As
of October 14, 1997, the amount of interest owed amounted to $84,244. The
promissory note is to be paid in 24 monthly installments commencing September 5,
1996. To date, only three payments have been made. In July 1997, the Company and
MG Holdings agreed that no payments will be due until the consummation of this
offering or the scheduled maturity of the note, whichever occurs earlier.
(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 after deducting commissions in the amount of $600,000
and expenses incurred in the offering of approximately $300,000, which either
have been paid already or are to be paid by the Company 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 unforseen 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 anticipates that the proceeds from this offering together with the
projected cash flows from operations will be sufficient to fund its contemplated
cash requirements for the twelve months following the consummation of this
offering.
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.
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.
14
<PAGE> 18
SELECTED FINANCIAL DATA
Set forth below are selected financial data with respect to the Reorganized
Company for the three months ended July 31, 1997, the nine months ended April
30, 1997, and the three months ended July 31, 1996 and the years ended April 30,
1996, 1995, 1994 and 1993 for the predecessor company. 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(1) Year ended April 30
---------------------------------------------------------------------------------------------------------
Three Months Nine Months Three Months
Ended 7/31/97(1) Ended 4/30/97(1) Ended 7/31/96 1996 1995 1994 1993
---------------- ---------------- ------------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Net Sales $1,834,162 $7,492,729 $1,983,164 $7,151,715 $32,533,097 $29,497,353 $25,735,479
Net Income/ (Loss)
from Continuing
Operations 38,665 119,399 (76,364) (2,235,894) (11,227,335) 244,308 (427,409)
Net Income/(Loss) 38,665 119,399 (76,364) 6,945,299 (11,227,335) 244,308 (427,409)
Net Income/(Loss)
per Share .01 0.04
Selected Balance
Sheet Data:
Working Capital
(Deficit) $(221,664) $(45,789) $(293,884) $(7,493,435) $3,094,821 $3,173,751
Total Assets 4,628,741 4,807,062 4,253,396 6,414,185 16,677,772 13,373,816
Long term Obligations,
including Capitalized
Lease Obligations 54,435 215,254 23,965 116,124 127,877 92,129
Total Liabilities 4,444,541 4,661,527 4,300,398 13,406,486 12,442,738 9,383,090
Retained Earnings 158,064 119,399 -0- -0- 3,644,799 3,400,491
Accumulated Deficit -0- -0- (637,237) (7,582,536) -0- -0-
Shareholders' Equity
(Deficit) 184,200 145,535 (47,002) (6,992,301) 4,235,034 3,990,726
</TABLE>
- ------------------
(1) Due to the reorganization (see Note 2 to the financial statements),
operating results of the reorganized company may not be comparable to those of
the predecessor company. Management's assumptions used in determining the
Company's reorganization value are discussed in Note 2 to the financial
statements.
(2) In 1994, the Company added a new line of products consisting primarily
of treadmills and ski machines. Sales of these products began in June 1994.
Total sales of these products amounted to approximately $24,000,000 from June 1,
1994 to August 23, 1995, the date the Company filed its Chapter 11 petition.
Approximately 73% of these products were shipped directly to customers. 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, one of the
manufacturers acknowledged the defects and agreed to pay for returns and to
provide replacement goods at no cost, it breached this agreement soon
thereafter. As a result, during April 1995, the Company issued credits to
customers in the aggregate amount of approximately $5,000,000 for the fiscal
year ended April 30, 1995. The Company issued an additional $3,211,000 in
credits from defective merchandise during the fiscal year ended April 30, 1996.
In May 1996 the Company's plan of reorganization was approved by the Bankruptcy
Court. During July and August 1996, the Company satisfied its obligations under
the Plan through cash payments and the issuance of Common Stock
15
<PAGE> 19
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."
As a consequence of the Company's fresh-start accounting, as described
below, which the Company adopted effective on July 31, 1996, financial results
for the year ended April 30, 1997, are reported by combining the financial
results for the three-month period ended July 31, 1996, and those of the
nine-month period ended April 30, 1997.
Because of the application of fresh-start reporting, the financial
statements for the periods after reorganization are not comparable in any
respects to the financial statements for the periods prior to the
reorganization.
PLAN OF REORGANIZATION
In 1994, the Company added a new line of products consisting primarily of
treadmills and ski machines. Initially, the Company was successful in marketing
these products. For the fiscal year ended April 30, 1995, sales of these
products represented approximately 53% of the Company's gross sales. However,
due to serious manufacturing defects and poor construction of the Company's
products delivered by the Company's manufacturers, primarily located in the
People's Republic of China, the Company was forced to allow substantial
chargebacks by its customers. Although, pursuant to a written agreement, one of
the manufacturers, China National Metals and Minerals ("CNM"), acknowledged the
defects and agreed to pay for returns and to provide replacement goods at no
cost, it breached this agreement soon thereafter. In March 1995, CNM sued the
Company for monetary damages alleging, among other things, breach of contract.
The Company and CNM subsequently settled the matter by releasing each other from
any claims and allowing CNM to collect an aggregate of $15,000 from the Company.
The Company suffered severe losses from its venture into this line of business
and in August 1995 filed a voluntary petition for relief under Chapter 11 of the
Bankruptcy Code.
In May 1996, the Bankruptcy Court approved a plan of reorganization (the
"Plan") pursuant to which creditors received 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, which had purchased a promissory note from the Company's
principal financial institution, received 2,976,000 shares of Common Stock in
satisfaction of such promissory note, representing approximately 93% of the
issued and outstanding shares, thereby gaining absolute control over the
Company's affairs. See "Security Ownership of Certain Beneficial Owners and
Management" and "Certain Relationships and Related Transactions". An additional
160,000 shares and 62,798 shares were issued to the Company's unsecured
creditors and the Company's existing security holders, respectively. The value
of the cash and securities distributed under the plan of reorganization
aggregated $531,561. An amount of $16,692,193, representing the difference
between the value of the total distribution and the amount of allowable claims
under the bankruptcy, was recorded as an extraordinary gain.
16
<PAGE> 20
In addition, under the Plan, the Company merged with a newly-formed Nevada
corporation for the purpose of changing its state of incorporation. The balance
sheet of the combined entity was substantially similar to the balance sheet of
the Company prior to the merger.
Upon emergence from bankruptcy, the Company adopted fresh-start accounting
on July 31, 1996 (see Note 2 to the Financial Statements). Under fresh-start
accounting, all assets and liabilities were restated to reflect their
reorganization value which approximated book value at July 31, 1996. The
reorganization value in excess of amounts allocable to identifiable assets is
amortized over a period of eleven years. In connection with the bankruptcy
proceedings, the Company restructured its operations and relocated its
administrative headquarters and warehouse facilities.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JULY 31, 1997, THE NINE MONTHS
ENDED APRIL 30, 1997, THE THREE MONTHS ENDED JULY 31, 1996 AND THE YEARS ENDED
APRIL 30, 1997 AND 1996
Three Months Ended July 31, 1997
Sales for the three months ended July 31, 1997 decreased by $149,000, or
7.5%, from $1,983,000 to $1,834,000, compared to the three months ended July 31,
1996. Sales of the Company's exercise equipment and sports bags/luggage lines
decreased by $75,000 and $74,000, respectively.
The Company does not believe that the decrease in sales of its products
represents a material trend. The Company believes that the decrease is primarily
the result of the reorganization proceedings. The Company will attempt to
reverse this trend by expanding its product lines and increasing the
attractiveness of its products by developing new packaging. There can be no
assurance that the Company will be successful in this effort.
Operating expenses decreased by approximately $120,000 due primarily to
decreases in the following expenses:
<TABLE>
<CAPTION>
<S> <C> <C>
Officer salaries $ 38,000
Salesmen salaries $ 23,000
Insurance $ 12,000
Shipping expenses $ 46,000
</TABLE>
Officer salaries decreased by $38,000 as a result of the departure by the
former President of the Company in March 1997. Salesman salaries decreased by
$23,000 due to the elimination of a sales position in August 1996. Insurance
expense decreased due to lower product liability premiums. Shipping expenses
decreased due to an increase in the amount of sales which were shipped directly
to customers from the Company's overseas vendors. Interest expense remained
relatively constant. The Company had a pretax profit of $62,000 compared to a
pretax loss of $76,000 in the prior year's corresponding three-month period.
The following table sets forth the results of operations for the periods
discussed above:
17
<PAGE> 21
<TABLE>
<CAPTION>
Reorganized Company For the Predecessor Company For the
3 Months Ended July 31, 1997 3 Months Ended July 31, 1996
---------------------------- ----------------------------
<S> <C> <C>
Sales $1,834,000 $1,983,000
Other Income 8,000 10,000
--------- ---------
1,842,000 1,993,000
Cost of Sales 1,282,000 1,454,000
--------- ---------
Gross Profit 560,000 539,000
--------- ---------
Operating Expenses 438,000 558,000
Interest 60,000 57,000
--------- ---------
498,000 615,000
--------- ---------
Pretax Income 62,000 (76,000)
Tax Provision 24,000 ---
--------- ---------
Income 38,000 (76,000)
========= =========
</TABLE>
Nine Months Ended April 30, 1997
Total sales of $7,493,000 and $1,983,000 for the nine months ended April
30, 1997 and the three months ended July 31, 1996, respectively, were, on a
combined basis, $2,324,000, or 32% higher than during the previous fiscal year.
Sales of exercise equipment of $4,124,000 and $960,000 for the nine months ended
April 30, 1997 and the three months ended July 31, 1996, respectively, were
$5,084,000, on a combined basis. These combined sales of exercise products were
$532,000 or 9% less than during the previous fiscal year. Sales of sports
bags/luggage products of $3,368,000 and $1,023,000 for the nine months ended
April 30, 1997 and the three months ended July 31, 1996, respectively, were
$4,391,000, on a combined basis. These combined sales of sports bags/luggage
products were 7% less than the previous fiscal year. Sales for the fiscal year
ended April 30, 1996 were reduced by $3,211,000 of customer credits for a
discontinued line of manual treadmills and ski machines.
The Company does not believe that the decrease in sales of its products
represents a material trend. The Company believes that the decrease is primarily
the result of the reorganization proceedings. The Company will attempt to
reverse this trend by expanding its product lines and increasing the
attractiveness of its products by developing new packaging. There can be no
assurance that the Company will be successful in this effort.
Operating expenses of $2,227,000 and $558,000 for the nine months ended
April 30, 1997 and the three months ended July 31, 1996, respectively, were, on
a combined basis, $3,899,000 less than the fiscal year ended April 30, 1996, due
to the reorganization.
The following is a discussion of the effect of the Company's reorganization
and adoption of fresh-start reporting on the various income statement line items
during the nine-month period ended April 30, 1997. For this purpose, the nine
months ended April 30, 1997 are compared to the nine months ended April 30,
1996. Decreases for the nine months ended April 30, 1997 compared to the nine
months ended April 30, 1996 are represented approximately by net changes in the
following expenses:
18
<PAGE> 22
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Freight out 10,000 Travel & entertainment 30,000
Insurance claims 70,000 Office equipment rental 7,000
Lawsuits 289,000 Miscellaneous taxes 8,000
Showroom rent 319,000 Consultant fees 105,000
Officers salaries 81,000 Promotional material 189,000
Office salaries 262,000 Pension costs 726,000
Warehouse salaries 115,000 Telephone 31,000
Salesmen salaries 57,000 Data-processing fees 6,000
Payroll taxes 45,000 Postage 10,000
Fringe benefits 2,000 Bad debt expenses 666,000
Repairs & maintenance 4,000
</TABLE>
Freight out decreased by $10,000 due primarily to reduced volume. Insurance
claims and lawsuits decreased by $70,000 and $289,000, respectively, as a result
of the accrual of proofs of claim filed during the bankruptcy proceeding as
liabilities subject to compromise during the nine-month period ended April 30,
1996. Showroom rent decreased by $319,000 since a proof of claim for the balance
of the lease was recorded during the nine-month period ended April 30, 1996. The
showroom was closed in October 1995. Officers salaries decreased by $81,000 due
to reduction in the salary of the former President of the Company in September
1995, and the elimination of a Chief Operating Officer position in December
1995. These changes resulted in decreases of $37,000 and $44,000, respectively.
Office salaries decreased by $262,000 due primarily to the elimination of the
Vice President of Operations position in June 1996 which accounted for $119,000
of the reduction. In addition, the position of Credit Manager was eliminated in
May 1996 resulting in a savings of $45,000. The balance of $98,000 is due to the
overall reduction of the office staff as a part of the reorganization. Warehouse
salaries decreased by $115,000 due to the elimination of warehouse employees
under the reorganization. Salesmen salaries decreased by $57,000 due to the
elimination of a sales position in August 1996. Payroll taxes and fringe
benefits decreased by $45,000 and $2,000, respectively, due primarily to the
positions and employees eliminated during the reorganization. Repairs and
maintenance decreased by $4,000. Travel and entertainment expenses decreased by
$30,000 due to the decrease in executive and sales personnel. Office equipment
rental decreased by $7,000 due to a reduction of the equipment rented due to the
reorganization. Miscellaneous taxes decreased by $8,000 as a consequence of the
change in the Company's state of incorporation from Delaware to Nevada which
resulted in the elimination of Delaware franchise taxes. Consulting fees
decreased by $105,000 because the Company did not hire consultants during the
nine months ended April 30, 1997. Promotional materials decreased by $189,000
due to decreased spending for these materials. Pension costs decreased by
$726,000 because a proof of claim filed by the Pension Benefit Guarantee Corp.
for this amount was recorded as part of the reorganization during the nine
months ended April 30, 1996. Telephone expenses decreased by $31,000 due to the
closing of the showroom in October 1995. Data-processing costs decreased by
$6,441 due to the reorganization of the Company. Postage decreased by $10,000
due to improved cost management. Bad debt expense decreased by $666,000 because
of improved collections and decreased sales volume.
The Company's pre-tax profit of $147,000 for the fiscal year ended April
30, 1997 is comprised of a $76,000 loss for the period of May 1, 1996 to July
31, 1996, and a $223,000 profit for the period August 1, 1996 to April 30, 1997.
As a result of the merger of Dynamic Classics, Ltd. into Dynamic International,
Ltd. (see Note 2 to the Financial Statements) and the ownership change due to
the reorganization, for tax purposes, the $76,000 loss is reportable in the
Company's final tax return (see Note 5 to the Financial Statements). As there is
a loss for the period, no current tax provision was recorded for the period May
1, 1996 to July 31, 1996. The Company also has net operating loss carry-forwards
of approximately $19,500,000, out of which approximately $16,700,000 would be
utilized to offset the extraordinary gain on the discharge of pre-Petition
liabilities in its final tax return. All deferred taxes arising from the
preconfirmation net operating losses were offset entirely by a valuation
allowance. Effectively, no deferred tax benefits were realized from
preconfirmation net operating losses. Any loss carry-forward not utilized in the
Company's final tax return is lost. Accordingly, the Company has no deferred
taxes as of July 31, 1996. The Company's new tax period ending April 30, 1997
commenced on August 9, 1996. The current income tax provision
19
<PAGE> 23
of $104,000 for the fiscal year ended April 30, 1997 is based on pretax profits
of $223,000 for the period August 9, 1996 to April 30, 1997. The effective tax
rate is 46% comprised of 26% of federal taxes and 20% of state and local taxes.
The following table sets forth the results of operations for the periods
discussed above:
<TABLE>
<CAPTION>
Reorganized Company Predecessor Company Predecessor Company
for 9 Months for 3 Months for Fiscal Year
Ended 4/30/97 Ended 7/31/96 Ended 4/30/96
------------- ------------- -------------
<S> <C> <C> <C>
Sales $7,492,700 $1,983,200 $7,151,700
Other income 54,600 10,200 98,300
---------- ---------- ----------
7,547,300 1,993,400 7,250,000
Cost of sales 4,850,000 1,454,600 9,480,500
---------- ---------- ----------
Gross profit (loss) 2,697,300 538,800 (2,230,500)
---------- ---------- ----------
Operating expenses 2,226,600 556,500 6,683,200
Interest 198,800 57,300 383,500
---------- ---------- ----------
2,425,400 613,800 7,066,700
---------- ---------- ----------
Reorganization items 48,900 1,300 449,700
---------- ---------- ----------
48,900 1,300 449,700
---------- ---------- ----------
Pretax income (loss) 223,000 (76,300) (9,746,900)
Tax provision (benefit) 103,700 0 (7,511,000)
---------- ---------- ----------
Income (loss) before
extraordinary item 119,300 (76,300) (2,235,900)
---------- ---------- ----------
Extraordinary item gain
on discharge of
pre-Petition liabilities 0 0 16,692,200
Tax 0 0 (7,511,000)
---------- ---------- ----------
Extraordinary gain,
net of tax 0 0 9,181,200
---------- ---------- ----------
Net income (loss) $119,300 $(76,300) $6,945,300
========== ========== ==========
</TABLE>
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 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 sports bags/luggage products which led 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 sports bags/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 1994, the Company added a new line of products consisting primarily of
treadmills and ski machines. Sales of the treadmills and ski machines began in
June 1994. The Company sold approximately $24,000,000 of these products from
June 1, 1994 to August 23, 1995. Approximately $17,600,000 or 73% of these
products were shipped directly to customers. 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
20
<PAGE> 24
forced to allow substantial chargebacks by its customers. Although, pursuant to
a written agreement, the manufacturers acknowledged the defects and agreed to
pay for returns and to provide replacement goods at no cost, they breached this
agreement soon thereafter. As a result, during April 1995, the Company issued
credits to customers for approximately $5,000,000 of the $7,487,000 of credits
for the fiscal year then ended.
The following table sets forth the financial statement effect of the
Company's line of treadmills and ski machines for the periods indicated:
<TABLE>
<CAPTION>
Reorganized Company Predecessor Company Predecessor Company
for 9 months for 3 months for year:
ended 4/30/97 ended 7/31/96 ended 4/30/96 ended 4/30/95
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Sales $ --- $ --- $ 597,000 $ 23,255,000
Credits --- --- (3,210,900) (7,487,000)
------------ ------------ ----------- ------------
Net sales --- --- (2,613,900) 15,768,000
Inventory reserve --- --- --- (1,320,063)
Cost of sales --- --- 156,000 (18,604,172)
------------ ------------ ----------- ------------
Gross Loss $ -- $ --- $ (2,457,900) $ (4,156,235)
============= ============ ============ ==============
</TABLE>
The sale of these products was discontinued in August 1995 and all
inventory was disposed of by October 1995. Currently, the Company does not
believe that there will be additional returns of these products or that any
claims relating thereto remain to be settled.
In addition, the Company's operating expenses decreased by approximately
$1,083,300 to $6,683,200. As a result of the Company's reorganization, the
Company had decreases in the following expenses:
<TABLE>
<CAPTION>
<S> <C>
Officers salaries 160,000
Office salaries 180,000
Salesmen salaries 316,000
Payroll taxes 74,000
Fringe benefits 145,000
Travel & entertainment 237,000
</TABLE>
Officers salaries decreased by $160,000 as a result of a reduction in the
salary of the Company's former President in September 1995, and the separation
from the Company of the Senior Executive Vice President in January 1995. These
changes accounted for decreases of $67,000 and $73,000, respectively. Office
salaries decreased by $180,000 due to the overall reduction in office personnel
in October 1995 as the operations of the Company were consolidated and Achim
began to supply administrative and warehouse services. Salesmen salaries
decreased by $316,000 because bonuses and overrides were discontinued after
August 1995. Payroll taxes and fringe benefits decreased by $74,000 and
$145,000, respectively, due to the overall reduction in office personnel in
October 1995 as the operations of the Company were consolidated and Achim began
to supply administrative and warehouse services. Travel and entertainment
decreased by $237,000 due to the reduction in executive staff and the cost
containment measures instituted due to the reorganization.
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
fiscal year ended April 30, 1996, 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 operating expenses of
21
<PAGE> 25
approximately $1,083,300 and a reduction in interest expense of $1,001,400. This
decrease was due to the Company's exemption from making interest payments of
$558,312 during the reorganization proceedings. In addition, interest expense
decreased by $456,912 due to reduced borrowing for the year ended April 30,
1996.
The extraordinary gain on debt discharge of pre-Petition liabilities, which
is recorded on the Company's books in fiscal year ended April 30, 1996, was
taxable in the subsequent fiscal period, as the actual distribution to discharge
the debt occurred in July 1996. For tax purposes, without the gain on debt
discharge, the Company had an operating loss for the year ended April 30, 1996
which resulted in the Company's not having any current income tax liability
(effective tax rate of 0%). The current operating losses and the prior year loss
carry-forwards totaled approximately $19,500,000. Based on ownership changes
resulting from the reorganization (see Note 2 to the Financial Statements),
approximately $16,700,000 will be utilized to offset the extraordinary gain on
debt discharge in its final tax return for the period May 1, 1996 to August 8,
1996. The balance of the net operating loss carry-forward is lost. The deferred
tax effect of $16,700,000 using a federal tax rate of 34% and state tax rate of
11% is approximately $7,511,000. For the fiscal year ended April 30, 1995, the
Company's pretax loss of $11,309,000 resulted in a federal tax benefit of
$3,845,000 utilizing the statutory rate. As a result of changes to the valuation
allowance, the reversal of previously established deferred tax assets and losses
for which no benefit was provided, the Company's effective tax rate resulted in
a benefit of $82,000.
LIQUIDITY AND CAPITAL RESOURCES
Three Months Ended July 31, 1997
Cash flow provided by operations increased to $95,513 compared to the prior
year's quarter under the predecessor Company which used cash of $64,766. Net
income of $38,665, along with a decrease in inventory of $515,399, due to lower
purchases, were the primary providers of cash from operations during the quarter
ended July 1997.
Net income and inventory reductions were offset by increased accounts
receivable and amounts due from suppliers of $156,220 due to stronger sales in
the last month of the quarter. In addition, cash was used in operations to pay
for increases in prepaid expenses, decreases in accounts payable and accrued
expenses, and income taxes payable of $95,346, $107,320, and $103,700,
respectively.
Financing activities used cash of $79,811 due to an increase in costs
related to this stock offering of $73,844 and the repayment of capital lease
obligations of $5,967. The Company had a positive cash flow for the period of
$15,702.
Nine Months Ended April 30, 1997
During the first nine months after the Company's reorganization, cash used
in operations amounted to $294,371. Cash used to pay creditors during the
reorganization amounted to $515,638. Cash was also used to increase inventory by
$1,032,882 during the nine-month period. The increase in inventory was due to an
anticipated increase in sales and the purchase of larger volumes to take
advantage of the decreased costs associated with the higher-volume purchases.
Accounts receivable and amounts due from suppliers decreased by $482,254,
prepaid expenses decreased by 122,017, miscellaneous receivables decreased by
$132,379 and prepaid and refundable income taxes decreased by $252,046. These
amounts partially offset expenditures for inventory and payments to creditors.
22
<PAGE> 26
Cash of $332,957 provided by financing activities was primarily the result
of a $600,000 loan from MG Holding and was used to pay the creditors in
accordance with the Company's Plan. Cash provided by financing activities was
used to repay $145,324 of the note payable to MG Holding. In addition, payments
were made for capital leases, insurance notes, and deferred stock offering costs
of $29,656, $62,020, and $30,043, respectively. The Company had a positive cash
flow of $38,586.
Three Months Ended July 31, 1996
During the three months ended July 31, 1996, cash used by operating
activities amounted to $64,800. This was the result of a net loss of $76,400,
increases in accounts receivable and due from suppliers, and prepaid expenses of
$221,300 and $100,600, respectively, which were offset by a decrease in
inventory and an increase in accounts payable and accrued expenses of $115,600
and $155,800, respectively.
Financing activities provided cash of $43,200. Proceeds from insurance
notes payable of $77,200 were offset by repayments of insurance notes payable,
and repayments of capital lease obligations of $15,200 and $18,800,
respectively. The Company had a negative cash flow of $21,600 for the three
months ended July 31, 1996.
Fiscal Year Ended April 30, 1996
During the fiscal year ended April 30, 1996, cash used by operating
activities amounted to $1,145,616. This was primarily the result of temporary
benefits received by the Company under the bankruptcy and subsequent
reorganization. Net income of $6,945,299 and the increase in pre-Petition
liabilities of $8,614,728 were offset by the gain of debt discharge under the
Plan of $16,692,193. In addition, the Company was not required to pay interest
on most of its debt during the bankruptcy period. Future cash flows will no
longer receive these benefits. Cash of $47,933 was used primarily to purchase
equipment for the manufacture of two exercise products as well as computer
hardware and software.
Financing activities generated cash in the amount of $877,493. Proceeds
from bank notes payable, bankers acceptances, and a loan from MG Holding were
$3,393,628, $1,118,556, and $557,000, respectively. These proceeds were offset
by repayments of bankers acceptances and capital leases of $4,127,139 and
$64,552, respectively. The Company had a negative cash flow of $316,056 for this
period.
Current Position
Pursuant to an unwritten understanding, Achim arranges for the issuance by
its financial lender of letters of credit in favor of the Company's overseas
suppliers thereby enabling the Company to finance the purchases of its
inventory. Also, in the event of domestic suppliers, from time to time, Achim
purchases products from the manufacturer and resells them to the Company in
order to accommodate Achim's commercial lenders who often require a security
interest in the merchandise until it has been sold and the lender has been
repaid. The Company pays Achim for the amount actually paid to the supplier
(including any applicable discounts) without markup, reimburses Achim for its
bank charges and pays it interest at the prime rate plus one percent on the
unpaid balance of the purchases. As of April 30, 1997, the Company owed an
amount of $2,590,360 in principal and interest under this arrangement. As of
September 30, 1997, this sum had decreased to $1,440,476. See "Certain
Relationships and Related Transactions." The weighted average interest rate paid
by the Company to Achim at September 30, 1997, April 30, 1997 and April 30, 1996
was 9.37%, 9.25% and 11.5%, respectively.
The Company owes an aggregate of approximately $1,200,000 to MG Holdings,
which is wholly owned by Marton B. Grossman, the Company's Chairman and
President, under a note evidencing debtor-in-possession financing provided by MG
Holdings. The note accrues interest at the Citibank Prime Rate plus 1%. As of
April 30, 1997, the Company had accrued interest in the amount of $34,219 in
connection with this loan. The promissory note is to be
23
<PAGE> 27
paid in 24 monthly installments commencing September 5, 1996. To date, three
payments have been made. In July 1997, the Company and MG Holdings agreed that
no payments will be due until the consummation of this offering or the scheduled
maturity of the note, whichever occurs earlier. The Company intends to repay the
note from the proceeds of this offering.
The Company believes that cash generated by operations, the availability of
Achim's credit line to finance the Company's purchase of inventory, and the
proceeds from this offering will be sufficient to finance its operations for the
next twelve months.
SEASONALITY AND INFLATION
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 sports bags/luggage related to the holiday season.
Management does not believe that the effects of inflation will have a material
impact on the Company, nor is it aware of changes in prices of material or other
operating costs or in the selling price of its products and services that will
materially affect the Company.
24
<PAGE> 28
CAPITALIZATION
The following table sets forth the capitalization of the Company at July
31, 1997, and as adjusted to reflect receipt of the net proceeds from this
offering:
<TABLE>
<CAPTION>
July 31, 1997
Actual(1) As Adjusted(1)(2)
--------- -----------------
<S> <C> <C>
Short Term Debt 1,085,910(3) 18,261
========= ======
Long Term Debt 54,435 -0-
--------- ------
Stockholders' Equity:
Common Stock, $.001 Par Value, 50,000,000 Shares Authorized;
Issued 3,198,798 at April 30, 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 22,940 5,121,740
Retained Earnings 158,064 158,064
Less: Treasury Stock (3) (3)
--------- ------
Total Stockholders' Equity 184,200 5,284,200
--------- ------
Capitalization Total 238,635 5,284,200
========= ======
</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. Marton B. 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.
(3) Includes loan payable--related party, accrued interest payable of $62,299 on
such debt, and capital lease obligations of $18,261.
25
<PAGE> 29
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, one of the
manufacturers, CNM, acknowledged the defects and agreed to pay for returns and
to provide replacement goods at no cost, it breached this agreement soon
thereafter. In March 1995, CNM sued the Company for monetary damages alleging,
among other things, breach of contract. The Company and CNM subsequently settled
the matter by releasing each other from any claims and allowing CNM to collect
an aggregate of $15,000 from the Company. The Company suffered severe losses
from its venture into this line of business and in August 1995 filed a voluntary
petition for relief under Chapter 11 of the Bankruptcy Code.
In May 1996, the Bankruptcy Court approved a plan of reorganization
pursuant to which creditors received partial satisfaction of their claims. MG
Holdings, which had purchased a promissory note from the Company's principal
lender, received 2,976,000 shares of Common Stock in full satisfaction of the
promissory note. The number of shares issued to MG Holdings 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."
26
<PAGE> 30
PRODUCTS
Exercise Equipment
The Company's line of exercise equipment consists primarily of handheld
products, including dumbbells, ankle and wrist weights, hand grips, jumpropes,
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/Sports Bags
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.
Other Products
The Company, through a wholly owned subsidiary, has obtained the exclusive
rights to the patents underlying the technology used in 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. In addition, it
obtained the trademarks FREEZY-BAG(TM) and FREEZYGEL(TM) under which the
products are sold. See "Intellectual Property-License Agreements." The Company
is currently testing the marketability of these products.
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 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. The Company may from time to time utilize the services of
consultants for products and package design.
Most of the Company's products are manufactured in the Philippines, Taiwan
and Hong Kong, which in the most recent fiscal year accounted for approximately
38%, 27% and 10% of the Company's products, respectively. In addition, the
Company's products are manufactured in the United States, the People's Republic
of China 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.
27
<PAGE> 31
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, 1997 approximately
25% and 13% of the Company's revenues were derived from sales to K-Mart and
Service Merchandise, respectively. No other customer accounted for more than ten
percent of the Company's revenues. For the fiscal year ended April 30, 1997,
sales of exercise equipment accounted for approximately 53% of the Company's
revenues while 47% 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. Although the Company believes that its
sales agents sell products exclusively on behalf of the Company, there are no
agreements that prohibit them from selling competing products.
In addition, the Company on a small scale markets existing products to
retailers for resale under their own private labels. The Company has began
deliveries to Service Merchandise, Inc. and Kohl's Department Stores. Although
the scope of this marketing effort is currently limited, the Company intends to
expand the number of private label transactions. No assurance can be given that
its efforts in this area will be successful.
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. 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.
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 SPALDINGTM and KATHY IRELANDTM 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 sports bag/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 JEEPTM the Company will be able to continue to grow its
sports bag/luggage business. Nevertheless, there
28
<PAGE> 32
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 -- Pursuant to two separate agreements between the
Company and Spalding & Evenflo Companies Inc. dated November 1, 1992, and
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 agreements
expired in September 1997. However, the Company is currently negotiating a
renewal of the agreement relating to the handheld exercise equipment, and
it is confident that it will be able to negotiate such renewal.
Nevertheless, no assurance can be given that the Company will be successful
in negotiating a renewal of the agreements.
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.
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.
29
<PAGE> 33
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, 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. In consideration for these services,
Achim receives an annual fee, payable monthly, calculated as a percentage of the
Company's invoiced sales originating at the warehouse ranging from 4% of
invoiced sales under $30 million to 3% for sales of $60 million or more. For
sales not originating at the warehouse, 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.
In addition, under the Warehousing Agreement, Achim provides warehousing
services consisting of receiving, shipping and storing of the Company's
merchandise. The Company pays Achim a monthly fee of 3% of its invoiced sales
originating at the warehouse in connection with these warehousing services
performed by Achim under the Warehousing Agreement.
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.
During the fiscal year ended April 30, 1997, the Company accrued approximately
$458,488 in fees under the Warehousing Agreement, consisting of $94,907 for the
three months ended July 31, 1996 and $363,580 for the nine months ended April
30, 1997. Approximately $2,250 and $6,750 payable under the Warehousing
Agreement for these respective periods may be apportioned to rent for office
space. An additional $24,950 and $74,850 may be apportioned to rent for
warehouse space for these same respective periods. See "Properties."
Achim is wholly-owned 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 arranges for the
issuance by its financial lender of letters of credit in favor of the Company's
overseas suppliers thereby enabling the Company to finance the purchases of its
inventory. Also, in the event of domestic suppliers, from time to time, Achim
purchases products from the manufacturer and resells them to the Company in
order to accommodate Achim's commercial lenders who often require a security
interest in the merchandise until it has been sold and the lender has been
repaid. The Company pays Achim for the amount actually paid to the supplier
(including any applicable discounts) without markup, reimburses Achim for its
bank charges and pays it interest at the prime rate plus one percent on the
unpaid balance of the purchases. As of April 30, 1997, the Company owed an
amount of $2,590,360 in principal and interest under this arrangement. As of
September 30, 1997, this sum had decreased to $1,440,476. See "Certain
Relationships and Related Transactions." The weighted average interest rate paid
by the Company to Achim at September 30, April 30, 1997 and April 30, 1996 was
9.37%, 9.25% and 11.5%, respectively.
EMPLOYEES
As of September 30, 1997 the Company employed 13 persons, of whom five were
executive officers, three were engaged in administrative and clerical
activities, three were engaged in sales and two were involved in
30
<PAGE> 34
warehousing and shipping. None of the Company's employees are represented by a
union and no work stoppages have occurred.
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. Since Achim occupied the premises before
it became affiliated with the Company, it remains the lessee under the lease.
Achim makes the property available to the Company on an at will basis. Other
than the fees payable by the Company to Achim 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."
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.
31
<PAGE> 35
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
Sheila Grossman 58 Director
Harry P. Braunstein 48 Director*
Bernard Goldman 77 Director*
William Dolan 44 Vice President--Finance
John Holodnicki 44 Vice President-Sales
Gordon Sulltrop 62 Executive Vice President
</TABLE>
- ----------------
* Member of the Company's Audit Committee.
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. Mr. Grossman spends approximately 20% of his time working for the
Company.
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. Mr. Grossman spends
approximately 20% of his time working for the Company.
SHEILA GROSSMAN was elected a director in October 1997. From 1962 to 1987
she was affiliated with Achim where she performed a variety of functions
including Secretary to the President. Ms. Grossman is the spouse of Marton
Grossman, the Company's Chairman and President.
HARRY BRAUNSTEIN was elected a member of the Board in October 1997. Mr.
Braunstein has been a member of Hertzfeld & Rubin, a New York based law firm,
since 1984. He is member of the Board of Directors of Gotham
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<PAGE> 36
Bank of New York, Lark Holding Corp., the parent company of WDF, Inc., a
privately held plumbing supply company and Sentery Detection, Inc., a home alarm
business. Mr. Braunstein earned a J.D. degree from Brooklyn Law School in 1974.
BERNARD GOLDMAN was elected a member of the Board in October 1997. Mr.
Goldman was the Chief Executive Officer of Goldman's Department Store, a chain
consisting of 12 stores, from 1957 to 1997. Mr Goldman has been and continues to
be a member of the Board of Directors and executive officer of a number of
community and charitable institutions and organizations.
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 graduated from the William Paterson College of New Jersey.
Mr. Dolan is a certified public accountant.
JOHN HOLODNICKI has been a Vice President-Sales at the Company since 1994.
From 1981 to 1994 he was a Vice President-Sales at HIT Industries, an importer
of business computer cases. Mr. Holodnicki earned a degree in Marketing from the
University of Illinois in 1975.
GORDON SULLTROP was appointed Executive Vice President in September 1997.
Prior to joining the Company, from 1988 to 1997, he was employed by Rubbermaid
Specialty Products Division. At that company he acted as National Accounts Sales
Manager from 1996, Central Region Manager from 1991 to 1995, Military and
Premium Sales Manager from 1990 to 1991 and National Accounts Manager from 1988
to 1990. Mr. Sulltrop earned a B.S. in Education from Missouri Valley College,
Marshall, Missouri.
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.
The underwriting agreement provides that the underwriter for this offering
shall have the right to designate one member of the Board of Directors for a
period of three years following the date hereof. To date, no person has been
designated by the Underwriter. See "Underwriting."
AUDIT COMMITTEE
The Company's Board has designated Bernard Goldman and Harry Braunstein as
members of the Audit Committee.
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid or accrued by the
Company during the three fiscal years ended April 30, 1997 (i) to its Chief
Executive Officer, and (ii) the Company's other four executive officers:
33
<PAGE> 37
SUMMARY COMPENSATION TABLE(1)(2)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Annual Compensation
- ---------------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e)
- ---------------------------------------------------------------------------------------------------------------------------
Year Ended
Name/Principal Position April 30 Salary ($) Bonus ($) All Other Compensation (3)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Marton Grossman 1997 -0- 31,200
Chairman and President 1996 -0- 18,200
1995 -0- -0-
- ---------------------------------------------------------------------------------------------------------------------------
Isaac Grossman 1997 -0- 32,240
Director, Treasurer 1996 -0- 13,043
1995 -0- -0-
- ---------------------------------------------------------------------------------------------------------------------------
William P. Dolan 1997 100,000
Vice President-Finance 1996 100,000
1995 97,691
- ---------------------------------------------------------------------------------------------------------------------------
Marvin Cooper, 1997 128,125
President and Director 1996 182,176
(4) 1995 250,099
- ---------------------------------------------------------------------------------------------------------------------------
John Holodnicki 1997 120,000
Vice President 1996 120,000
1995
97,046
===========================================================================================================================
</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 Commission, the table
omits columns reserved for types of compensation not applicable to the
Company.
(3) Consists of estimated portion of the fees payable to Achim under the
Warehousing Agreement attributable to Marton Grossman's and Isaac
Grossman's activities performed on behalf of the Company. Marton
Grossman is the sole shareholder, and Isaac Grossman is an employee of
Achim. See "Certain Relationships and Related Transactions."
(4) Mr. Cooper resigned his positions from the Company in March 1997.
None of the individuals listed in the table above received any long-term
incentive plan awards during the fiscal year.
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 (the "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
34
<PAGE> 38
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 $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, such shortfall may be
compensated by earnings during a subsequent year, as a result of which Mr.
Grossman will be issued shares that, in the aggregate, equal the number of
shares issuable during these two years if the Company had reached earnings for
each year as required under the Bonus Agreement. The Bonus Agreement also
provides for piggyback registration rights with respect to the Common Stock to
be issued.
The following table sets forth the number of shares of Common Stock to be
issued to Mr. Marton Grossman under the Bonus Agreement:
LONG TERM INCENTIVE PLANS-AWARDS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
================================================================================================================================
Estimated Future Payouts Under
Performance or Other Non-stock Price based Plans
Number of Shares, Period Until
Name Units or Other Rights Maturation or Payout
Threshold Target Maximum
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Marton Grossman 2,000,000 April 30, 2000 * * *
================================================================================================================================
</TABLE>
- -------------
* The number of shares to be issued in a particular fiscal year is
based on the criteria set forth above.
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 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, 1996 through April 30, 1997 other
than Forms 3 that were filed late with respect to Messrs. Marton and Isaac
Grossman and William Dolan and the Marton Grossman Annuity Trust, 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 repaid by the Company through the issuance
of 2,976,000 shares of Common Stock to MG Holdings. MG Holdings subsequently
assigned the Common Stock to a trust for the benefit of members of Mr.
Grossman's family.
35
<PAGE> 39
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. The
promissory note is to be paid in 24 monthly installments commencing September 5,
1996. The note accrues interest at the Citibank Prime Rate plus one percent. The
weighted average interest rate as of the date hereof and at April 30, 1997 was
9.35% and 9.25%, respectively. As of April 30, 1997 the Company had accrued
interest in the amount of $37,219 in connection with this loan. As of October
14, 1997, the amount of interest owed amounted to $84,244. In July 1997 the
Company and MG Holding agreed that no principal or interest payments under the
note would be due until the consummation of this offering or the scheduled
maturity of the note, whichever occurs earlier. The Company intends to repay
this note from the proceeds of this offering.
Pursuant to the Warehousing Agreement, 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. In consideration for these services,
Achim receives an annual fee, payable monthly, calculated as a percentage of the
Company's invoiced sales originating at the warehouse ranging from 4% of
invoiced sales under $30 million to 3% for sales of $60 million or more. For
sales not originating at the warehouse, 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.
In addition, under the Warehousing Agreement, Achim provides warehousing
services consisting of receiving, shipping and storing of the Company's
merchandise. The Company pays Achim a monthly fee of 3% of its invoiced sales
originating at the warehouse in connection with these warehousing services
performed by Achim under the Warehousing Agreement.
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.
During the fiscal year ended April 30, 1997, the Company accrued approximately
$458,488 in fees under the Warehousing Agreement, consisting of $94,907 for the
three months ended July 31, 1996 and $363,580 for the nine months ended April
30, 1997. Approximately $2,250 and $6,750 payable under the Warehousing
Agreement for these respective periods may be apportioned to rent for office
space. An additional $24,950 and $74,850 may be apportioned to rent for
warehouse space for these same respective periods. See "Business-Properties."
Achim is wholly-owned 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 arranges for the
issuance by its financial lender of letters of credit in favor of the Company's
overseas suppliers thereby enabling the Company to finance the purchases of its
inventory. Also, from time to time, when taking deliveries from domestic
suppliers, Achim purchases products from the manufacturer and resells them to
the Company in order to accommodate Achim's commercial lenders who often require
a security interest in the merchandise until it has been sold and the lender has
been repaid. The Company pays Achim for the amount actually paid to the supplier
(including any applicable discounts) without markup, reimburses Achim for its
bank charges and pays it interest at the prime rate plus one percent on the
unpaid balance of the purchases. As of April 30, 1997, the Company owed an
amount of $2,590,360 in principal and interest under this arrangement. As of
September 30, 1997, this sum had decreased to $1,440,476. See "Certain
36
<PAGE> 40
Relationships and Related Transactions." The weighted average interest rate paid
by the Company to Achim at September 30, 1997, April 30, 1997 and April 30, 1996
was 9.37%, 9.25% and 11.5%, respectively.
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
fees payable by the Company under the Warehousing Agreement, the Company pays no
rent for the property. See "Business-Management Agreement with Achim Importing
Co., Inc." and "-Properties."
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 Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
37
<PAGE> 41
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of October 9, 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. 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)
-----------------
<S> <C> <C>
Name and Address No. of Shares % of Total
Marton Grossman (2) 2,976,000 93.0
Isaac Grossman (3) 2,976,000 93.0
Sheila Grossman (3) 2,976,000 93.0
Harry Braunstein
40 Wall Street
New York, NY 10004 -0- *
Bernard Goldman
2100 Boca West Drive
Laurel Oaks, OH -0- *
William P. Dolan 123 *
John Holodnicki 11 *
Gordon Sulltrop -0- *
All Officers and Directors as 2,976,134 93.0
a Group (8 persons)
</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.
(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. Mr. Isaac Grossman and two of his relatives are the trustees of the
Grossman Trusts. Under its terms, the Grossman Trust will return to Mr. Grossman
annually until August 1998 56% of the value of the shares (payable in cash or in
shares) when deposited into each of the Grossman Trusts. Since the number of
shares to be returned to Mr. Grossman is based on the then current market price
of the Common Stock, such number can not be determined at the present time. To
date, no shares have been returned to Mr. Grossman under this arrangement. Mr.
Grossman disclaims beneficial ownership in the shares held by the Grossman Trust
that will not be returned to him.
38
<PAGE> 42
(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, 3,198,258 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. The Common
Stock and the Warrants will be separately tradable commencing __________ [90
days after the effective date], or, upon written notice to each holder of Units,
earlier if, at the sole discretion of the Underwriter, such early separation is
warranted by market circumstances.
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
39
<PAGE> 43
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.
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."
The Warrants may not be exercised unless a current registration statement
is on file with the Commission and various state securities commissions. The
Company has agreed to use its best efforts to maintain a current effective
registration statement under the Securities Act. 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. Generally, the exercise price of the Warrants will be adjusted if
the Company issues and sells shares of Common Stock (or issue securities
convertible into Common Stock options, warrants and other similar rights) at a
price less than the exercise price of the Warrants in effect at the time of such
issuance. Upon each adjustment in the exercise price, corresponding adjustments
will be made in the number of shares of Common Stock issuable upon exercise of
the Warrants. In addition, in the event of a stock split, stock dividend,
recapitalization, merger, consolidation or similar corporate transactions
involving the Company, the then holders of the Warrants will receive the right
to purchase the kind and amount of securities (subject to adjustment as set
forth above) they would have been entitled to receive had they exercised the
Warrants immediately prior to any such corporate transaction. The foregoing does
not purport to be a complete description of the anti-dilution provisions of the
Warrants. The complete terms are set forth in the Warrant Agreement which has
been filed as an exhibit to the Registration Statement of which this Prospectus
forms a part.
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 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.
40
<PAGE> 44
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 be sold to the public immediately, 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
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 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.
No lock-up agreements are in effect with respect to any of the currently
issued and outstanding shares of Common Stock. The Company has been advised that
the affiliates of Mr. Grossman have no present intention to sell any of their
shares for a period of six months after the completion of this offering.
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.
MARKET FOR THE COMPANY'S SECURITIES
The Company believes that there are currently in excess of 1,000 registered
holders of the Company's Common Stock Prior to the Company's filing of a
petition for protection under the Bankruptcy Code in 1995, the Company's
securities were traded on the Nasdaq. There currently exists no active trading
market for the Company's securities and, therefore, no current pricing
information is available for the Common Stock. It is anticipated that the
Securities will be traded on the Nasdaq SmallCap Market upon completion of this
offering.
41
<PAGE> 45
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. Upon completion of the sale of all
Securities offered hereby, 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 8% (or
the maximum amount permissible under NASD rules) of the exercise price of all
Warrants it causes to be exercised commencing one year from the date hereof, 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 otherwise in compliance with the applicable NASD rules. The Warrant
solicitation fee will be payable only after one year from the date hereof.
Under the underwriting agreement, the Underwriter has the right to
designate one member of the Board of Directors for a period of three years from
the date hereof. The agreement also 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
exercisability 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 may not be exercised or sold, transferred, assigned
or hypothecated for one year from the date hereof except to officers of the
Underwriter. Any profit realized upon a 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
42
<PAGE> 46
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 Company has agreed to retain the Underwriter as a financial consultant
for the two years following the closing of this offering for an aggregate fee of
$20,000 payable at the closing of this offering.
The Underwriter has informed the Company that it does not expect sales of
Units to be made to discretionary accounts.
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 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. Gerald A. Kaufman, Esq., Huntington Station, 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, 1996
and 1997 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.
43
<PAGE> 47
DYNAMIC INTERNATIONAL, LTD.
AND SUBSIDIARY
FINANCIAL STATEMENTS
APRIL 30, 1997
<PAGE> 48
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Independent Auditors' Reports F-1 to F-2
Consolidated Financial Statements:
Balance Sheets as of July 31, 1997 (unaudited), April 30, 1997
and 1996 F-3 to F-4
Statements of Operations for the three months ended July 31, 1997
(unaudited) for the nine months ended April 30, 1997, three
months ended July 31, 1996 and the years ended April 30, 1996
and 1995 F-5
Statements of Stockholders' Equity (Deficit) for the three months
ended July 31, 1997 (unaudited) for the nine months ended April
30, 1997, three months ended July 31, 1996 and the years ended
April 30, 1996 and 1995 F-6
Statements of Cash Flows for the three months ended July 31, 1997
(unaudited) for the nine months ended April 30, 1997, three
months ended July 31, 1996 and the years ended April 30, 1996
and 1995 F-7 to F-8
Notes to Financial Statements F-9 to F-24
Independent Auditor's Report on Supplemental Schedule F-25
Schedule II - Valuation and Qualifying Accounts F-26
</TABLE>
<PAGE> 49
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 2) and its
subsidiary as of April 30, 1997 and 1996, and the related consolidated
statements of operations, stockholders' equity (deficit), and cash flows for the
nine months ended April 30, 1997, the three months ended July 31, 1996, and the
year ended April 30, 1996. 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 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 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 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 consolidated financial position of Dynamic
International, Ltd. (formerly Dynamic Classics, Ltd.) and its subsidiary as of
April 30, 1997 and 1996, and the results of their operations and their cash
flows for the nine months ended April 30, 1997, the three months ended July 31,
1996, and the year ended April 30, 1996, in conformity with generally accepted
accounting principles.
As discussed more fully in Note 2 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 June
27, 1997, except as
to Note 4, for which the
date is July 10, 1997
F-1
<PAGE> 50
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Dynamic International, Ltd.
We have audited the accompanying consolidated statements of operations,
stockholders' equity (deficit) and cash flows of Dynamic International, Ltd.
(formerly Dynamic Classics, Ltd., see Note 2) and Subsidiary for the year ended
April 30, 1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on those
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 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 results of
operations and cash flows of Dynamic International, Ltd. (formerly Dynamic
Classics, Ltd.) and Subsidiary for the year ended April 30, 1995 in conformity
with generally accepted accounting principles.
As more fully discussed in Note 2 the Company, on August 23, 1995,
filed a voluntary petition for relief under Chapter 11 of the United States
Bandruptcy Act.
HOBERMAN, MILLER & CO., P.C.
New York, New York
June 26, 1996
F-2
<PAGE> 51
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
REORGANIZED REORGANIZED PREDECESSOR
COMPANY COMPANY COMPANY
JULY 31, APRIL 30, APRIL 30,
1997 1997 1996
---- ---- ----
(UNAUDITED)
ASSETS
<S> <C> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 59,245 $ 43,543 $ 26,515
Accounts receivable - trade (net of allowance for doubtful
accounts of $167,000 in 1997 and 1996) 1,063,147 887,089 1,036,927
Due from suppliers 45,435 65,273 26,760
Inventory 2,786,336 3,301,735 2,384,469
Prepaid expenses 155,618 60,272 81,693
Miscellaneous receivables 2,658 2,658 135,039
Prepaid and refundable income taxes 56,003 39,914 291,146
----------- ----------- -----------
Total Current Assets 4,168,442 4,400,484 3,982,549
----------- ----------- -----------
PROPERTY AND EQUIPMENT
Tools and dies 707,939 707,939 707,939
Furniture and equipment 102,205 102,205 102,205
Capitalized equipment leases 576,071 576,071 576,071
----------- ----------- -----------
1,386,215 1,386,215 1,386,215
Accumulated depreciation (1,278,011) (1,260,924) (1,156,160)
----------- ----------- -----------
Total Property and Equipment, net 108,204 125,291 230,055
----------- ----------- -----------
OTHER ASSETS
Due from suppliers 36,142 36,142 36,142
Security deposits 4,650 4,650 4,650
Deferred stock offering costs 189,867 116,023 --
Reorganization value in excess of amounts allocable to
identifiable assets, net 121,436 124,472 --
----------- ----------- -----------
Total Other Assets 352,095 281,287 40,792
----------- ----------- -----------
TOTAL ASSETS $ 4,628,741 $ 4,807,062 $ 4,253,396
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
<PAGE> 52
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(CONTINUED)
<TABLE>
<CAPTION>
REORGANIZED REORGANIZED PREDECESSOR
COMPANY COMPANY COMPANY
JULY 31, APRIL 30, APRIL 30,
1997 1997 1996
---- ---- ----
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
<S> <C> <C> <C>
CURRENT LIABILITIES
Accounts payable and accrued expenses - non related $ 710,549 $ 846,234 1,009,248
Accounts payable and accrued expenses - related party 2,655,946 2,627,580 2,129,893
Capital lease obligations - current 18,261 24,228 48,731
Income taxes payable -- 103,700 --
Loan payable - related party 1,005,350 844,531 557,000
Other liabilities -- -- 531,561
----------- ----------- -----------
Total Current Liabilities 4,390,106 4,446,273 4,276,433
----------- ----------- -----------
OTHER LIABILITIES
Capital lease obligations, net of current portion -- -- 23,965
Loan payable - related party 54,435 215,254 --
----------- ----------- -----------
Total Other Liabilities 54,435 215,254 23,965
----------- ----------- -----------
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
Common stock, par value $.001 per share; authorized
50,000,000 shares; issued 3,198,798 shares 3,199 3,199 --
Additional paid in capital 22,940 22,940 590,291
Accumulated deficit -- -- (637,237)
Retained Earnings (since July 31, 1996, date of reorganization,
total deficit eliminated was $713,601) 158,064 119,399 --
----------- ----------- -----------
184,203 145,538 (29,502)
Less: Treasury stock, at cost, 15,000 shares -- -- (17,500)
Less: Treasury stock, at cost, 540 shares (3) (3) --
----------- ----------- -----------
Total Stockholders' Equity (Deficit) 184,200 145,535 (47,002)
----------- ----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,628,741 $ 4,807,062 $ 4,253,396
=========== =========== ===========
</TABLE>
All of the liabilities as stated above at April 30, 1996, the period during
which the Company was operating under reorganization proceedings, are
post-petition liabilities. The dischcharge of prepetition liabilities including
liabilities subject to compromise has been recorded and the gain on the debt
discharge is reflected in the consolidated statement of operations for the year
ended April 30, 1996.
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 53
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
REORGANIZED REORGANIZED PREDECESSOR
COMPANY COMPANY COMPANY
FOR THE THREE FOR THE NINE FOR THE THREE PREDECESSOR COMPANY
MONTHS ENDED MONTHS ENDED MONTHS ENDED FOR THE YEARS ENDED
JULY 31, APRIL 30, JULY 31, APRIL 30,
1997 1997 1996 1996 1995
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES
Sales $1,834,162 $7,492,729 $ 1,983,164 $ 7,151,715 $ 32,533,097
Other income 7,959 54,642 10,201 98,272 70,638
---------- ---------- ----------- ------------ ------------
1,842,121 7,547,371 1,993,365 7,249,987 32,603,735
COST OF SALES 1,282,334 4,850,002 1,454,637 9,480,484 34,761,846
---------- ---------- ----------- ------------ ------------
GROSS PROFIT (LOSS) 559,787 2,697,369 538,728 (2,230,497) (2,158,111)
---------- ---------- ----------- ------------ ------------
OPERATING EXPENSES
Research and development 14,420 4,042 -- 101,992 44,962
Shipping expenses 67,864 452,093 116,894 738,681 1,198,563
Selling expenses 179,824 686,214 198,993 1,254,006 2,455,493
Advertising and promotion 2,493 152,563 1,819 389,672 346,400
General and administrative 172,545 931,683 238,791 4,198,800 3,720,998
Interest and bank charges - non related
(Contractual interest of $806,937 for
the year ended April 30, 1996) 7,017 21,462 4,174 248,625 1,384,898
Interest and bank charges - related party 52,909 177,339 53,096 134,928 --
---------- ---------- ----------- ------------ ------------
497,072 2,425,396 613,767 7,066,704 9,151,314
---------- ---------- ----------- ------------ ------------
REORGANIZATION ITEMS:
Bankruptcy administration costs -- 48,874 1,325 449,693 --
---------- ---------- ----------- ------------ ------------
INCOME (LOSS) BEFORE
PROVISION FOR INCOME TAXES 62,715 223,099 (76,364) (9,746,894) (11,309,425)
---------- ---------- ----------- ------------ ------------
INCOME TAX PROVISION (BENEFIT)
Current -- 103,700 -- -- (396,143)
Deferred 24,050 -- -- (7,511,000) 314,053
---------- ---------- ----------- ------------ ------------
24,050 103,700 -- (7,511,000) (82,090)
---------- ---------- ----------- ------------ ------------
INCOME (LOSS) BEFORE
EXTRAORDINARY ITEM 38,665 119,399 (76,364) (2,235,894) (11,227,335)
---------- ---------- ----------- ------------ ------------
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) $ 38,665 $ 119,399 $ (76,364) $ 6,945,299 $(11,227,335)
========== ========== =========== ============ ============
INCOME PER SHARE OF COMMON
SHARES $ 0.01 $ 0.04
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES 3,198,258 3,198,258
</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-5
<PAGE> 54
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, 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 the Three Months Ended
July 31, 1996 - - (76,364) - (76,364)
-------- --------- ----------- -------- ------------
Balance - July 31, 1996 17,444 590,291 (713,601) (17,500) (123,366)
Eliminate predecessor equity accounts and
to reflect new issuance of shares in
connection with fresh start (1,450) (580,146) 713,601 17,497 149,502
-------- --------- ----------- -------- ------------
15,994 10,145 - (3) 26,136
To reflect 1 for 5 reverse stock split (12,795) 12,795 - - -
-------- --------- ----------- -------- ------------
Balance - July 31, 1996 3,199 22,940 - (3) 26,136
Net income for the Nine Months Ended
April 30, 1997 - - 119,399 - 119,399
-------- --------- ----------- -------- ------------
Balance - April 30, 1997 3,199 22,940 119,399 (3) 145,535
Net income for the Three Months Ended
July 31, 1997 (Unaudited) - - 38,665 - 38,665
-------- --------- ----------- -------- ------------
Balance - July 31, 1997 (Unaudited) $ 3,199 $ 22,940 $ 158,064 $ (3) $ 184,200
======== ========= =========== ======== ============
</TABLE>
The par value of the common stock prior to July 31, 1996 was $.01 per share. The
par value of the common stock of the reorganized company commencing July 31,
1996 is $.001 per share.
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 55
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
REORGANIZED REORGANIZED PREDECESSOR
COMPANY COMPANY COMPANY
FOR THE THREE FOR THE NINE FOR THE THREE PREDECESSOR COMPANY
MONTHS ENDED MONTHS ENDED MONTHS ENDED FOR THE YEARS ENDED
JULY 31, APRIL 30, JULY 31, APRIL 30,
1997 1997 1996 1996 1995
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (loss) $ 38,665 $ 119,399 $ (76,364) $ 6,945,299 $(11,227,335)
Adjustments to reconcile net income (loss) to
net cash provided (used) by operating activities:
Depreciation and amortization 20,124 87,681 26,191 220,400 268,148
Amortization of deferred interest under
capital leases - - - - 17,979
Reserve for bad debts - - - 167,000 -
Loss on disposal of property
and equipment - - - 71,030 -
Deferred income taxes - - - (7,511,000) 314,053
Income on partial discharge of
capital lease obligations - - - (77,403) -
Interest converted to principal - 11,439 36,670 - -
Reorganization item:
Gain on discharge of debt, net
of income tax - - - (9,181,193) -
Cash distribution - (515,638) - - -
Changes in operating assets and liabilities:
(Increase) Decrease in operating
assets:
Accounts receivable and due
from suppliers (156,220) 482,254 (221,255) 220,882 6,843,636
Inventory 515,399 (1,032,882) 115,616 1,065,821 3,260,017
Prepaid expenses (95,346) 122,017 (100,596) 168,856 (183,186)
Miscellaneous receivables - 132,379 - (108,179) 51,352
Prepaid and refundable income taxes (16,089) 252,046 (812) - (291,146)
Security deposits - - - 86,858 (3,537)
Increase (Decrease) in operating liabilities:
Prepetition liabilities - - - 8,614,728 -
Accounts payable and accrued expenses (107,320) (56,766) 155,784 (1,828,715) 1,949,987
Income taxes payable (103,700) 103,700 - - (200,770)
--------- ----------- --------- ----------- ------------
Net Cash Provided (Used) by
Operating Activities $ 95,513 $ (294,371) $ (64,766) $(1,145,616) $ 799,198
--------- ----------- --------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment - - - (47,933) (143,995)
--------- ----------- --------- ----------- ------------
Net Cash Used by Investing Activities $ - $ - $ - $ (47,933) $ (143,995)
--------- ----------- --------- ----------- ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE> 56
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
<TABLE>
<CAPTION>
REORGANIZED REORGANIZED PREDECESSOR
COMPANY COMPANY COMPANY
FOR THE THREE FOR THE NINE FOR THE THREE PREDECESSOR COMPANY
MONTHS ENDED MONTHS ENDED MONTHS ENDED FOR THE YEARS ENDED
JULY 31, APRIL 30, JULY 31, APRIL 30,
1997 1997 1996 1996 1995
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable $ - $ - $ - $ 3,393,628 $ 24,250,741
Repayment of notes payable - - - (26,460,130)
Proceeds from notes payable - related party - 600,000 - - -
Repayment of notes payable - related party - (145,324) - - -
Proceeds from loan payable - related party - - - 557,000 -
Proceeds from bankers acceptances - - - 1,118,556 9,321,558
Repayment of bankers acceptances - - - (4,127,139) (7,876,394)
Repayment of officer's loans payable - - - - (2,373)
Repayment of capital lease obligations (5,967) (29,656) (18,812) (64,552) (109,308)
Proceeds from insurance note payable - - 77,225 - -
Repayment of insurance note payable - (62,020) (15,205) - -
Payment of deferred offering costs (73,844) (30,043) - - -
----------- ---------- -------- ----------- ------------
Net Cash Provided (Used) by
Financing Activities (79,811) 332,957 43,208 877,493 (875,906)
----------- ---------- -------- ----------- ------------
Net Increase (Decrease) in Cash and
Cash Equivalents 15,702 38,586 (21,558) (316,056) (220,703)
Cash and Cash Equivalents, beginning of period 43,543 4,957 26,515 342,571 563,274
----------- ---------- -------- ----------- ------------
Cash and Cash Equivalents, end of period $ 59,245 $ 43,543 $ 4,957 $ 26,515 $ 342,571
=========== ========== ======== =========== ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the periods for:
Interest $ 1,575 $ 25,451 $ 1,553 $ 203,964 $ 1,196,322
Income tax $ 163,534 $ - $ - $ - $ 116,319
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
During the years ended April 30, 1995 the Company incurred capital lease
obligations of $143,855 in connection with lease agreements to acquire
equipment.
In July 1996, pursuant to a Plan of Reorganization under Chapter 11 of the
United States Bankruptcy Code, the Company discharged approximately $17.2
million of allowed claims including a secured loan in the amount of $6.8 million
owed to one creditor. The claims were discharged by a cash payment of $515,638
and the issuance of 3,198,798 shares of common stock. Of this amount, 2,976,000
shares were issued to one creditor which also satisfied $15,923 of loans made by
the chief executive officer of the Company to the Company.
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
<PAGE> 57
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE PERIOD ENDED JULY 31, 1997 IS 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 throughout the
United States.
b. Revenue
Revenue is recognized when the goods are shipped to the
customer.
c. Fresh Start Reporting
Financial accounting during a Chapter 11 proceeding is
prescribed in "Statement of Position 90-7 of the American
Institute of Certified Public Accountants," titled
"Financial Reporting by Entities in Reorganization Under
the Bankruptcy Code" ("SOP 90-7"), which the Company
adopted effective July 31, 1996. The emergence from the
Chapter 11 proceeding resulted in the creation of a new
reporting entity without any accumulated deficit and with
the Company's assets and liabilities restated at their
estimated fair values (also see Note 2 Reorganization and
Management Plan). Because of the application of fresh start
reporting, the financial statements for periods after
reorganization are not comparable in all respects to the
financial statements for periods prior to reorganization.
d. Principles of Consolidation
The consolidated financial statements include the accounts
of the Company and the wholly owned inactive subsidiary.
All significant intercompany accounts and transactions have
been eliminated.
e. 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.
f. Inventories
Inventories consist principally of finished goods and are
stated at the lower of cost; last-in, first-out method,
(LIFO) or market.
g. 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:
Tools and dies 5 years
Furniture and equipment 5 years to 7 years
F-9
<PAGE> 58
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE PERIOD ENDED JULY 31, 1997 IS UNAUDITED)
(continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
h. Deferred Offering Costs
Legal and accounting costs incurred in connection with the
proposed public offering of the Company's common stock will
be charged to additional paid-in capital upon completion of
the proposed public offering. If the offering is not
consummated, these costs will be expensed.
i. Advertising and Promotion
Advertising and promotion expense, primarily comprised of
print media distributed to current and potential customers,
is expensed as incurred.
j. 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. Common stock equivalents are included in the
calculation if they are dilutive. Amounts for the
predecessor company (see Note 2) are not presented as they
are not meaningful.
k. 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.
l. Stock Options and Similar Equity Instruments
On January 1, 1996, the Company adopted the disclosure
requirements of Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-Based
Compensation," for stock options and similar equity
instruments (collectively, "Options") issued to employees;
however, the Company will continue to apply the intrinsic
value based method of accounting for options issued to
employees prescribed by Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issues to Employees,"
rather than the fair value based method of accounting
prescribed by SFAS No. 123. SFAS No. 123 also applies to
transactions in which an entity issues its equity
instruments to acquire goods or services from
non-employees. Those transactions must be accounted for
based on the fair value of the consideration received or
the fair value of the equity instruments issued, whichever
is more reliably measurable.
m. Reorganization value in excess of amounts allocable to
identifiable assets
The excess reorganization value is amortized over a period
of eleven years on the straight line basis (see Note 2).
Management re-evaluates the periods of amortization to
F-10
<PAGE> 59
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE PERIOD ENDED JULY 31, 1997 IS UNAUDITED)
(continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
m. determine whether subsequent events and circumstances
warrant revised estimates of useful lives. If impairment is
deemed to exist, the excess reorganization value will be
written down to fair value or projected discounted cash
flows from related operations. As of April 30, 1997,
management expects the asset to be fully recoverable.
2. REORGANIZATION AND MANAGEMENT PLAN
In 1994, the Company added a new line of products consisting
primarily of treadmills and ski machines. Initially, the Company was
successful in marketing these products. However, due to defective
products delivered by the Company's manufacturers, primarily located
in the People's Republic of China, the Company was forced to allow
substantial returns by its customers. Although pursuant to a written
agreement, the manufacturers acknowledged the defects and agreed to
pay for returns and to provide replacement goods at no cost, they
breached this agreement soon thereafter. For the year ended April 30,
1996, the Company suffered significant losses in the amount of
approximately $3,700,000 from its venture into this line of business.
At April 30, 1995, the Company was not in compliance with certain of
the financial covenants which enabled the bank to declare the
outstanding balances of all amounts due the bank to be immediately
due and payable. In July 1995, the lender bank effectively terminated
its relationship with the Company as it experienced difficulty in
complying with the terms of the loans. As a result, certain
collateral was liquidated by the lender bank. On August 22, 1995, the
lender bank sold and assigned the loan balance of $6.8 million. The
assigned loan was secured by a security interest in substantially all
of the Company's assets. As discussed below, the assignor was issued
2,976,000 shares of new common stock in consideration of forgiving
the $6.8 million outstanding loan.
On August 23, 1995, the Company filed a voluntary petition for relief
under Chapter 11 of the United States Bankruptcy Code. A Plan of
Reorganization 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
balance sheet of the combined entity, immediately after the merger,
were substantially the same as those of the company prior to the
merger. The "new common stock" is referred to below as the common
stock of Dynamic International, Ltd.
Chapter 11 claims filed against the Company and subsequently allowed
in the bankruptcy proceeding totaled approximately $17.2 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 3,198,798
shares of new common stock were issued on July 25, 1996 out of which
2,976,000 shares were issued to one secured creditor, which also
satisfied $15,923 of loans made by the chief executive officer of the
Company to the Company (see Note 4); 160,000 shares were issued to
unsecured creditors, and
F-11
<PAGE> 60
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE PERIOD ENDED JULY 31, 1997 IS UNAUDITED)
(continued)
2. REORGANIZATION AND MANAGEMENT PLAN (cont'd)
62,798 shares were issued to the reconfirmation common stock equity
interest holders.
The discharge of claims was reflected in the April 30, 1996 financial
statements. The stock distribution value is based on the
reorganization value of the Company determined by projecting cash
flows over an eleven year period and discounting such cash flows at a
cost of capital rate of 15% and the statutory federal, state and
local tax rates currently in effect. The discounted residual value at
the end of the forecast period is based on the capitalized cash flows
for the last year of that period. Cash distributions and the
estimated stock distribution value totaling $531,561 has been
recorded as other liabilities as of April 30, 1996. The gain of
approximately $16.7 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 than the total of
all postpetition and allowed claims, and if holders of existing
voting shares immediately before confirmation receive less than 50
percent of the voting shares of the emerging entity, both conditions
of which were satisfied by the Company. Although the confirmation
date was May 23, 1996, fresh-start reporting was adopted on July 31,
1996. There were no material fresh-start related adjustments during
the period May 23, 1996 to July 31, 1996.
Under fresh start accounting, all assets and liabilities are restated
to reflect their reorganization value, which approximates book value
at date of reorganization. Therefore, no reorganization value has
been allocated to the assets and liabilities. In addition, the
accumulated deficit of the predecessor company at July 31, 1996
totaling $713,601 was eliminated, and at August 1, 1996, the
reorganized company's financial statements reflected no beginning
retained earnings or deficit. The reorganization value in excess of
amounts allocable to identifiable assets is being amortized over an
eleven year period on the straight line method. Amortization expense
for the nine months ended April 30, 1997 was $9,108.
F-12
<PAGE> 61
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE PERIOD ENDED JULY 31, 1997 IS UNAUDITED)
(continued)
2. REORGANIZATION AND MANAGEMENT PLAN (cont'd)
The following is a proforma balance sheet of the reorganized Company
based on the discounted cash flows as discussed above.
<TABLE>
<CAPTION>
Balance Reorganized
Sheet Stock Fresh Company
July 31, 1996 Exchange Start July 31, 1996
------------- --------- --------- -----------
<S> <C> <C> <C> <C>
Current Assets:
Cash $ 4,957 $ 4,957
Accounts receivable, net 1,258,182 1,258,182
Inventory 2,268,853 2,268,853
Prepaid & refundable
income taxes 291,960 291,960
Other assets 328,030 328,030
----------- -----------
Total Current Assets 4,151,982 4,151,982
Fixed assets, net 203,863 203,863
Other Assets 56,848 56,848
Reorganization value in
excess of amounts allo-
cable to identifiable assets 133,580 133,580
----------- --------- -----------
Total Assets $ 4,412,693 $ 133,580 $ 4,546,273
=========== ========= ===========
Current Liabilities:
Loans payable - MG $ 593,670 $ 593,670
Loans payable - Trade 62,020 62,020
Accounts payable and
accrued expenses 3,294,925 3,294,925
Capital lease obligations 32,226 32,226
Other current liabilities 531,561 (15,923) 515,638
----------- --------- --------- -----------
Total Current Liabilities 4,514,402 (15,923) 0 4,498,479
Other liabilities 21,658 21,658
----------- --------- --------- -----------
Total Liabilities 4,536,060 (15,923) 0 4,520,137
----------- --------- --------- -----------
Common stock par value 17,444 (17,444) 15,994
15,994
Additional paid in capital 590,290 (590,291) (580,021) 10,145
590,167
Accumulated deficit (713,601) 713,601 0
----------- --------- --------- -----------
(105,867) (1,574) 133,580 26,139
Less: treasury stock (17,500) 17,497 (3)
----------- --------- --------- -----------
Total Equity (123,367) 15,923 133,580 26,136
----------- --------- --------- -----------
Total Liabilities and Equity $ 4,412,693 $ 0 $ 133,580 $ 4,546,273
=========== ========= ========= ===========
</TABLE>
F-13
<PAGE> 62
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE PERIOD ENDED JULY 31, 1997 IS UNAUDITED)
(continued)
2. REORGANIZATION AND MANAGEMENT PLAN (cont'd)
The other current liabilities adjustment is all comprised of loans
from MG Holdings Corp. to pay creditors pursuant to the
reorganization plan. The liability to the reorganized company is
$515,638.
3. INVENTORIES
If the first-in, first-out (FIFO) method of accounting had been used
by the Company, reported net income would have been decreased by
$294,000 in fiscal 1997. Net income would have been increased by
$263,000 in fiscal 1996, and the net loss would have been increased
by $246,000 in fiscal 1995. On a FIFO basis, reported year end
inventories would have increased by $24,000 in 1997, $318,000 in 1996
and $55,000 in 1995.
4. RELATED PARTY TRANSACTIONS
Pursuant to a Warehouse and Service Agreement dated as of September
1, 1996 (the "Warehousing Agreement") between the Company and an
entity ("Related Party") owned by a major stockholder, the entity
performs certain administrative services on behalf of the Company.
Under the Warehousing Agreement, the entity 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. In consideration for these
services, Achim receives an annual fee, payable monthly, calculated
at a percentage of the Company's invoiced sales originating at the
warehouse ranging from 4% of the invoiced sales under $30 million to
3% of sales of $60 million or more. For sales not originating at the
warehouse, 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. In addition, under the Warehousing
Agreement, the entity provides warehousing services consisting of
receiving, shipping, and storing of the Company's merchandise. The
Company pays Achim a monthly fee of 3% of its invoiced sales
originating at the warehouse in connection with these warehousing
services performed by Achim under the Warehousing Agreement.
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. During the fiscal year ended
April 30, 1997, the Company accrued approximately $458,488 in fees
under the Warehousing Agreement. Total warehousing and administrative
expenses charged to operations for the nine months ended April 30,
1997 were approximately $364,000, for the three months ended July 31,
1996 were approximately $95,000 and 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.
Loan payable to the related party totaled $1,059,785 at April 30,
1997. Such note is secured by all of the Company's assets. On August
30, 1996, loans and other payables, including accrued interest
totaling $1,205,109, were converted into the note payable. Interest
is charged at the
F-14
<PAGE> 63
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE PERIOD ENDED JULY 31, 1997 IS UNAUDITED)
(continued)
4. RELATED PARTY TRANSACTIONS (cont'd)
Citibank prime rate plus 1%. This note is payable in 24 equal
installments of principal and interest through August 5, 1998. At
April 30, 1997, the Company was in arrears in the amount of $274,273
consisting of principal and interest. On July 10, 1997, the note was
amended to allow the arrears and note payments to be deferred until
the consummation of the Company's contemplated public offering (see
Note 10) or the scheduled maturity of the note, whichever is earlier.
Annual maturities of the note at 9.25% interest per annum is as
follows:
<TABLE>
<CAPTION>
For the Year Ending
-------------------
<S> <C> <C>
April 30,
1997 (in arrears) $ 237,053
1998 607,478
1999 215,254
----------
$1,059,785
==========
</TABLE>
Interest expense charged to operations for the nine months ended
April 30, 1997 was $67,898, for the three months ended July 31, 1996
was $16,746 and $19,924 for the year ended April 30, 1996.
Other amounts payable to the related party totaled $2,627,580 and
$2,129,893, respectively, at April 30, 1997 and 1996. Such amounts
represent unpaid inventory purchases and various fees due to the
related party. The amounts payable for the purchase of inventory
bears interest at the Citibank prime rate plus 1% from September 1996
to April, 1997 and the Citibank prime rate plus 3% prior to September
1996. The prime rate used was 8.25% for the period September 1996 to
April 1997 and 8.5% for the period prior to September 1996 . Interest
expense charged to operations was $111,411 for the nine months ended
April 30, 1997, $34,380 for the three months ended July 31, 1996 and
$115,004 for the year ended April 30, 1996. The weighted average
interest rate at April 30, 1997 and 1996 was 9.25% and 11.5%,
respectively.
5. INCOME TAXES
The Company utilizes an asset and liability approach to determine the
extent of any deferred income taxes, as described in Statement No.
109, "Accounting for Income Taxes" of the Financial Accounting
Standards Board. This method gives consideration to the future tax
consequences associated with differences between financial statement
and tax bases of assets and liabilities.
F-15
<PAGE> 64
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE PERIOD ENDED JULY 31, 1997 IS UNAUDITED)
(continued)
5. INCOME TAXES (cont'd)
There were no income tax liabilities at April 30, 1996. Income tax
liabilities at April 30, 1997 included in income taxes payable
consist of the following :
<TABLE>
<CAPTION>
1997
----
<S> <C>
Current taxes $ 103,700
Deferred taxes:
Federal -
Other income and franchise taxes -
---------
Total Income Tax Liability $ 103,700
=========
</TABLE>
At April 30, 1997, there are no temporary differences that would
result in a deferred tax asset or liability. The deferred income tax
assets and liabilities at April 30, 1996 consist of the following:
<TABLE>
<CAPTION>
1996
----
<S> <C>
DEFERRED TAX ASSETS:
Bad debt reserves $ 75,000
Difference in book and tax treatment
for advertising costs 16,000
Net operating loss carryforwards 8,783,000
Other deferred tax assets 50,000
------------
TOTAL DEFERRED TAX ASSETS 8,924,000
------------
DEFERRED TAX LIABILITY (ALLOCATED TO
EXTRAORDINARY GAIN):
Gain on discharge of prepetition
liabilities 7,511,000
------------
7,511,000
------------
Valuation allowance for deferred
tax assets (1,413,000)
------------
$ -0-
============
</TABLE>
The valuation allowance decreased by $1,094,000 in 1996.
F-16
<PAGE> 65
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE PERIOD ENDED JULY 31, 1997 IS UNAUDITED)
(continued)
5. INCOME TAXES (cont'd)
A summary of the provision (credit) for income taxes is as follows:
<TABLE>
<CAPTION>
Reorganized Predecessor
Company Company
-------------- -----------------------------------------
Nine Months
Ended Year Ended Year Ended
April 30, 1997 April 30, 1996 April 30, 1995
-------------- -------------- --------------
<S> <C> <C> <C>
Current:
Federal $ 59,000 $ -- $(401,529)
State and Local 44,700 -- 5,386
----------- ----------- ---------
103,700 -- (396,143)
----------- ----------- ---------
Deferred:
Federal -- (5,675,000) 313,039
State and Local -- (1,836,000) 1,014
----------- ----------- ---------
-- (7,511,000) 314,053
----------- ----------- ---------
$ 103,700 $(7,511,000) $ ( 82,090)
=========== =========== =========
</TABLE>
The reconciliation of the federal statutory income tax expense
(credit) to the Company's actual income tax (credit) is as follows:
<TABLE>
<CAPTION>
Reorganized Predecessor
Company Company
-------------- -----------------------------------------
Nine Months
Ended Year Ended Year Ended
April 30, 1997 April 30, 1996 April 30, 1995
-------------- -------------- --------------
<S> <C> <C> <C>
U.S. federal income taxes
at statutory rate $ 75,900 $ 2,361,000 $(3,845,205)
Losses for which no benefit
was provided -- -- 982,371
Change in valuation
allowance -- (1,094,000) 2,506,820
Reversal of previously
established tax asset -- -- 313,039
Tax effect of permanent
differences 5,400 8,000 17,035
State income taxes, net of
federal benefit 25,000 764,000 --
Benefit of unused net
operating losses -- (1,412,000) --
Differences due to change in
rate -- (627,000) --
Other (2,600) -- (56,150)
--------- ----------- -----------
$ 103,700 $ -0- $ (82,090)
========= =========== ===========
</TABLE>
F-17
<PAGE> 66
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE PERIOD ENDED JULY 31, 1997 IS UNAUDITED)
(continued)
5. INCOME TAXES (cont'd)
The Company had a net loss for the three months ended July 31, 1996
and accordingly, the Company has no income tax provision or liability
for the period.
The Company has 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. As of April 30, 1997, the
Company received $251,000 of the refundable income taxes. The balance
of $36,000 is included in prepaid and refundable income taxes at
April 30, 1997.
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 2 re: merger into Dynamic
International, Ltd.). Based on ownership changes resulting from the
reorganization (see Note 2), the balance of the net operating loss
carryforward is expected to be limited by the current provision of
Section 382 of the Internal Revenue Code.
6. 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.
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 4).
Rent expense for the years ended April 30, 1996 and 1995
was $341,427 and $583,596.
F-18
<PAGE> 67
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE PERIOD ENDED JULY 31, 1997 IS UNAUDITED)
(continued)
6. COMMITMENTS AND CONTINGENCIES (cont'd)
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 nine months ended
April 30, 1997 was approximately $353,000, for the three
months ended July 31, 1996 was $94,000 and for the years
ended April 30, 1996 and 1995 was approximately $275,000
and $779,000, 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 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 for the year ended
April 30, 1996.
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 were made by the Company for the 1996
calendar year nor will any be made by the 1997 calendar
year.
The 401(k) expense amounted to $0 for the period May 1,
1996 to April 30, 1997 and $2,600 and $9,460 for the years
ended April 30, 1996 and 1995, respectively.
f. Union Pension Plan
Certain union employees participate in a multiemployer
retirement plan sponsored by their union. The Company is
required to pay seven cents ($.07) per hour per employee to
the plan. The data available from administrators of the
multi-employer 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. For the years ended April
30, 1996 and 1995 pension expenses for the union employees
were $3,745 and $1,680, respectively.
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
to the financial statements taken as a whole and are
substantially covered by the Company's product liability
insurance.
F-19
<PAGE> 68
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE PERIOD ENDED JULY 31, 1997 IS UNAUDITED)
(continued)
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. At April 30,
1996, accounts receivable from these customers totaled $465,506.
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. At April 30, 1995, there
were no accounts receivable from these customers. The Company sells a
limited amount to foreign customers. There were no material
receivables subject to foreign currency fluctuations.
During the nine months ended April 30, 1997 sales to major customers
were approximately $3,080,180. At April 30, 1997 accounts receivable
from these customers totaled $379,902. During the three months ended
July 31, 1996, sales to major customers were approximately $837,450.
At July 31, 1996, accounts receivable from these customers totaled
$548,726.
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, 1997 there was no such
excess balance. At April 30, 1996 such excess balances totaled
approximately $207,000. The Company has not experienced any losses
and believes it is not exposed to any significant credit risk from
cash and cash equivalents.
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 it does not have an accounts
receivable credit risk exposure beyond the allowance provided. The
Company does not require collateral or other security to support
financial instruments subject to credit risk.
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. 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.
F-20
<PAGE> 69
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE PERIOD ENDED JULY 31, 1997 IS UNAUDITED)
(continued)
9. SIGNIFICANT RISKS AND UNCERTAINTIES (cont'd)
b. Most of the Company's products are purchased from the
Philippines, Taiwan and Hong Kong. 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.
10. OTHER ITEMS
a. Discontinued Products
In 1994, the Company added a new line of products
consisting primarily of treadmills and ski machines. Sales
of the treadmills and ski machines began in June 1994. The
Company sold approximately $24,000,000 of these products
from June 1, 1994 to August 23, 1995. Approximately
$17,600,000 or 73% of these products were shipped directly
to consumers. Due to serious manufacturing defects and poor
construction of the Company's products delivered by the
Company's manufacturers, primarily located in the People's
Republic of China, the Company was forced to allow
substantial chargebacks by its customers. Although,
pursuant to a written agreement, the manufacturers
acknowledged the defects and agreed to pay for returns and
to provide replacement goods at no cost, they breached this
agreement soon thereafter. As a result, during April 1995,
the Company issued credits to customers for approximately
$5,000,000 of the $7,487,000 of credits for the fiscal year
ended April 30, 1995. The Company issued another $3,211,000
in credits for defective merchandise during the fiscal year
ended April 30, 1996.
The following table sets forth the financial statement
effect of the Company's line of treadmills and ski machines
for the periods indicated:
<TABLE>
<CAPTION>
Reorganized Predecessor
Company Company
for the Nine for the Three Predecessor Company
Months Ended Months Ended For the Years Ended
April 30, 1997 July 31, 1996 April 30, 1996 April 30, 1995
-------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
Sales $ -- $ -- $ 597,000 $ 23,255,000
Credits -- -- (3,210,900) (7,487,000)
---- ---- ----------- ------------
Net Sales -- -- (2,613,900) 15,768,000
Inventory
Reserve -- -- -- (1,320,063)
Cost of Sales -- -- 156,000 (18,604,172)
---- ---- ----------- ------------
Gross Loss $ -- $ -- $(2,457,900) $ (4,156,235)
==== ==== =========== ============
</TABLE>
F-21
<PAGE> 70
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE PERIOD ENDED JULY 31, 1997 IS UNAUDITED)
(continued)
10. OTHER ITEMS (cont'd)
a. Discontinued Products (cont'd)
The sale of these products was discontinued in August 1995,
and all inventory was disposed of by October 1995.
Currently, the Company does not believe that there will be
additional returns of these products or that any claims
relating thereto remain to be settled.
b. 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.
The following supplementary earnings per share reflect the
repayment of indebtedness of $1,200,000 and the resulting
reduction of interest expense and increase in net income as
if it had taken place at the beginning of the
reorganization period.
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended July 31, 1997 Ended April 30, 1997
------------------- --------------------
<S> <C> <C>
Net Income $ 54,118 $ 155,738
Earnings Per Share .02 .05
Number of Shares 3,438,258 3,438,258
</TABLE>
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 earnings criteria as follows:
<TABLE>
<CAPTION>
Earnings Before Shares to
Year Ending Income Tax Be Issued
----------- ---------- ---------
<S> <C> <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.
Compensation expense will be measured based on the fair
value of the shares at the time the performance conditions
are achieved. Determination will be based on the best
estimate of the outcome of the performance condition.
Compensation will be recognized in the periods in which the
performance conditions are achieved.
F-22
<PAGE> 71
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
(continued)
10. OTHER ITEMS (cont'd
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 additional paid-in
capital when the warrants are issued. As capital in nature,
they are not compensatory.
f. Underwriter Option
The Company has granted the underwriter an option
exercisable for 45 days from the effective date of the
registration statement to purchase up to 180,000 units at
the public offering price less the underwriting discounts.
11. AUTHORITATIVE PRONOUNCEMENTS
a. The FASB issued SFAS No. 125, "Accounting for Transfer 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. The
Company does not have transactions which come under the
general heading of "Transfers of Servicing of Financial
Assets," and the added refinements for "Extinguishment of
Debt" are not expected to be significant. Therefore, SFAS
125 is not expected to have any effect on the Company.
b. The FASB has issued SFAS No. 128, "Earnings Per Share" and
FASB No. 129, "Disclosure of Information About Capital
Structure." Both are effective for financial statements
issued for periods ending after December 15, 1997. SFAS
No. 128 simplifies the computation of earning per share by
replacing the presentation of primary earnings per share
with a presentation of basic earnings per share. The
statement requires dual presentation of basic and diluted
earnings per share by entities with complex capital
structures. Basic earnings per share include no dilution
and is computed by dividing income available to common
stockholders by the weighted average number of shares
outstanding for the period. Diluted earnings per share
reflect the potential dilution of securities that could
share in the earnings of an entity similar to fully
diluted earnings per share.
F-23
<PAGE> 72
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
(continued)
11. AUTHORITATIVE PRONOUNCEMENTS (cont'd)
b. While the Company has not analyzed SFAS No. 128
sufficiently to determine its long-term impact on per
share reported amounts, SFAS No. 128 should not have a
significant effect on historically reported per share loss
amounts.
SFAS No. 129 does not change any previous disclosure
requirements but, rather, consolidates existing disclosure
requirements for ease of retrieval.
c. In June 1997, the FASB issued SFAS 130, "Reporting
Comprehensive Income" and SFAS 131, "Disclosures About
Segments of an Enterprise and Related Information". Both
are effective for financial statements for fiscal years
beginning after December 15, 1997. The Company will adopt
both statements on May 1, 1998. Adoption is not expected to
have a material impact on the financial position and
results of operations.
12. UNAUDITED INTERIM FINANCIAL STATEMENTS
The financial statements as of July 31, 1997 and for the three months
ended July 31, 1997 are unaudited. However, in the opinion of
management, all adjustments necessary for a fair presentation of the
financial statements for the interim period 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-24
<PAGE> 73
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, 1997 and 1996 and for the nine months
ended April 30, 1997 and three months ended July 31, 1996 is included on page
F-1 of this Form S-1. 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 nine months ended April 30, 1997, the
three months ended July 31, 1996, and 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,
presents fairly, in all material respects, the information required to be
included therein.
Moore Stephens, P.C.
Certified Public Accountants
New York, New York
June 27, 1997
F-25
<PAGE> 74
DYNAMIC CLASSICS, LTD. AND SUBSIDIARY
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
REORGANIZED PREDECESSOR PREDECESSOR
COMPANY COMPANY COMPANY
FOR THE NINE FOR THE THREE FOR THE YEAR
MONTHS ENDED MONTHS ENDED ENDED
APRIL 30, JULY 31, APRIL 30,
1997 1996 1996
-------- -------- --------
<S> <C> <C> <C>
Allowance for doubtful accounts balance - beginning $167,000 $167,000 $ --
Additions charged to income -- -- 167,000
Recovery of uncollectible accounts - net -- -- --
Writeoffs of uncollectible amounts -- -- --
-------- -------- --------
Allowance for doubtful accounts balance - ending $167,000 $167,000 $167,000
======== ======== ========
</TABLE>
F-26
<PAGE> 75
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> 76
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:
II-1
<PAGE> 77
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
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:
II-2
<PAGE> 78
(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.
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
II-3
<PAGE> 79
(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 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.
1 Form of Underwriting Agreement(1)
1.01 Form of Unit Purchase Option(1)
1.02 Form of Financial Advisory and Consulting Agreement(1)
1.03 Form of Selected Dealers 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)
II-4
<PAGE> 80
4.02 Form of Common Stock Certificate(2)
4.03(a) Form of A Warrant Certificate(1)
4.03(b) Form of B Warrant Certificate(1)
5 Revised 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.(1)*
10.06 Bonus Agreement with Marton Grossman(1)
16.01 Letter from Hoberman Miller & Co. dated October 23, 1996 (6)
23.01 Consent by Moore Stephens, P.C. (Included in Part II)
23.02 Consent by Hoberman, Miller, Goldstein & Lesser, P.C.
(Included in Part II)
- ----------------------------
(1) Previously filed.
(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.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
II-5
<PAGE> 81
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration statement:
(i) Include any prospectus required by section
10(a)(3) of the Securities Act;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration statement
(or the most recent post-effective amendment thereto) which,
individually or in the aggregate, represent a fundamental
change in the information set forth 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 the Commission pursuant to Rule
424(b) if, in the aggregate, the changes in volume and price
represent no more than 20 percent change in the maximum
aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration
statement.
(iii) To 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 a 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) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination 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 purposes of determining any liability under the Securities Act,
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 shall be deemed to be part of this registration statement as of
the time it was declared effective.
That for the purpose of determining any liability under the Securities
Act of 1933, each such 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.
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-6
<PAGE> 82
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 13th day of October 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
- --------- ----- ----
<S> <C> <C>
/s/ Marton Grossman October 13, 1997
- ---------------------------
Marton Grossman Chairman and President
/s/ Isaac Grossman October 13, 1997
- ---------------------------
Isaac Grossman Director
/s/ Sheila Grossman October 13, 1997
- ---------------------------
Sheila Grossman Director
- ---------------------------
Bernard Goldman Director
- ---------------------------
Harry P. Braunstein Director
/s/ William P. Dolan October 13, 1997
- --------------------------
William P. Dolan Vice President
Chief Financial
and Accounting Officer
</TABLE>
II-7
<PAGE> 83
CONSENT OF INDEPENDENT AUDITORS
We consent to the use in this Registration Statement on Form S-1 of
Dynamic International, Ltd. of our reports dated June 27, 1997, 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.
/s/ Moore Stephens, P.C.
New York, New York
October 15, 1997
II-8
<PAGE> 84
CONSENT OF INDEPENDENT AUDITORS
We consent to the use in this Amendment No. 2 to the 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.
New York, New York
October 14, 1997
II-9
<PAGE> 85
EXHIBIT INDEX
-------------
1 Form of Underwriting Agreement(1)
1.01 Form of Unit Purchase Option(1)
1.02 Form of Financial Advisory and Consulting Agreement(1)
1.03 Form of Selected Dealers 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(a) Form of A Warrant Certificate(1)
4.03(b) Form of B Warrant Certificate(1)
5 Revised 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.(1)*
10.06 Bonus Agreement with Marton Grossman(1)
16.01 Letter from Hoberman Miller & Co. dated October 23, 1996 (6)
23.01 Consent by Moore Stephens, P.C. (Included in Part II)
23.02 Consent by Hoberman, Miller, Goldstein & Lesser, P.C.
(Included in Part II)
- ----------------------------
(1) Previously filed.
(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 5
October 13, 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:
i. 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.
ii. The Units have been duly and validly authorized
and created.
iii. 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.
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.
<PAGE> 2
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.
HELLER, HOROWITZ & FEIT, P.C.
