<PAGE> 1
As filed with the Securities and Exchange Commission on August 20, 1997
Registration No. 333-25425
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
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<TABLE>
<S> <C> <C>
DYNAMIC INTERNATIONAL, LTD.
(Name of issuer in its charter)
NEVADA 5099 93-1215401
(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
718-469-4160
(Address and telephone number (Name, address and telephone
of registrant's principal executive number of agent for service)
offices and principal place of business)
------------------------------------
Copies to:
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]
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
- ------------------------------------------------------------------------------------------------------------------------------------
Title of Each Class of Securities to be Amount To Be Proposed Maximum Offering Proposed Maximum Aggregate Amount of
Registered Registered Price Per Security Offering Price(1) Registration Fee
- ------------------------------------------------------------------------------------------------------------------------------------
<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 ____ ____ ____
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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
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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 Warrants(3) 120,000 $ 9.90 $ 1,188,000 $ 360.00
included in the Underwriter's Warrants
- ------------------------------------------------------------------------------------------------------------------------------------
Common Stock underlying B Warrants(3) 120,000 $ 16.50 $ 1,980,000 $ 600.00
included in the Underwriter's Warrants
- ------------------------------------------------------------------------------------------------------------------------------------
Total (4) $33,138,120 $ 10,041.86
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</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>
1. Forepart of Registration Statement and
Outside Front Cover Page of Prospectus................ Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages of
Prospectus............................................ Inside Front and Outside Back Cover Pages of Prospectus
3. Summary Information, Risk Factors and Ratio
of Earnings to Fixed Charges.......................... Prospectus Summary, Risk Factors
4. Use of Proceeds....................................... Use of Proceeds
5. Determination of Offering Price ...................... Cover Page, Risk Factors, Underwriting
6. Dilution ............................................. Dilution
7. Selling Security Holders ............................. Not Applicable
8. Plan of Distribution ................................. Underwriting
9. Description of Securities to be Registered ........... Description of Securities
10. Interests of Named Experts and Counsel ............... Legal Matters; Experts
11. Information With Respect to Registrant ............... Business; Selected Financial Data; Management Discussion
and Analysis of Financial Condition and Results of Operations
12. Disclosure of Commission Position Disclosure of Commission Position on Indemnification for
on Indemnification for Securities Act Liabilities..... Securities Act Liabilities
</TABLE>
3
<PAGE> 4
SUBJECT TO COMPLETION DATED AUGUST 20, 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. Although the Company has made an application for inclusion with the
Nasdaq of the securities offered hereby, 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."
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 Underwriting Proceeds to
Public 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 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.
<PAGE> 5
The date of the Prospectus is ________, 1997.
2
<PAGE> 6
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.
3
<PAGE> 7
PROSPECTUS SUMMARY
Prospective investors should read this Prospectus carefully before making
any investment decision regarding the Company, and should pay particular
attention to the information contained in this Prospectus under the heading
"Risk Factors" and in the financial statements and related notes appearing
elsewhere in this Prospectus. In addition, prospective investors should consult
their own advisors in order to understand fully the consequences of an
investment in the Company. Unless indicated otherwise, the information contained
herein gives effect to a one for five reverse split of the Company's issued and
outstanding Common Stock that was completed in ___________ 1997 (the "Reverse
Stock Split"). The following summary does not purport to be complete and is
qualified by the more detailed information appearing elsewhere in this
Prospectus.
THE COMPANY
Dynamic International, Ltd., a Nevada corporation ("DIL"), is engaged in
the design, marketing and sale of a diverse line of hand exercise and light
exercise equipment, including hand grips, running weights, jump ropes and
aerobic steps and slides. It markets these products under the licensed
trademarks SPALDING(R) and KATHY IRELAND(R) as well as under its own trademarked
name SHAPE SHOP(R). In addition, it designs and markets sports bags and luggage,
which are marketed primarily under the licensed name JEEP(R) and under its own
names PROTECH(R) and SPORTS GEAR(R). The Company's objective is to become a
designer and marketer of goods that are associated with a free-spirited
lifestyle and leisure time.
The Company is the successor to Dynamic Classics, Ltd., a Delaware
corporation, incorporated in 1986 ("DCL," together with DIL, the "Company"),
which was the successor to a New York company incorporated in 1964. In August
1996, DCL merged with and into DIL, which had been newly formed for the purpose
of this merger. The objective of the merger was to change the Company's state of
incorporation from Delaware to Nevada.
PLAN OF REORGANIZATION
In 1994, the Company added a new line of products consisting primarily of
treadmills and ski machines. Initially, the Company was successful in marketing
these products. For the fiscal year ended April 30, 1995, sales of these
products represented approximately 53% of the Company's gross sales. However,
due to serious manufacturing defects and poor construction of the Company's
products delivered by the Company's manufacturers, primarily located in the
People's Republic of China, the Company was forced to allow substantial charge
backs by its customers. Although, pursuant to a written agreement, 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 14,880,000 shares of Common Stock in full
satisfaction of the promissory note. The number of shares issued to MG Holdings
(which has not been adjusted for the Reverse Stock Split) represented 93% of the
issued and outstanding shares. As a result, MG Holdings acquired absolute
control over the Company's affairs. MG Holdings is wholly-owned by Marton
Grossman, the Company's Chairman and President. See "Principal Stockholders" and
"Certain Relationships and Related Transactions." In addition, as part of the
plan of reorganization, the Company, then known as DCL, merged into DIL, a newly
formed Nevada corporation, for the purpose of changing its state of
incorporation. See "Business--Plan of Reorganization" and "--Legal Proceedings"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
4
<PAGE> 8
<TABLE>
<CAPTION>
THE OFFERING
<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."
USE OF PROCEEDS
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."
5
<PAGE> 9
SUMMARY FINANCIAL INFORMATION
Set forth below are selected financial data with respect to the
Company for 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 Predecessor Company
------------------- ---------------------------------------------------------------
Year ended April 30
Nine Months Ended Three Months Ended
April 30, 1997 July 31, 1996 1996 1995 1994
--------- ---------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Net Sales 7,492,729 1,983,164 $7,151,715 $ 32,533,097 $29,497,353
Income/(Loss) for period 119,399 (76,364) 6,945,299 (11,227,335) 244,308
Net Income (Loss) per Share .04
</TABLE>
<TABLE>
<CAPTION>
April 30, 1997
Selected Balance Sheet Data: April 30, 1997 As Adjusted(1)
- ---------------------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Working Capital (Deficit) (45,789) 4,854,211 (293,884) (7,493,435) 3,094,821
Total Assets 4,807,062 8,707,062 4,253,396 6,414,185 16,677,772
Long term obligations,
including capitalized lease
obligations 215,254 -0- 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."
6
<PAGE> 10
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
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
would receive 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 luggage products.
Similarly, the success of the Company's exercise products is mostly a
product of the perceived needs by consumers to improve their health and fitness.
In addition, the type of exercise equipment used by consumers may vary from time
to time based on which part of the body is perceived by consumers to require the
most exercise and how such consumers believe they may attain maximum results
from their efforts to stay fit. Therefore, the Company's ability to market its
exercise equipment will be dependent on its ability to anticipate consumers'
perceived fitness needs.
DEPENDENCE ON AFFILIATED PARTIES. Pursuant to an unwritten
understanding with Achim Importing Co., Inc. ("Achim"), Achim makes its lines of
credit available to the Company which will enable it to finance the purchases of
its inventory from its overseas suppliers. Also, from time to time, Achim
purchases products from the manufacturer and resells them to the Company without
markup 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 invoiced amount of inventory 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 $2,590,360 (including $260,795 in interest) under this
arrangement. As of June 30, 1997, this sum had decreased to $1,871,029
(including $276,894 in interest). Achim is wholly owned by Mr. Marton Grossman,
the Company's Chairman and President. If Achim were to terminate this
arrangement for any reason, it would have a material adverse effect on the
ability of the Company to purchase inventory and finance its operations. In
addition, all of the Company's assets are subject to a lien in favor of MG
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.
In addition, the Company is party to a number of other agreements
with affiliated parties. Specifically, the Company is party to an agreement
pursuant to which Achim assists the Company to perform a great number of
7
<PAGE> 11
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. Achim also provides warehousing
services consisting of receiving, shipping and storing of the Company's
merchandise. In consideration for these services, Achim receives an annual fee,
payable monthly, calculated as a percentage of the Company's invoiced sales
ranging from 4% of invoiced sales under $30 million to 3% for sales of $60
million or more. Achim also receives a service fee in the amount of 1.5% of the
Company's invoiced sales to customers and accounts located in the United States
if payment is made by letter of credit and 1% if such customers and accounts are
located outside the United States, irrespective of manner of payment. The
Company also pays a monthly fee of 3% of the Company's invoiced sales in
connection with the warehousing services performed by Achim under the
Warehousing Agreement.
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 of supply are available, any
serious disruptions could materially impair the Company's ability to deliver
exercise and luggage products in a timely manner. See "Business--Products."
SEASONALITY. The Company's business is highly seasonal with higher
sales typically in the second and third quarters of the fiscal year as a result
of shipments of exercise equipment and 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."
8
<PAGE> 12
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. 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. See "Business."
NEED TO INCREASE MARKETING CAPABILITY. In order to achieve continued
growth following the offering, the Company will need to expand its marketing and
sales and develop a network of marketing and sales representatives. There can be
no assurance that the Company will be able to build such a marketing staff or
sales force, that the cost of establishing such a marketing staff or sales force
will not exceed any product revenues, or that the Company's direct sales and
marketing efforts will be successful. Alternatively, the Company may enter into
co-marketing or other licensing arrangements. To enter into co-marketing or
other licensing arrangements, the Company must establish and maintain corporate
relationships. There can be no assurance that such corporate relationships can
be established or maintained on terms acceptable to the Company, if at all. To
the extent the Company enters into co-marketing or other licensing arrangements,
any revenues received by the Company will be dependent on the efforts of third
parties, and there can be no assurance that such efforts will be successful.
Although the Company believes that future corporate partners, if any, will have
an economic motivation to commercialize any such products, the Company may not
have any direct control over such partners' commercialization efforts. See
"Business."
LIMITED LIABILITY INSURANCE. The marketing and sale of the Company's
products entails a risk of product liability claims and claims of omission by
consumers and others. The Company has a general policy of disclaiming liability
arising from its products. The Company also maintains liability insurance 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
9
<PAGE> 13
per share of such shares. Specifically, the investors in this offering will
experience immediate dilution of $3.86 per share of Common Stock, or
approximately 77% of the $5.00 offering price. In addition, since the current
stockholders of the Company have acquired their respective equity interests at a
cost substantially below the offering price, the public investors will bear most
of the risk of loss. See "Dilution."
VOTING CONTROL; POTENTIAL ANTI-TAKEOVER EFFECT. After the completion
of this offering, the executive officers and directors of the Company will
beneficially own approximately 68% of the Company's outstanding Common Stock
and, accordingly, will be able to continue to elect all of the directors and,
therefore, to absolutely control the Company's affairs. As a result of the
absolute control exercisable by current management, potential takeover bids for
the Company may be deterred. This may have a depressive effect on the price of
the Securities offered hereby. In addition, 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 one
additional broker-dealer will attempt to make a market in the Company's
securities in accordance with the applicable Nasdaq rules. See "Underwriting."
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) total assets of at least $2 million,
(iii) minimum bid price per share of $1 or a market value of public float of $1
million and $2 million in capital and surplus, (iv) 300 stockholders, and (v)
100,000 shares held by non-insiders which shares must have a market value of at
least $200,000.
EXERCISE OF WARRANTS SUBJECT TO CURRENT EFFECTIVE REGISTRATION AND
QUALIFICATION. Any exercise of the Warrants must be made pursuant to a
prospectus which is current at the time of exercise. The Company 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.
10
<PAGE> 14
Although the Securities offered hereby will not knowingly be sold to purchasers
in jurisdictions in which they are not registered or otherwise qualified for
sale, purchasers may buy Warrants in the aftermarket which may develop for the
Warrants in, or purchasers of the Warrants may move to, jurisdictions in which
the shares of Common Stock underlying the Warrants are not registered or
qualified during the period when the Warrants are exercisable. In such event,
the Company would be unable to issue shares to those persons desiring to
exercise their Warrants unless and until the shares could be registered or
qualified for sale in jurisdictions in which such purchasers reside, or an
exemption to such qualification exists in such jurisdictions. No assurance can
be given that the Company will be able to effect any required registration or
qualifications. See "Description of Securities - Warrants."
POSSIBLE DEPRESSIVE EFFECT OF RULE 144 SALES. At the time of the
completion of this offering, approximately 2,976,000 shares of Common Stock may
be deemed to be "restricted securities" under Rule 144 promulgated under the
Securities Act. Under Rule 144, such shares 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. No lock-up agreements are in effect with respect to any of the
currently issued and outstanding shares of Common Stock. See "Description of
Securities - Shares Available for Future Sale."
Investors should be aware that sales of the Company's Common Stock
pursuant to options and warrants may have a depressive effect on the price of
the Common Stock and the Warrants, and that the issuance of additional shares of
Common Stock upon the exercise of options, warrants, the Warrants and the
Warrants included in the Units underlying the Underwriter's Warrants will also
dilute the proportionate ownership of the then current stockholders of the
Company. See "Description of Securities--Warrants."
POSSIBLE ISSUANCE OF SUBSTANTIAL AMOUNTS OF ADDITIONAL SHARES WITHOUT
STOCKHOLDER APPROVAL. After this offering, the Company will have a large number
of shares of Common Stock authorized but unissued and reserved for issuance
pursuant to (i) exercise of the Warrants being offered hereby, (ii) exercise by
the Underwriter of the Underwriter's Warrants and the exercise of the Warrants
included in the Units underlying the Underwriter's Warrants (the Underwriter's
Warrants, including the underlying Units, the Common Stock and the Warrants
included therein are collectively sometimes referred to herein as the
"Underwriter's Securities"), and (iii) an agreement to issue an aggregate of
2,000,000 shares of Common Stock to the Company's Chairman and President over a
three-year period, provided the Company meets certain earnings criteria. All of
such shares and any additional shares may be issued without any action or
approval by the Company's stockholders. Although, other than as set forth in the
previous sentence, there are no present plans, agreements, commitments or
undertakings with respect to the issuance of additional shares, or securities
convertible into any such shares by the Company, any additional shares issued
would further dilute the percentage ownership of the Company held by the public
stockholders and would likely have an adverse impact on the market price of the
Common Stock. See "Description of Securities."
In addition, the Company is authorized to issue 10,000,000 shares of
Preferred Stock of which, as of the date hereof, none are outstanding. Shares of
Preferred Stock are issuable at any time and from time to time, by action of the
Board of Directors without further authorization from the Company's
stockholders, except as otherwise required by applicable law or rules and
regulations to which the Company may be subject, to such persons and for such
consideration as the Board of Directors determines. The issuance of preferred
stock by the Board of Directors could adversely affect the rights of the holders
of Common Stock. For example, such issuance could result in a class of
securities outstanding that would have preferences with respect to voting rights
and dividends and in liquidation over the Common Stock, and could (upon
conversion or otherwise) enjoy all of the rights appurtenant to Common Stock.
The authority possessed by the Board of Directors to issue preferred stock could
potentially be used to discourage attempts by others to obtain control of the
Company through a merger, tender offer, proxy contest or otherwise by making
such attempts more difficult or more costly to achieve. There are no agreements
or understandings regarding the issuance of preferred stock.
UNDERWRITER'S WARRANTS. In connection with this offering, the Company
will sell to the Underwriter for a nominal amount, warrants to purchase up to
120,000 Units. The Underwriter's Warrants will be exercisable
11
<PAGE> 15
commencing one year after the effective date of this Prospectus and will
continue to be exercisable until five years from the date hereof at an exercise
price of $8.25 per Unit, with the Class A Warrants and Class B Warrants
underlying the Units included in the Underwriter's Warrants allowing the
purchase of Common Stock at $9.90 and $16.50 per share, respectively. As long as
the Underwriter's Warrants are outstanding, the terms on which the Company could
obtain additional capital may be adversely affected because the holder of the
Underwriter's Warrants might be expected to exercise them if the Company were
able to obtain any needed additional capital in a new offering of securities at
a price greater than the exercise price of the Underwriter's Warrants. See
"Underwriting."
POTENTIAL ADVERSE EFFECT OF REDEMPTION OF WARRANTS. The Class A
Warrants and the Class B Warrants are redeemable by the Company at $.01 per
Warrant on thirty day's prior written notice at any time provided that the
average closing bid price for the Common Stock is no less than $9.00 per share
with respect to the Class A Warrants and $15.00 with respect to the Class B
Warrants for any ten consecutive trading days within a period of 30 consecutive
trading days as reported on the principal exchange on which the Common Stock is
traded. Notice of redemption of the Warrants could force the Warrant holders to
exercise the Warrants at a time when it might be disadvantageous for the holders
to do so or to sell the Warrants at their then current market price when the
holders might otherwise wish to hold the Warrants for possible appreciation.
Alternatively, the holders may accept the redemption price, when it is likely to
be substantially less than the market value of the Warrants at the time of
redemption. Any holders who do not exercise Warrants prior to their expiration
or redemption, as the case may be, will forfeit the right to purchase the shares
of Common Stock underlying the Warrants. While the Company may legally be
permitted to give notice to redeem the Warrants at a time when a current
prospectus is not available thereby leaving the Warrant holders no opportunity
to exercise their Warrants prior to redemption, the Company does not intend to
redeem the Warrants unless a current prospectus is available at the time of the
redemption. See "Description of Securities - Warrants."
UNDERWRITER'S INFLUENCE ON THE MARKET. A significant amount of the
Securities offered hereby will be sold to customers of the Underwriter. Such
customers subsequently may engage in transactions for the sale or purchase of
such Securities through or with the Underwriter. Although it has no legal
obligation to do so, the Underwriter has indicated that it intends to act as a
market-maker and otherwise effect transactions in the Securities offered hereby.
To the extent the Underwriter acts as a market-maker in the Common Stock or
Warrants, they may be dominating influences in those markets. The degree of
participation in those markets by the Underwriter may significantly effect the
price and liquidity of the Securities. The Underwriter may discontinue such
activities at any time or from time to time. Moreover, pursuant to Regulation M,
if the Underwriter solicits exercise of any of the Warrants, including the
Underwriter's Warrants, it will be unable to act as a market-maker with respect
to the Securities for a period of two or nine business days prior to any
solicitation by it of the exercise of any of the Warrants, including the
Underwriter's Warrants, until the termination of such activity. Accordingly, the
Underwriter will not be able to act as a market-maker during certain periods
and, as a result, holders of the Company's Securities may find it more difficult
to sell their holdings. Also, the same restriction may arise if the Underwriter
becomes involved in a distribution of any of the currently restricted
securities.
PENNY STOCK REGULATION. Broker-dealer practices in connection with
transactions in "penny stocks" are regulated by certain penny stock rules
adopted by the Securities and Exchange Commission (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
12
<PAGE> 16
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.
DILUTION
At April 30, 1997, the Company had a net tangible book value deficit
of $(99,610) or $(.03) 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 April 30, 1997, would have been $5,000,390 or $1.14 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 $3.86 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 $(.03)
Increase per share attributable to the sale of the Units offered hereby $1.17
-----
Net tangible book value per share after offering (1) $1.14
-----
Dilution per share to investors in offering (2) $3.86
=====
</TABLE>
- -----------------
(1) After deduction of underwriting discounts and commissions, the
Underwriter's non-accountable expense allowance and other estimated
expenses of the offering. See "Use of Proceeds" and "Underwriting."
(2) Does not give effect to (i) up to 2,400,000 shares of authorized but
unissued Common Stock reserved for issuance upon exercise of the
Warrants included in the offering (ii) up to 120,000 shares of Common
Stock issuable upon exercise of the Underwriter's Warrants; (iii) up to
240,000 shares of Common Stock issuable upon exercise of the Warrants
underlying the Underwriter's Warrants; (iv) up to an additional 540,000
shares of Common Stock (including 360,000 shares of Common Stock
underlying warrants) issuable upon exercise of the Underwriter's
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 April 30, 1997, the pro forma net tangible book value would have been
approximately $1,700,390 or $.33 per share. After giving effect to the sale of
the 1,200,000 Units hereby, the pro forma net tangible book value at April 30,
1997, would have been approximately $6,800,390 or $1.06 per share of Common
Stock. This represents an immediate increase in pro forma net tangible book
value of $.73 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 $.33
Increase per share attributable to the sale of the Units offered hereby $.73
----
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.
13
<PAGE> 17
The following table presents as of April 30, 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:
<TABLE>
<CAPTION>
COMMON STOCK ONLY
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>
14
<PAGE> 18
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. As of April 30, 1997 the Company had accrued interest in the
amount of $37,219 in connection with this loan. 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 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 unforeseen opportunity,
acquisition or otherwise, is presented to the Company. While the Company has no
specific current acquisition plans, it currently intends to simultaneously focus
its energies and assets towards growing its business internally, while at the
same time exploring opportunities to expand its business through acquisitions.
The Company 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.
15
<PAGE> 19
SELECTED FINANCIAL DATA
Set forth below are selected financial data with respect to the
Reorganized Company for 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>
Reorganized
Company(1) Predecessor Company
------------ ----------------------------------------------------------------------------
Year ended April 30
-------------------
Nine Months Three Months
Ended 4/30/97 Ended 7/31/96 1996 1995 1994 1993
------------- ------------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net Sales 7,492,729 1,983,164 7,151,715 32,533,097 29,497,353 25,735,479
Net Income/ (Loss) from
Continuing Operations 119,399 (76,364) (2,235,894) (11,227,335) 244,308 (427,409)
Net Income/(Loss) 119,399 (76,364) 6,945,299 (11,227,335) 244,308 (427,409)
Net Income/(Loss) per Share 0.04
</TABLE>
<TABLE>
<CAPTION>
Reorganized
Company(1)
Selected Balance Sheet Data: 4/30/97
- ---------------------------- ------------
<S> <C> <C> <C> <C> <C>
Working Capital (Deficit) (45,789) (293,884) (7,493,435) 3,094,821 3,173,751
Total Assets 4,807,062 4,253,396 6,414,185 16,677,772 13,373,816
Long term Obligations,
including Capitalized Lease 215,254 23,965 116,124 127,8774 92,129
Obligations
Total Liabilities 4,661,527 4,300,398 13,406,486 12,442,738 9,383,090
Retained Earnings 119,399 -0- -0- 3,644,799 3,400,491
Accumulated Deficit -0- (637,237) (7,582,536) -0- -0-
Shareholders' Equity (Deficit)
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.
16
<PAGE> 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION 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.
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 Code.
In May 1996, the Bankruptcy Court approved a plan of reorganization
(the "Plan") pursuant to which creditors would receive partial satisfaction of
their claims. The amount of claims allowed under the bankruptcy proceedings,
aggregated approximately $17,223,800, which exceeded the assets as recorded
immediately subsequent to the confirmation of the Plan by approximately
$12,970,400. Under the Plan, the Company made cash payments in the amount of
approximately $515,800. MG Holdings, which had purchased a promissory note from
the Company's principal financial institution, received 14,880,000 shares of
Common Stock in satisfaction of such promissory note, representing approximately
93% of the issued and outstanding shares thereby gaining absolute control over
the Company's affairs. See "Security Ownership of Certain Beneficial Owners and
Management" and "Certain Relationships and Related Transactions." An additional
800,000 shares and 320,000 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. Numbers of shares
issued under the Plan and disclosed herein have not been adjusted for the
Reverse Stock Split.
17
<PAGE> 21
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 NINE MONTHS ENDED APRIL 30, 1997,
THE THREE MONTHS ENDED JULY 31, 1996 AND YEARS ENDED APRIL 30, 1997 AND 1996
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 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 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 $556,000 for the nine months ended
April 30, 1997 and three months ended July 31, 1996, respectively, were, on a
combined basis, $3,901,000 less than the fiscal year ended April 30, 1996, due
to the reorganization. This decrease was represented approximately by net
changes in the following expenses:
18
<PAGE> 22
<TABLE>
<S> <C>
Freight out 218,000
Insurance claims 70,000
Lawsuits 289,000
Showroom rent 341,000
Research & development 24,000
Officers' salaries 138,000
Office salaries 474,000
Warehouse salaries 207,000
Salesmen salaries 37,000
Payroll taxes 72,000
Fringe benefits 65,000
Repairs & maintenance 8,000
Travel & entertainment 64,000
Office equipment rental 7,000
Miscellaneous taxes 7,000
Consultant fees 105,000
Promotional material 210,000
Trade shows 24,000
Pension costs 749,000
Telephone 44,000
Data-processing fees 10,000
Postage 11,000
Professional fees 172,000
Bad debt expense 660,000
</TABLE>
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 begins on August 9, 1996. The current income tax provision 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.
19
<PAGE> 23
The following table sets forth the results of operations for the periods
discussed above:
<TABLE>
<CAPTION>
Reorganized Company for Predecessor Company For Predecessor Company For
The Nine Months Ended The Three Months Ended The Fiscal Year Ended
April 30, 1997 July 31, 1996 April 30, 1996
------------ ------------ ------------
<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
------------ ------------ ------------
Pre Tax 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
Prepetition 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 alone accounted for approximately $15,580,000 during the fiscal
year ended April 30, 1995. During the fiscal year ended April 30, 1996, as a
result of the Company's bankruptcy proceedings, it was forced to reduce its
sales of other exercise equipment and of its 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.
20
<PAGE> 24
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 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>
Predecessor
Company
Reorganized for the three Predecessor Company
Company months ended For the Year Ended April 30
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>
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>
<S> <C>
Officers' salaries $160,200
Office salaries 180,100
Salesmen salaries 316,300
Payroll taxes 73,500
Fringe benefits 145,400
Travel & entertainment 236,600
</TABLE>
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 approximately
21
<PAGE> 25
$1,083,300 and a reduction in interest expense of $1,001,400 primarily as a
result of the bankruptcy proceedings which for the most part exempted the
Company from making interest payments on outstanding debt.
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 is
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 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
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 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.
Nine Months Ended April 30, 1997
During the nine months ended April 30, 1997, cash used by operating
activities amounted to $294,400. This was primarily the result of an increase in
inventory of $1,032,900, cash distributions to creditors of $515,600, and a
decrease in accounts payable and accrued expenses of $56,800, which were offset
by net income of $119,400 and decreases in accounts receivable and due from
supplier, prepaid expenses, miscellaneous receivables, prepaid and refundable
income taxes, and an increase in income taxes payable of $482,300, $122,000,
$132,400, $252,000, and $103,700, respectively.
Financing activities provided cash of $333,000. Proceeds from notes
payable of $600,000 were offset by repayments of notes payable, repayments of
capital lease obligations, repayments of insurance note payable, and payment of
deferred offering costs of $145,300, $29,700, $62,000, and $30,000,
respectively. The Company had positive cash flow of $38,600 for the nine months
ended April 30, 1997.
Three Months Ended July 31, 1996
22
<PAGE> 26
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 supplier, 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.
Current Position
Pursuant to an unwritten understanding, Achim makes its lines of
credit available to the Company which will enable it to finance the purchases of
its inventory from its overseas suppliers. Also, from time to time, Achim will
purchase the products directly from the manufacturer and resell them to the
Company without markup. Achim charges the Company interest on the unpaid balance
of the purchases. As of April 30, 1997, the Company owed an amount of $2,590,360
in principal and interest under this arrangement. As of June 30, 1997, this sum
had decreased to $1,871,029. See "Business - Management Agreement with Achim
Importing Co., Inc" and "Certain Relationships and Related Transactions."
The Company owes an aggregate of approximately $1,200,000 to MG
Holdings, which is wholly owned by Marton 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 one percent.
As of April 30, 1997 the Company had accrued interest in the amount of $37,219
in connection with this loan. The promissory note is to be 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 public 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 quarter of the fiscal year as a result of shipments of
exercise equipment and luggage/sports bag related to the holiday season.
Management does not believe that the effects of inflation will have a
material impact on the Company, nor is it aware of changes in prices of material
or other operating costs or in the selling price of its products and services
that will materially effect the Company.
23
<PAGE> 27
CAPITALIZATION
The following table sets forth the capitalization of the Company at
April 30, 1997, and as adjusted to reflect receipt of the net proceeds from this
offering:
<TABLE>
<CAPTION>
April 30, 1997
------------------------------
Actual (1) As Adjusted (1)(2)
----------- -----------
<S> <C> <C>
Short term debt $ 972,459 $ -0-
=========== ===========
Long term debt 215,254 -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 119,399 119,399
Less: Treasury Stock (3) (3)
----------- -----------
Total Stockholders' Equity 145,535 5,245,535
----------- -----------
Capitalization Total $ 360,789 $ 5,245,535
=========== ===========
</TABLE>
- ----------
(1) Does not give effect to (i) up to 2,400,000 shares of authorized but
unissued Common Stock reserved for issuance upon exercise of the Warrants
included in the offering (ii) up to 120,000 shares of Common Stock issuable upon
exercise of the Underwriter's Warrants; (iii) up to 240,000 shares of Common
Stock issuable upon exercise of the Warrants underlying the Underwriter's
Warrants; (iv) up to an additional 540,000 shares of Common Stock (including
360,000 shares of Common Stock underlying warrants) issuable upon exercise of
the Underwriter's over-allotment option; and (v) 2,000,000 shares of Common
Stock issuable to Mr. Grossman, the Company's Chairman and President over a
three year period, provided the Company meets certain earnings criteria. See
"Description of Securities," over a three year period "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.
24
<PAGE> 28
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, China National Metals and Minerals ("CNA"), 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, CNA sued the
Company for monetary damages alleging, among other things, breach of contract.
The Company and CNA subsequently settled the matter by releasing each other from
any claims and allowing CNA to collect an aggregate of $15,000 from the Company.
The Company suffered severe losses from its venture into this line of business
and in August 1995 was forced to seek protection from its creditors under
Chapter 11 of the Bankruptcy Code.
In May 1996, the Bankruptcy Court approved a plan of reorganization
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 14,880,000 shares of Common Stock in full satisfaction of the
promissory note. The number of shares issued to MG Holdings (which has not been
adjusted for the Reverse Stock Split) represented 93% of the issued and
outstanding shares. As a result, MG Holdings acquired absolute control over the
Company's affairs. MG Holdings is wholly-owned by Marton Grossman, the Company's
Chairman and President. See "Principal Stockholders" and "Certain Relationships
and Related Transactions." In addition, as part of the plan of reorganization,
the Company, then known as DCL, merged into DIL, a newly formed Nevada
corporation, for the purpose of changing its state of incorporation. See "Legal
Proceedings" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
25
<PAGE> 29
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
It is anticipated that in September 1997 the Company will begin
marketing an insulated bag incorporating a wrap-around gel pack or freeze pack
with the ability to cool and preserve food and other products for an extended
period of time. The Company, through a wholly owned subsidiary, obtained the
exclusive rights to the patents underlying the technology as well as the
trademarks FREEZY-BAG(TM) and FREEZYGEL(TM) under which the products are sold.
See "Intellectual Property-License Agreements."
The Company may from time to time manufacture and/or market additional
products under its own names or under licensed names.
Design and Development
The Company usually designs its own exercise equipment and 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. The Company believes that, if necessary, it will be able to
obtain its products from firms located in other countries
26
<PAGE> 30
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 46% of the Company's revenues were derived from the sale of
luggage.
The Company sells its products primarily through independent sales
agents on a commission-only basis. The Company currently engages approximately
23 sales agents either on an individual basis or through independent sales
organizations. Although it has written agreements with a number of its agents,
all of such agreements are terminable at will. The Company has no long term
arrangements with any of its agents. The Company usually pays commissions
ranging from 1% to 5% of the net sale price of its products. The Company
believes that its sales agents sell products exclusively on behalf of the
Company.
In addition, the Company on a small scale markets existing products to
retailers for resale under their own private labels. The Company has already
began deliveries to one retailer and expects to start deliveries to other
retailers in the fall of 1997. 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 SPALDING(TM) and KATHY IRELAND(TM) it will be able to
retain its share of the market. Nevertheless, there can be no assurance that the
Company will be able to effectively compete with these companies as well as with
other smaller entities.
The Company's luggage products compete with products designed by a
number of the largest companies in the industry, including Samsonite, Sky Way
and American Tourister. The Company believes that because of its concentration
on the upscale lifestyle and more specialized leisure market that are associated
with the trademark JEEP(TM) the Company will be able to continue to grow its
luggage business. Nevertheless, there
27
<PAGE> 31
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 current expiration date of the agreements is September 30, 1997.
However, the Company is currently negotiating a renewal of the
agreement relating to the handheld exercise equipment.
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.
MANAGEMENT AGREEMENT WITH ACHIM IMPORTING CO., INC.
Pursuant to a Warehousing and Service Agreement dated as of September
1, 1996 (the "Warehousing Agreement") between the Company and Achim Importing
Co., Inc. ("Achim"), Achim performs certain
28
<PAGE> 32
administrative services on behalf of the Company. Under the Warehousing
Agreement, Achim assists, among other things, in the maintenance of financial
and accounting books and records, in the preparation of monthly financial
accounts receivable aging schedules and other reports and in the performance of
credit checks on the Company's customers. Achim also provides warehousing
services consisting of receiving, shipping and storing of the Company's
merchandise. The Warehousing Agreement has a term of two years and is
automatically renewable for additional one year periods unless written notice of
termination is given at least six months prior to the commencement of a renewal
period.
In consideration for the services performed under the Warehousing
Agreement, Achim receives an annual fee, payable monthly, calculated as a
percentage of the Company's invoiced sales ranging from 4% of invoiced sales
under $30 million to 3% for sales of $60 million or more. In addition, Achim
receives a service fee in the amount of 1.5% of the Company's invoiced sales to
customers and accounts located in the United States if payment is made by letter
of credit and 1% if such customers and accounts are located outside the United
States, irrespective of manner of payment. The Company also pays a monthly fee
of 3% of the Company's invoiced sales in connection with the warehousing
services performed by Achim under the Warehousing Agreement. During the fiscal
year ended April 30, 1997, the Company paid approximately $458,488 in fees under
the Warehousing Agreement.
Achim is controlled by Marton Grossman, the Company's Chairman and
President. The Company believes that the terms of the Warehousing Agreement with
Achim are at least as favorable as would have been obtained from an unaffiliated
third party.
In addition, pursuant to an unwritten understanding, Achim makes its
lines of credit available to the Company which will enable it to finance the
purchases of its inventory from its overseas suppliers. Also, from time to time,
Achim purchases products from the manufacturer and resells them to the Company
without markup 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 invoiced amount of
inventory 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 June 30, 1997, this sum had
decreased to $1,871,029. See "Certain Relationships and Related Transactions."
EMPLOYEES
As of July 31, 1997 the Company employed 12 persons, of whom three were
executive officers, three were engaged in administrative and clerical
activities, four were engaged in sales and two were involved in 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 service fees paid 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."
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<PAGE> 33
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.
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<PAGE> 34
MANAGEMENT
OFFICERS AND DIRECTORS
The officers and directors of the Company are as follows:
Name Age Position
- ---- --- --------
Marton Grossman 66 Chairman and President
Isaac Grossman 34 Vice Chairman, Treasurer and Secretary
William Dolan 44 Vice President--Finance
MARTON GROSSMAN has been the Chairman and President of the Company
since July 29, 1996. For the past 34 years, he has been President of Achim
Importing Co., a privately held company engaged in the import and export of
window coverings and accessories ("Achim"). In addition, he has been President
of MG Holding Co., Inc., a privately held financial holding company. Mr.
Grossman is the father of Isaac Grossman, the Company's Vice Chairman, Treasurer
and Secretary.
ISAAC GROSSMAN has been the Company's Vice Chairman, Treasurer and
Secretary since July 1996. He has been Vice President of Achim since 1989. Prior
thereto, Mr. Grossman worked in various positions at Achim, including in sales
and marketing and warehousing. Mr. Grossman is the son of Marton Grossman, the
Company's Chairman and President.
WILLIAM DOLAN has been the Company's Vice President-Finance since July
1996. Prior thereto, he had been the Company's Treasurer and Secretary since
1989. Mr. Dolan graduated from the William Paterson College of New Jersey. Mr.
Dolan is a certified public accountant.
BOARD OF DIRECTORS
Each director is elected at the Company's annual meeting of
stockholders and holds office until the next annual meeting of stockholders, or
until his successor is elected and qualified. At present, the Company's bylaws
require no fewer than one director. Currently, there are two directors of the
Company. The bylaws permit the Board of Directors to fill any vacancy and the
new director may serve until the next annual meeting of stockholders or until
his successor is elected and qualified. Officers are elected by the Board of
Directors and their terms of office are, except to the extent governed by
employment contracts, at the discretion of the Board.
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. See "Underwriting."
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<PAGE> 35
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid or accrued by the
Company during the three fiscal years ended April 30, 1996 (i) to its Chief
Executive Officer, (ii) the Company's other two executive officers, and (iii) to
additional non executive officers whose cash compensation exceeded $100,000 per
year in any such year:
SUMMARY COMPENSATION TABLE(1)(2)
<TABLE>
<CAPTION>
Annual Compensation
- ----------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e)
- ----------------------------------------------------------------------------------------------------------------------
Year Ended
Name/Principal Position April 30 Salary ($) Bonus ($) All Other Compensation
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Marton Grossman 1997 -0-
Chairman and President 1996 -0-
1995 -0-
- ----------------------------------------------------------------------------------------------------------------------
Isaac Grossman 1997 -0-
Director, Treasurer 1996 -0-
1995 -0-
- ----------------------------------------------------------------------------------------------------------------------
William P. Dolan 1997 100,000
Vice President-Finance 1996 100,000
1995 97,691
- ----------------------------------------------------------------------------------------------------------------------
Marvin Cooper, 1997 128,125
President and Director (3) 1996 182,176
1995 250,099
- ----------------------------------------------------------------------------------------------------------------------
John Holodnicki 1997 120,000
Vice President (4) 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.
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<PAGE> 36
(3) Mr. Cooper resigned his positions from the Company in March 1997.
(4) Not an executive officer.
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 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:
<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.
33
<PAGE> 37
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 14,880,000 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.
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. 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.
Pursuant to the Warehousing Agreement between the Company and Achim,
Achim performs certain administrative services on behalf of the Company. Under
the Warehousing Agreement, Achim assists, among other things, in the maintenance
of financial and accounting books and records, the preparation of monthly
financial accounts receivable aging schedules and other reports and in the
performance of credit checks on the Company's customers. Achim also provides
warehousing services consisting of receiving, shipping and storing of the
Company's merchandise. The Warehousing Agreement has a term of two years and is
automatically renewable for successive one year periods unless written notice of
termination shall have been given at least six months prior to the commencement
of a renewal period.
In consideration for the services performed under the Warehousing
Agreement, Achim receives an annual fee, payable monthly, calculated as a
percentage of the Company's invoiced sales ranging from 4% of invoiced sales
under $30 million to 3% for sales of $60 million or more. In addition, Achim
receives a service fee in the amount of 1.5% of the Company's invoiced sales to
customers and accounts located in the United States if payment is made by letter
of credit and 1% if such customers and accounts are located outside the United
States, irrespective of manner of payment. The Company also pays a monthly fee
of 3% of the Company's invoiced sales in connection with the warehousing
services performed by Achim under the Warehousing Agreement. During the fiscal
year ended April 30, 1997, the Company accrued approximately $458,488 in fees
under the Warehousing Agreement.
Achim is controlled by Marton Grossman, the Company's Chairman and
President. The Company believes that the terms of the Warehousing Agreement with
Achim are at least as favorable as would have been obtained from an unaffiliated
third party.
In addition, pursuant to an unwritten understanding, Achim makes its
lines of credit available to the Company which will enable it to finance the
purchases of its inventory from its overseas suppliers. Also, from time to time,
Achim will purchase the products directly from the manufacturer and resell them
to the Company without markup. Achim charges the Company interest on the unpaid
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 June 30,
1997, this sum had decreased to $1,871,029.
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
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<PAGE> 38
Holding which is owned by Isaac Grossman and one of his siblings. Mr. Grossman
is the Company's Vice Chairman, Treasurer and Secretary. The property is leased
to Achim which makes the property available to the Company on an at will basis.
Other than the service fees paid by the Company under the Warehousing Agreement,
the Company pays no rent for the property. See "Certain Relationships and
Related Transactions" and "Management Agreement with Achim Importing Co., Inc."
DISCLOSURE OF COMMISSION POSITION ON
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Section 78.751 of the Nevada Revised Statutes, as amended, authorizes
the Company to indemnify any director or officer under certain prescribed
circumstances and subject to certain limitations against certain costs and
expenses, including attorneys' fees actually and reasonably incurred in
connection with any action, suit or proceeding, whether civil, criminal,
administrative or investigative, to which such person is a party by reason of
being a director or officer of the Company if it is determined that such person
acted in accordance with the applicable standard of conduct set forth in such
statutory provisions. Article 10 of the Company's Bylaws contains provisions
relating to the indemnification of directors and officers.
The Company may also purchase and maintain insurance for the benefit of
any director or officer which may cover claims for which the Company could not
indemnify such person.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions, or otherwise, the Company has been
advised that in the opinion of the Commission such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable.
35
<PAGE> 39
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of August 18, 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.
Shares Owned Beneficially
and of Record (1)
<TABLE>
<CAPTION>
Name and Address No. of Shares % of Total
- ---------------- ------------- ----------
<S> <C> <C>
Marton Grossman (2) 2,976,000 93.0
Isaac Grossman (3) 2,976,000 93.0
William P. Dolan 123 *
All Officers and Directors as a Group (3 2,976,123 93.0
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. Under its terms, the Grossman Trust
will return to Mr. Grossman annually until August 1998, a
portion of the shares held by the Grossman Trust. The number
of shares to be returned to Mr. Grossman is based on the then
current market price of the Common Stock and can therefore not
be determined at the present time. Mr. Grossman disclaims
beneficial ownership in the shares held by the Grossman Trust
that will not be returned to him.
(3) Consists of shares held by the Grossman Trust of which Mr.
Isaac Grossman is currently a beneficiary as to 464,600
shares. The actual number of shares held by the Grossman Trust
as to which Isaac Grossman is a beneficiary may be smaller
since under the terms of the Grossman Trust, a portion of the
shares may be returned to Marton Grossman as described in
footnote 2. Mr. Grossman is a trustee of the Grossman Trust
and in that capacity shares voting power as to the shares held
by the Grossman Trust.
36
<PAGE> 40
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 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
37
<PAGE> 41
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 in the event of a stock split, stock dividend, recapitalization,
merger, consolidation or certain other events.
At any time, The Class A Warrants and the Class B Warrants are
redeemable by the Company at $.01 per Warrant on thirty day's prior written
notice at any time provided that the average closing bid price for the Common
Stock is no less than $9.00 per share with respect to the Class A Warrants and
$15.00 with respect to the Class B Warrants for any ten consecutive trading days
within a period of 30 consecutive trading days as reported on the principal
exchange or market on which the Common Stock is traded. The right to purchase
the Common Stock issuable upon exercise by the Warrants noticed for redemption
will be forfeited unless the Warrants are exercised prior to the date specified
in the notice of redemption. While the Company may legally be permitted to give
notice to redeem the Warrants at a time when a current prospectus is not
available thereby leaving the Warrant holders no opportunity to exercise their
Warrants prior to redemption, the Company does not intend to redeem the Warrants
unless a current prospectus is available at the time of redemption.
SHARES AVAILABLE FOR FUTURE SALE
Upon completion of this offering, the Company will have 4,398,798
shares of Common Stock outstanding (4,578,798 shares if the Underwriter's
over-allotment option is exercised in full). Of these shares, the shares
included in the Units and 224,000 shares held by existing security holders will
be freely tradeable without restriction or further registration under the
Securities Act except for any shares purchased by an "affiliate" of the Company
(in general, a person who has a control relationship with the Company) which
will be subject to the limitations of Rule 144 adopted under the Securities Act.
Except as described below, all of the remaining shares of Common Stock may be
deemed "restricted securities," as that term is defined under Rule 144
promulgated under the Securities Act. Such shares may 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
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<PAGE> 42
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.
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
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. It
is anticipated that the Securities will be traded on the Nasdaq SmallCap Market
upon completion of this offering.
39
<PAGE> 43
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 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
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
40
<PAGE> 44
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.
41
<PAGE> 45
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> 46
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 these
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 Classic, 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 Bankruptcy
Act.
/s/ HOBERMAN, MILLER & CO., P.C.
- --------------------------------
New York, New York
June 26, 1996
F-2
<PAGE> 47
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
REORGANIZED PREDECESSOR
COMPANY COMPANY
APRIL 30, APRIL 30,
1997 1996
---- ----
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 43,543 $ 26,515
Accounts receivable - trade (net of allowance for doubtful
accounts of $167,000 in 1997 and 1996) 887,089 1,036,927
Due from suppliers 65,273 26,760
Inventory 3,301,735 2,384,469
Prepaid expenses 60,272 81,693
Miscellaneous receivables 2,658 135,039
Prepaid and refundable income taxes 39,914 291,146
----------- -----------
Total Current Assets 4,400,484 3,982,549
----------- -----------
PROPERTY AND EQUIPMENT
Tools and dies 707,939 707,939
Furniture and equipment 102,205 102,205
Capitalized equipment leases 576,071 576,071
----------- -----------
1,386,215 1,386,215
Accumulated depreciation (1,260,924) (1,156,160)
----------- -----------
Total Property and Equipment, net 125,291 230,055
----------- -----------
OTHER ASSETS
Due from suppliers 36,142 36,142
Security deposits 4,650 4,650
Deferred stock offering costs 116,023 --
Reorganization value in excess of amounts allocable to
identifiable assets, net 124,472 --
----------- -----------
Total Other Assets 281,287 40,792
----------- -----------
TOTAL ASSETS $ 4,807,062 $ 4,253,396
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 48
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Continued)
<TABLE>
<CAPTION>
REORGANIZED PREDECESSOR
COMPANY COMPANY
APRIL 30, APRIL 30,
1997 1996
---- ----
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable and accrued expenses - non related $ 846,234 $ 1,009,248
Accounts payable and accrued expenses - related party 2,627,580 2,129,893
Capital lease obligations - current 24,228 48,731
Income taxes payable 103,700 --
Loan payable - related party 844,531 557,000
Other liabilities -- 531,561
----------- -----------
Total Current Liabilities 4,446,273 4,276,433
----------- -----------
OTHER LIABILITIES
Capital lease obligations, net of current portion -- 23,965
Loan payable - related party 215,254 --
----------- -----------
Total Other Liabilities 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 --
Additional paid in capital 22,940 590,291
Accumulated deficit -- (637,237)
Retained Earnings (since July 31, 1996, date of reorganization,
total deficit eliminated was $713,601) 119,399 --
----------- -----------
145,538 (29,502)
Less: Treasury stock, at cost, 15,000 shares -- (17,500)
Less: Treasury stock, at cost, 540 shares (3) --
----------- -----------
Total Stockholders' Equity (Deficit) 145,535 (47,002)
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 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 discharge 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> 49
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
REORGANIZED PREDECESSOR
COMPANY COMPANY
FOR THE NINE FOR THE THREE PREDECESSOR COMPANY
MONTHS ENDED MONTHS ENDED FOR THE YEARS ENDED
APRIL 30, JULY 31, APRIL 30,
1997 1996 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES
Sales $7,492,729 $ 1,983,164 $ 7,151,715 $ 32,533,097
Other income 54,642 10,201 98,272 70,638
---------- ----------- ------------ ------------
7,547,371 1,993,365 7,249,987 32,603,735
COST OF SALES 4,850,002 1,454,637 9,480,484 34,761,846
---------- ----------- ------------ ------------
GROSS PROFIT (LOSS) 2,697,369 538,728 (2,230,497) (2,158,111)
---------- ----------- ------------ ------------
OPERATING EXPENSES
Research and development 4,042 -- 101,992 44,962
Shipping expenses 452,093 116,894 738,681 1,198,563
Selling expenses 686,214 198,993 1,254,006 2,455,493
Advertising and promotion 152,563 1,819 389,672 346,400
General and administrative 931,683 238,791 4,198,800 3,720,998
Interest and bank charges - non related 21,462 4,174 248,625 1,384,898
Interest and bank charges - related party 177,339 53,096 134,928 --
---------- ----------- ------------ ------------
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 223,099 (76,364) (9,746,894) (11,309,425)
---------- ----------- ------------ ------------
INCOME TAX PROVISION (BENEFIT)
Current 103,700 -- -- (396,143)
Deferred -- -- (7,511,000) 314,053
---------- ----------- ------------ ------------
103,700 -- (7,511,000) (82,090)
---------- ----------- ------------ ------------
INCOME (LOSS) BEFORE
EXTRAORDINARY ITEM 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) $ 119,399 $ (76,364) $ 6,945,299 $(11,227,335)
========== =========== ============ ============
INCOME PER SHARE OF COMMON
SHARES $ 0.04
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES 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> 50
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
============ ============ =========== ======== ===========
</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> 51
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
REORGANIZED PREDECESSOR
COMPANY COMPANY
FOR THE NINE FOR THE THREE PREDECESSOR COMPANY
MONTHS ENDED MONTHS ENDED FOR THE YEARS ENDED
APRIL 30, JULY 31, APRIL 30,
1997 1996 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (loss) $ 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 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 482,254 (221,255) 220,882 6,843,636
Inventory (1,032,882) 115,616 1,065,821 3,260,017
Prepaid expenses 122,017 (100,596) 168,856 (183,186)
Miscellaneous receivables 132,379 -- (108,179) 51,352
Prepaid and refundable income taxes 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 (56,766) 155,784 (1,828,715) 1,949,987
Income taxes payable 103,700 -- -- (200,770)
----------- ----------- ----------- ------------
Net Cash Provided (Used) by
Operating Activities (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> 52
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
<TABLE>
<CAPTION>
REORGANIZED PREDECESSOR
COMPANY COMPANY
FOR THE NINE FOR THE THREE PREDECESSOR COMPANY
MONTHS ENDED MONTHS ENDED FOR THE YEARS ENDED
APRIL 30, JULY 31, APRIL 30,
1997 1996 1996 1995
---- ---- ---- ----
<S> <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 (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 (30,043) -- -- --
--------- ----------- ----------- ------------
Net Cash Provided (Used) by
Financing Activities 332,957 43,208 877,493 (875,906)
--------- ----------- ----------- ------------
Net Increase (Decrease) in Cash and
Cash Equivalents 38,586 (21,558) (316,056) (220,703)
Cash and Cash Equivalents, beginning of period 4,957 26,515 342,571 563,274
--------- ----------- ----------- ------------
Cash and Cash Equivalents, end of period $ 43,543 $ 4,957 $ 26,515 $ 342,571
========= =========== =========== ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the periods for:
Interest $ 25,451 $ 1,553 $ 203,964 $ 1,196,322
Income tax $ -- $ -- $ -- $ 116,319
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
During the year 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> 53
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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> 54
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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
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.
F-10
<PAGE> 55
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
2. REORGANIZATION AND MANAGEMENT'S 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 (see Note 4); 160,000 shares
were issued to unsecured creditors, and 62,798 shares were issued to
the reconfirmation common stock equity interest holders.
F-11
<PAGE> 56
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
2. REORGANIZATION AND MANAGEMENT'S PLAN (cont'd)
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> 57
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
2. REORGANIZATION AND MANAGEMENT'S 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> 58
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
2. REORGANIZATION AND MANAGEMENT'S PLAN (cont'd)
The other current liabilities adjustment is all comprised of loans from
MG Holding 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
The Company has an agreement with an entity ("Related Party") owned by
the major shareholder, whereby the entity agreed to provide warehousing
and general administrative services to the Company. The agreement is
for a period of two years with automatic year to year renewals.
The monthly fee for the warehousing services is 3% of monthly sales.
The fee for general administrative services is payable monthly and is
based on annual sales in percentages ranging from 3% to 4% of invoiced
sales. Total warehousing and administrative expenses charged to
operations for the 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.
The 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 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
April 30,
<S> <C>
1997 (in arrears) $ 237,053
1998 607,478
1999 215,254
------------
$ 1,059,785
============
</TABLE>
F-14
<PAGE> 59
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
4. RELATED PARTY TRANSACTIONS (cont'd)
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.
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 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
------------
</TABLE>
F-15
<PAGE> 60
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
5. INCOME TAXES (cont'd)
DEFERRED TAX LIABILITY (ALLOCATED TO EXTRAORDINARY GAIN):
<TABLE>
<S> <C>
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.
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>
F-16
<PAGE> 61
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
5. INCOME TAXES (cont'd)
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>
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.
F-17
<PAGE> 62
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
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, respectively.
c. Royalty Obligations
The Company has entered into various royalty, licensing, and
commission agreements for products sold by the Company. These
agreements provide for minimum payments and a percentage of
specific product sales, over a period of one to eight years.
Royalty expense for the 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.
F-18
<PAGE> 63
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
6. COMMITMENTS AND CONTINGENCIES (cont'd)
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.
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.
F-19
<PAGE> 64
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
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.
b. Most of the Company's exercise products are purchased from
Philippines, Korea, and Taiwan. The Company believes that, if
necessary, it will be able to obtain its products from firms
located in other countries at little, if any, additional
expense. As a consequence, the Company believes that an
interruption in deliveries by a manufacturer located in a
particular country will not have a material adverse impact on
the business of the Company. Nevertheless, because of
political instability in a number of the supply countries,
occasional import quotas and other restrictions on trade or
otherwise, there can be no assurance that the Company will at
all times have access to a sufficient supply of merchandise.
F-20
<PAGE> 65
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
10. OTHER ITEMS
a. Public Offering
The Company is offering for public sale 1,200,000 units, each
consisting of one share of common stock, one Class A Warrant
and one Class B Warrant at $5.00 per unit. Although no
assurance can be given that the sale will be successful, the
Company intends to utilize the net proceeds of approximately
$5,100,000 for the repayment of current debt, purchase of
inventory, general corporate services, and working capital.
Simultaneous with the public offering, the Company intends to
declare a one for five reverse stock split. All share data for
the reorganized Company has been adjusted for the split.
The following supplementary earnings per share reflect the
repayment of indebtedness of $1,300,000 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 Nine Months
Ended April 30, 1997
--------------------
<S> <C>
Net Income 155,738
Earnings Per Share .05
Number of Shares 3,458,258
</TABLE>
b. 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-21
<PAGE> 66
DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
(continued)
10. OTHER ITEMS (cont'd)
c. 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.
d. 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.
e. 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-22
<PAGE> 67
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.
F-23
<PAGE> 68
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.
/s/
Moore Stephens, P.C.
Certified Public Accountants
New York, New York
June 27, 1997
F-24
<PAGE> 69
DYNAMIC CLASSICS, LTD. AND SUBSIDIARY
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
REORGANIZED PREDECESSOR
COMPANY COMPANY
FOR THE NINE FOR THE THREE PREDECESSOR COMPANY
MONTHS ENDED MONTHS ENDED FOR THE YEARS 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-25
<PAGE> 70
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
Page
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
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> 71
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.
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
========
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-2
<PAGE> 72
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-3
<PAGE> 73
(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:
II-4
<PAGE> 74
(1) Is not void or voidable; and
(2) Does not subject any director approving it to personal
liability for his action,
even if a director approving the insurance or other financial
arrangement is a beneficiary of the insurance or other financial arrangement.
5. A corporation or its subsidiary which provides self-insurance for
itself or for another affiliated corporation pursuant to this section is not
subject to the provisions of Title 57 of NRS.
The Registrant may also purchase and maintain insurance for the benefit
of any director or officer which may cover claims for which the Registrant could
not indemnify such persons.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In August and September 1996 Registrant issued an aggregate of
approximately 16,000,000 shares of Common Stock (without giving effect to the
Reverse Stock Split) to existing shareholders and to its creditors in settlement
of claims under the Plan of Reorganization that was confirmed by the Bankruptcy
Court in May 1996. The issuances were exempt from registration under Section
1145 of the Bankruptcy Code.
Also during August and September 1996, Registrant, in connection with
its merger with Dynamic Classics, Ltd., Registrant's predecessor corporation
("DCL"), issued shares of Common Stock in exchange for all issued and
outstanding shares of DCL Common Stock. The capital structure and balance sheet
of the 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
1.02 Form of Financial Advisory and Consulting Agreement
1.03 Form of Selected Dealers Agreement
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)
II-5
<PAGE> 75
4.01 Form of Warrant Agreement to be entered into between the
Company and American Stock Transfer & Trust Company
4.02 Form of Common Stock Certificate(2)
4.03(a) Form of A Warrant Certificate
4.03(b) Form of B Warrant Certificate
5 Legal Opinion of Heller, Horowitz & Feit, P.C.(1)
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 Heller, Horowitz & Feit, P.C. (Included in Part II)
23.02 Consent by Moore Stephens, P.C. (Included in Part II)
23.03 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.
II-6
<PAGE> 76
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement to:
(i) Include any prospectus required by section 10(a)(3) of the
Securities Act;
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the
information in the registration statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities offered (if
the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high and of the
estimated maximum offering range may be reflected in the form of
prospectus filed with Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more than 20
percent change in he maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration
statement.
(iii) Include any material information with respect to the
plan of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement provided, however, that paragraphs (a)(1)(i) and
(a)(1)(ii) do not apply if the registration statement is on Form S-3,
Form S-8 or Form F-3, and the information required to be included in
post-effective amendment by those paragraphs is contained in periodic
reports filed with or furnished to the Commission by the registrant
pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
that are incorporated by reference in the registration statement.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(3) File a post-effective amendment to remove from registration by
means of a post-effective amendment any of the securities that remain unsold at
the end of the offering.
Insofar as indemnification for liabilities arising under the
Securities Act (the "Act") may be permitted to directors, officers and
controlling persons of the Company pursuant to the foregoing provisions, or
otherwise, the Company has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the Company of expenses incurred or paid by a
director, officer or controlling person of the Company in the successful defense
of any action, suit or proceedings) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Company will, unless in the opinion of its counsel the matter has been settled
by controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
For 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.
II-7
<PAGE> 77
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-8
<PAGE> 78
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 18th day of August 1997.
DYNAMIC INTERNATIONAL, LTD.
By: /s/
----------------------------
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:
SIGNATURE TITLE DATE
/s/ August 18, 1997
- ---------------------------
Marton Grossman Chairman and President
/s/ August 18, 1997
- ---------------------------
Isaac Grossman Director
/s/ August 18, 1997
- ---------------------------
William P. Dolan Vice President
Chief Financial
and Accounting Officer
<PAGE> 79
Exhibit 23.01
CONSENT OF COUNSEL
We consent to the reference to us under the heading "Legal Matters" in
the Prospectus which is part of this Registration Statement on Form S-1 of
Dynamic International.
/s/
Heller, Horowitz & Feit, P.C.
New York, New York
August 18, 1997
II-10
<PAGE> 80
Exhibit 23.02
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
August 18, 1997
II-11
<PAGE> 81
Exhibit 23.03
CONSENT OF INDEPENDENT AUDITORS
We consent to the use in this Amendment No. 1 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
August 19, 1997
II-12
<PAGE> 82
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
DYNAMIC INTERNATIONAL, LTD.
EXHIBIT VOLUME
<PAGE> 83
EXHIBITS INDEX
1 Form of Underwriting Agreement(1)
1.01 Form of Unit Purchase Option
1.02 Form of Financial Advisory and Consulting Agreement
1.03 Form of Selected Dealers Agreement
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
4.02 Form of Common Stock Certificate(2)
4.03(a) Form of A Warrant Certificate
4.03(b) Form of B Warrant Certificate
5 Legal Opinion of Heller, Horowitz & Feit, P.C.(1)
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 Heller, Horowitz & Feit, P.C. (Included in Part II)
23.02 Consent by Moore Stephens, P.C. (Included in Part II)
23.03 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.
2
<PAGE> 1
NO SALE, OFFER TO SELL OR TRANSFER OF THE OPTION REPRESENTED BY THIS CERTIFICATE
OR OF THE SECURITIES ISSUED ON ACCOUNT OF EXERCISE OF THE OPTION REPRESENTED BY
THIS CERTIFICATE SHALL BE MADE UNLESS A REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, WITH RESPECT TO SUCH OPTION AND/OR SUCH
SECURITIES IS THEN IN EFFECT OR AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS
OF SUCH ACT IS THEN IN FACT APPLICABLE TO SUCH OPTION AND/OR SUCH SECURITIES.
No. WA-1 Option to Purchase _______ Units
Dated:1997 (subject to adjustment)
VOID AFTER 2002
DYNAMIC INTERNATIONAL, LTD.
UNIT PURCHASE OPTION FOR UNITS (SHARES AND WARRANTS)
DYNAMIC INTERNATIONAL, INC. (HEREINAFTER CALLED THE "COMPANY"), A
NEVADA CORPORATION, HEREBY CERTIFIES THAT, FOR VALUE RECEIVED,
PATTERSON TRAVIS, INC.
12835 E. ARAPAHOE ROAD, #1-700
ENGLEWOOD, COLORADO 80112
or assigns, is entitled to purchase from the Company, at any time or from time
to time, subsequent to 9:00 A.M., New York local time on , 1998 and before 3:00
P.M. New York local time on , 2002 an aggregate of Units
(the number and character of such Units being subject to adjustment as provided
below) of the Company on the payment therefore of $8.25 for each Unit subscribed
for and purchased, upon the surrender of this warrant duly signed by the
registered holder hereof or assigns at the time of subscription, accompanied by
payment of the total subscription price in cash or by certified check or bank
draft payable to the order of the Company, upon the terms and subject to the
conditions hereinafter set forth. The Units are non-redeemable.
Each Unit consists of one (1) share of the Company's stock, one (1)
Class A Redeemable Common Stock Purchase Warrant ("Class A Warrants") to
purchase one (1) share of Common Stock at an exercise price of $9.90 and one (1)
Class B Redeemable Common Stock Purchase Warrant ("Class B Warrants") to
purchase one (1) share of Common
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Stock at an exercise price of $16.50 with the Class A and Class B Warrants being
exercisable until , 2002.
Except as specifically otherwise provided herein, the Common Stock and
the Warrants issued pursuant to this Option shall bear the same terms and
conditions as described under the caption "Description of Securities" in the
Registration Statement (File #333-25425, declared effective , 1997
and the Warrants shall be governed by the terms of the Warrant Agreement dated
as of , 1997 executed in connection with such public offering (the
"Warrant Agreement"), and except that (i) the holder hereof shall have
registration rights under the Securities Act of 1933, as amended (the "Act"),
for the Option, the Common Stock and the Warrants included in the Units, and the
shares of Common Stock underlying the Warrants, as more fully described in
paragraph 6 of this Option, and (ii) the exercise price for the Class A Warrants
included in this Option is $9.90 and the exercise price for the Class B Warrants
is $16.50 and (iii) the Warrants expire five (5) years from date hereof. In the
event of any reduction of the exercise price of the Warrants included in the
Public Units, the same changes to the Warrants included in the Option Units
shall be simultaneously effected.
1. NOTICE OF EXERCISE. Notice of intention to exercise any of the
purchase rights evidenced by this option must be given by written notice
addressed to the Company at its principal office or by written notice addressed
to its duly designated and acting agent, if any, at least ten (10) days prior to
any intended exercise. Such notice shall specify the date on which purchase
rights are to be exercised and the number of shares of units to be purchased on
that date.
2. EXERCISE OF OPTION. On or before the date of exercise specified in
such notice, the holder shall surrender this warrant (in negotiable form, if not
surrendered by the holder named above) to the principal office of the Company,
or to that of its duly designated and acting agent with the exercise form
attached to this duly signed together with the purchase price of the Units
represented by certified or official bank check payable to the order of the
Company.
3. DELIVERY OF STOCK AND WARRANT CERTIFICATES ON EXERCISE. As soon as
practicable after the exercise of this option and payment of the purchase
price,and in any event no later than ten (10) days thereafter, the Company or
its duly designated and acting agent, if any, will cause to be issued in the
name of and delivered to the holder hereof, or such holders nominee or nominees,
certificates for the number of full shares of the Common Stock and Warrants of
the Company to which such holder shall be entitled upon such exercise. In case,
between the date of such exercise and the
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date on which such certificates are issued, the record holder of the common
stock shall become entitled to any dividend or other right, the Company will
forthwith pay or cause to be paid in cash to the holder hereof the amount of
such dividend, or transfer to the holder hereof such rights, as the case may be.
No fraction of a share or scrip certificate for such a fraction shall be issued
upon the exercise of this warrant; in lieu thereof, the Company will pay or
cause to be paid to such holder cash equal to a like fraction at the then
prevailing market price for such share as determined by the Company.
4. PARTIAL EXERCISE OF A WARRANT. In case this option shall be
exercised for less than the full number of Units, to which the holder is
entitled, the Company at its expense will issue, or will cause to be issued and
delivered to the holder hereof, a new option of like tenor issued in said
holder's name, calling for the number of Units, for which the surrendered option
shall not have been exercised.
5. DIVIDENDS IN STOCK, PROPERTY, RECLASSIFICATIONS. In case at any time
or from time to time the holders of the common stock of the Company (or any
other shares of stock or other securities at that time receivable upon exercise
of this option) shall have received, or as of a record date shall have become
entitled to receive other or additional or less stock or other securities or
property (other than cash) without payment therefore (whether through a dividend
in stock of any class of stock of the Company or any other corporation, or a
dividend in any securities or property other than cash, or through stock split,
spin-off, reclassification, combination of shares or otherwise), then and in
each such case the holder of this option upon the exercise thereof and upon the
payment of the sum obtained by multiplying (a) the number shares of common stock
of the Company issuable upon exercise of this option by (b) the purchase price
of $8.25 per Unit stated on the face of this option, shall be entitled to
receive, in lieu of the Units called for hereby, the stock or other securities
or property which said holder would hold on the date of such exercise, if, from
the date hereof to and including such date, he had been the holder of record of
the number of shares of the common stock of the Company issuable upon exercise
of this option and had retained such shares and all such other or additional or
less stock and other securities and property receivable in respect of such
shares. In case of the partial exercise of this warrant under such
circumstances, the number of shares of stock which would have been receivable
upon the full exercise of this warrant, computed as provided above, shall be
proportionately reduced. Similar adjustments shall be made for the Warrants.
6. REORGANIZATIONS, CONSOLIDATIONS, MERGERS. In case of any
reorganization of the Company, or any other corporation, the stock
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or securities of which are at the time deliverable on the exercise of this
option, or in case the Company or such other corporation shall consolidate with
or merge into another corporation, or convey all or substantially all of its
assets to another corporation, the holder of this option, upon the exercise
hereof and upon the payment of sum obtained by multiplying (a) the number of
shares of the Company issuable upon exercise of this warrant by (b) the purchase
price of $8.25 per Unit stated on the face of this option, shall be entitled to
receive, in lieu of the shares theretofore called for hereby, the stock or other
securities or property to which such holder would have been entitled upon the
consummation of such reorganization, consolidation, merger or conveyance if he
had purchased the shares called for hereby immediately prior thereto; and in
such case, the provisions of this option shall be applicable to the shares of
stock or other securities or property thereafter deliverable upon the exercise
of this option. In the case of the partial exercise of this option under such
circumstances, the number of shares of stock or other securities or property
which would have been receivable upon the full exercise of this warrant, and the
sum payable therefore, shall be proportionately reduced.
7. WARRANT AGENT. Whenever an event occurs which requires an adjustment
of the shares of stock, securities or other property which the holder of this
option upon the exercise thereof is entitled to receive, the Company will file
promptly with the duly designated and acting warrant agent, if any, a
certificate signed by the president or a vice president of the Company, and by
the secretary or an assistant secretary of the Company, setting forth a brief
statement of the facts requiring such adjustment and the number and character of
the shares of stock, or other securities or property which the holder of this
warrant upon the exercise thereof shall be entitled to receive after such
adjustment in lieu of each Share called for hereby. The duly designated and
acting warrant agent may rely conclusively on such certificates and the
correctness of such adjustment without further investigation and shall be under
no duty or responsibility with respect to such certificate except to exhibit it
from time to time to any warrant holder desiring an inspection thereof.
8. EXCHANGE OF WARRANTS. Upon the surrender by any holder of any option
or options at the principal office of the Company or at that of its duly
designated and acting warrant agent (in negotiable form if not surrendered by
the holder named on the face thereto@, the Company or its duly designated
warrant agent will issue and deliver to, or on the order of such holder, at the
Company's expense, a new option or options in the name of such holder or as such
holder (upon the payment of such holder of any applicable transfer tax) may
direct, in such authorized denomination or denominations as such holder may
request, evidencing the rights to purchase an aggregate amount of units
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equal to the aggregate amount of Shares which the option or options so
surrendered evidenced the right to purchase.
9. LOST, STOLEN, DESTROYED OR MUTILATED OPTIONS. Upon receipt by the
Company or its duly designated and acting agent, if any, of evidence
satisfactory (in the exercise of reasonable discretion) to each of them of the
ownership of and the loss, theft or destruction or mutilation of any Unit
Purchase Option and (in the case of loss, theft or destruction) or indemnity
satisfactory (in the exercise of reasonable discretion) to each of them, and (in
the case of mutilation) upon the surrender and cancellation thereof, the Company
or its duly designated and acting agent will issue and deliver, in lieu thereof,
a new Unit Purchase Option of like tenor.
10. NEGOTIABILITY. This option is issued upon the following terms and
conditions, to all of which each taker or owner hereof consents and agrees (a)
title to this option may be transferred by endorsement and delivery in the same
manner as in the case of a negotiable instrument transferable by endorsement and
delivery; (b) any person in possession of this option properly endorsed is
authorized to represent himself as absolute owner hereof and is granted power to
transfer absolute title hereto by endorsement and delivery hereof to a bona fide
purchaser hereof for value; each prior taker or owner waives and renounces all
of his equities or rights in this warrant in favor of each such bona fide
purchaser, and every such bona fide purchaser shall acquire absolute title
hereof and all rights represented hereof by; and (c) the Company or its duly
designated and acting agent, if any, may treat the holder of the warrant
properly endorsed as absolute owner hereof for all purposes without being
affected by any notice to the contrary.
11. MISCELLANEOUS. This option shall not be valid for any purpose
unless signed by an authorized officer of the Company and countersigned by the
duly designated and acting agent, if any. This option does not confer upon the
holder any right to vote or to consent or to receive notice as a stockholder of
the company.
12. HEADINGS. The headings in this warrant are for purposes of
reference only, and shall not limit or otherwise affect the meaning hereof.
13. EXPIRATION. This option will be wholly void and of no effect after
3:00 PM, New York local time, on , 2002.
14. RESTRICTIONS. This option is originally issued by way of additional
underwriting compensation in connection with the public offering of securities
of the Company pursuant to a registration statement filed with the Securities
and Exchange Commission (File
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No. 333-25425) (the "Registration Statement") and pursuant to a certain
underwriting agreement between the Company and Patterson Travis, Inc. (the
"Underwriter") whereby this option:
(a) shall not be exercisable in whole or in part for a period of one
year from the effective date of said public offering, and
(b) shall be restricted from sale, transfer, assignment or
hypothecation for a period of one year from the effective date of said
public offering, except to officers or partners of the Underwriter and
members of the selling group and/or their officers or partners.
15. REGISTRATION RIGHTS. If, at any time, or from time to time,
commencing one year after and ending five years after the effective date of the
Registration Statement, the Company proposes to file another registration
statement with the Commission with respect to the sale of any securities of the
Company, the Company will, at least thirty (30) days prior to such filing, give
written notice thereof to the holders of this Option and/or the holders of the
underlying securities and if, within twenty (20) days after receipt of such
notice, such holders request inclusion of this Option and/or any underlying
shares in such registration statement, the Company will use its best efforts to
include this Option and/or such underlying shares in such registration
statement. In addition to the foregoing, one time only, upon the written request
of Patterson Travis or its specifically authorized designee or together with its
consent or the consent of its authorized designee at the request of the holders
of a majority of the Underwriters Options or underlying shares, for a period of
four years commencing one year from the effective date of the Registration
Statement, the Company further agrees to register the Underwrites Options
and/or underlying shares and to register and qualify same under applicable blue
sky laws. The Company will pay and bear all costs and expenses in connection
with registering this Option and/or the underlying securities, except for the
fees of the holders' counsel in connection therewith.
16. LAW GOVERNING. This option shall be construed and enforced in
accordance with and governed by the laws of the State of New York.
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This Option represents Options out of a total of 120,000 Options to be
issued.
DYNAMIC INTERNATIONAL, INC.
By:
------------------------
President
ATTEST:
Secretary
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ASSIGNMENT
(TO BE EXECUTED BY THE REGISTERED HOLDER TO
EFFECT A TRANSFER OF THE WITHIN WARRANT)
FOR VALUE RECEIVED, I, , hereby sell, assign and transfer
unto this option and the rights hereof, and do hereby
irrevocably constitute and appoint , my attorney, to transfer this said option
on the books of the Company, with full power of substitution.
DATED: 19-.
SIGNED
Witness:
NOTICE: The signature to this assignment must correspond with the name as
written upon the face of the within option in every particular, without
alteration or enlargement or any change whatever. The signature to the
assignment must be guaranteed by a bank or trust company having an office or
correspondent in New York City, or by a firm having membership on the New York
Stock Exchange or in the American Stock Exchange Clearing Corporation.
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ELECTION TO PURCHASE
(To be executed by the holder desiring to exercise the right
to purchase Shares evidenced by the within Warrant)
DYNAMIC INTERNATIONAL, INC.
The undersigned irrevocably elects to exercise the right to purchase
hereunder Units of the Company in accordance with the terms and
conditions of this Option, and requests that a certificate for such common
shares be issued in the name of the undersigned and be delivered to the
undersigned at the address stated below and, if said number of common shares,
shall not be all of the shares purchasable hereunder, that a new warrant of like
tenor for the balance of the remaining shares and warrants purchasable hereunder
be delivered to the undersigned at the address stated below.
DATED: SIGNED:
Address:
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CONSULTING AGREEMENT
This Agreement, entered into as of , 1997, acknowledges
and confirms the terms of our corporate finance agreement (the "Agreement") as
follows:
1. Dynamic International, Inc., with its executive offices located at
58 Second Avenue, Brooklyn, New York 11215 (the "Company"), hereby engages
Patterson Travis, Inc. (the "Consultant") and Consultant hereby agrees to render
services to the Company as its corporate finance consultant, financial advisor
and investment banker.
2. During the term of this Agreement.
(a) Consultant shall provide advice to, and consult with, the Company
concerning financial planning, corporate organization and structure, financial
matters in connection with the operation of the business of the Company, private
and public equity and debt financing, acquisitions, mergers and other similar
business combinations and shall review and advise the Company regarding its
overall progress, needs and financial condition. Said advice and consultation
shall be
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provided by Consultant to the Company in such form, manner and place as the
Company reasonably requests except that Consultant shall provide such services
from its principle place of business during such hours as may be determined by
Consultant.
(b) The services of Consultant are non-exclusive and subject to
paragraph 5 hereof, Consultant may render services of the same or similar
nature, as herein described, to an entity whose business is in competition with
the Company, directly or indirectly.
3. The Company shall pay to Consultant for its consulting services
hereunder the annual sum of Ten Thousand Dollars ($10,000) for the Term (as
defined herein), which aggregate amount of Twenty Thousand Dollars ($20,000)
shall be paid at closing of the Company's initial public offering ("Closing")
pursuant to the Company's registration statement filed with the Securities and
Exchange Commission on Form SB-2, File No. 333-25425. The Company will also
reimburse Consultant, promptly upon receipt of invoices therefore, for
out-of-pocket expenses incurred in connection with its services hereunder. All
expenses in excess of $25.00 shall be approved in advance by the Company.
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4. The term of this Agreement shall be for two years commencing on the
Closing (the "Term").
5. Consultant will not disclose to any other person, firm, or
corporation, nor use for its own benefit, during or after the term of this
Agreement, any trade secrets or other information designated as confidential by
the Company which is acquired by Consultant in the course of performing services
hereunder. (A trade secret is information not generally known to the trade which
gives the Company an advantage over its competitors. Trade secrets can include,
by way of example, products or services under development, production methods
and processes, sources of supply, customer lists, marketing plans and
information concerning the filing or pendency of patent applications).
6. This Agreement sets forth the entire understanding of the parties
relating to the subject matter hereof, and supersedes and cancels any prior
communications, understandings, and agreements between the parties. This
Agreement cannot be modified or changed, not can any of its provisions be
waived, except by written agreement signed by all parties.
7. This Agreement shall be governed by the laws of the State of New
York any dispute arising out of this Agreement
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shall be adjudicated in the courts of the State of New York or in the federal
court for the Southern District of New York, and the Company hereby agrees that
service of process upon it by registered mail at the address shown in this
Agreement shall be deemed adequate and lawful.
8. This Agreement may be executed in one or more counterparts, each of
which shall be deemed an original but all of which together shall constitute one
and the same instrument.
IN WITNESS WHEREOF, the parties have executed this Agreement as of
, 1997.
PATTERSON TRAVIS, INC.
By:
-----------------------------
Name: Judah L. Wernick
Title: President
ACCEPTED AND AGREED to as of
this day of , 1997
--- --------
DYNAMIC INTERNATIONAL, LTD.
By:
---------------------------
Name: Marton B. Grossman
Title: President
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1,500,000 Units
DYNAMIC INTERNATIONAL, LTD.
SELECTED DEALERS AGREEMENT
New York, New York
,1997
Dear Sirs:
1. We as the Underwriter named in the enclosed Prospectus have agreed,
subject to the terms of the Underwriting Agreement to purchase and offer for
sale an aggregate of 1,200,000 Units ("Units"), each Unit consisting of one
share of common stock, $.001 par value, one Class A Redeemable Common Stock
Purchase Warrant and one Class B Redeemable Common Stock Purchase Warrant, at a
price of $5.00 per Unit of Dynamic International, Ltd. (the "Company"), which we
have agreed to offer on a "firm commitment basis." In addition, we have been
granted an option to purchase up to an additional 180,000 Units to cover
overallotments in connection with the sale of Units. The Units and the terms
under which they are to be offered for sale by us are more particularly
described in the Prospectus.
2. The Units are to be offered to the public by the Company through
Patterson Travis, Inc., as the Underwriter at the price per Unit set forth on
the cover page of the Prospectus (the "Public Offering Price"), in accordance
with the terms of the offering thereof set forth in the Prospectus.
3. We are offering to certain dealers, subject to the terms and
conditions hereof and in the Prospectus a portion of the Units at the Public
Offering Price, less a selling concession (which may be changed) of not in
excess of $ per Unit payable as hereinafter provided, out of which concession
an amount not exceeding $ per Unit may be reallowed. Such dealers who execute
and deliver a Selected Dealer Agreement are referred to herein as "Selected
Dealers." You hereby confirm by signing this agreement that you are actually
engaged in the investment banking or securities business, and are either (i)
members in good standing of the National Association of Securities Dealers, Inc.
(the "NASD") or (ii) dealers with their principal places of business located
outside the United States, its territories and its possessions and not
registered as brokers or dealers under the Securities and Exchange Act of 1934,
as amended (the " 1934 Act"), who have agreed not to make any sales within the
United
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States its territories or its possessions or to persons who are nationals
thereof or residents therein. The Selected Dealers have agreed to comply with
the provisions of Section 24 of Article III of the Rules of Fair Practice of the
NASD, and, if any such dealers is a foreign dealer and not a member of the NASD,
such Selected Dealer also has agreed to comply with the NASD's interpretation
with respect to free-riding and withholding, to comply, as though it were a
member of the NASD, with the provisions of Section 8 and 36 of Article III of
such Rules of Fair Practice, and to comply with Section 25 of Article III
thereof as that Section applies to non- member foreign dealers.
4. We shall have full authority to take such action as we may deem
advisable in respect to all matters pertaining to the public offering of the
Units.
5. If you desire to act as a Selected Dealer with respect to the Units,
your application should reach us promptly by telephone or other means of
telecommunications at our office at One Battery Park Plaza, New York, New York
10004, Attention: Syndicate, telephone number (212) 837-7300. The Units allotted
to you will be confirmed, subject to the terms and conditions of this Agreement.
6. The privilege of subscribing for the Units is extended to you only
as you may lawfully sell the Units to dealers in your state or other
jurisdiction.
7. Any Units subscribed for by you under the terms of this Agreement
may be immediately reoffered to the public in accordance with the terms of
offering thereof set forth herein and in the Prospectus, subject to the
securities or blue sky laws of the various states or other jurisdictions.
8. You agree to pay us on demand for our account an amount equal to the
Selected Dealer concession as to any Units purchased by you hereunder which,
prior to the termination of this paragraph, we may purchase or contract to
purchase for the account of any Underwriter and, in addition, we may charge you
with any broker's commission and transfer tax paid in connection with such
purchase or contract to purchase. Certificates for Units delivered on such
repurchase need not be the identical certificates originally purchased.
9. No expenses shall be charged to Selected Dealers. A single transfer
tax, if payable, upon the sale of the Units by the Underwriter to you will be
paid when such Units are delivered to you. However, you shall pay any transfer
tax on sales of Units by you and you shall pay your proportionate Unit of any
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transfer tax (other than the single transfer tax describe above) in the
event that any such tax shall from time to time be otherwise.
10. Neither you nor any other person is or has been authorized to give
any information or to make any representation in connection with the sale of
the Units other than as contained in the Prospectus.
11. The first three paragraphs of Section 7 hereof will terminate when
we shall have determined that the public offering of the Units has been
completed and upon telegraphic notice of you of such termination, but, if not
therefore terminated, they will terminate at the close of business on the 30th
full business day after the date hereof, provided, however, that we shall have
the right to extend such provisions for a further period or periods, not
exceeding an additional 30 days in the aggregate upon telegraphic notice to you.
12. For the purpose of stabilizing the market in the Units, we have
been authorized to make purchase and sales of the Units, in the open market or
otherwise, for long or short account, and, in arranging for sales, to
over-allot.
13. On becoming a Selected Dealer, and in offering and selling the
Units, you agree to comply with all the applicable requirements of the
Securities Act of 1933, as amended (the " 1933 Act"), and the 1934 Act. You
confirm that you are familiar with Rule 15c2-8 under the 1934 Act relating to
the distribution of preliminary and final prospectuses for securities of an
issuer (where or not the issuer is subject to the reporting requirements of
Section 13 or 15(d) of the 1934 Act) and confirm that you have complied and will
comply therewith.
14. We hereby confirm that we will make available to you such number of
copies of the Prospectus (as amended or supplemented) as may reasonably request
for the purposes contemplated by the 1933 Act of the 1934 Act, or the rules and
regulations thereof.
15. Upon request, you will be informed as to the states and other
jurisdictions in which we have been advised that the Units have been qualified
for sale under the respective securities or blue sky laws of such states and
other jurisdictions, but neither we nor any of the Underwriters assume any
obligation or responsibility as to the right of any Selected Dealer to sell the
Units in any state or other jurisdiction or as to the eligibility of the Units
for sale therein. We will, if requested, file a Further State Notice in respect
of the Units pursuant to Article 23-A of the General Business Law of the State
of New York.
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16. No Selected Dealer is authorized to act as our agent or as agent
for the Underwriter, or otherwise to act on our behalf or on behalf of the
Underwriter, in offering or selling the Units to the public or otherwise or to
fumish any information or make any representation except as contained in the
Prospectus.
17. Nothing will constitute the Selected Dealers an association or
other separate entity or partner with the Underwriters, with us, or with each
other, but you will be responsible for your Unit of any liability or expense
based on any claim to the contrary. We shall not be under any liability for or
in respect of value, validity or form of the Units, or the delivery of the
certificates for the Units, or the performance by anyone of any agreement on its
part, or the qualification of the Units for sale under the laws of any
jurisdiction, or for or in respect of any other matter relating to this
Agreement, except for lack of good faith or for obligations expressly assumed by
us in this Agreement and no obligation on our part shall be implied herefrom.
The foregoing provisions shall not be deemed a waiver of any liability imposed
under the 1933 Act.
18. Payment for the Units sold to you hereunder is to be made at the
public offering price less the above selling concession on such date and time as
we may advise at our office by certified or official bank check in current New
York Clearing House Funds, payable to Patterson Travis, Inc. against delivery of
certificates for the Units so purchased.
19. Notices to us should be addressed to us at the office of Patterson
Travis, Inc., Attention: Syndicate Department. Notices to you shall be deemed to
have been duly given if telegraphed or mailed to you at the address to which
this letter is addressed.
20. If you desire to purchase any Units, please confirm your
application by signing and returning to us your confirmation on the duplicate
copy of this letter enclosed herewith, even though you may have previously
advised us thereof by telephone or telegraph. Our signature hereon may be by
facsimile.
Very truly yours,
PATTERSON TRAVIS,
INC.
By:
- ---------------------------
(Authorized Officer)
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TO: PATTERSON TRAVIS, INC.
We hereby confirm our agreement to purchase Units of Dynamic
International, Ltd. in accordance with the terms and conditions stated in the
foregoing letter. We hereby acknowledge receipt of the Prospectus referred to in
the first paragraph thereof relating to the Units. We further state that in
purchasing said Units we have relied upon said Prospectus, and upon no other
statement whatsoever, whether written or oral. We confirm that we are a dealer
actually engaged in the investment banking or securities business and that we
are either (i) a member in good standing of the National Association of
Securities Dealers, Inc. (the "NASD") or (ii) a dealer with its principal place
of business located outside the United States, its territories and its
possessions and not registered as a broker or dealer under the Securities
Exchange Act of 1934, as amended, who hereby agrees not to make any sales within
the United States, its territories or its possessions or to persons who are
nationals thereof or residents therein. We hereby agree to comply with the
provisions of Section 24 of Article III of the Rules of Fair Practice of the
NASD, and if we are foreign dealer and not a member of the NASD, we also agree
to comply with the NASD's interpretation with respect to free-riding and
withholding, to comply, as though we were a member of the NASD, with provisions
of Sections 8 and 36 of Article III of such Rules of Fair Practice, and to
comply with Section 25 of Article III thereof as that Section applies to
non-member foreign dealers. We will comply with Section 12 of Schedule E to the
NASD By-Laws.
[Name of Dealer]
By:
Address:
Dated: 1997
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COMMON STOCK PURCHASE WARRANT AGREEMENT
THIS AGREEMENT, dated as of this ___ day of ________, 1997, is
between DYNAMIC INTERNATIONAL, LTD., a Nevada corporation (the "Company"),
PATTERSON TRAVIS, INC. (the "Underwriter") and AMERICAN STOCK TRANSFER & TRUST
COMPANY, as Warrant Agent (the "Warrant Agent").
RECITALS
A. The Company is issuing, in connection with a public
offering, up to 1,200,000 Units ("Units"), each consisting of one share of the
Company's common stock, $.001 par value (the "Common Stock"), one Class A Common
Stock Purchase Warrant (the "Class A Warrants") and one Class B Common Stock
Purchase Warrants (the "Class B Warrants" and collectively with the Class A
Warrants, the "Public Warrants" or "Warrants"), not including, in both cases,
over-allotments.
B. One Warrant entitles the registered holder to purchase one
share of Common Stock.
C. The Company desires to provide for the issuance of
certificates representing the Warrants.
D. The Company desires the Warrant Agent to act on behalf of
the Company, and the Warrant Agent is willing to so act, in connection with the
issuance, registration, transfer and exchange of certificates representing the
Warrants and the exercise of the Warrants.
AGREEMENTS
In consideration of the recitals and the mutual agreements set
forth below, and for the purpose of defining the terms and provisions of the
Warrants and the certificates representing the Warrants and the respective
rights and obligations thereunder of the Company, the holders of certificates
representing the Warrants and the Warrant Agent, the parties agree as follows:
1. Definitions. As used herein, the following terms shall have
the following meanings, unless the context shall otherwise require.
(a) "Common Stock" shall mean common stock of the Company
of any class, whether now or hereafter authorized, which has the right to
participate in the distribution of earnings and assets of the Company without
limit as to amount or percentage, which at the date hereof consists of 50
million shares of authorized Common Stock, $.001 par value per share, and as
further defined in section 8(e) below.
<PAGE> 2
(b) "Warrant Expiration Date" shall mean 5:00 p.m. (New York
City time) on __________, 1999 [18 months from IPO] as to the Class A Warrants
and _________, 2000 [3 years from IPO] as to the Class B Warrants, or if such a
date shall in the State of New York be a holiday or a day on which banks are
authorized to close, then 5:00 p.m. (New York City time) on the next following
day which in the State of New York is not a holiday on which banks are
authorized to close. Unless exercised during the Warrant Exercise Period, the
Warrants will automatically expire. The Warrants may be called for redemption
and the expiration date therefor accelerated, on the terms and conditions set
forth in sections 4(b) and 4(c) of this Agreement. If so called for redemption,
Warrant Certificate holders shall have a period of at least thirty (30) days
after the date of the call notice within which to exercise the Warrants.
However, Warrant Certificate holders will receive the redemption price only if
such certificates are surrendered to the Corporate Office (defined below) within
the redemption period.
(c) "Warrant Exercise Period" shall mean from __________, 1997
[IPO Date] until the Warrant Expiration Date.
(d) "Corporate Office" shall mean the office of the Warrant
Agent (or its successor) at which at any particular time its principal business
is conducted, currently located at 40 Wall Street, New York, New York 10005.
(e) "Exercise Date" shall mean the date a certificate
representing a Warrant is surrendered for exercise. "Surrender" for purposes
hereof shall mean in the event of (i) personal delivery by a Registered Holder,
the date it is received by the Warrant Agent, (ii) mailing, the postmark date,
and (iii) delivery by a messenger or similar service the date of dispatch, as
reflected on the delivery receipt.
(f) "Purchase Price" shall mean $6.00 per share for the Class
A Warrants and $10.00 per share for the Class B Warrants, unless such purchase
price has been adjusted as hereinafter provided. Each Warrant is exercisable for
one share of Common Stock upon payment of the Purchase Price at any time during
the Warrant Exercise Period. The Warrants, which are being publicly offered
pursuant to a registration statement and prospectus filed by the Company with
the Securities and Exchange Commission, will trade, initially, on the Nasdaq
SmallCap Market under the symbol _____ after the effective date of such
registration statement.
(g) "Registered Holder" shall mean the person or persons in
whose name or names any certificates representing the Warrants shall be
registered from time to time on the books maintained by the Warrant Agent
pursuant to section 6.
(h) "Subsidiary" or "Subsidiaries" shall mean any corporation
or corporations, as the case may be, of which stock having ordinary power to
elect a majority of the Board of Directors of such corporation (regardless of
whether or not at the time stock
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<PAGE> 3
of any other class or classes of such corporation shall have or may have voting
power by reason of the happening of any contingency) is at the time directly or
indirectly owned by the Company or by one or more Subsidiaries, or by the
Company and one or more Subsidiaries.
(i) "Transfer Agent" shall mean American Stock Transfer &
Trust Company or its authorized successor.
(j) "Warrant Certificate" shall mean a certificate
representing Warrants.
2. Warrants and Issuance of Warrant Certificates.
(a) Each Warrant shall entitle the Registered Holder thereof
to purchase one share of Common Stock upon its exercise. The Warrants will be
separately transferable once the Underwriter determines to separate the Units.
(b) Upon closing of the offering, Warrant Certificates
representing an aggregate of not more than 1,200,000 Class A Warrants and
1,200,000 Class B Warrants (or up to 1,380,000 of each class in the event the
Underwriter's over-allotment option is exercised) to purchase an aggregate of
not more than a like number of shares of Common Stock, shall be executed by the
Company and delivered to the Warrant Agent and shall be countersigned, issued
and delivered by the Warrant Agent upon written order of the Company signed by
its President or a Vice President and its Treasurer or an Assistant Treasurer or
its Secretary or Assistant Secretary.
(c) From time to time, up to the Warrant Expiration Date, plus
such additional time as may reasonably be required to perform, accomplish and
complete necessary administrative functions connected with the exercise of the
Warrants, the Warrant Agent, in its capacity as the Company's Transfer Agent,
shall countersign and deliver stock certificates representing an aggregate of
not more than 2,400,000 shares of Common Stock, or up to an aggregate of
2,760,000 in the event the Underwriters over-allotment option is exercised
(subject to adjustment pursuant to section 8 of this Agreement), upon the
exercise of the Warrants pursuant to the terms of this Agreement.
(d) From time to time, up to the Warrant Expiration Date, the
Warrant Agent shall countersign and deliver Warrant Certificates in required
whole number denominations to the persons entitled thereto in connection with
any transfer or exchange permitted under this Agreement. Except as provided in
section 7 hereof, no Warrant Certificates shall be issued except (i) Warrant
Certificates initially issued hereunder, (ii) upon the exercise of any Warrants,
to evidence the unexercised Warrants held by the exercising Registered Holder
and (iii) upon any transfer or exchange of Warrants.
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<PAGE> 4
3. Form and Execution of Warrant Certificates.
(a) The Warrant Certificates shall be substantially in the
form annexed hereto as Exhibit A (the provisions of which are hereby
incorporated herein) and may have such letters, numbers or other marks of
identification or designation and such legends, summaries or endorsements
printed, lithographed or engraved thereon as the Company may deem appropriate
and as are not inconsistent with the provisions of this Agreement, or as may be
required to comply with any law or with any rule or regulation made pursuant
thereto or with any rule or regulation of any stock exchange or automated
quotation system on which the Warrants may be listed, or to conform to usage.
The Warrant Certificates shall be dated the date of issuance thereof (whether
upon initial issuance, transfer, exchange or in lieu of mutilated, lost, stolen
or destroyed Warrant Certificates). Warrant Certificates shall be numbered
serially with the letters, "DIW" on Warrant Certificates of all denominations.
(b) Warrant Certificates shall be executed on behalf of the
Company by its President or any Vice President and its Treasurer or an Assistant
Treasurer or its Secretary or an Assistant Secretary, by manual signatures or by
facsimile signatures printed thereon. Warrant Certificates shall be manually
countersigned by the Warrant Agent and shall not be valid for any purpose unless
so countersigned. In case any officer of the Company who shall have signed any
of the Warrant Certificates shall cease to hold such position with the Company
before the date of issuance of the Warrant Certificates or before
countersignature by the Warrant Agent and issue and delivery thereof, such
Warrant Certificates, nevertheless, may be countersigned by the Warrant Agent,
issued and delivered with the same force and effect as though the person who
signed such Warrant Certificates had not ceased to be such officer of the
Company.
4. Exercise; Redemption.
(a) Each Warrant represented by a Warrant Certificate may be
exercised during the Warrant Exercise Period, upon the terms and subject to the
conditions set forth herein and in the Warrant Certificate. A Warrant shall be
deemed to have been exercised immediately prior to the close of business on the
Exercise Date, provided that the Warrant Certificate representing such Warrant,
with the appropriate exercise form thereon duly executed by the Registered
Holder thereof or his or her attorney duly authorized in writing, together with
payment in cash, or by official bank or certified check made payable to the
Company, of an amount equal to the Purchase Price has been timely received by
the Warrant Agent. Payment must be made in United States funds. The person
entitled to receive the securities deliverable upon such exercise shall be
treated for all purposes as the holder of such securities as of the close of
business on the Exercise Date. The Company shall not be obligated to issue any
fractional share interests or fractional warrant interests upon the exercise of
any Warrants. Computations resulting in the issuance of fractional shares be
rounded to the nearest whole share. As soon as practicable
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<PAGE> 5
on or after the Exercise Date and in any event within 10 days after having
received authorization from the Company, the Warrant Agent, on behalf of the
Company, shall cause to be issued to the person or persons entitled to receive
the same a certificate or certificates for the shares of Common Stock, and the
Warrant Agent shall deliver the same to the person or persons entitled thereto.
No adjustment shall be made in respect of cash dividends on any shares delivered
upon exercise of any Warrant. Upon the exercise of any Warrants, the Warrant
Agent shall promptly notify the Company in writing of such fact and of the
number of securities delivered upon such exercise and shall cause all payments
of an amount in cash or check made payable to the order of the Company, equal to
the Purchase Price, less any Warrant solicitation fee, as hereinafter described.
(b) If at the time of exercise of any Warrant after
___________, 1998 [One Year After IPO] (i) the market price of the Company's
Common Stock is equal to or greater than the then Purchase Price of the Warrant,
(ii) the exercise of the Warrant is solicited by the underwriter at such time
while the Underwriter is a member of the National Association of Securities
Dealers, Inc. ("NASD"), (iii) the Warrant is not held in a discretionary
account, (iv) disclosure of the compensation arrangement is made in documents
provided to the holders of the Warrants; and (v) the solicitation of the
exercise of the Warrant is not in violation of Rule 10b-6 (as such rule or any
successor rule may be in effect as of such time of exercise) promulgated under
the Securities Exchange Act of 1934, then the Underwriter shall be entitled to
receive from the Company upon exercise of each of the Warrant(s) so exercised a
fee of eight percent (8%) of the aggregate price of the Warrants so exercised
(the "Exercise Fee"). The procedures for payment of the warrant solicitation fee
are set forth in subparagraph (c) below.
(c) (1) Within five (5) days of the last day of each month
commencing with ________ 1998 [one year anniversary of IPO month], the Warrant
Agent will notify the Underwriter of each Warrant Certificate which has been
properly completed for exercise by holders of Warrants during the last month.
The Company and Warrant Agent shall determine, in their sole and absolute
discretion, whether a Warrant Certificate has been properly completed. The
Warrant Agent will provide the Underwriter with such information, in connection
with the exercise of each Warrant, as the Underwriter shall reasonably request.
(2) The Company hereby authorizes and instructs the
Warrant Agent to deliver to the Underwriter the Exercise Fee promptly after
receipt by the Warrant Agent from the Company of a check payable to the order of
the Underwriter in the amount of the Exercise Fee. The Warrant Agent shall not
issue the shares of Common Stock issuable upon exercise of the Warrants until
receipt and forwarding of such check to the Underwriter. In the event that an
Exercise Fee is paid to the Underwriter with respect to a Warrant which the
Company or the Warrant Agent determines is not properly completed for exercise
or in respect of which the Underwriter is not entitled to an Exercise Fee, the
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<PAGE> 6
Underwriter will promptly return such Exercise Fee to the Warrant Agent which
shall forthwith return such fee to the Company.
The Underwriter and the Company may at any time, after
__________, 1998 [one year anniversary of IPO month], and during business hours,
examine the records of the Warrant Agent, including its ledger of original
Warrant certificates returned to the Warrant Agent upon exercise of Warrants.
Notwithstanding any provision to the contrary, the provisions of this paragraph
and of subparagraph (b) above may not be modified, amended or deleted without
the prior written consent of the Underwriter.
(d) The Warrants may be redeemed at any time during the
exercise period by the Company beginning on __________, 1998 [One year after
IPO], unless earlier permitted by the Underwriter, on not less than 30 or more
than 60 days' prior written notice to all Registered Holders of the Warrants, at
a redemption price of $.01 per Warrant, if the last reported sale price, or if
not published, the average closing bid price of the Common Stock as reported by
the National Association of Securities Dealers Automated Quotation System
(NASDAQ) (or a national securities exchange or the National Quotation Bureau or
the OTC Bulletin Board, as the case may be) is at least $9.00 for the Class A
Warrants and $15.00 for the Class B Warrants for 10 consecutive trading days
within a period of 30 consecutive trading days ending five (5) days prior to the
date of the written notice of redemption. All Warrants must be redeemed if any
are redeemed.
(e) If the Company calls the Warrants for redemption, the
price at which such Warrants are to be redeemed shall not be paid to any Warrant
holder unless the certificates representing such Warrants are surrendered to the
Corporate Office within the redemption period specified in the Company's notice
to Registered Holders. At the end of any such redemption period respecting
Warrants called for redemption, any Warrants not exercised or tendered for
redemption shall expire and the certificate(s) therefor shall become void.
5. Reservation of Shares; Listing; Payment of Taxes, Etc.
(a) The Company covenants that it will at all times reserve
and keep available out of its authorized Common Stock, solely for the purpose of
issue upon exercise of Warrants, such number of shares of Common Stock as shall
then be issuable upon the exercise of all outstanding Warrants. The Company
covenants that all shares of Common Stock which shall be issuable upon exercise
of Warrants shall be duly and validly issued any fully paid and nonassessable
and free from all taxes, liens and charges with respect to the issue thereof,
and that upon issuance such shares shall be listed on each national securities
exchange or automated quotation system, if any, on which the other shares of
outstanding Common Stock of the Company are then listed.
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<PAGE> 7
(b) If any Common Stock reserved for issuance upon exercise of
Warrants hereunder requires registration with or approval of any governmental
authority under any federal or state law, before such securities may be validly
issued or delivered upon such exercise, then the Company covenants that it will
in good faith and as expeditiously as possible endeavor to secure such
registration or approval, as the case may be; provided, however, that the
Company need not endeavor to seek such registration or approval in a state in
which the Warrants were not sold by the Company pursuant to the registration
statement unless an exemption from registration under such state's laws is
available; provided, further, that Warrants may not be exercised by, or shares
of Common Stock issued to, any Registered Holder in any state in which such
exercise would be unlawful.
(c) The Company shall pay all documentary, stamp or similar
taxes and other governmental charges that may be imposed with respect to the
issuance of Warrants, or the issuance or delivery of any shares upon exercise of
Warrants; provided, however, that if shares of Common Stock are to be delivered
in a name other than the name of the Registered Holder of the Warrant
Certificate representing any Warrant being exercised, then no such delivery
shall be made unless the person requesting the same has paid to the Warrant
Agent the amount of transfer taxes or charges incident thereto, if any.
(d) The Warrant Agent, unless it is acting as such, is hereby
irrevocably authorized to requisition the Company's Transfer Agent from time to
time for certificates representing shares of Common Stock required upon exercise
of the Warrants, and the Company will authorize its Transfer Agent to comply
with all such requisitions. The Company will file with the Warrant Agent a
statement setting forth the name and address of its Transfer Agent for shares of
Common Stock or other capital stock issuable upon exercise of the Warrants and
of each successor Transfer Agent.
6. Exchange and Registration of Transfer.
(a) Warrant Certificates may be exchanged for other Warrant
Certificates representing an equal aggregate number of Warrants or may be
transferred in whole or in part. Warrant Certificates to be so exchanged shall
be surrendered to the Warrant Agent at its Corporate Office, accompanied by an
Assignment, when necessary, and the Company shall execute and the Warrant Agent
shall countersign, issue and deliver in exchange therefor the Warrant
Certificate(s) which the Registered Holder shall be entitled to receive.
(b) The Warrant Agent shall keep at such office, books in
which, subject to such reasonable regulations as it may prescribe, it shall
register Warrant Certificates and the transfer thereof. Upon due presentment for
registration of transfer of any Warrant Certificate at such office, the Company
shall execute and the Warrant Agent
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<PAGE> 8
shall issue and deliver to the transferee or transferees a new Warrant
Certificate or Certificates representing an equal aggregate number of Warrants.
(c) With respect to all Warrant Certificates presented for
registration or transfer, or for exchange or exercise, the subscription form on
the reverse thereof shall be duly endorsed, or be accompanied by a written
instrument or instruments of transfer and subscription, in form satisfactory to
the Company and the Warrant Agent, duly executed by the Registered Holder
thereof or his or her attorney duly authorized in writing.
(d) The Company may require payment of a sum sufficient to
cover any tax or other governmental charge that may be imposed upon any
exchange, registration or transfer of any Warrant Certificates.
(e) All Warrant Certificates surrendered for exercise or for
exchange in case of mutilated Warrant Certificates shall be promptly canceled by
the Warrant Agent and thereafter retained by the Warrant Agent until termination
of the agency.
(f) Prior to due presentment for registration of transfer
thereof the Company and the Warrant Agent may deem and treat the Registered
Holder of any Warrant Certificate as the absolute owner thereof and of each
Warrant represented thereby (notwithstanding any notations of ownership or
writing thereon made by anyone other than the Company or the Warrant Agent) for
all purposes and shall not be affected by any notice to the contrary.
7. Loss or Mutilation. Upon receipt by the Company and the
Warrant Agent of evidence satisfactory to them of the ownership of and the loss,
theft, destruction or mutilation of any Warrant Certificate and (in the case of
loss, theft or destruction) of indemnity satisfactory to them, and (in the case
of mutilation) upon surrender and cancellation thereof, the Company shall
execute and the Warrant Agent shall countersign and deliver a new Warrant
Certificate representing an equal aggregate number of Warrants. Applicants for a
substitute Warrant Certificate shall also comply with such other reasonable
regulations and pay such other reasonable charges as the Warrant Agent may
prescribe.
8. Adjustments to Exercise Price and Number of Securities.
(a) Computation of Adjusted Exercise Price. Except as
hereinafter provided, in case the Company shall at any time after the date
hereof issue or sell any shares of Common Stock (other than the issuances or
sales referred to in subparagraph (g) of this section 8), including shares held
in the Company's treasury and shares of Common Stock issued upon the exercise of
any options, rights or warrants to subscribe for shares of Common Stock and
shares of Common Stock issued upon the direct or indirect conversion
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<PAGE> 9
or exchange of securities for shares of Common Stock, for a consideration per
share less than the Purchase Price in effect immediately prior to the issuance
or sale of such shares, or without consideration, then forthwith upon such
issuance or sale, the Purchase Price shall (until another such issuance or sale)
be reduced to the price (calculated to the nearest full cent) equal to the
quotient derived by dividing (i) an amount equal to the sum of (a) the total
number of shares of Common Stock outstanding immediately prior to the issuance
or sale of such shares, multiplied by the Purchase Price in effect immediately
prior to such issuance or sale, and (b) the aggregate of the amount of all
consideration, if any, received by the Company upon such issuance or sale, by
(ii) the total number of shares of Common Stock outstanding immediately after
such issuance or sale; provided, however, that in no event shall the Purchase
Price be adjusted pursuant to this computation to an amount in excess of the
Purchase Price in effect immediately prior to such computation, except in the
case of a combination of outstanding shares of Common Stock, as provided by
subparagraph (c) of this section 8.
For the purposes of any computation to be made in accordance
with this subparagraph (a), the following provisions shall be applicable:
(i) In case of the issuance or sale of shares of
Common Stock for a consideration part or all of which shall be cash, the amount
of the cash consideration therefor shall be deemed to be the amount of cash
received by the Company for such shares (or, if shares of Common Stock are
offered by the Company for subscription, the subscription price, or, if either
of such securities shall be sold to underwriters or dealers for public offering
without a subscription offering, the initial public offering price) before
deducting therefrom any compensation paid or discount allowed in the sale,
underwriting or purchase thereof by underwriters or dealers or others performing
similar services, or any expenses incurred in connection therewith.
(ii) In case of the issuance or sale (otherwise than
as a dividend or other distribution on any stock of the Company) of shares of
Common Stock for a consideration part or all of which shall be other than cash,
the amount of the consideration therefor other than cash shall be deemed to be
the value of such consideration as determined in good faith by the Board of
Directors of the Company and shall include any amounts payable to security
holders or any affiliates thereof, including without limitation, pursuant to any
employment agreement, royalty, consulting agreement, covenant not to compete,
earnout or contingent payment right or similar arrangement, agreement or
understanding, whether oral or written; all such amounts being valued for the
purposes hereof at the aggregate amount payable thereunder, whether such
payments are absolute or contingent, and irrespective of the period or
uncertainty of payment, the rate of interest, if any, or the contingent nature
thereof.
(iii) Shares of Common Stock issuable by way of
dividend or other distribution on any stock of the Company shall be deemed to
have been issued
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<PAGE> 10
immediately after the opening of business on the day following the record date
for the determination of shareholders entitled to receive such dividend or other
distribution and shall be deemed to have been issued without consideration.
(iv) The reclassification of securities of the
Company other than shares of Common Stock into securities including shares of
Common Stock shall be deemed to involve the issuance of such shares of Common
Stock for a consideration other than cash immediately prior to the close of
business on the date fixed for the determination of security holders entitled to
receive such shares, and the value of the consideration allocable to such shares
of Common Stock shall be determined as provided in subparagraph (a) of this
section 8.
(v) The number of shares of Common Stock at any one
time outstanding shall include the aggregate number of shares issued or issuable
(subject to readjustment upon the actual issuance thereof) upon the exercise of
options, rights, warrants and upon the conversion or exchange of convertible or
exchangeable securities.
(b) Options, Rights, Warrants and Convertible and
Exchangeable Securities. In case the Company shall at any time after the date
hereof issue options, rights or warrants to subscribe for shares of Common
Stock, or issue any securities convertible into or exchangeable for shares of
Common Stock, for a consideration per share less than the Purchase Price in
effect immediately prior to the issuance of such options, rights or warrants, or
such convertible or exchangeable securities, or without consideration, the
Purchase Price in effect immediately prior to the issuance of such options,
rights or warrants, or such convertible or exchangeable securities, as the case
may be, shall be reduced to a price determined by making a computation in
accordance with the provisions of subparagraph (a) of this section 8., provided
that:
(i) The aggregate maximum number of shares of Common
Stock, as the case may be, issuable under such options, rights or warrants shall
be deemed to be issued and outstanding at the time such options, rights or
warrants were issued, and for a consideration equal to the minimum purchase
price per share provided for in such options, rights or warrants at the time of
issuance, plus the consideration (determined in the same manner as consideration
received on the issue or sale of shares in accordance with the terms of the
Warrants), if any, received by the Company for such options, rights or warrants.
(ii) The aggregate maximum number of shares of Common
Stock issuable upon conversion or exchange of any convertible or exchangeable
securities shall be deemed to be issued and outstanding at the time of issuance
of such securities, and for a consideration equal to the consideration
(determined in the same manner as consideration received on the issue or sale of
shares of Common Stock in accordance with the terms of the Warrants) received by
the Company for such securities, plus the minimum
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<PAGE> 11
consideration, if any, receivable by the Company upon the conversion or exchange
thereof.
(iii) If any change shall occur in the price per
share provided for in any of the options, rights or warrants referred to in
subparagraph (i) of section 8(b), or in the price per share at which the
securities referred to in subparagraph (ii) of this section 8(b) are convertible
or exchangeable, such options, rights or warrants or conversion or exchange
rights, as the case may be, shall be deemed to have expired or terminated on the
date when such price change became effective in respect of shares not
theretofore issued pursuant to the exercise or conversion or exchange thereof,
and the Company shall be deemed to have issued upon such date new options,
rights or warrants or convertible or exchangeable securities at the new price in
respect of the number of shares issuable upon the exercise of such options,
rights or warrants or the conversion or exchange of such convertible or
exchangeable securities, provided, however, in no event shall the adjustment
provide the Holder with any greater rights arising from consecutive adjustments
than if the last adjustment occurred initially.
(c) Subdivision and Combination. In case the Company
shall at any time subdivide or combine the outstanding shares of Common Stock,
the Purchase Price shall forthwith be proportionately decreased in the case of
subdivision or increased in the case of combination.
(d) Adjustment in Number of Securities. Upon each
adjustment of the Purchase Price pursuant to the provisions of this section 8,
the number of securities issuable upon the exercise at the adjusted Purchase
Price of each Warrant shall be adjusted to the nearest full amount by
multiplying a number equal to the Purchase Price in effect immediately prior to
such adjustment by the number of securities issuable upon exercise of the
Warrants immediately prior to such adjustment and dividing the product so
obtained by the adjusted Purchase Price.
(e) Definition of Common Stock. For the purpose of this
Agreement, the term "Common Stock" shall mean (i) the class of stock designated
as Common Stock in the Certificate of Incorporation of the Company as may be
amended as of the date hereof, or (ii) any other class of stock resulting from
successive changes or reclassifications of such Common Stock consisting solely
of changes in par value, or from par value to no par value, or from no par value
to par value. In the event that the Company shall after the date hereof issue
securities with greater or superior voting rights than the shares of Common
Stock outstanding as of the date hereof, the Registered Holder, at its option,
may receive upon exercise of any Warrant either shares of Common Stock or a like
number of such securities with greater or superior voting rights.
(f) Merger or Consolidation. In case of any consolidation
of the Company with, or merger of the Company with, or merger of the Company
into, another
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<PAGE> 12
corporation (other than a consolidation or merger which does not result in any
reclassification or change of the outstanding Common Stock), the corporation
formed by such consolidation or merger shall execute and deliver to the
Registered Holder a supplemental warrant agreement providing that the holder of
each Warrant then outstanding or to be outstanding shall have the right
thereafter (until the expiration of such Warrant) to receive, upon exercise of
such Warrant, the kind and amount of shares of stock and other securities and
property receivable upon such consolidation or merger, by a holder of the number
of shares of Common Stock of the Company for which such Warrant might have been
exercised immediately prior to such consolidation, merger, sale or transfer.
Such supplemental warrant agreement shall provide for adjustments which shall be
identical to the adjustments provided in this section 8. The above provision of
this subsection shall similarly apply to successive consolidations or mergers.
(g) No Adjustment of Purchase Price in Certain Cases. No
adjustment of the Purchase Price shall be made:
(i) Upon the issuance or sale of the Warrants,
the shares issuable upon the exercise of the Warrants; the securities issuable
upon the exercise of the Representative's warrants, and the shares of Common
Stock issuable upon the exercise of any of them;
(ii) If the amount of said adjustment shall be
less than two cents (2(cent)) per security, provided, however, that in such case
any adjustment that would otherwise be required then to be made shall be carried
forward and shall be made at the time of and together with the next subsequent
adjustment which, together with any adjustment so carried forward, shall amount
to at least two cents (2(cent)) per security; or
(iii) Upon the issuance of shares of Common Stock
pursuant to a Bonus Agreement between the Company and Marton Grossman.
(h) Dividends and Other Distributions. In the event that
the Company shall at any time prior to the exercise of all Warrants fix a record
date for the determination of stockholders entitled to receive (including any
such distribution made to the stockholders of the Company in connection with
consolidation or merger in which the Company is the continuing corporation in a
distribution to all holders of Common Stock) evidence of its indebtedness, cash,
or assets (other than distributions and dividends payable in shares of Common
Stock), or rights, options,or warrants to subscribe for or purchase shares of
Common Stock, or securities convertible into, or exchangeable for, shares of
Common Stock in a distribution to all holders of Common Stock, then, in each
case, the Purchase Price in effect at the time of such record date shall be
adjusted by multiplying the Purchase Price in effect immediately prior to such
record date by a fraction, the numerator of which shall be the market price per
share of Common Stock on such record date, less the fair market value (as
determined in good faith by the board of
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<PAGE> 13
directors of the Company, whose determination shall be conclusive absent
manifest error) of the portion of the evidence of indebtedness or assets so to
be distributed, or such rights, options, or warrants, or convertible or
exchangeable securities, or the amount of cash, applicable to one share of
Common Stock, and the denominator of which shall be the market price per share
of Common Stock on such record date. Such adjustment shall be made successively
whenever any event listed above shall occur and become effective at the close of
business on such record date.
9. Concerning the Warrant Agent.
(a) The Warrant Agent acts hereunder as agent and in a
ministerial capacity for the Company, and its duties shall be determined solely
by the provisions hereof. The Warrant Agent shall not, by issuing and delivering
Warrant Certificates or by any other act hereunder, be deemed to make any
representations as to the validity or value or authorization of the Warrant
Certificates or the Warrants represented thereby or of any securities or other
property delivered upon exercise of any Warrant or whether any stock issued upon
exercise of any Warrant is fully paid and nonassessable.
(b) The Warrant Agent shall not at any time (i) be liable for
any recital or statement of fact contained herein or for any action taken,
suffered or omitted by it in reliance on any Warrant Certificate or other
document or instrument believed by it in good faith to be genuine and to have
been signed or presented by the proper party or parties, (ii) be responsible for
any failure on the part of the Company to comply with any of its covenants and
obligations contained in this Agreement or in any Warrant Certificate, or (iii)
be liable for any act or omission in connection with this Agreement except for
its own negligence or willful misconduct.
(c) The Warrant Agent may at any time consult with counsel for
the Company and shall incur no liability or responsibility for any action taken,
suffered or omitted by it in good faith in accordance with the opinion or advice
of such counsel.
(d) Any notice, statement, instruction, request, direction,
order or demand of the Company shall be sufficiently evidenced by an instrument
signed by its President, a Vice President, its Treasurer, an Assistant
Treasurer, its Secretary, or an Assistant Secretary (unless other evidence in
respect thereof is herein specifically prescribed). The Warrant Agent shall not
be liable for any action taken, suffered or omitted by it in accordance with
such notice, statement, instruction, request, direction, order or demand.
(e) The Company agrees to pay the Warrant Agent the usual and
customary compensation it normally receives for its services of this nature and
to reimburse it for its reasonable expenses hereunder; it further agrees to
indemnify the
13
<PAGE> 14
Warrant Agent and save it harmless against any and all losses, expenses and
liabilities, including judgments, costs and counsel fees, for anything done or
omitted by the Warrant Agent in the execution of its duties and powers hereunder
except those arising as a result of the Warrant Agent's negligence or willful
misconduct.
(f) The Warrant Agent may resign its duties and be discharged
from all further duties and liabilities hereunder (except liabilities arising as
a result of the Warrant Agent's own negligence or willful misconduct), after
giving 30 days' prior written notice to the Company. At least 15 days prior to
the date such resignation is to become effective, the Warrant Agent shall cause
a copy of such notice of resignation to be mailed to each Registered Holder at
the Company's expense. Upon such resignation the Company shall appoint in
writing a new warrant agent. If the Company shall fail to make such appointment
within a period of 30 days after it has been notified in writing of such
resignation by the resigning Warrant Agent, then any Registered Holder may apply
in any court of competent jurisdiction for the appointment of a new warrant
agent. After acceptance in writing of such appointment by the new warrant agent
is received by the Company, such new warrant agent shall be vested with the same
powers, rights, duties and responsibilities as if it had been originally named
herein as the warrant agent, without any further assurance, conveyance, act or
deed; provided, however, that if for any reason it shall be necessary or
expedient to execute and deliver any further assurance, conveyance, act or deed,
the same shall be done at the expense of the Company and shall be legally and
validly executed and delivered by the resigning Warrant Agent. Not later than
the effective date of any such appointment the Company shall file notice thereof
with the resigning Warrant Agent and shall forthwith cause a copy of such notice
to be mailed to each Registered Holder.
(g) Any corporation into which the Warrant Agent or any new
warrant agent may be converted or merged or any corporation resulting from any
consolidation to which the Warrant Agent or any new warrant agent shall be a
party or any corporation succeeding to the corporate trust business of the
Warrant Agent shall be a successor warrant agent under this Agreement without
any further act, provided that such corporation is eligible for appointment as
successor to the Warrant Agent under the provisions of the preceding paragraph.
Any such successor warrant agent shall promptly cause notice of its succession
as warrant agent to be mailed, at its expense, to the Company and to each
Registered Holder.
(h) The Warrant Agent, its subsidiaries and affiliates, and
any of its or their officers or directors, may buy and hold or sell Warrants or
other securities of the Company and otherwise deal with the Company in the same
manner and to the same extent and with like effect as though it were not the
Warrant Agent. Nothing herein shall preclude the Warrant Agent from acting in
any other capacity for the Company or for any other legal entity.
14
<PAGE> 15
10. Modification of Agreement. The Warrant Agent and the Company
may by supplemental agreement make any changes or corrections in this Agreement
(a) that they shall deem appropriate to cure any ambiguity or to correct any
defective or inconsistent provision or manifest mistake or error herein
contained; or (b) that they may deem necessary or desirable and which shall not
adversely affect the interests of the holders of Warrant Certificates; provided,
however, that this Agreement shall not otherwise be modified, supplemented or
altered in any respect except with the consent in writing of the Registered
Holders representing not less than 50% of the Warrants then outstanding;
provided, further, that no change shall be made in the terms or provisions of
any Warrant which would adversely affect such registered Holders, other than
such changes as are expressly permitted by this Agreement as originally
executed, without the consent in writing of the Registered Holders of the
Warrants affected.
11. Notices. All notices, requests, consents and other
communications hereunder shall be in writing and shall be deemed to have been
made when mailed, first-class postage prepaid, when delivered to a telegraph
office for transmission, or when delivered to any commercial overnight air
courier service or other commercial messenger or delivery service which
regularly retains its receipts; if to a Registered Holder, at the address of
such holder as shown on the registry books maintained by the Warrant Agent; if
to the Company at 58 Second Avenue, Brooklyn, New York 11215, Attention:
President, or at such other address as may have been furnished to the Warrant
Agent in writing by the Company, with a copy to the Company's counsel, Heller,
Horowitz & Feit, 292 Madison Avenue, New York, New York 10017, Attention: Louis
A. Brilleman, Esq.; and, if to the Warrant Agent, at the Corporate Office.
12. Governing Law; Section Headings. This Agreement shall be
governed by and construed in accordance with the laws of the State of New York.
Section headings in this Agreement appear for convenience of reference only and
shall not be used in any interpretation of this Agreement.
13. Binding Effect. This Agreement shall be binding upon and inure
to the benefit of the Company, the Warrant Agent and their respective successors
and assigns, and the Registered Holders from time to time of Warrant
Certificates or any of them. Nothing in this Agreement shall be construed to
confer any right, remedy or claim upon any other person.
15
<PAGE> 16
14. Counterparts. This Agreement may be executed in counterparts,
which taken together shall constitute a single document.
DYNAMIC INTERNATIONAL, LTD.
BY: _________________________
AMERICAN STOCK TRANSFER & TRUST
COMPANY
BY: _________________________
AUTHORIZED OFFICER
PATTERSON TRAVIS, INC.
BY: _________________________
<PAGE> 1
NO ________ WARRANTS
CLASS A REDEEMABLE COMMON STOCK PURCHASE WARRANT
VOID AFTER 5:00 P.M. NEW YORK CITY TIME ON ___________, 1999
DYNAMIC INTERNATIONAL, LTD.
CUSIP ______ __ _
THIS CERTIFIES THAT, FOR VALUE RECEIVED
or registered assigns (the "Registered Holder") is the owner of the number of
Class A Redeemable Common Stock Purchase Warrants (the "Warrants") specified
above. Each Warrant initially entitles the Registered Holder to purchase,
subject to the terms and conditions set forth in this Certificate and the
Warrant Agreement (as hereinafter defined), one fully paid and nonassessable
share of Common Stock, $.001 par value, of Dynamic International, Ltd., a Nevada
corporation (the "Company"), of the Company at any time prior to the Expiration
Date (as hereinafter defined), upon the presentation and surrender of this
Warrant Certificate with the Purchase Form on the reverse hereof duly executed,
at the corporate office of American Stock Transfer & Trust Company as Warrant
Agent, or its successor (the "Warrant Agent"), accompanied by payment of $6.00
(the "Purchase Price") in lawful money of the United States of America in cash
or by official bank or certified check made payable to the Company.
This Warrant Certificate and each Warrant represented hereby
are issued pursuant to and are subject in all respects to the terms and
conditions set forth in the Warrant Agreement (the "Warrant Agreement"), dated
_____________, 1997 between the Company and the Warrant Agent.
In the event of certain contingencies provided for in the
Warrant Agreement, the Purchase Price or the number of shares of Common Stock
subject to purchase upon the exercise of each Warrant represented hereby are
subject to modification or adjustment.
Each Warrant represented hereby is exercisable at the option
of the Registered Holder, but no fractional shares of Common Stock will be
issued. In the case of the exercise of less than all the Warrants represented
hereby, the Company shall cancel this Warrant Certificate upon the surrender
hereof and shall execute and deliver a new Warrant Certificate or Warrant
Certificates of like tenor, which the Warrant Agent shall countersign, for the
balance of such Warrants.
The term "Expiration date" shall mean 5:00 P.M. (New York City
time) on ___________, 1999 [18 months after IPO], or such earlier date as stated
in a notice advising that the Warrants shall be redeemed. If such date shall in
the State of New York be a
1
<PAGE> 2
holiday or a day on which the banks are authorized to close, then the Expiration
Date shall mean 5:00 P.M. (New York City time) the next following day which in
the State of New York is not a holiday or a day on which banks are authorized to
close.
The Company shall not be obligated to deliver any securities
pursuant to the exercise of this Warrant unless a registration statement under
the Securities Act of 1933, as amended, with respect to such securities is
effective, unless the Company receives an opinion of counsel, satisfactory to
the Company's counsel, that an exemption from is available. The Company has
covenanted and agreed that it will file a registration statement and will use
its best efforts to cause the same to become effective and to keep such
registration statement current while any of the Warrants are outstanding. This
Warrant shall not be exercisable by a Registered Holder in any state where such
exercise would be unlawful.
This Warrant Certificate is exchangeable, upon the surrender
hereof by the Registered Holder at the corporate office of the Warrant Agent,
for a new Warrant Certificate or Warrant Certificates of like tenor representing
an equal aggregate number of Warrants, each of such new Warrant Certificates to
represent such number of Warrants as shall be designated by such Registered
Holder at the time of such surrender. Upon due presentment with any tax or other
governmental charge imposed in connection therewith, for registration of
transfer of this Warrant Certificate at such office, a new Warrant Certificate
or Warrant Certificates representing an equal aggregate number of Warrants will
be issued to the transferee in exchange therefor, subject to the limitations
provided in the Warrant Agreement.
Prior to the exercise of any Warrant represented hereby, the
Registered Holder shall not be entitled to any rights of a stockholder of the
Company, including, without limitation, the right to vote or to receive
dividends or other distributions, and shall not be entitled to receive notice of
any proceedings of the Company, except as provided in the Warrant Agreement.
This Warrant may be redeemed at the option of the Company, at
a redemption price of $.01 per Warrant, provided the market price (as defined in
the Warrant Agreement) for the securities issuable upon exercise of such Warrant
shall exceed $9.00 per share, for ten consecutive business days within a period
of thirty consecutive trading days ending within five days prior to the date of
the notice of redemption, as reported on the Nasdaq Stock Market, Inc. or such
other primary exchange upon which the Common Stock is traded. Notice of
redemption shall be given not earlier than the sixtieth day and not later than
the thirtieth day before the date the fixed for redemption, all as provided in
the Warrant Agreement. On and after the date fixed for redemption, the
Registered Holder shall have no rights with respect to this Warrant except to
receive $.01 per Warrant upon surrender of this Certificate.
2
<PAGE> 3
Prior to due presentment for registration of transfer hereof,
the Company and the Warrant Agent may deem and treat the Registered Holder as
the absolute owner hereof and of each Warrant represented hereby
(notwithstanding any notations or writing hereon made by anyone other than a
duly authorized officer of the Company or the Warrant Agent) for all purposes
and shall not be affected by any notice to the contrary.
This Warrant Certificate shall be governed by and construed in
accordance with the laws of the State of New York.
This Warrant Certificate is not valid unless countersigned by
the Warrant Agent.
IN WITNESS WHEREOF, the Company has caused this Warrant
Certificate to be duly executed manually or in facsimile by two of its officers
thereunto duly authorized and a facsimile of its corporate seal to be imprinted
hereon.
Dated: _______________
Countersigned: DYNAMIC INTERNATIONAL, LTD.
AMERICAN STOCK TRANSFER
& TRUST COMPANY
By: ATTEST:
By:____________________ PRESIDENT SECRETARY
Authorized Officer
3
<PAGE> 4
[FORM OF ELECTION TO EXERCISE WARRANTS]
The undersigned hereby irrevocably elect to exercise the
right, represented by this Warrant Certificate, to purchase shares of Common
Stock and herewith tenders in payment for such securities a certified or
official bank check payable in New York Clearing House Funds to the order of
Dynamic International, Ltd. in the amount of $_______________, all in accordance
with the terms hereof. The undersigned requests that a certificate for such
securities be registered in the name of _____________________ whose address is
____________________________ and that such Certificate be delivered to
_______________________ whose address is _______________.
Dated: Signature _____________________________
(Signature must conform in all respects to name of holder
as specified on the face of the Warrant Certificate.)
_______________________________________
(Insert Social Security or Other Identifying Number of
Holder)
4
<PAGE> 5
[FORM OF ASSIGNMENT]
(To be executed by the registered holder if such
holder desires to transfer the Warrant Certificate.)
FOR VALUE RECEIVED ________________________________ hereby
sells, assign, and transfers unto _________________________
(Please print name and address of transferee)
this Warrant Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint ______________________,
Attorney, to transfer the within Warrant Certificate on the books of the
within-named Company, with full power of substitution.
Dated: Signature _____________________________
(Signature must conform in all respects to name of holder as
specified on the face of the Warrant Certificate.)
_______________________________________
(Insert Social Security or Other Identifying Number of
Holder)
5
<PAGE> 1
NO ________ WARRANTS
CLASS B REDEEMABLE COMMON STOCK PURCHASE WARRANT
VOID AFTER 5:00 P.M. NEW YORK CITY TIME ON ___________, 2000
DYNAMIC INTERNATIONAL, LTD.
CUSIP ______ __ _
THIS CERTIFIES THAT, FOR VALUE RECEIVED
or registered assigns (the "Registered Holder") is the owner of the number of
Class B Redeemable Common Stock Purchase Warrants (the "Warrants") specified
above. Each Warrant initially entitles the Registered Holder to purchase,
subject to the terms and conditions set forth in this Certificate and the
Warrant Agreement (as hereinafter defined), one fully paid and nonassessable
share of Common Stock, $.001 par value, of Dynamic International, Ltd., a Nevada
corporation (the "Company"), of the Company at any time prior to the Expiration
Date (as hereinafter defined), upon the presentation and surrender of this
Warrant Certificate with the Purchase Form on the reverse hereof duly executed,
at the corporate office of American Stock Transfer & Trust Company as Warrant
Agent, or its successor (the "Warrant Agent"), accompanied by payment of $10.00
(the "Purchase Price") in lawful money of the United States of America in cash
or by official bank or certified check made payable to the Company.
This Warrant Certificate and each Warrant represented hereby
are issued pursuant to and are subject in all respects to the terms and
conditions set forth in the Warrant Agreement (the "Warrant Agreement"), dated
_____________, 1997 between the Company and the Warrant Agent.
In the event of certain contingencies provided for in the
Warrant Agreement, the Purchase Price or the number of shares of Common Stock
subject to purchase upon the exercise of each Warrant represented hereby are
subject to modification or adjustment.
Each Warrant represented hereby is exercisable at the option
of the Registered Holder, but no fractional shares of Common Stock will be
issued. In the case of the exercise of less than all the Warrants represented
hereby, the Company shall cancel this Warrant Certificate upon the surrender
hereof and shall execute and deliver a new Warrant Certificate or Warrant
Certificates of like tenor, which the Warrant Agent shall countersign, for the
balance of such Warrants.
The term "Expiration date" shall mean 5:00 P.M. (New York City
time) on ___________, 2000 [3 years after IPO], or such earlier date as stated
in a notice advising that the Warrants shall be redeemed. If such date shall in
the State of New York be a holiday or a day
1
<PAGE> 2
on which the banks are authorized to close, then the Expiration Date shall mean
5:00 P.M. (New York City time) the next following day which in the State of New
York is not a holiday or a day on which banks are authorized to close.
The Company shall not be obligated to deliver any securities
pursuant to the exercise of this Warrant unless a registration statement under
the Securities Act of 1933, as amended, with respect to such securities is
effective, unless the Company receives an opinion of counsel, satisfactory to
the Company's counsel, that an exemption from is available. The Company has
covenanted and agreed that it will file a registration statement and will use
its best efforts to cause the same to become effective and to keep such
registration statement current while any of the Warrants are outstanding. This
Warrant shall not be exercisable by a Registered Holder in any state where such
exercise would be unlawful.
This Warrant Certificate is exchangeable, upon the surrender
hereof by the Registered Holder at the corporate office of the Warrant Agent,
for a new Warrant Certificate or Warrant Certificates of like tenor representing
an equal aggregate number of Warrants, each of such new Warrant Certificates to
represent such number of Warrants as shall be designated by such Registered
Holder at the time of such surrender. Upon due presentment with any tax or other
governmental charge imposed in connection therewith, for registration of
transfer of this Warrant Certificate at such office, a new Warrant Certificate
or Warrant Certificates representing an equal aggregate number of Warrants will
be issued to the transferee in exchange therefor, subject to the limitations
provided in the Warrant Agreement.
Prior to the exercise of any Warrant represented hereby, the
Registered Holder shall not be entitled to any rights of a stockholder of the
Company, including, without limitation, the right to vote or to receive
dividends or other distributions, and shall not be entitled to receive notice of
any proceedings of the Company, except as provided in the Warrant Agreement.
This Warrant may be redeemed at the option of the Company, at
a redemption price of $.01 per Warrant, provided the market price (as defined in
the Warrant Agreement) for the securities issuable upon exercise of such Warrant
shall exceed $15.00 per share, for ten consecutive business days within a period
of thirty consecutive trading days ending within five days prior to the date of
the notice of redemption, as reported on the Nasdaq Stock Market, Inc. or such
other primary exchange upon which the Common Stock is traded. Notice of
redemption shall be given not earlier than the sixtieth day and not later than
the thirtieth day before the date the fixed for redemption, all as provided in
the Warrant Agreement. On and after the date fixed for redemption, the
Registered Holder shall have no rights with respect to this Warrant except to
receive $.01 per Warrant upon surrender of this Certificate.
Prior to due presentment for registration of transfer hereof,
the Company and the Warrant Agent may deem and treat the Registered Holder as
the absolute owner hereof and of each Warrant represented hereby
(notwithstanding any notations or writing hereon made by
2
<PAGE> 3
anyone other than a duly authorized officer of the Company or the Warrant Agent)
for all purposes and shall not be affected by any notice to the contrary.
This Warrant Certificate shall be governed by and construed in
accordance with the laws of the State of New York.
This Warrant Certificate is not valid unless countersigned by
the Warrant Agent.
IN WITNESS WHEREOF, the Company has caused this Warrant
Certificate to be duly executed manually or in facsimile by two of its officers
thereunto duly authorized and a facsimile of its corporate seal to be imprinted
hereon.
Dated: _______________
Countersigned: DYNAMIC INTERNATIONAL, LTD.
AMERICAN STOCK TRANSFER
& TRUST COMPANY
By: ATTEST:
By:__________________ PRESIDENT SECRETARY
Authorized Officer
3
<PAGE> 4
[FORM OF ELECTION TO EXERCISE WARRANTS]
The undersigned hereby irrevocably elect to exercise the
right, represented by this Warrant Certificate, to purchase shares of Common
Stock and herewith tenders in payment for such securities a certified or
official bank check payable in New York Clearing House Funds to the order of
Dynamic International, Ltd. in the amount of $_______________, all in accordance
with the terms hereof. The undersigned requests that a certificate for such
securities be registered in the name of _____________________ whose address is
____________________________ and that such Certificate be delivered to
_______________________ whose address is _______________.
Dated: Signature _____________________________
(Signature must conform in all respects to name of holder as
specified on the face of the Warrant Certificate.)
_______________________________________
(Insert Social Security or Other Identifying Number of
Holder)
4
<PAGE> 5
[FORM OF ASSIGNMENT]
(To be executed by the registered holder if such
holder desires to transfer the Warrant Certificate.)
FOR VALUE RECEIVED ________________________________ hereby
sells, assign, and transfers unto _________________________
(Please print name and address of transferee)
this Warrant Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint ______________________,
Attorney, to transfer the within Warrant Certificate on the books of the
within-named Company, with full power of substitution.
Dated: Signature _____________________________
(Signature must conform in all respects to name of holder
as specified on the face of the Warrant Certificate.)
_______________________________________
(Insert Social Security or Other Identifying Number of
Holder)
5
